Professional Documents
Culture Documents
PARTNERSHIP
PARTNERSHIP
PARTNERSHIP
General Provisions
Profession – a group of men pursuing a learned art as a common calling in the spirit of public service – no less a
public service because it may incidentally be a means of livelihood.
Characteristics of Partnership
1. Consensual
2. Nominate
3. Bilateral
4. Onerous
5. Commutative
6. Principal
7. Preparatory
Elements
1. consensual;
2. there must be a contribution of money, property or industry to a common fund;
3. the subject must be a lawful one;
4. there must be an intention of dividing the profit among the partners;
5. there must be a desire to formulate an active union (affectio societatis);
6. a new personality, that of the firm – must arise, distinct from the separate personality of each of the members
Differentiation:
Art. 1768 – Partnership is a juridical person separate and distinct from each of the partners.
Consequences:
1. Its juridical personality is separate and distinct from that of each of the partners.
2. The partnership can:
- acquire and possess property of all kinds;
- incur obligations;
- bring civil or criminal actions;
- can be adjudged insolvent even if the individual members be each financially solvent
3. A partner has no right to make a separate appearance in court, if the partnership being sued is already
represented, unless he is personally sued.
· Purpose:
- to indicate some test to determine if what may seem to be a partnership really is one, or it is not
· Requisites for Existence of Partnership
1. intention to create a partnership;
2. common fund obtained from contributions;
3. there was joint interest in the profits;
Therefore:
mere co-ownership or co-possession; mere profit sharing or GROSS returns do not establish a partnership
1. General Rule:
-for the validity of the contract, as well as for enforceability, no form is required, regardless of the value of
the contributions
Exception:
- whenever real properties or real rights in real properties are contributed – regardless of the value – a
public instrument is needed. Moreover, an inventory of the immovables is needed. This must be signed by the parties
and attached to the public instrument
1. for effectivity of the partnership contract insofar as innocent third persons are concerned, the same must be
registered if real properties are involved.
Art. 1772 – Partnership with capital of Php 3,000 or more – Registration with the SEC
· Applicability
1. applies regardless of the value of the property;
2. applies even if only real rights over real property are contributed;
3. applies also if cash or personal property is contributed
Registration
– transfer of the land to the partnership must be duly recorded in the Registration of Property to make the
transfer effective insofar as third persons are concerned
- applicable to immovable as well as personalty because the partnership is a juridical entity, capable of
owning and possessing property
- alien partners must comply with the requirements as provided for in Sec. 7, Art 12 of the 1987 Constitution
· Limitations on Acquisition
- a partnership, even if entirely of Filipino capital may not:
1. acquire, lease or hold public agricultural lands in excess of 1,024 hectares;
2. lease public lands adapted to grazing in excess of 2,000
· Note:
- contracts entered into by a partner in his own name may be sued upon still by him in his own individual
capacity, notwithstanding the absence of partnership
· Partnership needs publicity to prevent fraud/deceit
a. as to object/subject matter
1. Universal Partnership
- may refer to all the present
property or to all the profits
a. universal of all present property
- that which the partners contribute all the property which actually belongs to them to a common
b. universal of profits
- comprises all that the partners may acquire by their industry or work during the existence of the
partnership
2. Particular Partnership
- object are determinate things, their use or fruits; a specific undertaking or the exercise of a profession or
occupation
b. as to liability of partners
1. General
- they are liable even with respect to their individual properties, in pro rata after the assets of the partnership
have been exhausted, for the contracts which may be entered into in the name and for the account of the
partnership, under its signature and by a person authorized to act for the partnership
2. Limited
- formed by two or more persons having as members one or more general partners and one or more limited
partners.
· The limited partners as such shall not be bound by the obligations of the partnership
· A limited partner is one whose liability is limited only up to the extent of his contribution
c. as to duration
1. at will
2. at a fixed term
- the term of existence has been agreed upon expressly or impliedly
- the expiration of the term thus fixed or the accomplishment of the particular undertaking specified will
cause the automatic dissolution of the partnership
d. as to legality of existence
1. de jure –
2. de facto
e. as to representation
1. ordinary/real
2. ostensible/ partnership by estoppel
f. as to publicity
1. secret
2. open or notorious
g. as to purpose
1. commercial
2. professional
· Kinds of Partners
1. Capitalist Partners
- one who furnishes capital;
- not exempted from losses; can engage in other business provided there is no competition between the
partner and his business
2. Industrial
- one who furnishes industry or labor;
- can be a general partner but never a limited partner;
- exempted from losses as between the partner; cannot engage in any other business without express
consent of the partners, otherwise
- he can be excluded from the firm (plus damage)
- or the benefits he obtains from the other business can be availed of by the other partners (plus
damages)
3. General/Real
- one who is liable beyond the extent of his contribution
4. Managing
- one who manages actively the firm’s affairs
5. Liquidating
- one who liquidates or winds up the affairs of the firm after it has been dishonored
6. Partner by estoppel/Quasi-partner
- one who is not really a partner but who may become liable as such insofar as third persons are concerned
7. Continuing
8. Surviving
9. Subpartner
· Other classifications
a. ostensible partner
- one whose connection with the firm is public and open
b. secret
- one whose connection with the firm is concealed or kept a secret
c. silent
- one who does not participate in the management, though he shares in the profits or losses
d. dormant/sleeping
- one who is both a secret and silent partner (not managing)
e. original
f. incoming
g. retiring
Arts. 1778-80 – Universal Partnership
· Property which the partners may acquire subsequently by inheritance, legacy or donation cannot be
included for the stipulation for common enjoyment
· Fruits thereof may be included
B. All profits
- comprises all that the partners may acquire by their industry or work during the existence of the partnership
· All profits
- only the usufruct of the properties of the partners become common property; naked ownership is retained
by each of the partners
- all profits required by the industry or work of the partners become common property
· All present property
- all the property actually belonging to the partners are contributed- and said properties become common
properties
- as a rule, aside from the properties, only the profits of the said contributed common property
· Note:
- profits from other sources may become common, but only if there is a stipulation to such effect.
