Chapter 1

General Provisions

1. Define partnership.

 By the contract of partnership 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. (Article 1767)

2. What are the essential features of a partnership?

 There must be a valid contract.

 There must be a contribution of money, property, or industry to a common
fund.
 It must be organized for gain or profit.
 It should have a lawful object or purpose and must be established for the
common benefit or interest of partners.

3. What is the consequence/s of a partnership having a separate and

distinct personality from that of each of the partners?

 Can sue and be sued

 Acquire any kind of property
 Insolvency of a partnership does not mean that the partners themselves
are insolvent.

4. State the formalities required for the creation of a partnership?

Article 1772: “Every contract of partnership having a capital of P3,000.00 or

more, in money or property, shall appear in a public instrument, which must
be recorded in the office of the Securities and Exchange Commission.
Failure to comply with the requirements of the preceding paragraph shall not
affect the liability of the partnership and the members thereof to third
persons.”

Article 1773: “A contract of partnership is void, whenever immovable

property is contributed thereto, if an inventory of said property is not made,
signed by the parties and attached to the public instrument.”

Article 1774: “Any immovable property or an interest therein may be

acquired in the partnership name. Title so acquired can be conveyed only in
the partnership name.”

Article 1775: “Associations and societies whose articles are kept secret
among members, and wherein anyone of the members may contract in his
own name with third persons, shall have no juridical personality and shall be
governed by the provisions relating to co-ownership.”
5. What are the effects of unlawful partnership?

 The contract is void ab initio and the partnership never existed in the eyes
of the law
 The profits shall be confiscated in favor of the State government.

– It would be immoral and unjust for the law to permit a profit from an industry
prohibited by it. Besides, if profits are not confiscated, this would only give
incentives to other persons to establish partnerships for the same illegal
purpose because even if their contributions (see #4) are confiscated, they still
have earnings or profit, which is basically the reason why they set up the
partnership in the first place.

 The instruments or tools and proceeds of the crime shall also be forfeited
in favor of the government.
 The contributions of the partners shall not be confiscated unless they fall
under #3

6. Make a comparative table on Partnership versus Corporation.

Partnership Corporation
Creation  Voluntary agreement Created by the state in
of parties the form of a special
 Consensual character or by a
(perfected by the general enabling law.
mere contract of the (The Corporation Code)
partners)
Number of Organizers Two or more Not more than 15

Existence No time limit unless there Not more than 50 years

is an agreement of the (now with perpetual
parties existence under the
Revised Corporation
Code)
Liability of Owners May extend to private Liable only to their
property. capital contributors
Transferability of All partners need to Does not need the
Interest consent to the transfer of consent of the other
interest to another. stockholder,
Ability of owners to As a general rule, As a genral rule,
bind the firm partners acting on behalf stockholders cannot
of the partnership are bind corporation since it
agents thereof. is official acts through a
board of directors.
Remedies in case of A partner can sue another A stockholder cannot
mismanagement partner who mismanages. sue a director who
mismanages, it must be
in the name of the
corporation, through a
 derivative suit.
Nationality A partnership is a national As a general rule, under
of the country where it whose laws it was
was created and created as to nationality,
dependent on percentage on the ownership of the
of ownership. outstanding capital
stock.
Legal Personality From the time the contract Generally from the
begins issuance of COR.
Right of succession None. Death, retirement, Yes. Such causes does
insolvency, civil not dissolve a
interdiction or insanity of a corporation.
partner dissolves the
partnership.

7. What are the classes of Partnership?

Classifications of Partnerships:

(1) As to the Object:

(a) Universal Partnership of All Present Property – defined in Article

1778
(b) Universal Partnership of All Profits – defined in Article 1780
(c) Particular Partnerships – defined in Article 1783

(2) As to the Liability:

(a) General – general partners are liable PRO-RATA and subsidiarily,

sometimes solidarily, with their own property/assets if the partnership
is insolvent. (may include industrial partners)
(b) Limited – limited partners are liable only up to the extent of their
contribution

(3) As to Duration:

(a) At will – no particular undertaking, can be dissolved at any time

(b) With a Fixed Term – may only be dissolved upon the end of its term
unless continued by the partners

(4) As to Legality of Existence:

(a) De Jure – complied with ALL requirements

(b) De Facto – failed to comply with ALL requirements

(5) As to Representation to Others:

(a) Ordinary/Real – actually exists

(b) Ostensible/by Estoppel – exists only to partners
 (6) As to Publicity

(a) Secret – some partners are not known to the public

(b) Open/Notorious – all partners are known to the public
(7) As to Purpose

(a) Commercial/Trading – business transactions

(b) Professional/Non-Trading – exercise of professions

8. Make a comparative table on Universal Partnership of all profits

versus Universal Partnership of all present property.

