De Leon Reviewer

(7) “A partnership is a joint undertaking to share in

CHAPTER 1 General Provisions
the profit and loss.”
Article 1767. By the contract of partnership two or
more persons bind themselves to contribute How is a Partnership Determined?
money, property, or industry to a common fund,
with the intention of dividing the profits among Partnership is a legal concept, but the
themselves. determination of the existence of a partnership
may involve inferences drawn from an analysis of
Two or more persons may also form a partnership all the circumstances attending its creation and
for the exercise of a profession. operation.
Concept of Partnership
Organizational Form
(1) “A partnership is a contract of two or more
competent persons to place their money, effects, As a form of business organization, it falls between
labor and skill, or some or all of them, in lawful two extremes of organizational form — the single
commerce or business and to divide the profits and proprietorship and the corporation.
bear the losses in certain proportions.”
Civil Law Concept and American Concept of
(2) “A partnership is an association of two or more Partnership Distinguished
persons to carry on as co-owners of a business for
profit.” (Uniform Partnership Act, Sec. 6.) CL AC
Basis Partnership as a Partnership as
(3) “A partnership is a legal relation based upon the Contract a Relation.
express or implied agreement of two or more
competent persons whereby they unite their Article 1767 Based on the
property, labor or skill in carrying on some lawful considers the result of the
business as principals for their joint profit.” term as the contract
agreement itself creating the
(4) “A partnership is the status arising out of a out of which a partnership,
contract entered into by two or more persons partnership is (the juridical
whereby they agree to share as common owners created relation)
the profits of a business carried on by all or any of Possession Partnership has Does not
them on behalf of all of them.” of a Sep. a Juridical recognize such
Pers. Personality of separate
(5) “A partnership is an organization for production its own, distinct juridical
of income to which each partner contributes one or and separate personality.
both of the ingredients of income, which are from that each a partnership
capital or service.” (Ibid., p. 292.) of the partners. being
considered
(6) “A partnership is an entity, distinct and apart merely an
from the members composing it, and, for the extension
purpose of which it was created, it is a person of its
having its own assets and liabilities and any benefit members,
or liability attaching to a member of the although some
partnership, results from the partnership relation.” states of the
(Ibid., p. 293.) Union classify
 the business or of holding property.
partnership as Thus, the use of a nomde plume,
a legal entity. assumed, or trade name in law
practice is improper.
The Uniform Partnership Act has in this respect
codified the “aggregate theory” of partnership Distinguis The practice of law is intimately and
more than it has the “entity theory” or Roman Law hed from peculiarly related to the
theory of partnership. Unlike a corporation, a Business administration of justice and should
partnership is generally regarded as a not be considered like an ordinary
conglomerate of individuals, “an association of two “money making trade.’’
or more persons” and as such does not pay federal
or state income taxes (although for purposes of
information it is required to fi le a partnership tax The Primary Characteristics Which Distinguish the
return). Legal Profession from Business
The individual members of the partnership
severally pay their income taxes, the partnership 1. A duty of public service, of which the
business being regarded merely as a source of emolument is a by-product, and in which
income. In our jurisdiction, partnerships, except one may attain the highest eminence
general professional partnerships, are treated for without making much money;
income tax purposes as corporations and subject to
tax as such. 2. A relation as an “officer of court” to the
administration of justice involving thorough
General professional partnership. sincerity, integrity, and reliability;

Paragraph 2 relates to the exercise of a profession. 3. A relation to clients in the highest fiduciary
degree; and
Profession – “a group of men pursuing a learned
art as a common calling in the spirit of public 4. A relation to colleagues at the bar
service — no less a public service because it may characterized by candor, fairness, and
incidentally be a means of livelihood.” unwillingness to resort to current business
methods of advertising and encroachment
Strictly speaking, the practice of a profession is not on their practice, or dealing directly with
a business or an enterprise for profit. However, the their clients.
law allows the joint pursuit thereof by two or more
persons as partners. Characteristic Elements of Partnership

Partnership for the practice of law. The contract of partnership is:

A Mere The right to practice law is not a 1. Consensual, because it is perfected by mere
Associatio natural or constitutional right but is consent, that is, upon the express or
n for Non- in the nature of a privilege or implied agreement of two or more persons;
Business franchise. A partnership for the 2. Nominate, because it has a special name or
Purpose practice of law cannot be likened to designation in our law;
partnerships formed by other 3. Bilateral, because it is entered into by two
professionals or for business. or more persons and the rights and
It is not a partnership formed for obligations arising therefrom are always
the purpose of carrying on trade or reciprocal;
 4. Onerous, because each of the parties Partnership is a voluntary relation created by
aspires to procure for himself a benefit agreement of the parties. It excludes from its
through the giving of something; concept all other associations which do not have
5. Commutative, because the undertaking of their origin in a contract, express or implied.
each of the partners is considered as the
equivalent of that of the others; There is no such thing as a partnership created by
6. Principal, because it does not depend for its law or by operation or implication of law alone.
existence or validity upon some other Religious societies, conjugal partnerships, and
contracts; and others of a similar nature are not, therefore,
7. Preparatory, because it is entered into as a included as they are not created by the express or
means to an end, i.e., to engage in business implied contract of the parties. Actually, the
or specific venture for the realization of partnership relation is not the contract itself, but
profits with the view of dividing them the result of the contract.
among the contracting parties.
a. Form — The relation is evidenced by the
Contract of Agency terms of the contract which may be oral or
written, express or implied from the acts
A partnership contract, in its essence, is a contract and declarations of the parties, subject to
of agency. the provisions of Articles 1771 to 1773 and
to the Statute of Frauds. An election to
Essential Features of Partnership become a member of a partnership was
held sufficient to render a member a
1. There must be a valid contract; “partner,” (no necessity that the member
2. The parties (two or more persons) must should sign any articles of partnership)
have legal capacity to enter into the
contract; b. Articles of Partnership. — Partnership
3. There must be a mutual contribution of relation may be informally created and its
money, property, or industry to a common existence proved by manifestations of the
fund; parties, it is customary to embody the
4. The object must be lawful; and terms of the association in a written
5. The primary purpose must be to obtain document known as “Articles of
profits and to divide the same among the Partnership” stating the:
parties. i. name,
ii. nature or purpose and
Must Not be Kept Secret iii. location of the firm, and
iv. defining powers, rights, duties, and
It is also required that the articles of partnership liabilities of the partners among
must not be kept secret among the members; themselves, their contributions, the
otherwise, the association shall have no legal manner by which the profits and
personality and shall be governed by the provisions losses are to be shared, and the
of the Civil Code relating to co-ownership. procedure for dissolving the
partnership.
Existence of a Valid Contract.
c. Requisites. — Since partnership is
(1) Partnership relation fundamentally contractual. fundamentally contractual, all the essentials
of a valid contract must be present. Under
 the law, the following requisites must Any one of the partners may, at his sole
concur: pleasure, dictate a dissolution of the
i. Consent and capacity of the partnership at will.
contracting parties;
ii. Object which is the subject matter of GF Can dissolve
the contract; and BF Can dissolve + can result in a
iii. Cause which is established. liability for damages

c. Application of principles of estoppel. — A

partnership liability may be imposed upon a
(2) Partnership relation fiduciary in nature. person under principles of estoppel where
he holds himself out, or permits himself to
Partnership is a form of voluntary association be held out, as a partner in an enterprise. In
entered into by the associates. It is a personal such cases, there is no actual or legal
relation in which the element of delectus personae partnership relation but merely a
(choice of the persons) exists, involving as it does partnership liability imposed by law in favor
trust and confidence between the partners. of third persons.

a. Right to choose co-partners. — Created without Intention to Create It

GR No one can become a member of A partnership may be created without any

the partnership association definite intention to create it.
without the consent of all the
other associates. It is the substance and not the name of the
EXP Unless otherwise provided in the arrangement which determines the legal
partnership agreement relationship, although the designation
adopted by the parties should be
The fiduciary nature of the partnership considered as indicative of their intention.
relation and the liability of each partner for In case there is no written agreement
the acts of the others within the scope of between the parties, the existence or non-
the partnership business (Art. 1818.) existence of a partnership must be
require that each person be granted the determined from the conduct of the parties,
right to choose with whom he will be any documentary evidence bearing
associated in the firm. thereon, and the testimony of the parties.
b. Power to dissolve partnership. — Even if
there is a presence of a period for its Legal Capacity of the Parties to Enter into the
specific duration or the statement of a Contract
particular purpose for its creation, the
dissolution of any partnership can be done (1) Individuals. — Before there can be a valid
by an act or will of a partner. contract of partnership, contracting parties must
have the necessary legal capacity to enter into the
Among partners, mutual agency arises and contract.
the doctrine of delectus personae allows Can enter a Capable of entering
them to have the power, although not Partnership into contractual
necessarily the right, to dissolve the relations.
partnership. Cannot Cannot give consent to
a contract cannot be a
 partner
a. A corporation may enter into joint venture
The following cannot give their consent to a partnership with another where the nature
contract of partnership: of the venture is in line with the business
a. Unemancipated minors; authorized by its charter.
b. Insane or demented persons; b. Where the partnership agreement provides
c. Deaf-mutes who do not know how to write; that the two partners will manage the
d. Persons who are suffering from civil partnership so that the management of
interdiction; and corporate interest is not surrendered, the
e. Incompetents who are under guardianship. partnership may be allowed.
c. Where the entry of the foreign corporation
as a limited partner in a limited partnership
Prohibited from Donation (Chap. 4.) is merely for investment purposes
and it shall not take part in the
Under Article 1782, persons who are prohibited management and control of the business
from giving each other any donation or advantage operation of the partnership, it shall not be
cannot enter into a universal partnership. deemed “doing business’’ in the Philippines,
and hence, it is not required to obtain a
Married Women license to do business in the Philippines as
required by Sections 123-126 of the
A married woman may enter into a contract of Corporation Code. (B.P. Blg. 68.) Such
partnership even without her husband’s consent, investment is allowed by and complies with
but the latter may object under certain conditions. R.A. No. 7042, the Foreign Investment Act.
(SEC Opinion, Aug. 6, 1998.)
(2) Partnerships. — There is no prohibition against
a partnership being a partner in another Contribution of Money, Property, or Industry to a
partnership. Common Fund.

When two or more partnerships combine with (1) Existence of proprietary interest. — The
each other (or with a natural person or persons) partners must have a proprietary interest in the
creating a distinct partnership, say, partnership X, business or undertaking. They must contribute
all the members of the constituent partnerships capital which may be money or property, or their
will be individually liable to the creditors of services, or both, to the common business. The
partnership X. very definition of partnership in Article 1767
provides for this element. Without the element of
(3) Corporations. — The doctrine adopted by our mutual contribution to a common fund there can
Supreme Court is that, unless authorized by statute be no partnership (see Art. 1784.), although its
or by its charter, a corporation is without capacity presence is not necessarily a conclusive evidence of
or power to enter into a contract of partnership. the existence of partnership.

This limitation is based on public policy since in a a. Money. — The term is to be understood as
partnership the corporation would be bound by the referring to currency which is legal tender in
acts of persons who are not its duly appointed and the Philippines.
authorized agents and officers, which would be
entirely inconsistent with the policy of the law that Representatives of Money – Checks, drafts,
the corporation shall manage its own affairs promissory notes payable to order, and
separately and exclusively.
 other mercantile documents are not money the law does not specify the kind of
but only representatives of money. industry that a partner may contribute.

Consequently, there is no contribution of A limited partner in a limited partnership,

money until they have been cashed. however, cannot contribute mere industry
b. Property. — The property contributed may or services.
be:
Partner Lessor of the
i. Real or Personal, Contributing Services
ii. Corporeal or Incorporeal. His Industry
Independent of the Under the
Credit such as promissory note or other other partners, that supervision of the
evidence of obligation or even a mere goodwill is, he is not subject lessee or
may be contributed, as they are considered to the supervision of employer.
property. It has been held that a license to the other partners
construct and operate a cockpit may be given
as a contribution to a partnership. (2) Proof of contribution. — In partnership, proof is
necessary that there be contribution of money,
property, or industry to a common fund with the
c. Industry. — The law permits the
intention of dividing the income or profits obtained
contribution of industry:
therefrom.
i. In the absence of money or
No Enforceable Enforceable Contract
property,
Contract
ii. In concurrence with these two,
If the partnership But if the latter takes
agreement provides part in carrying on the
“Industry” –The active cooperation, the
simply that one of the enterprise, and thus
work of the party associated, which may be
parties is to give and subjects himself to
either personal manual efforts or
the other is to receive partnership liability to
intellectual, and for which he receives a
a half interest in the outsiders, he furnishes
share in the profits (not merely salary) of
profits of an enterprise sufficient consideration
the business. (11 Manresa 273-274.)
started by the former, for the former’s
without anything being promise and acquires
The contribution of a partner may be:
promised by the latter all the rights of a co-
i. in the three forms of money,
toward the partner.
property and industry, or
accomplishment of its
ii. any two or one of them.
object
Partnership Even if No Contribution to
Legality of the Object.
Common Fund
The object is unlawful when it is contrary to law,
A partnership may, therefore, exist even if it
morals, good customs, public order, or public
is shown that the partners have not
policy. As in other kinds of contract, the purpose of
contributed any capital of their own to a
a partnership must be lawful. No partnership can
“common fund’’ for the contribution may
arise as the contract is inexistent and void ab initio.
be in the form of credit or industry not
necessarily cash or fixed assets. Note that
GR A partnership may be organized for any
 purpose joint contributions and efforts need not be the
EXP It may not engage in an enterprise for exclusive aim of a partnership. It is sufficient that it
which the law requires a specific form of is the principal purpose even if there are,
business organization, such as banking incidentally, moral, social, or spiritual ends.
which, under the General Banking Law of
2000, only stock corporations may In a partnership, the parties intend to share the
undertake. profits in certain proportions.