- Properties subsequently acquired by inheritance, legacy or donation, cannot be included in the stipulation,
but the fruits thereof can be included in the stipulation
· note:
- future property cannot be included in the stipulation regarding universal partnership of all present property
Reasons:
1. contracts regarding successions rights cannot be made;
2. partnership demands that the contributed things be determinate, known and certain;
3. universal partnership of all present properties really implies a donation and future property cannot be
donated
Art. 1782 – Persons prohibited by law to give donation- cannot enter into Universal Partnership
Reason: they should not be allowed to do indirectly what the law forbids directly
Art. 1783 – Particular Partnership
- it has for its object determinate things, their use of fruits, or specific undertaking, or the exercise of a profession
or vocation
· Doctrine:
If two (2) individuals form a particular partnership for a deal in reality, it does not necessarily follow that all deals
are for the benefit of the partnership. In the absence of agreement, each particular deal results in a particular
partnership. If one of them, on his account, and using his own funds, should make transactions in the same
business, it is his own undertaking
General Rule:
- begins from the moment of the execution of the contract
Exception:
- unless it is otherwise stipulated
· Duration: unlimited in the sense that no time limit is fixed by law; may be agreed upon (expressly or impliedly)
- note:
It is called “at will” because its continued existence really depends upon the will of the partners or even on
the will of any of them.
4. to preserve said property with the diligence of a good father of a family pending delivery to the partnership;
and
5. to indemnify the partnership for any damage caused to it by the retention of the sane or by the delay in its
contribution
The remedy of the partner is not rescission but an action for specific performance with damages and
interest from the defaulting partner from the time he should have complied with his obligation.
- manner prescribed by the contract of partnership in the absence of stipulation, appraisal shall be
made by experts chosen by the partners and according to current prices
D. Risk of loss
- after goods have been contributed, the partnership bears the risk of subsequent changes in their value
1. to contribute on the date due the amount he has undertaken to contribute to the partnership;
2. to reimburse any amount he may have taken from the partnership coffers and converted to his own
use;
3. to pay the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any
amount from the common fund and converts it for his own use; and
4. to indemnify the partnership for the damages caused to it by the delay in the contribution or the
conversion of any sum for his personal benefit
· Coverage of liability
a. interest at the agreed rate (if none, the legal interest)
b. damages that may be suffered by the partnership
· note: even if no actual injury results, the liability exists because Art. 1788 is absolute
note: the permission given must be express; hence, mere toleration by the partnership will not exempt the
industrial partner from liability
c. as to profits
CP – shares in the profits according to the agreement thereon; if none, pro rata to his contribution
IP – receives a just and equitable share
d. as to losses
CP – stipulation; if no stipulation, the agreement as to the profits; if none, pro rata contribution
IP – exempted as to losses (as between the partners0; but is liable to strangers without prejudice to
reimbursement from capitalist partners
General Rule: Partner shall contribute equal shares to the capital of the partnership
· Amount of contribution
- it is permissible to contribute unequal shares, if there is a stipulation to that effect
· To whom applicable
- both to industrial as well as to capital partners undoubtedly
General Rule:
- a capitalist partner is not bound to contribute to the partnership more than what he agreed to contribute but
in case of imminent loss of the business, and there is no agreement to the contrary, he is under obligation to
contribute an additional share to save the venture.
- if he refuses to contribute, he shall be obliged to sell his interest to the other partners
· Requisites when a capitalist partner is obliged to sell his interest to the other partners:
1. if there is imminent loss of the partnership;
2. he refuses to contribute an additional share to the capital; and
3. there is no agreement to the contrary
· note: industrial partner is exempted for he is already giving his entire industry
a. the partner has the duty to secure benefits for the partnership; on the other hand, he has the duty also not
to be at fault
b. since both are duties, compensation should not take place, the partner being the debtor in both instances
- compensation requires 2 persons who are reciprocally debtors and creditors of each other
· Mitigation of Liability
- equity may mitigate liability if there are “extraordinary efforts” resulting in unusual “profits”
Cases contemplated:
1. Specific and determinate things which are not fungible where only the use is contributed
- the risk of loss is borne by the partner because he remains the owner of the things
2. Specific and determinate things the ownership of which is transferred to the partnership
- the risk of loss is for the account of the partnership, being the owner
3. Fungible things or things which cannot be kept without deteriorating even if they are contributed only for the
use of the partnership
- the risk of loss is borne by the partnership for evidently the ownership was being transferred since use is
impossible without the things being consumed or impaired
4. Things contributed to be sold
- the partnership bears risk of loss for there cannot be any doubt that the partnership was intended to be the
owner; otherwise’ the partnership could not effect the sale
5. Things brought and appraised in the inventory
- the partnership bears the risk of loss because the intention of the parties was to contribute to the
partnership the price of the things contributed with an appraisal in the inventory. There is thus an implied
sale making the partnership owner of the said things, the price being represented by their appraised value.
· Distribution of Profits
a. partners share the profits according to their agreement subject to Art. 1799
b. if there is no such agreement:
1. the share of each capitalist partner shall be in proportion to his capital contribution (this rule is based
on the presumed will of the partners)
2. the industrial partner shall receive such share, which must be satisfied first before the capitalist
partners shall divide the profits, as may be just and equitable under the circumstances.
- the share of the industrial partner in the profits is not fixed, as in the case of the capitalist partners, as
it is very difficult to ascertain the value of the services of a person
· Distribution of Losses
a. the losses shall be distributed according to their agreement subject to Art. 1799
b. if there is no such agreement, but the contract provides for the share of the partners in the profits, the
share of each in the losses shall be in accordance with the profit-sharing ratio, but the industrial partner
shall not be liable for losses. The profits or losses of the partnership cannot be determined by taking
into account the result of one particular transaction but of all the transactions had.
c. If there is also no profit-sharing stipulated in the contract, then losses shall be born by the partners in
proportion to their capital contributions, but the purely industrial partner shall not be liable for the losses.
