Relations created by a contract of partnership.

A contract of partnership gives rise to at least four distinct juridical relations, namely:

(1) Relations among the partners themselves;

(2) Relations of the partners with the partnership;
(3) Relations of the partnership with third persons with whom it contracts; and
(4) Relations of the partners with such third persons.
 Each partner is, in one sense, a trustee and at the same time, a cestui que trust.
He is a trustee to the extent that his duties bind him with respect to his co-
partners and the partnership, and a cestui que trust as far as the duties that rest
on his co-partners. (Allen vs. Steinberg, 223 A.d. 240.) This relationship is as
much the same as the one existing between the principal and agent because,
technically, the partnership is the principal and each partner is an agent of the
partnership and every other partners with respect to partnership affairs.

ARTICLE 1784

The following are the essential features of a partnership contract:

(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.

ARTICLE 1785

The expiration of the term thus fixed or the accomplishment of the particular undertaking
specified (or the demonstration of the impossibility of its accomplishment) will cause the
automatic dissolution of the partnership. (Art. 1830[1, a].)

In other words, with such continuation, the partnership for a fixed term or particular
undertaking is dissolved and a new one, a partnership at will, is created by implied
agreement the continued existence of which will depend upon the mutual desire and
consent of the partners. Thus, for example, the manner of management and profit-
sharing ratio originally agreed upon shall still govern but the partnership having become
a partnership at will may be lawfully terminated at any time by the express will of all the
partners or any of them.

Dissolution of partnership. — Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of a partnership at will. He must, however, act in good faith not that
the attendance of bad faith can prevent the dissolution of the partnership (see Art.
1830[1, b].) but that can result in a liability for damages to the other partners. (Art.
1830[2]; see Art. 1837, par. 2; Ortega vs. Court of Appeals, 245 SCRA 529 [1995].)
Implicit in good faith is the requirement that the dissolution must not be made at an
improper or unreasonable time.

ARTICLE 1786

The mutual contribution to a common fund being of the essence of the contract of
partnership, for without the contributions the partnership is useless, it is but logical that
the failure to contribute is to make the partner a debtor of the partnership even in the
absence of any demand.

Under this article, the remedy of the other partner or the partnership is not rescission
but an action for specific performance (to collect what is owing) with damages and
interest from the defaulting partner from the time he should have complied with his
obligation.

ARTICLE 1887

The appraisal of the value of the goods contributed is necessary to determine how
much has been contributed by the partners. In the absence of a stipulation, the share of
each partner in the profits and losses is in proportion to what he may have contributed.

The appraisal is made, firstly, in the manner prescribed by the contract of partnership; secondly, in the
absence of stipulation, by experts chosen by the partners and according to current prices.

ARTICLE 1888

This article contemplates two distinct cases. The fi rst paragraph refers to money
promised but not given on time and the second, to partnership money converted to the
personal use of the partner.

The following are the obligations of the partners with respect to the partnership capital
under Article 1788:

(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 to 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.

Liability of guilty partner for interest

and damages.

The guilty partner is liable for interest and damages not from the time judicial or
extrajudicial demand is made but from the time he should have complied with his
obligation or from the
time he converted the amount to his own use, as the case may be.

ARTICLE 1889

An industrial partner is one who contributes his industry, labor, or services to the
partnership. He is considered the owner of his services, which is his contribution to the
common fund.

Unless the contrary is stipulated, he becomes a debtor of the partnership for his work or
services from the moment the partnership relation begins. In effect, the partnership
acquires an exclusive right to avail itself of his industry. Consequently, if he engages in
business for himself, such act is considered prejudicial to the interest of the other
partners.

Prohibition against engaging in business.

(1) As regards an industrial partner. — The prohibition is absolute and applies whether
the industrial partner is to engage in the same business in which the partnership is
engaged or in any kind of business. It is clear that the reason for the prohibition exists in
both cases, which is to prevent any confl ict of interest between the industrial partner
and the partnership and to insure faithful compliance by said partner with his prestation.

(2) As regards capitalist partners. — The prohibition extends only to any operation
which is of the same kind of business in which the partnership is engaged unless there
is a stipulation to the contrary. (Art. 1808.)

Remedies where industrial partner engages in business.

If the industrial partner engages in business for himself, without the express permission
of the partnership, the capitalist partners have the right either to exclude him from the fi
rm or to avail themselves of the benefi ts which he may have obtained. In either case,
the capitalist partners have a right to damages. Note that the permission given must be
express; hence, mere toleration by the partnership will not exempt the industrial partner
from liability.
Although the law mentions only the capitalist partners, it is believed that industrial
partners are also entitled to the remedy granted since they are equally prejudiced by the
act of their copartner engaging in business for himself.

ARTICLE 1890

The partners can stipulate the contribution of unequal shares to the common fund, but
in the absence of such stipulation, the presumption is that their contribution shall be in
equal shares.
This principle is just and reasonable and is consistent with the rule that partners are
deemed to have equal rights and obligations. (Art. 1770, par. 1.)

