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    PAGE 297

  • UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

    PAGE 298

    PARTNERSHIP

    Contract of Partnership DEFINITION By the contract of partnership: (1) Two or more persons; (2) Bind themselves to contribute money,

    property, or industry to a common fund; (3) With the intention of dividing the profits

    among themselves [Art. 1767] Article 1767 defines partnership from the viewpoint of a contract. From the contract arises the partnership relation [De Leon (2010)]

    ESSENTIAL FEATURES (1) There must be a valid contract; (2) The parties must have legal capacity; (3) There must be a mutual contribution of

    money, property, or industry to a common fund;

    (4) The object must be lawful; (5) The primary purpose must be to obtain

    profits and to divide the same among the parties;

    (6) The partnership has a juridical personality separate from individual partners [Art. 1768].

    As such, any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name [Art. 1774].

    PARTIES General rule: Any person capacitated to contract may enter into a contract of partnership. As such, the following persons cannot enter into a contract of partnership: (1) Those suffering from civil interdiction; (2) Minors; (3) Insane or demented persons; (4) Deaf-mutes who do not know how to write; (5) Incompetents who are under guardianship. Exceptions : The capacity of the following persons to enter into a contract of partnership, though capacitated to contract generally, are limited:

    (1) Those who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership [Art. 1782];

    (2) A corporation cannot enter into a partnership in the absence of express authorization by statute or charter.

    Although a corporation cannot enter into a partnership contract, it may, however, engage in a joint venture with others [Auerbach vs. Sanitary Wares Manufacturing Corp (1989)]. On the other hand, there is no prohibition against a partnership being a partner in another partnership [De Leon (2010)]

    OBJECT OBJECT OF UNIVERSAL PARTNERSHIP A universal partnership may refer to: (1) All present property :

    (a) The partners contribute all the property which belongs to them to a common fund, with the intention of dividing the same among themselves, as well as the profits they may acquire therewith [Art. 1778].

    (b) The property contributed includes all those belonging to the partners at the time of the constitution of the partnership.

    (c) A stipulation for the common enjoyment of any other profits may also be made. However, the property which the partners may acquire subsequently by inheritance, legacy or donation cannot be included in such stipulation, except the fruits thereof [Art. 1779].

    (2) All the profits: (a) It comprises all that the partners may

    acquire by their industry or work during the existence of the partnership.

    (b) Only the usufruct over the property of the partners passes to the partnership [Art. 1780].

    Art. 1781. When the articles of universal partnership does not specify its nature (all present property or all the profits), the partnership will be considered as one only of all the profits.

  • UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

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    OBJECT OF PARTICULAR PARTNERSHIP

    Art. 1783. A particular partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. EFFECT OF UNLAWFUL OBJECT If the partnership has an unlawful object or purpose: (1) The contract is void ab initio [Art. 1409, par.

    1]. (2) Once dissolved by judicial decree:

    (a) The profits shall be confiscated by favor of the State;

    (b) The instruments or tools and proceeds of the crime shall also be forfeited in favor of the State [Art. 1770].

    (3) The contributions of partners shall not be confiscated unless they are instruments or tools of the crime [De Leon (2010)].

    FORM General rule: The contract may be constituted in any form [Art. 1771]. Exceptions: (1) Where immovable property or real rights

    are contributed: (a) The contract must appear in a public

    instrument; and (b) Attached to such instrument must be

    an inventory, signed by the parties, of the property contributed [Arts. 1771 and 1773];

    (2) Where the capital is at least P3,000, in money or property: (a) The contract must appear in a public

    instrument; and (b) It must be recorded in the Office of the

    Securities and Exchange Commission (SEC).

    As to the second, failure to comply with these requirements, however, does not affect the liability of the partnership and the partners to third persons [Arts. 1768 and 1772].

    DURATION COMMENCEMENT

    Art. 1784. A partnership begins from the moment of the execution of the contract, unless otherwise stipulated.

    TERM As to period, a partnership may either be: (1) For a fixed term or particular undertaking;

    or (2) At will, the formation and dissolution of

    which depend on the mutual desire and consent of the parties. Any one of the partners may, at his sole pleasure, dictate the dissolution of the partnership, even in bad faith, subject to liability for damages [Ortega v. CA (1995)].

    EXTENSION A partnership term may be extended by: (1) Express renewal; or (2) Implied renewal, when these requisites

    concur: (a) The partnership is for a fixed term or

    particular undertaking; (b) It is continued after the termination of

    the fixed term or particular undertaking without any express agreement [Art. 1785].

    RULES TO DETERMINE EXISTENCE When the intent of the parties is clear, such intent shall govern. When it does not clearly appear, the following rules apply: (1) Persons who are not partners to each other

    are not partners as to third persons, subject to the provisions on partnership by estoppel.

    (2) Co-ownership or co-possession does not of itself establish a partnership, even when there is sharing of profits in the use of the property.

    (3) Sharing of gross returns does not of itself establish a partnership, even when the parties have joint or common interest in any property from which the returns are derived.

  • UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

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    (4) The receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner.

    As to the fourth, no such inference is drawn if the profits are received in payment: (1) As a debt by installments or otherwise; (2) As wages of an employee of rent to a

    landlord; (3) As an annuity to a widow or representative

    of a deceased partner; (4) As interest on a loan, though the amount of

    payment vary with the profits of the business;

    (5) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise [Art. 1769].

    KINDS (1) As to the legality of its existence:

    (a) Partnership de jure is one which has complied with all the requisites for its lawful establishment;

    (b) Partnership de facto is one which failed to so comply.

    (2) As to its object: (a) Universal partnership:

    (i) Of all present property; (ii) Of profits;

    (b) Particular partnership. (3) As to its duration:

    (a) For a fixed term or particular undertaking; (b) At will.

    (4) As to the liability of the partners: (a) General partnership, consisting of

    general partners only, who are liable pro rata for partnership obligations with all their after exhaustion of partnership assets;

    (b) Limited partnership, includes, aside from general partner/s, limited partners, who are not personally liable for partnership obligations.

    (5) As to its publicity: (a) Secret partnership, where the existence

    of certain persons as partners is not made known by the partners;

    (b) Open or notorious partnership, the existence of which is made known to the public by the partners.

    (6) As to its purpose: (a) Commercial or trading partnership, for

    transaction of business; (b) Professional or non-trading partnership,

    for the exercise of profession.

    A profession has been defined as a group of men pursuing a learned art as a common calling in the spirit of public service no less a public service because it may incidentally be a means of livelihood [In the Matter of the Petition for Authority to Continue Use of Firm name Sycip, Salazar, etc./Ozaeta, Romulo, etc. (1979)]. A professional partnership is a particular partnership [Art. 1783].

    KINDS OF PARTNERS (1) Capitalist partner, whose contribution is

    money or property; (2) Industrial partner, contribution is only his

    industry; (3) General partner, whose liability to third

    persons extends to his separate property; (4) Limited partner, whose liability to third

    persons is limited to his capital contribution; (5) Managing partner, who was designated to

    manage the affairs or business of the partnership;

    (6) Liquidating partner, who takes charge of the winding up of partnership affairs;

    (7) Partner by estoppel, who is not really a partner but is liable as such for the protection of innocent third persons;

    (8) Continuing partner, who continues the business after dissolution of the partnership by admission of a new partner, or retirement, death or expulsion of existing partners;

    (9) Surviving partner, who remains a partner after dissolution by death of any partner;

    (10) Subpartner, who is not a member of the partnership but contracts with a partner with regard to the share of the latter in the partnership;

    (11) Ostensible partner, who takes active part in the business of the partnership and is known by the public;

    (12) Secret partner, who takes active part in the business, but is unknown to the third persons as a partner;

  • UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

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    (13) Silent partner, who does not take active part in the business, but may be known to be a partner by third persons;

    (14) Dormant partner, who does not take active part in the business and is not known or held out as a partner;

    (15) Original partner, who has been a partner since the constitution of the partnership;

    (16) Incoming partner, who is about to be taken as a member into an existing partnership;

    (17) Retiring partner, who is withdrawing from the partnership.