· Non-applicability to Strangers
- Art. 1797 applies only to the partners, not when liability in favor of strangers are concerned, particularly
with reference to the industrial partner
a. third person
- in the article, not a partner; to avoid partiality
Art. 1799 – (1) Stipulation excluding a partner from any share in profits or losses
General Rule:
- a stipulation excluding one or more partners from any share in the profits or losses is void
Reason: partnership is for COMMON BENEFIT
Exception:
- in the case of the industrial partner whom the law itself excludes from losses
note: stipulation exempting a partner from losses should be allowed
· Reason why industrial partner is generally exempted from losses
- the industrial partner cannot withdraw any labor or industry he had already exerted.
· Distinction between Appointment in Articles of Partnership and Appointment from other Source (other than the
articles of partnership)
a. as to power
Partnership – power is irrevocable without just or lawful cause
- to justify removal for just cause: controlling partners should vote to oust him
- without just cause: there must be unanimity
other source - power to act may be revoked at any time, with or without just cause
b. as to extent of power
Partnership
· good faith – he may do all acts of administration (not ownership) despite the opposition of his partners
· bad faith – he cannot
other source – as long as he remains manager, he can perform all acts of administration, but of course, if the
others oppose and he persists, he can be removed
· Rules as to Compensation
General Rule:
- in the absence of an agreement to the contrary, each member of the partnership assumes the duty to give
his time, attention, and skill to the management of its affairs, so far at least, as may be reasonable
necessary to the success of the common enterprise; and for this service a share of the profits is only his
compensation.
Exception:
a. a partner engaged by his co-partners to perform services not required of him in fulfillment of the duties
which the partnership relation imposes and in a capacity other than that of a partner is entitled to receive
the compensation agreed upon therefor;
b. a contract for compensation may be implied where there is extraordinary neglect on the part of one partner
to perform his duties toward the firm’s business, thereby imposing the entire burden on the remaining
partner;
c. one partner may employ his co-partner to do work for him outside of and independent of the co-
partnership, and become personally liable therefor;
d. partners exempted by the terms of partnership from rendering services to the firm may demand pay for
services rendered;
e. where one partner is entrusted with the management of the partnership business and devotes his whole
time and attention thereto, at the instance of the other partners who are attending to their individual
business and giving no time or attention to the business of the firm, the case presents unusual conditions, is
taken out of the general rule as to compensation and warrants the implication of an agreement to make
compensation, In such cases, the amount of compensation depends, of course, upon the agreement of the
parties, express or implied, as well as upon the particular circumstances of the case; and
f. by the contract of partnership, one partner is exempted from the duty of rendering personal services to the
concerned, if he afterwards does render such service at the instance and request of his co-partners, or
where the services rendered are extraordinary.
· Specific Rules:
1. Each may separately execute all acts of administration;
2. except if any of the managers should oppose (division of the majority of the managers shall prevail)
- if there is a tie, the partners owning the controlling interest prevail; provided they are also managers
APPLICABILITY:
When they innocently deal with a partner apparently carrying on in the usual way the business, it is
imperative that if unanimity is required it is essential that there be unanimity; otherwise the act shall not be valid,
that is the partnership is not bound.
Art. 1803 – Rule when manner of management has not been agreed upon
b. “alteration”
- contemplates useful expenses
Subpartnership – partnership formed between a member of a partnership and a third person for a division of the
profits coming to him from the partnership enterprise
- partnership within a partnership and is distinct and separate from the main or principal partnership
· Associate of Partner
a. for a partner to have an associate in his share, consent of the other partners is not required;
b. for the associate to become a partner, all must consent
a. such a right is granted to enable the partner to obtain true and fuel information of the partnership
affairs
b. the article presupposes an “ongoing partnership”
c. “reasonable hour”
- contemplates business days throughout the year
· Duties of a partner
1. Duty to act for common benefit
2. Duty begins during the formation of partnership
3. Duty continues even after dissolution of partnership
4. Duty to account for secret and similar profits
5. Duty to account for earnings accruing even after termination of partnership
6. Duty to make full disclosure of information belonging to partnership
7. Duty not to acquire interest or right adverse to partnership
· Duty to Account
REASON:
- the fiduciary relation between the partners are relationships of trust and confidence which must not be
abused or used to personal advantage
- trust relations exists only during the life of the partnership, not before nor after
· Effect of Violation
a. the violator shall bring the partner shall of the profits illegally obtained;
b. he shall personally bear all the losses
Estoppel
- cannot be questioned anymore if it was accepted without objection for this would now be a case of
estoppel, unless fraud and error are alleged and proved
Principal Rights:
a. specific partnership
b. interest in the partnership
c. right to participate in the management
Related Rights:
a. the right to reimbursement for amounts advanced to the partnership and to indemnification for risks in
consequence of management;
b. the right to access the inspection of partnership books;
c. the right to true and full information of all things affecting the partnership;
d. the right to formal account of partnership affairs under certain circumstances; and
e. the right to have the partnership dissolved also under certain conditions
a. as to changes in value
PP – variable; its value may vary from day to day with changes in the market value of the partnership assets
PC – constant; remains unchanged as the amount fixed by agreement of partners, and is not affected by
fluctuations in the value of partnership property, although it may be increased or diminished by unanimous
consent of the partners
b. as to assets included
PP – includes not only the original capital contributions of the partners, but all property subsequently
acquired on account of the partnership or with partnership funds, including partnership name and the good
will of the partnership
PC – represents the aggregate of the individual contributions made by the partners in establishing or
continuing the partnership
Art. 1812 – Partner’s Interest in the Partnership is his share of the profits and surplus
In general., a partner’s interest in the partnership (his share in the profits and surplus) may be assigned,
attached or be subject to legal support
· Rights of Assignee
1. to get whatever profits the assignor-partner would have obtained;
2. to avail himself of the usual remedies in case of fraud in the management;
3. to ask for annulment of the contract of assignment if there was fraud, error, intimidation, force, undue
influence;
4. to demand an accounting
Art. 1814 –
· Receivership
a. when the charging order is applied for and granted, the court may at the same time or later appoint a
receiver of the partner’s share in the profits or money due him
b. the receiver appointed is entitled to any relief necessary to conserve the partnership assets for partnership
purposes
· Firm Name
- name, title or style under which a company transacts business; a partnership of two or more persons; a
commercial house
· Purpose
- necessary to distinguish the partnership which has a distinct and separate juridical personality from the
individuals composing the partnership and from other partnerships and entities.