Instances of Unlawful Object Sharing of Profits.

a. to create illegal monopolies or A partnership is essentially a business enterprise

combinations in restraint of trade (Art. 185, established for profit.
Revised Penal Code.);
b. to carry on gambling (Arbes vs. Polistico, 53 (1) Not necessarily in equal shares. — Since the
Phil. 489 [1929].); partnership is engaged for the common benefit or
c. to engage in smuggling; interest of the partners (Art. 1770.), it is necessary
d. to lease furnished apartments to that there be an intention to divide the profits
prostitutes; among the members, although not necessarily in
e. to prevent competition in bidding for equal shares. In the words of the Supreme Court,
government contracts; “there must be a joint interest in the profits.”
f. to control the price of a commodity in the Without this sharing of profits, it cannot be said
interest of its members, etc. that an agreement of partnership has been entered
into, and exists.
Purpose to Obtain Profits.
If all the other elements create a partnership, a
(1) The very reason for existence of partnership. — stipulation which excludes one or more partners
A partnership is formed to carry on a business. The from any participation in the profits (or losses) is
idea of obtaining pecuniary profit or gain directly void. (Art. 1799.)
through or as a result of the business to be carried
on is the very reason for the existence of a (2) Not conclusive evidence of partnership. — The
partnership. sharing in profits is merely presumptive and not
conclusive, even if cogent, evidence of partnership.
This element is what distinguishes the contract of
partnership from voluntary religious or social There are numerous instances of parties who have
organizations. a common interest in the profits and losses of an
enterprise but who are not partners. (Art. 1769.)
One without any right to participate in the profits,
cannot be deemed as partner since the essence of Partner All other elements are
partnership is that the partners share in the profits present not only the
and losses. All that is needed is a profit motive. sharing of profits.
Hence, even an unprofitable business can be a Not a Partner If the division of profits
partnership provided the goal of the business is to is merely used as a
generate profits. guide to determine the
compensation due to
(2) Need only be the principal, not exclusive aim. — one of the parties
The realization of pecuniary profit, however, by
engaging in some business activity through their Sharing of losses.
  Acquire and possess property of all kinds in
(1) Necessary corollary of sharing in profits. — The its name,
definition of partnership under Article 1767 refers  Incur obligations and
to “profits” only and is silent as to “losses.”  Bring civil or criminal actions in conformity
with the laws and regulations of its
The reason is that the object of a partnership is organizations.
primarily the sharing of profits, while the
distribution of losses is but a “consequence of the Thus, in the partnership X & Co., in which A and B
same.” Be that as it may, the right to share in the are the partners, there are three distinct persons,
profits carries with it the duty to contribute to the namely, the partnership X & Co., A, and B.
losses, if any. In other words, a community in As a consequence of the distinct legal personality
losses is a necessary corollary of a participation in possessed by X & Co., it may be declared insolvent
profits, where it is determined that a partnership even if A and B are not. It may enter into contracts
exists. and may sue and be sued, it being sufficient that
service of summons or other process be served on
(2) Agreement not necessary. — It is not necessary any partner; and the death of either A or B is not a
for the parties to agree upon a system of sharing ground for the dismissal of a pending suit against X
losses, for the obligation is implied from the & Co. Neither A nor B may sue on a cause of action
partnership relation but if only the share of each belonging to X & Co., in his own name and for his
partner in the profits has been agreed upon, the own benefit. X & Co. may sue and be sued in its
share of each in the losses shall be in the same firm name or by its duly authorized representative.
proportion.
Partners Cannot be Held Liable for the Obligations
Generally, a stipulation which excludes one or of the Partnership; Exception
more partners from any share in the profits or
losses is void. In view of the separate juridical personality
possessed by a partnership,
ART. 1768. The partnership has a juridical
personality separate and distinct from that of GR Partners cannot be held liable for the
each of the partners even in case of failure to obligations of the partnership
comply with the requirements of Article 1772, EXP Unless it is shown that the legal fiction
first paragraph. of a different juridical personality is
being used for a fraudulent, unfair, or
Partnership, a Juridical Person. illegal purpose

A partnership is sometimes referred to as a “firm’’ Art 1816: All partners, including

or a “company,’’ terms that connote an entity industrial ones, shall be liable pro rata
separate from its aggregate individual partners. with all their property and after all the
partnership assets have been
Like the corporation, a partnership duly formed exhausted, for the contracts which
under the law is a juridical person to which the law may be entered into in the name and
grants a juridical personality separate and distinct for the account of the partnership,
from that of each of the partners. under its signature and by a person
authorized to act for the partnership.
As an independent juridical person, a partnership However, any partner may enter into a
may: separate obligation to perform a
 Enter into contracts, partnership contract.
 Filipinos could continue to engage in the retail
Effect of Failure to Comply with Statutory business only until the expiration of its term.
Requirements.
This provision is clearly intended to apply to
(1) Under Article 1772. — This article makes it clear partnerships already existing at the time of the
that even in case of failure to comply with the enactment of the law.
requirements of Article 1772, with reference to the
execution of a public instrument and registration of Hence, the agreement in the articles of partnership
the same with the Securities and Exchange to extend the terms of its life must be deemed
Commission in cases when the partnership capital subject to Republic Act No. 1180 if it was already in
exceeds P3,000.00, such partnership acquires force when the parties came to agree regarding the
juridical personality. extension of the original term of their partnership.
The law recognizes that in the Philippines, most
partnerships are created with very small capital to ART. 1769. In determining whether a partnership
engage in small business and it would be exists, these rules shall apply:
impractical to require that they appear in a public
instrument and be registered as provided in Article (1) Except as provided by article 1825, persons
1772. who
are not partners as to each other are not partners
(2) Under Articles 1773 and 1775. —The as to third persons;
partnership shall not acquire any juridical (2) Co-ownership or co-possession does not of
personality: itself establish a partnership, whether such co-
owners or copssessors do or do not share any
 Because the contract itself is void (Article profits made by the use of the property;
1773). (3) The sharing of gross returns does not of itself
 This is also true regarding secret establish a partnership, whether or not the
associations or societies which do not persons sharing them have a joint or common
acquire juridical personality under Article right or interest in any property from which the
1775. returns are derived;
(4) The receipt by a person of a share of the
profits of a business is prima facie evidence that
To Organize A Partnership Not An Absolute Right. he is a partner in the business, but no such
inference shall be drawn if such profits were
To organize a corporation or a partnership that received in payment:
could claim a juridical personality of its own and
transact business as such, is not a matter of (a) As a debt by installments or otherwise;
absolute right but a privilege which may be (b) As wages of an employee or rent to a
enjoyed only under such terms as the State may landlord;
deem necessary to impose. Thus, it has been held (c) As an annuity to a widow or
that the State through Congress, and in the manner representative of a deceased partner;
provided by law, had the right to enact Republic (d) As interest on a loan, though the
Act No. 1180 (Retail Trade Nationalization Law) and amount of payment vary with the profits
to provide therein that only Filipinos may engage in of the business;
the retail business, cannot be seriously doubted. (e) As the consideration for the sale of a
The law provides, among other things, that after its goodwill of a business or other property by
enactment, a partnership not wholly formed by installments or otherwise.
Rules To Determine Existence Of Partnership. No single factor usually is controlling. Where
circumstances taken singly may be inadequate to
Article 1769 lays down the rules for determining prove the intent to form a partnership,
whether or not an association is one of nevertheless the collective effect of these
partnership. circumstances may be such as to support a finding
of the existence of the parties’ intent.
In general, to establish the existence of a
partnership, all of its essential features or Persons Not Partners As To Each Other.
characteristics must be shown as being present.
Persons who are partners as between themselves
(1) Where terms of contract not clear. — In the are partners as to third persons. Generally, the
typical contract of partnership, the parties converse is true, to wit: if they are not partners as
expressly agree to unite their property and services between themselves, they cannot be partners as to
as co-proprietors to carry on a business for profit, third persons.
and to share the profits in stated proportions. Such
a contract creates no difficulty in regard to the (1) Intention to create partnership. — Partnership
determination of the existence of a partnership is a matter of intention, each party giving his
relation. consent to become a partner.

Sometimes, however, the contract between the Name or Belief is Immaterial

persons engaged in a business enterprise which is
supposed to create a partnership is uncertain in Whether or not the parties call their relationship or
terms, or they have never executed a formal believe their relationship a partnership is
expression of their relations. immaterial.

In case of doubt, Article 1769 shall apply. It must be Expressly Declare

observed that this article seeks to exclude from the
category of partnership certain features However, whether a partnership exists between
enumerated therein which, by themselves, are not the parties is a factual matter. Where the parties
indicative of the existence of a partnership. expressly declare they are not partners, this, as a
rule, settles the question as between themselves.
(2) Where existence disputed. —
(2) Partnership by estoppel. —
Who May Dispute
GR A partnership can never exist as to third
The existence of a partnership may be disputed by persons if no contract of partnership,
an interested party. express or implied, has been entered into
between the parties themselves.
Factual Matter EXP The exception refers to partnership by
estoppel.
The issue as to whether a partnership exists is a
factual matter to be decided on the basis of all Where persons by their acts, consent, or
circumstances. representations have misled third persons or
parties into believing that the former are partners
Collective Effect in a non-existing partnership, such persons become
subject to liabilities of partners to all who, in good
faith, deal with them in their apparent relations.
This liability is predicated on the doctrine of because of the fact that they develop or
estoppel provided for in Article 1825. operate a common property, since they
may rightfully do this by virtue of their
EXAMPLE: respective titles.
If A and B are not partners as to each other, neither
will they be partners with respect to C, a third Thus, in a case, it was held that two isolated
person. But if A, with the consent of B, represents transactions whereby two persons
to C that they are partners, then A and B will be purchased two (2) parcels of land and then
considered partners as to C even if they are not another three (3) parcels of land and sold
really partners. the same a few years thereafter, did not
thereby make them partners. There must
Co-Ownership or Co-Possession. be a clear intent to form a partnership.

When is there Co-Ownership or Co-Possession (2) Existence of fiduciary relationship. —

Whenever ownership (or co-possession) of an Parties Are Partners In there is a well-defined

undivided thing or right belongs to different The Business fiduciary relationship
persons. (Art. 484.) Undertaking between them as
partners
(1) Clear intent to derive profits from operation of
business. — Coownership of property does not of remedy for a dispute
itself establish the existence of a partnership, or difference between
although “co-ownership” is an essential element them would be an
of partnership. action for dissolution,
termination, and
a. Two or more persons may become co- accounting
owners without a contract (e.g., by If The Parties Are there is no fiduciary
inheritance or by law) but they cannot be Merely Co-Owners, relationship between
partners in the absence of contract. them.

This is true even though the co-owners the remedy would be

share in the profits derived incident to the an action (for non-
joint ownership. The profits must be performance of a
derived from the operation of the business contract)
or undertaking by the members of the
association and not merely from property (3) Persons living together without benefit of
ownership. marriage. — Before the new Civil Code went into
operation on August 30, 1950, the Supreme Court
A partner may transfer to the partnership, had recognized marital partnerships between
as his contribution, merely the use or persons living together without the bond of
enjoyment of a specific thing, retaining the marriage and made such union as basis of an
ownership. In such case, the partners informal civil partnership which accords to each
become co-owners, not of the property, but partner an equal interest in the properties acquired
of the right to use such property. by their joint efforts, but this is only so where there
is no impediment for a legal marriage between
b. The law does not imply a partnership them.
between coowners or co-possessors
This doctrine is no longer applicable under the partnership may result, even though the
Family Code in view of the following provisions: agreement calls for a portion of “gross returns.”

“Art. 147. When a man and a woman who are Of course, opinions will differ with respect to the
capacitated to marry each other, live exclusively precise extent of management and control
with each other as husband and wife without the necessary to create an inference of partnership,
benefit of marriage or under a void marriage, their when gross returns are involved.
wages and salaries shall be owned by them in equal
shares and the property acquired by both of them EXAMPLE:
through their work or industry shall be governed by
the rules on co-ownership x x x.” A, owner of a passenger jeepney, agrees with B, a
driver, that B shall have full control and use of the
Under Article 147, the property acquired by a man jeepney to carry passengers, pay for gasoline and
and a woman who live together as husband and oil, and shoulder the cost of repairs, and that the
wife shall be governed by the rules on co- gross receipts are to be divided between them.
ownership. In this case, no partnership is established between
A and B as no sharing of profits is contemplated.
Sharing Of Gross Returns.
Receipt of Share in the Profits.
(1) Not even presumptive evidence of partnership.
— The mere sharing of gross returns alone does (1) Strong presumptive evidence of partnership. —
not indicate a partnership, since in a partnership, An agreement to share both profits and losses
the partners share net profits after satisfying all of tends strongly to establish the existence of a
the partnership’s liabilities. partnership, and conversely, the lack of such an
agreement tends strongly to negate the existence
Sharing of Profits Presumptive Evidence of a partnership.
of Partnership
Sharing of Gross Not to constitute even But the mere fact of a right under the contract to
Returns prima facie evidence of participate in both profits and losses of a business
the relalation does not of itself have the effect of establishing a
partnership between those engaged therein.
(2) Reason for rule. — For when a business is
carried on in behalf of a given person as partner, he The sharing of profits and losses is prima facie
is conceived as being interested in its failures as evidence of an intention to form a partnership but
well as its successes; it is the chance of gain or loss not a conclusive evidence.
which characterizes a business, whether in the
form of a partnership or otherwise. The presumption of partnership arising from such
profit sharing agreement may be rebutted and
It is found generally that where the contract outweighed by other circumstances.
requires a given portion of “gross returns” to be
paid over, the portion is paid over as commission, (2) When no such inference will be drawn. — While
wages, rent, interest on a loan, etc. a right to share of the profits, as such, is essential
to constitute a person a partner, this test may be
(3) Where there is evidence of mutual controlled by other considerations.
management. — Where, however, there is further
evidence of mutual management and control, a Thus, under paragraph 4 of Article 1769, sharing of
profits by a person is not a prima facie evidence
that he is a partner in the business in the cases EXAMPLES:
enumerated under sub-paragraphs (a), (b), (c), (d),
and (e). In all of the said cases, the profits in the In the following cases, Y is not a partner in
business are not shared as profits of a partner as a partnership X:
partner but in some other respects or for some
other purpose, i.e., to pay a debt to creditor, wage (1) Y, creditor of partnership X, is entrusted by the
to an employee, or rent to a landlord, annuity to a partners to manage the business, and Y shall
widow or legal representative of a deceased receive, in addition to his compensation, a share in
partner, or interest on a loan, or consideration for the net profits of the business in settlement of his
the sale of property, though the amount of credit;
payment varies with the net profits of the business. (2) Y, an employee of partnership X, shall receive
instead a fixed salary, or being the owner of a
Where the “compensation’’ given to the manager building rented by the partnership, Y shall receive
of a project who had put substantial sum in the as rent a certain percentage of the monthly net
venture is pegged to profits, said compensation profits of the business;
actually constitutes his share in the net profits of (3) Y, the widow of a deceased partner in
the partnership as partner and not as employee. partnership X, in consideration of the continuation
of the business without liquidation and satisfaction
The Basic Test of Partnership of the deceased’s interest, shall receive an annuity
for a period of five (5) years based on a certain
The basic test of partnership, whether inter se or as percentage of the net profits;
to third persons, is whether the business is carried (4) Y, creditor of partnership X, agreed that the
on in behalf of the person sought to be held liable. payment of interest shall be taken from the net
And persons who are partners in fact may not profits to be realized by the partnership; and
avoid the consequences of the relation by mere (5) Y sold property to partnership X, and he agreed
word of denial. that the purchase price shall be paid out of the net
profits of the business.
(3) Sharing of profits as owner. — It is not merely
the sharing of profits, but the sharing of them as In any of the above cases, Y shall not be entitled to
co-owner of the business or undertaking, that receive payment where there are no profits; nor
makes one a partner. If the contract states that the shall he be liable to share any losses incurred by
parties are partners or co-owners of the business, the partnership.
then they are co-owners of the business. The
courts must look beyond the agreement if it is Burden of Proof and Presumption.
ambiguous or unclear.
In accordance with the general rule of evidence,
A test given is this: “Does the recipient of a share of the burden of proving the existence of a
the profits have an equal voice as proprietor in the partnership rests on the party having the
conduct and control of the business? Does he own affirmative of that issue.
a share of the profits as proprietor of the business
producing them?” Thus, if one takes a share of the (1) The existence of a partnership must be proved
profits as payment of a debt, he is not a partner. and will not be presumed.