    Industrial partner

    Capitalist partner

    Form of contribution

    Industry Money or property

    Share in profits

    Just and equitable share

    According to agreement; if none, in proportion to contribution

    Share in losses

    Exempted as to losses as between partners, but liable to third persons, without prejudice to reimbursement from capitalist partners

    According to agreement; if none, in the same proportion as the agreed share in profits; if none, in proportion to contribution

    Engagement in business

    Cannot engage in business for himself, unless the partnership expressly permits him to do so; should he do so without permission, the capitalist partners may: (1) exclude him from the firm; or (2) avail themselves of the benefits obtained in violation of the prohibition, with right to damages in either case [Art. 1789]

    Cannot engage, for his own account, in the same kind of business as that of the partnership, unless there is a stipulation to the contrary; should he do so, he shall bring to the common fund any profits accruing to him from his transactions and shall personally bear all the losses [Art. 1808]

    PARTNERSHIP AND OTHER CONTRACTS DISTINGUISHED

    Partnership Joint venture

    Operates with firm name and legal personality

    Operates without firm name and legal personality

    Generally relates to a continuing business of various transactions of a certain kind

    Usually limited to a single transaction

    Corporations may not enter into a partnership

    Corporations may enter into joint ventures

    Under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of partnership [Auerbach vs. Sanitary Wares Manufacturing Corp. (1989)].

    Partnership Co-ownership

    Generally created by either express or implied contract

    Generally created by law and may exist even without a contract

    Has a separate juridical personality

    Has no separate juridical personality

    Generally, the purpose is to obtain profits

    The purpose is the common enjoyment of a thing or right

    Duration has no limitation

    An agreement to keep a thing undivided for more than ten years is not allowed, but may be extended

    There is mutual agency between partners

    There is no mutual representation among co-owners

    Death or incapacity of a partner dissolves the partnership

    Death or incapacity of a co-owner does not dissolve the co-ownership

    A partner cannot dispose of his interest, so as to make the assignee a partner, without consent of others

    A co-owner can dispose of his share without consent of others

  • UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

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    Partnership Corporation

    Has juridical personality separate and distinct from its individual members

    Can only act through agents

    Composed of an aggregate of individuals

    Distributes its profits to those who contributed capital to the business

    Can only be organized where there is a law authorizing its organization

    Taxable as in a corporation

    Created by agreement Created by operation of law

    Involves at least two persons

    Except for corporation sole, requires at least five incorporators

    Personality commences from the moment of execution of the contract

    Personality commences from the issuance of certificate of incorporation

    Can exercise any power authorized by partners

    Can exercise only powers conferred by the Corporation Code or by its articles of incorporation, and such as are necessary or incidental to the exercise of such powers

    When management is not agreed upon, every partner may act for the partnership

    Management is vested in the board of directors or trustees

    Partners are generally liable for partnership debts

    Stockholders are liable only to the extent of their shares

    A partner cannot dispose of his interest, so as to make the assignee a partner, without consent of others

    A stockholder has the right to transfer his shares without consent of others

    Duration has no limitation

    The term limit is 50 years, but may be extended

    May be dissolved at any time by one or all of the partners

    May only be dissolved with the consent of the state

    Partnership Conjugal Partnership of

    Gains

    Created by voluntary agreement of two or more partners of either sex

    Arises in case the spouses, of opposite sex, agree before marriage

    Governed by agreement

    Governed by law

    Has juridical personality

    Has no juridical personality

    Commencement date may be stipulated

    Commencement is on the date of the celebration of the marriage and any stipulation to the contrary is void

    Share in profits may be stipulated; otherwise, in proportion to contribution

    Share in profits is equal

    Management shared by all partners, unless otherwise agreed upon

    Administration belongs to the spouses jointly, but decision of husband prevails in case of disagreement

    Partner can dispose of interest even without consent of others

    Spouse cannot dispose of interest during marriage, even with consent

    Partnership Association

    Has juridical personality

    Has no juridical personality

    Organized for profit Not always organized for profit

    Capital is contributed Capital is not contributed, although fees are collected from members

    The partnership is primarily liable; the partners are liable only subsidiarily

    The members are liable individually for debts which they authorized or ratified

    Share in profits may be stipulated; otherwise, in proportion to contribution

    Share in profits is equal

  • UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

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    Rights and Obligations of the Partnership

    RIGHT TO CONTRIBUTION The partnership has a right to the contribution (or the partners are obliged to contribute). The money or property thus contributed, or their use or fruits, become the property of the partnership. CONTRIBUTION OF MONEY OR PROPERTY With respect to contribution of property, a partner is obliged to: (1) To contribute, at the beginning of the

    partnership or at the stipulated time, the money, property or industry which he undertook to contribute;

    (2) In case a specific and determinate thing is to be contributed: (a) To warrant against eviction in the same

    manner as a vendor; and (b) To deliver to the partnership the fruits

    of the property promised to be contributed, from the time they should have been delivered, without need of demand [Art. 1786];

    (3) In case a sum of money is to be contributed, or in case he took any amount from the partnership coffers, to indemnify the partnership for: (a) Interest; and (b) Damages, from the time he should have

    complied with his obligation, or from the time he converted the amount to his own use, respectively [Art. 1788].

    AMOUNT OF CONTRIBUTION General rule: Partners are to contribute equal shares to the capital of the partnership.

    Exception: When there is an agreement to the contrary, the contribution shall follow such agreement [Art. 1790].

    ADDITIONAL CAPITAL CONTRIBUTION Requisites: (1) There is an imminent loss of the business of

    the partnership;

    (2) The majority of the capitalist partners are of the opinion that an additional contribution to the common fund would save the business;

    (3) The capitalist partner refuses deliberately (not because of financial inability) to contribute an additional share to the capital; and

    (4) There is no agreement that even in case of imminent loss of the business, the partners are not obliged to contribute.

    Any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall be obliged to sell his interest to the other partners, unless there is an agreement to the contrary [Art. 1791].

    CONTRIBUTION OF INDUSTRY An industrial partner is obliged to contribute his industry at the stipulated time.

    General rule: An industrial partner cannot engage in business for himself. Should he do so, the capitalist partners, as well as industrial partners [De Leon (2010)] may either: (1) Exclude him from the firm; or (2) Avail themselves of the benefit which he

    may have obtained.

    Exception: He may engage in business for himself when the partnership expressly permits him to do so [Art. 1789]. RIGHT TO APPLY PAYMENT RECEIVED TO PARTNERSHIP CREDIT General rule: A partner authorized to manage, who collects a demandable sum owed to him in his own name from a person who also owes the partnership a demandable sum, is obliged to apply the sum collected to both credits pro rata, even if he issued a receipt for his own credit only. Requisites: (1) There exist at least two debts, one where

    the collecting partner is creditor, and the other, where the partnership is the creditor;

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    (2) Both debts are demandable; and (3) The partner who collects is authorized to

    manage and actually manages the partnership.

    Exceptions: (1) In case the receipt was issued for the

    account of the partnership credit only, however, the sum shall be applied to the partnership credit alone.

    (2) When the debtor declares, pursuant to Article 1252, at the time of making the payment, to which debt the sum must be applied, it shall be so applied [Art. 1792].

    RIGHT TO RETURN OF CREDIT RECEIVED A partner, authorized to manage or not, who already received, in whole or in part, his share of a partnership credit, is obliged to bring to the partnership capital what he received when: (1) The other partners have not collected their

    shares; and (2) The partnership debtor has become

    insolvent.

    This obligation exists even when he issued a receipt for his share only [Art. 1793].

    Ratio: In this case, the debt becomes a bad debt. It would be unfair for the partner who already collected not to share in the loss of the other partners.

    RIGHT TO INDEMNITY FOR DAMAGES Every partner is responsible to the partnership for damages suffered by it through his fault.

    SET-OFF OF LIABILITY General rule: The liability for damages cannot be set-off or compensated by profits or benefits which the partner may have earned for the partnership by his industry.

    Ratio: The partner has the obligation to secure the benefits for the partnership. As such, the requirement for compensation, that the partner be both a creditor and a debtor of the partnership at the same time, is not complied with [Art. 1278; De Leon (2010)].

    Exception : The court may equitably lessen the liability if, through his extraordinary efforts in other activities of the partnership, unusual profits were realized [Art. 1794]. Note, however, that there is still no compensation in this case.