Universal Partnership of all profits Universal Partnership of all present

property
 Article 1780  Article 1778
A universal partnership of profits A partnership of all present property is
comprises all that the partners may that in which the partners contribute all
acquire by their industry or work during the property which actually belongs to
the existence of the partnership. them to a common fund, with the
intention of dividing the same among
Movable or immovable property which themselves, as well as the profits
each of the partners may possess at which they may acquire therewith.
the time of the celebration of the
contract shall continue to pertain  Article 1779
exclusively to each, only the usufruct In a universal partnership of all present
passing to the partnership. (1675) property, the property which belongs to
each of the partners at the time of the
constitution of the partnership becomes
the common property of all the
partners, as well as all the profits which
they may acquire therewith.

A stipulation for the common

enjoyment of any other profits may also
be made; but the
property which the partners may
acquire subsequently by inheritance,
legacy or donation cannot
be included in such stipulation, except
the fruits thereof. (1674a)

9. What are the classes of partners? Define each.

Kinds of Partners:

(1) Under the Civil Code:

 (a) Capitalist – contributes money/property
(b) Industrial – contributes industry
(c) General – liability extends to personal assets
(d) Limited – liability up to contribution only
(e) Managing – manages the partnership
(f) Liquidating – responsible during dissolution
(g) By Estoppel – not really a partner
(h) Continuing – continues business after dissolution
(i) Surviving – remains after partner’s death
(j) Sub-partner – contracts with partners, Article 1804

(2) Other Classifications:

(a) Ostensible – active, known to the public

(b) Secret – active, unknown to the public
(c) Silent – inactive, known to the public
(d) Dormant – inactive, unknown to the public
(e) Original – member at time of organization
(f) Incoming – about to become a member
(g) Retiring – about to withdraw

10. Who may become partners?

1. Any natural person who is capacitated may become a partner but the
following persons cannot give their consent to a contract of partnership:

i. Unemancipated minors (emancipation takes place by the attainment of

majority
ii. Insane or Demented Persons
iii. Deaf-mutes who do not know how to write
iv. Persons who are suffering from civil interdiction (mental incapacity)
v. Incompetents who are under guardianship

2. A partnership may enter into another partnership with individuals or other

partnerships as there is no prohibition thereto.However, a corporation is
prohibited from doing such.

11. What are the rules to determine the existence of a partnership?

 Article 1769
In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by article 1825, persons who are not partners as to
each other are not partners as to third persons.
(2) Co-ownership or co-possession odes not of itself establish a partnership,
whether such coowners or co-possessors do or do not share any profits made
by the use of the property
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived
(4) The receipt by a person of a share in the profits of a business is prima
facie evidence that he is partner in the business, but no such inference shall
be drawn if such profits were received in payment:

(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord
(c) As an annuity to a widow or representative of a deceased partner
(d) As interest on a loan, though the amounts of payment vary with the
profits of the business
(e) As consideration for the sale of a goodwill of a business or other
property by installments or otherwise. (n

Chapter 2 Obligations of the Partners

Section 1. Obligations of the partners among themselves

1) What are the relations created by a contract of partnership?

1. Relations among partners themselves

2. Relations of the partners with the partnership
3. Relations of the partnership with the third persons
4. Relations of partners with such third persons

2) What are the obligations of the partners among themselves and to

the partnership with respect contribution of money or property?

1. To give his contribution

2. To give additional contribution in case of imminent losses
3. Prohibition to engage in other businesses:
4. Credit to the firm the payment made by a debtor who owes both the
partnership and the managing partner (Art.1792)
5. Other obligations of partners to the partnership and to other partners:

a. Not to convert partnership funds/ property for his own use (Art. 1788)
b. To account for and hold as trustee, unauthorized (or secret) personal
profits (Art. 1807)
c. Pay for damages caused by his fault (Art. 1794)
d. Share with other partners the share of the partnership credit which he has
received from an insolvent firm debtor (Art. 1743)
e. Keep the partnership books in the principal office (except when otherwise
agreed) and allow other partners to have access, inspect and copy the
same.
f. Reimburse the partnership of damages suffered by it through his fault.
i. The liability for damages is not compensable with profits and
benefits earned for the partnership;
ii. Damages, however, may be decreased by courts if through the
partner’s extraordinary efforts, the partnership earned unusual
profits.
g. To inform the other partners on all matters affecting the partnership or
relative to partnership affairs.
h. To observe the diligence of a good father of a family in all his dealings.
i. To adhere to the partnership agreement and decisions of appointed
managing partner(s)

3) Who bears the risk of loss on the things contributed by a partner to

the partnership?