Obviously, the above rule is not applicable to an industrial partner unless, besides his
services, he has contributed capital pursuant to an agreement to that effect. (see Art.
1797, par. 2.)

ARTICLE 1891

Requisites for application of rule. — The following are the requisites before a capitalist
partner may be obliged to sell his interest to the others:
(a) There is an imminent loss of the business of the partnership;
(b) The majority of the capitalist partners are of the opinion that an additional
contribution to the common fund would save the business;
(c) The capitalist partner refuses deliberately (not because of his financial inability to do
so), to contribute an additional share to the capital; and
(d) There is no agreement that even in case of an imminent loss of the business the
partners are not obliged to contribute.

It is to be noted that the industrial partner is exempted from the requirement to

contribute an additional share. Having contributed his entire industry, he can do nothing
further.

Reason for the sanction. — The refusal of the partner to contribute his additional share
refl ects his lack of interest in the continuance of the partnership. It would be unjust for
him to remain and reap the benefits of the efforts of the others while he himself refuses
to help. Hence, the law provides a remedy which, incidentally, is just to both parties
since the partner who refuses to contribute is paid the value of his interest while the
other partners are thereby relieved from the burden of continuing their association with
him in the business.

ARTICLE 1892
The article does not apply where the partner who collects for his own credit only is not
authorized to manage, for there can be no ground for suspicion that he may have acted
improperly to create an undue advantage to himself. However, where the manner of
management has not been agreed upon and all the partners participate in the
management of the partnership (see Art. 1803.), then every partner shall be considered
a managing partner for purposes of Article 1792.

Reason for applying payment to partnership credit. — The law safeguards the interests
of the partnership by preventing the possibility of their being subordinated by the
managing partner to his own interest to the prejudice of the other partners. Good faith
demands that the partner vested with the management of the partnership attend more
to the interest of the partnership than to his own and he should not intentionally fail to
effect the collection of the credit of the partnership in order to effect the collection of his
own.

EXAMPLE:

A and B are partners in X and Co., with A as the managing partner. C is indebted to A in
the sum of P2,000.00. C is also indebted to the partnership in the sum of P4,000.00.
Both debts
are demandable. A collects the amount of P1,500.00 from C.

If A issues a receipt to the effect that it is in payment of his (A’s) credit, P500.00 will be
applied only to his credit, the partnership being entitled to a proportionate amount of
P1,000.00 in the payment made by C. But if A gives a receipt for the account only of the
partnership credit, the amount of P1,500.00 will be fully applied to the latter.

ARTICLE 1893

(1) Requisites for application of rule. — The requisites for the application of this article
are as follows:

(a) A partner has received, in whole or in part, his share of the partnership credit;
(b) The other partners have not collected their shares; and
(c) The partnership debtor has become insolvent.

EXAMPLE:

D owes partnership X and Co. P4,500.00. A, a partner, received a share of P1,500.00

ahead of B and C, the two other partners. When B and C were collecting from D, the
latter was already insolvent. In this case, even if A had given a receipt for his share
only, he can be required to share the P1,500.00 with B and C.
The above provision is based on the communityof interest among the partners, which is
one of the underlying principles of the contract of partnership. (11 Manresa 353; Art.
1770, par. 1.)

ARTICLE 1894

Compensation of damages with profits earned for partnership by guilty partner.

(1) Damages not generally subject to set-off. — As a general rule, the damages caused
by a partner to the partnership cannot be offset by the profi ts or benefi ts which he may
have earned for the partnership by his industry.

(a) The partner has the obligation to secure benefi ts for the partnership. Hence, the
profi ts which he may have earned pertain as a matter of law or right, to the partnership.
(b) He has also the obligation to exercise diligence in the performance of his obligation
as a partner. Consequently, inasmuch as a partner is a debtor to the partnership for his
industry, and at the same time is obliged to repair the injury which he might have
occasioned through his fault, there cannot be any compensation. Compensation
requires that the negligent partner be both a creditor and a debtor of the partnership.

This article follows the general rule applicable to all contracts that any person guilty of
negligence or fault in the fulfillment of his obligation shall be liable for damages. (Art.
1170.)

(a) Form. — 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 to 1773 and to the Statute of Frauds. (infra.) Thus, an election to become a member
of a partnership was held suffi cient to render a member a “partner,” there being no necessity that
the member should sign any articles of partnership.

Partnership relation fiduciary in nature. — Partnership is a

form of voluntary association entered into by the associates. It
is a personal relation in which the element of delectus personae8
exists, involving as it does trust and confi dence between the
partners.

Industry. — In the absence of money or property, or in

concurrence with these two, the law permits the contribution
of industry. The word “industry” has been interpreted to
mean the active cooperation, the work of the party associated,
which may be either personal manual efforts or intellectual,
and for which he receives a share in the profi ts (not merely
salary) of the business.