Partnership and Agency

7/28/2019 Partnership and Agency

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PARTNERSHIP & AGENCY

General Provisions

Art. 1767 Definition:Partnership a contract whereby two or more persons bind themselves to contribute money, property or industry to a commonfund, with the intention of dividing the profits among themselves, or in order to exercise profession. Profession a group of men pursuing a learned art as a common calling in the spirit of public service no less a public servicebecause it may incidentally be a means of livelihood.Characteristics of Partnership1. Consensual2. Nominate3. Bilateral4. Onerous5. Commutative6. Principal7. Preparatory A partnership contract, in its essence, is a contract of agencyElements1. consensual;2. there must be a contribution of money, property or industry to a common fund;3. the subject must be a lawful one;4. there must be an intention of dividing the profit among the partners;5. there must be a desire to formulate an active union (affectio societatis); 6. a new personality, that of the firm must arise, distinct from the separate personality of each of the members Essential Features of Partnership1. there must be a valid contract;2. the parties must have legal capacity to enter into the contract;3. there must be a mutual contribution of money, property, or industry to a common fund;4. the object must be lawful; and5. the primary purpose must be to obtain profits and to divide the same among the parties

Differentiation:Partnership (P) vs. Corporation (C)a. creation

P voluntary agreement of partiesC created by the state in the form of a special charter or by a general enabling law b. how long it existsP no time limit except agreement by partiesC not more than 50 years; may be reduced, but never extended

c. liability to strangersP may be liable with their private property beyond their contribution to the firm C liable only for payment of their subscribed capital stock

d. transferability of interestP even if a partner transfers his interest to another, the transferee does not become a partner unless all other partiesconsent


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C a transfer of interest makes the transferee a stockholder, even without the consent of the others e. ability to bind the firm

P generally, partners acting on behalf of the partnership are agents thereof; consequently they can bind both the firm andthe partnersC generally, the stockholders cannot bind the corporation since they are not agents thereof

f. mismanagementP a partner can sue a partner who mismanagesC a stockholder cannot sue a member of the board of directors who mismanages: the action must be in the name of thecorporation

g. nationalityP- a partnership is a national of the country it was createdC a corporation is a national of the country under whose laws it was incorporated, except for wartime purposes or for theacquisition of land, natural resources and the operation of public utilities in the Philippines, in which case the veil of thecorporate identity is pierced and we go to the nationality of the controlling stockholders

h. attainment of legal personalityP the firm becomes a juridical person from the time the contract begins C the firm becomes a juridical person from the time it is registered in the Securities and Exchange Commission, and allrequisites have been complied with

i. dissolutionP death, retirement, insolvency, civil interdiction, or insanity of a partner dissolves the firm C such causes do not dissolve the corporation

Ordinary Partnership (OP) vs. Conjugal Partnership of Gains (CPG)a. how created

OP by will or consent of the partiesCPG created by operation of law upon the celebration of the marriage

b. law that governsOP in general, it is the will of the partners that governs matters like object, length of existence, etc; the law is onlysubsidiaryCPG in general, it is the law that governs

c. legal personalityPO - possesses a legal personalityCPG does not possess any legal personality distinct from that of the husband or wife; hence, it cannot sue or be sue as

suchd. commencement of the partnershipPO begins at the moment of the execution of the contract but a contrary stipulation is allowed CPG commences precisely on the date o the celebration of the marriage no contrary stipulation is allowed

e. purposePO formed for profitCPG not formed particularly for profit

f. division of profitsas a rule, profits are divided according to previous agreement; and if there is no agreement, in proportion to the amountcontributedCPG as a rule, profits are divided equally (but settlement can provide otherwise)

g. managementPO as a rule, management is conferred upon the partners so appointed by the others; otherwise, all are equallyconsidered agents of the firmCPG as a rule, the administration and enjoyment of the conjugal partnership property belong to both spouses jointly

h. dissolutionPO there are many grounds for dissolutionCPG there are few grounds for dissolution

i. liquidation of profitsPO there may be division of profits even without dissolutionCPG there will be no liquidation or giving of profits till after dissolution

Partnership (P) vs. Co-Ownership (Community of property Tenancy in Common) (CO)


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a. creationP created by contract only (express or implied)CO created by contract, law and other things

b. juridicalP has juridical or legal personalityCO has none, hence, it cannot sue or be sued as such

c. purposeP for profitCO collective enjoyment (hence, not necessarily for profit)

d. agency or representationP as a rule, there is mutual representationCO as a rule, there is no mutual representation (although it is enough for one co-owner to bring an action for ejectmentagainst a stranger)

e. transfer of interestP cannot substitute another as partner in his place, without unanimous consentCO can dispose of his share without the consent of the others

f. length of existence if created by contractP no term limit is set by lawCO must not be for more that 10 years (although agreement after termination may be renewed) (hence, if more than 10years, the excess is VOID) 20 years is the maximum if imposed by the testator or donee of the common propertyg. profitsP- may be stipulated uponCO profits must always depend on proportionate shares (any stipulation to the contrary is VOID)

h. dissolutionP dissolved by death or incapacity of a partnerCO not dissolved by the death or incapacity of co-owner

i. formP may be made in any form except when real property is contributed (here, a public instrument is required) CO no public instrument needed even if real property is the object of the co-ownership

Partnership (P) vs. Joint-Stock Company (JSC)a. as to composition

P essentially, an association of personsJSC essentially, an association of capitalb. as to division of capital

P capital is not divided into sharesJSC although a special form of partnership, its capital is divided into shares, like in a corporation

c. as to managementP generally, in all the partnersJSC generally, in a board of directors

d. as to liabilityP partners may be liable with their individual properties after exhaustion of the partnership assetsJSC liability of the members is only up to the extent of their shares if such is what the statute provides

e. effect of transfer of interestPtransferee of partners share does not become a partner unless all the other partners consent JSC transferee of members shares himself becomes a member without any necessity of consent from the other members

Partnership (P) vs. Social Organizations (SO)a. as to contribution

P capital is given in money, property or servicesSO no capital is given although, of course, fees are usually collected

b. as to liability of debtsP partners are liable only after the partnership assets are exhaustedSO members are the ones individually liable for the debts of the organization, debts authorized or ratified by saidmembers


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c. as to purpose of objectiveP organized for gain, principally financialSO organized usually only for social or civic objectives

d. as to personalityP a legal personSO not a legal person

Partnership (P) vs. Voluntary Association (V)a. juridical personality

P has juridical personalityV - none

b. purposeP always organized for pecuniary profitV such objective is lacking

c. contribution of membersP there is contribution of capital, either in the form of money, property, or services V for social purposes, although fees are usually collected from the members to maintain the organization, there is nocontribution of capital

d. liability of membersP the partnership, as a rule, is the one liable in the first place for the debts of the firmV the members are individually liable for the debts of the association, authorized by them either expressly or impliedly, orsubsequently ratified by them

Partnership vs. Business Trusts- when certain persons entrust their property or money to others who will manage the same for the former, a business

trust is created. The investors are called cestui que trust; the managers are the trustees. In a true business trust, the cestui quetrust (beneficiaries) does not at all participate in the management; hence, they are exempted from personal liability, in that theycan be bound only to the extent of their contribution.Partnership vs. Tenancya. a partner acts as agent for the partnership whom he represents; the tenant does not represent the landlord. b. a partnership is a legal person; no such person is created in the relationship between landlord and tenant. Partnership vs. Agencya. agency may in one sense be considered the broader term because: partnership is only a form of agency. b. an agent never acts for himself but only for his principal; a partner is both a principal (for his own interest) and an agent (for

the firm and the others).Partnership vs. Joint Adventure (joint accounts)a. a joint adventure is a sort of informal partnership, with no firm name and no legal personality. In a joint account, the

participating merchants can transact business under their own name, and can be individually liable therefor. b. usually but not necessarily, a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing it

to a successful termination may continue for a number of years; a partnership generally relates to a continuing business ofvarious transactions of a certain kind.

