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1 | Partnership

August 26, 2015 -partnership for the exercise of a profession, contributing


industry
Partnership (Article 1767-1867) -partnership for the giving of service
-it is the individual partners, and not the partnership, who
- It is a contract whereby two or more persons bind engage in the practice of the profession and are
themselves to contribute money, property, or industry to responsible for their own acts as such.
a common fund, with the intention of dividing the profits
among themselves, or in order to exercise a profession. How many members are there in a partnership
(Art. 1767). -Min: 2; Max: None, but for practicality, if more than 5
better form a corporation.

Composition of a Partnership
B. Contribution of money, property, or industry to a
A. 2 or more persons common fund

- may be natural and juridical persons What kind of money?


Legal tender,
Q: Can a Corporation into a partnership? Promissory Note is considered as property,
Checks- only when encashed
A: GR: No; Exc: If allowed by its charter.
Rationale: Corporation is only allowed act due to: Property
a. There is need of the approval of the board of Real or personal; corporeal or incorporeal
directors It should be an accessible property,
b. A partnership needs contribution of money Rights over a property
and property, and the money of the
stockholders corporation might be used. Partnership Property
The property will depend on the use, the rights over the
Q: May a partnership may enter into another partnership property including the name, usage, title, the partner shall
with another partnership? lose the rights over the property,

A: Yes, condition: the new partnership has separate and Upon dissolution: partnership property will be used for
distinct personality from the partnerships. answering all the debts of the partnership
The contributions, i.e. money and properties are distinctly
different Universal Partnership of Property
Rationale: If the same, there will be a difficulty to - if all rights over the property are given to the partnership
distinguish the properties of each partnerships and of the -all profits realized in shall be under such property
new partnership e.g. Taxi of the partnership, the profit will be divided
-the property shall return back to the partner
Kinds of Partnerships
Q: If Industrial Partner and earning salary instead of profit,
1. General Partner is it a partner?
-contribution of money and property No. Differentiate between an employee. An industrial
partner is considered a partner if s/he receives profit and
2. Industrial Partner salary
-contribution of industry (services)
C. Common fund
Allowed: -pooling of all the contributions of the partners for the
Both General; General-Industrial capital

D. Profits
Not Allowed: -test in determining if a partnership exists or not
Both Industrial Partners -if only one partner earns profits, there is no partnership
Rationale: there is no money or property---since money -determine if there is a sharing of profits
and property is essential to a partnership

General Professional Partnership


-purpose is not for profit unlike Characteristics of a Contract of Partnership
2 | Partnership

1. Consensual
-there must be consent between the partners
-can be oral and written 2. There is a contribution of property

The Articles of Partnership must registered with the SEC 3. It must be an association of profits with the intention of
when: dividing their profits themselves
a. there is a contribution of P3,000 or more;
b. there is a contribution of property. The division must be proportionate to the contribution of
the partner
2. Nominate
-the partnership must have a special name or A partnership once has its own separate juridical
designation personality it can now be sue and sued, it can even own
properties and shall pay its own taxes.
3. Bilateral
- it is entered into by two or more persons and the rights There is a sharing of profits entails the sharing of loss
and obligations arising therefrom are always reciprocal
4. It has a juridical personality which is separate and
4. Preparatory distinct from the partners
-the contract of partnership must be perfected before the
partnership begins When a partnership enters into a contract and there was
a breach of contract, who pays the damages?
5. Onerous the partnership
- because there is a giving of contribution for the partner
to benefit himself, i.e. profit Q: When will the partner be liable personally?
A: when he acts beyond his scope of his authority
6. Commutative,
-the undertaking of each of the partners is considered as 5. The partner is mutually an agent of the other partner
the equivalent of that of the others - a partner who enters into contract for and in behalf of
the partnership is considered as the agent of another
7. Principal partner and thus they are bound
-partnership it does not depend for its existence or
validity upon some other contracts; If an authorized partner enters into a contract s/he shall
be personally liable.
Special Features of Partnership
If there is a managing partner and such partner enters
1. There must be a valid contract into a contract with a third person, the partnership shall
-There has to be a valid and voluntary agreement to be held liable.
become partners
6. Purpose of the partnership must be lawful, not morals,
The parties must have legal capacity to enter into a public policy and within the commerce of man
contract
-incapable: unemancipated minors, insane, deaf-mute, 7. An Article of Partnership must not be kept secret
persons suffering civil interdiction--- cannot enter into any -the provisions, terms and conditions must be open and
contracts, known to the partners in order the that each partners
those who cannot give donation, e.g. husband and wife, may act intelligently and wisely for the common of the
rationale: circumvent the law on donation, partnership
the property donated shall become partnership property,
partners who are living as husband and wife (common Effect if kept secret: If one of the partners was acting in
law) behalf of the other partner, without knowledge of an
existence of a managing partner, and one of the partners
delectus personae was able to buy a property for the partnership---rules on
choice of the person or choice of the persons co-ownership shall apply
-the person who you wants to choose as a partner, right
to choose a partner
-a partnership is a fiduciary relationship and entails full
trust and confidence
One ground of dissolution is loss of trust and confidence 3 Levels of Existence
3 | Partnership

Distinction between Partnership and Co-ownership


1. It is a contractual Relation between the partners
Partnership Co-ownership
2. It is a means or medium of doing business Contract only,
-it has a juridical personality (express or implied)
Creation Contract or Law
Agreement of the
3. It is a business enterprise/venture parties
O
Juridical
Art. 1768 The partnership has a juridical personality Personality
P Cannot sue or be
sued
Comm on enjoyment
Consequences of the Partnership Being a Juridical
Purpose Realization of Profits of their pro-indiviso
Entity share
Undivided property
a. Its juridical personality is SEPARATE and DISTINCT Duration No limitation for 10 years is not
from that of each of the partners. allowed
Cannot dispose his
Co-owner may sell
b. The partnership can, in general: Disposal/Transfe individual interest
only his pro-indiviso
r of Interest without unanimous
1. acquire and possess property of all kinds; consent
share
2. incur obligations; Cannot be transferred
3. bring civil or criminal actions, it can sue and be Death Heirs may succeed
to heirs
sued; Upon the death or Not dissolved by
Dissolution
4. can be adjudged INSOLVENT even if the incapacity of a partner death or incapacity
individual
members be each financially solvent. Distinction between Partnership and Corporation