    SUIT FOR DAMAGES Before a partner may sue another for alleged fraudulent management and resultant damages, liquidation must first be effected to determine the extent of the damage. Without liquidation of partnership affairs, a partner cannot claim damages [Soncuya v. De Luna (1939)].

    RESPONSIBILITY TO PARTNERS In the absence of any stipulation to the contrary, every partner is an agent of the partnership for the purpose of its business. As such, it is responsible to every partner: (1) For amounts, and the corresponding

    interest from the time the expenses were made, which he may have disbursed on behalf of the partnership;

    (2) For obligations he may have contracted in good faith in the interest of the partnership business; and

    (3) For risks in consequence of the management of the partnership [Art. 1796].

    Rights and Obligations of Partners Inter Se

    RIGHT TO ASSOCIATE ANOTHER IN SHARE Every partner may associate another person with him in his share. The admission of the associate to the partnership, however, requires consent of all the other partners even if the partner having an associate is a managing partner [Art. 1804].

    This arrangement refers to a contract of subpartnership, which is a partnership within a partnership, distinct and separate from the main partnership. It is considered a modification of the original contract [De Leon (2010)].

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    RIGHT TO INSPECT PARTNERSHIP BOOKS The partnership books shall be kept: (1) At a place agreed upon by the partners; (2) When there is no such agreement, at the

    principal place of business of the partnership.

    Every partner shall, at any reasonable hour, have access to and may inspect and copy any of them. Any reasonable hour means reasonable hours on business days throughout the year [Pardo v. Lumber Co. (1925)].

    RIGHT TO FORMAL ACCOUNT General rule: The right to a formal account of partnership affairs accrues only when the partnership is dissolved.

    Exceptions: In the special and unusual cases mentioned in Article 1809, formal accounting may be demanded by any partner even before dissolution: (1) If he is wrongfully excluded from the

    partnership business or possession of its property by his co-partners;

    (2) If the right exists under the terms of any agreement;

    (3) If, without his consent, a partner has derived profits from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use of partnership property;

    (4) Whenever other circumstances render it just and reasonable [Art. 1809].

    PROPERTY RIGHTS OF PARTNERS IN GENERAL The property rights of a partner are: (1) Rights in specific partnership property; (2) Interest in the partnership; and (3) Right to participate in the management

    [Art. 1810].

    PROPERTY AND CAPITAL DISTINGUISHED

    Partnership capital Partnership property

    With constant value Value varies with market conditions

    Includes only actually contributed and promised capital

    Includes the contributions and property acquired by the partnership

    OWNERSHIP OF CERTAIN PROPERTIES (1) The ownership of property used by the

    partnership depends on the intention of the parties, which may be drawn from an express agreement or their conduct. (a) A partner may allow the property to be

    used by the partnership without transfer of ownership, contributing only the use or enjoyment thereof.

    (b) He may also hold title to partnership property, without acquiring ownership thereof [Art. 1819].

    (2) Property acquired by a partner with partnership funds is presumed to be partnership property.

    (3) The same presumption also arises when the property is indicated in the partnership books as partnership asset.

    (4) Other factors may be considered to determine ownership of the property.

    RIGHTS IN SPECIFIC PROPERTY (1) The partners have equal rights to possess

    partnership property for partnership purposes.

    (2) For other purposes, the consent of his partners is necessary.

    (3) If the partner is excluded, he may ask for: (a) Formal accounting [Art. 1809]; or (b) Dissolution by judicial decree [Art. 1831].

    (4) A partners right in such property is not assignable, except when all the partners assign their rights in the same property;

    (5) The right is not subject to attachment or execution, except on claim against the partnership. In case of such attachment, the partners, or any of them, or the representatives of a deceased partner,

  • UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

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    cannot claim any right under the homestead or exemption laws.

    (6) The right is not subject to legal support under Article 291 [Art. 1811].

    INTEREST IN PARTNERSHIP A partners interest in the partnership is his share of the profits and surplus [Art. 1812].

    ASSIGNMENT OF INTEREST Assignment by a partner of his whole interest in the partnership, of itself: (1) Does not dissolve the partnership; or (2) Does not entitle the assignee to:

    (a) Interfere in the management or administration of the partnership business or affairs;

    (b) Require information or account of partnership; or

    (c) Inspect the partnership books.

    It merely entitles the assignee to: (1) Receive the profits to which the assigning

    partner was entitled; (2) In case of fraud in management, avail

    himself of the usual remedies; (3) In case of dissolution:

    (a) Receive his assignors interest; and (b) Require an accounting from the date

    only of the last account agreed to by all the partners [Art. 1813].

    INTEREST BY PERSONAL CREDITORS General rule: Partnership creditors are preferred over the personal creditors of the partners as regards partnership property.

    Exception: On due application by any judgment creditor of a partner, a competent court may: (1) Charge the interest of the partner for the

    satisfaction of the judgment debt; (2) Appoint a receiver of the share of the profits

    and of any other money due or to fall due to the partner; and

    (3) Make all other orders, directions, accounts and inquiries, which the debtor partner might have made, or which the circumstances may require.

    The interest charged may be redeemed before foreclosure or, in case of sale directed by the

    court, may be purchased without causing dissolution: (1) With separate property, by one or more of

    the partners; or (2) With partnership property, by one or more

    of the partners, will consent of all, except the debtor partner [Art. 1814].

    RIGHT TO PARTICIPATE IN MANAGEMENT Management of the partnership is primarily governed by the agreement of the partners in the articles of partnership. It may be stipulated that the partnership will be managed by: (1) All the partners; or (2) A number of partners appointed as

    managers, which may be appointed: (a) In the articles of partnership; or (b) After constitution of the partnership.

    POWERS OF A MANAGING PARTNER General rule: The partner designated as manager in the articles may execute all acts of administration despite opposition by the other partners.

    Exception: He cannot do so when he acts in bad faith.

    REVOCATION OF POWER BY MANAGING PARTNER The powers of the managing partner may be revoked: (1) If appointed in the articles of partnership,

    when: (a) There is just or lawful cause for

    revocation; and (b) The partners representing the

    controlling interest revoke such power. (2) If appointed after the constitution of the

    partnership, at any time and for any cause [Art. 1800].

    MANAGING BY TWO OR MORE PARTNERS When there are two or more managing partners appointed, without specification of their duties or without a stipulation on how each one will act:

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    (1) Each one may separately execute all acts of administration.

    (2) If any of them opposes the acts of the others, the decision of the majority prevails.

    (3) In case of a tie, the partners owning the controlling interest will decide [Art. 1801].

    Requisites: (1) Two or more partners have been appointed

    as managers; (2) There is no specification of their respective

    duties; and (3) There is no stipulation that one of them

    shall not act without the consent of all the others.

    STIPULATION OF UNANIMITY

    Art. 1802. In case there is a stipulation that none of the managing partners shall act without the consent of others, the concurrence of all is necessary for the validity of the acts, and the absence or disability of one cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership.

    MANAGEMENT WHEN MANNER NOT AGREED UPON When there is no agreement as to the manner of management, the following rules apply: (1) All the partners are considered agents

    (mutual agency). Whatever any one does alone binds the partnership, unless there is a timely opposition to the act, under Article 1801.

    (2) Any important alteration in the immovable property of the partnership, even if useful to the partnership, requires unanimity. If the alteration is necessary for the preservation of the property, however, consent of the others is not required [De Leon (2010)].

    If the refusal is manifestly prejudicial to the partnership, court intervention may be sought [Art. 1803].

    MUTUAL AGENCY In addition to the Article 1801, there is effectively a mutual agency in the following cases: (1) Partners can dispose of partnership

    property even when in partnership name [Art. 1819].

    (2) An admission or representation made by any partner concerning partnership affairs is evidence against the partnership [Art. 1820].

    (3) Notice to any partner of any matter relating to partnership affairs is notice to the partnership [Art. 1821].

    (4) Wrongful act or omission of any partner acting for partnership affairs makes the partnership liable [Art. 1822].

    (5) Partnership is bound to make good losses for wrongful acts or misapplications of partners [Art. 1823].

    RIGHT TO PROFITS AND OBLIGATIONS FOR LOSSES RULES FOR DISTRIBUTION OF PROFITS AND LOSSES The distribution of profits and losses shall be in accordance with the following rules: (1) They shall be distributed in conformity with

    the agreement. (2) If only the share in profits has been

    stipulated, the share in the losses shall be in the same proportion.

