Partnership - Chapter 2 - Section 1 PDF

Partnership: Chapter 2: Section 1 -Obligations of of Partners among Themselves Relations created by a Contract of Partnership a. Relations among partners themselves b. Relations of the partners with the partnership c. Relations of the partnership with third person with whom it contracts...

Partnership: Chapter 2: Section 1 -Obligations of of Partners among Themselves Relations created by a Contract of Partnership a. Relations among partners themselves b. Relations of the partners with the partnership c. Relations of the partnership with third person with whom it contracts d. Relations of the partners with such third persons Commencement of a Partnership (Article 1784) A. General Rule - From the moment of celebration of the contract (consensual) - In case of limited partnership: it must be first registered to SEC - Article 1771-1773 B. Exception - When there is a contrary stipulation that the partnership is to be formed at some future time or on the happening or fulfillment of some condition of future contingency. (resolutory, suspensive) Duration of a Partnership (Article 1785) - A partnership is unlimited as to its duration in the sense that no time limit is fixed by law (partnership at will). The duration may be agreed upon – expressly, when there is a definite period or impliedly, as when a particular enterprise is undertaken – it being understood that the firm ends as soon as its purpose has been achieved. (partnership at fixed term) OBLIGATIONS OF THE PARTNERS Obligations of the Partners among Themselves and to the Partnership (Article 1786) 1. Duty to Contribute - The contribution must be made ordinarily at the time the partnership is entered into, unless a different period is stipulated. - Failure to contribute would make the partner automatically liable as a debtor of the partnership and in default even without the demand. 2. Duty to Warrant against Eviction - The warranty in case of eviction refers to specific and determinate things already contributed. 3. Duty to Deliver Fruits - A partner shall be liable to deliver the fruits thereof from the time they should have been contributed to the time of actual delivery, without the need of any demand. 4. Duty to Preserve Property - The partner must exercise due diligence in preserving the property to be contributed, before he actually contributed the same otherwise, he can be held liable for losses and deterioration. (In relation to Article 1163) 5. Duty to Indemnify for Damages - Damages in case the contribution is retained without justifiable reason or contribution is delayed. (In relation to Articles 1170 and 1788) RULES REGARDING CONTRIBUTION Extent of Contribution (Article 1790) - Contribution shall be in equal shares unless so stipulated. In the absence of proof, the shares are presumed equal (commutative) Appraisal of Goods - Necessary to determine how much has been contributed by the partners in order to determine the share of each partner in the profits and losses in proportion to what he has been contributed to the absence of any stipulation to the contrary. How Appraisal is made (Article 1787) a. As prescribed by the contract of partnership b. In default of the first, by experts chosen by the partners; and at current prices. Duty to Indemnify for Interest and Damages (Article 1788) - In cases when there is failure to contribute or in cases when a partner takes money from the partnership coffers (funds) - The guilty partner is liable for both interest and damages from the time he should have complied with his obligations or from the time he converted the amount to his own use. Obligations with Respect to Contribution of Money and Money Converted to Personal Use (Article 1788) A. To contribute on the date due the amount he has undertaken to contribute to the partnership B. To reimburse any amount he may have taken from the partnership coffers and converted to his own use. C. 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 to his own use D. 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. Duty to Contribute Additional Capital (Article 1791) - In case of imminent loss of the business and there is no contrary agreement, a capitalist partner is obliged to give additional contributions to save the business. If he refuses to contribute, he shall be obliged to sell his interest to the other partners. Duty to Bear Risk of Loss - Before delivery of the thing to be contributed by a partner, the risk of loss is borne by the partner. (Articles 712,1164, 1262, and 1263) Rules Regarding Risk of Loss of Things Contributed or Delivered A. Specific and determinate things which are not fungible where only the use is contributed. - The risk is borne by the partner because he remains the owner of the thing - “res perit domino” – “the thing perishes with the owner” - if the object is destroyed it is as is the partner did not contribute anything B. Specific and Determinate Things the Ownership of which Transferred to the Partnership - The risk is for the account of the partnership, being the owner. C. 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 evidently the ownership was being transferred since use is impossible without the things being consumed or impaired. D. Things Contributed to be Sold  - The partnership bears the risk of loss for there cannot be any doubt that the partnership was intended to be the owner. E. 