In other words, to be a partner, one must have an (2) The law presumes that persons who are acting
interest with another in the profits of a business as as partners have entered into a contract of
profits. partnership.
Where the law presumes the existence of a
partnership (supra.), the burden of proof is on the Tests and Incidents of Partnership.
party denying its existence.
In determining whether a partnership exists, it is
(3) When a partnership is shown to exist, the important to distinguish between tests or indicia
presumption is that it continues in the absence of and incidents of partnership.
evidence to the contrary, and the burden of proof
is on the person asserting its termination. (1) Only those terms of a contract upon which the
parties have reached an actual understanding,
(4) One who alleges a partnership cannot prove it either expressly or impliedly, may afford a test by
merely by evidence of an agreement wherein the which to ascertain the legal nature of the contract.
parties call themselves partners, since use of the
term “partner” in popular sense, or as a matter of Once the legal nature of a contract as one of
business convenience, will not necessarily import partnership has been established, whether or not
an intention that a legal partnership should result. the parties intended that relationship to be called
partnership or believed it to be a partnership,
But while use of “partnership” or “partners” in an certain consequences or incidents follow as a
alleged oral agreement claimed to have constituted matter of law, irrespective of any actual
partnership is not conclusive that partnership did understanding between the parties.
not exist, non-use of such terms is entitled to
weight. (2) Some of the typical incidents of a partnership
are:
(5) Among other meanings, “associate” means
“partner,” but a mere employee may also be an a. The partners share in profits and losses.
“associate.” “We” and “us,” when used in an This community of interest in profits is not
editorial sense, are not conclusive of either incidental to the ordinary agency;
partnership or employment. b. They have equal rights in the management
and conduct of the partnership business
(6) The question of whether or not a partnership c. Every partner is an agent of the
exists is not always dependent upon the personal partnership, and entitled to bind the other
arrangement or understanding of the parties. partners by his acts, for the purpose of its
Parties intending to do a thing which in law business. He may also be liable for the
constitutes partnership are partners, whether their entire partnership obligations;
purpose was to create or avoid the relation, or d. All partners are personally liable for the
even expressly stipulated in their agreement that debts of the partnership with their separate
they were not to become partners. property except that limited partners are
not bound beyond the amount of their
We, therefore, arrive at the rule that legal investment;
intention is the crux of partnership. Parties may call e. A fiduciary relation exists between the
themselves partners in no uncertain terms, yet partners; and
their contract may be adjudged something quite f. On dissolution, the partnership is not
different. Conversely, parties may expressly terminated, but continues until the winding
stipulate that their contract is not a partnership yet up of partnership is completed.
the law may determine otherwise on the basis of
legal intent. It is true, however, that courts will be Such incidents may be modified by stipulation of
influenced to some extent by what the parties call the partners subject to the rights of third persons
their contract. dealing with the partnership.
 common dominion which two or more persons
have in a spiritual part of a thing which is not
Partnership distinguished from Labor Union physically divided.

Labor Union Partnership Co-Ownership Partnership

Any association of The purpose of Creation By law. May exist By contract.
employees which exists partnership is without contract
in whole or in part for essentially to enable
the purpose of its members, as JP Does not have Has
collective bargaining or principals, to conduct
of dealing with a lawful business, Purpose Common enjoyment Realization of
employers concerning trade, or profession of a thing or right Profits
terms and conditions for pecuniary gain of which does not
of employment. partners, and no one necessarily involve
may become a partner the sharing of
without consent of all profits;
partners. Duration An agreement to There is no
keep the thing limitation
Partnership distinguished from a Business Trust undivided for more upon
than ten years is not the duration of
Business Trust – A trust is the legal relationship allowed a partnership
between one person (beneficiary) having the Disposal Co-Owner may May not
equitable ownership in property and another of freely do so dispose of his
(trustee) owning the legal title to such property, Interests individual
the equitable ownership of the former entitling interest in the
him to the performance of certain duties and the Partnership so
exercise of certain powers by the latter. as to make the
assignee a
Business Trust Partnership partner unless
The trustee is only a All of the members are agreed upon
principal and is not an principals and are by all of the P
agent. agents for each other Power Co-owner cannot In the absence
while to Act represent the co- of any
Only the trustee and In a partnership, a with 3rd ownership. A stipulation to
not the beneficiaries is partner is a “co-owner” Persons judgment secured the contrary, a
empowered to make with his partners of against only one of partner may
contracts to carry on specific partnership the co-owners will bind the
the business affairs and property. not bind the other partnership
the only one who has co-owners
legal title to the Effect of Dos not necessarily Dissolution of
property. Death dissolve the co- the
ownership Partnership
Partnership distinguished from Co-Ownership
Partnership distinguished from Conjugal
Co-Ownership – There is a co-ownership whenever Partnership of Gains
the ownership of an undivided thing or right
belongs to different persons. It is the right of
Conjugal Partnership of Gains – A partnership Disposi Share of each The whole
formed by the marriage of husband and wife by tion of spouse cannot be interest of a
virtue of which they place in a common fund the Shares disposed of during partner may
fruits and income of their separate properties and the marriage even be disposed of
those acquired through their efforts or by chance with the consent of without the
and unless otherwise agreed upon in the marriage the other consent of
settlements, divide equally, upon the dissolution of other partners
the marriage or the partnership, the net gains or Partnership distinguished from Voluntary
benefits obtained by either or both of them during Association (organized for social purposes such as
the marriage. social clubs, committees, lodges, fraternal societies,
etc.)
CPG Partnership
Parties Future spouses- Voluntary VA Partnerships
man and woman- agreement of JP Does not have Has
agree that it shall 2 or more Purpose Objective is lacking Profit
govern their Partners Contrib Although fees are Contribution
property relations belong to utions usually collected from of capital,
during the marriage either sex of members to maintain either in form
Laws Laws Stipulation of Membe the org, there is not of money,
which the Parties rs contribution of property,
Govern capital services
JP Does not have Has Liability Members are The
Comme Commences Moment of the of individually liable for partnership,
ncemen precisely on the execution of Membe the debts of the as a rule, is
t date of the the contract, rs association, the one liable
celebration of the unless authorized by them in the first
marriage and any otherwise either expressly or place for the
stipulation to the stipulated impliedly, or debts of the
contrary is void subsequently ratified firm.
Purpose Regulate the Obtain profits by them
property relations of
husband and wife
during the marriage The members of such associations, societies, or
Distribu Equally Acc to the clubs are not strictly partners, though the
tion of agreement or organization may possess business features and be
Profits in proportion conducted partly for pecuniary gain.
to their capital
contributions The property rights and the legal liabilities of the
Manage Although the Shared members depend, as between themselves, on the
ment administration equally, unless constitution and rules of the association or club. If
belongs to the one or more of in a particular case such members are held
spouses jointly, the them are personally liable for the acts or obligations of the
husband’s decision appointed association, their liability is based on the law of
shall prevail in case managers in agency, and such agency must be clearly shown.
of disagreement the articles of
partnership Partnership distinguished from a Corporation
 Corporation Partnership of transfer his shares interest in the
Creation By law or by Agreement Interest without the prior Partnership
operation of law consent of the other so as to make
Num of Copr (except a sole May be org by stockholders because the transferee
Incorpor corp) requires at only two a corporation is not a partner
ators least 5 incorporators persons based on the without the
Comme Only from the date of Moment of principle of delectus consent of all
ncemen issuance of the the execution personarum other
t of JP certificate of of the partners
incorporation by the Contract of because of
Securities and Partnership the principle
Exchange delectus
Commission personarum
Powers Expressly granted by Any power Term of May not be formed May be
law or implied from authorized by Existenc for a term in excess established
those granted or the Partners e of 50 years for any period
incident to its provided not extendible but not of time
existence contrary more than 50 years stipulated by
Manage Vested in the Board If not agreed in one instance the partners
ment of Directors or upon, every Firm May adopt any firm A limited
Trustees partner is an Name name provided it is partnership is
agent not the same or required by
Effect of Suit against a A partner can similar to any the law to
Misman member of the Board sue a co- registered firm name add the word
agemen of Directors or partner who Ltd
t Trustees who mismanages Dissolu Can only be dissolved At any time
mismanages must be tion with the consent of by the will of
in the name of the the State any or all the
corporation partners
Right of Has such right No such right Governi Corporation Code Civil Code
Successi ng Law
on
Extent Stockholders are
Partners Similarities between a Partnership and a
of liable only to the (except Corporation
liability extent of the shareslimited
to 3rd subscribed to them partners) are 1. Like a corporation, a partnership has a
Persons liable juridical personality separate and distinct
personally from that of the individuals composing it;
and 2. Like a corporation, a partnership can act
subsidiarily only through agents;
for 3. Like a corporation, a partnership (except a
partnership corporation sole) is an organization
debts to 3rd composed of an aggregate of individuals;
persons 4. Like a (stock) corporation, a partnership
Transfer A stockholder has Cannot distributes its profits to those who
ability generally the right to transfer his contribute capital to the business (although
 an industrial partner also shares in Effects of an Unlawful Partnership
partnership profits);
5. Like a corporation, a partnership can be The following are the consequences of a
organized only where there is a law partnership formed for an unlawful purpose:
authorizing its organization; and
6. A partnership, no matter how created or 1. The contract is void ab initio and the
organized (except a general professional partnership never existed in the eyes of the
partnership) is taxable as a corporation, law;
subject to income tax. 2. The profits shall be confiscated in favor of
the government;
ART. 1770. A partnership must have a lawful 3. The instruments or tools and proceeds of
object or purpose, and must be established for the crime shall also be forfeited in favor of
the common benefit or interest of the partners. the government; and
When an unlawful partnership is dissolved by a 4. The contributions of the partners shall not
judicial decree, the profits shall be confiscated in be confiscated unless they fall under No. 3.
favor of the State, without prejudice to the
provisions of the Penal Code governing the Dissolved by Operation of Law
confiscation of the instruments and effects of a
crime. A partnership is dissolved by operation of law upon
the happening of an event which makes it unlawful
Object or Purpose of Partnership. for the business of the partnership to be carried
on, or for the members to carry it on in
The provision of the first paragraph of the above partnership.
article reiterates two essential elements of a
contract of partnership: Judicial Decree not Necessary
1. Legality of the object and
2. Community of benefit or interest of the A judicial decree is not necessary to dissolve an
partners. unlawful partnership. However, it may sometimes
be advisable that a judicial decree of dissolution be
Limitation secured for the convenience and peace of mind of
the parties. Third persons who deal with the
The parties possess absolute freedom to choose partnership without being aware of its illegal
the transaction or transactions they must engage purpose or character are protected unless such
in. The only limitation is that the object must be knowledge can be presumed as where the
lawful and for the common benefit of the transaction is plainly unlawful.
members. This limitation arises not only from the
express provisions of the law, but from the general Right to Return of Contribution Where Partnership
principles of morality and justice. is Unlawful.

