Learning Content and Objectives

Module 1-A covers:

Partnership
1. Nature and Form
2. Elements and Kinds
3. Formalities Required

This is covered by Chapter 1 of the Law on Partnership. Refer to the codal provisions and
read your annotated textbook to better understand these Lecture Notes. The legal basis (or
article numbers) are placed inside parentheses, for your reference.

For this module, the student must be able to:

a. Describe the nature of partnership and distinguish it from corporation

b. Discuss the kinds of partnerships
c. Determine the formalities required

By the contract of partnership two or more persons bind themselves to contribute money,
property or industry to a common fund, with the intention of dividing the profits among
themselves (1767.)

A partnership is a contract. The core provisions and principles of a contract also apply in a
partnership. The essential elements of a contract (consent, object, cause/consideration)
must also be present in a partnership.

From the definition of a contract of partnership, you should be able to answer the following
questions:

1. Who are the parties in a contract of partnership? Two or more persons = PARTNERS
2. What is the object/OBLIGATION of a contract of partnership? Contribute money, property,
or industry to a common fund
3. What is the cause(WHY?) or consideration in a contract of partnership? Intention of
dividing the profits among themselves. Joint interest in the profits, proportionate into their
contribution.

In a partnership:
1. There must be a valid contract;
2. There must be two or more persons who have the legal capacity to enter into a contract;
3. There must be a mutual contribution of money, property or industry to a common fund;
4. The object must be lawful; There must be an intent to engage in lawful business, trade or
profession; (1770)
5. The purpose is to obtain profits and to divide the same among the partners; joint interest
in the profits, EXC: exercise of profession (1767, 2nd par.)

Requisites / Elements of a Contract of Partnership

1. Mutual contribution to a common fund - M, P, and I
2. Joint interest in the profits

Characteristics of the Contract of Partnership

1. Juridical Person/Artificial Being (1768, 1774, 1775) - Exist due to operation of law, NOT
a natural person, but consisted with natural person.
Question: A,B, and C establish a partnership named ABC company, now how many person are
in the partnership? It consists of 4 person, 3 natural and 1 juridical person.
2. Fiduciary - Partnership exists due to fidelity or trust and confidence.
3. Consensual (1784) - GENERAL RULE: It is protected by mere consent. EXCEPTION:
Formalities of contract
4. Nominate - It has its own name.
5. Bilateral or Multilateral - It consists of 2 or more person.
6. Onerous - It is burdensome, because the obligation needed is not only to contribute money,
property, or industry.
7. Commutative - it is only joint and proportionate to your contribution.
8. Principal - It can exist by only stand-alone contracts.
9. Preparatory - It can receive and give contracts.
10. Essentially a contract of agency - they can individually represent (agent) their
partnership without other consent.
11. Capable of suit - They can sue or be sued.
12. Profit-oriented - As the definition said, “divide profit among themselves” thus, the
partnership is profit-oriented.

Kinds of Partnership

As to object: (1776, 1st par.)

1. Universal Partnership (1777, 1781)
2. Particular Partnership (1783)

As to liability of partners: (1776, 2nd par.)

1. General Partnership (1850)
2. Limited Partnership (Chapter 4)

As to the nature of contribution:

1. Capitalist partner (1808) - A partner that contributes money or property.
2. Industrial partner (1789) - A partner that contributes industry or profession.

As to exposure to public perception:

1. Secret partner
2. Silent partner
3. Ostensible partner
4. Dormant Partner

Rights of Partners
A. Principal/Property Rights(1810)
- Rights in Specific Partnership Property (1811)
- Rights to the Interest in Partnership (1812)
- Right to Participate in the Management

B. Non-principal Rights
- Right to demand reimbursement for amounts advanced to the partnership and to
indemnify for the burdens arising from risks in management (1796);
- Right to have access and to inspect partnership books (1805)
- Right to demand true and full information of all things affecting the partnership affairs
(1806)
- Right to demand a formal account of partnership affairs under the circumstances in 1809
- Right to dissolve the partnership under certain conditions.

