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corporation.
parties.
A partnership contract, in its essence, is a contract of
agency (Art.1818).
(1) Consensual, because it is perfected by mere consent, (1) There must be a valid contract;
that is, upon the expressed or implied agreement of two or
more persons;
(2) The parties must have legal capacity to enter into the
contract;
(2) Nominate, because it has a special name or designation
in our law;
(3) There must be a mutual contribution of money,
property, or industry to a common fund;
(3) Bilateral, because it is entered into by two or more
persons and the rights and obligations arising therefrom are (4) The object must be lawful; and
always reciprocal;
(5) The purpose or primary purpose must be to obtain
(4) Onerous, because each of the parties aspires to procure profits and to divide the same among the parties.
for himself a benefit through the giving of something;
It is also required that the articles of partnership must
(5) Commutative, because the undertaking of each of the not be kept secret among the members; otherwise, the
partner is considered as the equivalent of that of the association shall have no legal personality and shall be
others;
governed by the provisions of the Civil Code relating to coownership (Art. 1775).
(6) Principal, because it does not depend for its existence or
validity upon some other contract; and
Existence of a valid contract
(7) Preparatory, because it is entered into as a means to an (1) A form of voluntary and personal association. end, i.e., to engage in business for the realization of profits Partnership is a form of voluntary association entered into
with the view of dividing them among the contracting by the associates. It is a personal relation in which the
element of delectus personae exists. No one can become a under the law of entering into contractual relations.
member of the partnership association without the consent Consequently, any person who cannot legally give consent
of all the other associates.
to a contract cannot be a partner. Hence, the following
cannot give their consent to a contract of partnership:
(2) Creation and proof of existence. - It may be informally
created and its existence proved by the conduct or acts of
(a) Unemancipated minors;
the parties but it is customary to embody the terms of the
(b) Insane or demented persons;
association in a written document known as Articles of
Partnership. Obviously, a person cannot enter into a
(c) Deaf-mutes who do not know how to write;
contract of partnership solely with himself; there must be at
(d) Persons who are suffering from civil interdiction;
least two competent parties.
and
(3) Other forms of association excluded. - Partnership,
(e) Incompetents who are under guardianship
therefore, excludes from its concept all the other
associations which do not have their origin in a contract,
(2) Exceptions. - Under Article 1782, persons who are
express or implied. There is no such thing as a partnership
prohibited from giving each other any donation or
created by law or by operation or implication of law.
advantage cannot enter into a universal partnership. A
Religious societies, conjugal or community partnerships,
married woman may enter into a contract of partnership
and others of a similar nature are not, therefore, included
even without her husband's consent, but the later may
as they are not created by the expressed or implied
object under certain conditions.
contract of the parties.
(3) Capacity of partnership/corporation to be a partner. A limited partnership, however, as distinguished from
The typical partnership is composed of individual human
a general partnership (Art.1776), cannot be created by
beings. But these is no prohibition against a partnership
mere voluntary agreement alone (Art.1844).
being a partner in another partnership. Unless authorized
by law, a corporation is without capacity or power to enter
Legal capacity of parties to enter into the contract
into a contract of partnership. The reason for the limitation
(1) General rule. - Before there can be a valid contract of is that in a partnership, a corporation would be bound by
partnership, it is essential that the contracting parties have the acts of persons who are not its duly appointed and
the necessary legal capacity to enter into the contract. As a authorized officers and agents, and this is entirely
general rule, any person may be a partner who is capable
inconsistent with the policy of the law that the corporation work or services of the party associated, which may be
shall manage its own affairs separately and exclusively.
either personal manual efforts or intellectual, and for which
he receives a share in the profits (not merely salary) of the
Mutual contribution to a common fund
business.
(1) Proprietory or financial interest. - The partners must
The law does not specify the kind of industry that a
have a proprietory or financial interest in the business. The partner may contribute. A limited partner in a limited
very definition of partnership in Article 1767 provides for partnership, however, cannot contribute mere industry or
this element. Without the element of mutual contribution to services. (Art. 1845)
a common fund, there can be no partnership. (Art. 1784)
Legality of object
(2) Form of contribution. - The partners must contribute
money, property, and/or industry or services to the (1) Effect of illegality. - The object is unlawful when it is
common business:
contrary to law, morals, good customs, public order, or
public policy. (Art.1306). As in other kinds of contract, the
(a) Money - The term is to be understood as referring purpose of a partnership must be lawful (Art. 1770);
to currency which is legal tender in the Philippines. It must otherwise, no partnership can arise as the contract is void
be pointed out that checks, drafts, promissory notes ab initio (Art. 1409), i.e., void or without force and effect
payable to order, and other mercantile documents are not from the beginning.