Constitutional Rights of a Partnership Partnership Corporation


1. Right to Due Process Agreement of the Created by law or
Creation
2. Right to Equal Protection parties, voluntary operation of Law
No. of
3. Right against self-incrimination At least 2 persons At least 5persons
Incorporation
Date of the
Piercing the Veil of Corporate Fiction Commencement Issuance of the
Execution of the
-used only to check if there is fraud or sham transaction of Juridical Certificate of
Contract
entered into between the parties Personality Incorporation by
SEC
Any powers
Distinction between Partnership and Joint Venture Only expressly
Powers authorized by the
granted by law
partners
Partnership Joint Ad/Venture a stockholder
Single Transaction, cannot sue a
Temporary member of the
For profit with Effect of A partner may sue a
Purpose board of directors,
Purpose some degree of Mismanagement co-partner
Specie of the action must be
continuity in the name of the
Partnership
e.g. Mining Ventures corporation
Legal/Juridical Right of
P O Succession
O P
Personality
Firm Name P (req uired) O Partners may be The stockholders
Extend of Liability personally and are liable only to the
to Third Persons subsidiarily liable for extent of the shares
partnership debts subscribed by them
Anytime by the will of
any partners caused
by death, retirement, upon the Consent of
Dissolution
insolvency, civil the State
interdiction, or insanity
of a partner
Term of
Any period 50 years, extendible
Existence
4 | Partnership

Sept 2, 2015 Consequences of the Establishment of Partnership

Art. 1769. Test to determine the existence of a 1. Sharing of profits and losses
partnership
2. Equal rights or voice in management and on the
Without any agreement or contract of partnership conduct of the partnership business (Art. 1807)

1. Persons who are not partners as to each other are not 3. A partner is an agent of the other partners---
partners as to third persons; his action binds the partnership and other partner as long
as it is for the purpose of the business (Art. 1818)
2. Co-ownership or co-possession does not itself
establish a partnership, whether such co-owners or co- 4. Partners are personally liable to the debt of the
possessors do or do not share any profits made by the partnership (Art. 1816, 1822-1824), liability of a limited
use of the property; partner is different to a general partner

3. The sharing of gross returns does not of itself establish 5. The books of the partnership shall be kept at the
a partnership, whether or not the persons sharing them principal place of business--- any of the partner may look
have a joint or common right or interest in any property into the books
from which the returns are derived;
6. There is a fiduciary relationship existing among the
4. The receipt by a person of a share of the profits of a parties
business is prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if 7. A capitalist partner, one who contributes money or
such profits were received in payment: property, you cannot venture into another partnership
that is in competition with the business venture, while an
a. As a debt by installments or otherwise;
Industrial Partner is absolutely prohibited to venture into
b. As wages of an employee or rent to a landlord; another partnership since what he contributes is only
service and should be loyal
c. As an annuity to a widow or representative of a
deceased partner; 8. On dissolution, the partnership is not totally terminated,
but continues until the winding up of partnership is
d. As interest on a loan, though the amount of completed.
payment vary with the profits of the business;
Different Parties in Partnership
e. As the consideration for the sale of a goodwill of a
business or other property by installments or GR: There is no special capacity required by the partners,
otherwise. anyone can be a partner

Requisites for Existence of Partnership Exc:


In particular it must be proved that: 1. Those who cannot give consent to a contract
a. there was an intention to create a partnership
2. Those who prohibited from giving each other donation,
b. there was a common fund obtained from contributions or advantage, e.g.
a. husband and wife in a universal partnership
c. there was a joint interest in the profits. (Art. 1782)

Absence of one of the requisites--- no partnership b. Art. 739. The following donations shall be void:

Who has the burden of proof to show that a partnership 1. Those made between persons who were guilty
exists? of adultery or concubinage at the time of the
It is the partner/partnership donation, no need of conviction;

If there is no certainty with what kind of relationship is 2. Those made between persons found guilty of
entered into--- the partner has the burden of proof the same criminal offense, in consideration
thereof;
5 | Partnership

of the government in re: Art. 45 of the Revised Penal


3. Those made to a public officer or his wife, Code
descendants and ascendants, by reason of his
office If the contributions not used in the crime can be returned
to the partners
Consent
- The consent is essential to the contract of Exc: the property of a third person not liable for the
partnership offense
- The Consent and Intent to form a partnership
3. No legal personality

Partnership by Estoppel Partial Illegality


when two persons not partners represent themselves as Initially legal and becomes illegal
partners to strangers.
Effect:
The person represents himself as a partner in a Does not automatically dissolve the partnership,
partnership Ask for an accounting, and make a new partnership with
another business
Ex.
Suppose A, B, and C are not really partners, but A told X As to the Legal, the innocent partner may ask for an
that he (A), B, and C are partners. X, believing the accounting and return of contribution and distribution of
representation made by A and consented to by B, his profit
extended credit to A.
e.g
As against A and B, A, B, and C constitute a partnership Business of selling 2nd hand cars
by estoppel. But as against C, there is no partnership but there was a law prohibiting the selling of 2nd hand
and X cannot hold him liable as a partner. When the debt cars.
matures, The partners may ask for an accounting,
X is entitled to collect only from A and B who are liable Dissolve or change the business venture
as partners although not actually partners.
Examples of Unlawful Partnership
Q: Is there a partnership formed?
A: None, Art. 1825 provides only liability a. A partnership formed to furnish brothels or prostitution
A and B can run after X and vice versa. dens
b. A partnership formed to create illegal monopolies or
Art. 1770 Object or Purpose combinations in restraint of trade.
c. A partnership for gambling purposes.
The object or purpose must be LAWFUL and established d. A partnership formed for the purpose of acquiring
for the common benefit of the partners, i.e., it must be parcels of land much in excess of the maximum allowed
within the commerce of man, possible, and not contrary by the law.
to law, morals, good customs, public order or public
policy Consideration
-contribution of money, property and industry
If a partnership has several purposes, one of which is
unlawful, the partnership can still validly exist so long as Effect Failure to Contribute
the illegal purpose can be separated from the legal
purposes. Money : the partner becomes a debtor to the partnership,
if there are interest and damages incurred due to non
Unlawful partnership-purpose is to commit a crime contribution, the partner is liable

