Law on Partnership by Hector De Leon (Summary) PDF

lOMoARcPSD|43131314 Law on Partnership by Hector De Leon (Summary) Business (Gordon College (Philippines)) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university...

lOMoARcPSD|43131314 Law on Partnership by Hector De Leon (Summary) Business (Gordon College (Philippines)) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 Chapter 1 – General Provisions Article 1768 The partnership has a juridical personality separate Article 1767 and distinct from that of each of the partners, even in By the contract of partnership two or more persons case of failure to comply with the requirements of article bind themselves to contribute money, property, or 1772, first paragraph. (n) industry to a common fund, with the intention of dividing the profits among themselves.  Example Two or more persons may also form a partnership - If A and B form a partnership with X & Co., the property for the exercise of a profession. (1665a). of X & Co. is not A & B’s property and likewise, A & B’s property is not X & Co.’s.  NOMINATE - Since X & Co is a juridical entity, it can acquire any - There is a name given by the law property since the partners are merely agents. - Contract of Partnership: CONSENSUAL (meaning it is - Thus the obligations of X & Co are not those of A & B’s. perfected by both parties) - The partnership of X & Co can file against A & B and be  PERSONS sued by A & B, likewise, if a third party sues X & Co., A - Includes not only natural persons but also JURIDICAL & B are not affected. persons. A corporation may NOT be a partner but it may - The partnership will still be a juridical entity even without engage in JOINT VENTURES. compliance with A1772.  BIND THEMSELVES - If X & Co. is exempted from certain things, it does not - Must be capable and competent, meaning, the following follow that A & B are included. may are not included:  Consequences of being a Juridical Person 1. Minors - Can sue and be sued 2. Emancipated Minors - Acquire any kind of property 3. Those under civil interdiction – accessory penalty of - Insolvency of a partnership does not mean that the being convicted of crimes partners themselves are insolvent. 4. Insane persons 5. Incompetent persons (see oblicon notes) Article 1769 - HOWEVER, if the person is only a SUSPECT, he may In determining whether a partnership exists, these still bind himself into a contract since there is no final rules shall apply: verdict yet. (1) Except as provided by article 1825, persons who are  TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY not partners as to each other are not partners as to - Makes the contract onerous since this is MUTAL and third persons. ALL must give either one of the above (2) Co-ownership or co-possession odes not of itself - Examples: establish a partnership, whether such co-owners or 1. A and B create a partnership with a promise of co-possessors do or do not share any profits made contributing P10,000 each in cash. A gave his share by the use of the property while B gave a check worth P10,000. Is the (3) The sharing of gross returns does not of itself issuance a contribution of money? establish a partnership, whether or not the persons No, unless the check is encashed. sharing them have a joint or common right or 2. Considering the same information above but with B interest in any property from which the returns are contributing P10,000 in equivalent dollars. derived No, the contribution must be made using the legal (4) The receipt by a person of a share in the profits of a tender, in this case, Philippine pesos. business is prima facie evidence that he is partner - Property contributed may be movable, immovable or in the business, but no such inference shall be intangible property. (Ex: equipment, land, patents, etc.) drawn if such profits were received in payment: - If the partnership did not contribute money or property, (a) As a debt by installments or otherwise; then industry was contributed. (b) As wages of an employee or rent to a landlord - Note: Contributions may differ for each of the partners. (c) As an annuity to a widow or representative of a  TO A COMMON FUND TO DIVIDE PROFITS AMONGST deceased partner EACH OTHER (d) As interest on a loan, though the amounts of - The primary objective of partnerships is to make profits. payment vary with the profits of the business Sharing profits need not be equal. (e) As consideration for the sale of a goodwill of a - Sharing ratios are determined by the partner’s business or other property by installments or agreement, and if there was no agreement, then the otherwise. (n) ratios will be based on the ratio of the partners’ contributions.  Provides the rule in determining partnerships - Sharing ratios for losses will be the same as the sharing  Example for (1) ratios for profits. - If A & B say PUBLICLY that they are not partners, then - The industrial partner shall NOT share in losses. according to A1825, if they told C that they are and C - The industrial partner is exempt only to the partners but enters into a contract of partnership with them, then A not to 3rd parties without prejudice to his right. A1816 and B are in a PARTNERSHIP OF ESTOPPEL.  CONSENT (DELECTUS PERSONAE)  Example for (2) - You can’t join a partnership without the consent of ALL - If A & B inherited land from their parents and partners. subsequently leased the land out for P50,000/month, Why? then it can be said that they share profits, but are they in Because the partnership will need to be dissolved a partnership? before you are admitted and a new partnership will be No, they are merely co-owners. The P50,000 profit is made in its place. merely incidental and besides, it was not derived from BUSINESS OPERATIONS. Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 - If they bought the land for P1,000,000 each to build a  Can a partnership be created orally? house but instead opted to sell it for P2,500,000 then Yes. A partnership may be constituted in any form (as stated they have a profit of P500,000 but are they partners? in Article 1771) No, because even if there was a profit of P500,000, this  Partnerships are not covered by the Statute of Fraud since is merely incidental to the sale and not from business these are not necessarily required to be in writing (contract operations of A&B. of partnership can be in any form) - If the land was instead used to build an apartment that  If immovable property and/or real rights are contributed to is rented out? the partnership, then the contract must be in a public Yes, because A & B share profits from RENTING, this instrument (notarized documents) can be considered as ordinary business operations.  In order to bind 3rd persons, the transfer of OWNERSHIP of  Example for (3) immovable property MUST BE REGISTERED with the - If a person owns a big tract of land for planting rice and REGISTRY OF PROPERTY in the province or city where the entered into an agreement with a farmer that they will property is located divide the harvest, is the farmer partners with the owner  The article shows that partnerships can be perfected by of the land? MERE CONSENT. No because of the following reasons: (1) The farmer had no contribution Article 1772 (2) The farmer has no say in the disposition of the land Every contract of partnership having a capital of (3) The farmer has no say in management P3,000.00 or more, in money or property, shall appear in a (4) In case of loss, the owner shall carry the entire public instrument, which must be recorded in the office burden and the farmer need not pay anything of the Securities and Exchange Commission.  Example for (4) Failure to comply with the requirements of the - A partnership borrowed P50,000 and instead of giving preceding paragraph shall not affect the liability of the the creditor a specific amount to be repaid, they agreed partnership and the members thereof to third persons. (n) that the creditor will receive 1% of the partnership’s annual gross profit. Is the creditor a partner?  