Partnership vs. Labor Union- a labor union is any association of employees which exists in whole or in part for the purpose of collective bargaining

or of dealing with employers concerning terms and conditions of employment.- partnerships and labor unions have some characteristics in common, but the purpose of partnership is essentially to

enable its members, as principals, to conduct a lawful business, trade, or profession for pecuniary gain of partners, and no onemay become a partner without consent of all partners Partnership vs. Syndicate

- a syndicate is usually a particular partnership, that is, it may have been organized to carry out a particularundertaking or for some temporary objective


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Art. 1768 Partnership is a juridical person separate and distinct from each of the partners.Consequences:1. Its juridical personality is separate and distinct from that of each of the partners. 2. The partnership can:

- acquire and possess property of all kinds;- incur obligations;- bring civil or criminal actions;- can be adjudged insolvent even if the individual members be each financially solvent

3. A partner has no right to make a separate appearance in court, if the partnership being sued is already represented, unlesshe is personally sued.

Limitations on Alien Partnership- Secs. 2, 7, 10 and 11 of Art. 12 of the 1987 the Philippine Constitution

Rules in case of Associations now lawfully organized as Partnerships 1. If an association is not lawfully organized as a partnership, it possesses no legal personality. Therefore, it cannot sue.

However, the partners, in their individual capacity can.2. One who enters into contract with a partnership as such cannot, when sued later on for recovery of the debt, allege the

lack of legal personality on the part of the firm, even if it indeed had no personality. Art. 1769 Determinants for the Existence of a Partnership Purpose:

- to indicate some test to determine if what may seem to be a partnership really is one, or it is not Requisites for Existence of Partnership1. intention to create a partnership;2. common fund obtained from contributions;3. there was joint interest in the profits;

Therefore:mere co-ownership or co-possession; mere profit sharing or GROSS returns do not establish a partnershipSharing of net profits

- a prima facie evidence that one is a partner except in the 5 instances under Art. 1769 Art. 1770 Lawful Object or Purpose1. must be within the commerce of man, possible and not contrary to law, morals, good customs, public order or public policy 2. if a partnership has several purposes, one of which is unlawful, the partnership can still validly exist so long as the illegal

purpose can be separated from the legal purpose Judicial decree is not necessary to dissolve an unlawful partnership.

- the contract is void and therefore never existed from the viewpoint of the law Consequences of Unlawful Partnerships1. Art. 45, RPC2. The partners forfeit the proceeds or profits, but not their contributions, provided no criminal prosecution has been instituted.

- if the contributions have already been made, they can be returned; - if the contributions have not yet been made, the parties cannot be made to make the contributions

3. An unlawful partnership has no legal personality.Art. 1771 Formalities of Partnership


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1. General Rule:

-for the validity of the contract, as well as for enforceability, no form is required, regardless of the value of thecontributionsException:- whenever real properties or real rights in real properties are contributed regardless of the value a public

instrument is needed. Moreover, an inventory of the immovables is needed. This must be signed by the parties and attached tothe public instrument1. for effectivity of the partnership contract insofar as innocent third persons are concerned, the same must be registered if

real properties are involved.

Art. 1772 Partnership with capital of Php 3,000 or more Registration with the SEC Purpose of the registration with the office of the SEC

- to set a condition for the issuance of licenses to engage in business or trade Effect of non-registration1. even if not registered, the partnership having a capital of Php 3,000.00 or more is still a valid one, and therefore has legal

personality;2. if registration is needed, or desired, any of the partners of a valid partnership can compel the others to execute the needed

public instrument, and to subsequently cause its registration.Art. 1773 Where real property is contributed Requirements where real property is contributed1. There must be a public instrument regarding the partnership;2. The inventory of the realty must be made, signed by the parties, and attached to the public instrument Applicability1. applies regardless of the value of the property;2. applies even if only real rights over real property are contributed; 3. applies also if cash or personal property is contributed Registration

transfer of the land to the partnership must be duly recorded in the Registration of Property to make the transfereffective insofar as third persons are concernedArt. 1774 Acquisition of property under the Partnership name

- applicable to immovable as well as personalty because the partnership is a juridical entity, capable of owning andpossessing property

- alien partners must comply with the requirements as provided for in Sec. 7, Art 12 of the 1987 Constitution Limitations on Acquisition

- a partnership, even if entirely of Filipino capital may not:1. acquire, lease or hold public agricultural lands in excess of 1,024 hectares;2. lease public lands adapted to grazing in excess of 2,000 Art. 1775 Secret Partnership If articles are kept secret


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1. the association here is certainly not a partnership and therefore not a legal person, because anyone of themembers may contract in his own name with third persons and not in the name of the firm;

2. although not a juridical entity, it may be sued by third persons under the common name it uses, otherwise, saidinnocent third parties may be prejudiced;

3. however, it cannot sue as such, because it has no legal personality and therefore, cannot ordinarily be a partyto a civil action;

4. therefore, insofar as innocent third parties are concerned, the partners can be considered as members of apartnership; but as between themselves, or insofar as third persons are prejudiced, only the rules on co-ownership must apply. Same rule applies in the case of a partnership by estoppel

Note:- contracts entered into by a partner in his own name may be sued upon still by him in his own individual capacity,

notwithstanding the absence of partnership Partnership needs publicity to prevent fraud/deceitArt. 1776 Classification of Partnershipa. as to object/subject matter

1. Universal Partnership- may refer to all the presentproperty or to all the profitsa. universal of all present property- that which the partners contribute all the property which actually belongs to them to a common b. universal of profits- comprises all that the partners may acquire by their industry or work during the existence of the partnership

2. Particular Partnership- object are determinate things, their use or fruits; a specific undertaking or the exercise of a profession or occupation

b. as to liability of partners1. General

- they are liable even with respect to their individual properties, in pro rata after the assets of the partnership have been

exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under itssignature and by a person authorized to act for the partnership 2. Limited- formed by two or more persons having as members one or more general partners and one or more limited partners.

The limited partners as such shall not be bound by the obligations of the partnership A limited partner is one whose liability is limited only up to the extent of his contribution c. as to duration

1. at will2. at a fixed term- the term of existence has been agreed upon expressly or impliedly - the expiration of the term thus fixed or the accomplishment of the particular undertaking specified will cause the

automatic dissolution of the partnershipd. as to legality of existence

1. de jure2. de facto

e. as to representation1. ordinary/real2. ostensible/ partnership by estoppel


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f. as to publicity

1. secret2. open or notorious

g. as to purpose1. commercial2. professional

Kinds of Partners1. Capitalist Partners

- one who furnishes capital;- not exempted from losses; can engage in other business provided there is no competition between the partner and his

business2. Industrial

- one who furnishes industry or labor;- can be a general partner but never a limited partner;- exempted from losses as between the partner; cannot engage in any other business without express consent of the

partners, otherwise- he can be excluded from the firm (plus damage)- or the benefits he obtains from the other business can be availed of by the other partners (plus damages)

3. General/Real- one who is liable beyond the extent of his contribution

4. Managing- one who manages actively the firms affairs

5. Liquidating- one who liquidates or winds up the affairs of the firm after it has been dishonored

6. Partner by estoppel/Quasi-partner- one who is not really a partner but who may become liable as such insofar as third persons are concerned

7. Continuing8. Surviving9. Subpartner Other classificationsa. ostensible partner

- one whose connection with the firm is public and open b. secret

- one whose connection with the firm is concealed or kept a secretc.

silent

- one who does not participate in the management, though he shares in the profits or losses d. dormant/sleeping

- one who is both a secret and silent partner (not managing) e. originalf. incomingg. retiring


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Arts. 1778-80 Universal Partnership 2 kinds of Universal Partnership

A. Universal property of al l present property- one which comprises all that the partners may acquire by their industry or work during the existence of the partnership

and the usufruct of movable or immovable property which each of the partners may possess at the time of thecelebration of the contract.