Consequences of an unlawful partnership Specific, Real or Personal Property:


loss before delivery: partnership is dissolved, the partner
1. The partnership contract is VOID AB INITIO. has nothing to contribute, the owner bears the loss

2. The profits derived and properties, instruments used loss after delivery: partnership bears the loss, the
and contributed shall be seized and confiscated in favor partners can contribute to give an additional capital for
the business venture
6 | Partnership

if only use is given and not ownership: before and after Sept. 4, 2015
delivery, partnership is dissolved
Classes of Partnership
Art. 1771: Formalities
Gr: No specific form, thus maybe oral or written A. Object

WRITTEN when there was a contribution of: 1. universal


1. Real/ Immovable Property
2. money P3,000 or more a. with all present property
---lose ownership of their property
Requirements
1. It must be in a public instrument b. with all profits
2. Registered in the Securities and Exchange ---the individual properties here continue to be
Commission owned by the partners, but the usufruct thereof
passes to the firm)
Contribution of real properties or real rights in real
properties: 2. particular
here the object are determinate things, their use or
a. must be in a PUBLIC INSTRUMENT, and; fruits is for a specific undertaking, or the exercise of a
profession or occupation
b. there must be an INVENTORY of the immovables,
attached to the public instrument and signed by all the B. Duration
parties.
Reason: to determine in terms of money the contribution 1. Fixed
of the partner
2. For particular undertaking/venture/purpose
c. Registered in the Register of Deeds, to protect the
third persons 3. partnership at will

If non-compliance: The partnership will still be existent a. here, no period, express or implied, is given and
but the contract VOID so its duration depends on the will of the partners;

The partnership may be considered as a de facto or b. if the period has expired, but the partnership
partnership by estoppel continued, without liquidation, by the partners who
habitually acted as such during the term.
Art. 1774. Acquisition of Property Under the
Partnership Name C. Extent of Partner Liability

-Applicable to immovable, and personal property because 1. General Partneship


the partnership is a juridical entity and capable of owning - liable beyond his contribution, maybeliable pro rata
and possessing property. and subsidiarily and sometimes solidarily (Arts. 1822-
1824.) with their separate property for partnership
If there are Alien Partners debts
Follow the 40-60 ratio of Filipino to Foreign capital stock -maybe all General Partners or General and Industrial
ownership Partner;

Art. 1775. If Articles are Kept Secret 2. Limited partnership that where at least one
partner is a general partner, and the rest are limited
Effect: partners.
a. The association here is certainly not a partnership and -A limited partner is liable only to the extent of his
therefore not a legal person, contribution.

b. It may be sued by third persons under the common D. According to representation to others:
name it uses; otherwise, said innocent third parties may
be prejudiced. 1. ordinary partnership
2. partnership by estoppel
7 | Partnership

Classes of Partners 3. Nominal Partner or Partner by Implication


-He is one who is represented as being in fact a
A. Nature of Contribution partner, but who is not so as between the partners
themselves, but there was no objection to the
1. Capitalist partner partners
-one who contributes money or property to the
common fund; 4. Secret partner
-who takes active part in the business but is not
2. Industrial partner known to be a partner by outside parties nor
-who contributes only his industry or personal service. held out as a partner by the other partners.
B. Liability
5. Dormant partner
1. General partner -does not take active part in the business and is
-whose liability to third persons extends to his not known or held out as partner.
separate property; he may be either a capitalist or
industrial partner. E. Membership
-He is also known as real partner;
1. Original partner
2. Limited partner -a member of the partnership from the time of its
- whose liability to third persons is limited to his capital organization;
contribution.
-May demand the return of his contribution 2. Incoming partner
-He is also known as special partner. -a person lately, or about to be, taken into an existing
partnership as a member;
C. Management
3. Retiring partner
1. Managing partner -one withdrawn from the partnership; a withdrawing
-who manages the affairs or business of the partner
partnership; he may be appointed either in the articles
of partnership or after the constitution of the 4. Continuing partner
partnership. -continues the business of a partnership after it has
been dissolved by reason of the admission of a new
2. Liquidating partner partner, or the retirement, death, or expulsion of one
-who takes charge of the winding up of partnership or more partners.
affairs upon dissolution
-may ONLY be designated 5. Surviving partner
-who remains after apartnership has been
3. Silent Partner dissolved by the death of any partner
-does not take any active part in the business
although he may be known to be a partner 6. Subpartner
-only for Profits - or one who, not being a member of the
partnership, contracts with a partner with
D. As to third persons
reference to the latters share in the partnership.
1. Partner by estoppel
-who is not really a partner, not being a party to a Art. 1784. Commencement of Partnership
partnership agreement, but is liable as a partner for
the protection of innocent third persons GR: A partnership begins from the moment of the
execution of the contract,
2. Ostensible Partner -even if contributions have not yet been made
Ostensible partner or one who takes active part and
known to the public as a partner in the business Exc: Stipulation
The agreement for a future partnership, the intent must
later on be actualized by the formation of the intended
partnership.
8 | Partnership