    (3) In the absence of any stipulation: (a) The share in the profits of the capitalist

    partners shall be in proportion to their contributions.

    (b) The losses shall be borne by the capitalist partners, also in proportion to the contributions.

    (c) The share of the industrial partners in the profits is that share as may be just and equitable. If he also contributed capital, he will receive a share of the profits in proportion to his contribution; and

    (d) The industrial partner, who did not contribute capital, is not liable for losses [Art. 1797].

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    EXCLUSION OF PARTNER FROM SHARE General rule: A stipulation excluding one or more partners from any share in the profits or losses is void [Art. 1799]. Exception: A stipulation exempting an industrial partner from losses is valid, since, if the partnership fails to realize profits, he can no longer withdraw his work or labor [De Leon (2010)].

    OBLIGATION TO RENDER INFORMATION Partners shall render on demand true and full information of all things affecting the partnership to: (1) Any partner; (2) The legal representative of any deceased

    partner; or (3) The legal representative of any partner

    under legal disability [Art. 1806].

    OBLIGATION TO ACCOUNT AND ACT AS TRUSTEE Every partner must (1) account to the partnership for any benefit and (2) hold as trustee for it any profits derived by him without the consent of the other partners: (1) From any transaction connected with the

    formation, conduct, or liquidation of the partnership; or

    (2) From any use by him of its property [Art. 1807].

    Obligations of the Partnership/Partners to Third Persons

    OBLIGATION TO OPERATE UNDER A FIRM NAME

    Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners. Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner. General rule: The partners may adopt any firm name desired. Exceptions: (1) They cannot use a name which is identical

    or deceptively or confusingly similar to an existing or corporation [or partnership] or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws [Sec. 18, Corporation Code].

    (2) Use of names of deceased partner in law firms is permissible provided that the firm indicates in all its communications that said partner is deceased [Rule 3.02, Code of Professional Responsibility].

    LIABILITY OF PARTNERS FOR PARTNERSHIP CONTRACTS The partnership is primarily liable for contracts entered into: (1) In its name and for its account; (2) Under its signature; and (3) By a person authorized to act for it.

    Upon exhaustion of its assets, all partners are liable pro rata with all their property. Any partner may enter into a separate obligation to perform a partnership contract [Art. 1816].

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    NATURE OF INDIVIDUAL LIABILITY SUBSIDIARY General rule: The partners are liable subsidiarily. It only arises upon exhaustion of partnership assets [Cia. Maritima v. Muoz (1907)].

    Exceptions: (1) A third person who transacted with the

    partnership can hold the partners solidarily (rather than subsidiarily) liable for the whole obligation if the case falls under Articles 1822 or 1823 [Muasque v. CA (1985)]. The provisions refer to wrongful acts or omission and misapplication of money or property by a partner in the ordinary course of business.

    (2) A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission, except that his liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary [Art. 1826]. In other words, he is not personally liable.

    PRO RATA The partners are liable pro rata. This liability is not increased even when a partner: (1) Has left the country and the payment of his

    share of the liability cannot be enforced [Co-Pitco v. Yulo (1907)]; or

    (2) His liability is condoned by the creditor [Island Sales v. United Pioneers (1975)].

    LIABILITY OF AN INDUSTRIAL PARTNER An industrial partner, who is not liable for losses, is not exempt from this liability. However, he can recover the amount he has paid from the capitalist partners, unless there is a stipulation to the contrary [Cia. Maritima v. Muoz (1907)]. STIPULATION AGAINST INDIVIDUAL LIABILITY Any stipulation against this liability is: (1) Void against third persons; but (2) Valid among the partners [Art. 1817].

    LIABILITY OF PARTNERS FOR PARTNERSHIP CONTRACTS ACTS APPARENTLY FOR THE CARRYING ON OF USUAL BUSINESS General rule: Any act of a partner which is apparently for the carrying on of the usual business of the partnership binds the latter, including the execution of any instrument in the partnership name.

    Exception: The partnership is not bound when the following concur: (1) The partner has in fact no authority to act;

    and (2) The person with whom he deals has

    knowledge of such fact [Art. 1818, par. 1]. ACTS NOT APPARENTLY FOR CARRYING ON OF THE USUAL BUSINESS General rule: Acts of a partner which is not apparently for carrying on of the usual business does not bind the partnership.

    Exception: The partnership is bound if the other partners authorized him to do the act [Art. 1818, par. 2].

    ACTS OF STRICT DOMINION General Rule: One or some of the partners have no authority to do the following acts of strict dominion: (1) Assign the partnership property in trust for

    creditors or on the assignees promise to pay the debts of the partnership;

    (2) Dispose of the goodwill of the business; (3) Do any other act which makes it impossible

    to carry on the ordinary business of the partnership;

    (4) Confess a judgment; (5) Enter into a compromise concerning a

    partnership claim or liability; (6) Submit a partnership claim or liability to

    arbitration; (7) Renounce a claim of the partnership.

    Exceptions: They may do so if: (1) Authorized by all the partners; or (2) The other partners have abandoned the

    business [Art. 1818, par. 3].

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    ACTS IN CONTRAVENTION OF A RESTRICTION Any act of a partner in contravention of a restriction on authority does not bind the partnership to persons having knowledge of the restriction [Art. 1818, par. 4].

    CONVEYANCE OF PARTNERSHIP REAL PROPERTY TITLE IN PARTNERSHIP NAME Any partner may convey the real property in the name of the partnership. The partnership can recover it, except when: (1) The act of the partner binds the partnership,

    when he has authority to carry out the usual business of the partnership, under Article 1818, 1st par.; or

    (2) If not so authorized, the property has been conveyed by the grantee, or a person claiming under him, to a holder for value and without knowledge that the partner exceeded his authority [Art. 1819, par. 1].

    A partner authorized to carry out the usual business may convey, in his own name, the equitable interest of the partnership [Art. 1819, par. 2]. TITLE IN THE NAME OF OTHER PERSONS Where the title is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership: (1) The partners having title may convey title. (2) The partnership may recover it when the

    partners conveying title have no authority to carry on the usual business of the partnership, unless the purchaser or his assignee is: (a) A holder for value; and (b) Without knowledge that the act

    exceeded authority [Art. 1819, par. 4]. Where the title is in the name of one or more or all the partners, or in a third person in trust for the partnership a partner authorized to carry on the usual business may convey equitable title in the partnership name or in his own name [Art. 1819, par. 4].

    Where the title is in the names of all the partners, a conveyance executed by all of them passes all the rights to the property [Art. 1819, par. 5].

    LIABILITY OF PARTNERSHIP FOR ADMISSION BY A PARTNER An admission or representation by any partner may be used as evidence against the partnership when: (1) It concerns partnership affairs; (2) Such affairs are within the scope of his

    authority [Art. 1820].

    LIABILITY OF PARTNERSHIP FOR WRONGFUL ACTS OF A PARTNER The partnership is solidarily liable with the partner who causes loss or injury to any person not a partner, or incurs any penalty through any wrongful act or omission: (1) In the ordinary course of the business of the

    partnership; or (2) Not in such ordinary course of business, but

    with the authority of his co-partners [Art. 1822].

    LIABILITY OF THE PARTNERSHIP FOR MISAPPLICATION OF MONEY OR PROPERTY The partnership is liable for losses suffered by a third person whose money or property was: (1) Received by a partner:

    (a) Acting within the scope of his apparent authority; and

    (b) Misapplied it; (2) Received by the partnership:

    (a) In the course of its business; and (b) Misapplied by any partner while it is in

    the custody of the partnership [Art. 1823].

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    LIABILITY OF THE OTHER PARTNERS UNDER ART. 1822 AND 1823 All partners are solidarily liable with the partnership for its liabilities under Articles 1822 and 1823 [Art. 1824].

    This is without prejudice to the guilty partner being liable to the other partners. However, as far as third persons are concerned, the partnership is answerable [De Leon (2010)]. LIABILITY IN CASE OF PARTNERSHIP BY ESTOPPEL PARTNER BY ESTOPPEL A partner by estoppel is a person who, by words spoken or written or by conduct (1) represents himself as a partner or (2) consents to another representing him to anyone as a partner: (1) In an existing partnership; or (2) With one or more persons not actual

    partners [Art. 1825, par. 1]. LIABILITY OF A PARTNER BY ESTOPPEL PERSONAL REPRESENTATION A partner by estoppel is liable to any such persons: (1) To whom such representation has been

    made; and (2) Who has, on the faith of such

    representation, given credit to the actual or apparent partnership [Art. 1825, par. 1].