Life of a Partnership
1. Creation/Birth (Chapter I)
2. Business Proper (Chapter II)
(Chapter III)
3. Dissolution (1828, 1829)
4. Liquidation/Winding-up
5. Termination

Requisites or Elements of Partnership

1. Mutual contribution to a common fund;

- Every partner is a debtor of the partnership for whatever he may have promised to
contribute (1786.)
- An entity must sustain their obligatory promise that they imposed, or the partnership can
take legal action on their contract(verbal negotiation)
- Duties of a contributing partner:
a. To deliver what he has promised to contribute
b. To answer for his breach of warranty - Also necessary in partnership
Example: A contributed money, B contributed space, and C contributed laptops, B suddenly
evicted the space because he’s not the owner, would he be liable?

Yes, he is liable to action for damages by the partners as he breached the warranty that was
implied not just by the law but also by partnership.
c. To answer for undelivered fruits - The accessory is also included in the contribution.

- When contribution is goods (1787) - the appraisal must be in a manner prescribed by the
partnership, in the absence of stipulation, it shall be made by experts or professionals
chosen by the partners.
- When contribution is money (1788) - if a partner tries to contribute money as his capital
and fails to comply, the partner will become debtor for the interest and damages from the
time he should have complied.
- When contribution is industry (1789) - GENERAL RULE:industrial partner cannot engage in
business for himself EXCEPTION: expressly permits him to do so.
- How much will be the contribution? (1790)

2. Joint interest in the profits → net profit (after satisfying all of the partnership liabilities)
(1770)
a. Distribution of profit derived incident to joint ownership of property (co-owners,
co-possessors (1769, no. 2) does not of itself indicate a partnership. To constitute as a
partnership, it must be derived from the operation of a business, not merely from property
ownership

Question 1: A, owner of rental property, father of B and C, an unfortunate event happen, A

died, now B and C decided to take the operation of the property and divide the profits
among them. Have A and B established a partnership?

Answer: Yes, they already contributed a property (inheritance) that has the operation of
business (Rental property) and has an interest and dividing it among them.

Question 2: B and C inherited the property that their father(A) left for them, but due to their
different circumstances, they couldn't manage the property so they decided to sell it. Have A
and B formed a partnership by selling the property?

Answer: No, there is no operation of business, not just mere property owners.

b. Mere sharing of gross returns alone does not of itself indicate a partnership (1769, no.
3) (ex. Division of harvest between tenants and landlord, gross receipts between driver and
owner of jeep: RULES OF TENANCY) - the basis of separation of profit in partnership is NET
PROFIT, not gross returns/profit.
c. GENERAL RULE: Receipt of share of profit = partner (1769, no. 4)
EXCEPTION: When the profits were received as:
- Payment of debt - Creditors can’t be considered a partner because their profit is part of
payment of DEBT.
- Payment of wages of employees - Employees can’t be considered a partner because their
profit is part of payment of WAGES.
- Payment of rent to landlord - Landlords can’t be considered a partner because their profit
is part of payment of RENTS.
- Payment of annuity to widow/representative of deceased partner - Widow can’t be
considered as a partner because the profit they accept is part of payment for their
ANNUITY.
- Payment of interest in loan - Banks can’t be considered as a partner because their profit is
part of payment of INTEREST.
-Payment/consideration of sale of goodwill or other property - Buyer can’t be considered as
a partner as their payment is a form of CONSIDERATION OF SALE, not a profit.

At the end of this section, try to answer the following questions, to test your understanding of
the concepts discussed in this section.

1. Three of the following do not prove the existence of a valid partnership. Which is the
exception:
a. The sharing of gross receipts
b. There is the intention of dividing the profits among themselves
c. Receipts by a person of a share of the profits for payment of a partnership debt by
installments.
d. When two or more persons are co-owners and they share correspondingly in the profits
made from the sale or use of their property.

2. Which of the following is considered prima facie evidence of the existence of a

partnership?
a. Where payment of interest on a loan varies with the profits of the business
b. The receipts by a person of a share of the profits.
c. The sharing of gross returns of a business.
d. Where the parties are established as co-owners of a property.