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 without an appraisal in the inventory DUTY NOT TO ENGAGE IN ANY BUSINESS (Article 1789) – industrial partners - An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so. Consequently, if he engages in business for himself, such an act is considered prejudicial to the interests of the other partners. Effect of Violation (Article 1789) a. The capitalist partner, even industrial ones, can exclude said partner from the firm. b. The partnership can avail themselves of the benefits from the illegal business. c. The partnership has a right to damages in either case DUTY TO CREDIT PAYMENT TO PARTNERSHIP Duty of the Managing Partner to Credit to the Partnership, Payment made by a debtor who owes him personally and the Partnership (Article 1792) - When a debtor is separately indebted to the partnership and to the managing partner, any sum received by the managing partner shall be applied to the two credits pro rata except when such sum was received for the account of the partnership, in which the whole sum shall be applied to the partnership credit only. - The interest of the partnership (paramount) comes first before the partners personal interests Duty of a Partner to Share with the other Partners, the Share of the Partnership Credit, which He has Received from an Insolvent Debtor. (Article 1793) - The article applies whether the partner has received his share wholly or in part. DUTY TO PAY FOR DAMAGES Duty to Pay for Damages caused by his fault (Article 1794) - Every partner is responsible for the partnership for damages suffered by it through his fault, and he cannot compensate them with the profits and benefits of which he may have earned for the partnership by his industry. - The courts may mitigate or lessen the liability for damages if through extraordinary efforts, unusual profits were realized. 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 to be at fault. b. Since both are duties, compensation should not take place, the partner being the debtor in both instances. Compensation requires two persons who are reciprocally debtors and creditors of each other. DUTY OF PARTNERSHIP TO PARTNERS 3 Duties of the Partnership to the Partners (Article 1796) 1. Duty to Refund - The partnership has the duty to refund amounts disbursed on behalf of the firm plus legal interest from the time expenses were made. 2. Duty to Answer for Obligation or Give Effect to Contracts - The partnership is obliged to recognize or give effect to contracts entered by a partner in good faith in the interests of the partnership business with the authority from the partnership 3. Duty to Answer for Risks - There are risks as a consequence of the management of the partnership PROFITS AND LOSSES Rules in Distribution of Profits (Article 1797) 1. According to agreement subject to Article 1799 2. If there be no such agreement: a. The share of each capitalist partner shall be in proportion to his capital contribution b. The industrial partner shall receive such share as may be just and equitable under the circumstances. Rules in Distribution of Losses (Article 1797) 1. According to agreement – as to losses (but not iniquitously) subject to Article 1799) 2. If there be 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 liable for losses. 3. If the be no profit-sharing stipulated in the contract, the losses shall be borne by the partners in proportion to their capital contribution, but the purely industrial partner shall not be liable for the losses. Designation by Third Person of Shares in Profits and Losses (Article 1798) - May be made by common consent of the partners. The designation cannot be made in favor of one partner. When Designation by a Third Party may be Questioned (Article 1798) - When it is manifestly inequitable Exception: When designation by a third party cannot be questioned even if manifestly inequitable a. If the aggrieved party has already begun to execute the decision. b. If he has impugned the same within a period of 3 months from the time, he had knowledge thereof and not from the time of making of the designation Exclusion from Profits and Losses (Article 1799) General Rule: - The law does not allow a stipulation excluding one or more partners from any share in the profits and losses because the partnership must exist from the common benefit and interest of all partners. Even if such stipulation is void, the partnership still valid and such stipulation will be disregarded. Exception: - The case of an industrial partner whom the law itself excludes from the losses (Article 1797). This is without prejudice to the rights of third persons (Article 1817)  - An industrial partner is exempted in losses, but not in liability. However, he can ask for reimbursement from the capitalist partners. MANAGEMENT OF A PARTNERSHIP Right and Duty to Manage Partnership - Each partner has a right to an equal voice in the conduct of the partnership business and this right is not dependent on the amount of the partner’s capital. The partners also have a duty to manage the partnership. 2 Distinct Cases of Appointment (Article 1800) I. Appointment as Manager in the Articles of Partnership - The partner appointed by common agreement in the articles of partnership. - To remove a managing partner, there must be a just and lawful cause and vote of the controlling financial interest. II. Appointment as Manager after Constitution of the Partnership or Orally - Appointment is a mere delegation of power, revocable at any time. Extent of Power of a Managing Partner General Rule: - A partner appointed as manager has all the necessary and incidental powers to carry out the object of the partnership in the transaction of its business. Exception: 1. When the powers of the manager are specifically restricted or expressly withheld 2. Managing partners cannot also exercise powers which are neither necessary nor incidental to carry out the object of the partnership 2 or More Managers whose Duties are Unspecified and Unanimity is not required (Article 1801) - Each managing partner may separately perform acts of administration Rules In Case of Opposition - Only managing partner has the right to oppose - Opposing is not applicable when there is specification of duties 1. If one or more of the managing partners shall oppose the acts of others, then the decision of the majority (per head) of the managing partners shall prevail. Note that the right to oppose can be exercised only by those entrusted with the management of the partnership and not by any partner. 