    PUBLIC REPRESENTATION If he has made such representation or consented to its being made in a public manner, whether the representation has or has not been (personally) made or communicated to such persons so giving credit by or with his knowledge, and: (1) Partnership liability results, he is liable as

    though he were an actual member of the partnership.

    (2) No partnership liability results, he is liable pro rata with the other persons, if any, so

    consenting to the contract or representation.

    (3) When there are no such other persons, he is separately liable [Art. 1825, par. 1].

    EFFECT ON EXISTING PARTNERSHIP OR OTHER PERSONS NOT ACTUAL PARTNERS (1) When a person has been represented to be

    a partner (a) in an existing partnership, or (b) with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation.

    (2) When all the members of the existing partnership consent to the representation, a partnership act or obligation results.

    (3) In all other cases, it is the joint act or obligation of the person acting and the persons consenting to the representation [Art. 1825, par. 2].

    NATURE OF LIABILITY Summarizing Article 1825, a partner by estoppel is liable in the following manner: (1) He is liable as though he were a partner

    when: (a) There is an existing partnership; (b) All the partners consented to the

    representation; and (c) A partnership liability results.

    (2) He is liable jointly and pro rata (as though he were a partner in fact) with those who consented to the representation when: (a) There is an existing partnership but not

    all the partners consented; or (b) There is no existing partnership and all

    those represented as partners consented to the representation.

    (3) He is liable separately when: (a) There is an existing partnership but

    none of the partners consented; or (b) There is no existing partnership and not

    all of those represented as partners consented to the representation.

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    LIABILITY OF AN INCOMING PARTNER A person admitted as a partner is liable: (1) For obligations incurred subsequent to his

    admission as the other partners are liable; (2) For obligations incurred before his

    admission, but will be satisfied only out of the partnership property, unless otherwise stipulated that he fully assumes such obligations.

    Ratio: (1) The new partner partakes of the benefits of

    the partnership property and an already established business.

    (2) He has every means of obtaining full knowledge of the debts of the partnership and remedies that amply protect his interest [De Leon (2010)].

    NOTICE TO OR KNOWLEDGE OF THE PARTNERSHIP The following operate as notice to or knowledge of the partnership: (1) Notice to any partner of any matter relating

    to partnership affairs; (2) Knowledge of the partner acting in the

    particular matter acquired while a partner; (3) Knowledge of the partner acting in the

    particular matter then present to his mind; or

    (4) Knowledge of any other partner who reasonably could and should have communicated it to the acting partner.

    These do not apply in case of fraud on the partnership committed by or with the consent of the partner [Art. 1821].

    Dissolution and Winding Up

    CONCEPTS Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. It is different from the winding-up of the business [Art. 1828]. It does not terminate the partnership, which continues until the winding up of partnership affairs is completed [Art. 1829]. Winding up is the actual process of settling the partnership business or affairs after dissolution. It involves collection and distribution of partnership assets, payment of debts, and determination of the value of the interest of the partners in the partnership. Termination is the point in time when all partnership affairs are completely wound up and finally settled. It signifies the end of the partnership life [De Leon (2010)].

    CAUSES OF DISSOLUTION WITHOUT VIOLATION OF THE AGREEMENT (1) By the termination of the definite term or

    particular undertaking specified in the agreement;

    (2) By the express will of any partner, who must act in good faith, when no definite term or particular is specified.

    (3) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking;

    (4) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners [Art. 1830, par. 1].

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    If, after the expiration of the definite term or particular undertaking, the partners continue the partnership without making a new agreement, the firm becomes a partnership at will [Art. 1785]. Any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages [Ortega v. CA (1995)].

    IN CONTRAVENTION OF THE AGREEMENT Where circumstances do not permit dissolution under any other provision of Article 1830, it may also be dissolved by the express will of any partner at any time. Thus, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. If the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm [Rojas v. Maglana (1990)].

    BY OPERATION OF LAW (1) By any event which makes it unlawful for

    the business of the partnership to be carried on or for the members to carry it on in partnership;

    (2) When a specific thing which a partner had promised to contribute, perishes before delivery, or by the loss of the thing, only the use or enjoyment of which has been contributed; the loss of a specific thing, however, does not dissolve the corporation after its ownership has already been transferred to the partnership;

    (3) By the death of any partner; (4) By the insolvency of any partner or of the

    partnership; (5) By the civil interdiction of any partner;

    BY DECREE OF A COURT A partner may apply for dissolution in court when: (1) A partner has been declared insane in any

    judicial proceeding or is shown to be of unsound mind;

    (2) A partner becomes in any other way incapable of performing his part of the partnership contract;

    (3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;

    (4) A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him;

    (5) The business of the partnership can only be carried on at a loss;

    (6) Other circumstances render a dissolution equitable.

    A person who acquires the interest of a partner may likewise apply: (1) After the termination of the specified term

    or particular undertaking; (2) At any time if the partnership was a

    partnership at will when the interest was assigned or when the charging order was issued

    OTHER CAUSES

    (1) When a new partner is admitted into an existing partnership;

    (2) When any partner retires; (3) When the other partners assign their

    rights to the sole remaining partner; (4) When all the partners assign their rights

    in the partnership property to third persons [Art. 1840].

    The statutory enumeration of the causes of dissolution is exclusive [De Leon (2010)].

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    EFFECTS OF DISSOLUTION ON AUTHORITY OF THE PARTNERS In general, upon dissolution, the authority of the partners to represent the partnership is confined only to acts necessary to: (1) Wind up partnership affairs; or (2) Complete transactions begun but not then

    finished [Art. 1832, par. 1].

    WITH RESPECT TO PARTNERS The authority of partners to act for the partnership is terminated, with respect to partners: (1) When the dissolution is not by the act,

    insolvency or death of a partner; or (2) When the dissolution is by such act,

    insolvency or death, when the partner acting for the partnership has knowledge or notice of the cause [Arts. 1832 and 1833].

    In other cases, each partner is still liable for his share in the liability created by the partner acting for the partnership [Art. 1833].

    WITH RESPECT TO THIRD PERSONS With respect to persons not partners: (1) After dissolution, a partner can bind the

    partnership by any act appropriate for: (a) Winding up partnership affairs; or (b) Completing transactions unfinished at

    dissolution. (2) He can also bind it by any transaction which

    would bind the partnership as if dissolution had not taken place, provided the other party to the transaction: (a) Had extended credit to the partnership

    prior to dissolution and had no knowledge or notice thereof; or

    (b) Had not so extended credit but had known of the partnership prior to dissolution, and having no knowledge or notice of dissolution, the fact had not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on [Art. 1834, par. 1].

    Note the character of the notice required: (1) As to persons who extended credit to the

    partnership prior to dissolution, notice must be actual.

    (2) As to persons who merely knew of the existence of the partnership, publication in a newspaper of general circulation in the place of business of the partnership is sufficient.

    ON LIABILITY FOR TRANSACTIONS AFTER DISSOLUTION The liability of a partner, in general, is the same as in ordinary contracts (pro rata and subsidiary). In the following cases, however, the liability shall be satisfied out of the partnership assets alone (i.e., there is no subsidiary liability): (1) When the partner had been, prior to the

    dissolution, unknown as a partner to the person with whom the contract is made;

    (2) When the partner had been, prior to the dissolution, so far unknown or inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it [Art. 1834].

    Any act of a partner after dissolution in no case binds the partnership in the following cases: (1) Where the partnership is dissolved because

    it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs;

    (2) Where the partner has become insolvent; or (3) Where the partner has no authority to wind

    up partnership affairs, except by a transaction with one who: (a) Had extended credit to the partnership

    prior to dissolution and had no knowledge or notice of his want of authority; or

    (b) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised [Art. 1834].

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    Article 1834 does not affect the liability under Article 1825 of any person who, after dissolution, represents himself or consents to another representing him as a partner in a partnership engaged in carrying on business [Art. 1834]. ON LIABILITY FOR CONTRACTS AFTER DISSOLUTION BY SPECIFIC CAUSES General rule: A contract entered into by a partner acting for the partnership after dissolution by act, death or insolvency of a partner binds the other partners.