No Presumption; Should be of the Essence (1) Article 1770 does not state whether upon the
dissolution of the unlawful partnership, the
The illegality of the object will not be presumed; it amounts contributed are to be returned to the
must appear to be of the essence of the partners, because it only deals with the disposition
relationship. Pursuant to applicable laws, certain of profits.
businesses (e.g., banking) may be engaged in only
by corporations. The fact, however, that said contributions are not
included in the disposal prescribed for said profits,
shows that in consequence of said exclusion, the (3) Furthermore, it would be immoral and unjust
general rules of law must be followed, and hence, for the law to permit a profit from an industry
the partners must be reimbursed the amount of prohibited by it.
their respective contributions.
(4) Under the general rule that the courts will not
(2) The partner who limits himself to demanding aid either party to an illegal agreement, where a
only the amount contributed by him need not partnership is formed for the prosecution of an
resort to the partnership contract on which to base illegal business or for the conduct of a lawful
his claim or action. Since the purpose for which the business in an illegal manner, the courts will refuse
contribution was made has not come into to recognize its existence, and will not lend their
existence, the manager or administrator of the aid to assist either of the parties thereto in an
partnership holding said contribution retains what action against each other.
belongs to others, without any consideration, for
which reason he is bound to return it, and he who Therefore, there can be no accounting demanded
has paid in his share is entitled to recover it. of a partner for the profits which may be in his
hands, nor can a recovery be had.
(3) Any other solution would be immoral, and the
law will not consent to the contribution remaining Effect of Partial Illegality of Partnership Business
in the possession of the manager or administrator
who has refused to return them by denying to the 1. Where a part of the business of a
partners the action to demand them. partnership is legal and a part illegal, an
account of that which is legal may be had.
Right to Receive Profits Where Partnership is 2. Where, without the knowledge or
Unlawful. participation of the partners, the firm’s
profits in a lawful business have been
(1) Article 1770 permits no action for the purpose increased by wrongful acts, the innocent
of obtaining the earnings made by an unlawful partners are not precluded as against the
partnership, during its existence as a result of the guilty partners from recovering their share
business in which it was engaged, because for that of the profits.
purpose, the partner will have to base his action
upon the partnership contract, which is null and Effect of Subsequent Illegality of Partnership
without legal existence by reason of its unlawful Business.
object; and it is self-evident that what does not
exist cannot be a cause of action. Under Article 1830, one of the causes for the
(2) The profits earned in the course of the dissolution of a partnership is “any event which
partnership do not constitute or represent the makes it unlawful for the business of the
partner’s contribution but are the result of the partnership to be carried on or for the members
industry, business, or speculation which is the to carry it on in partnership.”
object of the partnership; and again, in order to Valid The happening of an
demand the proportional part of said profits, the event subsequent to
partner would have to base his action on the the making of a valid
contract, which is null and void since the partition partnership contract
or distribution of profits is one of the juridical which would render
effects thereof. illegal the business of
the partnership as
planned, will not nullify
the contract.
 Accounting May Be Where the business for ART. 1771. A partnership may be constituted in
Had as to the Business which the partnership any form, except where immovable property or
Transacted prior to is formed is legal when real rights are contributed thereto, in which case a
such time the partnership is public instrument shall be necessary.
entered into, but
afterward becomes Form of Partnership Contract.
illegal.
(1) General rule. — As a general rule, no special
Community of Interest Between the Partners for form is required for the validity or existence of the
Business Purposes. contract of partnership. The contract may be made
orally or in writing regardless of the value of the
The salient features of an ordinary partnership are contributions.
a community of interest in profits and losses, a
community of interest in the capital employed, and (2) Where immovable property or real rights are
a community of power in administration. contributed. — In such case, according to Article
1771, “a public instrument shall be necessary,”
(1) This community of interest — the partners must without stating, unlike Article 1773, that without
be coowners of the business — is the basis of the the public instrument, the contract is void.
partnership relation.
Read together, they require the execution of a
However, although every partnership appears to be public instrument for the validity of a contract of
founded on a community of interest, every partnership whenever immovable property is
community of interest does not necessarily contributed thereto.
constitute a partnership. For example, tenants in
common of land are not partners. To affect third persons, the transfer of real
property to the partnership must be duly
(2) Property used in the business may belong to registered in the Registry of Property of the
one or more partners, so that there is no joint province or city where the property contributed is
property, other than joint earnings. To state that located.
partners are co-owners of a business is to state
that they have the power of ultimate control. But (3) When partnership agreement covered by
partners may agree upon concentration of Statute of Frauds. — An agreement to enter in a
management, leaving some of their members partnership at a future time, which “by its terms is
entirely inactive or dormant. not to be performed within a year from the making
thereof” is covered by the Statute of Frauds. Such
(3) Only one of these features, profit-sharing, agreement is unenforceable unless the same be in
seems to be absolutely essential. No doubt, in writing or at least evidenced by some note or
every partnership, profits are to be divided among memorandum thereof subscribed by the parties.
the partners. But the mere sharing of profits of
itself does not of necessity constitute a partnership Partnership Implied From Conduct.
or the members partners inter se.
Pursuant to Article 1767, the court must consider (1) Binding effect. — A partnership may exist and
all the essential elements of a partnership in the often exists in the absence of express agreement,
light of the facts of the particular case before written or verbal, between the parties. Its existence
deciding whether or not a partnership exists. may be implied from the acts or conduct of the
parties, as well as from other declarations, and
such implied contract would be as binding as a
written and express contract. (1) Partnership with capital of P3,000.00 or more.
— There are two requirements where the capital of
Thus, where A and B, house painters, oblige the partnership is P3,000.00 or more, in money or
themselves to paint the house of C for a certain property, namely:
sum, undertaking to furnish both labor and a. The contract must appear in a public
material, and they divide the sum received after instrument; and
payment of expenses, a partnership is created b. It must be recorded or registered with the
notwithstanding that they did not expressly agree Securities and Exchange Commission.
to establish a partnership.
However, failure to comply with the above
(2) Ascertainment of intention of parties. — In requirements does not prevent the formation of
determining whether or not a particular the partnership or affect its liability and that of the
transaction constitutes a partnership, as between partners to third persons.
the parties, the intention as disclosed by the entire
transaction, and as gathered from the facts and But any of the partners is granted the right by the
from the language employed by the parties as well law to compel each other to execute the contract
as their conduct, should be ascertained. in a public instrument. Of course, this right cannot
be availed of if the partnership is void under Article
A partnership may even be created without any 1773.
definite intention; the intention of the parties
being inferred from their conduct and dealings with (2) Purpose of registration. — The requirement of
each other. public instrument is imposed as a prerequisite to
registration, and registration is necessary as “a
(3) Conflict between intention and terms of condition for the issuance of licenses to engage in
contract. — Also, if the parties intend a general business or trade. In this way, the tax liabilities of
partnership, they are general partners although big partnerships cannot be evaded and the public
their purpose is to avoid the creation of such a can also determine more accurately their
relation. Thus, in a case, the Supreme Court membership and capital before dealing with
declared an association as a general partnership it them.”
appearing that the inclusion of “Ltd.” (limited) in
the firm name was only a subterfuge resorted to by (3) When partnership considered registered. — The
the partners in order to evade liability for possible Securities and Exchange Commission performs the
losses, while assuming their enjoyment of the works of a mercantile registrar insofar as the
advantages to be derived from the relation. recording of articles of partnership is concerned.
Since the recording of articles of partnership is not
ART. 1772. Every contract of partnership having a for the purpose of giving the partnership juridical
capital of three thousand pesos or more, in money personality, the only objective of the law is to make
or property, shall appear in a public instrument, the recorded instrument open to all and to give
which must be recorded in the Office of the notice thereof to interested parties.
Securities and Exchange Commission.
Failure to comply with the requirements of the This objective is achieved from the date the
preceding paragraph shall not affect the liability of partnership papers are presented to and left for
the partnership and the members thereof to third record in the Commission. For this reason, when
persons. the certificate of recording of the instrument is
issued on a date subsequent to the date of
Registration of Partnership
presentation thereof, its effectivity retroacts as of and obligations to each other may be inferred and
the latter date. enforced.

In other words, the date the partnership papers are When Inventory is not Required
presented to and left for record in the Commission
is considered the effective date of registration of An inventory is required only “whenever
the articles of partnership. This conforms with the immovable property is contributed.”
ordinary rule of jurisprudence that: “Ordinarily, an
instrument is deemed to be recorded when it is Hence, Article 1773 does not apply in the case of
deposited with the proper office for the purpose of immovable property which may be possessed or
being recorded.” even owned by the partnership but not contributed
by any of the partners.
ART. 1773. A contract of partnership is void,
whenever immovable property is contributed Thus, it has been held that a partnership contract
thereto, if an inventory of said property is not which states that the partnership is established “to
made, signed by the parties, and attached to the operate a fishpond” (not “to engage in a fishpond
public instrument. business”) is not rendered void because no
inventory of the fishpond was made where it did
Partnership with Contribution of Immovable not clearly and positively appear in the articles of
Property. partnership that the real property had been
contributed by anyone of the partners.
(1) Requirements. — Where immovable property,
regardless of its value, is contributed, the failure to If personal property, aside from real property, is
comply with the following requirements will render contributed, the inventory need not include the
the partnership contract void in so far as the former.
contracting parties are concerned:
a. The contract must be in a public Importance of Making Inventory of Real Property in
instrument; and a Partnership.
b. An inventory of the property contributed
must be made, signed by the parties, and Article 1773 complements Article 1771.
attached to the public instrument.
(1) An inventory is very important in a partnership
(2) As to contracting parties. — The absence of to show how much is due from each partner to
either formality renders the contract void. complete his share in the common fund and how
Although Article 1771 does not expressly state that much is due to each of them in case of liquidation.
without the public instrument the contract is void,
Article 1773 is very clear that the contract is void if (2) The execution of a public instrument of
the formalities specifically provided therein are not partnership would be useless if there is no
observed, implying that compliance therewith is inventory of immovable property contributed
absolute and indispensable for validity. because without its description and designation,
the instrument cannot be subject to inscription in
(3) As to third persons. — Article 1773 is intended the Registry of Property, and the contribution
primarily to protect third persons. With regard to cannot prejudice third persons. This will result in
them, a de facto partnership or partnership by fraud to those who contract with the partnership in
estoppel may exist. There is nothing to prevent the the belief of the efficacy of the guaranty in which
court from considering the partnership agreement the immovables may consist.
an ordinary contract from which the parties’ rights
Thus, the contract is declared void by law when no
such inventory is made. Every partnership must have a firm name under
which it shall conduct its business and to
ART. 1774. Any immovable property or an interest distinguish it from the partners and other
therein may be acquired in the partnership name. partnerships.
Title so acquired can be conveyed only in the
partnership name. The partners have equal rights and interests in the
partnership which must be established for the
Acquisition or Conveyance of Property by common benefit or interest of the partners.
Partnership
Secret Agreements or Articles; Co-ownership
Since a partnership has juridical personality
separate from and independent of that of the Associations whose articles or agreements are kept
persons or members composing it, it is but logical secret among the members and wherein anyone
and natural that immovable property may be of them may contract in his own name with third
acquired in the partnership name. persons are, by this article, deprived of juridical
personality for evidently such associations are not
Title so acquired can, therefore, be conveyed only partnerships. As among themselves, they shall be
in the partnership name. The legal effects of governed by the provisions relating to co-
conveyance of property standing in the name of ownership.
the partnership executed by a partner in the
partnership name or in his own name are governed Importance of Giving Publicity to Articles of
by Article 1819, paragraphs one and two. Partnership

The right of a partnership to deal in real as well as It is essential that the articles of partnership be
personal property is subject to limitations and given publicity for the protection not only of the
restrictions prescribed by the Constitution and members themselves but also third persons from
special laws. A partnership is an “association” fraud and deceit to which otherwise they would be
within the meaning of the word as used in the easy victims.
Constitution. A member who transacts business for the secret
partnership in his own name becomes personally
ART. 1775. Associations and societies, whose bound to third persons unaware of the existence of
articles are kept secret among the members, and such association, in the same way and for the same
wherein any one of the members may contract in reason that an agent who acts in his own name
his own name with third persons, shall have no when dealing with third persons is directly bound
juridical personality, and shall be governed by the in favor of such persons who may only sue or be
provisions relating to coownership. sued by the agent and not his principal.

