PARTNERSHIP

Section 1

OBLIGATIONS OF THE PARTNERS

AMONG THEMSELVES
 OBLIGATIONS OF A PARTNER

• (a) To give his contribution. (Arts. 1786, 1788, Civil Code).

• (b) Not to convert firm money or property for his own use.
(Art. 1788, Civil Code).
• (c) Not to engage in unfair competition with his own firm.
(Art. 1808, Civil Code).
• (d) To account for and hold as trustee, unauthorized
personal profits. (Art. 1807, Civil Code).
 OBLIGATIONS OF A PARTNER

• (e) Pay for damages caused by his fault. (Art. 1794, Civil
Code).
• (f) Duty to credit to the fi rm, payment made by a debtor
who owes him and the fi rm. (Art. 1792, Civil Code).
• (g) To share with the other partners the share of the
partnership credit which he has received from an insolvent
firm debtor. (Art. 1743, Civil Code).
Art. 1784. A partnership begins from the
moment of the execution of the contract,
unless it is otherwise stipulated.
When a Partnership Begins

(a) Generally, from the moment of the execution of the

contract.
(b) Exception — When there is a contrary stipulation.
Intent to Create a Future Partnership
The Article presupposes that there can be a future
partnership which at the moment has no juridical
existence yet.

The agreement for a future partnership does not of itself

result in a partnership. The intent must later on be
actualized by the formation of the intended partnership.
(See Limuco v. Calinao, C.A., L-10099-R, Sept. 30, 1953).
Rule if Contributions Have Not Yet Been Actually
Made

Generally, even if contributions have not yet been made,

the firm already exists, for partnership is a consensual
contract (of course all the requisite formalities for such
consent must be present).
Art. 1785. When a partnership for a fixed term or particular
undertaking is continued after the termination of such term or
particular undertaking without any express agreement, the
rights and duties of the partners remain the same as they were
at such termination, so far as is consistent with a partnership at
will.

A continuation of the business by the partners or such of them

as habitually acted therein during the term, without any
settlement or liquidation of the partnership affairs, is prima facie
evidence of a continuation of the partnership.
Duration of a Partnership

A partnership is unlimited as to its duration in the sense

that no time limit is fixed by law. The duration may be
agreed upon — expressly (as when there is a definite
period) or impliedly (as when a particular enterprise is
undertaken — it being understood that the fi rm ends
as soon as its purpose has been achieved).
There are two kinds of a partnership “at will.”

(a) 1st kind — when there is no term, express or

implied
(b) 2nd kind — when it is continued by the
habitual managers — although the period has
ended, or the purpose has been accomplished.
(NOTE: This is “prima facie” evidence of the fi rm’s
continuation.)
Art. 1786. Every partner is a debtor of the partnership
for whatever he may have promised to contribute
thereto.
He shall also be bound for warranty in case of eviction
with regard to specific and determinate things which he
may have contributed to the partnership, in the same
cases and in the same manner as the vendor is bound
with respect to the vendee. He shall also be liable for the
fruits thereof from the time they should have been
delivered, without the need of any demand.
Three Important Duties of Every Partner

The Article speaks of three things:

(a) the duty to contribute what had been promised;
(b) the duty to deliver the fruits of what should have
been delivered; and
(c) the duty to warrant.
The Duty to Contribute

(a) The contribution must be made ordinarily at the

time the partnership is entered into, unless a
different period is stipulated.

Is demand necessary?
In either case, no demand is needed to put the
partner in default, because in a partnership the
obligation to contribute is one where time is of the
essence (for without the contribution, the
partnership is useless).
The Duty to Contribute

(b) The partner must exercise due diligence in

preserving the property to be contributed, before
he actually contributes the same; otherwise, he can
be held liable for losses and deterioration.
The Duty to Deliver the Fruits
(a) If property has been promised, the fruits thereof should
also be given. The fruits referred to are those arising
from the time they should have been delivered, without
need of any demand.

(b) If money has been promised, “interest and damages

from the time he should have complied with his
obligation” should be given. (Art. 1788). Here again, no
demand is needed to put the partner in default.
The Duty to Warrant
(a) The warranty in case of eviction refers to “specific and
determinate things” already contributed. (See Art. 1786,
Civil Code).

(b) There is “eviction” whenever by a final judgment based

on a right prior to the sale or an act imputable to the
partner, the partnership is deprived of the whole or a
part of the thing purchased.
Art. 1787. When the capital or a part thereof which
a partner is bound to contribute consists of goods, their
appraisal must be made in the manner prescribed in the
contract of partnership, and in the absence of stipulation,
it shall be made by experts chosen by the partners, and
according to current prices, the subsequent changes
thereof being for the account of the partnership.
(1) When Contribution Consists of Goods
Appraisal of value is needed to determine how much
has been contributed.