· Partnership Liability
· Individual Liability
Stipulations such as those exempting all the industrial partners and some of the capitalist partners, insofar
as third persons are concerned, would be null and void
NOTE: The 7 kinds of acts enumerated in Art. 1818 are instances of acts which are NOT for apparently
carrying on in the usual way the business of the partnership.
In the 7 instances, the authority must be unanimous except if the business has been abandoned.
Conditions:
- admission must concern partnership affairs;
- within the scope of the authority
note: a previous admission of a partner is admissible in evidence against the partnership when it is made
within the scope of the partnership, and during the existence, provided of course that the existence of the
partnership is first proved by evidence other than such act or declaration
· Instances when the firm and other partners are not liable:
a. if the wrongful act or omission was not done within the scope of the partnership business and for its
benefit;
b. if the act or omission was not wrongful;
c. if the act or omission, although wrongful, did not make the partner concerned liable himself; and
d. if the wrongful act or omission was committed after the firm had been dissolved and the same was not in
connection with the process of winding up
· Estoppel
- a bar which precludes a person from denying or asserting anything contrary to that which has been
established as the truth by his own deed or representation, either express or implied
Burden of Proof
- the creditor, or whoever alleges the existence of a partner or partnership by estoppel has the burden of
proving the existence of the misrepresentation and the innocent reliance on it
· the rule of holding the new partner liable for previous obligations of the firm is not harsh on the said new
partner. After all the incoming partner partakes of the benefit of the partnership, property and an established
business
Art. 1827 – Creditors of Partnership
- after all, the partnership is a juridical person with whom the creditors have contracted; moreover the assets
of the partnership must first be executed
Reason why industrial creditors may still attach the partner’s share
- if a partner sells his share to a third party, but the firm itself still remains solvent, creditors of the
partnership cannot assail the validity of the sale by alleging that it is made in fraud of them, since they have
not really been prejudiced
Art. 1828 & 1829 – Definition of Dissolution, Winding up and Termination; Effects of Dissolution
Dissolution
- the change in the relation of the partners caused by any partner ceasing to be associated in the carrying
on of the business
- that point of time when the partners cease to carry on the business together
Effects of Dissolution:
a. partnership is not terminated;
b. partnership continues for a limited purpose; and
c. transaction of new business is prohibited
Winding Up
- the process of settling business affairs after dissolution
Termination
- the point in time after all the partnership affairs have been wound up
Effect on Obligations
a. a partner cannot evade previous obligations entered into by the partnership
b. absolution saves the former partners from new obligation to which they have not expressly or
impliedly consented, unless the same be essential for winding up
1. as to first cause
- partnership agreement has not been violated
4 instances:
v termination of the definite term or specific undertaking;
v express will of a partner who must act in good faith when there is no definite term and specific
undertaking;
v express will of all the partners who have not assigned their interests or suffered them to be
charged for their separate debts, either before or after the termination of any specified term or
particular undertaking;
v by the expulsion of any partner from the business bona fide in accordance with such p[power
conferred by the agreement between the partners
3. In contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time;
4. when a specific thing, which a partner had promised to contribute to the partnership, perishes before
delivery
5. by the death of any partner;
6. by the insolvency of any partner or of the partnership;
7. by the civil interdiction of any partner; and
8. by decree of court
note: partners in their contract cannot limit the cause for dissolution
· this article speaks of a dissolution by decree of court. In a suit for dissolution proof as to the existence of
the firm must be given
· Who may sue for dissolution:
a. a partner for any of the causes given under 1831
b. the purchaser of a partner’s interest in the partnership under Art. 1813/1814, provided that the period
has expired or if the firm was a partnership at will when the interest was assigned or changed
note: if period is not yet over, said purchaser cannot sue for dissolution
· Insanity of a partner
a. even if a partner has not yet been previously declared insane by the court, dissolution may be asked,
as long as the insanity is duly proved in court;
b. insanity is a cause since the partner will be incapacitated to contract
Appointment of a receiver
In a suit for dissolution, the court may appoint a receiver at its own discretion but a receiver is not needed
when practically all the firm assets are in the hands of a sheriff under a writ of replevin, or when the existence of
a partnership with the plaintiff is denied, particularly if the business of the firm is being conducted successfully
· Time of Dissolution
- a firm becomes a dissolved partnership at the time the judicial decree become s a final judgment
Effects of dissolution
- when a partnership is dissolved, certain effects are inevitable, insofar as the relations of the firm toward
third persons are concerned, and insofar as the partners themselves are affected in their relations with one
another
a. Act-Insolvency-Death
b. Other things like termination
Effect of AID
- all partners are still bound to each other generally, except:
a. if the partner had knowledge (as distinguished by NOTICE without actual knowledge)
- if dissolution is caused by an act (e.g. withdrawing, retiring)
b. if the partner acting had knowledge or notice, if dissolution was caused by death or insolvency
note:
Death or insolvency being more ordinary than an “act,” notice is enough. Hence, the law provides
“knowledge” or notice.
However, it is still essential that there be knowledge or notice of the fact of death or insolvency to justify
non-liability of the other partners to the parties acting.