Secret Partnerships Without Juridical Personality. But a person may be held liable as a partner or
partnership liability may result in favor of third
The partnership relation is created only by the persons by reason of estoppel.
voluntary agreement of the partners. It is essential
that the partners are fully informed not only of the ART. 1776. As to its object, a partnership is either
agreement but of all matters affecting the universal or particular.
partnership. A partner is considered the agent of As regards the liability of the partners, a
his co-partners and of the partnership in respect of partnership may be general or limited.
all partnership transactions.
Classifications of Partnership. formed for a particular undertaking, and
upon the expiration of the term or
(1) As to the extent of its subject matter. — A completion of the particular enterprise, the
partnership may be: partnership is dissolved, unless continued
by the partners.
Universal Partnership One which refers to all
the present property (4) As to the legality of its existence. — It may be:
or to all profits. (Art. a. De jure partnership or one which has
1777.) complied with all the legal requirements for
its establishment; or
Article UP of all b. De facto partnership or one which has
1778 present failed to comply with all the legal
property requirements for its establishment.
Article UP or
1780 profits (5) As to representation to others. — It may be:
Particular Partnership Article 1783 a. Ordinary or real partnership or one which
actually exists among the partners and also
(2) As to liability of the partners. — It may be: as to third persons; or
b. Ostensible partnership or partnership by
a. General partnership or one consisting of estoppel or one which in reality is not a
general partners who are liable pro rata and partnership, but is considered a partnership
subsidiarily (Art. 1816.) and sometimes only in relation to those who, by their
solidarily (Arts. 1822-1824.) with their conduct or admission, are precluded to
separate property for partnership debts; or deny or disprove its existence.
b. Limited partnership or one formed by two
or more persons having as members one or (6) As to publicity. — It may be:
more general partners and one or more a. Secret partnership or one wherein the
limited partners, the latter not being existence of certain persons as partners is
personally liable for the obligations of the not avowed or made known to the public by
partnership. (Art. 1843.) any of the partners; or
b. Open or notorious partnership or one
(3) As to its duration. — It is either: whose existence is avowed or made known
a. Partnership at will or one in which no time to the public by the members of the firm.
is specified and is not formed for a (7) As to purpose. — It may be:
particular undertaking or venture and which a. Commercial or trading partnership or one
may be terminated at anytime by mutual formed for the transaction of business; or
agreement of the partners, or by the will of b. Professional or non-trading partnership or
any one partner alone; or one for a fixed one formed for the exercise of a profession.
term or particular undertaking which is
continued by the partners after the Kinds of Partners
termination of such term or particular
undertaking without express agreement Partners are classified according to their interests
(see Art. 1785.); or in the partnership business, or their obligations to
the partnership, or their liabilities to third persons.
b. Partnership with a fixed term or one in
which the term for which the partnership is (1) Under the Civil Code. — Partners are classified
to exist is fixed or agreed upon or one into:
a. Capitalist partner or one who contributes j. Subpartner or one who, not being a
money or property to the common fund member of the partnership, contracts with
(see Art. 1767.); a partner with reference to the latter’s
b. Industrial partner or one who contributes share in the partnership. (see Art. 1804.)
only his industry or personal service (Arts.
1789, 1767.); (2) Other classifications. — They have also been
c. General partner or one whose liability to classified into:
third persons extends to his separate
property; he may be either a capitalist or a. Ostensible partner or one who takes active
industrial partner. (see Arts. 1843, 1816.) part and known to the public as a partner in
He is also known as real partner; the business (see Art. 1834, par. 2.),
d. Limited partner or one whose liability to whether or not he has an actual interest in
third persons is limited to his capital the firm. Thus, he may be an actual partner
contribution. (see Art. 1843.) He is also or a nominal partner. If he is not actually a
known as special partner. The terms partner, he is subject to liability by the
“general partner” and “limited partner” doctrine of estoppel (Art. 1825.);
have relevance only in a limited
partnership; b. Secret partner or one who takes active part
e. Managing partner or one who manages the in the business but is not known to be a
affairs or business of the partnership; he partner by outside parties nor held out as a
may be appointed either in the articles of partner by the other partners (Ibid.),
partnership or after the constitution of the although he participates in the profits and
partnership. (see Art. 1800.) He is also losses of the partnership. He is an actual
known as general or real partner; partner. He is also an active partner in the
f. Liquidating partner or one who takes sense that he participates in the
charge of the winding up of partnership management of the partnership affairs;
affairs upon dissolution (see Art. 1836.);
g. Partner by estoppel or one who is not really c. Silent partner or one who does not take any
a partner, not being a party to a partnership active part in the business although he may
agreement, but is liable as a partner for the be known to be a partner. Thus, he need
protection of innocent third persons. (see not be a secret partner. If he withdraws
Art. 1825.) He is one who is represented as from the partnership, he must give notice
being in fact a partner, but who is not so as to those persons who do business with the
between the partners themselves. He is also firm to escape liability in the future;
known as partner by implication or nominal
partner. The term “quasi-partner” is d. Dormant partner or one who does not take
sometimes used active part in the business and is not known
h. Continuing partner or one who continues or held out as partner. He would be both a
the business of a partnership after it has silent and a secret partner. He would be
been dissolved by reason of the admission both a secret and a silent partner. He may
of a new partner, or the retirement, death, retire from the partnership without giving
or expulsion of one or more partners (see notice and cannot be held liable for
Art. 1840.); obligations of the firm subsequent to his
i. Surviving partner or one who remains after withdrawal. His only interest in joining the
a partnership has been dissolved by the partnership would be the sharing of the
death of any partner (see Art. 1842.); and profits earned. The term is used as
synonymous with “sleeping partner”
 may possess at the time of the celebration of the
e. Original partner or one who is a member of contract.
the partnership from the time of its
organization; In this kind of partnership, the following become
the common property of all the partners:
f. Incoming partner or a person lately, or
about to be, taken into an existing (1) Property which belonged to each of them at the
partnership as a member; and time of the constitution of the partnership; and

g. Retiring partner or one withdrawn from the (2) Profits which they may acquire from the
partnership; a withdrawing partner. property contributed.

EXAMPLE:
All partners in any of these six classes are subject
to liability for all partnership obligations. A and B are partners in a partnership known as X &
Co. They agreed that they would contribute all
ART. 1777. A universal partnership may refer to all their properties to a common fund for the purpose
the present property or to all the profits. of dividing the same between themselves, as well
as the profits to be derived therefrom. A
ART. 1778. A partnership of all present property is contributed all his properties consisting of two big
that in which the partners contribute all the parcels of agricultural land and a tractor. B
property which actually belongs to them to a contributed also his properties consisting of
common fund, with the intention of dividing the P100,000.00 cash and farm implements.
same among themselves, as well as all the profits
they may acquire therewith. The partnership formed by the contract of A and B
is a universal partnership of all present property.
ART. 1779. In a universal partnership of all present
property, the property which belongs to each of Contribution of Future Property.
the partners at the time of the constitution of the
partnership, becomes the common property of all As a general rule, future properties cannot be
the partners, as well as all the profits which they contributed.
may acquire therewith.
A stipulation for the common enjoyment of any The very essence of the contract of partnership
other profits may also be made; but the property that the properties contributed be included in the
which the partners may acquire subsequently by partnership requires the contribution of things
inheritance, legacy or donation cannot be determinate. The position of a partner is like that
included in such stipulation, except the fruits of a donor, and donations cannot comprehend
thereof. future property.

Universal Partnership of all Present Property Property subsequently acquired through the
Explained. following cannot be included by stipulation:

Universal Partnership of Profits – is one which 1. Inheritance,

comprises all that the partners may acquire by 2. Legacy, or
their industry or work during the existence of the 3. Donation except the fruits thereof.
partnership and the usufruct of movable or
immovable property which each of the partners
Hence, any stipulation including property so
acquired is void. (3) Fruits of property subsequently acquired.
Profits from Other Sources
GR Fruits of property subsequently acquired
Profits from other sources (not from the properties by the partners do not belong to the
contributed) will become common property only if partnership.
there is a stipulation. EXP Such profits may, however, be included
by express stipulation.
ART. 1780. A universal partnership of profits
comprises all that the partners may acquire by Profits Acquired by their Industry of Work
their industry or work during the existence of the
partnership. But profits which the partners may acquire by their
Movable or immovable property which each of industry or work during the existence of the
the partners may possess at the time of the partnership as well as the usufruct of their present
celebration of the contract shall continue to properties belong to the partnership as a matter of
pertain exclusively to each, only the usufruct right. An express stipulation is necessary to exclude
passing to the partnership. any of them.

Universal Partnership of Profits Explained. ART. 1781. Articles of universal partnership,

entered into without specification of its nature,
Universal Partnership of Profits – is one which only constitute a universal partnership of profits.
comprises all that the partners may acquire by
their industry or work during the existence of the Presumption in favor of Universal Partnership of
partnership and the usufruct of movable or Profits.
immovable property which each of the partners
may possess at the time of the celebration of the Where the articles of partnership do not specify
contract. the nature of the partnership, whether it is one of
“present property” or of “profits” only, it will be
(1) Ownership of present and future property. — It presumed that the parties intended merely a
is to be noted that in this class of partnership, the partnership of profits.
partners retain their ownership over their present
and future property. The reason for this presumption is that a universal
partnership of profits imposes less obligations on
What passes to the partnership are the profits or the partners, since they preserve the ownership of
income and the use or usufruct of the same. their separate property.

Consequently, upon the dissolution of the When the Presumption Applies

partnership, such property is returned to the
partners who own it. It is to be noted that this article applies only when
a universal partnership has been organized.
(2) Profits acquired through chance. — Since the
law speaks only of profits which the partners may ART. 1782. Persons who are prohibited from
acquire by their industry or work, it follows that giving each other any donation or advantage
profits acquired by the partners through chance, cannot enter into a universal partnership.
such as lottery or by lucrative title without
employment of any physical or intellectual efforts, Limitations upon the Right to form a Partnership
are not included.
Persons who are prohibited by law to give In order that Article 739 may apply, it is not
donations cannot enter into a universal partnership required that there be a previous conviction for
for the reason that each of the partners virtually adultery or concubinage. This can be inferred from
makes a donation. To allow persons who are the clause that “the guilt of the donor and the
prohibited to give each other any donation or donee may be proved by preponderance of
advantage to form a universal partnership will be evidence.’’
like permitting them to do indirectly what the law
expressly prohibits. ART. 1783. A particular partnership has for its
object determinate things, their use or fruits, or a
A partnership formed in violation of this article is specific undertaking, or the exercise of a
null and void. Consequently, no legal personality is profession or vocation.
acquired.
Particular Partnership Explained.
A husband and his wife, however, may enter into a
particular partnership or be members thereof. Particular Partnership – It is a partnership which is
neither a universal partnership of present property
In connection with Article 1782, the following nor a universal partnership of profits.
provisions must be noted:
The Fundamental Difference; Scope of their Subject
“Art. 87. Every donation or grant of Matter or Object
gratuitous advantage, direct or indirect,
between the spouses during the marriage Universal Partnership Particular Partnership
shall be void, except moderate gifts, which The object is vague and It is limited and well-
the spouses may give to each other on the indefinite, defined, being
occasion of any family rejoicing. The contemplating a confined
prohibition shall also apply to persons living general business with to an undertaking of a
together as husband and wife without a some degree of single, temporary, or
valid marriage.” (Family Code.) continuity ad hoc nature

“Art. 739. The following donations shall be Examples of Particular Partnerships

void:
(1) Those made between persons who were  Those formed for the acquisition of an
guilty of adultery or concubinage at the immovable property for the purpose of
time of the donation; reselling it at a profit or for the common
(2) Those made between persons found enjoyment of its use and the benefits
guilty of the same criminal offense, in derived therefrom, or
consideration thereof;  Those established for the purpose of
(3) Those made to a public offi cer or his carrying out a specific enterprise such as
wife, descendants and ascendants, by the construction of a building, or those
reason of his office. formed for the practice of a profession or
In the case referred to in No. 1, the action vocation.
for declaration of nullity may be brought by
the spouse of the donor or donee; and the Hence, two or more persons as accountants
guilt of the donor and the donee may be associating themselves in the practice of
proved by preponderance of evidence in accountancy or two or more lawyers in the practice
the same action.” (Civil Code.) of law form a particular partnership.
“A firm engaged, among other activities, in the
importation, marketing, distribution and operation (2) Joint venture. —
of automatic phonographs, radios, television sets
and amusement machines, their parts and Joint Venture - It is essentially a partnership
accessories” is a particular partnership. created for a limited purpose. While a joint venture
is not a formal partnership in the legal or technical
Business of Partnership Need Not be Continuing in sense, both are governed, subject to certain
Nature qualifications, practically by the same rules or
principles of partnership. This is logical since in a
It may be inferred from Articles 1767 and 1783 that joint venture, like in a partnership, there is a
the carrying on of a business of a continuing nature community of interest in the business and a mutual
is not essential to constitute a partnership. right of control and an agreement to share jointly
in profits and losses resulting from the enterprise.
An agreement to undertake a particular piece of
work or a single transaction or a limited number of The usual rules as regards the construction and
transactions and immediately divide the resulting operation of contracts generally apply to a contract
profits would seem to fall within the meaning of of a joint venture.
the term “partnership” as used in the law.
(3) Corporation as a partner. — While under the
(1) Rule under American law. — The above is not Philippine Civil Code:
true under the Uniform Partnership Act which
defines: Joint Venture – is a form of partnership with a legal
personality separate and distinct from the parties
Partnership as “an association of two or more composing it, and should thus be governed by the
persons to carry on as co-owners a business for law of partnership.
profit” (Sec. 6 thereof.)
The Supreme Court has, however, recognized a
Business – “business includes every trade, distinction between these two business forms, and
occupation, or profession.” It means business in has held that although a corporation cannot enter
the commercial sense only, not merely “a joint into a partnership contract, it may, however,
venture’’. engage in a joint venture with others through a
contract or agreement if the nature of the venture
Joint Venture –exists for carrying on a single act or is authorized by its charter.
isolated transaction or a limited number of
transactions.