The following become common property of all the partners:1. property which belonged to each of them at the time of the construction of the partnership 2. profits which they may acquire from the property contributed Property which the partners may acquire subsequently by inheritance, legacy or donation cannot be included for the

stipulation for common enjoyment Fruits thereof may be includedB. All profits- comprises all that the partners may acquire by their industry or work during the existence of the partnership

Distinction between all profits and all present property All profits

- only the usufruct of the properties of the partners become common property; naked ownership is retained by each ofthe partners

- all profits required by the industry or work of the partners become common property All present property

- all the property actually belonging to the partners are contributed- and said properties become common properties- as a rule, aside from the properties, only the profits of the said contributed common property Note:- profits from other sources may become common, but only if there is a stipulation to such effect.- Properties subsequently acquired by inheritance, legacy or donation, cannot be included in the stipulation, but the

fruits thereof can be included in the stipulation Art. 1781 Presumption in favor of partnership of profits- applicable only when a universal partnership has been entered into note:- future property cannot be included in the stipulation regarding universal partnership of all present property Reasons:1. contracts regarding successions rights cannot be made;2. partnership demands that the contributed things be determinate, known and certain;3. universal partnership of all present properties really implies a donation and future property cannot be donated

Art. 1782 Persons prohibited by law to give donation- cannot enter into Universal PartnershipReason: they should not be allowed to do indirectly what the law forbids directly Art. 1783 Particular Partnership

- it has for its object determinate things, their use of fruits, or specific undertaking, or the exercise of a profession or vocation Doctrine:

If two (2) individuals form a particular partnership for a deal in reality, it does not necessarily follow that all deals are for thebenefit of the partnership. In the absence of agreement, each particular deal results in a particular partnership. If one ofthem, on his account, and using his own funds, should make transactions in the same business, it is his own undertaking


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II. Obligations of the Partners among themselvesArt. 1784 When partnership beginsGeneral Rule:- begins from the moment of the execution of the contractException:- unless it is otherwise stipulated Intent to create a future partnership

Art 1784 presupposes that there can be a future partnership which at the moment has no juridical existence yet The agreement for a future partnership does not itself result in a partnership. The intent must be later on

actualized by the formation of the intended partnership Rule if contributions have not yet been actually made

- generally, even if contributions have not yet been made, the firm already exists, for partnership is a consensual contract(all requisites for such consent must be present)

Art. 1785 Duration of Partnership Duration: unlimited in the sense that no time limit is fixed by law; may be agreed upon (expressly or impliedly) Partnership at will

- 2 kindsa. when there is no term, express or impliedb. when continued by habitual managers

- note:It is called at will because its continued existence really depends upon the will of the partners or even on the will ofany of them.

Art. 1786 Duties of Parties 3 Important Duties of a partner

1. to contribute what has been promised;2. to deliver the fruits of what should have been delivered; and 3. to warrant

Obligations with respect to contribution of property1. to contribute at the beginning of the partnership or at the stipulated time the money, property or industry which he may

have promised to contribute;2. to answer for eviction in case the partnership is deprived of the determinate property contributed; and 3. to answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they

should have been contributed up to the time of actual delivery in addition, the partner has the obligation:4. to preserve said property with the diligence of a good father of a family pending delivery to the partnership; and 5. to indemnify the partnership for any damage caused to it by the retention of the sane or by the delay in its contribution

Effects of failure to contribute property promisedThe mutual contribution to a common fund being of the essence of the contract of partnership, for without the

contributions the partnership is useless, it is but logical that the failure to contribute is to make the partner ipso jure a debtorof the partnership even in the absence of any demand.


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The remedy of the partner is not rescission but an action for specific performance with damages and interest from thedefaulting partner from the time he should have complied with his obligation.Art. 1787 Appraisal of Goods

- manner prescribed by the contract of partnership in the absence of stipulation, appraisal shall be made byexperts chosen by the partners and according to current prices

A. When contribution consist of goods- appraisal of value is needed to determine how much has been contributed

B. How appraisal is made- as prescribed by the contract- in default of the first, experts chosen by the partners, and at current prices

C. Necessity of the Inventory Appraisal- proof is needed to determine how much goods or money had been contributed. An inventory is useful

D. Risk of loss- after goods have been contributed, the partnership bears the risk of subsequent changes in their value

Art. 1788- Obligations with respect to contribution of money1. to contribute on the date due the amount he has undertaken to contribute to the partnership; 2. to reimburse any amount he may have taken from the partnership coffers and converted to his own use; 3. to pay the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from

the common fund and converts it for his own use; and4. to indemnify the partnership for the damages caused to it by the delay in the contribution or the conversion of any

sum for his personal benefit Liability of guilty partner for interest and damages

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

case may be.- Unless there is a stipulation fixing a different time, this obligation of a partner to give his promised contribution arisesfrom the commencement of the partnership, that is, upon perfection of the contract.

Cases covered by the article:a. when money promised is not given on time;b. when partnership money is converted to the personal use of the partner

Coverage of liabilitya. interest at the agreed rate (if none, the legal interest)b. damages that may be suffered by the partnership

Why no demand is needed to put partners in default:a. contribution- a partnership is formed precisely to make use of contributions, and this use should start from its formation, unless a

different period has been set; otherwise the firm is necessarily deprived of the benefits thereof- injury is constant- time is of the essence

b. conversion- the form is deprived of the

benefits of the money, from the very moment of conversion

note: even if no actual injury results, the liability exists because Art. 1788 is absolute


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Art. 1789 Obligations of an Industrial Partner

Remedies where industrial partner engages in business- if the industrial partner engages in business for himself, without the express permission of the partnership, the

capitalist partners have the right to exclude him from the firm or to avail themselves of the benefits which he may haveobtained. In either case, the capitalist partners have the right to damages

note: the permission given must be express; hence, mere toleration by the partnership will not exempt the industrial partnerfrom liability

Distinction between Capitalist Partnerand Industrial Partnera. as to contribution

CP contributes money or propertyIP contributes industry (mental or physical)

b. as to prohibition to engage in other business CP cannot generally engage in the same or similar enterprise as that of his firm (possibility of unfair competition) IP cannot engage in any business for himself (all his industry is supposed to be contributed to the firm)

c. as to profitsCP shares in the profits according to the agreement thereon; if none, pro rata to his contribution IP receives a just and equitable share

d. as to lossesCP stipulation; if no stipulation, the agreement as to the profits; if none, pro rata contribution IP exempted as to losses (as between the partners0; but is liable to strangers without prejudice to reimbursementfrom capitalist partners

Art. 1790 - Contribution

General Rule: Partner shall contribute equal shares to the capital of the partnership

Exception: stipulation to the contrary

Amount of contribution - it is permissible to contribute unequal shares, if there is a stipulation to that effect

To whom applicable- both to industrial as well as to capital partners undoubtedly

Art. 1791 Obligation of Capitalist Partner

General Rule:- a capitalist partner is not bound to contribute to the partnership more than what he agreed to contribute but in case of

imminent loss of the business, and there is no agreement to the contrary, he is under obligation to contribute an

additional share to save the venture.