Consequences when a managing partner gets money


Sept 9, 2015 from the common for his personal use:
1. Reimburse the money taken;
2. Pay the agreed interest or legal interest
Art. 1786 Three Important Duties of Every Partner
3. Pay damages caused by the conversion of money to
personal use
a. the duty to contribute what had been promised;
When do you count the payment of interest and damages?
b. the duty to deliver the fruits of what should have been
Reckon at the time the managing partner converted the
delivered; and
fund for personal use, look at the intent, even if there is
no demand
c. the duty to warrant.
If there is intent to convert the money, the managing
Obligations of a Partner
partner is also criminally liable for ESTAFA---
misappropriation of partnership funds and there is intent
Art. 1788
to defraud the partnership
1. Contribute money, property, or industry
Property Obligation
If there is a failure to contribute and from the time he
Contribution on Immovable property:
failed to deliver his contribution, he becomes a debtor
Obligation to deliver on the agreed date
Q: When do you consider him to become a debtor?
If there is delay the partner becomes a debtor until the
time he delivers,
A: At the time the formation of the partnership was
entered into or a period has been agreed upon.
As a debtor the partner is also liable to:
Art. 1786, 1785
e.g. X partner was supposed to contribute money on
1. Preserve the property
Sept. 15, but he failed, after Sept.15 up to the time you
2. Warrants the property against eviction by judicial
gave your contribution, X is considered a debtor
process
X has the obligation to:
The partner warranties that the property is not subject to
1. Payment of the contribution including interest, if it is
eviction
agreed
Without any agreement, legal interest shall prevail 12%
Eg. You have property that you want to contribute to the
per annum
partnership unfortunately that property is a subject of a
case and that case ruled against the partner, the property
2. Damages
rightly belongs to Z,
-actual damages that the partnership should have earned
and the lost opportunity
Q: What happens to this property?
A: The ownership and possession is lost by the partner,
e.g. failure to enter into a transaction due to the non-
this cannot be transferred to the partnership
contribution of a partner, there was a lost opportunity to
earn
Q: The property was evicted, what happens to the
partner?
Art. 1788 2nd paragraph presupposes:
A: The partner shall become a trustee of the partnership,
The partnership is in operation,
therefore this partner has the duty to look for another
There is a managing partner and;
property that shall be agreeable to all the partners and
a common fund
has to be satisfactory and meet the standards of the
partnership
Rule: Managing partner can get money from the common
fund
If the partner cannot contribute any other property:
Exc: no agreement or no managing partner, anybody can
Dissolution of the partnership
get from the coffers of the management
Two(2) actions that can be filed with respect to
Managing partner should monitor and whenever he gets
contributions:
money,
1. Rescission of the partnership
9 | Partnership

2. Specific performance No, involuntary servitude


Liability of the fruits of the property
If your industrial partner enters into a business of his own,
e.g. The property is being leased, earning rentals what is the remedy?
rentals, Z promised to contribute the property on Sept. 9, 1. Partner may be excluded
but the tenants are staying there until Oct 10, thus cannot 2. Liable for damages because of his failure to contribute
be delivered. since there was loss on the partnership,
3. The profits/benefits earned by the industrial partner
The rentals earned from Sept. 9 to Oct. 10 shall be may be taken by the partnership
included in the partnership assets, The partnership may demand from the industrial partner
the partner cannot keep the rentals such profits or benefits

Art 1787 Contribution of Goods Other obligation in relation to contribution:

Rule: Appraisal of value of the goods is needed to Obligation to Preserve the Property
determine how much has been contributed. With the diligence of a good father of a family, take care
of the contributions a partner promised
How Appraisal is made?
Art. 1790. Respect the stipulation as to the amount of
(a) Firstly, as prescribed by the contract. contribution to be contributed
(b) Secondly, in default of the first, by EXPERTS chosen
by the partners, and at CURRENT prices. E.g. licensed In Articles of Partnership, can stipulate to the amount of
real estate appraisers contribution, this shall follow to the sharing of profits and
losses.
Art. 1795 Risk of loss of contribution of property or
goods e.g. Total= 5M; A=1M, B=3M, C=1M

(a) Specific and determinate things (NOT fungible) If no stipulation, they shall contribute equally
whose use/usufruct is enjoyed by a firm like a car Exc: An industrial partner shall receive just and equitable
partner who owns it bears loss for ownership share.

Ex. Taxi business, Z allowed the car be used, If the car Additional Contribution
was wrecked, it Z who will bear the loss. If:
! There is stipulation, the partners are compelled
(b) Fungible or Deteriorable Firm bears loss for ! There is imminent loss of the business partnership, the
evidently, ownership was being transferred; otherwise, business is to go bankrupt
use is impossible.
If one of the partner refuse--- he is obliged to sell his
Ex. Business of vegetable, or cell phone was lost, the interest over other partners
partnership shall bear the loss
If he refuses to contribute and refuses to sell---he is no
(c) Things Contributed to be Sold Firm bears loss for longer interested in pursuing the business venture
evidently, firm was intended to be the owner; otherwise,
a sale could not be made. If there is a stipulation that Z partners is not compelled to
contribute even if there is imminent loss---cannot compel
(d) Contributed under Appraisal Firm bears loss to contribute additional amount
because this has the effect of an implied sale.
What kind of refusal and still the partner is a part of
Art. 1789 Contribution of Services and Industry partnership? By reason of insolvency and he cannot
-labor and service therefore the partner is bound to give contribute additionally
100% attention to the partnership
- he cannot engage in any other business without the
express
consent of the other partners;

Can you compel a partner to perform his obligation if he


refuses, to contribute his industry?
10 | Partnership

Sept 11, 2015 Management


-an important property right,
can be all of them or by a designated a managing partner
Art. 1796 Obligation of the Partnership to a partner
-a partner has a voice on how the business will proceed
1. Reimburse cash expenses that the partner incurred
Interest
2. To honor the all the contract the partner entered into, -the share of the partner with respect to the profit and the
these transactions should be: for the benefit and interest surplus---refers to excess after the distribution of profits
of the partnership; and entered into in good faith
If partnerships assets were sold after the payment of
3. To refund all cash advances or amounts disbursed on debts and there were excess, this excess should be
behalf of firm plus interest (legal) from the time expenses returned to the partnership and shall be distributed
were made
(and not from demand, since after all, a partner is an If there are debts:
agent, and the rule on agency applies to him). 1. Pay off the debts
2. The remaining shall be the profits
Example: 3. Distribute depending to the contribution of each partner
4. The remaining shall be the surplus
Fastfood business
Agreement to contribute money, but it was not enough to Partner s share is also partnership assets, this includes:
buy machineries 1. Return of his contribution; and
Partner A will contribute money for the business to start, 2. Share in the net profits
but his money is also not enough
A entered into a loan transaction, this was for the Once the partner receives his share in the profits,
partnership, it is now considered as the personal property of the
The loan was due even if not profits were not realized partner, he may dispose as long as the way he disposes
and he made cash advances to pay for such loan, is not contrary to law, public policy, public order
You should count the period when the expenses and
cash advances were made Art 1810 (3) MANAGEMENT RIGHTS
Q: What if the business incurred losses, can you still ask GR: partners are agents of the partnership, therefore
for reimbursement? anybody can manage the partnership
A: The partner who made cash advances and expenses Exc:
may still ask for reimbursement, cause a partner is still A. There is an appointed managing partner designated in
considered an agent of the partnership the Articles of Partnership
An agent is not liable for the obligation incurred by the
principal. If a partner is designated in the articles of partnership, his
managing power is irrevocable since revocation
Art. 1810. The property rights of a partner are: represents a change in the terms of the contract.
(1) His rights in specific partnership property;
(2) His interest in the partnership; and Rationale: the mismanagement is management
(3) His right to participate in the management. prerogative and the court cannot question such.