If the partnership’s capital is P3, 000.00 or more (in any No because the receipt of share in net income happens form), it must be in a public instrument, recorded with the to be because of an existing debt. SEC and note that property referred to here is MOVABLE  To determine whether a person is a partner: since immovable property is covered by Article 1771. (1) Required contribution  Failure to comply with the requirements of Article 1772 will (2) Say in management not affect the liability of the partnership to 3rd persons. (3) Share in losses  Isn’t this inconsistent with Article 1358? No, remember that in Article 1358, if the contract terms Article 1770 exceed P500.00 then the contract must be in writing. A partnership must have a lawful object or purpose, This is merely for purposes of convenience and not and must be established for the common benefit or validity or enforceability of the law. Also note that interest of the partners. according to Article 1768, the partnership will still be When an unlawful partnership is dissolved by a valid and have a juridical entity. judicial decree, the profits shall be confiscated in favor  How do we reconcile this with Article 1358 and 1357? of the State, without prejudice to the provisions of the Article 1358 is for purposes of convenience and not for Penal Code governing the confiscation of the validity or enforceability of the law. instruments and effects of a crime. (1666a) Article 1357 states that contracting parties have the right to compel each other to place the contract into writing.  The partnership must have a lawful object or purpose  Purpose of Registration: - Lawful object refers to CAPITAL (1) Condition for obtaining a license to engage in business - Lawful purpose refers to the BUSINESS itself and in trade  There must be common interest and benefit (2) 3rd persons want proof that the partnership is existent,  Unlawfulness of the partnership will cause it to be dissolved who the partners are and what the capitalization is and profits shall be confiscated before they enter into contracts/engage in business.  Example of unlawful purpose: (3) The government requires this so that tax liabilities may - GAMBLING not be avoided (BIR) A & B are partners where A contributed P100,000 in  Failure to comply with the Article’s requirements will not cash and B contributes gambling paraphernalia. They prevent the formation of the partnership were raided and the gambling paraphernalia was  The Statute of Fraud will only apply if there was an confiscated. Can the P100,000 also be confiscated? agreement made by the contracting parties No because the P100,000 was not the reason for the  Example: crime in anyway. The state is therefore required to A and B promise to contribute to their partnership money return this amount to A. worth P10,000.00 each within one year from their  Legal effects of a Judicial Dissolution agreement. A contributes early but when the time comes for - Partnership is considered void from the beginning B to contribute his share, he refuses to do so. Can A compel - Profit and instrument of the crime is confiscated B to give his contribution? - The only returnable items are those that were never No, A cannot compel B to pay his contribution to the related to or connected with the crime committed partnership. Why? Article 1771 Because the contract/agreement between the two parties A partnership may be constituted in any form, was purely ORAL and never really written, and it has already except where immovable property or real rights are been one year since they agreed to their contract terms. contributed thereto, in which case, a public instrument shall be necessary (1667a) Article 1773 Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 A contract of partnership is void, whenever (b) Universal Partnership of All Profits – defined in immovable property is contributed thereto, if an Article 1780 inventory of said property is not made, signed by the (c) Particular Partnerships – defined in Article 1783 parties and attached to the public instrument. (1668a) (2) As to the Liability: (a) General – general partners are liable PRO-RATA  Refers specifically where one or both of the parties and subsidiarily, sometimes solitarily, with their own contribute immovable property. The requirements are: property/assets if the partnership is insolvent. (may (1) The contract must be in a public instrument include industrial partners) (2) An inventory of the immovable property must be made, (b) Limited – limited partners are liable only up to the signed by BOTH parties and attached to the public extent of their contribution instrument, otherwise the partnership is VOIDED. (3) As to Duration:  Actual Case in Applying Article 1773: (a) At will – no particular undertaking, can be dissolved A and B agree to form a partnership engaging in a fish pond at any time business where both partners will contribute cash; the cash (b) With a Fixed Term – may only be dissolved upon is later used to buy land that is converted into a fish pond. C the end of its term unless continued by the partners comes along and points out that the partnership is void (4) As to Legality of Existence: because no inventory of the land was made. Is the (a) De Jure – complied with ALL requirements partnership really void? (b) De Facto – failed to comply with ALL requirements No, the partnership is not void because according to the (5) As to Representation to Others: Supreme Court, Article 1773 need not apply since the land (a) Ordinary/Real – actually exists was BOUGHT from the CASH CONTRIBUTION. (b) Ostensible/by Estoppel – exists only to partners Suppose a partnership contributes immovable property but (6) As to Publicity: does not conduct an inventory and enters into a contract with (a) Secret – some partners are not known to the public A. The partnership does not fulfill its obligation to A and A (b) Open/Notorious – all partners are known to the sues the partnership. Was A right in suing the partnership? public No, since the partnership was void from the beginning. A (7) As to Purpose: should instead file against the “partners” themselves. They (a) Commercial/Trading – business transactions will be sued under the legal basis of them being partners by (b) Professional/Non-Trading – exercise of professions estoppels, as stated in Article 1825.  Kinds of Partners: If A wishes to be in a partnership with B and promises to (1) Under the Civil Code: contribute land but subsequently sells the same plot to C, (a) Capitalist – contributes money/property who immediately registers the transfer, who owns the land? (b) Industrial – contributes industry C owns the land because A never registered the transfer. (c) General – liability extends to personal assets  Estafa: when the owner of a property sells the same to two (d) Limited – liability up to contribution only or more different persons. (e) Managing – manages the partnership (f) Liquidating – responsible during dissolution Article 1774 (g) By Estoppel – not really a partner Any immovable property or an interest therein may (h) Continuing – continues business after dissolution be acquired in the partnership name. Title so acquired (i) Surviving – remains after partner’s death can be conveyed only in the partnership name. (n) (j) Sub-partner – contracts with partners, Article 1804 (2) Other Classifications:  Being a juridical entity, a partnership can acquire property (a) Ostensible – active, known to the public and subsequently become its owner. (b) Secret – active, unknown to the public (c) Silent – inactive, known to the public Article 1775 (d) Dormant – inactive, unknown to the public Associations and societies