- if he refuses to contribute, he shall be obliged to sell his interest to the other partners

Requisites when a capitalist partner is obliged to sell his interest to the other partners: 1. if there is imminent loss of the partnership;2. he refuses to contribute an additional share to the capital; and 3. there is no agreement to the contrary note: industrial partner is exempted for he is already giving his entire industry


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Art. 1792 Obligations of Managing Partner who collects debt

Requisites:a. existence of at least two debts;b. both sums are demandable; andc. collecting partner is authorized to manage and actually manages the partnership

when not applicable- if the partner collecting is not a managing partner- here, there is no basis for the suspicion that the partner is in BAD FAITH

Art. 1793 Obligation of Partner who receives share of partnership credit- to bring such to the partnership capital in case of insolvency of the debtor and other partners have not yet collected

their share

as compared to Art. 1792a. one debt only (firm credit)b. applies to any partner

Art. 1794 Obligation of partner for damages to partnership

Why General Damages cannot be offset by benefits:

a. the partner has the duty to secure benefits for the partnership; on the other hand, he has the duty also not tobe at fault

b. since both are duties, compensation should not take place, the partner being the debtor in both instances - compensation requires 2 persons who are reciprocally debtors and creditors of each other

Mitigation of Liability- equity may mitigate liability if there are extraordinary efforts resulting in unusual profits

Need for Liquidation- before a partner sues another for alleged fraudulent management and resultant damages, a liquidation must

first be effected to know the extent of damages

Effect of Death of the negligent Partner- suit for recovery may be had against his estate

Art. 1795 Risk of Loss of things contributed

Cases contemplated:1. Specific and determinate things which are not fungible where only the use is contributed

- the risk of loss is borne by the partner because he remains the owner of the things2. Specific and determinate things the ownership of which is transferred to the partnership

- the risk of loss is for the account of the partnership, being the owner3. Fungible things or things which cannot be kept without deteriorating even if they are contributed only for the use of the

partnership- the risk of loss is borne by the partnership for evidently the ownership was being transferred since use is impossible

without the things being consumed or impaired4. Things contributed to be sold

- the partnership bears risk of loss for there cannot be any doubt that the partnership was intended to be the owner;otherwise the partnership could not effect the sale

5. Things brought and appraised in the inventory- the partnership bears the risk of loss because the intention of the parties was to contribute to the partnership the price

of the things contributed with an appraisal in the inventory. There is thus an implied sale making the partnership ownerof the said things, the price being represented by their appraised value.


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Art. 1796 Responsibility of the Firm

Obligation of the partnership to the partners:1. refund amounts disbursed by the partner in behalf of the partnership plus the corresponding interest from the time the

expenses are made;2. to answer for the obligations the partner may have contracted in good faith in the interest of the partnership business;

and3. answer for risk in consequence of its management

Art. 1797 Rules for Distribution of Profits and Losses

Distribution of Profitsa. partners share the profits according to their agreement subject to Art. 1799 b. if there is no such agreement:

1. the share of each capitalist partner shall be in proportion to his capital contribution (this rule is based on thepresumed will of the partners)

2. the industrial partner shall receive such share, which must be satisfied first before the capitalist partners shalldivide the profits, as may be just and equitable under the circumstances.

- the share of the industrial partner in the profits is not fixed, as in the case of the capitalist partners, as it is very

difficult to ascertain the value of the services of a person

Distribution of Lossesa. the losses shall be distributed according to their agreement subject to Art. 1799 b. if there is no such agreement, but the contract provides for the share of the partners in the profits, the share of

each in the losses shall be in accordance with the profit-sharing ratio, but the industrial partner shall not be liablefor losses. The profits or losses of the partnership cannot be determined by taking into account the result of oneparticular transaction but of all the transactions had.

c. If there is also no profit-sharing stipulated in the contract, then losses shall be born by the partners in proportionto their capital contributions, but the purely industrial partner shall not be liable for the losses.

Industrial Partners Profit- a just and equitable share

Industrial Partners Losses- while he may be held liable by third persons, still he can recover whatever he is made to give them, from the other

partners, for he is exempted from losses, with or without stipulation to this effect

Non-applicability to Strangers- Art. 1797 applies only to the partners, not when liability in favor of strangers are concerned, particular ly with reference

to the industrial partner

Art. 1798 Designation by Third Persons

a. third person- in the article, not a partner; to avoid partiality

b. when designation by the 3rd party may be impugned- when it is manifestly inequitable

c. when designation cannot be impugned even if manifestly inequitable: - if the aggrieved partner has already begun to execute the decision - if he has not impugned the same within 3 months from the time he had knowledge thereof

Art. 1799 (1) Stipulation excluding a partner from any share in profits or losses


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General Rule:- a stipulation excluding one or more partners from any share in the profits or losses is void Reason: partnership is for COMMON BENEFIT

Exception:- in the case of the industrial partner whom the law itself excludes from losses note: stipulation exempting a partner from losses should be allowed

Reason why industrial partner is generally exempted from losses- the industrial partner cannot withdraw any labor or industry he had already exerted.

Art.1800 - Rights and Obligations of a Managing Partner

Modes of Appointing a Manager1. appointment as manager in the articles of partnership2. appointment as manager made in an instrument other than the articles of partnership or made orally

Distinction between Appointment in Articles of Partnership and Appointment from other Source (other than the articles ofpartnership)

a. as to powerPartnership power is irrevocable without just or lawful cause- to justify removal for just cause: controlling partners should vote to oust him - without just cause: there must be unanimity

other source - power to act may be revoked at any time, with or without just cause

- such appointment is a mere delegation of power; revocable at any time - removal shall also be done by the controlling interest

b. as to extent of powerPartnership good faith he may do all acts of administration (not ownership) despite the opposition of his partners bad faith he cannot

other source as long as he remains manager, he can perform all acts of administration, but of course, if the others opposeand he persists, he can be removed

Scope of the Powers of the ManagerUnless specifically restricted:- he has the powers of a general agent;- as well as the incidental powers needed to carry out the objectives of the partnership

Rules as to CompensationGeneral Rule:- in the absence of an agreement to the contrary, each member of the partnership assumes the duty to give his time,

attention, and skill to the management of its affairs, so far at least, as may be reasonable necessary to the success ofthe common enterprise; and for this service a share of the profits is only his compensation.

Exception:a. a partner engaged by his co-partners to perform services not required of him in fulfillment of the duties which the

partnership relation imposes and in a capacity other than that of a partner is entitled to receive the compensationagreed upon therefor;

b. a contract for compensation may be implied where there is extraordinary neglect on the part of one partner to performhis duties toward the firms business, thereby imposing the entire burden on the remaining partner;


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c. one partner may employ his co-partner to do work for him outside of and independent of the co-partnership, andbecome personally liable therefor;

d. partners exempted by the terms of partnership from rendering services to the firm may demand pay for servicesrendered;

e. where one partner is entrusted with the management of the partnership business and devotes his whole time andattention thereto, at the instance of the other partners who are attending to their individual business and giving no timeor attention to the business of the firm, the case presents unusual conditions, is taken out of the general rule as tocompensation and warrants the implication of an agreement to make compensation, In such cases, the amount ofcompensation depends, of course, upon the agreement of the parties, express or implied, as well as upon theparticular circumstances of the case; and

f. by the contract of partnership, one 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 his co-partners, or where the servicesrendered are extraordinary.

Art. 1801 Rule where there are 2 or more Managers

Applicability of the Article1. there are two or more managers;2. there is no specification of respective duties; and3. there is no stipulation requiring unanimity

Specific Rules:1. Each may separately execute all acts of administration;2. except if any of the managers should oppose (division of the majority of the managers shall prevail) - if there is a tie, the partners owning the controlling interest prevail; provided they are also managers

when opposition may be made- before the acts produce legal effects insofar as third persons are concerned

Art. 1802 Unanimity of Action

When Unanimity is Requireda. applies when there must be unanimity in the actuations of the managers

b. absence or incapacity of one of the managers still requires unanimity except:- when there is imminent danger of grave or irreparable injury to the partnership

Duty of third personsRULE:

Third persons are not required to inquire as to whether or not a partner with whom he transacts has the consent of allthe managers, for the presumption is that he acts with due authority and can bind the partnership.

APPLICABILITY:When they innocently deal with a partner apparently carrying on in the usual way the business, it is imperative that if

unanimity is required it is essential that there be unanimity; otherwise the act shall not be valid, that is the partnership is notbound.

Art. 1803 Rule when manner of management has not been agreed upon

a. Generally, each partner is an agentb. Although each is an agent, still if the acts are opposed by the rest, the majority should prevail for the presumed

intent is for all the partners to manage as in Art. 1801;c. When a partner acts as an agent, it is understood that he acts in behalf of the firm; therefor when he acts in his

own name, he does not bind the partnership generallyd. On the other hand, the authority to bind the firm does not apply if somebody else had been given authority to

manage in the articles of organization or thru other means.