    Exceptions: (1) The dissolution being by act of any partner,

    the partner acting for the partnership had knowledge of the dissolution; or

    (2) The dissolution being by death or insolvency of a partner, the partner acting for the partnership had knowledge or notice of the death or insolvency [Art. 1833].

    ON EXISTING LAIBILITY OF PARTNERS General rule: Dissolution does not of itself discharge the existing liability of any partner.

    Exception: A partner may be relieved when there is an agreement to that effect between: (1) Himself; (2) The partnership creditor; and (3) The person or partnership continuing the

    business.

    Such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business. In case of dissolution by death, the individual property of a deceased partner is liable for obligations of the partnership incurred while he was a partner, after payment of his separate debts [Art. 1835].

    WINDING UP PARTNERS WHO MAY WIND UP The following partners have the right to wind up the partnership affairs: (1) Those designated in an agreement; (2) Those who have not wrongfully dissolved

    the partnership; or (3) The legal representative of the last surviving

    partner, who was not insolvent.

    Any partner or his legal representative or assignee may obtain winding up by the court, upon cause shown [Art. 1836].

    MANNER OF WINDING UP (1) Extrajudicial, by the partners themselves; or (2) Judicial, under the control and direction of

    the proper court.

    The action for liquidation of the partnership is personal. The fact that sale of assets, including real property, is involved does not change its character, such sale being merely a necessary incident of the liquidation of the partnership, which should precede and/or is part of its process of dissolution [Claridades v. Mercader (1966)].

    RIGHTS OF PARTNERS IN CASE OF DISSOLUTION DISSOLUTION WITHOUT VIOLATION OF THE AGREEMENT Each partner may have: (1) The partnership property applied to

    discharge the partnership liabilities; and (2) The surplus applied in cash to the net

    amount owing to the respective partners.

    This is a right as against his co-partners and all partners claiming through them in respect of their interests in the partnership. It cannot be availed if there is an agreement to the contrary [Art. 1837, par. 1].

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    DISSOLUTION IN CONTRAVENTION OF THE AGREEMENT PARTNER WHO DID NOT CAUSE THE DISSOLUTION The partners who did not cause the dissolution wrongfully has the following rights: (1) To demand the right under Article 1837, 1st

    par.; (2) To be indemnified for damages for breach

    of the agreement against the partner who caused the dissolution wrongfully [Art. 1837(1)];

    (3) To continue the business: (a) In the same name; (b) By themselves or jointly with others; (c) During the agreed term for the

    partnership. For the purpose of continuing the business, the said partners may possess the partnership property provided: (1) They secure the payment by bond approved

    by the court; or (2) They pay any partner who has caused the

    dissolution wrongfully the value of his interest in the partnership, less any damages recoverable, and indemnity against all present or future partnership liabilities [Art. 1837(2)].

    PARTNER WHO CAUSED THE DISSOLUTION The partner who caused the dissolution wrongfully has the following rights: (1) If the business is not continued, all the

    rights Article 1837, par. 1, subject to liability for damages;

    (2) If the business is continued, the right, as against his co-partners and all claiming through them, to: (a) Ascertainment, without considering the

    value of the goodwill of the business, and payment to him in cash the value of his partnership interest, less any damage, or have the payment secured by a bond approved by the court; and

    (b) Be released from all existing liabilities of the partnership [Art. 1837(3)].

    The goodwill of a business may be defined to be the advantage which it has from its establishment or from the patronage of its customers, over and above the mere value of its property and capital. The goodwill (which includes the firm name) is part of the partnership assets and may be subject of sale [De Leon (2010)].

    RIGHTS OF PARTNERS IN CASE OF RECISSION A partner, who is induced by fraud or misrepresentation to become such partner, may rescind the contract. Without prejudice to any other right, he is entitled: (1) To a lien on, or right of retention of, the

    surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him;

    (2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and

    (3) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership [Art. 1838].

    SETTLING OF ACCOUNTS BETWEEN PARTNERS Subject to any agreement to the contrary, the following rules shall be observed in settling accounts between partners after dissolution. COMPOSITION OF PARTNERSHIP ASSETS (1) The partnership property; and (2) The contributions of the partners necessary

    for the payment of all the liabilities [Art. 1839(1)].

    In accordance with the subsidiary liability of the partners, the partnership property shall be applied first to satisfy any liability of the partnership [Art. 1839(3)].

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    AMOUNT OF CONTRIBUTION FOR LIABILITIES The rules for distribution of losses shall determine the contributions of the partners [Art. 1839(4)]. As such: (1) The contribution shall be in conformity with

    the agreement. (2) If only the share in profits has been

    stipulated, the contribution shall be in the same proportion.

    (3) In the absence of any stipulation, the contribution shall be in proportion to the capital contribution [Art. 1797].

    ENFORCEMENT OF CONTRIBUTION The following persons have the right to enforce the contributions: (1) An assignee for the benefit of creditors; (2) Any person appointed by the court; or (3) To the extent of the amount which he has

    paid in excess of his share of the partnership liability, any partner or his legal representative [Art. 1839(5) and (6)].

    The individual property of a deceased partner shall be liable for the contributions [Art. 1839(7)].

    ORDER OF APPLICATION OF ASSETS The partnership liabilities shall rank, in order of payment, as follows: (1) Those owing to creditors other than

    partners; (2) Those owing to partners other than for

    capital and profits; (3) Those owing to partners in respect of

    capital; (4) Those owing to partners in respect of profits

    [Art. 1839(2)]. DOCTRINE OF MARSHALLING OF ASSETS When partnership property and the individual properties of the partners are in possession of a court for distribution: (1) Partnership creditors have priority on

    partnership property; (2) Separate creditors have priority on

    individual property, saving the rights of lien of secured creditors.

    (3) Anything left from either shall be applied to satisfy the other [Art. 1839(8)].

    DISTRIBUTION OF PROPERTY OF INSOLVENT PARTNER Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order: (1) Those owing to separate creditors; (2) Those owing to partnership creditors; (3) Those owing to partners by way of

    contribution [Art. 1839(9)].

    RIGHTS OF CREDITORS OF DISSOLVED PARTNERSHIP AS CREDITORS OF THE NEW PARTNERSHIP In the following cases, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business: (1) When the business is continued without

    liquidation, and the cause of dissolution is: (a) Admission of a new partner into the

    existing partnership; (b) Retirement or death of any partner, and

    his rights to partnership property are assigned to (1) two or more of the partners, or (2) one or more of the partners and one or more third persons;

    (c) Retirement of all but one partner, and their rights to partnership property are assigned to the remaining partner, who continues the business, either alone or with others;

    (d) Wrongful dissolution by any partner, and the remaining partners continue the business, either alone or with others;

    (e) Expulsion of a partner, and the remaining partners continue the business, either alone or with others.

    (2) When the cause of dissolution is the retirement or death of any partner, and business is continued with the consent of the retired partner or the representative of the deceased partner, without assignment of their rights to partnership property.

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    (3) When the cause of dissolution is the assignment by all the partners or their representatives of their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the partnership [Art. 1840, par. 1].

    LIABILITY OF A NEW PARTNER The liability to the creditors of the dissolved partnership of a new partner in the partnership continuing the business shall be satisfied out of the partnership property alone. However, he may, through agreement, assume individual liability [Art. 1840, par. 2]. PRIORITY OF CREDITORS OF DISSOLVED PARTNERSHIP Creditors of the dissolved partnership have prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business [Art. 1840, par. 3]. This is without prejudice to the right of creditors to set aside any assignment on the ground of fraud [Art. 1840, par. 4].

    RIGHTS OF A RETIRED PARTNER OR A REPRESENTATIVE OF DECEASED PARTNER Unless otherwise agreed upon, when any partner retires or dies, and the business is continued without any settlement of accounts as between him or his estate and the person or partnership continuing the business, he or his legal representative, as against such person or partnership, subject to the prior rights of creditors of the dissolved partnership: (1) May have the value of his interest at the

    date of dissolution ascertained; and (2) Shall receive as an ordinary creditor:

    (a) An amount equal to the value of his interest in the dissolved partnership with interest; or

    (b) At his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his

    right in the property of the dissolved partnership [Art. 1841].