Dissolution ordinarily does not discharge existing liability of partners, otherwise, creditors would be
prejudiced, particularly if a partner will just withdraw anytime from the firm
Art. 1836 – Judicial and Extrajudicial Wind up; Persons authorized to wind up
Extrajudicial winding up
- by the partners who have not wrongfully dissolved the partnership;
- or by the legal representative of the last surviving partner provided the last survivor was not insolvent
Judicial winding up
- under the control and direction of the court, upon proper cause that is shown to the court;
- petition for judicial winding up can be done by any partner, his legal representative or assignee
Innocent Partners:
- have better rights than guilty partners;
- may continue the business (new partnership);
- rights of the guilty partners are safeguarded by a:
a. bond approved by the court
b. payment of interest at the time of dissolution minus damages
note: a guilty partner, in ascertaining the value of his interest is not entitled to a proportionate share of the value
of the GOOD WILL
Division of Losses
-rule on losses must apply, provided that their real market values at the time of liquidation are the values
considered
Three Rights (without prejudice to the other rights under other legal provisions)
a. right to lien or retention;
b. right of subrogation; and
c. right of indemnification
Liquidation
- before liquidation is made, no action for accounting of a partner’s share in the profit or for a return of his
capital assets can properly be made, since it is essential to first pay off the creditors
Assets of Partnership
- partnership property
- contributions of the partners, which are made to pay off the partnership liabilities
note:
- if the partnership assets are insufficient the other partners must contribute more money or property
- such contributors may be enforced by:
- any assignee for the benefit of the creditor, or any person appointed by the court;
- any partner or his legitimate representative
Why are the old creditors considered creditors of the new firm?
- the reason for the law (in making creditors of the dissolved firm also creditors of the person or partnership
continuing the business) is for said creditors not to loss their preferential rights as creditors to the
partnership property
General Rule:
- when a partner retires from the firm he is entitled to the payment of what may be due him after liquidation
- but no liquidation is needed when there already is a settlement as to what the retiring partner shall receive
Art. 1842 – Accrual and Prescription of Partner’s right to account for his Interest
Possible defendants:
Action against
- winding up partners
- surviving partners
- person in partnership continuing the business
Prescription
- begins to run only upon the dissolution of the partnership when the final accounting is done
Limited Partnership
Characteristics:
a. formed by compliance with the statutory requirements;
b. one or more general partners control the business and are personally liable to creditors
c. one or more limited partners contribute to the capital and share in the profits but do not participate in
the management of the business and are not personally liable for partnership obligations beyond the
amount of their capital contributions;
d. the ;limited partners may ask for the return of their capital contributions under the conditions
prescribed by law; and
e. the partnership debts are paid out of common fund and the individual properties of the general
partners
Limited Partnership
- one formed by two or more persons under the provisions of Art. 1844, having as members one ore more
general partners and one or more limited partners. The limited partners as such shall not be bound by the
obligations of the partnership
Requisites:
a. signing under oath of the required certificate;
b. filing for record of the certificate in the SEC
Rule:
a. a limited partner is not allowed to contribute industry or services alone
b. an industrial partner can become a general partner in a limited partnership
Art. 1846 – Effect where surname of limited partner appears in partnership name
- the limited partner violating this article is liable, as a general rule, to partnership creditors without, however,
the rights of a general partner. Of course, such limited partner shall not be liable as a general partner with
respect to third persons with actual knowledge that he is only a limited partner.
- a limited partner is liable as a general partner for the firm’s obligations if he takes part or interfere in the
management of the firm’s business.
The following do not constitute taking part in the control of the business:
a. mere dealing with a customer;
b. mere consultation on one occasion with the general partners
note: participation in the control of the business makes the limited partners liable as a general partner without getting
the latter’s rights
· Under the acts enumerated (under Art. 1850), the general partners (even if unanimous) must still get the
written consent of all the limited partners.
· If a general partner in a limited partnership goes abroad, his capacity to bind the firm is governed by the
law of the place where the limited partnership was formed.
Art. 1852 – Status of partner where there if failure to create limited partnership
· a contributor who erroneously believes he has become a limited partner and thereupon exercises the rights
of a limited partner, he should not be considered as a general partner
· however, he can be held liable as a general partner:
- unless in ascertaining the mistake, he promptly renounces his interest in the profits of the business or other
compensation by way of income;
- unless, even if no such renouncing is made, partnership creditors are not prejudiced
Art. 1853 – A person may be both a general partner and a limited partner
· a person may be a general and a limited partners at the same time, provided the same is stated in the
certificate
· generally, his rights are those of a limited partner
exception:
- regarding his contribution, he would be considered a limited partner, with the rights of a limited partner
insofar as the other partners are concerned
Art. 1854 – Loan and other business transactions with limited partners
Right of a limited partner to lend money and transact other business with the firm
a. the parties are always given preferential rights insofar as the firm’s assets are concerned
b. while a limited partner, in the case of claims referred to in the article, is prohibited to receive or hold as
collateral security any partnership property, still he is not prohibited to purchase partnership assets which
are used to satisfy partnership obligations towards third parties
Allowable transactions
a. granting loans to the partnership;
b. transacting other business with it; and
c. receiving a pro rata share of the partnership assets with general creditors if he is not also a general partner
Prohibited transactions
a. receiving or holding collateral security any partnership property
b. receiving any payment, conveyance, or release from liability if it will prejudice the right of third persons
Preference involves:
- return of contribution
- compensation
- other matters
For this article to apply, partnership assets must be in excess of partnership liabilities to third persons, not
liabilities to partners
a. all liabilities of the partnership have been paid or if they have not yet been paid, the assets of the
partnership are sufficient to pay such liabilities
b. the consent of all the members has been obtained except when the return may be rightfully demanded;
and
c. the certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution
Par. 1 – deals with the conditions that must exist before contribution by a limited partner can be returned to him
Par. 2 – deals with the time when such contributions can be returned, provided that the conditions are complied with
· even if a limited partner has contributed property, he has the right to demand and receive cash in return
· if par. 1 is violated, previous creditors can sue, but they must allege and prove the non-existence of the
conditions
- new provision
- source: Sec. 20 Uniform Limited Partnership Act
- new provision
- source: Sec. 21 Uniform Limited Partnership Act
- new provision
- source: Sec. 22 Uniform Limited Partnership Act
Art. 1863 – Payment of liabilities of limited partner
- new provision
- source: Sec. 23 Uniform Limited Partnership Act
- new provision
- source: Sec. 24 Uniform Limited Partnership Act
Cancellation
- when the partnership is dissolved, or when all the limited partners cease to be limited partners, the limited
partners shall be cancelled, not merely amended. The writing to cancel a certificate shall be signed b y all
the members
- new provision
- source: Sec. 25 Uniform Limited Partnership Act
Art. 1866 – When contributors (other than general partners) should be made parties to proceedings
- new provision
- source: Sec. 30 Uniform Limited Partnership Act
Art. 1868
Definition of agency
- a relationship which implies a power in an agent to contract with a third person on behalf of the principal.