money but only representatives of money. Consequently,
there is no contribution of money until they have been (2) Business partnership not permitted to engage in. cashed. (Art. 1249)
Subject to this general limitation on contracts, a partnership
may be organized for any purpose except that it may not
(b) Property - The property contributed may be real or engage in an enterprise for which the law requires a specific
personal, tangible or intangible. Hence, credit such as form of business organization, such as banking which,
promissory note or other evidence of obligation or even a under the General Banking Law of 2000 (R.A. No. 8791, Sec.
mere goodwill may be contributed as it is considered 8.), only stock corporations may undertake.
property.
(c) Industry - In the absence of money or property, or
in concurrence with these two, the law permits the Intention to realize and divide profits
contribution of industry. The word "industry" means the
Sharing of losses
to third persons;
(2) Co-ownership or co-possession does not of itself
establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by
Co-ownership or co-possession
profits after satisfying all of the partnership's liabilities. The presumption of partnership arising from such profit(Arts. 1812, 1839.) It is not merely the sharing of profits, sharing agreement may be contradicted by other
but the sharing of them as a co-owner of the business that circumstances.
makes one a partner.
Thus, under paragraph 4 of Article 1769, sharing of
The decisive test is this: Does the recipient of a share profits by a person is not a prima facie evidence that he is a
of the profits have an equal voice as proprietor in the partner in the business in the cases enumerated under
conduct and control of the business? Does he own a share subparagraphs (a), (b), (c), (d), and (e). In all of the said
of the profits as a proprietor of the business producing cases, the profits in the business but in some other respects
them? Thus, if one takes a share of the profits as payment or for some other purpose.
of a debt, he is not a partner.
EXAMPLES:
EXAMPLE:
In the following cases, Y is not a partner in
A, owner of a passenger jeepney, agrees with B, a partnership X:
driver, that he shall have full control and us of the jeepney
to carry passengers, pay for cost of repairs and other (1) Y, creditor of partnership X, is entrusted by the partners
expenses, and that the gross receipts are to be divided to manage the business, and X shall receive, in addition to
his compensation, a share in the net profits of the business
between them.
in settlement of his credit;
No partnership is established between A and B as no
(2) Y, an employee of partnership X, shall receive instead of
sharing of profits is contemplated.
a fixed salary, or being the owner of a building rented by
Receipt of share in the profits
the partnership, Y shall receive as rent, a certain
percentage of the monthly net profits of the business;
An agreement to share both profits and losses tends
strongly to establish the existence of a partnership, and (3) Y, the widow of a deceased partner in partnership X, in
conversely, the lack of such an agreement tends strongly to consideration of the continuation of the business without
disprove the existence of a partnership. But the mere fact liquidation and satisfaction of the deceased's interest, shall
of a right under the contract to participate in both profits receive an annuity for a period of five years based on a
and losses of a business does not of itself have the effect of certain percentage of the net profit;
establishing a partnership between those engaged therein.
(3) Purpose.
- The purpose of a partnership is the
Issue: Did the parties enter into a contract of
realization of profits, while in co-ownership, it is the partnership?
common enjoyment of a thing or right;
Held: No. The transaction entered into between A and
(4) Duration. - Under the law, there is no limitation upon the B was the acquisition jointly by mutual agreement of the
duration of a partnership, while in co-ownership, an land in question not for the purpose of undertaking any
agreement to keep the thing undivided for more than ten business, nor for its cultivation in partnership, but solely to
years is not allowed;
divide it equally between them. Since the land was
undivided, A and B were co-owners of the said land, and the
(5) Disposal of interests. - A partner may not dispose of his partition or division of such property must, therefore, be
individual interest in the partnership so as to make the allowed in accordance with their agreement.
assignee a partner unless agreed upon by all of the
partners, while a co-owner may freely to do so;
Partnership distinguished from conjugal partnership
of gains
(6) Power to act with third persons. -In the absence of any
stipulation to the contrary, a partner may bind the
Conjugal partnership of gains is a partnership formed
partnership, while a co-owner cannot represent the co- by the marriage of husband and wife by virtue of which,
ownership; hence, a judgment secured against only one of they place in a common fund the fruits and income from
the co-owners will not bind the other co-owners; and
their separate properties and those acquired through their
efforts or by chance, and unless otherwise agreed in the
(7) Effect of death. - The death of a partner results in the marriage settlements, divide equally, upon the dissolution
dissolution of the partnership, but the death of a co-owner of the marriage or the partnership, the net gains or benefits
does not necessarily dissolve the co-ownership.
obtained by either or both of them during the marriage.