    RIGHT TO AN ACCOUNT In the absence of any agreement to the contrary, the right to an account of his interest shall accrue to any partner, or his legal representative at the date of dissolution, as against: (1) The winding up partners; (2) The surviving partners; or (3) The person or partnership continuing the

    business [Art. 1842].

    Limited Partnership

    DEFINITION A limited partnership is: (1) A partnership; (2) Formed by two or more persons; (3) Having as members:

    (a) One or more general partners; and (b) One or more limited partners.

    The limited partners as such shall not be bound by the obligations of the partnership [Art. 1843].

    CHARACTERISTICS (1) A limited partnership is formed by

    compliance with the statutory requirements [Art. 1844].

    (2) The business is controlled or managed by one or more general partners, who are personally liable to creditors [Arts. 1848 and 1850].

    (3) One or more limited partners contribute to the capital and share in the profits but do not manage the business and are not personally liable for partnership obligations beyond their capital contributions [Arts. 1845, 1848 and 1856].

    (4) Obligations or debts are paid out of the partnership assets and the individual property of the general partners [Art. 1843].

    (5) The limited partners may have their contributions back subject to conditions prescribed by law [Arts. 1844 and 1957].

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    A limited partnership has the following advantages: (1) For general partners, to secure capital from

    others while retaining control and supervision for the business;

    (2) For limited partners, to have a share in the profits without risk of personal liability.

    GENERAL AND LIMITED PARTNERS DISTINGUISHED

    General partner Limited partner

    Extent of liability

    Personally, but subsidiarily, liable for obligations of the partnership

    Liable only to the extent of his capital contributions

    Right to participate in management

    Unless otherwise agreed upon, all general partners have an equal right to manage the partnership

    No right to participate in management

    Nature of contribution

    Cash, property or industry

    Cash or property only, not industry

    Proper party in proceedings by or against partnership

    Proper party Not proper party, unless (1) he is also a general partner; or (2) where the object of the proceedings is to enforce his right against or liability to the partnership

    Firm name

    Name may appear in the firm name

    Name must not appear in the firm name

    Prohibition to engage in other business

    Prohibited (subject to qualifications)

    Not prohibited

    General partner Limited partner

    Effect of retirement, death, insanity or insolvency

    Dissolves partnership Does not dissolve partnership; rights transferred to executor or administrator for selling his estate

    Assignability of interest

    Not assignable Assignable

    GENERAL AND LIMITED PARTNERSHIP DISTINGUISHED

    General partnership

    Limited partnership

    Creation

    May be constituted in any form, subject to exceptions

    Partners must: (1) sign and swear to a certificate in compliance with Article 1844; and (2) file the certificate for record in the SEC

    Composition

    Only general partners One or more general, and one or more limited partners

    Firm name

    Must contain the word Company [SEC Memo Circ No. 14-00], except for professional partnerships May or may not include the name of one or more of the partners

    Must include the word Limited [SEC Memo. Circ. No. 14-00] Must not include name of limited partners, unless: (1) it is also the surname of a general partner, or (2) prior to the time when the limited partner became such, the business has been carried on under a name in which his surname appeared

    Rules governing dissolution

    Articles 1828-1842 Articles 1860-1863

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    FORMATION GENERAL REQUIREMENTS Two or more persons desiring to form a limited partnership shall: (1) Sign and swear to a certificate stating the

    items in Article 1844; and (2) File for record the certificate in the SEC [Art.

    1844]. A limited partnership is formed if there is substantial compliance in good faith with the requirements. When there is failure to substantially comply with the requirements: (1) In relation to third persons, the partnership

    is general, unless they recognized that the firm is a limited partnership; and

    (2) As between the partners, the partnership remains limited, since they are bound by their agreement [De Leon (2010)].

    PURPOSE OF FILING The purpose of filing the certificate in the SEC is: (1) To give actual or constructive notice to

    potential creditors or persons dealing with the partnership; and

    (2) To acquaint them with its essential features, including the limited liability of limited partners [De Leon (2010)].

    FIRM NAME General rule: The surname of a limited partner shall not appear in the partnership name.

    Exceptions: (1) It is also the surname of a general partner;

    or (2) Prior to the time when the limited partner

    became such, the business had been carried on under a name in which his surname appeared.

    A limited partner whose surname appears in a partnership name contrary to this prohibition is liable as a general partner to partnership creditors who extend credit without actual knowledge that he is not a general partner.

    FALSE STATEMENT IN THE CERTIFICATE If the certificate contains a false statement, one who suffers loss by reliance thereon may hold liable any party to the certificate who knew the statement to be false: (1) At the time he signed the certificate; or (2) Subsequently, but within a sufficient time

    before the statement was relied upon to enable him to cancel or amend the certificate, or to file a petition for its cancellation or amendment [Art. 1847].

    Requisites: (1) The partner knew the statement to be false:

    (a) At the time he signed the certificate; or (b) Subsequently, but having sufficient time

    to cancel or amend it, or file a petition for its cancellation or amendment, and he failed to do so;

    (2) The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership; and

    (3) The person suffered loss as a result of reliance upon such false statement.

    GENERAL AND LIMITED PARTNER AT THE SAME TIME

    Art. 1853. A person may be a general and a limited partner in the same partnership at the same time. This fact must be stated in the certificate. A person who is a general, and also at the same time a limited partner, shall have all the rights and powers, and be subject to all the restrictions of a general partner, except that, in respect to his contribution as a limited partner, he shall have the rights against the other members which he would have had if he were not also a general partner.

    MANAGEMENT Only general partners have the right to manage the partnership. If a limited partner takes part in the control of the business, he becomes liable as a general partner [Art. 1848].

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    A general partner shall have the rights and powers and be subject to all restrictions and liabilities of a partner in a partnership without limited partners. Thus, he has general authority over the business. However, written consent or ratification by all limited partners is necessary to authorize the general partners to: (1) Do any act in contravention of the

    certificate; (2) Do any act which would make it impossible

    to carry on the ordinary business of the partnership;

    (3) Confess a judgment against the partnership;

    (4) Possess partnership property, or assign their rights in specific property, for other than a partnership purpose;

    (5) Admit a person as a general partner; (6) Admit a person as a limited partner, unless

    the right to do so is given in the certificate; (7) Continue the business with partnership

    property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right so to do is given in the certificate.

    OBLIGATIONS OF A LIMITED PARTNER OBLIGATIONS RELATED TO CONTRIBUTION The contributions of a limited partner may be cash or other property, but not services [Art. 1845]. A limited partner is liable for partnership obligations when he contributes services instead of only money or property to the partnership [De Leon (2010)]. A limited partner is liable to the partnership: (1) For the difference between his actual

    contribution and that stated in the certificate as having been made; and

    (2) For any unpaid contribution which he agreed in the certificate to make in the future at the time and on the conditions stated in the certificate [Art. 1858, par. 1].

    He holds as trustee for the partnership: (1) Specific property stated in the certificate as

    contributed by him, but which was not contributed or which has been wrongfully returned; and

    (2) Money or other property wrongfully paid or conveyed to him on account of his contribution [Art. 1858, par. 2].

    These liabilities can be waived or compromised only by the consent of all members. Such waiver or compromise, however, shall not affect the right to enforce said liabilities of a creditor: (1) Who extended credit; or (2) Whose claim arose, after the filing or before

    a cancellation or amendment of the certificate, to enforce such liabilities [Art. 1858, par. 3].

    Even after a limited partner has rightfully received the return in whole or in part of his capital contribution, he is still liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors: (1) Who extended credit; or (2) Whose claims arose before such return [Art.

    1858, par. 4]. A person who has contributed capital to a partnership, erroneously believing that he has become a limited partner, but his name appears in the certificate as a general partner or he is not designated as a limited partner, is not personally liable as a general partner by reason of his exercise of the rights of a limited partner, provided: (1) On ascertaining the mistake, he promptly

    renounces his interest in the profits of the business or other compensation by way of income [Art. 1852];

    (2) He does not participate in the management of the business [Art. 1848]; and

    (3) His surname does not appear in the partnership name [Art. 1846].

    LIABLITY TO PARTNERSHIP CREDITORS General rule: A limited partner is not liable as a general partner. His liability is limited to the extent of his contributions [Art. 1843].