whose articles are kept (e) Original – member at time of organization secret among members, and wherein anyone of the (f) Incoming – about to become a member members may contract in his own name with third (g) Retiring – about to withdraw persons, shall have no juridical personality and shall be governed by the provisions relating to co-ownership. Article 1777 (1669) A universal partnership may refer to all the present property or to all the profits. (1672)  There is no juridical entity since the members can contract with 3rd persons in their own name without binding others. Article 1778  In a partnership: A partnership of all present property is that in which (1) The partners are merely agents who cannot act alone the partners contribute all the property which actually (2) Articles of Partnership are known to ALL partners AND belongs to them to a common fund, with the intention of to the GENERAL PUBLIC. dividing the same among themselves, as well as the profits which they may acquire therewith. (1673) Article 1776 As to its object, a partnership is either universal or Article 1779 particular. In a universal partnership of all present property, the As regards to the liability of the partners, a property which belongs to each of the partners at the partnership may be general or limited. (1671a) time of the constitution of the partnership becomes the common property of all the partners, as well as all the  Classifications of Partnerships: profits which they may acquire therewith. (1) As to the Object: A stipulation for the common enjoyment of any (a) Universal Partnership of All Present Property – other profits may also be made; but the property which defined in Article 1778 the partners may acquire subsequently by inheritance, Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 legacy or donation cannot be included in such get to retain ownership over the property that they stipulation, except the fruits thereof. (1674a) contribute.  Why is the universal partnership of all present property not Article 1782 popular in the Philippines? Persons who are prohibited from giving each other  Property owned at the time of contribution will become any donation or advantage cannot enter into a universal common property of the partnership eventually because only partnership. (1677) the profits acquired through the contribution will become common property, unless there was a stipulation that says  A husband and wife cannot join a universal partnership. otherwise. - They are not allowed to donate to each other and a  Example: universal partnership essentially requires that the A and B form a Universal Partnership of All Present Property partners donate to each other. and stipulate that property and profits that are acquired - They can join a particular partnership instead. during business operations will become common property  A partnership formed in violation of this article shall be null even if these were not due to their contributions and that if and void. It shall not have any legal personality either. anyone inherits property, it will become common property as  Illustrative Case: well. A acquires land as part of his compensation package A, B and C form a partnership to engage in the importation, from AyalaLand and B inherits land from his parents. Whose marketing and operation of automatic phonographs, radios, property will become common property? television sets, amusement machines and their parts Only A’s land will become common property because it was accessories, with B and C as limited partners. Subsequently, essentially PAYMENT while B’s was inherited. The article A and B got married and thereafter, C sold his share to A and prohibits donations to become common property, only fruits B for a nominal amount. Was the partnership dissolved after of such can become common property. the marriage of A and B and C’s sale to them of his share in  In a partnership, contributions must be determinate/certain the partnership? and partners are akin to donors. Donations cannot No, the firm was not a universal partnership but a particular comprehend future property but profits can be stipulated. one.  Pertinent Legal Provisions Article 1780 (1) Article 87: Every donation or grant of gratuitous A universal partnership of profits comprises all that advantage, direct or indirect, between spouses during the partners may acquire by their industry or work their marriage, valid or not, shall be void except during the existence of the partnership. moderate gifts which the spouses may give each other Movable or immovable property which each of the on the occasion of any family rejoicing. partners may possess at the time of the celebration of (2) Article 739: The following donations shall be void: the contract shall continue to pertain exclusively to (a) Those made between persons who were guilty of each, only the usufruct passing to the partnership. adultery or concubinage at the time of the donation (1675) (b) Those made between persons found guilty of the same criminal offense, in consideration thereof  Example: (c) Those made to a public officer or his wife, Suppose A and B form a Universal Partnership of All Profits descendants and ascendants by reason of his and A wins in the lotto, P100,000.00. B tries to share in 50% office citing the existence of their partnership and that A used the partnership’s money to purchase the lottery ticket. Can B Article 1783 really share in the lotto winnings? A particular partnership has for its object No, B cannot since it came from CHANCE, not WORK. determinate things, their use or fruits, or a specific If the P100,000.00 instead came from A’s work in DLSU, can undertaking, or the exercise of a profession or vocation B share in the profits of A? (1678) Yes, because it came from WORK.  As long as it is PROFIT, the profit becomes common  Defines what a particular partnership is property to the partners UNLESS there was a stipulation in  Particular partnerships are those that are: their agreement - Neither a universal partnership for all present property  If A and B form a Universal Partnership of All Profits for a nor a universal partnership for all profits Taxi-Cab business and both contribute vehicles that will - Example: Those that are formed for the acquisition and serve as the taxi, what they were actually contributing is the sale of property, Accounting Firms, Law Firms, etc. USE or the RIGHT TO USE their vehicles. Upon dissolution, - Popular because it is easy to join the vehicles will be returned to them since there was never a transfer of ownership. Chapter 2 – Obligations of the Partners  Unique feature of the Universal Partnership of All Profits: - The partners retain the title of ownership. Section 1 – Obligations of the Partners amongst Themselves Article 1781  Relations created by a contract of partnership Articles of Universal Partnership, entered into (1) Relations among the partners themselves without specification of its nature, only constitute a (2) Relations of the partners with the partnership universal partnership of profits (1676) (3) Relations of the partnership with third persons (4) Relations of the partners with third persons  If the articles of universal partnership are doubtful or unclear then the presumption is that it is a universal partnership of all Article 1784 profits. A partnership begins from the moment of the - Because a universal partnership of all profits require execution of the contract, unless it is otherwise less obligations and is less onerous since the partners stipulated. (1679) Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 for the fruits thereof from the time they should have  Partnership is perfected by mere consent and if ALL the been delivered, without the need of any demand. (1681a) requirements are met  Notwithstanding the fact that the partners have not given Article 1787 their contributions yet When the capital or a part thereof which a partner is  Example: bound to contribute consists of goods, their appraisal A and B agree to form a partnership that will begin on must be made in the manner prescribed in the contract December 1 and upon the arrival of certain machinery of partnership, and in the absence of stipulation, it shall needed by the business. In this situation, are A and B in be made by experts chosen by the partners, and already in a partnership? according to current prices, the subsequent changes As long as the agreement remains executory, then A and B thereof being the account of the partnership. (n) are NOT partners therefore there is no partnership yet.  