(2) How Appraisal Is Made

(a) Firstly, as prescribed by the contract.
(b) Secondly, in default of the fi rst, by EXPERTS
chosen by the partners, and at CURRENT prices.
Necessity of the Inventory-Appraisal

Proof is needed to determine how much goods or

money had been contributed. An inventory is therefore
useful. (See Tablason v. Bollozos, C.A., 51 O.G. 1966).
Art. 1788. A partner who has undertaken to contribute
a sum of money and fails to do so becomes a debtor for
the interest and damages from the time he should have
complied with his obligation.

The same rule applies to any amount he may have taken

from the partnership coffers, and his liability stroll begin
from the time he converted the amount to his own use.
(1) Rules of Failure to Contribute and for Conversion
Cases covered by the Article:
(a) when money promised is not given on time;
(b) when partnership money is converted to the personal use of
the partner.

(2) Coverage of Liability

Liability covers ALSO interest and damages:
(a) Interest at the agreed rate; if none, at the legal rate of 6%
per annum.
(b) Damages that may be suffered by the partnership.
Art. 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.
Definitions and Some Characteristics

(a) Capitalist partner — one who furnishes capital.

(He is not exempted from losses; he can engage in other
business provided there is NO COMPETITION between
the partner and his business.) (See Art. 1808, Civil Code).
(b) Industrial partner — one who furnishes industry or
labor. [He is exempted from losses as between the partner;
he cannot engage in any other business without the express
consent of the other partners; otherwise:

1) he can be EXCLUDED from the firm (PLUS DAMAGES);

2) OR the benefi ts he obtains from the other businesses
can be availed of by the other partners (PLUS DAMAGES).
(Art. 1789, Civil Code).]
[NOTE: The rule remains true whether or not there is
COMPETITION. Reason: All his industry is supposed to
be given only to the partnership. (Limuco v. Calinao, C.A.,
L-10099-R, Sept. 30, 1953).]
(f) Managing partner — one who manages actively the fi
rm’s affairs.

(g) Silent partner — one who does not participate in the

management (though he shares in the profits or losses).

(h) Liquidating partner — one who liquidates or winds

up the affairs of the fi rm after it has been dissolved.
(i) Ostensible partner — one whose connection with the
firm is public and open (that is, not hidden). (Usually his name is
included in the fi rm name.)

(j) Secret partner — one whose connection with the firm is

concealed or kept a secret.

(k) Dormant partner — one who is both a secret (hidden)

and silent (not managing) partner.

(l) Nominal partner — one who is not really a partner but

who may become liable as such insofar as third persons are
concerned. (Example: a partner by estoppel.)
Distinctions Between a ‘Capitalist’ and an
‘Industrial Partner’

(a) As to contribution:
1) the capitalist partner contributes money or
property
2) the industrial partner contributes his industry
(mental or physical)
Distinctions Between a ‘Capitalist’ and an ‘Industrial
Partner’

(b) As to prohibition to engage in other business:

1) the capitalist partner cannot generally engage in the
same or similar enterprise as that of his firm (the test is
the possibility of unfair competition). (Art. 1808, Civil
Code).
2) the industrial partner cannot engage in any business for
himself (Reason: all his industry is supposed to be
contributed to the fi rm). (Art. 1789, Civil Code).
Distinctions Between a ‘Capitalist’ and an
‘Industrial Partner’

(c)As to profits:
1) the capitalist partner shares in the profi ts
according to the agreement thereon; if none, pro
rata to his contribution. (Art. 1797, Civil Code).
2) the industrial partner receives a just and
equitable share. (Art. 1797, Civil Code).
(d) As to losses:
1) capitalist
a) first, the stipulation as to losses
b) if none, the agreement as to profits
c) if none, pro rata to contribution
2) the industrial partner is exempted as to losses (as
between the partners). But is liable to strangers,
without prejudice to reimbursement from the capitalist
partners. (Art. 1816, Civil Code).
Art. 1790. Unless there is a stipulation to the contrary
the partners shall contribute equal shares to the capital
of the partnership.
Amount of Contribution
(a) It is permissible to contribute unequal shares, if
there is a stipulation to this effect.
(b) In the absence of proof, the shares are presumed
equal.
To Whom Applicable

The rule applies to capitalist partners apparently;

however, the share of the industrial partner is
undoubtedly also available, for his industry may be worth
even more than the entire capital contributed.