 The partnership bears the risk of loss of things brought and appraised in
the inventory as this has the effect of an implied sale thus making the
partnership the owner of said things. If a partner has advanced funds for
the partnership, he is entitled to recover the amounts advanced by him
with interest.

4) What are the obligations of an industrial partner?

 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. Action for specific performance not available
against him – involuntary servitude.

5) May a capitalist partner engage in business for himself? What about

an industrial partner?

Article 1789: “An industrial partner cannot engage in business for himself,
unless the partnership expressly permits him to do so; and if he should do so,
the capitalist partners may either exclude him from the firm or avail
themselves of the benefits which he may have obtained in violation of this
provision, with a right to damages in either case.”

Article 1808: “The capitalist partners cannot engage for their own account in
any operation which is of the kind of business in which the partnership is
engaged, unless there is a stipulation to the contrary. Any capitalist partner
violating this prohibition shall bring to the common funds any profits accruing
to him from his transactions, and shall personally bear all the losses.”

6) State the rules governing the management of a partnership?

Article 1800: “The partner who has been appointed manager in the articles of
partnership may execute all acts of administration despite the opposition of
his partners, unless he should act in bad faith; and his power is irrevocable
without just or lawful cause. The vote of the partners representing the
controlling interest shall be necessary for such revocation of power. A power
granted after the partnership has been constituted may be revoked at any
time.”

Article 1801: “If two or more partners have been intrusted with the
management of the partnership without specification of their respective duties,
or without a stipulation that one of them shall not act without the consent of all
the others, each one may separately execute all acts of administration, but if
any of them should oppose the acts of the others, the decision of the majority
shall prevail. In case of a tie, the matter shall be decided by the partners
owning the controlling interest. (1693a)

Article 1802: “In case it should have been stipulated that none of the
managing partners shall act without the consent of the others, the
concurrence of all shall be necessary for the validity of the acts, and the
absence or disability of any one of them cannot be alleged, unless there is
imminent danger of grave or irreparable injury to the
partnership. (1694)”

Article 1803: “When the manner of management has not been agreed upon,
the following rules shall be observed:

(1) All the partners shall be considered agents and whatever any one of them
may do alone shall bind the
partnership, without prejudice to the provisions of Article 1801.

(3) None of the partners may, without the consent of the others, make any
important alteration in the immovable property of the partnership, even if it
may be useful to the partnership. But if the refusal of consent by the other
partners is manifested.

Section 2: Obligations of the partners among themselves

1. What are the relations created by a contract of partnership?

1. Relations among partners themselves

2. Relations of the partners with the partnership
3. Relations of the partnership with the third persons
4. Relations of partners with such third persons

2. What are the obligations of the partners among themselves and to the
partnership with respect contribution of money or property?

1. To give his contribution

2. To give additional contribution in case of imminent losses
3. Prohibition to engage in other businesses:
4. Credit to the firm the payment made by a debtor who owes both the
partnership and the managing partner (Art.1792)
5. Other obligations of partners to the partnership and to other partners:
 a. Not to convert partnership funds/ property for his own use (Art. 1788)
b. To account for and hold as trustee, unauthorized (or secret) personal
profits (Art. 1807)
c. Pay for damages caused by his fault (Art. 1794)
d. Share with other partners the share of the partnership credit which he
has received from an insolvent firm debtor (Art. 1743)
e. Keep the partnership books in the principal office (except when
otherwise agreed) and allow other partners to have access,
inspect and copy the same.
f. Reimburse the partnership of damages suffered by it through his fault.
iii. The liability for damages is not compensable with profits and
benefits earned for the partnership;
iv. Damages, however, may be decreased by courts if through the
partner’s extraordinary efforts, the partnership earned unusual
profits.
g. To inform the other partners on all matters affecting the partnership or
relative to partnership affairs.
h. To observe the diligence of a good father of a family in all his dealings.
i. To adhere to the partnership agreement and decisions of appointed
managing partner(s)

3. Who bears the risk of loss on the things contributed by a partner to

the partnership?

 The partnership bears the risk of loss of things brought and appraised in
the inventory as this has the effect of an implied sale thus making the
partnership the owner of said things. If a partner has advanced funds for
the partnership, he is entitled to recover the amounts advanced by him
with interest.

4. What are the obligations of an industrial partner?

 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. Action for specific performance not available
against him – involuntary servitude.

5. May a capitalist partner engage in business for himself? What about

an industrial partner?