Partners may agree to form a partnership to take effect in Article 1788 the future A partner who has undertaken to contribute a sum  Example: of money and fails to do so becomes a debtor for the A and B agree to form a partnership 1.5 years later, with interest and damages from the time he should have contributions of P100,000.00 each. A contributes his share complied with his obligation. early but when the time comes for B to contribute his share, The same rule applies to any amount he may have he refuses and says he no longer wants to partake in the taken from the partnership coffers, and his liability shall partnership. Can A compel B to contribute his share to the begin from the time he converted the amount to his own partnership? use. (1682) NO. Because they cannot enforce the contract since it was perfected 1.5 years ago and the contract was only oral.  Suppose A, B and C are partners. A promises to contribute a Since the contract was for 1.5 years, it was greater than 1 RED CAR, B promises to contribute GOODS WORTH year and should have been written instead. P50,000.00 and C promises to contribute P50,000.00 IN  The Statute of Fraud does not usually apply but to some CASH on October 2011. On October 2011, none of them particular cases such as the example above, it will. comply. What happens?  If the contribution is immovable property, comply with Article A, B and C thus become debtors to the partnership. 1773 otherwise the partnership will be void.  Suppose B and C contribute their parts but A does not. Can B and C ask for the recission or annulment of the contract? Article 1785 NO. If one of the partners fails to comply with his When a partnership for a fixed term or particular requirements, then the others can request for specific undertaking is continued after the termination of such performance with damages from the defaulting partner A. term or particular undertaking without any express  What are the obligations of A before October 2011? agreement, the rights and duties of the partners remain (1) To contribute what he promised the same as they were at such termination, so far as is (2) To be held liable to answer for eviction if the partnership consistent with a partnership at will. is deprived of his contribution A continuation of the business by the partners or (3) To take care of the contribution with the diligence of a such of them as habitually acted therein during the term, good father of a family. without any settlement or liquidation of the partnership  Suppose A leased the car out and gets it back by December affairs, is prima facie evidence of a continuation of the 2011. partnership. (n) Then A must deliver the car and the fruits (profits from lease) to the partnership because there was a delay.  A partnership with a fixed term/particular undertaking is  Suppose that after A contributes the car, a 3rd person, D continued without express agreement claims to the real owner of the car and is able to prove so. - Rights and duties remain the same as they were at Then A is held liable for eviction because the partnership is termination. deprived for a specific thing. A is also held liable for  Example: damages to BOTH the partnership and to D. If A and B form a partnership to last until December 30, 2011  What about B? Can the partnership determine the value of and A is the manager and they share profits 50-50 and after the goods he contributed? December 30, 2011 they continue with their partnership. In Article 1787, it clearly states that the goods SHOULD be What happens? appraised by the partnership. If there was no A and B retain their rights, meaning A is still the manager agreement/stipulation, then the partnership shall have the and they still share profits 50-50. goods appraised by an expert.  If there was express agreement for the term of existence,  What if the goods appreciate/depreciate? then when the term expires, the partnership is dissolved and It will be charged to the partnership’s account. becomes a partnership at will  What will happen if C fails to comply with his obligation?  Continuation is when there is NO settlement/liquidation. C will be liable for his contribution plus interest and damages There must be prima facie evidence, meaning it must be from the date he was supposed to contribute. The same rule seen on first glance. will apply if the partners take money from the partnership’s funds without everyone’s consent. He will however, not be Article 1786 charged for theft or estafa and his obligation will only be to Every partner is a debtor of the partnership for return the money he took plus interest and damages from whatever he may have promised to contribute thereto. the time he took the money. He shall also be bound for warranty in case of  When will a partner be held criminally liable? eviction with regard to specific and determinate things Suppose the partners set aside P10,000.00 for payment to which he may have contributed to the partnership, in the one of their creditors. A takes this amount from the fund and same cases and in the same manner as the vendor is is subsequently discovered to have done so. bound with respect to the vendee. He shall also be liable Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 - Then A can be charged for estafa since he CAPABLE TO DO SO, shall sell his share TO THE misappropriated the money ALREADY SET ASIDE. PARTNERS, unless he is an industrial partner. - Imminent Loss Article 1789  There is a need for the capitalist partners to An industrial partner cannot engage in business for contribute additional funds to save the partnership himself, unless the partnership expressly permits him to  The industrial partner need not do so because he do so; and if he should do so, the capitalist partners has already given 100% of his efforts may either exclude him from the firm or avail  If the capitalist partner is WILLING but NOT themselves of the benefits which he may have obtained FINANCIALLY CAPABLE, the article will NOT apply in violation of this provision, with a right to damages in to him because he is already insolvent either case. (n) - Selling of interest  Refusal to contribute additional funds to save the  An industrial partner contributes his industry partnership means that the partner no longer has - Partnership has the EXCLUSIVE RIGHT to his industry any interest in the partnership - Prohibited from the engaging in business of ANY kind  He should not be allowed to reap the benefits that unless the partnership has expressly permitted him to the other partners have worked hard for because do so. he had not done anything to help anyway  Example:  He cannot complain of being removed from the Suppose that a partnership is engaged in a automobile partnership because he will be paid what is due to repair shop. A is the industrial partner (chief mechanic) and him for his share in the interest of the partnership works only up to 5PM every working day. Can he go home - Agreement that the partner need not contribute and work on the partnership’s customers’ autos, even if he additional funds in cases of loss says it to the capitalist partners EVERY DAY before he  The capitalist partner will not be required since it leaves? was in their agreement in the first place. The law says that there must be EXPRESSED permission,  Note that more contribution to the partnership in this situation, all A has is IMPLIED permission. The capital would mean you share more in the profits capitalist partners’ remedy is therefore to either: (only one) but this should be voluntary (1) Avail of the benefits from A’s “business”  Things to consider: (2) Exclude A from the partnership and demand for (1) There must be an IMMINENT LOSS damages (2) The partner who is unwilling to contribute must be  Capitalist partners are prohibited from engaging in SIMILAR SOLVENT/FINANCIALLY CAPABLE businesses only. (3) There was no agreement that the partners will not have  Industrial partners have the same remedies as capitalist to contribute additional funds in cases of loss partners.  