All the partners has the right to own the property Rule: Power is irrevocable.
Partnership property are covered by Rules on co- Exc: when there is just or unjust cause
ownership
What can the partners with respect to their partnership 1) In just cause, the controlling partners (partner with the
property? highest percentage in the contribution) should vote
to OUST HIM.
Any of the partners may use the property as long as for
the purpose of the business Therefore, the controlling partner as much as possible
should not be the managing partner
If for personal use: there should be consent of all the
partners
11 | Partnership

2) For unjust cause, there must be a unanimous vote, 3. not incidental to the business
including the vote of the managing partner. -not part of the business

Reason: This represents a change in the will of the 4. it is not necessary to carry out the object of the
parties: a change in the terms of the contract; partnership
a novation , so to speak, requiring unanimity.
Art. 1801 Two or more managing partners
How do you revoke?
may file an application for dissolution of the partnership Rules:
by a judicial decree and create a new partnership. 1. If there is a designation
NO Court intervention since it is a management -The partner can only perform the power designated to
prerogative. him

What is the extent of you power? 2. If there is no designation, these partners have equal
If done in Good Faith, power, unlimited act of management
All acts of administration, e.g. business transactions, hire
and fire employees---should be done in good faith, 3. If it is stipulated that the managing partner cannot act
without the consent of the partners
no need for the consent of other partners
Rationale: When they appointed a managing partner, the If one of the managing partner objects to the acts of
other partners already surrendered their power to another managing partner
management
Remedy: Register his objection before the other partner
If the managing partner is acting in Bad Faith, completes the act or before the acts produce legal effect
He cannot do all acts of administration, but he is enjoying e.g. hiring then there is a contract of employment, the
the presumption that he is in good faith. objecting partner may stop the other partner.

B. Appointment as manager after the constitution of the If not, the act will bind the partnership
partnership in another instrument or orally
-this may be revoked at any time for any cause just or Why will register your objection? To protect third persons
unlawful cause.
Q: Who has the right to object the act of managing
Why is there a difference in revocation? partner?
The appointment is a mere designation of power
A: The other managing partner can only object to the
Extent of power? acts of the managing partners.
As long as he remains as the managing partner, he can
do all acts of administration. A & B managing partner
C & D partners
The act of administration of the managing partner should C & D cannot object because they already gave up the
be within his authority and for the best interest of the right to management to A & B
partnership
If there is an objection, how do you now decide?
Act of dominion---act of ownership Majority of all the managing partner
there should be consent of all the partners for it to
binding If there is a tie: vote of the partner with controlling
interest--- such partner is also a managing partner
GR: All acts of administration is conferred to the
managing partner Art. 1802 The all the acts of administration must be with
Exc: the consent of all the partners, even if you are a
1. specifically restricted managing partner.
Eg. All acts of administration except hire and fire
employees All partners must agree to the act of the managing
partner, e.g. hiring of an employee and all partners
2. expressly withheld should consent
-same as 1
12 | Partnership

The managing partner cannot act without the consent of It shall bind the partnership.
the other managing partner. Sept. 16, 2015
A, B & C are managing partner Rules in management when there is no designated
A for his acts to be valid, B & C must consent partner
A cannot put up the defense he is did not yet get the
consent because he is incapacitated Every partner is an agent of the partnership, any partner
A will hire is a managing partner as long as:
B & C was out of the country 1. The partner is acting is good faith
A cannot hire without the consent of B & C 2. It is acting in behalf of the partnership and for the
interest of the partnership;
Exc: there is an imminent danger or irreparable injury
that which will be a cost to the partnership if there is a Therefore the act of partnership binds the partnership.
delay, e.g. damage upon the taxi
There is no need for the consent of other managing When does the act of a partner does not bind a
partner partnership?
If there is timely objection by the other partner
Art. 1803: There is no designation of a managing partner
Eg. X partner will enter into a transaction with a third
The partners shall all be considered as managing person, X partner is in good faith and is acting for the
partners best interest of the partnership, for the act not to bind the
partnership, there should be a timely objection by Y
In re: Art. 1818 as long as the partners are acting in good partner
faith, the acts are binding upon the partnership
How can the objection Y partner be overturned?
As an agent, a partner is keen to act within the scope of Art. 1801 there has to be a majority decision of all the
his authority, whether actual, implied or apparent partners
authority The transaction may proceed and shall bind the
---his acts concerning the partnership business and every partnership
contract in the partnership name will bind the partnership
Art. 1818 as an agent of the partnership, a partner is
Q: When can a partner bind the partnership? deemed to have acted within his scope of his authority,
A: A partner binds the partnership when the following That includes all acts of administration, whether implied,
requisites are present: actual or apparent.

(a) expressly authorized; or -limitations on the authorizations of a partner are not


binding on innocent third persons who have a right to
(b) impliedly authorized; assume that every general partner has the power to bind
the partnership especially those partners acting with
Instances of implied authorization: ostensible authority by whatever is proper for the
transaction in the ordinary and usual manner of the
1) when the other partners do not object, partnership
although they have knowledge of the act;
-third persons who transacts with a partner are not
2) when the act is for apparently carrying on in required to inquire as to whether or not the authority of
the usual way the business of the partnership. the partner to whom they are transacting has the consent
of the other partners
Doctrine of Apparent Authority
-The act is binding on the firm even if the partner -innocent persons who deal with the partner will not be
was not really authorized, provided that the third liable, they can hold liable the partnership, despite the
party is in GOOD FAITH. limitations on the partner, as long as the partner is acting
in the ordinary and usual manner of the business