Characteristics of the Contract of Partnership

1. Juridical Person/Artificial Being (1768, 1774, 1775)

What are the juridical relations that arise from a partnership?

a. Between or among partners themselves (Chapter 2, Section 1: Obligations of the Partners
Among Themselves)
b. Between partners and the partnership
c. Between the partnership and third persons who may have contracted with it (Chapter 2,
Section 3: Obligations of the Partners with Regard Third Persons)
d. Between the partners and third persons

(See Lecture Notes on Obligations of the Partners)

2. Fiduciary

What are the incidents of a fiduciary relationship?

a. No right of succession
b. Transferee does not become a partner unless all other partners give their consent. (1813)
→ Principle of delectus personae (Choice of the person)
c. Subpartner shall not be admitted into the partnership without the consent of all the
other partners, even if the subpartner is for the managing partner. (1804)

3. Consensual (1784)

GR: Partnership begins from the moment of the execution of the contract. Being a
consensual contract, it exists from the celebration of the contract, even if no contributions
had been made yet, as long as the elements of a contract are present.
EXC: Unless otherwise stipulated by the partners. The partners may stipulate on the date
the contract of partnership shall begin to exist. They do not become partners until the
appointed time has arrived.

GR: A partnership may be constituted in any form (it can be perfected by mere consent or
agreement by the parties)
EXC: where immovable property or real rights are contributed thereto, in which case a public
instrument shall be necessary. (1771)

4. Nominate
5. Bilateral or Multilateral

6. Onerous

7. Commutative

8. Principal

9. Preparatory

10. Essentially a contract of agency

(See Lecture Notes on Management of Partnership)
11. Capable of suit
12. Profit-oriented

At the end of this section, try to answer the following questions, to test your understanding of
the concepts discussed in this section.

1. Three of the following are the effects if immovable property is contributed in a partnership
but the contract did not appear in a public instrument. Which is the exemption?
a. A partnership has no juridical personality
b. The parties may compel each other to observe the required from
c. The parties may request the return of their capital contribution
d. The contract of partnership is void

2. TRUE OR FALSE. A partnership has a juridical personality separate and distinct from that of
each of the partners.

Kinds of Partnership

As to object: (1776, 1st par.)

1. Universal Partnership (1777, 1781)
a. Of all present property (1778-79) - the partners contribute all their present property which
belongs to them, including fruits derived from the properties. It does NOT include properties
subsequently acquired by partners by way of inheritance, legacy or donation because they are
not present properties, they are not determinate and existing at the time of the constitution of
the partnership

Note: this is in the nature of a donation, thus persons who are prohibited from donating to
each other cannot enter in a universal partnership of all present property (1782)

b. Of profits (1780) - the partners contribute all that the partners may acquire by their industry
or work (commission, salary, wages); usufruct (use and fruits) shall become common
property of the partnership.

* Note: Where only the use is contributed, the risk of loss remains with the partner, because
he remains the owner of the thing (res perit, domino). If what is contributed is fungible things,
or things that cannot be kept without deterioration, or contributed to be sold, or appraised in
the inventory - ownership is transferred to the partnership, it will bear the risk of loss (1795)

2. Particular Partnership (1783)

As to liability of partners: (1776, 2nd par.)

1. General Partnership (1850) - it is a partnership where all the partners are general partners
(1850). General partners are liable even with their individual and separate properties to
partnership creditors after the assets of the firm have been exhausted. In other words, general
partners shall be liable even beyond their capital contributions.

2. Limited Partnership (Chapter 4) - it is a partnership formed by two or more persons in

accordance with the requirements of the law (1844), having as members one or more general
partners and one or more limited partners (1843). The special partners referred to as limited
partners are not liable to the partnership debts. Their liability is limited to the amount that
they have contributed or invested in the partnership.

(see Lecture notes on Limited Partnership)

As to the nature of contribution:

1. Capitalist partner (1808) - one who contributes capital (money or property)
2. Industrial partner (1789) - one who does not contribute capital but only his industry or
labor.
As to exposure to public perception:
1. Secret partner - one who participates in the profits and losses of the firm but is not publicly
known as a partner.
2. Silent partner - one who does not take any active part in the partnership business although
he may be known to be a partner. However, he shares in the profits and losses.
3. Ostensible partner - one who publicly takes active part in the business of the firm and at the
same time is publicly known as a partner.
4. Dormant Partner - one who does not take active part in the partnership business and is not
publicly known as the partner.

