LAW ON PARTNERSHIP

Art. 1767. By the contract of partnership two

or more persons bind themselves to

contribute money, property, or industry to a
common fund, with the intention of dividing
the profits among themselves.
Two or more persons may also form a
partnership for the exercise of a profession.

Concept of partnership
a partnership is a:
Contract
Association
Legal relation
Status arising out of a contract
Organization
Entity distinct and apart from its members
Joint undertaking to share in profit and loss

 Characteristics/ elements of partnership:

A. Consensual perfected by mere consent express

or implied
B.Nominate special name or designation in law
C. Bilateral entered into by two or more persons
and the rights and obligations are reciprocal
D.Onerous benefit by giving something
Commutative undertaking of each partner is
considered as equivalent of the others Principal E.
does not depend on its existence on other contracts
E. Preparatory means to an end
F. A contract of Agency

 Essential features of partnership:

There must be a valid contract
The parties must have legal capacity to enter

into the contract

There must be mutual contribution of money,
property, industry to a common fund
The object must be lawful
The primary purpose must be to obtain
profits and to divide the same among
themselves
Articles of partnership must not be kept
secret among the members otherwise there
is no legal personality

 Existence of a valid contract:

Partnership relation fundamentally

contractual
o There is no such thing as partnership created
by law or operation of law alone
o Form oral or written, express or implied
subject to the provisions of Art. 1771, 1773, and
Statute of Frauds. Thus a member need not
sign articles of co- partnership to become a
member, election is sufficient

 o Articles of partnership a written document

embodying the terms of the association. It

contains: the name, nature, purpose, location
of the firm and defines the powers, rights,
duties and liabilities of the partners among
themselves, their contributions, the manner
of which the profits and losses are to share
and the procedure of dissolving the
partnership o Requisites as a contract:
consent of at least 2 parties, object and cause
which is established

 Partnership relation fiduciary in nature

voluntary association entered into by the

associates
o In general partnership there is the element of
delectus personae (choice of the person/s
which gives such wide authority to one partner
to bind another by contract or otherwise).
Delectus personae allows one partner the
power (not the right) to dissolve partnership

 Application of principles of estoppel

O When a partner holds himself out or

permits himself to be held out as a partner in

an enterprise in favour of third persons. Even
if no real partnership exists, they are bound to
third persons by their conduct

 Legal capacity of the parties to enter into the

contract:
A. Individuals with legal capacity no
unemancipated minors, insane or demented
persons, deaf mutes who do not know how to
write, persons who are suffering from civil
interdiction, incompetents under guardianship

B. Partnerships no prohibition against a

partnership being a partner with another
partnership

 Corporations unless authorized by Statute

or by its charter, a corporation is without legal

capacity or power to enter into a contract of
partnership based on public policy

 A corporation however may enter into a Joint

Venture partnerships with another where the nature

of the venture is in line with the business authorized
by its charter

o Where the partnership agreement provides that the

two partners will manage the partnership so that the
management of the corporate interest is not
surrendered the partnership may be allowed
o Where the entry of the foreign corporation as a
limited partner in a limited partnership is merely for
investment purposes and it shall not take part in
management and control. It shall not be deemed as
doing business in the Philippines hence no license is
required (RA 7042 Foreign Investments Act)

 Contribution of money, property, or industry:

A. Existence of proprietary interest they must

contribute capital
o Money must be in legal tender. Checks, drafts,
promissory notes payable to order and other
mercantile documents must be cashed to constitute
contribution of money
o Property real, personal, corporeal or incorporeal.