(Art. 106, Family Code.)
ILLUSTRATIVE CASE:
Facts: Under a verbal contract, A and B contributed
P1,000.00 each for the purpose of purchasing a piece of
land. It was agreed that upon its acquisition, the property
would be divided equally between them. A kept the land for
himself and refused to divide. B brought an action for
partition.
be
one liable in the first place for the debts of the firm while in common benefit of the members. This limitation arises not
voluntary association, the members are individually liable only from the express provisions of the law, but from the
for the debts of the association, authorized by them, either general principles of morality and justice.
expressly or impliedly, or subsequently ratified by them.
Pursuant to applicable law, certain business (e.g.,banking)
The members of such associations, societies, or clubs may be engaged in only by corporations.
are not strictly partners, though the organization may
possess business features and be conducted partly for Effects of an unlawful partnership
pecuniary gain. The property rights and the legal liabilities
The following are the consequences of a partnership
of the members depend, as between themselves, on the formed for an unlawful purpose:
constitution and rules of the association or club.
(1) The contract is void ab initio and the partnership never
ARTICLE 1770 - A partnership must have a lawful existed in the eyes of the law;
object or purpose, and must be established for the
(2) The profits shall be confiscated in favor of the
common benefit or interest of the partners.
government;
When an unlawful partnership is dissolved by a
judicial decree, the profits shall be confiscated in favor of (3) The instruments or tools and proceeds of the crime shall
the State, without prejudice to the provisions of the Penal also be forfeited in favor of the government; and
Code governing the confiscation of the instruments and
(4) The contributions of the partners shall not be
effects of a crime. (1666a)
confiscated unless they fall under No. 3.
Object or purpose of partnership
Dissolution of unlawful partnership
The provision of the first paragraph og the above
Instances of unlawful object are those to create illegal
article reiterates two essential elements of a contract of
monopolies or combinations in restraint of trade, or to carry
partnership: legality of the object and community of benefit
on gambling, or for smuggling purposes, or for leasing
or interest of the partners. (see Art. 1767.)
furnished apartments to prostitutes, or to prevent
The parties possess absolute freedom to choose the competition in bidding for government contracts.
transaction or transactions they must engage in. The only
A judicial decree is not necessary to dissolve an
limitation is that the object must be lawful and for the
unlawful partnership. However, it may sometimes be
advisable that a judicial decree of dissolution be secured for Partnership with capital of P3,000.00 or more
the convenience and peace of mind of the parties.
There are two requirements where the capital of the
ARTICLE 1771 - A partnership may be constituted in partnership is P3,000.00 or more, in money or property,
any form, except where immovable property or real namely:
rights are contributed thereto, in which case a public
(1) The contract must appear in a public instrument; and
instrument shall be necessary. (1667a)
Form of partnership contract
agreements are kept secret among the members and (1) As to the extent of its subject matter. - A partnership
wherein anyone of them may contract in his own name with may be:
third persons are, by this article, deprived of juridical
(a) Universal partnership or one which refers to all
personality for evidently such associations are not
partnerships. As among themselves, they shall be governed the present property or to all profits. (Art. 1777.)
by the provisions relating to co-ownership.
Thus, there are two kinds of universal partnership, to
wit:
Importance of giving publicity to articles of
partnership
EXAMPLE:
Suppose A, B, and C are not really partners, but
A told X that he (A), B, and C are partners. X believing the
representation made by A and consented to by B, extended
credit to A.
Partners are classified according to their interests in partner, but who is not so as between the partners
the business or their obligations to the partnership or their themselves. He is also known as partner by implication or
liabilities to third persons.
nominal partner. The term "quasi-partner" is sometimes
used. He is liable for the debts of the firm to those who in
(1) Under the Civil Code. - They are classified into:
good faith believed in him to be a partner; and
(a) Capitalist partner or one who contributes money
(h) Continuing partner or one who continues the
or property to the common fund
business of a partnership after it has been dissolved by
(b) Industrial partner or one who contributes only his reason of the admission of a new partner, or the retirement,
death, or expulsion of one or more partners;
industry or personal service
(i) Surviving partner or one who remains after a
(c) General partner or one whose liability to third
persons extends to his separate property; he may either be partnership has been dissolved by the death of any partner;
and
a capitalist or industrial partner;
(j) Subpartner or one who, not being a member of the
(d) Limited partner or one whose liability to third
persons is limited to his capital contribution. He is also partnership, contracts with a partner with reference to the
known as special partner. Unlike the general partner, he latter's share in the partnership.