2 or more Managers where Unanimity is Required (Article 1802) General Rule: - Unanimity is required even if one of the managers is absent or incapacitated as it is not an excuse - To do any action, you have to get consent of all of managing partners Exception: - When there is imminent grave danger or irreparable injury to the partnership, a partner may act alone without the consent of the partner who is absent or under disability without prejudice to the former’s liability for damages under Article 1794 Rules when the Manager of Management has not been agreed upon (Article 1803) 1. All partners are considered managers - All of them shall be considered managers and agents (Article 1818) and whatever any one of them may do alone shall bind the partnership subject, however, to the provision of Article 1801  2. Unanimous consent required for any important alteration in Immovable Property of Partnership - Unanimous consent of all the partners is necessary for any important alteration in the immovable property of the partnership ASSOCIATE Right to Appoint an Associate (Article 1804) - A partner may associate another person with him in his share. The associate does not acquire the rights of a partner, nor he is liable for its debts. Duty to Admit Associate - The partnership must admit the third person as an associate PARTNERSHIP BOOKS Right to Inspect and Copy Partnership Books (Article 1805) - The partnership books should be kept at the principal place of business and subject to inspection during reasonable hours. - Reasonable hours should be on business days throughout the year, and not merely during some capricious or arbitrary period selected by the managers - Each partner has a right to inspect and copy the partnership books Duty to Keep Partnership Books (Article 1805) - The duty to keep true and correct books showing the firm’s accounts, such books being at all times open to inspection of all members of the firm, primarily rests on the managing or active partner INFORMATION Duty to Give Information (Article 1806) - There must be no concealment between the partners in all matters affecting the firm’s interest. This is required by good faith. Thus, this duty to give on demand “true and full information” Who can Demand Information (Article 1806) 1. Any partner 2. Legal representative of a dead partner 3. Legal representative of any partner under legal disability FIDUCIARY DUTIES Fiduciary Duties (Article 1807) 1. Duty to act for common benefit - It is the obligation of a partner to act for the common benefit of all in all transactions relating to the partnership business or affairs. 2. Duty to account for secret and similar profits - A partner who makes a secret profit out of the operation of the partnership, or who accepts a secret commission from a third person dealing with the partnership, is duty bound to account such profit or commission with other partner. 3. Duty to account for earnings accruing after termination of partnership - The duty of a former partner to share profits with his former associates may extend to earnings accruing after the termination of the partnership. 4. Duty to make full disclosure of information affecting partnership  - A partner cannot, to the detriment of the other partners, apply exclusively to his own benefit the results of the knowledge and information gained in the character of partner. DUTY TO NOT ENGAGE IN UNFAIR COMPETITION Duty to not engage in unfair competition with his own firm (Article 1808) - A capitalist partner is prohibited from engaging in his own account in any operation “which is one of the kinds of business in which the partnership is engaged” (same or similar business that may result in competition) (2 Blanco 426). The competition may become unfair in view of the knowledge by the capitalist partner of the firm’s business secrets (2 Blanco 426). - Capitalist partner business which is not the partnership’s business (1789) because of conflict in interest - A capitalist partner can engage in another business as long as it is not in the same kind or nature) Effect of Violation 1. The violator shall bring to the partnership all the profits illegally obtained 2. He shall bear all the losses 3. The violator can be ousted from the firm on the ground of lost of trust and confidence, particularly if the violation is repeated after due warning. This would not of course result in the dissolution of the firm. FORMAL ACCOUNT Right to Demand a Formal Account (Article 1809) General Rule - No formal accounting is demandable until after the dissolution because after all there is access to the books. Exception (WAPO) 1. If he is wrongfully excluded from the partnership business or possession of its property by his co-partners 2. If the right exists under the terms of agreement 3. As provided by Article 1807 as when a partner has derived profits from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. 4. Whenever other circumstances render it just and reasonable