Can be licenses, goodwill or credit

o Industry active cooperation which may be either
personal, manual efforts or intellectual for which the
partner receives share not merely salary. Industrial
partner must not be subject to control. He shall be
considered as a lessor of services if he is subject to
the supervision of other partners

 B. Proof of contribution proof that the

contribution was made with the intention of
dividing profits obtained therefrom
Legality of object if object is unlawful, contract
is inexistent and void ab initio. The object is
unlawful when it is contrary to law, morals, good
customs, public order, or public policy
Purpose to obtain profits the very reason for
the existence of partnership; need not only be
the principal, not the exclusive claim; there may
be incidental, moral, social or spiritual ends

 Sharing of profits not necessarily in equal

shares; not conclusive evidence of

partnership
Sharing of losses necessary corollary of

sharing in profits; agreement not necessary

 Art. 1768. The partnership has a judirical

personality separate and distinct from that of

each of the partners, even in case of failure to
comply with the requirements of Article 1772,
first paragraph.

 Partnership, a juridical person

A. A partnership duly formed under the law is

a juridical person to which the law grants a

juridical personality separate and distinct. As
an independent juridical person, a
partnership may:
1. Enter into contracts, acquire and possess
property of all kinds in its name
2. Incur obligations
3. Bring civil or criminal actions in conformity
with the laws and regulations of its
organizations

 Art. 1769. In determining whether a partnership

exists, these rules shall apply:
(1) Except as provided by Article 1825, persons
who are not partners as to each other are not
partners as to third persons;
(2) Co-ownership or co-possession does not of
itself establish a partnership, whether such-coowners or co-possessors do or do not share any
profits made by the use of the property;
(3) The sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common
right or interest in any property from which the
returns are derived;

 (4) The receipt by a person of a share of the

profits of a business is prima facie evidence that
he is a partner in the business, but no such
inference shall be drawn if such profits were
received in payment:
(a) As a debt by instalments or otherwise;
(b) As wages of an employee or rent to a
landlord;
(c) As an annuity to a widow or representative of
a deceased partner;
(d) As interest on a loan, though the amount of
payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill
of a business or other property by instalments or
otherwise.

 Rules in determining existence of

partnership:
Overview
o In general, all essential characteristics of a
partnership must be present. Partners must
expressly agree to contribute money,
property, or industry as co- proprietors to
carry on a business for profit, and to share the
profits
o An essential characteristic, by itself, does
not prove the existence of a partnership
o In case of doubt, Art. 1769 would apply

 Test to determine the existence of partnership

o The terms of the contract would determine the
legal nature of the contract
o Legal intention is the crux of partnership
existence of a partnership not always dependent
upon the personal arrangement or
understanding of the parties. Parties may call
themselves partners, but their contract may be
adjudged something different. On the other
hand, parties may expressly stipulate that their
contract is not a partnership yet it may still be
considered a partnership based on the legal
intention

 Incidents of partnership
o Share in the profits and losses
o Equal rights in management and conduct of
business (see Art. 1803)
o Every partner is an agent of the partnership
(Art. 1818)
o All partners, except limited partners, are
personally liable for partnership debts with their
separate property (see Art. 1816)
o There is a fiduciary relationship (see Art. 1807)
o Partnership is not terminated upon dissolution.
It continues until the winding up is completed
(see Art. 1828)

 Presumption and burden of proof

o Existence of partnership is not presumed. It

must be proved
o Persons who are acting as partners are
presumed to have entered into a contract of
partnership. The burden of proof is on the
party denying its existence
o Once partnership is shown to exist, the
presumption is that it continues in the
absence of evidence to the contrary. The
burden of proof is on the person claiming its
termination


Use of partner o Person asserting the

existence of the partnership cannot prove it

by just showing an agreement wherein the
parties call themselves partners. The use of
the word partners may be just for
convenience and not necessarily to show the
intention to create a partnership o associate
means partner, but an employee may also
be an associate

 Persons not partners as to each other:

A. Persons who are partners as between

themselves are partners as to third persons.

Consequently, persons who are not partners
as to each other cannot be partners as to
third persons
B. General rule: persons who are not partners
as to each other cannot be partners as to
third persons

 Exception:
If by their acts, consent, representations,

third persons were led to believe that they are

partners in a non-existing partnership
Example: A and B are not partners. However,
A, with the consent of B, told X that they are
partners. So as to X, A and B are partners

 Co-ownership or co-possession:
A. Intention to obtain profits o In partnership,
the profits must be derived from the operation of
a business or undertaking and not merely from
property ownership
o There is no presumption of partnership between
co-owners because there must be a clear intention
to a partnership
B. Existence of fiduciary relationship
o There is no fiduciary relationship between coowners
o Persons may become co-owners without a
contract. For example, by inheritance. But they
cannot be partners without a contract.