Joint Venture Partnership

a legal concept of the members
common law origin, on (partners) are
which the members interested in carrying
are interested only in a on together of a
single transaction, and general and continuing
is thus of a temporary business of a particular
nature although the kind
business of conducting
it may continue for a
number of years
 because, technically, the partnership is the
Chapter 2 principal and each partner is an agent of the
OBLIGATIONS OF THE PARTNERS partnership and every other partners with
respect to partnership affairs.
SECTION 1. — Obligations of the Partners Among b. The many particular rights and duties to
Themselves. each other are, in reality, but aspects of the
broad fiduciary relation. These particular
Relations created by a Contract of Partnership. duties are expressly defined by law subject
to any modifying agreement between the
A contract of partnership gives rise to at least four partners themselves (40 Am. Jur. 137, 208.),
distinct juridical relations, namely: though its provisions will not in many cases
1. Relations among the partners themselves; be effective as to third persons dealing with
2. Relations of the partners with the the partnership.
partnership;
3. Relations of the partnership with third (2) Fiduciary relationship remains until partnership
persons with whom it contracts; and terminated. — The relation of trust applies also to
4. Relations of the partners with such third matters concerned with the formation of the
persons. partnership, and when a partnership is dissolved,
the assets of the partnership must still be managed
EXAMPLE: in accordance with this fiduciary principle.
If A and B formed a partnership called X & Co., and
it transacts business with Y, a third person, the The obligation of partners to act with the utmost
relations created will be as follows: relations candor and good faith in their dealings between
between A and B; relations between A and B on the themselves is not lessened by the existence of
one hand and X & Co. on the other hand; relations strained relations between them or the existence
between X & Co. and Y, and relations between A of any condition which might in and of itself justify
and the firm’s dissolution. The fiduciary obligation of a
B on the one hand and Y on the other hand. partner remains until the relationship is terminated
and the equities between the partners adjusted
Rights and Obligations, in general, of partners inter and satisfied.
se.
(3) Relationship in a limited partnership. — The
(1) Partnership relationship essentially one of rights and obligations of the partners as to each
mutual trust and confidence. — The partnership other are provided on the theory that a partner is
relationship is essentially one of mutual trust and both a principal and an agent in relation to his co-
confidence, and the law imposes upon the partners partners. But the relationship between a limited
highest standards of integrity and good faith in partner and the other partners in a limited
their dealings with each other for the benefit of the partnership does not involve the element of trust
partnership. and confidence, as in the case of a general
a. Each partner is, in one sense, a trustee and partnership.
at the same time, a cestui que trust. He is a
trustee to the extent that his duties bind ART. 1784. A partnership begins from the moment
him with respect to his co-partners and the of the execution of the contract, unless it is
partnership, and a cestui que trust as far as otherwise stipulated.
the duties that rest on his co-partners. This
relationship is as much the same as the one Commencement and Term of Partnership.
existing between the principal and agent
(1) A partnership is a consensual contract; hence, it (1) Future partnership. — The partners may
exists from the moment of the celebration of the stipulate some other date for the commencement
contract by the partners. of the partnership. Persons who have entered into
Since under Article 1784, a partnership commences a contract to become partners at some future time
from the time of execution of the contract if there or on the happening of some future contingency do
is no contrary stipulation as to the date of not become partners until or unless the agreed
effectivity of the same, its registration in the time has arrived or the contingency has happened.
Securities and Exchange Commission is not As long as the agreement for a partnership remains
essential to give it juridical personality. inchoate or unperformed, the partnership is not
consummated.
(2) The birth and life of a partnership is predicated
on the mutual desire and consent of the parties. Hence, there can be a future partnership which at
Unlike a corporation, no time limit is prescribed by the moment has no juridical existence yet. In the
law for the life of partnership. Hence, the partners absence of express stipulation, evidence is
may fi x in their contract any term and they shall be admissible to show the commencement date as
bound to remain under such a relation for the determined by the words, acts or conduct of the
duration of the term barring the occurrence of any parties.
of the events causing dissolution of the partnership
before its expiration. Incidentally, the Statute of Frauds provides that an
agreement that by its terms is not to be performed
Rules Governing Partnership Relation. within a year from the making thereof, must be in
writing and signed by the party charged in order to
What is necessary for the existence of a be enforceable.
partnership is that the essential requisites of a
contract of partnership are present even when the More than 1 year; FP
partners have not yet actually begun the carrying
on of its business or given their contributions, or  Writing
even though its conditions or details, such as the  Signed by the Party charged in order to be
participation of the partners in the profits and enforceable
losses and the nature of the partnership, have not
yet been fixed, as they pertain to the accidental (2) Agreement to create partnership. — There is a
and not to the essential parts of the contract. marked distinction between a partnership actually
consummated and an agreement to enter into a
Where a partnership relation results, the law itself contract of partnership at a future time.
fixes the incidents and consequences of this
relation if the parties fail to do so. This is true A partnership in fact cannot be predicated on an
although the parties thereto actually call their agreement to enter into a co-partnership at a
relation something other than a partnership or future day unless it is shown that such an
even go as far as to state expressly that they are agreement was actually consummated. So long as
not partners. the agreement remains executory the partnership
is inchoate, not having called into being by the
Executory Agreement of Partnership. concerted action necessary under the partnership
agreement.
The above rule on the commencement of a
partnership is not absolute. The death of either party to an executory
agreement of partnership prevents the formation
of a firm, since such agreement is based on the In such case, the rights and duties of the partners
continuance of the life of each. remain the same as they were at such termination
but only insofar as is consistent with a partnership
(3) Failure to agree on material terms. — A failure at will.
of the parties to agree on material terms may not
merely be evidence of the intent of the parties to In other words, with such continuation, the
be bound only in the future, but may prevent any partnership for a fixed term or particular
rights or obligations from arising on either side for undertaking is dissolved and a new one, a
lack of complete contract partnership at will, is created by implied agreement
Article 1784 must be read in relation to Articles the continued existence of which will depend upon
1771 and 1773. the mutual desire and consent of the partners.
Thus, for example, the manner of management and
ART. 1785. When a partnership for a fixed term or profit-sharing ratio originally agreed upon shall still
particular undertaking is continued after the govern but the partnership having become a
termination of such term or particular partnership at will may be lawfully terminated at
undertaking without any express agreement, the any time by the express will of all the partners or
rights and duties of the partners remain the same any of them.
as they were at such termination, so far as is
consistent with a partnership at will. (2) Dissolution of partnership. — Any one of the
A continuation of the business by the partners or partners may, at his sole pleasure, dictate a
such of them as habitually acted therein during dissolution of a partnership at will.
the term, without any settlement or liquidation of
the partnership affairs, is prima facie evidence of He must, however, act in good faith not that the
a continuation of the partnership. attendance of bad faith can prevent the dissolution
of the partnership but that can result in a liability
Continuation of Partnership Beyond Fixed Term. for damages to the other partners.

Partnership with a Fixed Term – is one in which Implicit in good faith is the requirement that the
the term of its existence has been agreed upon dissolution must not be made at an improper or
expressly (as when there is a definite period) or unreasonable time.
impliedly (as when a particular enterprise or
transaction is undertaken). Even a partnership for a fixed term may likewise be
terminated by the express will of any partner
The expiration of the term thus fixed or the before the time mentioned.
accomplishment of the particular undertaking
specified (or the demonstration of the impossibility There is no such thing as an indissoluble
of its accomplishment) will cause the automatic partnership.
dissolution of the partnership.
Continuation of Partnership for an Indefinite Term.
(1) Rights and duties of partners. — The
partnership, however, may be extended or (1) Partnership for a term impliedly fixed. —
renewed by the partners by express agreement, Although the term of a partnership is not expressly
written or oral, or impliedly, by the mere fixed, an agreement of the parties may evidence an
continuation of the business after the termination understanding that the relation should continue
of such term or particular undertaking without any until the accomplishment of a particular
settlement or liquidation. undertaking or certain things have been done or
have taken place.
 favorable and mutually satisfactory
a. When a partner advances a sum of money terms.
to a partnership with the understanding
that the amount contributed is to be loaned (2) Partnership with mere expectation that
to the partnership and is to be repaid as business will be profitable. — Where the
soon as feasible from the prospective understanding to which defendant (the partner
profits of the business, the partnership is who contended that the partnership created was
for the term reasonably required to repay for a term) testified was no more than a common
the loan. The partners may impliedly agree hope that the partnership earnings would pay for
to continue in business until a certain sum all the necessary expenses, such a hope does not
of money is earned, or one or more establish even by implication a “fixed term or
partners recoup their investment, or until particular undertaking” as required by Article 1785.
certain debts are paid, or until certain
property could be disposed of on favorable The mere expectation that the business would be
terms. In each of these cases, however, the successful and that the partners would be able to
implied agreement must be proved. recoup their investment is not sufficient to create a
partnership for a term. All partnerships are
b. In each of the following cases the court ordinarily entered into with the hope or
properly held that the partners’ implied expectation that they will be profitable, but that
promise was to continue the partnership for alone does not make them all partnerships for a
a term reasonably required to allow the term and obligate the partners to continue in the
partnership to earn sufficient money to partnership until all the losses over a period of
accomplish the understood objective: many years may have been recovered.
i. where the partners borrowed
substantial amounts of money to ART. 1786. Every partner is a debtor of the
launch an enterprise and there was partnership for whatever he may have promised
an understanding that the loans to contribute thereto.
would be repaid from partnership He shall also be bound for warranty in case of
profits; eviction with regard to specific and determinate
ii. where one partner loaned his co- things which he may have contributed to the
partner money to invest in the partnership, in the same cases and in the same
partnership with the understanding manner as the vendor is bound with respect to
that the money would be repaid the vendee. He shall also be liable for the fruits
from partnership profits thereof from the time they should have been
iii. where one partner contributed all delivered, without the need of any demand.
the capital, the other contributed his
services, and it was understood that Obligations with Respect to Contribution of
upon the repayment of the Property.
contributed capital from partnership
profits the partner who contributed The above article deals with the obligations of the
his services would receive a one- partners among themselves and to the partnership
third interest in the partnership with respect to contribution of property. They are
assets; as follows:
iv. where the parties entered into a 1. To contribute at the beginning of the
joint venture to build and operate a partnership or at the stipulated time the
motel until it could be sold upon money, property, or industry which he may
have promised to contribute;
 2. To answer for eviction in case the well-known principle that special provisions prevail
partnership is deprived of the determinate over general provisions.
property contributed; and
3. To answer to the partnership for the fruits Article 1838, however, allows rescission or
of the property the contribution of which annulment of a partnership contract on the ground
he delayed, from the date they should have of fraud or misrepresentation committed by one of
been contributed up to the time of actual the parties thereto.
delivery.
Liability of Partner in case of Eviction.
In addition, the partner has the obligation:
4. To preserve said property with the diligence The partner is bound in the same cases and in the
of a good father of a family pending delivery same manner as the vendor is bound with respect
to the partnership to the vendee with regard to specific and
5. To indemnify the partnership for any determinate things which he may have contributed
damage caused to it by the retention of the to the partnership.
same or by the delay in its contribution.
This matter is, therefore, governed by the law on
The money or property contributed by a partner sales.
becomes the property of the partnership. It
necessarily follows that the same cannot be Under the law on sales, eviction shall take place
withdrawn or disposed of by the contributing whenever by a final judgment based on a right
partner without the consent or approval of the prior to the sale or an act imputable to the vendor,
partnership or of the other partners. the vendee is deprived of the whole or a part of the
thing purchased.
Effect Of Failure To Contribute Property Promised.
This obligation of warranty in case of eviction is in
The mutual contribution to a common fund being consequence of the character of the contract of
of the essence of the contract of partnership, for partnership which is an onerous contract.
without the contributions the partnership is
useless, it is but logical that the failure to Liability of Partner For Fruits of Property In Case Of
contribute is to make the partner ipso jure a debtor Delay.
of the partnership even in the absence of any
demand. Here, again, no demand is necessary to put the
partner in default.
Under this article, the remedy of the other partner
or the partnership is not rescission but an action From the mere fact that the property which a
for specific performance (to collect what is owing) partner ought to deliver does not pass to the
with damages and interest from the defaulting common fund on time, the partnership fails to
partner from the time he should have complied receive the fruits or benefits which the said
with his obligation. contribution produced as well as those it ought to
produce, thus prejudicing the common purpose of
Article 1191, which refers to resolution of obtaining from them the greatest possible profits
reciprocal obligations in general, is not applicable. through some means of speculation or investment.
The injury, therefore, to the partnership is
Articles 1786 and 1788 specifically refer to the constant.
contract of partnership in particular; and it is a
Liability Of Partner For Failure To Perform Service (c) If under the circumstances of the case
Stipulated. the proper measure of the damages or
loss (which may include unrealized profits)
Is a partner who fails to perform the personal is the value of the services wrongfully
services which he has stipulated to render to the withheld, then the defendant should be
partnership, liable to the other partners for the charged this value. If the defendant had
value of the services? made profit by engaging in other business
in violation of the contract, he is liable to
GR The partners are not entitled to charge account for the same.
each other, or the partnership of which
they are members, for their services in the
firm business. The doctrine seems to be
that every partner is bound to work to the ART. 1787. When the capital or a part thereof
extent of his ability for the benefit of the which a partner is bound to contribute consists of
whole, without regard to the services of goods, their appraisal must be made in the
his copartners, however unequal in value manner prescribed in the contract of partnership,
or amount, and to require a partner to and in the absence of stipulation, it shall be made
account for the value of his services would by experts chosen by the partners, and according
be, in effect, allowing compensation to the to current prices, the subsequent changes thereof
other members of the partnership for the being for the account of the partnership.
services they rendered.

EXP 1. There is a Special Agreement

2. Reason of it fails: Appraisal of Goods Or Property Contributed.
(a) If a partner neglects or refuses, without
reasonable cause, to render the service (1) The appraisal of the value of the goods
which he agreed to perform by reason of contributed is necessary to determine how much
which the partnership suffered loss, no has been contributed by the partners.
good reason can be suggested why the
erring partner should not be just as GR The share of each partner in the profits
responsible for the breach of his and losses is in proportion to what he
agreement to render personal service to may have contributed.
the partnership as for the breach of any EXP Stipulation
other stipulation in the partnership
contract. The appraisal is made:
1. In the manner prescribed by the contract of
(b) If the partner is compelled to make partnership;
good the loss, each member of the firm, 2. In the absence of stipulation, by experts
including himself, will receive his chosen by the partners and according to
proportion of the amount in the current prices.
distribution of the partnership assets, and
in no just sense can this be regarded as After the goods have been contributed, the
compensation for the services individually partnership bears the risk or gets the benefit of
rendered. The proper measure of damages subsequent changes in their value.
in such case is the value of the services
wrongfully withheld. (2) In the case of immovable property, the
appraisal is made in the inventory of said property;
otherwise, it may be made as provided in Article
1787. There is no reason why the rule in Article The guilty partner is liable for interest and damages
1787 should not also apply with respect to other not from the time judicial or extrajudicial demand
kinds of property. is made but:
 From the time he should have complied
ART. 1788. A partner who has undertaken to with his obligation or
contribute a sum of money and fails to do so  From the time he converted the amount to
becomes a debtor for the interest and damages his own use, as the case may be.
from the time he should have complied with his
obligation. Unless there is a stipulation fixing a different time,
The same rule applies to any amount he may have this obligation of a partner to give his promised
taken from the partnership coffers, and his contribution arises from the commencement of the
liability shall begin from the time he converted partnership, that is, upon perfection of the
the amount to his own use. contract.

