CONTRACT OF PARTNERSHIP

Partnership

It is a contract whereby two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves (NCC, Art. 1767).

Two or more persons may also form a partnership for the exercise of a profession (NCC, Art. 1767).

Essential elements of partnership

1. Agreement to contribute money, property or industry to a common fund (mutual contribution to a

common stock); and
2. Intention to divide the profits among the contracting parties (joint interest in the profits)
(Evangelista v. Collector of Internal Revenue, G.R. No. L-9996, October 15, 1987). 1957

Characteristics of partnership

1. Bilateral – It is entered into by two or more persons and the rights and obligations arising therefrom
are always reciprocal;
2. Onerous – Each of the parties aspires to procure for himself a benefit through the giving of
something;
3. Nominate – It has a special name or designation in our law;
4. Consensual – Perfected by mere consent, upon the express or implied agreement of two or more
persons;
5. Commutative – The undertaking of each of the partners is considered as the equivalent of that of the
others;
6. Principal – It does not depend for its existence or validity upon some other contracts;
7. Preparatory – Because it is entered into as a means to an end, i.e. to engage in business or specific
venture for the realization of profits with the view of dividing them among the contracting parties;
and
8. Profit-oriented (NCC, Art. 1770).

Typical incidents of partnership

1. The partners share in profits and losses (NCC, Arts. 1767, 1797-98);
2. The partnership has a juridical personality separate and distinct from that of each of the partners.
Such juridical personality shall be automatically acquired despite the failure to register in the SEC
(NCC, Art. 1768);
3. Partners have equal rights in the management and conduct of the partnership business (NCC, Art.
1803);
4. Every partner is an agent of the partnership, and entitled to bind the other partners by his acts, for
the purpose of its business (NCC, Art. 1818). He may also be liable for the entire partnership
obligations;
5. All partners are personally liable for the debts of the partnership with their separate property (NCC,
Arts. 1816, 1822-24) except limited partners are not bound beyond the amount of their investment
(NCC, Art. 1843);
6. A fiduciary relation exists between the partners
(NCC, Art. 1807); and
7. On dissolution, the partnership is not terminated, but continues until the winding up of partnership is
completed (NCC, Art. 1829).

NOTE: These incidents may be modified by stipulation of the partners subject to the rights of third persons
dealing with the partnership.

Q: TRUE or FALSE. An oral partnership is valid (2009 BAR).

A: TRUE. An oral contract of partnership is valid even though not in writing. However, if it involves
contribution of an immovable property or a real right, an oral contract of partnership is void. In such a case,
the contract of partnership to be valid, must be in a public instrument (NCC, Art. 1771), and the inventory of
said property signed by the parties must be attached to said public instrument (NCC, Art. 1773; Litonjua, Jr. v.
Litonjua, Sr., G.R. Nos. 166299-300, December 13, 2005)

Partnership and Co-ownership

BASIS PARTNERSHIP CO-OWNERSHIP

 By contract or by mere agreement of Generally created by law and can exist
Creation the parties. without a contract (Albano, 2013).
Juridical Personality Has separate and distinct juridical No separate and distinct
personality from that of each juridical personality.
partner.
Purpose Realization of profits. Common enjoyment of a thing or right.
Duration/ Term of No limitation. 10 years maximum (May be extended
Existence by new agreement) (NCC, Art. 494).
Number of Minimum of two persons. Minimum of two persons.
incorporators
Commencement of From the moment of execution of Not applicable; no juridical personality.
Juridical Personality the contract of partnership.
Disposal/ Partner may not dispose of his Co-owner may freely do so (NCC, Art.
Transferability of individual interest unless agreed upon 495).
Interest by all partners.

In the absence of stipulation to Co-owner cannot represent the co-

Power to Act with 3rd contrary, a partner may bind ownership (NCC, Art. 491-492).
Persons partnership. Each partner is agent of
partnership.
NOTE: Except as provided by Art.
1825, persons who are not partners as
to each other are not partners as to
third persons [NCC, Art. 1769(1);
Albano, 201].
Effect of Death Death of a partner results in Death of co-owner does not
dissolution of partnership. necessarily dissolve co-ownership.
Dissolution May be dissolved at any time by the May be dissolved anytime by the
will of any or all of the partners. will of any or all of the co- owners.
NOTE: If an unlawful partnership is
dissolved by a judicial decree, the
profits shall be confiscated in favor of
the State.
Liability In case of a general partner, his
separate and personal property shall
also be liable if the assets of the
partnership is not sufficient to satisfy
the obligation to third persons.

Partnership v. Joint Venture

BASIS Partnership Joint Venture

Contemplates the undertaking of a Ordinarily limited to a single
Coverage general and continuous business of a transaction and not intended to
particular kind. pursue a continuous business.
Firm name Required to operate under a firm name. Has no firm name.

The property used becomes the property The property used remains
Transfer of property of the business entity and hence of all the undivided property of its contributor.
Partners.
A partner acting in pursuance of the firm None of the co-venturers can bind the
business, binds not only himself as a joint venture or his co-venturers.
Power principal, but as their agent as well, also
the partnership and the partners.
A partnership acquires personality after A joint venture has no legal
Firm Name and following the requisites required by law. personality.
Liabilities
NOTE: SEC registration is not required
before a partnership acquires legal
personality (NCC, Art. 1768).
Joint venture
It is an association of persons or companies jointly undertaking some commercial enterprise. Generally, all
contribute assets and share risks. It requires a community of interest in the performance of the subject
matter, a right to direct and govern the policy in connection therewith, and a duty which may be altered by
agreement to share both in profits and losses.

NOTE: Section 35(h) of RA 11232 or the Revised Corporation Code of the Philippines provides for the power
of a corporation, “to enter into a partnership, joint venture, merger, consolidation or other
commercial agreement with natural or juridical persons.”