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    Exceptions: The limited partner is liable as a general partner when: (1) His surname appears in the partnership

    name, with certain exceptions [Art. 1846, par. 2].

    (2) He takes part in the control of the business [Art. 1848].

    LIABILITY TO SEPARATE CREDITORS On due application to a court of competent jurisdiction by any separate creditor of a limited partner, the court may: (1) Charge his interest with payment of the

    unsatisfied amount of such claim; (2) Appoint a receiver; and (3) Make all other orders, directions and

    inquiries which the circumstances of the case may require.

    The interest so charged may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property [Art. 1862]. Note: In a general partnership, the interest may be redeemed with partnership property with the consent of all the partners whose interests are not charged [Art. 1814].

    RIGHTS OF A LIMITED PARTNER IN GENERAL A limited partner shall have the same rights as a general partner to: (1) Require that the partnership books be kept

    at the principal place of business of the partnership;

    (2) To inspect and copy any of them at a reasonable hour;

    (3) To demand true and full information of all things affecting the partnership;

    (4) To demand a formal account of partnership affairs whenever circumstances render it just and reasonable;

    (5) To ask for dissolution and winding up by decree of court;

    (6) To receive a share of the profits or other compensation by way of income; and

    (7) To receive the return of his contribution provided the partnership assets are in excess of all its liabilities [Art. 1851].

    RIGHT TO TRANSACT BUSINESS WITH THE PARTNERSHIP A limited partner may: (1) Loan money to the partnership; (2) Transact other business with the

    partnership; and (3) Receive a pro rata share of the partnership

    assets with general creditors if he is not also a general partner [Art. 1854, par. 1].

    Limitations: A limited partner, with respect to his transactions with the partnership, cannot: (1) Receive or hold as collateral security any

    partnership property; or (2) Receive any payment, conveyance, or

    release from liability if it will prejudice the right of third persons [Art. 1854, par. 1].

    Violation of the prohibition is considered a fraud on the creditors of the partnership [Art. 1854, par. 2]. RIGHT TO SHARE IN PROFITS A limited partner may receive from the partnership the share of the profits or the compensation by way of income stipulated for in the certificate. This right is subject to the condition that partnership assets will still be in excess of partnership liabilities after such payment [Art. 1856] The partnership liabilities being referred to exclude the liabilities to the limited and general partners. Ratio: Otherwise, he will receive a share to the prejudice of third-party creditors. RIGHT TO RETURN OF CONTRIBUTION A limited partner may have his contributions withdrawn or reduced when: (1) All the liabilities of the partnership, except

    liabilities to general partners and to limited partners on account of their contributions, have been paid or there remains property of the partnership sufficient to pay them;

    (2) The consent of all members is had, unless the return may be demanded as a matter of right; and

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    (3) The certificate is cancelled or so amended as to set forth the withdrawal or reduction [Art. 1857, par. 1].

    The return of his contributions may be demanded, as a matter of right (i.e., even when not all the other partners consent), when (1) and (2) above are complied with: (1) On the dissolution of the partnership; (2) Upon the arrival of the date specified in the

    certificate for the return; or (3) After the expiration of a 6-month notice in

    writing given by him to the other partners, if no time is fixed in the certificate for: (a) The return of the contribution; or (b) The dissolution of the partnership [Art. 1857, par. 2].

    General rule: A limited partner, irrespective of the nature of his contribution has only the right to demand and receive cash in return for his contribution. Exceptions: He may receive his contribution in a form other than cash when: (1) There is a statement in the certificate to the

    contrary; or (2) All the members of the partnership consent

    [Art. 1857, par. 3]. PREFERENCE OF LIMITED PARTNERS General rule: The limited partners stand on equal footing. Exception: By an agreement of all the partners (general and limited) in the certificate, priority or preference may be given to some limited partners over others with respect to: (1) The return of contributions; (2) Their compensation by way of income; or (3) Any other matter [Art. 1855].

    RIGHT TO ASSIGN INTEREST The interest of a limited partner is assignable. The assignee may become: (1) A substituted limited partner; or (2) A mere assignee.

    A substituted limited partner is a person admitted to all the rights of a limited partner

    who has died or has assigned his interest in a partnership. He has all the rights and powers, and is subject to all the restrictions and liabilities of his assignor, except those liabilities which: (1) The assignee was ignorant of; and (2) Cannot be ascertained from the certificate

    [Art. 1859, pars. 2 and 6].

    An assignee is only entitled to receive the share of the profits or other compensation by way of income, or the return of contribution, to which the assignor would otherwise be entitled. He has no right: (1) To require any information or account of the

    partnership transactions; (2) To inspect the partnership books [Art. 1859,

    par. 3]. An assignee has the right to become a substituted limited partner if: (1) All the partners consent thereto; or (2) The assignor, being empowered to do so by

    the certificate, gives him that right [Art. 1859, par. 4].

    An assignee becomes a substituted limited partner when the certificate is appropriately amended [Art. 1859, par. 5]. RIGHT TO ASK FOR DISSOLUTION A limited partner may have the partnership dissolved and its affairs wound up when: (1) He rightfully but unsuccessfully demands

    the return of his contribution; or (2) He has a right to contribution but his

    contribution is not paid because the partnership property is insufficient to pay its liabilities [Art. 1857, par. 4].

    DISSOLUTION A limited partnership is dissolved in much the same way and causes as an ordinary partnership [De Leon (2010)]. General rule: The retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership. Exception: It is not so dissolved when the business is continued by the remaining general partners:

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    (1) Under a right to do so stated in the certificate; or

    (2) With the consent of all members [Art. 1860].

    Upon the death of a limited partner, his executor or administrator shall have: (1) All the rights of a limited partner for the

    purpose of settling his estate; and (2) The power to constitute an assignee as a

    substituted limited partner, if the deceased was so empowered in the certificate.

    The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner [Art. 1861].

    SETTLEMENT OF ACCOUNTS ORDER OF PAYMENT In settling accounts after dissolution, the liabilities of the partnership shall be entitled to payment in the following order: (1) Those to creditors, including limited

    partners except those on account of their contributions, in the order of priority as provided by law;

    (2) Those to limited partners in respect to their share of the profits and other compensation by way of income in their contributions;

    (3) Those to limited partners in respect to the capital of their contributions;

    (4) Those to general partners other than for capital and profits;

    (5) Those to general partners in respect to profits;

    (6) Those to general partners in respect to capital [Art. 1863, par. 1].

    Note: In settling accounts of a general partnership, those owing to partners in respect to capital enjoy preference over those in respect to profits. SHARE IN PARTNERSHIP ASSETS The share of limited partners in respect to their claims for capital, profits, or for compensation by way of income, is in proportion of their contribution, unless: (1) There is a statement in the certificate as to

    their share in the profits; or

    (2) There is a subsequent agreement fixing their share [Art. 1863].

    AMENDMENT OR CANCELLATION OF CERTIFICATE CANCELLATION OF CERTIFICATE The certificate shall be cancelled when: (1) The partnership is dissolved; or (2) All limited partners cease to be such limited

    partners. AMENDMENT OF CERTIFICATE A certificate shall be amended when: (1) There is a change in the name of the

    partnership or in the amount or character of the contribution of any limited partner;

    (2) A person is substituted as a limited partner; (3) An additional limited partner is admitted; (4) A person is admitted as a general partner; (5) A general partner retires, dies, becomes

    insolvent or insane, or is sentenced to civil interdiction and the business is continued;

    (6) There is a change in the character of the business of the partnership;

    (7) There is a false or erroneous statement in the certificate;

    (8) There is a change in the time as stated in the certificate for the dissolution of the partnership or for the return of a contribution;

    (9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate; or

    (10) The members desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them [Art. 1864].

    REQUIREMENTS FOR AMENDMENT OR CANCELLATION To amend or cancel a certificate: (1) The amendment or cancellation must be in

    writing; (2) It must be signed and sworn to by all the

    members including the new members, and the assigning limited partner in case of

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    substitution or addition of a limited or general partner; and

    (3) The writing to amend (with the certificate, as amended) or to cancel must be filed for record in the SEC.

    When a person required to sign the writing, a person desiring the cancellation or amendment may petition the court to order cancellation or amendment. The court shall order the SEC to record the cancellation o


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