- The power to effect the principal’s contractual relations with third persons that differentiates the agent from
the employee, the servant, and the independent contractor
Importance
- enables a man to increase the range of his individual and corporate activity by enabling him to be
constructively present in many places and to carry on divers activities at the same time
Characteristics
a. principal
b. nominate
c. bilateral
d. preparatory
e. commutative
f. generally onerous
g. fiduciary
Nature – a contract
Basis – representation constitutes the basis of agency
Purpose – to extend the personality of the principal through the facility of the agent
Parties:
a. principal
- he whom the agent represents and from whom he derives authority; he is the one primarily concerned
in the contract
b. agent
- he who acts or stands for another
- usually, he is given full or partial discretion, but sometimes he acts under a specific command
Elements of Agency
Capacity of an Agent
· the same as the law on contracts
- able to bind himself but only insofar as his obligation to his principal is concerned;
- insofar as third persons are concerned, however, it is enough that his principal be the one
capacitated, for generally an agent assumes no personal liability
Distinctions
An agent acts not for himself, but for his principal; a partner acts for himself, for his firm, and for his
partners. It may be even said that partnership is a branch of the law on agency.
An agent may be given funds by the principal to advance the latter’s business, while the borrower is given
money for purposes of his own, and he must generally return it, whether or not his own business is successful. A lot
however depends on the intent of the
parties.
1. The agent represents a capacitated person while the guardian represents an incapacitated person
2. The agent is appointed by the principal and can be removed by the latter while the guardian is appointed by the
court and stands in locos parentis
3. The agent is subject to the directions of the principal while the guardian is not subject to the directions of the ward,
but must of course act for the benefit of the ward.
4. The agent can make the principal personally liable while the guardian has no power to impose personal liability on
the ward.
(1) The agent is appointed by the principal while the judicial administrator (JA) is appointed by the court.
(2) The agent represents the principal while the JA represents not only the court but also the heirs and
creditors of the estate.
(3)Agent generally does not file a bond while the JA files a bond.
(4)The agent is controlled by the principal thru their agreement while the acts of the JA are subject to the
specific orders from the court.
(1)The agent is controlled by the principal while the lease is not controlled by the lessor
(2) The agency may involve things other than property while, obviously, a lease of property involves
property only.
(3) The agent can bind the principal while the lessee, as such, cannot bind the lessor.
1. The agent represents the principal while the lessor of services does not represent his employer
2. relationship can be terminated at the will of either principal or agent while in lease, generally, the
relationship can be terminated only at the will of the both
3. agent exercises discretionary powers while the employee has ministerial functions
4. in agency, it usually involves 3 persons: the principal, the agent, and a stranger while lease of services
usually involves only two persons
NOTE: it should be understood however that an agent may incidentally render acts of service, while a lessor of
services or employee may incidentally make contracts
a. the agent acts under the control of the principal, while the independent contractor is authorized to do
the work according to his own method, without being subject to the other party’s control, except insofar
as the RESULT of the work is concerned
b. the agent of the agent may be controlled by the principal while the employees of the contractor are not
the employees of the employer of the contractor
c. agent can bind the principal while ordinarily, the independent contractor cannot bind the employer by
tort
d. the negligence of the agent is imputable to the principal while the negligence if the independent
contractor is generally not imputable to his employer
Agency vs. Negotiorum Gestio
a. in agency there is a contract caused by a meeting of the minds, expressly or impliedly while in
negotiorum gestio, there is only a quasi-contract, there having been no meeting of minds. Hence, the
representation was not agreed upon
b. agent is controlled by the principal while the officious manager follows his judgment and the presumed
will of the owner
c. in agency the legal relation is created by the parties while in negotiorum gestio the legal relationship is
created by law (occasioned of course by the acts of the manager)
a. an agent usually holds no title at all while the trustee may hold legal title to the property
b. usually, agent acts in the name of the principal while the trustee may act in his own name
c. usually, agency may be terminated or revoked at any time while the trusty is usually ended by the
accomplishment of the purposes for which it was formed
d. agency may not be connected at all with property while trust involves control over property
e. agent has authority to make contracts which will be binding on his principal while trustee does not
necessarily or even possess such authority to bind the trustor or the cestui que trust
f. agency is really a contractual relation while a trust may be the result of the contract or not: it may be
created also by law
b. according to form
- oral
- written
c. as to character
· gratuitous
- one where the agent receives no compensation for his services
· compensated or onerous
- one where the agent receives compensation for his services
e. as to authority conferred
· couched in general terms – one which is created in general terms and is deemed to comprise only acts of
administration
· couched in specific terms – one authorizing only the performance of a specific act or acts
Form of agency
In general, there are no formal requirements governing the appointment of an agent. The agent’s authority
may be oral or written. It may be in public or private writing.
Agency may even be implied from words and conduct of the parties and the circumstances of the particular
case. But agency cannot be inferred from mere relationship or family ties.
Appointment of agent
It is not essential that an agent be appointed directly by the principal, but the appointment may be made
through another, as by referring an applicant to another and representing that he has authority to act, or the relation
may arise out of an agent to employ the agent of the first party.
An agent appointed by the directors of a corporation to act for the corporation is an agent of the corporation
and not of the directors.
Presumption of agency
General Rule:
- agency is generally not presumed. The relationship between the principal and the agent must exist as a
fact.