At the end of this section, try to answer the following questions, to test your understanding of
the concepts discussed in this section:

1. A, B, and C are partners where C as a capital partner is engaged in the same business in
which the partnership is engaged. In this situation:
a. the partnership may oust C from the partnership and at the same time avail of C's profit in
her separate business
b. the partnership may oust C from the partnership
c. the partnership may avail of C's profits in her separate business
d. the partnership has nothing to do with C since it is her right to engage in any business.

2. Which of the following is valid?

a. Oral contract of partnership where a partner contributes real property with a value less than
P3,000

b. Oral contract of partnership where the capital is P3,000 or more

c. Written contract of universal partnership of present properties between husband and wife.

d. None of them
Module 1-B covers:

Partnership
4. Rules on Management
5. Obligations of the Partners

This is covered by Chapter 2 of the Law on Partnership. Refer to the codal provisions and
read your annotated textbook to better understand this Lecture Notes. The legal basis (or
article numbers) are placed inside parentheses, for your reference.

For this module, the student must be able to:

d. Discuss the rules of management

e. Determine the obligations of partners
- To the partnership
- To the partners
- To third persons

GR: When management has not been agreed upon, all partners shall be considered agents
of the partnership. Each partner if acting in the name of the partnership can bind the
partnership (1803). The partners may execute all acts of administration. If there is an
opposition, the decision of the majority will prevail. If there is a tie, it shall be decided by
partners with controlling interest (1801). None of the partners may, without the consent of
the others, make important alterations in immovable property (an act of
ownership/dominion; 1818), even if it may be useful (1803 (2)).

EXC:

a. When a managing partner has been appointed in the Articles of Partnership (1800)
- Has all the powers pertaining to a general agent
- Can exercise al the acts of administration (not ownership), despite the opposition of his
partners, unless he acts in bad faith
- His power is generally irrevocable. It can be revoked only (1) upon showing of just and
lawful cause and (2) upon the vote of the partners representing controlling interest.

b. When a managing partner has been appointed in another instrument, aside from the (or
after the) Articles of Partnership (1800, by implication)
- His power may be revoked at any time and for any cause by the partners representing the
controlling interest. It is regarded as just a simple contract of agency (1920)

c. When two or more partners have been appointed manager (1801) - Solidary Management
- There is no specification of their respective duties
- There is no stipulation that one of them shall not act without unanimous consent of all the
other partners
- Each of the partners may separately execute all acts of administration. If there is an
opposition, the decision of the majority will prevail. If there is a tie, it shall be decided by
partners with controlling interest

d. When two or more partners have been appointed manager (1802) - Joint Management
- There is a stipulation that none of the MP shall act without unanimous consent of all the
other partners. Unanimous decision is required.
- The joint managers cannot execute and decide separately, the concurrence of all shall be
necessary for the validity of the acts, otherwise, the act shall not be binding on the
partnership.
- If one of the managers will oppose, the act will not be executed, unless there is an
imminent danger or grave or irreparable injury to the partnership.
- The absence of incapacity of one of the managers is of no moment, unanimity is still
required unless there is irreparable injury to the partnership

* Rules specific to Managing Partners:

- Obligation of MP in collecting debt (1792)
i. Two credits due and demandable (1) partnership credit and (2) personal credit of MP
ii. MP received debt payment
iii. If receipt of payment made under the name of MP, he is obliged to apply payment to both
debts, proportionately.
iv. If receipt of payment made under the name of the partnership, the payment shall be
applied fully to the partnership credit
v. Why? To prevent MP from choosing his own interest as against that of the partnership.
MP < P
vi. VS. 1793