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Rule on Alterationsa. important alterations

- deals with immovable property because of their greater importance than personality. Also, in proper cases, theyshould be returned to the partners in the same condition as when they were delivered to the partnership

b. alteration- contemplates useful expenses

c. consent of the others may be express or implied

Art. 1804 Contract of Subpartnership

Subpartnership partnership formed between a member of a partnership and a third person for a division of the profits coming tohim from the partnership enterprise

- partnership within a partnership and is distinct and separate from the main or principal partnership

Right of person associated with partner share- subpartnership agreements do not in any wise affect the composition, existence, or operations of the firm. The

partners are partners inter se, but, in the absence of the mutual assent of all the parties, the subpartner does notbecome a member of the partnership, even the agreement is known to the other members of the firm.

Associate of Partnera. for a partner to have an associate in his share, consent of the other partners is not required; b. for the associate to become a partner, all must consent

Art. 1805 Partnership Books

a. such a right is granted to enable the partner to obtain true and fuel information of the partnership affairs b. the article presupposes an ongoing partnershipc. reasonable hour

- contemplates business days throughout the year

Value of Partnership Books of Account as Evidence

- they constitute an admission of the facts stated therein, an admission that can be introduced on evidence as againstthe keeper or maker thereof.

Art. 1806 Duty of Partner to render Information

Duty to give information- there must be no concealment between partners in all matters affecting the firms interest - requires good faith- duty to give on demand true and full information

Errors in the Book- if partnership books contain error, but said errors have not been alleged, the books must be considered entirely

correct insofar as the keeper of said books of account is concerned

Who can demand informationa. any partner;b. legitimate representative of dead partner;c. legitimate representative of any partner under any legal disability

Art. 1807 Duty to Account

Partner accountable as fiduciary


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- the relation between the partners is essentially fiduciary involving trust and confidence, each partner being consideredin law, as he is, the confidential agent of the others

Duties of a partner1. Duty to act for common benefit2. Duty begins during the formation of partnership3. Duty continues even after dissolution of partnership4. Duty to account for secret and similar profits5. Duty to account for earnings accruing even after termination of partnership6. Duty to make full disclosure of information belonging to partnership 7. Duty not to acquire interest or right adverse to partnership

Duty to AccountREASON:- the fiduciary relation between the partners are relationships of trust and confidence which must not be abused or used

to personal advantage- trust relations exists only during the life of the partnership, not before nor after

Art. 1808 Prohibition against a Capitalist Partner

Business Prohibition on Capitalist Partner- prohibited from engaging for his own account in any operation which is the kind of business in which the partnership is

engaged

Instances where there is no prohibitiona. when there is an express stipulation allowing the capitalist partner to engage himself;b. when the other partners expressly allow him to do so;c. when the other partners impliedly allowed him to do so; d. when the company ceases to be engaged in business during the period of liquidation and winding up; ande. when the general-capitalist partner becomes merely a limited partner in a competitive enterprise

Effect of Violationa. the violator shall bring the partner shall of the profits illegally obtained;

b. he shall personally bear all the losses

Art. 1809 Right of Partner to a Formal Account

Right to demand a formal accounta. generally, no formal accounting is demandable until after dissolutionb. however, under Art. 1809, formal accounting may be properly asked for

Estoppel- cannot be questioned anymore if it was accepted without objection for this would now be a case of estoppel, unless

fraud and error are alleged and proved

Stipulation and Continuing Share

- valid and proper accounting must be made

III. Property Rights of a Partner

Art. 1810 Property Rights of a Partner

Principal Rights:a. specific partnershipb. interest in the partnershipc. right to participate in the management


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Related Rights:

a. the right to reimbursement for amounts advanced to the partnership and to indemnification for risks inconsequence of management;

b. the right to access the inspection of partnership books; c. the right to true and full information of all things affecting the partnership;d. the right to formal account of partnership affairs under certain circumstances; and e. the right to have the partnership dissolved also under certain conditions

Distinction between Partnership Property and Partnership Capital

a. as to changes in valuePP variable; its value may vary from day to day with changes in the market value of the partnership assets PC constant; remains unchanged as the amount fixed by agreement of partners, and is not affected by fluctuations inthe value of partnership property, although it may be increased or diminished by unanimous consent of the partners

b. as to assets includedPP includes not only the original capital contributions of the partners, but all property subsequently acquired onaccount of the partnership or with partnership funds, including partnership name and the good will of the partnershipPC represents the aggregate of the individual contributions made by the partners in establishing or continuing thepartnership

Art. 1811 Partnership in Specific Partnership Property

Co-ownership in Specific Partnership Property- partners are co-owners but rules on co-ownership does not necessarily apply

Rights of a partner in specific partnership property1. in general, he has an equal right with his partners to posses, but only for partnership purposes; 2. he cannot assign his right;3. his right is not subject to attachment or execution; and4. his rights is not subject to legal support

Art. 1812Partners Interest in the Partnership is his share of the profits and surplus

In general., a partners interest in the partnership (his share in the profits and surplus) may be assigned, attached or besubject to legal support

Art. 1813 Conveyance of Interest

Effects of conveyance by partner of his Interest in the Partnership1. Partnership may still remain; partnership may be dissolved2. Assignee does not necessarily become a partner3. Assignee cannot even interfere in the management or administration of the partnership business or affairs 4. Assignee cannot demand information, accounting or inspection of the partnership books

Rights of Assignee

1. to get whatever profits the assignor-partner would have obtained;2. to avail himself of the usual remedies in case of fraud in the management; 3. to ask for annulment of the contract of assignment if there was fraud, error, intimidation, force, undue influence;4. to demand an accounting

Art. 1814

Charging Interest of a Partner- while a partners interest in the partnership may be charged or levied upon, his interest in a specific firm property

cannot as a rule be attached.


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Preferential Rights of Partnership Creditors- preference is given to partnership creditors in the partnership assets;- separate or individual creditors have preference in separate or individual properties

Remedies of separate Judgment Creditor of a Partner

1.

Application for the charging order after securing judgment on his credit

2. Availability of other remedies

Receivershipa. when the charging order is applied for and granted, the court may at the same time or later appoint a receiver of the

partners share in the profits or money due himb. the receiver appointed is entitled to any relief necessary to conserve the partnership assets for partnership purposes

Redemption of the Interest Chargeda. redemption- means the extinguishment of the charge orattachment on the partners interest in the profits;b. when redemption is made- any time before closure;- after closure, it may still be bought with separate property or with partnership property

IV. Obligation of the Partners with regard to Third Persons

Art. 1815 Firm Name

Firm Name- name, title or style under which a company transacts business; a partnership of two or more persons; a commercial

house

Purpose- necessary to distinguish the partnership which has a distinct and separate juridical personality from the individuals

composing the partnership and from other partnerships and entities.

Liability of strangers who include their name- liability as partners because of estoppel, but do not have the rights as partners

Art. 1816 Liability for Contractual Obligations of Partners

Partnership Liability Individual Liability

Liability Distinguished from Losses- an industrial partner is exempted by law for losses but not from liability; - third persons may sue the firm and the partners, including the industrial partners; - partners will be personally liable only after the assets of the partnership have been exhausted

Stipulations such as those exempting all the industrial partners and some of the capitalist partners, insofar as third

persons are concerned, would be null and void

Art 1817 Stipulations Eliminating Liability

Art. 1799 and 1817 reconciled:- it is permissible to stipulate among them that a capitalist partner will be exempted from liability in excess of the original

capital contributed; but will not be exempted insofar as his capital is concerned

Liability vs. Losses


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Liability refers to responsibility towards third personsLosses refers to responsibility as among partners

Art. 1818 Partner as an Agent of Partnership

When a partner can bind or cannot bind the firma. Art. 1818 speaks of an instance when the partner is an agent; andb. when he can and cannot bind as agent

Agency of a partner- partnership is a contract of mutual agency- each partner acting as a principal on his own behalf and as an agent for his co-partners or the firm

When can a partner bind the partnershipRequisites:a. when he is expressly authorized or impliedly authorized; andb. when he acts in behalf and in the name of the partnership

When will act not bind the partnershipA. when, although for apparently carrying on in the usual way the business of the partnership, still the partner has in

fact NO AUTHORITY, and the third party knows that the partner has no authority;

B. when the act is not for apparently carrying on in the usual way of the partnership and the partner has no authority

NOTE: The 7 kinds of acts enumerated in Art. 1818 are instances of acts which are NOT for apparently carrying on inthe usual way the business of the partnership.