Exception:
- a presumption of agency may arise, however, in those few cases where an agency may arise by
operation of law or to prevent unjust enrichment
Forms:
a. express
b. implied
Rules:
Acceptance cannot be implied from the silence of the agent except:
a. transmission of the Power of Attorney by the principal to the agent, who receives it without objection;
and
b. principal entrusts to the agent a letter or telegram a Power of Attorney, and he did not reply to the
same
Power of Attorney
- an instrument in writing by which one person, as principal, appoints another as his agent and
confers upon him the authority to perform certain specified acts or kinds of acts on behalf of
the principal
- the written authority itself is the power of the attorney and this is clearly indicated by the fact it
has also been called a “letter of attorney.”
Primary Purpose:
- not to define the authority of the agent as between himself and his principal but to evidence the
authority of the agent to the third parties within whom the agent deals; and the person holding the power of
attorney is shown and designated as an “attorney in fact,” thus distinguishing such person from an attorney
at law
General Rule: The instrument will be held to grant only those powers which are specified, and the agent may neither
go beyond nor deviate from the power of attorney.
Exception to the Rule: The general rule shall not be applied to the extent of destroying the very purpose of the
power.
Rules:
Acceptance of the agency by the agent is not implied from his silence or inaction. Since the agent is not
bound to accept the agency, he can simply ignore the offer.
There are two ways of giving notice of agency with different effects:
1. If by special information (by letter), the person appointed as agent is considered such with
respect to the person to whom it was given.
2. If by public advertisement, the agent is considered as such with regard to any person.
In either case, the agency is deemed to exist whether there is actually an agency or not.
The power of attorney must be revoked in the same manner in which it was given.
If the agency has been entrusted for the purpose of contracting with specified persons, its
revocation shall not prejudice the latter if they were not given notice thereof. If the agent had general
powers, revocation of the agency does not prejudice third persons who acted in good faith and without
knowledge of the revocation.
This article changes the rule in the old Civil Code under which an agency was presumed to be
gratuitous. Hence, the agent does not have to prove that the agency is for compensation.
Distinction:
The distinction is based on the scope of the business covered. A General Agency must not be
confused with one couched in general terms which is a special agency when it involves only one or more
specific transactions.
As to the extent of the power conferred, agency may be couched in general terms or couched in specific
terms.
An agency couched in general terms may be a general agency or a special agency. It includes only acts of
administration and an express power is necessary to perform any act of strict ownership
15 instances:
1. To make payment
2. To effect novation
3. To compromise, etc
4. To waive an obligation gratuitously
5. To convey or acquire immovable
6. To make gifts
7. To loan or borrow money
8. To lease realty for more than 1 year
9. To bind the principal to render service gratuitously
10. To bind the principal in a contract of partnership
11. To obligate principal as guarantor or surety
12. To create or convey real rights over immovable property
An agent authorized to compromise can do anything which the principal himself can do to effect a
settlement, unless there is a contrary legal provision.
A special power to submit to arbitration does not authorize the power to compromise.
note: the power of an agent is also the limitation upon his ability to bind the principal, for it is well settled
that an agent binds his principal only as to acts within his actual or apparent authority
b. as to scope
general rule: the extent of the agent’s authority depends upon the purpose of the agency
- as between the agent and the principal, an act is within the authority of the agent if it is not a violation of
his duty to the principal, and it is within the power if he has the legal ability to bind the p[principal to a third
parson although the act constitutes a violation of his duty to the principal
- so far as third persons are concerned, no distinction exists. An act within the power of the agent is
deemed within the scope of his authority even if the agent has, in fact, exceeded the limits of his authority or he
has no authority whatever to do so
Kinds of authority:
1. actual
2. express
3. implied
4. apparent or ostensible
5. general
6. special
7. authority by necessity or by operation of law
- when it is demanded by virtue of the existence of an emergency; it terminates when the agency
has passed
Requisites when
1. principal is bound by act of agent
a. agent must act within the scope of his authority; and
b. the agent must act in behalf of the principal
a. Disclosed Principal
- if at the time of the transaction contracted by the agent, the other party thereto has known
that the agent is acting for a principal and of the principal’s identity.
- This is the usual type of agency
b. Partially Disclosed Principal
- if the other part knows or has reason to know that the agent is or may be acting for a
principal but is unaware of the principal’s identity.
- The par6tially disclosed partner may enforce against the third person the contract of the
agent like any disclosed principal. Similarly, the third has the right of action against the
principal
c. Undisclosed Principal
- if the party has no notice of the fact that the agent is acting as such for a principal
· Agency with an undisclosed principal
- the article speaks of a case where the agent was authorized, but instead of acting in behalf of
the principal, he acts in his own behalf
- does not apply if the agent was unauthorized or he acts in excess of his authority
· When authorized agent buys in his own name but really in behalf of principal
- seller has the option to look to either for payment unless:
a. he trusted the agent exclusively;
b. by usage and understanding of business, the agent only is held;
c. unless the special circumstances of the case reveal that the agent was intended to be bound
and the seller knew it, or was chargeable with knowledge of it
· When authority of agent is doubtful
- the action must be directed against both the principal and “agent”
General obligations
a. Loyalty to his trust agent’s first duty
b. Obedience to principal’s instruction
c. Exercise of reasonable care
Duty of Owner
a. by appointing an agent
b. by taking charge of the goods
Rule:
- the principal must advance to the agent, should the latter so request, the sums necessary for the
execution of the agency
- the contract on agency, however, may stipulate that the agent shall advance the necessary funds
- in such case, the agent is bound to furnish such funds except when the principal is insolvent
Instruction of principal
- private directions which the principal may give the agent in regard to the manner of performing his duties
as such agent
a. sudden emergency
b. ambiguous instructions
c. insubstantial departure
- agent must not carry out the agency if its execution would manifestly result in the loss or damage to the
principal
a. agent should exercise due diligence;
b. agent must presumably act for the benefit, and not to the detriment of the principal
manifestly – means that the execution would damage only the principal
Art. 1889 – Obligation by the agent not to prefer his own interest to those of principal
- the article applies whether the agency is onerous or gratuitous for here the law does not distinguish
b. basis:
- the underlying basis of the rule is to shut the door against temptation and keep the agent’s
eye single to the rights and welfare of his principal
a. if he is expressly empowered to borrow money, he may himself be the lender at the current rate of
interest for there is no danger of the principal suffering any damage since the current rate of interest
would have to be paid in case if the loan were obtained from a third person.
b. If the agent has been authorized to lend money at interest, he cannot be the borrower without the
consent of the principal because the agent may prove to be a bad debtor.