Co-ownership

Partnership

Creation

Generally created
Always created by a
by law.
contract, either
It may exist without express or implied
a contract

Juridical personality

Has a juridical
personality

No juridical
personality

Purpose

Common
enjoyment of a
thing. Does not
necessarily involve
sharing of profits

To obtain profit

Duration

Maximum is 10
years

No limitation

Disposal of interest

May dispose his

interest

A partner cannot
dispose his interest
as to make the
transferee a partner

Co-ownership

Partnership

Power to act with third

persons

Co-owner cannot
represent the coownership

Partner may bind the

partnership, unless there
is a stipulation to the
contrary

Effect of death

Does not necessarily

dissolve the partnership

Dissolves the partnership

 Sharing of gross returns not presumptive

evidence of partnership
Reason: because in a partnership, the

partners, being interested in the success and

failure of the business, share in the profits
only after satisfying all partnership liabilities

 Sharing of gross profits:

A. Prima facie evidence of partnership
o Sharing of profits and losses is a strong

presumptive evidence of a partnership.

Conversely, lack of such agreement strongly
negates the existence of a partnership
o Sharing of profits and losses is not

conclusive evidence. This may be rebutted by

other circumstances

 B. When existence of partnership will not be inferred

despite share in the profits

o Profits received as payment of a debt by instalment or
otherwise Example: A is a creditor of a partnership X. A
was authorized to manage the business. A will receive
compensation, and a share in the net profits as payment for
the debt
o Profits received as wages of an employee or rent to a

landlord
1. Example: A is an employee of partnership X. instead of a
fixed salary, A agreed to receive a certain percentage of the
monthly net profits
2. Example: A is the owner of the building where

partnership X holds its office. As payment for rent, A will

receive a share if the net profits.

 o Profits received as an annuity to a widow or

representative of a deceased partner

Example: A is the widow of a partner in Partnership X. A
will receive an annuity based on a certain percentage of the
net profits in exchange for the continuation of the
partnership without liquidation and satisfaction of the
deceased partners interest
o Profits received as interest on a loan
Example: A is a creditor of partnership X. A agreed that the

interest on the loan be taken from the net profits

o Profits received as the consideration for the sale of a

goodwill or other property by instalments or otherwise

Example: A sold a land to partnership X. A agreed that the
purchase price will be paid out of the net profits

 Partnership distinguished from other legal

relationships:
A. Distinguished from a labor union
o A labor union is an association of employees,
which exists in whole or in part, for the purpose
of collective bargaining agreement or dealing
with the employers concerning terms and
conditions of employment
o The difference between them is the purpose.
The purpose of a partnership is the realization of
profits whereas the purpose of a labor union is to
negotiate with the employers, collective bargain

 Distinguished from a business trust

o A trust is when the equitable ownership and

the legal title of a property are with two

different persons
o The difference is that partners are principals
and agents of each other. While in trust, the
trustee is just a principal, and not an agent

Partnership vs Corporation
Manner of creation
Number of persons originally forming
Commencement of juridical personality
Powers
Management
Effect of Mismanagement
Right of succession
Extent of liability to third persons
Transferability of interest
Term of Existence
Firm Name
Dissolution
Governing Law

 Partnership vs Conjugal Partnership of Gains

Parties
Laws which govern
Juridical personality
Commencement
Purpose
Distribution of profits
Management
Disposition of shares

 Partnership vs Voluntary Association

Juridical personality
Purpose
Contribution of members
Liability of members

Art. 1770
Art. 1770. A partnership must have a lawful

object or purpose, and must be established

for the common benefit or interest of the
partners.
When an unlawful partnership is dissolved by
a judicial decree, the profits shall be
confiscated in favor of the State, without
prejudice to the provisions of the Penal Code
governing the confiscation of the instruments
and effects of a crime

Illegal Purpose is separable

Where a partnership is sought to be

performed for several purposes, and only one

of the purposes is illegal, the partnership will
be sustained if the illegal object can be clearly
separated from the legal object of the
partnership.