In the 7 instances, the authority must be unanimous except if the business has been abandoned.

Reasons why 7 acts are unusuala. assign the firm property firm will virtually be dishonoredb. dispose of the goodwill good will is valuable propertyc. do any other act which would make it impossible to carry on this is evidently prejudiciald. confers a judgment if done before a case is filed, this is null and void; if done later, the firm would be jeopardized e. compromise an act of ownership and may be said to be equivalent to alienation f. arbitration an act of ownership which may not be justified

g. renounce a claim why should a partner renounce a claim that does not belong to him but to the partnership?

Art. 1819 Conveyance of Real Property

the article speaks of :to convey or a conveyance real property may be registered or owned in the name of

- the partnership- all the partners- one, some or not all the partners in trust for the partnership

Art. 1920 Admission or representation made by a partner

Conditions:

- admission must concern partnership affairs;- within the scope of the authority

Restrictions on the rule:a. admission made BEFORE dissolution are binding only when the partners has authority to act on the particular

matterb. admissions made AFTER dissolution are binding only if the admissions were necessary to wind up the business


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note: a previous admission of a partner is admissible in evidence against the partnership when it is made within thescope of the partnership, and during the existence, provided of course that the existence of the partnership is firstproved by evidence other than such act or declaration

Art. 1821 Notice to a Partner

Cases of Knowledge of a Partner

1. knowledge of a partner acting in a particular matter acquired while a partner;2. knowledge of a partner acting in a particular matter then present to his mind; and3. knowledge of any partner who reasonably could and should have communicated it to the acting partner

Effect of Notice to a Partnera. in general, notice to a partner is notice to the partnership, that is, a partnership cannot claim ignorance if a partner

knew (but this is with restriction)b. notice to a partner, given while already a partner, is a notice to the partnership provided it relates to partnership affairs

Effect of knowledge although no notice was given- notice of the partner is also knowledge of the firm provided:

a. the knowledge was acquired by a partner who is acting in the particular matter involved; b. the knowledge may have been acquired by a partner not acting in the particular matter involved

Art. 1822 Liability of Partnership

Requisites for Liabilitya. the partner must be guilty of a wrongful act or omission; andb. he must be acting in the ordinary course of business, or with the authority of his co-partners even if the act is

unconnected with the business

note: partnership liability does not extend to criminal liability

Instances when the firm and other partners are not liable:a. if the wrongful act or omission was not done within the scope of the partnership business and for its benefit; b. if the act or omission was not wrongful;

c. if the act or omission, although wrongful, did not make the partner concerned liable himself; and d. if the wrongful act or omission was committed after the firm had been dissolved and the same was not in connection

with the process of winding up

Art. 1823 Liability for Misappropriation

Liability of partnership for misappropriation- the difference between par. 1 and par. 2 is that in the former misappropriation is made by the receiving partner, while

in the latter, the culprit may be any partner. The effect however is the same in both cases

Art. 1824 Solidary Liability of partners- not only the partners that are liable in solidum; it is also the partnership

Art. 1825 Partner by Estoppel and Partnership by Estoppel

Estoppel- a bar which precludes a person from denying or asserting anything contrary to that which has been established as the

truth by his own deed or representation, either express or implied

When Partnership Liability Results:- if all the actual partners consented to the representation, then the liability of the person who represented himself to be

a partner or who consented to such representation and the actual partners is considered a partnership liability.


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Elements to establish liability as a partner on ground of estoppel:

1. proof by plaintiff that he was individually aware of the defendants representations as to his being a partner orthat such representations were made by others and not denied or refuted by the defendant;

2. reliance on such representations by the plaintiff; and3. lack of denial or refutation of the statements by the defendants; such denial need not precede plaintiffs acting

thereon if the denial was forthcoming promptly upon hearing of the representations, and if, by prudence anddiligence the plaintiff might have learned the truth or untruth of the representations.

When the problem may arise:A person may:

a. represent himself as a partner of an existing partnership with or without the consent of the partnership; b. represent himself as a partner of a non-consent partnership

When estoppel does not apply:- when although there is misrepresentation, the third party is not deceived, the doctrine of estoppel does not apply

Burden of Proof- the creditor, or whoever alleges the existence of a partner or partnership by estoppel has the burden of proving the

existence of the misrepresentation and the innocent reliance on it

Art. 1826 Entry of a New Partner

Entry of a new partner into an existing partnership- the newly admitted partner would be liable as an ordinary original partner for all partnership obligations incurred after

his admission to the firm

Creation of a new partnership in view of the entry- the admission of a new partner dissolves the old firm and creates a new one; - since the old firm is dissolved, the original creditors would not be the creditors of the new firm, but only of the original

partners; hence, they may lose their preference;- under the civil code, they are considered creditors of the new firm

Liability of incoming partner for partnership obligations1. limited to his share in partnership property for existing obligations, unless there is stipulation to the contrary; 2. extends to his separate property for subsequent obligations

Liability of an Outgoing Partner- where a partner gives notice of his retirement or withdrawal from the partnership, he is freed from any liability on

contracts entered into thereafter, but his liability on existing incomplete contract continues.

the rule of holding the new partner liable for previous obligations of the firm is not harsh on the said new partner. Afterall the incoming partner partakes of the benefit of the partnership, property and an established business

Art. 1827 Creditors of Partnership

Reason for the Preference of Partnership Creditors

- after all, the partnership is a juridical person with whom the creditors have contracted; moreover the assets of thepartnership must first be executed

Reason why industrial creditors may still attach the partners share

- after all, remainder belongs to the partner

Sale by a partner of his share to a third party


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- if a partner sells his share to a third party, but the firm itself still remains solvent, creditors of the partnership cannot

assail the validity of the sale by alleging that it is made in fraud of them, since they have not really been prejudiced

IV. Dissolution and Winding Up

Art. 1828 & 1829 Definition of Dissolution, Winding up and Termination; Effects of Dissolution

Dissolution- the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the

business- that point of time when the partners cease to carry on the business together

Effects of Dissolution:a. partnership is not terminated;b. partnership continues for a limited purpose; andc. transaction of new business is prohibited

Winding Up- the process of settling business affairs after dissolution

Termination- the point in time after all the partnership affairs have been wound up

Effect on Obligationsa. a partner cannot evade previous obligations entered into by the partnershipb. absolution saves the former partners from new obligation to which they have not expressly or impliedly

consented, unless the same be essential for winding up

Art. 1830 Causes of Dissolution

1. as to first cause- partnership agreement has not been violated

4 instances: termination of the definite term or specific undertaking; express will of a partner who must act in good faith when there is no definite term and specific undertaking; 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; by the expulsion of any partner from the business bona fide in accordance with such p[power conferred by

the agreement between the partners

3. In contravention of the agreement between the partners, where the circumstances do not permit a dissolution underany other provision of this article, by the express will of any partner at any time;

4. when a specific thing, which a partner had promised to contribute to the partnership, perishes before delivery5. by the death of any partner;6. by the insolvency of any partner or of the partnership;7. by the civil interdiction of any partner; and8. by decree of court

note: partners in their contract cannot limit the cause for dissolution

Art. 1831 Judicial determination as to dissolution

this article speaks of a dissolution by decree of court. In a suit for dissolution proof as to the existence of the firm mustbe given