Ex: Partner is authorized to buy products which will be e.g. XYZ partnership uses only cash basis in their
used to sell, The partnership uses only cash and the third transactions, X enters into a transaction with instalment
person does not know this limitation and this partner or credit basis, the third person who enters into such
used check or credit,
13 | Partnership

transaction may hold the XYZ partnership liable, as long 5. Enter into a compromise concerning a partnership
as the third person does not know such limitation. claim or liability;
this is an act of ownership and may be said to be
How can we determine whether or not the transaction equivalent to alienation, removing ownership from
is within the scope of the partnership business? partnership property

may be gauged by the usual manner in which it is carried 6. Submit a partnership claim or liability to arbitration;
out in the locality; same as alienation
but scope may be broadened by actual conduct of
business, as carried out with knowledge, actual or 7. Renounce a claim of the partnership.
presumed, of the partner (partners, or partnership) the right to renounce belongs to the partnership only
sought to be charged.
Exception to these acts of dominion
e.g. XYZ partnership transacts using cash only, the X -there is a need of unanimous authorization
partner uses a check or credit 1. When the partner is authorized by other partners
2. When all the other partners have abandoned the
ABC partnership is in the Real estate business but then partnership, the remaining partner may perform acts of
A partner is now selling motor vehicles, the third person dominion
should start to be wary and vigilant
In the event there is abandonment, 1 or more but not all
Effect: if there the transaction is not within the scope of partner may perform the acts of dominion
partnership business, the partnership may not be held
liable Art. 1803 (2) No designation of managing partner,
Important alteration in an immovable property
For third persons, and there is no designated managing
partner in the partnership, None of the partners may, without the consent of the
check if the partner has authority to enter into such others, make any important alteration in the immovable
transaction and if there is general authority property of the partnership, even if it may be useful to the
partnership. But if the refusal of consent by the other
Art. 1818. 7 Instances these acts binds a partner if partners is manifestly prejudicial to the interest of the
there is no designation, cannot act on its own partnership, the courts intervention may be sought.
There is a need for unanimous consent
These important alterations are useful expenses but
Rationale: Because there are already acts of dominion, not necessary
actual ownership, they are not apparently carrying on in
the usual way of the business of the partnership Rationale: alteration in the immovable property of the
partnership is an act of strict dominion.
1. Assign the partnership property in trust for creditors or
on the assignees promise to pay the debts of the Rule:
partnership; Useful expenses must be with consent
---the firm will virtually be dissolved since there is a Necessary expenses do not need consent
removal of asset, giving the asset to the creditor
The consent required:
2. Dispose of the goodwill of the business; Unanimous consent of all the partners
goodwill is valuable property, e.g. name of the The consent need not be express or implied.
business of the partnership Implied: as when the partners had knowledge of the
alteration and no opposition was made by them
3. Do any other act which would make it impossible to
carry on the ordinary business of a partnership; Eg. Taxi business
this is evidently prejudicial Building where you house your office,
A part of the building is deteriorating,
4. Confess a judgment; The use will depend on the part of that building which is
if done before a case is filed: confession is null and deteriorating,
void,; If the part is not used---- useful expense, there is a need
if done after the case is filed, the firm would be to get the consent
jeopardized, the confession is not binding.
14 | Partnership

If the part houses the office, computer and files---- After dissolution, the partnership has to dispose
necessary, no need to get the consent of the partners, partnership assets, if statements that must pertain to
this is partnership liability these transactions, then it shall be binding

Q: Why is it limited only to immovable property? e.g. Vehicle that is owned by the partnership and it is
paid in instalment, and a partner admitted that there is
A: First, because of their comparative greater importance still a debt to the bank, this obligation is still demandable
than movable property. to the partnership and it shall pay for the debt

Second, because, in a proper case, they should be Rationale: If the admission is not the act of the
returned to the partners in the same condition as when partnership, it should NOT be evidence against it.
they were delivered to the partnership.
Since the partner shall only give the usufruct or right to
use and the same shall be returned to the partner upon Sept. 18, 2015
dissolution
Other Acts of a Partner that binds the partnership
Remedy of a partner if one of the partners object to the
important alteration and no alteration can be done: Art. 1821 Notice given by third persons
Court intervention,
If such objection is manifestly prejudicial to the Generally, notice to a partner is notice to the partnership
partnership
e.g. Deterioration on the not used part, but there might Reason: because of the existing fiduciary relationship, it
be termites on the deterioration, then court intervention is presumed that partners disclose to one another
may be sought relevant information concerning partnership business
Another act that may bind the partnership A third person need not to send notices to all partners
Art. 1820 Admission or Representation Made By a Conditions:
Partner
1. Notice must be related to partnership affairs
An admission, stipulation or statement by a partner is
admissible against the partnership under the conditions 2. The partner who receives notice is within the scope of
given: his authority
a. the admission must concern partnership affairs only e.g. Matter about a property, one of the partners is a
managing partner, it is within his scope of authority that
b. partner is acting within the scope of his authority he is notified of such matter, if the partner is notified,
---made to a third person is binding to the partnership
The partnership cannot claim ignorance of this notice
c. made by the partner while engaged in the partnership
As provided by Uniform Partnership Act
d. the existence of the partnership must be proved or
Knowledge of fact Notice of fact
established,
Actual knowledge of fact A person claiming the
but also when the partner benefit of the notice:
e.g. partner by estoppels, the admission may not be
has knowledge of other
binding to the partnership
facts A person states the fact to
such person and it is this
Restrictions on the Rule
There are other person who claims, and
information regarding such states it to another person
1. Admissions made BEFORE and going towards
fact
dissolution, and third party are going after the partnership,
Or delivers the fact
The admissions are binding only when the partner has
Maybe learned through through a written notice to
authority to act on that particular matter.
rumors or gossips his place of business or
residence
2. Admissions made AFTER dissolution are binding only
if the admissions were necessary to WIND UP the
business.
15 | Partnership

There might be notice but knowledge has been acquired


regarding an important matter, Art. 1822. Wrongful Act or Omission of a Partner

Q: Does this knowledge without notice considered Torts committed in the ordinary course of the business or
knowledge of the partnership? with the authority of the co-partners

Yes, still considered knowledge of the partnership when: The non-erring partners are also liable

1. The knowledge was acquired by a partner who is e.g. A, B, and C were partners. While acting within the
acting in the particular matter involved. scope of the firms business, A committed a tort against
X, a third person. Is the firm liable?
Q: When is the knowledge acquired and that may bind ANS.: Yes. Moreover A, B, and C, as well as the firm
the partnership? itself, are liable solidarily.