If the purpose of additional contribution is simply to raise capital, then this article will not apply. Article 1790 Unless there is a stipulation to the contrary, the Article 1792 partners shall contribute equal shares to the capital of If a partner authorized to manage collects a the partnership. (n) demandable sum, which was owed to him in his own name, from a person who owed the partnership another  The partners shall contribute to the capital of the partnership sum also demandable, the sum thus collected shall be as per their agreement, except if there was no agreement in applied to the two credits in proportion to their amounts, the first place, in which case, they shall contribute equally. even though he may have given a receipt for his own  Example: credit only; but should he have given it for the account A and B decide to form a partnership and agree to contribute of the partnership credit, the amount shall be fully to the capital in the ratio of 60:40, how much should the applied to the latter. partners contribute to the partnership? The provisions of this article are understood to be The partners shall contribute in the ratio of 60:40, meaning if without prejudice to the right granted to the debtor by their partnership capital is a combined total of P10, 000.00 Article 1252, but only if the personal credit of that then A contributed P6, 000.00 and B contributed P4, 000.00. partner should be more onerous to him. (1684) A and B decide to form a partnership but did not say how much the other should contribute, how much should each  A and B are in a partnership where A is the managing partner contribute to the partnership? partner. C owes A a sum of P5,000.00 and the partnership a Since the partners did not give any sort of agreement as to sum of P10,000.00. The credit to A is due on September 1 the ratio of their capital contribution, we shall assume that while the partnership’s is due on September 15, both debts they will contribute in equal proportions, meaning if the are due and demandable. A collects from C a total of partnership capital is a combined total of P10, 000.00, then P3,000.00 only and A subsequently issues a receipt in his each partner contributed P5, 000.00. name. Is the partnership entitled to share in the P3,000.00? Yes but in proportion to their respective debts so A gets Article 1791 P1,000.00 and the partnership gets P2,000.00. If there is no agreement to the contrary, in case of  Supposing there was no mention as to who the managing imminent loss of the business of the partnership, any partner is, will the requisites of Article 1792 still be present? partner who refuses to contribute an additional share to Yes, in the absence of information relating to the identity of the capital, except an industrial partner, to sav4e the the managing partner, the assumption shall be that ALL venture, shall be obliged to sell his interest to the other partners are managing partners. partners. (n)  If A issues a receipt on the name of the partnership instead, to whose credit will the P3,000.00 be put?  If there is an imminent loss in the partnership, the partner The entire P3,000.00 will go to the partnership. who refuses to contribute additional funds, IF HE IS Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314  Supposing the credit of A carries 18% while that of the unusual or extraordinary profits, meaning, he may be partnership carries only 10%. C pays A and says that the allowed by the courts to pay back just P15,000.00 instead. P3,000.00 shall be applied to A’s credit. Is the partnership  Follows that if the partner is guilty of fraud or damages, he entitled to share in the P3,000.00 still? shall be liable for that. No, the debtor is given the right to apply payment to whichever debt is more onerous. Article 1795  Things to remember: The risk of specific and determinate things which The two conditions should be both present in order for the are not fungible, contributed to the partnership so that Article to apply, otherwise, the entire amount will go to only their use and fruits may be for the common benefit, whoever collects payment from the debtor. shall be borne by the partner who owns them. (1) 2 debts and both are due and demandable If the things contributed are fungible, or cannot be (2) The one collecting should be the managing partner kept without deteriorating, or if they were contributed to be sold, the risk shall be borne by the partnership. In the Article 1793 absence of stipulation, the risk of things brought and A partner who was received, in whole or in part, his appraised in the inventory, shall also be borne by the share of a partnership credit, when the other partners partnership, and in such case the claim shall be limited have not collected theirs, shall be obliged, if the debtor to the value at which they were appraised. (1687) should thereafter become insolvent, to bring to the partnership capital what he received even though he  Refers to rules as to who bears the risks made by may have given receipt for his share only. (1685a) contributions  If the contribution is determinate and non-fungible but only  In this case, there is only ONE debt but 2 or more debtors, the use is contributed, when it is lost, then the one who both of which are partners. contributes it is liable for it.  Example:  If fungible things are contributed, the partnership shall be the A and B are partners and C owes the partnership a sum of one to shoulder the risks P10,000.00. B is the managing partner but A collects his  The partnership shall also be the one to bear the risk for share in the P10,000.00 and C pays A P5,000.00 to which A items brought for sale in inventory for appraisal for the value issues a receipt in his name. When B’s turn to collect comes, at which they were appraised. C is already insolvent. What should A do? A shall return his P5,000.00 to the partnership and split it Article 1796 with B because C has already become insolvent. The partnership shall be responsible to every  Take not that whoever collects doesn’t matter as it doesn’t partner for the amounts he may have disbursed on make a difference behalf of the partnership and for the corresponding  If you get your share early and the other parties cannot get interest from the time the expenses are made; it shall theirs because the debtor has become insolvent, then you also answer to each partner for the obligations he may must return YOUR share to the partnership so that no one have contracted in good faith in the interest of the gets more than he should have. partnership business, and for the risks in consequence of its management. (1688a) Article 1794  Refers to the obligation of the partnership to the partners Every partner is responsible to the partnership for  The partners are merely agents so they are not personally damages suffered by it through his fault, and he cannot liable except if they are at fault or if they exceeded their compensate them with the profits and benefits which he expressed authority may have earned for the partnership by his industry.  