Example of Unlawful
Partnership
Partnership formed to create illegal

monopolies or combinations in restraint of

trade.
Partnership for illegal gambling purpose
Partnership to furnish apartment houses for
prostitution or white slavery.

Profits obtained if Ph is
unlawful
No share in the profits
Confiscated in favor of the state

Common benefit
Must be established for the common benefit

of all the partners

Any stipulation which excludes one or more

partners from any share in the profits or

losses is void.

Art. 1771
A partnership may be constituted in any

form, except where immovable property or

real rights are contributed thereto, in which
case a public instrument shall be necessary.

Form of partnership contract

A. If contribution is money or personal

property
Contract may be oral or written, express or
implied
If capital is less than P3,000 in money or
property may be constituted orally or in
writing

 B. If immovable property or real rights are

contributed
Contract must appear in a public instrument,

together with inventory of the immovables or

real rights contributed, signed by the parties,
and attached to the public instrument,
otherwise the contract is void. (Art. 1773)

Coverage of the Statute of

Frauds

1. Promise to answer for the debt, default or

miscarriage of another must be in writing.
2. If the agreement to form a partnership shall be
performed after one year, the same must be in
writing.
3. Contracts for the sale of real property or any
interest therein for leasing of partnership
property for more than one year must be in
writing.
4. Sale of property at a price not less than P500
must be in writing, unless there is delivery or
payment.

Art 1772
Every contract of partnership having a capital

of three thousand pesos or more, in money or

property, shall appear in a public instrument,
which must be recorded in the Office of the
SEC.

Failure to comply with the requirements of

the preceding par. shall not affect the liability

of the partnership and the members thereof
to third persons.

Directory provision, not

mandatory
Legal effects
1. There is a valid partnership, separate and

distinct from the partners.

2. The partnership and the partners are still
liable.
3. The partners may compel each other to put
it in a public instrument (Art. 1357)

Effect of non-registration
For validity, a contract of partnership, whether
written or oral is valid.
Registration is only necessary as a condition for
the issuance of license to engage in business or
trade, so that tax liabilities of big partnership
cannot be evaded, and the public can also
determine more accurately the partnership
members and their capital contribution on the
partnership capital before dealing with them.

Art. 1773
A contract of partnership is void, whenever

immovable property is contributed thereto if

an inventory of said property is not made,
signed by the parties, and attached to the
public instrument.

Requirements if immovable
property is contributed
1. public instrument must be constituted
2. Inventory of real or immovable property,

signed by the parties

3. Inventory must be attached to the public
instrument.

Effect of failure to comply

1. No juridical personality
2. The parties cannot compel each other to

observe the required form

3. The parties may request the return of their
capital contribution

Art. 1774
Any immovable property or an interest

therein may be acquired in the partnership

name. Title so acquired can be conveyed only
in the partnership name.

Acquisition of immovable
property
Being a juridical person, it can acquire and

possess property of all kinds, as well as incur

obligations and bring civil or criminal actions,
in conformity with the laws and regulations of
their organization.

Conveyance of property
Only in the name of the partnership

Art. 1775
Associations and societies, whose articles are

kept secret among the members, and

wherein any one of the members may
contract in his own name with third persons,
shall have no juridical personality, and shall
be governed by the provisions relating to coownership.

Where rules on co-ownership

governs
Lack of legal personality as members can

enter into a contract in their individual

capacity.
Third persons with whom the partnership
wishes to deal are entitled to know the
articles of partnership.

Art. 1776
As to its object, a partnership is either

universal or particular.
As regards the liability of the partners, a

partnership may be general or limited.