A: May have been acquired while already a partner, or When the Firm and the Other Partners are NOT Liable
even PRIOR TO THAT TIME, provided present to his
mind,----he still remembers the knowledge. a. If the wrongful act or omission was not done within the
scope of the partnership business and for its benefit or
2. The partner was present to his mind and remembers with the authority of the co-partners.
the knowledge--- Prior to the partnership and the partner
is in authority to act for a particular matter b. If the act or omission was NOT wrongful.
There was no wrongful act
3. The knowledge was acquired by a partner not acting in e.g. self-defense,
a particular matter
----while the partner is already in the partnership c. If the act or omission, although wrongful, did not make
the partner concerned liable himself----the partner is not
e.g. The Y partner is authorized in the hiring and firing of the reason for the act or omission
an employee, X partner came to know that one of the
employees has a criminal record, d. If the wrongful act or omission was committed after the
X partner has the obligation to say about character of the partnership had been dissolved and same was not in
employee. connection with the process of winding up.

Scenario Art. 1823. Liability of Partnership for Misappropriation


P acquired some knowledge about Ss cre dit before P became entrusted by third persons given to the partnership
a partner.
Later P became a partner, and one day S had a transaction
The partnership is bound to make good the loss:
with the firm. P never conveyed the information he knew to the
firm although he could have done so.
R was the person who dealt with Ss transaction. (1) Where one partner acting within the scope of his
Nobody else in the firm knew what P already knew. apparent authority receives money or property of a third
person and misapplies it; and
Q: Is Ps knowledge also the knowledge of the partnership?
(2) Where the partnership in the course of its business
A: No, because P was not the partner acting in the particular receives money or property of a third person and the
matter involved. He had acquired the knowledge BEFORE he money or property so received is misapplied by any
became a partner, not afterwards. The words present to his
partner while it is in the custody of the partnership.
mind (rememb ered) do not apply, for they apply only to the
person ACTING in the particular matter.
P has no obligation to disclose such information
Requisites of Art. 1823

Q: When is the knowledge not binding to the partnership? 1. Partner was acting within scope of his authority
2. There was receipt of money
A: The partner comes to know of an information, in case 3. The partner misapplied the money while it is in the
the partner commits deliberate intent or fraud on the custody of the partnership
partnership committed by or with the consent of the other
partner who knew such knowledge e.g Investment business, Z partner has the authority to
receive money, Z misappropriates by gambling
Other acts of the partner that binds the partnership
16 | Partnership

A. The property is in the name of the partnership or


Par. 1 Misappropriation is made by the receiving partner, of
within the scope of his authority (Par. 1)
Par 2. Misappropriation made culprit may be any partner
who receives money in the course of the business Any partner may convey title to such property by a
Effect: same, the partnership is still liable conveyance executed in the partnership name
With authority, the title passes to the buyer
Remedy: The erring partner may be sued for damages
by the partnership or other partners Without authority, will it pass valid title to the buyer?
Yes, but the firm may recover the title land unless:

Art. 1824. All partners are liable solidarily with the 1. The partner was acting in the usual way of the
partnership for everything chargeable to the partnership business, e.g. real estate business
under Articles 1822 and 1823
---due to tort - the buyer does not know the lack of authority

Different from Art. 1816 2. The buyer already sold the property to a third person
-provides joint liability, partnership obligations the Who is a buyer in good faith, for value and has no notice
transactions that was entered by the partnership itself has that the partner has acted with lack of authority
and there is corresponding obligation
Ex. A, B, C, and D are partners of the firm Edimus.
A parcel of land registered under the name Edimus was
Obligation of the Partnership re: Workmens sold by A on behalf and in the name of the firm Edimus,
Compensation but without express authority. The purchaser is X. Does
X become the owner?
Scene:
there was illegal dismissal and the worker was able to A.: Ordinarily YES, but the firm may get back the land
obtain a favourable judgment unless:
a. the firm is engaged in the usual buying and selling of
The liability of the business partners should be land
SOLIDARY.
b. X had in turn sold the same land to Y for value and Y
Rationale: If the responsibility of the partners were to be did not know of As actual lack of authority.
merely joint and not solidary, and one of them happens
to be insolvent, the amount awarded to the dependents Reason: The property has in turn been conveyed by the
of the deceased employee would be only partially grantee (X) to a holder for value (Y) without knowledge
satisfied. that the partner, in making the conveyance, has
The law intends to give full protection to the employee. exceeded his authority.

Art. 1819 Conveyance B. The title is in the name of the partnership but was
-conveyance of real property through sale and donation sold in the name of the partner (Par. 2)

In partnership, if there is a specific authority to sell a real What passes to the buyer is only the equitable interest
property it includes the authority to mortgage over the property, such as beneficial interest of use and
fruits over the property
Real property may be registered or owned in the name of:
1. The partnership; Conditions
2. 1 or more but not all the partners; The partner was:
3. 1 or more, or all in trust;
4. All partners 1. acting with scope of his authority
2. in the usual way of the business of the partnership
What is equitable interest? 3. sells the property in his own name, instead of putting
-all interest which the partnership had, except TITLE, that the name of the partnership
is, the beneficial interests like use, fruits, but not the
naked ownership. Remedy of the buyer:
Reformation of the contract,
Rules:
17 | Partnership

The partnership shall execute a new contract changing How does a buyer acquire valid title from a property sold
the name of the seller, to the name of the partnership by a trustee?
provided: other partners would not object to the There must be Ratification:
reformation of the contract
1. After the lapse of many years from the time of
If the partners object: The buyer may use and have the execution of a conveyance by a partner purporting to act
fruits of the property for the partnership,

The buyer is not entitled to equitable interest when: The partnership came to know the act of the trustee
1. The buyer knows the lack of authority of the partner laches will already apply
2. They are not in the usual manner of business, not in ---reasonable time
the real estate business
3. When the buyer knows the lack of authority, and the 2. At the time the document was given and executed to
partnership is in the usual manner of the business. the buyer, e.g. Deed of Sale, the partners was present
and there was no objection
C. One or more but not all of the partner and there is
no indication that the property is a partnership Implied Ratification on the action of the trustee will validly
property. (Par. 3) pass title

e.g. A, B, C and D were partners in the real estate firm of 3. From the nature of the partnership business, and
Edimus. Although a certain parcel of land really where a firm is engaged in the business of buying and
belonged to the firm, it was registered in the name of A selling real estate, a contract of sale executed by one of
and B. the partners in the firm name is valid.