Obligations of the Partners

a. Between or among partners themselves (Chapter 2, Section 1: Obligations of the Partners
Among Themselves)

a.1. Obligation to contribute additional capital in case of imminent loss of the business
(1791)
- EXC: if partner is insolvent; if partner is exempted from stipulation; if he is an industrial
partner
- Effect of refusal: if general partner is financially capable but refuses to contribute
additional capital to save the business venture, he is obliged to sell his interests to other
partners, for his apparent lack of interest to save the partnership.
a.2. Obligation to bring to the partnership capital his share of the partnership credit from an
insolvent debtor (1793)
a.3. Obligation to pay for damages, because of his fault or negligence (1794)
a.4. Obligation to keep partnership books (1805)
a.5. Obligation to render on demand true and full information of all things affecting the
partnership (1806)
a.6. Obligation to account to the partnership and hold as trustee any profit or commission
(1807); right of partner to formal account (1809)

b. Between partners and the partnership

b.1. The partnership must refund amounts disbursed by any partner in behalf of the
partnership, plus corresponding interest from the expenses are made (1796, 1st sentence)
b.2. The partnership shall answer to each partner for the obligations he may have
contracted in good faith in the interest of the partnership business (1796, 2nd sentence)
c. Between the partnership and third persons who may have contracted with it (Chapter 2,
Section 3: Obligations of the Partners with Regard Third Persons)
c.1. Rules on Partnership/Firm Name (1815)
- Third persons who include their name in the firm name shall be liable as partner (partner
by estoppel, 1825), but is not entitled to the rights of a partner
c.2. All partners, including industrial partners, shall be jointly liable to third persons, after
exhaustion of partnership property. (1816)
- Losses (as between or among partners) vs Liabilities (to third persons)
- IL is exempt from losses (1797) but not liabilities. If IL contributed his share, he may ask
reimbursement from the capitalist partners, unless otherwise agreed upon.
- Can a partner, by contract or stipulation, exempt himself from liability to third persons?
Such stipulation is void as to third persons, but valid among partners (1817)
c.3. The partnership shall be liable for acts of partners (1818)
- Acts of administration or acts for apparently carrying on in the usual way the business of
the partnership
GR: Every partner is an agent of the partnership. Act is binding on the partnership.
EXC: 1. Acting partner has in fact no authority; AND
2. The third person knows that the acting partner has no authority
- Acts of ownership or strict dominion
GR: Acts of ownership will not bind the partnership
EXC: 1. The act is authorized by all of the partners; OR
2. The partners have abandoned the business; OR
3. Acts is in contravention of a restriction on authority; OR
4. The third person knows that the acting partner has no authority
c.4. Rules on transfer/conveyance of real/immovable property (1819)
Par. 5. If the RP is registered in the name of all partners, and conveyed in the name of all
partners, it will pass title to the buyer.

c.5. Admission or representation of partner can be used as evidence against the partnership
(1820), provided:
- Admission concerns partnership affairs
- Admission is made within the scope of his authority, by a current partner
c.6. Notice to any partner, while already a partner, about partnership affairs, is notice to the
partnership. Notice to one partner is considered a sufficient and effective notice to the
partnership. Knowledge of a partner is also knowledge of the partnership. (1821)
c.7. When a partner who commits a crime or quasi-delict, in the ordinary course of business
or with authority, the partner and the partnership shall be solidarily, vicariously, civilly liable
to the third person who suffered the injury, loss, or damage (1822, 1824). The innocent
partner who were made liable solidarily with the offending partner can seek recovery
against the latter, with interest.
c.8. If loss is suffered by the third person who delivered money or property to a partner or
partnership, the partnership and the partners shall be solidarily liable. (1823, 1824)
c.9. Liability of newly-admitted partner
- Obligations before his admission - he shall be liable but only up to the extent of his capital
contribution. His separate properties will not be reached by partnership creditors. Why
liable? The incoming partner partakes the benefit of the partnership property and an already
established business.
- Obligations after his admission - he is liable as an ordinary original partner. As general
partner, he can be liable beyond his capital contribution

4. Between the partners and third persons

GR: Persons who are not partners as to each other, are not partners as to third persons
(1769, no. 1)
EXC: Partnership by estoppel (1825)
If A and B are not partners, BUT B represents to X, a third person, that A and B are partners,
in the presence of A and without A’s objection, then the law considers A and B as partners
to X, although they are not actual partners