ESSENTIAL FEATURES OF PARTNERSHIP

1. There must be a valid contract;

2. The parties (two or more persons) must have legal capacity to enter into the contract;
3. There must be a mutual contribution of money, property, or industry to a common fund;
4. The object must be lawful; and
5. The primary purpose must be to obtain profits and to divide the same among the parties (De Leon, 2010).

Valid contract

Partnership is a voluntary relation created by agreement of the parties. It excludes from its concept all other
associations which do not have their origin in a contract, express or implied (De Leon, 2010).

Legal capacity of the parties to contract

Before there can be a valid contract of partnership, it is essential that the contracting parties have the
necessary legal capacity to enter into the contract. Consequently, any person who cannot give consent to a
contract cannot be a partner.

Persons qualified to be a partner

GR: Any person capacitated to contract may enter into a contract of partnership.

XPNs: Persons who are prohibited from giving each other any donation or advantage cannot enter into a
universal partnership (NCC, Art. 1782, 1994 BAR);

NOTE: A husband and wife, however, may enter into a particular partnership or be members thereof (De
Leon, 2010).

1. Persons suffering from civil interdiction; and

2. Persons who cannot give consent to a contract:
a. Minors
b. Insane persons
c. Deaf-mutes who do not know how to write

Kinds of partners

1. As to the extent of liability

a. Capitalist- contributes either money or property to the common fund; he can also contribute an
intangible like credit, such as promissory note or other evidence of obligation, or even a goodwill
(Rabuya, 2017); and
b. Industrial- contributes only his industry

2. As to the time of entry

a. Original- one who became a partner at the time of the constitution of the partnership
b. Incoming- one who became a partner as a new member of an existing partnership.

3. Other kinds:
a. Managing- one entrusted with the management of the partnership. (Arts. 1800 and 1801, NCC)
b. Liquidating- one who takes charge of the liquidation and winding up of the partnership affairs (Art.
1836, NCC)
c. . Retiring- those who cease to be part of the partnership
d. Continuing- one who continues the business of a partnership after it has been dissolved by reason of
the admission of a new partner, or the retirement, death, or expulsion of one or more partners
e. . Dormant- one whose connection to the partnership is concealed and who does not take any
active part in it.
f. . Silent- one who does not take any active part in the business although he may be known to be a partner.
 g. Secret-one who takes active part in the business but is not known to a partner.
h. Ostensible partner-one who takes active part active part in the business and known to be a partner
whether or not he has an actual interest in the firm.
i. Partner by Estoppel- although not an actual partner, he has made himself liable as such by holding
himself out as a partner of allowing himself to be so held out (Art. 1815, NCC)

NOTE: A corporation cannot become a member of a partnership in the absence of express authorization by
statute or charter. This doctrine is based on the following considerations: (1) Mutual agency between the
partners and, (2) Such arrangement would improperly allow corporate property to become subject to risks
not contemplated by the stockholders when they originally invested in the corporation (Mendiola vs CA,
GR.No.159333, July 31, 2006).

Principle of delectus personae (choice of the person)

No one can become a member of the partnership association without the consent of all the partners. This rule
is inherent in every partnership.

RATIO: The right to choose with whom a person wishes to associate or continue to associate himself is the
very foundation and essence of partnership relation in view of its fiduciary nature involving as it does trust
and confidence reposed by the partners to each other.

NOTE: Even if a partner will associate another person in his share in the partnership, the associate shall not
be admitted into the partnership without the consent of all the partners, even if the partner having an
associate should be a manager (NCC, Art. 1804). This element of delectus personae, however, is true only in the
case of a general partner, but not as regards a limited partner.

A partnership may be formed even if the common fund is comprised entirely of borrowed or loaned
money

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to
divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any
capital of their own to a "common fund." Their contribution may be in the form of credit or industry, not
necessarily cash or fixed assets. Being partners, they are all liable for debts incurred by or on behalf of the
partnership. (Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, November 3, 1999)

Consequences of a partnership formed for an unlawful purpose

1. The contract is void ab initio and the partnership never existed in the eyes of the law;
2. The profits shall be confiscated in favor of the government;
3. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the government; and
4. The contributions of the partners shall not be confiscated unless they fall under No. 3 (De Leon, 2010).
Necessity of judicial decree to dissolve an unlawful partnership

Judicial decree is not necessary to dissolve an unlawful partnership; however, it may sometimes be advisable
that a judicial decree of dissolution be secured for the convenience and peace of mind of the parties (De Leon,
2010).

Intention to divide the profits

The sharing in profits is merely presumptive and not conclusive evidence of partnership. There are numerous
instances of parties who have a common interest in the profits and losses of an enterprise but who are not
partners. Thus, if the division of profits is merely used as guide to determine the compensation due to one of
the parties, such is not a partner (De Leon, 2010).

Distribution of losses

Agreeing upon a system of sharing losses is not necessary for the obligation is implied in the partnership
relation. If only the share of each partner in the profits has been agreed upon, the share of each in the losses
shall be in the same proportion.

The definition of partnership under Art. 1767 refers to “profits” only and is silent as to “losses.” The reason
is that the object of partnership is primarily the sharing of profits, while the distribution of losses is but a
“consequence of the same.” The right to share in the profits carries with it the duty to contribute to the
losses, of any.

NOTE: The partnership relation is not the contract itself, but the result of the contract. The relation is
evidenced by the terms of the contract which may be oral or written, express or implied from the acts and
declarations of the parties, subject to the provisions of Articles 1771-1773 and to the Statute of Frauds (De
Leon, 2010).

Sources:

UST_Golden Notes_2019 Bar

De Leon 2013 Law on Partnerships and Private Corporations.