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Who may sue for dissolution:a. a partner for any of the causes given under 1831b. the purchaser of a partners interest in the partnership under Art. 1813/1814, provided that the period has expired

or if the firm was a partnership at will when the interest was assigned or changed

note: if period is not yet over, said purchaser cannot sue for dissolution

Grounds for Dissolutiona. insanityb. incapacityc. misconduct and persistent breach of partnership agreementd. business can be carried on only at a losse. other circumstances

Insanity of a partnera. even if a partner has not yet been previously declared insane by the court, dissolution may be asked, as long as

the insanity is duly proved in court;b. insanity is a cause since the partner will be incapacitated to contract

Incapability to perform part- may happen when the partner enters the government service which would prohibit him from participating in the firm, or

when he will stay abroad for a long time

Appointment of a receiverIn a suit for dissolution, the court may appoint a receiver at its own discretion but a receiver is not needed when

practically all the firm assets are in the hands of a sheriff under a writ of replevin, or when the existence of a partnership withthe plaintiff is denied, particularly if the business of the firm is being conducted successfully

Time of Dissolution- a firm becomes a dissolved partnership at the time the judicial decree become s a final judgment

Art. 1832 Effects of Dissolution

General Rile: Art. 1832Exception: Art. 1833 and 1834

Effects of dissolution- when a partnership is dissolved, certain effects are inevitable, insofar as the relations of the firm toward third personsare concerned, and insofar as the partners themselves are affected in their relations with one another

Effect of previous contract- when a firm is dissolved, it does not mean that the contracts and obligations entered into, whether the firm is the

creditor or debtor, automatically cease;- the firm is still allowed to collect previously acquired credits, it is also bound to pay all the debts; - a dissolved partnership still has the personality for winding up its affairs

Creditors who have not been prejudiced- if the obligations and rights of a dissolved firm are transferred to another firm, the creditors may not hold the formerliable even if said creditors have not been prejudiced, as long as the new firm can indeed take care of said creditors. Itwould be erroneous to let the old firm pay, if the new firm can really pay.

Art. 1833 Kinds of Causes of Dissolution

a. Act-Insolvency-Deathb. Other things like termination


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Effect of AID- all partners are still bound to each other generally, except: a. if the partner had knowledge (as distinguished by NOTICE without actual knowledge)

- if dissolution is caused by an act (e.g. withdrawing, retiring)

b. if the partner acting had knowledge or notice, if dissolution was caused by death or insolvency

note:Death or insolvency being more ordinary than an act, notice is enough. Hence, the law provides knowledge or

notice.However, it is still essential that there be knowledge or notice of the fact of death or insolvency to justify non-liability of

the other partners to the parties acting.

Right of partner to contribution from co-partners- when a partner enters into a new contract with a third person after dissolution, the new contract generally will bind

the partners (Art. 1834, par. 1). Each of them is liable for his share of any liability created by the acting partner asif the partnership had not been dissolved.

Art. 1834 When Partnership is Bound

Article speaks of 2 possibilities:a. when the partnership is bound to strangers; andb. when the partnership is not bound to strangers

When Partnership is bound:(a partnership liability is created)a. business is for winding up;b. business is to complete unfinished transactions; andc. completely new business with third parties considered innocent

When firm is not bound:a. in all cases not included when partnership is bound;b. when the firm was discharged because it was unlawful to carry on the business; except when the act is winding

up;c. where the partner had acted in the transaction has become insolvent;d. where the partner is unauthorized to wind up

except: if the transaction is with a customer in good faithNote:

- it is understood that if after dissolution a stranger will represent himself as a partner although he is not one, he will bea partner by estoppel

Art. 1835Effect of Dissolution on Partners Existing Liability

Dissolution ordinarily does not discharge existing liability of partners, otherwise, creditors would be prejudiced,particularly if a partner will just withdraw anytime from the firm

How a Partners liability is discharged

- the following must agree:a. the partner concerned;b. the other partners; andc. the creditors

Effect of death on pending action- An action for accounting against a managing partner should be discontinued if he dies during the pendency of the

action;


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- The suit must be conducted in the settlement proceedings of the deceaseds estate, particularly if this is the desire ofhis administration;

- Thus, it is wrong to just continue the action for accounting and substitute the dead defendant with his heirs

Art. 1836 Judicial and Extrajudicial Wind up; Persons authorized to wind up

Extrajudicial winding up- by the partners who have not wrongfully dissolved the partnership;- or by the legal representative of the last surviving partner provided the last survivor was not insolvent

Judicial winding up- under the control and direction of the court, upon proper cause that is shown to the court; - petition for judicial winding up can be done by any partner, his legal representative or assignee

Rule if survivor is not the manager- he is not required to serve as liquidator thereof;- he is not required as liquidator without compensation; and - if he liquidates the affairs upon promise of a certain compensation by the managing partners, he is naturally entitled to

receive compensation

Profits- profits are supposed to accrue only during the existence of the partnership before dissolution;- profits that will actually enter the firm after dissolution as a consequence of transactions already made before

dissolution are included because they are considered as profits existing at the time of dissolution; and- any other income earned after the time should not be disturbed as profits, but merely as additional income to the

capital

Persons authorized to wind up:a. the partners designated by the agreement;b. in the absence of such agreement, all the partners who have not wrongfully dissolved the partnership; and c. the legal representative (executor or administrator) of the last surviving partner (when all the partners are already

dead) not insolvent.

Art. 1837 - Right of Partner to Application of Partnership Property on Dissolution

rights where dissolution not in contravention of agreement (par. 1) rights where dissolution is in contravention of agreement (par.2)

Two aspects of dissolutionDissolution may be caused:

a. although the partnership contract is not violated;b. because the partnership contract is violated

Innocent Partners:- have better rights than guilty partners;- may continue the business (new partnership);

-

rights of the guilty partners are safeguarded by a:

a. bond approved by the courtb. payment of interest at the time of dissolution minus damages

Right to get cash- in case of non-continuance of the business, the interest of the partner should, if he desires, be given in CASH

note: a guilty partner, in ascertaining the value of his interest is not entitled to a proportionate share of the value of theGOOD WILL


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Partner wrongfully excluded- he should be considered an innocent party;- the other partner must account not only for what is due to him at the date of the dissolution but also for damages or for

his share of the profits realized from the appreciation of the partnership business and good will (provided the excludedpartner had not substantially broken the partnership agreement)

Division of Losses-rule on losses must apply, provided that their real market values at the time of liquidation are the values considered

Art. 1838 Right of Partner to Rescind Contract of Partnership

if the contract is annulled, the injured partner is entitled to restitution

Rescission or annulment of partnership contract- fraud or misrepresentation violates the consent whereby the contract of partnership had been entered into, hence, it is

really also causante

Three Rights (without prejudice to the other rights under other legal provisions)a. right to lien or retention;b. right of subrogation; and

c. right of indemnification

Art. 1839 Liquidation and Distribution of Assets of Dissolved Partnership

Liquidation- before liquidation is made, no action for accounting of a partners share in the profit or for a return of his capital

assets can properly be made, since it is essential to first pay off the creditors

Assets of Partnership- partnership property- contributions of the partners, which are made to pay off the partnership liabilities

Order of Payment of Firms Liabilities

1. creditors (who are strangers) otherwise they may be prejudiced;2. partners (who are already creditors);3. distribute profits

note:- if the partnership assets are insufficient the other partners must contribute more money or property - such contributors may be enforced by:

- any assignee for the benefit of the creditor, or any person appointed by the court;- any partner or his legitimate representative

Preference with respect to the assetsIt depends:

- regarding partnership property, partnership creditors have preference

-

regarding individual property, creditors are prejudiced

Rules if partners are insolventa. give to the individual/separate creditors;b. give to the partnership creditor;c. then those owing to the other partners by way of contribution

Art. 1840 Dissolution of Partnership by Change in Membershipa. a new partner is admitted;b. when a partner dies, retires, expelled or withdraws;


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c. when the other partners assign their rights to the sole remaining partner; d. when all the partners assign their rights in partnership property to third persons