Definition of Sub-agent
A person to whom the agent delegates, as his agent, the performance of an act for the principal which the
agent has been empowered to perform through his representative.
Effects of Substitution.
a. When the substitute is appointed by the agent against the express prohibition of the principal, the agent
exceeds the limits of his authority. All acts of the substitute in such case is VOID.
b. If the agent is given the power to appoint a substitute and the principal did not designate any person to be
appointed, the substitution has the effect of releasing the agent from his responsibility unless the person
appointed is notoriously incompetent or insolvent.
c. If the agent appoints a substitute when he was not given the power to appoint one, the substitution is valid
if the same is BENEFICIAL to the principal.
Rule: It is advisable that when a principal hires several agents to act for him, he must define their respective powers
– whether that may act only as a unit or whether they may act separately.
a. The presumption is that an obligation is joint. The rule in 1894 follows the general principle respecting
solidarity.
b. If solidarity has been agreed upon, each of the agents becomes solidarily liable:
a. For the non-fulfillment of the agency even though in this case, the fellow agents acted beyond the
scope of their authority; and
b. For the fault or negligence of his fellow agents provided the latter acted within the scope of their
authority.
c. An agent who exceeds his powers does not act as such agent, and therefore, the principal assumes no
liability to third person.
The article is without prejudice to a criminal action that may be brought because of conversion;
On the other hand, there is no liability for interest on sums which have not been converted for the agent’s own
use, unless of course, at the expiration of the agency, the agent still owed the principal certain sums.
Rule: The PRINCIPAL is responsible for the acts of the agent done within the scope of his authority and should bear
any damage caused to third persons.
This article refers only to the liability of the agent towards third persons.
Principal is not bound except if there is subsequent ratification by him.
It is not enough for the agent to act within the scope of his authority. It is also imperative for such agent to
have complied with the orders and instructions of the principal. If the agent is ignorant, the principal is liable.
Ratification in effect grants authority to the agent. The ratification may be in the future. Note also that only
the principal can ratify.
Art. 1902 – Third persons may require the agent to present Power of Attorney or instructions as regards agency.
Third person deals with an agent at his peril. Hence, he is bound to inquire as to the extent of the agent’s
authority, and this is especially true where the act of the agent is of an unusual nature.
A commission agent who has made an authorized sale on credit must collect the credits due the principal
at the time they become due and demandable. If he fails to do so, he shall be liable for damages unless he can
show that the credit cannot be collected notwithstanding the exercise of due diligence on his part.
Estoppel is a bar which precludes a person from denying or asserting anything contrary to that which has
been established as the truth by his own deed or representation either express or implied.
When the Principal is in estoppel, therefore innocent third persons should not be prejudiced.
RATIFICATION vs ESTOPPEL
Ratification differs from estoppel mainly in that the former rests on intention, express or implied, regardless
of prejudice to another, whereas estoppel rests on prejudice rather than intention.
Art. 1912
In the absence of stipulation that the agent shall advance the necessary funds, the principal must advance
to the agent upon his request the sums necessary for the execution of the agency .
Even if the agency is gratuitous,1912 will also apply; hence, the agent will still be entitled to reimbursement
Art. 1913
Obligation of the principal to reimburse agent for damages
Article is based on equity, and applies even if the agency is gratuitous.
Art.1914
Right of agent to retain by way of pledge
-speaks of one kind of pledge—pledge by operation of law
Art.1915
Solidarity liability of principals
Solidarity is the rule under 1915 because of the common transaction (even if the agent
have been appointed separately).
Art.1916
-the article is subject, however, to the rules under art. 1544.
Art. 1917
Liability to third persons of agent or principal who contracts separately
-if agent is in good faith, the principal shall be liable in damages to third persons whose
contract must be rejected.
-agent alone in bad faith is solely responsible
Art.1918
In four cases provided in this article, the principal I not liable for expenses incurred by the agent.
Reasons :
Under no.1, is to punish the agent; for the exception, the acceptance of benefits is implied ratification;
Under no.2, it is self-evident;
Under no.3 the agent is guilty of bad faith and lack of diligence; and
Under no.4, an express stipulation which is not contrary to law, morals, good customs, public order, or
public policy is binding between the parties
a. revocation;
b. withdrawal of the agent;
c. death, civil interdiction, insanity or insolvency of the principal or agent;
d. dissolution of the firm or corporation
e. accomplishment of the object or purpose of the agency;
f. expiration of the period
note: presence, capacity, and solvency of parties are essential for continuance of agency
Reason:
- agency is generally irrevocable at the will of the principal because the trust and confidence may have
been lost
Kinds of revocation
- express or implied
· appointment of new agent is an IMPLIED REVOCATION of the previous agency from the day
on which notice was given thereof.
Effect:
a. in case of true inconsistency, the agency is revoked, for there would no lo0nger be any basis therefore
b. another case of implied revocation
Effect:
- the power to revoke is a consequence of the solidary liability of the principals
- any of the principals may revoke without the consent of the others
· the general power is impliedly revoked as to matters covered by the special power.
· It is indispensable that notice of the revocation be communicated in some way to the agent
Exceptions:
a. when the agency is created not only for the interest of the principal and the agent; and
b. when the agency is created for the mutual interest of both the principal and the agent
Withdrawal by agent
- reasons of health can justify withdrawal
exceptions:
see duty of agent’s heirs