Obligations With Respect To Contribution Of GR In obligations consisting in the payment of

Money a sum of money, the indemnity for
And Money Converted To Personal Use. damages shall be:
 only the payment of interest
This article contemplates two distinct cases. agreed upon or,
 in the absence of stipulation, the
1. The first paragraph refers to money legal interest.
promised but not given on time and EXP Double Responsibility of the Partner
2. The second, to partnership money
converted to the personal use of the It is in harmony with the principle laid down in
partner. Article 1794 that every partner is responsible to the
The following are the obligations of the partners partnership for damages suffered by it through his
with respect to the partnership capital under fault and is justified by the nature of the contract
Article 1788: of partnership.
1. To contribute on the date due the amount In a case, a partner in a construction venture, who,
he has undertaken to contribute to the contrary to the terms of the partnership, failed to
partnership; contribute his share in the capital of the
2. To reimburse any amount he may have partnership, was ordered by the court to reimburse
taken from the partnership coffers and his co-partner whatever amount the latter invested
converted to his own use; in or spent for the partnership on account of the
3. To pay the agreed or legal interest, if he construction projects.
fails to pay his contribution on time or in
case he takes any amount from the Liability Of Partner For Failure To Return
common fund and converts it to his own Partnership Money Received.
use; and
4. To indemnify the partnership for the (1) Where fraudulent misappropriation committed.
damages caused to it by the delay in the — A partner is guilty of estafa if he misappropriates
contribution or the conversion of any sum partnership money or property received by him for
for his personal benefit a specific purpose of the partnership.

Liability Of Guilty Partner For Interest And (2) Where there was mere failure to return. — The
Damages. mere failure on the part of an industrial partner to
return to the capitalist partner the capital brought he engages in business for himself, such act is
by him into the partnership is not an act considered prejudicial to the interest of the other
constituting the crime of estafa. partners.

The money having been received by the An action for specific performance to compel the
partnership, the business commenced and profits partner to perform the promised work or service is
accrued, the action that lies with the partner who not available as a remedy because this will amount
furnished capital for the recovery of his money is a to involuntary servitude which, as a rule, is
civil one arising from the partnership contract for a prohibited by the Constitution.
liquidation of the partnership and a levy on its
assets if there should be any. Prohibition Against Engaging In Business.

In this case, there was mere failure on the part of (1) As regards an industrial partner. — The
the industrial partner to liquidate partnership prohibition is absolute and applies whether the
affairs and to account to persons interested the industrial partner is to engage in the same business
amounts respectively due them. in which the partnership is engaged or in any kind
of business. It is clear that the reason for the
A partner is guilty of estafa if he fraudulently prohibition exists in both cases, which is to prevent
appropriates partnership property delivered to any conflict of interest between the industrial
him, with specific directions to apply it to partner and the partnership and to insure faithful
partnership purposes. compliance by said partner with his prestation.

ART. 1789. An industrial partner cannot engage in (2) As regards capitalist partners. — The
business for himself unless the partnership prohibition extends only to any operation which is
expressly permits him to do so; and if he should of the same kind of business in which the
do so, the capitalist partners may either exclude partnership is engaged unless there is a stipulation
him from the firm or avail themselves of the to the contrary.
benefits which he may have obtained in violation
of this provision, with a right to damages in either
case.

Obligations Of Industrial Partner

Remedies Where Industrial Partner Engages In
Industrial Partner – one who contributes his Business.
industry, labor, or services to the partnership.
If the industrial partner engages in business for
He is considered the owner of his services, which is himself, without the express permission of the
his contribution to the common fund. partnership, the capitalist partners have the right
either to:
GR The IP becomes a debtor of the  to exclude him from the firm or
partnership for his work or services  to avail themselves of the benefits which he
from the moment the partnership may have obtained.
relation begins.
EXP Unless contrary is stipulated In either case, the capitalist partners have a right to
damages. Note that the permission given must be
In effect, the partnership acquires an exclusive express; hence, mere toleration by the partnership
right to avail itself of his industry. Consequently, if will not exempt the industrial partner from liability.
 loss of the business, and there is no agreement to
Although the law mentions only the capitalist the contrary, he is under obligation to contribute
partners, it is believed that industrial partners are an additional share to save the venture. If he
also entitled to the remedy granted since they are refuses to contribute, he shall be obliged to sell his
equally prejudiced by the act of their copartner interest to the other partners.
engaging in business for himself.
(1) Requisites for application of rule. — The
ART. 1790. Unless there is a stipulation to the following are the requisites before a capitalist
contrary, the partners shall contribute equal partner may be obliged to sell his interest to the
shares to the capital of the partnership. others:
a. There is an imminent loss of the business of
Extent of Contribution To Partnership Capital. the partnership;
b. The majority of the capitalist partners are of
The partners can stipulate the contribution of the opinion that an additional contribution
unequal shares to the common fund. to the common fund would save the
business;
But in the absence of such stipulation, the c. The capitalist partner refuses deliberately
presumption is that their contribution shall be in (not because of his financial inability to do
equal shares. so), to contribute an additional share to the
capital; and
This principle is just and reasonable and is d. There is no agreement that even in case of
consistent with the rule that partners are deemed an imminent loss of the business the
to have equal rights and obligations. partners are not obliged to contribute.

Obviously, the above rule is not applicable to an It is to be noted that the industrial partner is
industrial partner unless, besides his services, he exempted from the requirement to contribute an
has contributed capital pursuant to an agreement additional share. Having contributed his entire
to that effect. industry, he can do nothing further.

(2) Reason for the sanction. — The refusal of the

partner to contribute his additional share reflects
his lack of interest in the continuance of the
partnership. It would be unjust for him to remain
ART. 1791. If there is no agreement to the and reap the benefits of the efforts of the others
contrary, in case of an imminent loss of the while he himself refuses to help.
business of the partnership, any partner who Hence, the law provides a remedy which,
refuses to contribute an additional share to the incidentally, is just to both parties since the partner
capital, except an industrial partner, to save the who refuses to contribute is paid the value of his
venture, shall be obliged to sell his interest to the interest while the other partners are thereby
other partners. relieved from the burden of continuing their
association with him in the business.
Obligation Of Capitalist Partner To Contribute
Additional Capital. ART. 1792. If a partner authorized to manage
collects a demandable sum, which was owed to
As a general rule, a capitalist partner is not bound him in his own name, from a person who owed
to contribute to the partnership more than what the partnership another sum also demandable,
he agreed to contribute but in case of an imminent the sum thus collected shall be applied to the two
credits in proportion to their amounts, even The article does not apply where the partner who
though he may have given a receipt for his own collects for his own credit only is not authorized to
credit only; but should he have given it for the manage, for there can be no ground for suspicion
account of the partnership credit, the amount that he may have acted improperly to create an
shall be fully applied to the latter. undue advantage to himself. However, where the
The provisions of this article are understood to be manner of management has not been agreed upon
without prejudice to the right granted to the and all the partners participate in the management
debtor by Article 1252, but only if the personal of the partnership, then every partner shall be
credit of the partner should be more onerous to considered a managing partner for purposes of
him. Article 1792.

Obligation Of Managing Partner Who Collects Debt. (3) Right of debtor to application of payment. —
Under the second paragraph, the debtor is given
Where a person is separately indebted to the the right to prefer payment of the credit of the
partnership and to the managing partner at the partner if it should be more onerous to him in
same time, any sum received by the managing accordance with his right to application of
partner shall be applied to the two credits in payment.
proportion to their amounts, except where he
received it for the account of the partnership, in ART. 1793. A partner who has received, in whole
which case the whole sum shall be applied to the or in part, his share of a partnership, when the
partnership credit only. other partners have not collected theirs, shall be
obliged, if the debtor should thereafter become
(1) Requisites for application of rule. — The insolvent, to bring to the partnership capital what
following are the requisites for the application of he received even though he may have given
this article: receipt for his share only.
a. There exist at least two debts, one where
the collecting partner is creditor, and the Oblig Of Partner Who Receives Share Of Part.
other, where the partnership is the creditor; Credit.
b. Both debts are demandable; and
c. The partner who collects is authorized to Article 1792 Article 1793
manage and actually manages the Treats of two distinct Only one credit —
partnership. credits, one in favor of credit in favor of the
the partnership and partnership. Applies
another in favor of the whether the partner
managing partner. who receives his share
(2) Reason for applying payment to partnership of the partnership
credit. — The law safeguards the interests of the credit is authorized to
partnership by preventing the possibility of their manage or not.
being subordinated by the managing partner to his (1) Requisites for application of rule. — The
own interest to the prejudice of the other partners. requisites for the application of this article are as
Good faith demands that the partner vested with follows:
the management of the partnership attend more to a. A partner has received, in whole or in part,
the interest of the partnership than to his own and his share of the partnership credit;
he should not intentionally fail to effect the b. The other partners have not collected their
collection of the credit of the partnership in order shares; and
to effect the collection of his own. c. The partnership debtor has become
insolvent.
 b. Upon the dissolution of the partnership, the
(2) Reason for imposing obligation to return. — The tie that unites the partnership ceases. This
debt of D becomes a bad debt. It would be unjust being the case, the reason for the obligation
or unfair for A not to share in the loss with B and C disappears. Article 1793 presupposes that
or for him to obtain more and B and C, less. The there exists a partnership capital. Upon the
above provision is based on the community of dissolution of the partnership and the
interest among the partners, which is one of the return to each principal of what he
underlying principles of the contract of contributed, the community of interest
partnership. between them disappears altogether and it
cannot be said that there is still a
Credit Collected After Dissolution Of The partnership capital or common property. If
Partnership. a common credit remains among the
partners after the dissolution of the
Does the obligation of the partner to bring to the partnership, there would be among them a
partnership capital what he has collected refer only mere simple credit owned in common but
to that collected during the existence of the not a partnership credit.
partnership, or does it also refer to that collected
after the dissolution of the same? ART. 1794. Every partner is responsible to the
partnership for damages suffered by it through his
(1) Obligation to bring amount collected to the fault, and he cannot compensate them with the
partnership fund. — For example, upon the profits and benefits which he may have earned for
dissolution of the partnership, a partnership credit the partnership by his industry. However, the
is divided among the partners in such a manner courts may equitably lessen this responsibility if
that each partner assumes the responsibility of through the partner’s extraordinary efforts in
collecting the portion pertaining to him. One of other activities of the partnership, unusual profits
them who is more diligent collects the share have been realized.
corresponding to him before the debtor becomes
insolvent. May the other partners demand that he Obligation Of Partner For Damages To Partnership.
bring to the partnership fund what he had been
able to collect and that said amount so collected be This article follows the general rule applicable to all
divided among the partners in proportion to their contracts that any person guilty of negligence or
respective shares? fault in the fulfillment of his obligation shall be
liable for damages.
Some commentators answer this question in the
affirmative, basing their answer in the community The partner’s fault, however, must be determined
and equality which ought to exist among all the in accordance with the nature of the obligation and
partners. the circumstances of the person, the time, and the
place.

(2) Contrary view. — Manresa and Ricci believed Compensation Of Damages With ProfiTs Earned
otherwise. Their reasons are: For Partnership By Guilty Partner.
a. It would not be just that he who has been
diligent and collected his quota should (1) Damages not generally subject to set-off. — As
suffer the consequence of the negligence of a general rule, the damages caused by a partner to
his associates, thus making him responsible the partnership cannot be offset by the profits or
for the default of the latter. benefits which he may have earned for the
partnership by his industry.
 There are five cases contemplated by the present
a. The partner has the obligation to secure article for the determination of the risk of the
benefits for the partnership. Hence, the things contributed to the partnership, namely:
profits which he may have earned pertain
as a matter of law or right, to the (1) Specific and determinate things which are not
partnership. fungible where only the use is contributed. — The
b. He has also the obligation to exercise risk of loss is borne by the partner because he
diligence in the performance of his remains the owner of the things (like car);
obligation as a partner.
(2) Specific and determinate things the ownership
Consequently, inasmuch as a partner is a debtor to of which is transferred to the partnership. — The
the partnership for his industry, and at the same risk of loss is for the account of the partnership,
time is obliged to repair the injury which he might being the owner;
have occasioned through his fault, there cannot be
any compensation. Compensation requires that the (3) Fungible things or things which cannot be kept
negligent partner be both a creditor and a debtor without deteriorating even if they are contributed
of the partnership. Of course, the amount of only for the use of the partnership. — The risk of
insurance, if any, received by the partnership shall loss is borne by the partnership for evidently the
be deducted from the liability of the erring partner. ownership was being transferred since use is
(2) Exception. — If unusual profits are realized impossible without the things (e.g., oil, wine) being
through the extraordinary efforts of the partner at consumed or impaired;
fault, the courts may equitably mitigate or lessen
his liability for damages. This rule rests on equity. (4) Things contributed to be sold. — The
Note that even in this case, the partner at fault is partnership bears risk of loss for there cannot be
not allowed to compensate such damages with the any doubt that the partnership was intended to be
profits earned. The law does not specify as to when the owner; otherwise, the partnership could not
profits may be considered “unusual.” The question effect the sale; and
depends upon the circumstances of the particular
case. (5) Things brought and appraised in the inventory.
— The partnership bears the risk of loss because
ART. 1795. The risk of specific and determinate the intention of the parties was to contribute to
things, which are not fungible, contributed to the the partnership the price of the things contributed
partnership so that only their use and fruits may with an appraisal in the inventory.
be for the common benefit, shall be borne by the
partner who owns them. There is thus an implied sale making the
If the things contributed are fungible, or cannot partnership owner of the said things, the price
be kept without deteriorating, or if they were being represented by their appraised value. The
contributed to be sold, the risk shall be borne by above presuppose that the things contributed have
the partnership. In the absence of stipulation, the been delivered actually or constructively to the
risks of things brought and appraised in the partnership. Before delivery, the risk of loss is
inventory, shall also be borne by the partnership, borne by the partner since he remains their owner.
and in such case the claim shall be limited to the He is a debtor of the partnership for whatever he
value at which they were appraised. may have promised to contribute.
Risk Of Loss Of Things Contributed.