does not participate in the management of the business;
(2) Other classifications. - They have also been classified
(e) Managing partner or one who manages the affairs into:
or business of the partnership; he may be appointed either
(a) Ostensible partner or one who takes active part
in the articles of partnership or after the constitution of the and known to the public as a partner in the business,
partnership. He is also known as a general or real partner;
whether or not he has an actual interest in the firm. If he is
(f) Liquidating partner or one who takes charge of the not actually a partner, he is subject to liability by the
doctrine of estoppel;
winding up of the partnership affairs upon dissolution;
(b) Secret partner or one who takes active part in the
(g) Partner by estoppel or one who is not really a
partner, not being a party to a partnership agreement, but business but is not known to be a partner by outside parties
is liable as a partner for the protection of innocent third nor held out as a partner by the other partners, although he
persons. He is one who is represented as being, in fact, a participated in the profits and losses of the partnership;
(c) Silent partner or one who does not take any active
part in the business although he may be known to be a
partner. Thus, he need not to be a secret partner. If he
withdraws from the partnership, he must give notice to
those persons who do business with the firm to escape
liability in the future;
of
all
present
property,
(1) Property which belonged to each of them at the time of legacy; or (3) donation cannot be included by stipulation
the constitution of the partnership; and
except the fruits thereof. Hence, any stipulation including
property so acquired is void.
(2) Profits which they may acquire from the property
contributed.
Profits from other sources (not from the properties
contributed) will become common property only if there is a
stipulation.
ARTICLE 1780 - A universal partnership of profits
comprises all that the partners may acquire by their
EXAMPLE:
industry or work during the existence of the
A and B are partners in a partnership known as X & partnership.
Co. They agreed that they would contribute all their
Movable or immovable property which each of
properties to a common fund for the purpose of dividing the
same between themselves, as well as the profits to be the partners may possess at the time of the
derived therefrom. A contributed all his properties celebration of the contract shall continue to pertain
consisting of two big parcels of agricultural land and a exclusively to each, only the usufruct passing to the
tractor. B contributed also his properties consisting of partnership. (1675)
P400,000 cash and farm implements.
Universal partnership of profits explained
The partnership formed by the contract of A and B is
a universal partnership of all present property.
the usufruct or use of the same. Consequently, upon the their industry or work during the existence of the
dissolution of the partnership, such property is returned to partnership as well as the usufruct of their present
the partners who own it.
properties belong to the partnership as a matter of right. An
express stipulation is necessary to exclude any of them.
EXAMPLE:
ARTICLE 1781 -Articles of universal partnership, entered
In the preceding example, if the agreement of into without specification of its nature, only constitute a
A and B is that they would retain the ownership over their universal partnership of profits. (1676)
respective properties, only their usufruct being transferred
to partnership X & Co., and that they would divide equally Presumption in favor of universal partnership of
the net profits realized during the existence of the profits
partnership, then the partnership formed is a universal
Where the articles of partnership do not specify the
partnership of profits.
nature of the partnership, whether it is one of "present
Upon the dissolution of the partnership, the property" or of "profits" only, it will be presumed that the
properties shall be returned to the respective owners. The parties intended merely a partnership of profits. The reason
amount of P400,000 contributed by B shall be paid to him for this presumption is that a universal partnership of profits
as a loan to the partnership.
imposes less obligations on the partners, since they
preserve the ownership of their separate property.
(2) Profits acquired through chance. - Since the law speaks
only of profits which the partners may acquire by their
It is to be noted that this article applies only when a
industry or work, it follows that profits acquired by the universal partnership has been organized.
partners through chance, such as lottery or by lucrative title
without employment of any physical or intellectual efforts, ARTICLE 1782 - Persons who are prohibited from
giving each other any donation or advantage cannot
are not included.
enter into a universal partnership.
(3) Fruits of property subsequently acquired. - In view of
paragraph 2 of Article 1780, fruits of property subsequently Limitations upon the right to form a universal
partnership
acquired by the partners do not belong to the partnership.
Persons who are prohibited by law to give donations
Such profits may, however, be included by express
stipulation. But profits which the partners may acquire by cannot enter into a universal partnership for the reason that