Article 1789: “An industrial partner cannot engage in business for himself,
unless the partnership expressly permits him to do so; and if he should do so,
the capitalist partners may either exclude him from the firm or avail
themselves of the benefits which he may have obtained in violation of this
provision, with a right to damages in either case.”
Article 1808: “The capitalist partners cannot engage for their own account in
any operation which is of the kind of business in which the partnership is
engaged, unless there is a stipulation to the contrary. Any capitalist partner
violating this prohibition shall bring to the common funds any profits accruing
to him from his transactions, and shall personally bear all the losses.”

6. State the rules governing the management of a partnership?

Article 1800: “The partner who has been appointed manager in the articles of
partnership may execute all acts of administration despite the opposition of
his partners, unless he should act in bad faith; and his power is irrevocable
without just or lawful cause. The vote of the partners representing the
controlling interest shall be necessary for such revocation of power. A power
granted after the partnership has been constituted may be revoked at any
time.”

Article1801: “If two or more partners have been intrusted with the
management of the partnership without specification of their respective duties,
or without a stipulation that one of them shall not act without the consent of all
the others, each one may separately execute all acts of administration, but if
any of them should oppose the acts of the others, the decision of the majority
shall prevail. In case of a tie, the matter shall be decided by the partners
owning the controlling interest. (1693a)”

Article 1802: “In case it should have been stipulated that none of the
managing partners shall act without the consent of the others, the
concurrence of all shall be necessary for the validity of the acts, and the
absence or disability of any one of them cannot be alleged, unless there is
imminent danger of grave or irreparable injury to the partnership. (1694)”

Article 1803: “When the manner of management has not been agreed upon,
the following rules shall be observed:

(1) All the partners shall be considered agents and whatever any one
of them may do alone shall bind the partnership, without prejudice to the
provisions of Article 1801.
(2) None of the partners may, without the consent of the others, make
any important alteration in the immovable property of the partnership, even if it
may be useful to the partnership. But if the refusal of consent by the other
partners is manifested.

7. State the rules in case a managing partner collects a demandable debt

from a person who also owes the partnership a demandable debt.

Article 1792 : “If a partner authorized to manage collects a demandable sum

which was owed to him in his own name, from a person who owed the
partnership another sum also demandable, the sum thus collected shall be
applied to the two credits in proportion to their amounts, even though he may
have given a receipt for his own credit only; but should he have given it for the
account of the partnership credit, the amount shall be fully applied to the
latter. The provisions of this article are understood to be without prejudice to
the right granted to the other debtor by Article 1252, but only if the personal
credit of the partner should be more onerous to him. (1684)”

8. What are the rights enjoyed by a partner?

 A partner has certain rights in the partnership. Thus, he has a share in the
profits of the partnership and has the right to a specific partnership
property. As a partner, he has a right to participate in the management,
inspect partnership books and can in fact, demand for a formal
accounting. However, rights have corresponding obligations. Hence, a
partner is obligated to give his contribution and share in the losses.

9. What are the rules on the distribution of profits and losses among the
partners?

DIVISION OF PROFITS AND LOSSES

➢ The partnership law provides that profits and losses of the partnership are
to bedivided in accordance with the partners agreement.
➢ If no agreement is made between and among the partners, profits and
losses areto be divided according to their original capital contributions.
➢ Should the partners agree to divide the profits only, losses, if any are to be
dividedin the same manner as that of dividing profits.
➢ Should the partners agree to divide losses only, profits, if any shall be
divided by the partners according to their original capital contributions

10. May a partner be excluded from any share in the profits or losses?
Explain.

Artcle 1799: “A stipulation which excludes one or more partners from any
share in the profits or losses is void. (1691)”

STIPULATIONS EXCLUDING A PARTNER FROM ANY SHARE IN

PROFITS OR LOSSES

− The stipulation is generally void but the partnership will subsist

− The parties expressly stipulate that there shall be no liability for losses, or
were fro the nature of the contract, it is clear that a party did not intend to
share in the losses, such fact may be a factor in determining that no
partnership exist
− The one excluded from any share in the profits or losses is not intended by
the parties to become a partner
− It is valid to stipulate that an industrial partner is excluded from losses

Explaination: Only the Industrial Partner is excluded because he offers his

expertise to the company as an investment instead of money.
− Parties can stipulate unequal shares
11. What are the obligations of the partnership to the partner?

Article 1796: “The partnership shall be responsible to every partner for the
amounts he may have disbursed on behalf of the partnership and for the
corresponding interest, from the time the expense are made; it shall also
answer to each partner for the obligations he may have contracted in good
faith in the interest of the partnership business, and for risks in consequence
of its management. (1688a)”