If the loss is due to the fault of any of the partners,

he shall be liable for damages to the partnership in
accordance with the provision of the preceding
article. In the absence of an agreement to the contrary, no
partner is entitled to compensation for his services
ART. 1796. The partnership shall be responsible to to the partnership without the consent of all the
every partner for the amounts he may have partners unless it can be implied from the
disbursed on behalf of the partnership and for the circumstances that the parties intended a partner
corresponding interest, from the time the to receive additional compensation where the
expenses are made; it shall also answer to each partner’s work was beyond normal partnership
partner for the obligations he may have functions.
contracted in good faith in the interest of the
partnership business, and for risks in consequence ART. 1797. The losses and profits shall be
of its management. distributed in conformity with the agreement. If
only the share of each partner in the profits has
Responsibility Of The Partnership To The Partners. been agreed upon, the share of each in the losses
shall be in the same proportion.
In the absence of any stipulation to the contrary, In the absence of stipulation, the share of each
every partner is an agent of the partnership for the partner in the profi ts and losses shall be in
purpose of its business. proportion to what he may have contributed, but
the industrial partner shall not be liable for the
Hence, the partnership has the obligation to: losses. As for the profi ts, the industrial partner
(1) Refund amounts disbursed by the partner in shall receive such share as may be just and
behalf of the partnership plus the corresponding equitable under the circumstances. If besides his
interest from the time the expenses are made (not services he has contributed capital, he shall also
from the date of demand). Here, the law refers to receive a share in the profi ts in proportion to his
loans or advances made by a partner to the capital.
partnership other than capital contributed by him;
Rules For Distribution Of Profits And Losses.
(2) Answer for the obligations the partner may
have contracted in good faith in the interest of the This article and the two succeeding ones regulate
partnership business; and the distribution of profits and losses among the
partners.
(3) Answer for risks in consequence of its
management. They do not refer to the liability of the partners to
third persons which is governed by Article 1816.
Being a mere agent, the partner is not personally
liable, provided, however, that: (1) Distribution of profits:
a. The partners share the profits according to
 He is free from all fault and their agreement subject to Article 1799.
b. If there is no such agreement:
 He acted within the scope of his authority. i. The share of each capitalist partner
shall be in proportion to his capital
But unlike an ordinary agent, he is not given the contribution. This rule is based on
right of retention if he is not reimbursed or the presumed will of the partners.
indemnified. ii. 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 capital contributions, but the purely
circumstances. industrial partner shall not be liable for the
The share of an industrial partner in the profi ts is losses.
not fi xed, as in the case of the capitalist partners,
as it is very diffi cult to ascertain the value of the
services of a person. Under the Code of Commerce, ART. 1798. If the partners have agreed to intrust
the industrial partner was “placed in the to a third person the designation of the share of
distribution in the same position as the capitalist each one in the profits and losses, such
partner having the smallest interest.” designation may be impugned only when it is
manifestly inequitable. In no case may a partner
In a case, where two brothers engaged in a who has begun to execute the decision of the
business venture, with one furnishing the capital third person, or who has not impugned the same
and the other contributing his industry, the within a period of three months from the time he
Supreme Court ruled that “Justice and equity had knowledge thereof, complain of such
dictate that the two share equally the fruit of their decision.
joint investment and efforts,” because it was The designation of losses and profits cannot be
through the “industry and geniuses” of the intrusted to one of the partners.
industrial partner that the property of the venture
was developed and improved into a valuable asset Designation By A Third Person Of Share in Profits
worth more than P22 million. And Losses.

A partner is entitled to receive only his share of the (1) Delegation to a third person. — The designation
profi ts actually realized by the venture. Even when of the share in the profits and losses may be
an assurance was made by a partner that they delegated to a third person by common consent.
would earn a huge amount of profi ts, in the
absence of fraud, the other partner cannot claim a This article speaks of a third person, not a partner,
right to recover the profi ts promised where the following the general rule in contracts that the
business was highly speculative and turned out to fulfillment of a contract cannot be left to the will of
be a failure. Hidden risks in any business venture one of the contracting parties alone.
have to be considered.
The prohibition in the second paragraph (Art.
(2) Distribution of losses: 1798.) is necessary to guarantee the utmost
a. The losses shall be distributed according to impartiality in the distribution of shares in the
their agreement subject to Article 1799. profits and losses.
b. If there is no such agreement, but the
contract provides for the share of the (2) Binding force of designation by third person. —
partners in the profi ts, the share of each in The designation by the third person would
the losses shall be in accordance with the generally be binding unless manifestly inequitable.
profi t-sharing ratio, but the industrial Even then, a partner who has begun to execute the
partner shall not be liable for losses. The decision of the third person or who fails to impugn
profi ts or losses of the partnership cannot the same within three months from the time he
be determined by taking into account the had knowledge of it can no longer complain. In
result of one particular transaction but of all such case, the partner is guilty of estoppel or is
the transactions had. deemed to have given his consent or ratifi cation to
c. If there is also no profi t-sharing stipulated the designation.
in the contract, then losses shall be borne
by the partners in proportion to their
The reason behind the comparatively short period losses, if any, but not to receive any part of the
of three months within which to impugn the profits, which are to be divided among the others
designation is to forestall any paralyzation in the exclusively, such one is not to be deemed a partner
operations of the partnership. as between the others and himself.

ART. 1799. A stipulation which excludes one or However, if he holds himself out, or allows himself
more partners from any share in the profits or to be held, as a partner to a third person who,
losses is void. under the belief that he is such, enters into a
contract with them, he is liable on such contract.
Stipulation Excluding A Partner From Any Share In
Profits Or Losses. (4) Where person excluded from losses is industrial
partner. — With reference to the industrial
(1) Stipulation generally void, but partnership partner, since the law itself excludes him from
subsists. — The law does not, as a general rule, losses, a stipulation exempting him from the losses
allow a stipulation excluding one or more partners is naturally valid as an exception to the general rule
from any share in the profits and losses. in Article 1799. This is without prejudice, however,
to the rights of third persons.
The partnership must exist for the common benefit
and interest of the partners. Hence, such an The industrial partner is not liable for losses
agreement would contravene the very purpose of a because he cannot withdraw the work or labor
partnership contract, that is, profit-sharing among already done by him, unlike the capitalist partners
the partners. However, although the stipulation is who can withdraw their capital.
void, the partnership, if otherwise valid, subsists
and the profits or losses shall be apportioned as if Furthermore, if the partnership fails to realize any
there were no stipulation on the same. profi ts, then he has labored in vain and in a real
sense, he has already contributed his share in the
(2) Stipulation, a factor to show no partnership loss.
exists. — Where the parties expressly stipulate that
there shall be no liability for losses, or where from (5) Where stipulation provides for unequal shares.
the nature of the contract, it is clear that a party — The limitation does not mean that the partners
did not intend to share in the losses, such fact may cannot stipulate for unequal shares in the profi ts
be a factor in determining that no partnership or losses even if their respective contributions are
exists. equal, unless the inequality is so gross that it is, in
effect, a simulated form or attempt to exclude a
Thus, in a case, it was held that where one party partner from any share in the profi ts or losses.
sells personalty to another for use in a business,
and agrees in payment to take one-half of the profi Stipulation Exempting A Partner From Losses
ts that might be made, he does not thereby agree Should Be Allowed.
to share in the losses.
“The provision of Article 1799 which declares void
(3) Where person excluded not intended by parties an agreement excluding one or more partners from
to become a partner. — Where the one excluded sharing in the losses of the partnership is diffi cult
from any share in the profi ts or losses is not to explain. x x x. To declare also void an agreement
intended by the parties to become a partner, the which merely exempts or tends to exempt one or
stipulation is, of course, valid. Thus, where one of more partners from sharing or contributing in the
several persons engaged in an enterprise agreed to partnership losses as far as it affects the partners
assist by advancing money, and to share in the alone, is without any foundation either on reason
or justice; because if, in order to induce a person to especially in a large partnership. Article 1800
become a member of the firm, it becomes speaks of two distinct cases of appointments.
necessary to guaranty him against his suffering any
financial losses thereby, without which guaranty (1) Appointment as manager in the articles of
such person may not be willing to become a partnership. — The partner appointed by common
member of the partnership and yet his connection agreement in the articles of partnership may
thereto is considered as absolutely necessary by execute all acts of administration (not those of
the other partners willing to guaranty him against strict ownership) notwithstanding the opposition of
losses, such partnership may never materialize on the other partners, unless he should act in bad
account of the provision of said Article 1799. faith. His power is revocable only upon just and
It seems, therefore, that if a person can make a gift lawful cause and upon the vote of the partners
to another, there is no sound reason why a person representing the controlling interest.
cannot also agree to bear all the losses that a The reason for this principle is that the revocation
partnership may suffer, in order to exempt his co- represents a change in the terms of the contract.
partners from sharing in the said losses. The law presumes that the appointment thus
constituted is, in effect, one of the conditions of
Of course, as far as third persons are concerned, the contract and it is only logical that such
any agreement which tends to excuse or exclude appointment should not be revoked without the
one or more partners from satisfying the consent of all the partners, including the partner
partnership liability caused through partnership thus appointed. It is an elementary rule that no
losses may be properly declared void.” party to a contract can violate the law of the
contract without the consent of the others.
ART. 1800. The partner who has been appointed
manager in the articles of partnership may In case of mismanagement, the other partners may
execute all acts of administration despite the avail of the usual remedies allowed by law,
opposition of his partners, unless he should act in including an application for dissolution of the
bad faith; and his power is irrevocable without partnership by a judicial decree. (see Art. 1831.)
just or lawful cause. The vote of the partners
representing the controlling interest shall be (2) Appointment as manager after the constitution
necessary for such revocation of power. of the partnership. — But the management granted
A power granted after the partnership has been by the partners after the partnership has been
constituted may be revoked at any time. constituted independently of the articles of
partnership may be revoked at any time for any
Rights And Obligations With Respect To cause whatsoever.
Management.
The reason for this provision is that in such case,
Unless the partnership agreement provides the revocation is not founded on a change of will
otherwise, each partner in a general partnership on the part of the partners, the appointment not
has a right to an equal voice in the conduct and being a condition of the contract. It is merely a
management of the partnership business. simple contract of agency, which may be revoked
at any time. It is believed that the vote for
This right is not dependent on the amount or size revocation must also represent the controlling
of the partner’s capital contribution or services to interest. It should be noted that Article 1800 refers
the business. Of course, the partners may select a to a partner, not a stranger, who has been
managing partner or make such allocation of appointed manager. As a rule, a partner is not
functions as the needs of the business dictate entitled to compensation for his services other
than his share of the profits.
 properties could be considered as “supplies for the
Scope Of Power Of A Managing Partner. partnership business”; nor can the managing
partner of a partnership formed for the purpose of
As a general rule, a partner appointed as manager operating a tailoring shop sell or convey the
has all the powers of a general agent as well as all tailoring shop which is partnership property
the incidental powers necessary to carry out the without the consent of all the partners.
object of the partnership in the transaction of its
business. (6) A managing partner may not bind the
partnership by a contract wholly foreign to its
The exception is when the powers of the manager business. Thus, he has no authority to execute a
are specifically restricted. mortgage on the firm’s property to secure the debt
of a third person for which the fi rm is not liable.

(1) Hence, unless expressly withheld, the minor

power to issue receipts is included in the general
powers of the manager, as this is in keeping with Compensation For Services Rendered.
present day business dealings.
(1) Partner generally not entitled to compensation.
(2) Similarly, the manager of a partnership engaged — In the absence of an agreement to the contrary,
in buying and selling is clothed with suffi cient each member of the partnership assumes the duty
authority even without approval of the other to give his time, attention, and skill to the
partners to purchase on credit, as it is customary to management of its affairs, so far, at least, as may
buy and sell on credit. be reasonably necessary to the success of the
common enterprise; and for this service a share of
(3) It has also been held that the managing partner the profi ts is his only compensation.
has authority to secure loans to complete the
construction of a “casco” for use in the business Each partner in taking care of the joint property,
and necessary to carry out the express object of managing the partnership affairs, and directing the
the partnership; or to dismiss an employee, partnership business is practically taking care of his
particularly, when there is a justifiable cause for own interest or managing his own business. He is
dismissal as when the employee hurled at the not, in the absence of a contract, express or
manager abusive and unsavory remarks in the implied, entitled to compensation beyond his share
presence of the customers of the firm; or to of the profi ts for services rendered by him to the
employ a bookkeeper although the contract made partnership business, although the services
was not in writing. rendered by him may be greater in proportion than
the services rendered by other members of the
(4) A partnership may sue or be sued in its name or partnership, by reason of having assumed the
by its duly authorized representative. Thus, the position of managing partner, or even by reason of
managing partner may execute all acts of extra services necessitated by his partner’s illness
administration, including the right to sue debtors of and consequent inability to render his own just
the partnership. share of the services.

(5) But a partner designated as one of the In the absence of any prohibition in the articles of
managers to take charge of “selling fish in Manila partnership for the payment of salaries to general
and the purchase of supplies” has no authority to partners, there is nothing to prevent the partners
purchase for the partnership a “barge, a truck and to enter into a collateral verbal agreement to that
an adding machine,” inasmuch as neither of these effect.
 partner willfully fails to perform the services
(2) Exceptions. — In proper cases, however, the law which he agreed to perform, as a result of
may imply a contract for compensation. Thus: which the other partners are burdened with
greater work, is to calculate the value of the
a. A partner engaged by his co-partners to unperformed services, make it an asset of
perform services not required of him in the partnership chargeable against the
fulfillment of the duties which the defaulting partner, and divide among all the
partnership relation imposes and in a partners (including the defaulting partner)
capacity other than that of a partner (e.g., as any other partnership profit.
to perform clerical services in carrying on f. The rule requiring services of partners
the business of the firm) is entitled to without compensation does not also apply
receive the compensation agreed upon where, by the contract of partnership, one
therefor. 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
b. A contract for compensation may be his co-partners, or where the services
implied where there is extraordinary rendered are extraordinary. Thus, in a case,
neglect on the part of one partner to the surviving partner who discovered a firm
perform his duties toward the fi rm’s claim more than thirteen years after the
business, thereby imposing the entire liquidating partner’s death, and prosecuted
burden on the remaining partner. it for four years to a successful conclusion
c. One partner may employ his co-partner to was allowed, because of the exceptional
do work for him outside of and situation, extra compensation.
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 fi rm, 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 the compensation
depends, of course, upon the agreement of
the parties, express or implied, as well as
upon the particular circumstances of the
case. It has also been held that the way to
deal with such a situation or where a