Rights of creditors of dissolved partnership which is continued1. equal rights of dissolved and new partnership creditors2. liability of persons continuing business (see par. 2 and par. 1, no.4) 3. prior right of dissolved partnership as against purchaser- without a final settlement with creditors of the partnership

Why are the old creditors considered creditors of the new firm?- the reason for the law (in making creditors of the dissolved firm also creditors of the person or partnership continuing

the business) is for said creditors not to loss their preferential rights as creditors to the partnership property

Art. 1841 Retirement or Death of a partner

General Rule:- when a partner retires from the firm he is entitled to the payment of what may be due him after liquidation- but no liquidation is needed when there already is a settlement as to what the retiring partner shall receive

Art. 1842Accrual and Prescription of Partners right to account for his Interest

When right to account accrues- at the date of dissolution in the absence of any contrary agreement

Possible defendants:Action against

- winding up partners- surviving partners- person in partnership continuing the business

Prescription- begins to run only upon the dissolution of the partnership when the final accounting is done

Limited Partnership

Art. 1843 Limited Partnership

Characteristics:a. formed by compliance with the statutory requirements;b. one or more general partners control the business and are personally liable to creditorsc. one or more limited partners contribute to the capital and share in the profits but do not participate in the

management of the business and are not personally liable for partnership obligations beyond the amount of theircapital contributions;

d. the ;limited partners may ask for the return of their capital contributions under the conditions prescribed by law;and

e. the partnership debts are paid out of common fund and the individual properties of the general partners

Limited Partnership- one formed by two or more persons under the provisions of Art. 1844, having as members one ore more general

partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of thepartnership

Art. 1844 Requirements for the Formation of Limited Partnership

Presumption of General Partnership


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- a partnership transacting business is prima facie, a general partnership and those who seek to avail themselves of theprotection of the laws prevailing the creation of limited partnership must show due compliance with such laws

Requisites:a. signing under oath of the required certificate;b. filing for record of the certificate in the SEC

Effect of non-fulfillment of the requirements- then it is not considered a limited partnership but a general partnership

Effect of only aggregate contribution is stated- the law says that the contribution of each limited partner must be stated. Therefore, if the aggregate sum given by two

or more limited partners is given, the law has not been complied with.

Effect of omitting the term limited in the firm name- the law requires the firm name to have the word limited. If such is violated, the name cannot be considered the firm

name of the limited partnership.

Art. 1845Limited Partners Contribution

Rule:a. a limited partner is not allowed to contribute industry or services alone b. an industrial partner can become a general partner in a limited partnership

Art. 1846 Effect where surname of limited partner appears in partnership name

- the limited partner violating this article is liable, as a general rule, to partnership creditors without, however, the rightsof a general partner. Of course, such limited partner shall not be liable as a general partner with respect to thirdpersons with actual knowledge that he is only a limited partner.

Art. 1848 Liability of limited partner for participating in management of p[partnership

- a limited partner is liable as a general partner for the firms obligations if he takes part or interfere in the management

of the firms business.

The following do not constitute taking part in the control of the business: a. mere dealing with a customer;b. mere consultation on one occasion with the general partners

Acts constituting interference in the managementa. selection of who will be managing partners;b. supervision over a superintendent of the business of the firm

note: participation in the control of the business makes the limited partners liable as a general partner without getting the lattersrights

Art. 1849 Admission of additional limited partners

- even after a limited partnership has already been formed, the firm may still admit new limited partners, provided thereis a proper amendment to the certificate

- failure to amend the certificate does not necessarily mean the dissolution of the limited partnership

Art. 1850 Rights, powers and liabilities of a general partner

a. right of control/unlimited personal liabilityb. acts of administration/acts of strict dominion


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c. other limitations:- no power to bind the limited partners beyond the latters investment - no power to act for the firm beyond the purpose and scope of the partnership- no authority to change the nature of the business without the consent of the limited partners

Under the acts enumerated (under Art. 1850), the general partners (even if unanimous) must still get the writtenconsent of all the limited partners.

If a general partner in a limited partnership goes abroad, his capacity to bind the firm is governed by the law of theplace where the limited partnership was formed.

Art. 1851 Rights of a limited partner

Rights, in general, of a limited partner- as members of the firm, the limited partner, in order to protect his interest in the firm, has the same right to compel the

partners to account as a general partner has

Rights of a limited partnera. a limited partner necessarily has lesser rights than a general partner (as enumerated in Art. 1851) b. however, he has also the right to have dissolution and winding up by decree of court; he cannot, however, bind

the firm by a contract

Art. 1852 Status of partner where there if failure to create limited partnership

a contributor who erroneously believes he has become a limited partner and thereupon exercises the rights of alimited partner, he should not be considered as a general partner

however, he can be held liable as a general partner: - unless in ascertaining the mistake, he promptly renounces his interest in the profits of the business or other

compensation by way of income;- unless, even if no such renouncing is made, partnership creditors are not prejudiced

Art. 1853 A person may be both a general partner and a limited partner

a person may be a general and a limited partners at the same time, provided the same is stated in the certificate generally, his rights are those of a limited partner

exception:- regarding his contribution, he would be considered a limited partner, with the rights of a limited partner insofar as the

other partners are concerned

Art. 1854 Loan and other business transactions with limited partners

Right of a limited partner to lend money and transact other business with the firm a. the parties are always given preferential rights insofar as the firms assets are concerned b. while a limited partner, in the case of claims referred to in the article, is prohibited to receive or hold as collateral

security any partnership property, still he is not prohibited to purchase partnership assets which are used to satisfypartnership obligations towards third parties

Allowable transactionsa. granting loans to the partnership;b. transacting other business with it; andc. receiving a pro rata share of the partnership assets with general creditors if he is not also a general partner

Prohibited transactionsa. receiving or holding collateral security any partnership propertyb. receiving any payment, conveyance, or release from liability if it will prejudice the right of third persons


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Art. 1855 Preferred limited partners

Preference to some limited partners:- such preference must be stated in the certificate

Preference involves:- return of contribution- compensation- other matters

Art. 1856 Compensation of limited partners

For this article to apply, partnership assets must be in excess of partnership liabilities to third persons, not liabilities topartners

Art. 1857 Requisites for return of contribution of limited partner

a. all liabilities of the partnership have been paid or if they have not yet been paid, the assets of the partnership aresufficient to pay such liabilities

b. the consent of all the members has been obtained except when the return may be rightfully demanded; and

c. the certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution

Par. 1 deals with the conditions that must exist before contribution by a limited partner can be returned to him

Par. 2 deals with the time when such contributions can be returned, provided that the conditions are complied with

even if a limited partner has contributed property, he has the right to demand and receive cash in return if par. 1 is violated, previous creditors can sue, but they must allege and prove the non-existence of the conditions

Liability of a partner who has withdrawn- a limited partner who withdraws rightfully his contribution, and the certificate is amended properly, would still be liable

to previous creditors if later on the firm becomes insolvent. His contribution is to be treated as a trust fund for thedischarge of liabilities

Art. 1858 Liabilities of a limited partner

- liabilities may be waived provided the following concur:- all the other limited partners must agree- innocent third party creditors must not be prejudiced

Liabilities of a limited partnera. to the partnership- their liability is to the partnership not to the creditors of the partnershipb. to partnership creditors and other partners- see arts. 1843, 1846-48,1854,and 1844, par.2c. to separate creditors

-

see art 1862

When return of contribution a matter of righta. on the dissolution of the partnership; orb. upon the arrival of the date specified in the certificate for the returnc. after the expiration of the 6 months notice in writing given by him to the other partners if no time is fixed in the

certificate for the return of the contribution or for the dissolution of the partnership

Art. 1859 Change in the relation of limited partners


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Effect of change in the relationship of limited partners - does not necessarily dissolve the partnership. No limited par6tner, however, can withdraw his contribution until all

liabilities to creditors are paid

Substituted Limited Partner- a person admitted to all the rights of a limited partner who has died or has assigned his interest in the partnership

except only those of which he was ignorant at the time he became a limited partner and which could not be ascertained from thecertificate

- see arts. 1847 and

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