Obligations of the Partnership: However, the courts may equitably lessen this (1) To reimburse any amount disbursed by the partners in responsibility if through the partner’s extraordinary behalf of the partnership efforts in other activities of the partnership, unusual - Example: profits have been realized. (1686a) A partnership borrows from the bank a sum of P10,000.00 for additional funds but cannot pay it  Why compensation will not apply: back when it is due to be paid back. A pays back Compensation will not apply because in compensation, you the P10,000.00 using his personal funds. Should he should be both a debtor and a creditor at the same time. be reimbursed by the partnership? However, the partner here is only a DEBTOR for damages Yes, the partnership should reimburse A for the sum and he cannot compensate using his profits and benefits of P10,000.00 PLUS legal interest starting from the earned for the partnership because it IS HIS DUTY to do so date A disbursed the P10,000.00. in the first place. (2) To answer for any obligation contracted in good faith  Responsibility may be equitably mitigated by the courts if, - Example: through extraordinary efforts of the partner, unusual profits A partnership needs office supplies so B contracts are recognized/realized. for P10,000.00 worth of supplies. Who will pay for  Example: the contract price of P10,000.00? A partnership between A and B is engaged in an autoshop The partnership shall be the one to shoulder the business. A customer brought his car in to be painted cost as it was made in good faith and B did not YELLOW but A bought RED paint instead and the car is overstep his authority. painted RED. Damages are suffered by the partnership for If it was stated that the partners cannot contract for P30,000.00 due to the repainting. Can A compensate this more than P5,000.00 worth of supplies and B still loss using the profits he earned for the partnership? contracts for P10,000.00, how much will the A cannot compensate it with the profits he earned because it partnership pay? is his obligation to bring profits in the first place. The The partnership will only pay what was allowed, responsibility of the P30,000.00, however, may be mitigated that is, P5,000.00 and B will pay the remaining by the court if by other activities, A is able to bring about balance since B overstepped his authority. Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 (3) To answer for risks in management  The same rules shall apply for losses in the partnership’s - Example: operations, however the industrial partner shall not share in A partnership is engaged in selling goods and a the losses as there is no way for him to retract his industry customer keeps asking for discounts and an and in the event of losses, his efforts would have been for argument ensues between the customer, C and the vain and it can thus be said that he has already shared. partner A. A gets injured and is brought to the  What is the legal effect of having a stipulation that excludes hospital. Who shall shoulder the hospital bills? a partner from sharing in the profits or losses? The partnership shall shoulder the hospital bills as it Under Article 1799, the stipulation shall be void because was during A’s time in managing the business that there must be mutual sharing of profits and losses. he was injured.  Can the partners appoint a 3rd person to designate the division of their profits and losses? Article 1797 Yes and they will not be allowed to question his decisions The losses and profits shall be distributed in unless the designation of shares is manifestly inequitable. conformity with the agreement. If only the share of each  2 cases where partners ABSOLUTELY cannot question partner in the profits has been agreed upon, the share of designated shares by the 3rd parties: each in the losses shall be in the same proportion. (1) When a partner begins to execute the 3rd party’s In the absence of stipulation, the share of each decision partner in the profits and losses shall be in proportion to (2) When complaints are raised AFTER three months from what he may have contributed, but the industrial partner the point of knowledge of the designation shall not be liable for the losses. As for the profits, the  Can the partners designate one of themselves to distribute industrial partner shall receive such share as may be profits or losses? just and equitable under the circumstances. If besides No, the law prohibits this situation because there may be his services, he has contributed capital, he shall also disparities when it comes to the distribution of net profits. receive a share in the profits in proportion to his capital. (1689a) Article 1800 The partner who has been appointed manager in the Article 1798 articles of partnership may execute all acts of If the partners have agreed to entrust to a third administration despite the opposition of his partners, person the designation of the share of each one in the unless he should act in bad faith; and his power is profits and losses, such designation may be impugned irrevocable without just and lawful cause. The vote of only when it is manifestly inequitable. In no case may a the partners representing the controlling interest shall partner who has begun to execute the decision of the be necessary for such revocation of power. third person, or who has not impugned the same within A power granted after the partnership has been a period of three months from the time he had constituted may be revoked any time. (1692a) knowledge thereof, complain of such decision. The designation of losses and profits cannot be  2 Kinds of Managing Partners: entrusted to one of the partners. (1690) (1) Appointed DURING the Constitution of the Partnership - May execute all administrative acts unless he acted Article 1799 in bad faith. His power may not be revoked unless A stipulation which excludes one or more partners from there is a JUST and LAWFUL cause and the vote of any share in the profits or losses is void. (1691) the partners with controlling interest - Even if there are objections as to his decisions  Lays out the rules in the distribution of profits and losses coming from the partners, his authority will prevail  A, B and C are partners with the following capital UNLESS he has acted in bad faith contributions, P30,000.00, P20,000.00 and P10,000.00 - Acts of administration: ordinary business and respectively, where C is a capitalist-industrialist partner. For administrative transactions one year of their operations, their partnership had earned net - Why can he note be revoked for no reason? profits of P17,000.00. How shall these profits be divided Because if you revoke his power, you are in effect among the partners? (C is entitled to receive P2,000.00 out changing the terms of the contract of partnership. of the entire P17,000.00) (2) Appointed AFTER the Constitution of the Partnership (1) In accordance with any existing agreement between the - May have his power revoked with or without cause partners as to how they shall share. - Decided upon by those partners who own (2) If there was no agreement, then the partners shall share controlling interest in the partnership on a pro-rata basis (3) The industrial partner shall get what is JUST and Article 1801 EQUITABLE in the circumstances. (BONUS TO If two or more partners have been entrusted with the PARTNER) management of the partnership without specification of their respective duties, or without stipulation that one of SHARE IN TOTAL them shall not act without the consent of the others, CAPITAL P CONTRIBUTION RATIO DISTRIBUTABLE BONUS SHARE IN each one may separately execute all acts of PROFIT PROFITS administration, but if any of them should oppose the A P 30,000.00 3/6 P 7,500.00 - P 7,500.00 acts of the others, the decision of the majority shall prevail. In case of tie, the matter shall be decided by the B P 20,000.00 2/6 P 5,000.00 - P 5,000.00 partners owning the controlling interest. (1693a) C P 10,000.00 1/6 P 2,500.00 P 2,000.00 P 4,500.00  Assume that A, B, C and D are all managing partners. A P appoints E as a secretary but B objects to this. Is the TOTAL P 60,000.00 6/6 P 15,000.00 P 2,000.00 17,000.00 appointment of E valid? Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 Yes since majority votes are first counted by head. If C&D partnership, the court’s intervention may be were the ones to object, and they owned a combined total of sought. (1695a) 51% of partnership interest, then the appointment will not be valid. However, if B was still the one who objected and he  If there is no agreement as to who will be the managing owns 51% of partnership interest, the appointment will still partners, during constitution and after constitution of the be valid because majority votes are first counted by head. partnership, then the assumption shall be that ALL the  If the partnership cannot make a decision and ends up in a partners are managing partners, without prejudice to Article tie (head count and interest), then the partnership is to be 1801, meaning Article 1801 will then apply to their case. dissolved. This will be the only remedy, unless one of the  The second paragraph of this article provides that the other partners will relent. partners cannot simply alter immovable property owned by the partnership without the consent of the other partners Article 1802 because this is NOT an act of administration but of In case it should have been stipulated that none of OWNERSHIP. the managing partners shall act without the consent of  Note that consent here is no qualified, so it may be the others, the concurrence of all shall be necessary for expressed or it may be implied. the validity of the acts, and the absence or disability of  Example: any one of them cannot be alleged, unless there is Suppose A, B, C and D are in a partnership where the imminent danger of grave or irreparable injury to the managing partner is not specified and A decides to put up a partnership. (1694) warehouse in a piece of land owned by the partnership without consent of other partners because he believes it to  This is a case wherein two partners, A and B, stipulate that be useful and beneficial to the partnership. His partners one cannot act without the consent of the other. Thus, there come over, once the warehouse is finished, to look at it and must always be concurrence between the two before any did not object to its existence. Was this valid? transactions may be entered into, the absence of the other’s Yes, since the partners did not object, then there is IMPLIED consent shall not be used as an excuse. consent. Since consent was never qualified in the article, it is  Illustrative Case: assumed that implied consent is enough. A sold to B, one of the managing partners of Partnership X, Suppose before A builds the warehouse, he asks for the the other being C, a certain number of mining claims without consent of the other partners, who refuse to give it. When A the consent of C. In an action by A to recover the unpaid tries to convince them and asks why they refuse to give balance of the purchase price against Partnership X, C consent, they simply say that they do not want it to be there, claims that the contract is not binding upon the partnership making their objection manifestly prejudicial, meaning, there for the reason that under the articles of partnership, there is is really no reason for their objection, what then, is the a stipulation that one of the partners cannot bind the firm by remedy of A in this situation? a written contract without the consent of others. Is the A may bring the matter to court. If the court finds the other transaction made by B binding upon the partnership? partners of having no solid reason to object, it may compel According to the Supreme Court, the stipulation applies only the other partners to give their consent. to B and C. A has the right to assume that B was authorized to complete the transaction. Therefore, the partnership is Article 1804 liable, and since B violated the terms of contract between Every partner may associate another person with himself and C, he is required to reimburse C for the amount him in his share, but the associate shall not be admitted C will be paying A on behalf of the partnership, the reason into the partnership without the consent of all the other being, it would be unfair to C who had no knowledge of B’s partners, even if the partner having an associate should transaction to have to pay when he never agreed anyway. be a manager. (1696)  The only instance in which a partner may transact without concurrence is when there is imminent danger of grave or  Refers to SUBPARTNERSHIP irreparable damage to the partnership if he does not do so.  A, B and C are in a partnership wherein A is the managing However, the party involved must be able to prove so else partner. A enters into a contract with D that states D will he shall become liable for what he has done. receive 50% of A’s share in partnership profits. Can A do this  Example: even without the consent of the other partners? A and B are in a partnership where they sell fruits, B notices Yes, because a sub-partnership will not affect the that the fruits in the warehouse are starting to rot so, without composition of the partnership and D will not be able to consent of A, he sells them. interfere with the partnership’s management anyway. This will be alright because if the fruits rot, then it would have  When are you required to share your partnership profits with been bad on the part of the partnership. 3rd persons? When you contract with 3rd persons because perhaps in Article 1803 some past event you needed money and they provided you When the manner of management has not been with it, and in your contract, it was agreed upon that you will agreed upon, the following rules shall be observed: share in the partnership profits. (1) All of the partners shall be considered agents The 3rd person can also opt to receive ALL profits. and whatever any one of them may do alone  Can D become a partner without the consent of the other shall bind the partnership, without prejudice to partners, if he associates with the managing partner? the provisions of article 1801. No, D would need to get the consent of all partners because (2) None of the partners may, without the consent of this would change the partnership composition. the others, make any important alteration in the immovable property of the partnership, even if it Article 1805 may be useful to the partnership. But if the The partnership books shall be kept, subject to any refusal of consent by the other partners is agreement between the partners, at the principal place manifestly prejudicial to the interest of the of business of the partnership, and every partner shall Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 at any reasonable hour have access to and may inspect and the issuance of a new title in HIS name alone. Did A and copy any of them. (n) become the absolute owner of the property? No, the law says that he will only hold the property as the  The partnership books shall be kept in the following places, trustee and will be entitled to reimbursement plus interest in order: from the time he redeemed the property. (1) In accordance with partnership agreements (2) If there were no agreements, then the partnership books Article 1808 shall be kept in the principal place of business of the The capitalist partners cannot engage for their own partnership (ex: headquarters) account in any operation which is of the kind of  Each partner will have access to ALL partnership books. business in any operation which is of the kind of  When will the partner be allowed to access the partnership business in which the partnership is engaged, unless books? there is a stipulation to the contrary. The partner is allowed to access partnership books during Any capitalist partner violating this prohibition shall REASONABLE HOURS OF BUSINESS (8am-5pm), bring to the common fund any profits accruing to him according to the law. The one who is keeping the partnership from his transaction, and shall personally bear all the books cannot state when it can be inspected. losses. (n) Article 1806  The article is with regards to a capitalist partner engaging in Partners shall render on demand true and full other businesses. information of all things affecting the partnership to any  Is the capitalist partner allowed to engage in other partner or legal representative of any deceased partner businesses aside from the one he has with the partnership? or of any partner under legal disability. (n) Yes, as long as the business he engages in is something dissimilar or different from the of the partnership’s.  The article does not mean that the partners need wait for  What will happen if the capitalist partner violates the law demands before disclosing information, when they get hold regarding his ability to engage in other businesses? of the information, they should disclose it immediately, Then he shall have to bring the profits he gained from the although additional details may be demanded. other business to the partnership and be liable for losses  If information is not disclosed and it is found out later on, the suffered by the partnership. partner/s who did not disclose such will be held liable for it  Why is the capitalist partner not allowed to engage in a and be charged for misrepresentation. similar line of business?  Suppose A, B and C are in a partnership wherein A is sent to Because he might take advantage of the information in the inspect partnership property in Mindanao. A realizes that the partnership or of their clients, resulting in a conflict of interest property contains oil deposits and does not disclose this between himself and the other partners. information to B and C. He also lies and says that the  The capitalist partner can engage in a business similar to the property is completely useless for their business and offers partnership if there was a stipulation in the contract of to buy B and C’s interests in the partnership. When A is the partnership and if the business he operates exists in a only one holding the business, he develops the land and different area or place. gains substantial profits from the oil deposits. B and C later on learn about the information A kept hidden from them and Article 1809 demand that they be given their shares in the oil profits. The Any partner shall have the right to a formal account question now is, can B and C, after having sold their as to partnership affairs: interests in the partnership, still share in the profits? (1) If he is wrongfully excluded from the partnership Yes, they will be allowed to share in the profits because the business or possession of its property by his co- information regarding oil deposits was present when they partners sold their share to A, just that it was hidden from them. (2) If the right exists under the terms of any agreement Article 1807 (3) As provided by Article 1807 Every partner must account to the partnership for (4) Whenever other circumstances render it just and any benefit, and hold as trustee for it any profits derived reasonable. (n) by him without the consent of the other partners from any transaction connected with the formation, conduct  General Rule: or liquidation of the partnership or from any use by him During existence, a partner is not required to demand for an of its property. (n) accounting because his interest is already protected by two Articles of the law, Article 1805 and Article 1806. But for  A partner who receives benefits or profits derived without specific cases, the law provides that he can DEMAND for an consent of others shall account for it as the partnerships. accounting of the partnership books.  If particular property is mortgaged and foreclose, the partner  4 Cases where a partner can demand for an accounting: who uses personal funds is able to get the property back will (1) When he is wrongfully excluded from the partnership not become the new owner, he will only be its trustee. operations (business and property possession)  If the partner gets the property back after ONE year from the (2) If the right exists under their agreement 3rd party involved, then it shall become his as it was a private (3) Under Article 1807 transaction, so long as he uses his own funds. (4) Other circumstances which render it just and  Example: reasonable. A and B are partners engaged in the operation of a cinema business. The theater was mortgaged to C who foreclosed Section 2 – Property Rights of a Partner the mortgaged debt. A, in his own behalf, redeemed the property with his own private funds. Subsequently, A files a Article 1810 petition for the cancellation of the old title of the partnership The property rights of a partner are: (1) His rights in specific partnership property Downloaded by Tara Arrl ([email protected])  lOMoARcPSD|43131314 (2) His interest in the partnership  Interest can be subject to attachment or execution because it (3) His right to participate in the management. (n) belongs to the partner, not the partnership.  The partner has the following rights: Article 1813 (1) Right to the ownership of partnership property A conveyance by a partner of his whole interest in (2) Right to his interest in the partnership the partnership does not of itself dissolve the partner, (3) Right to participate in partnership management or, as against the other partners in the absence of agreement, entitle the assignee, during the continuance Article 1811 of the partnership, to interfere in the management or A partner is co-owner with his partners of specific administration of the partnership business or affairs, or partnership property. to require any information or account of partnership The incidents of this co-ownership are such that: transactions, or to inspect the partnership books but it (1) A partner, subject to the provisions of this Title merely entitles the assignee to receive in accordance and to any agreement between the partners, has with his contract the profits to which the assigning an equal right with his partners to possess partner would otherwise be entitled. However, in case of specific partnership property for partnership fraud in the management of the partnership, the purposes; but he has no right to possess such assignee may avail himself of the usual remedies. property for any other purpose without the In case of dissolution of the partnership, the consent of his partners; assignee is entitled to receive his assignor’s interest (2) A partner’s right in specific partnership and may require an account from the date only of the property is not assignable except in connection last account agreed to by all the partners. (n) with the assignment of rights of all the partners in the same property;  How can a partner convey his interest in the partnership (3) A partner’s right in specific partnership without getting the partnership dissolved? property is not subject to attachment or (1) By selling it to a 3rd person execution, except on a claim against the (2) By donating it to a 3rd person partnership. When partnership property is (3) By using it as security on a loan from a 3rd person attached for a partnership debt the partners, or  Example: any of them, or the representatives of a D offers to buy A’s interest of P50,000.00 for P1,000,000.00 deceased partner, cannot claim any right under