Effect: any of the partners in whose name the title stands


or registered owner may convey title to property to the E. All the partners
buyer Same as Rule in A. Title in the name of the partnership

The property may be subject to recovery of the Sept. 23, 2015


partnership if the buyer is in bad faith
Co-ownership Rights
exc:
1. The partner was acting in the usual way of the Art. 1811 A partner is co-owner with his partners of
business, e.g. real estate business specific partnership property.
- the buyer does not know the lack of authority -an extension to the right to participate in the
management of the partnership
2. The buyer already sold the property to a third person
Who is a buyer in good faith, for value and has no notice - they are co-owners (tenants in common with
has that the partner has acted with lack of authority proportional, sometimes equal) right thereto.
D. The title to real property is in the name of one -When a partner contributes real or personal property into
or more or all partners, or in a third person IN TRUST a common fund it becomes a common property they
for the partnership (Par. 4) become co-owners
The registration is in trust Rules on co-ownership does not necessarily apply to
partnership,
Ex. A, B, C, and D were partners in the real estate firm of
Edimus. A certain parcel of land was in the name of A, Article 486 Each co-owner may use the thing owned in
in trust for the firm Edimus. If sold to X, X only acquires common, provided he does so on accordance with the
equitable interest since A is a mere trustee. purpose for which it is intended and in such a way as not
As a trustee the beneficiary shall only be the partnership. to injure the interest of the co-ownership or prevent the
other co-owners from using it according to their rights.
The benefits, e.g. fruits inured by the trustee shall also
inure to the benefit of the partnership -Property once contribute is not subject to the sole will or
discretion of the contributing partner
18 | Partnership

Rights with respect to co-owned properties


e.g. ABC Partnership, A dies, B dies, C survived
A. Equal rights to possession
Effect: The right of the partner over a specific property
-anybody can use, possess for partnership purposes will go to C for purposes of winding up.

Can they use it for personal use? When C dies, the rights of the partnership over the
Yes, as long as there us consent of all the partners partnership property shall go to the legal representative
of C, he was the last to die. The legal representative shall
e.g. ABC Partnership, A wants to loan money for his own be in charge in liquidating, dissolution.
use and he makes use of the partnership property as the
security/collateral
A cannot use the property for his own use B. Right over a specific partnership property is not
assignable
If he uses loan for partnership purposes valid collateral.
A partner cannot separately assign his right to specific
Q: Can he use 1/3 of his interest over the property? partnership property but all of them can assign their
rights in the same property
A: Depends,
Reasons:
If with consent of partners, he may use that 1/3 share as
a collateral for the loan 1. It is impossible to determine the extent of his beneficial
interest in the property until after the liquidation of
Will a bank accept such collateral? Depends partnership affairs;

If without the consent then the partner cannot use if for 2. Prevents interference by third parties in partnership
collateral affairs--- there is no fiduciary relationship;

Reasons for the consent of the partner 3. It protects the right of other partners especially
partnership creditors to have partnership assets applied
1. The bank might not accept a portion over a co-owned to firm debt
property ----In partnership liabilities, partnership creditors are paid
before personal creditors
2. There is a difficulty to determine the exact beneficial
interest of a partner over specific partnership property If assigned,
without dissolution of the partner
-The assignment is VOID and the partners may recover
It is only during dissolution when there is liquidation that that might have been assigned
a partner will know the exact
The law allows a retiring partner to assign his rights in
If there is a violation, what is the remedy? partnership property to the partner or partners continuing
the business.
1. The erring partner, must account to any benefits or
profits he gained for the use, and for any damages that C. Right over a specific partnership property not
might have incurred for the wrongful use subject to attachment or execution

2. The partners have the right to ask for an accounting, if X has a creditor,
the erring partner does not account X is not an owner of the property even if it is through a
judgment
3. The partners may apply for a dissolution of the
partnership, because there the decrease in the fiduciary Q: When is it subject to attachment or execution?
relationship in the trust and confidence on a partner A: Differentiate who is a Personal creditor and a
Partnership Creditor, upon dissolution, the latter can first
The right to use or posses may be given up by a partner be satisfied.
and surrender it to a managing partner

Death of a partner
19 | Partnership

e.g. ABC Partnership, they entered into a transaction with


X, A has a personal debt to X, X will first be paid by the Conveyance of his interest may be whole or partially, all
ABC Partnership. profits or surplus that he might derive, may be assigned
to third persons even without the consent of other
If ABC cannot pay, and X wins, since this is a partnership partners
credit, it will be subject to attachment.
It does not mean dissolution unless the partners clearly
X cannot run after the partnership property of A, the shows that he want to withdraw from the partnership
partnership property is not owned only by A.
His act of assigning his interest does not mean
Remedy of Personal Creditor? dissolution but can be a reason for the dissolution
Go after the interest of this partner over the partnership,
Profits or Surplus Allows a personal creditor the remedy to require the
partner or debtor to assign to him his partnership
GR: Partnership Property cannot be attached interest---- it is a personal property.
Maybe assigned until the payment shall be fulfilled.
In the event that the partnership property will be attached,
the partners, or any of them, or the representatives of a Effect to the assignee:
deceased partner, cannot claim any right under the still not a partner and he cannot
homestead or exemption laws; a. interfere in the management;
b. cannot require any information or account on a
Exc: But a partner s interest in the partnership itself may partnership transaction; or
be levied upon by a judgment creditor. c. inspect any of the partnership books--- he cannot
check the book of account.
D. Partnership Property is not subject to legal
support Effect to assignors
-it is a personal obligation a partner, cannot be used to
support the family 1. He is still a partner
2. He may demand accounting and settlement of the
Art. 1812. Equity Rights partnership affairs

A partners interest in the partnership is his share of the Rights if an assignee


profits and surplus
1. To receive in accordance with his contract the profits
Profit: excess of the receipts over expenses accruing to the assignor

Surplus: assets over liabilities Q: Is an assignee considered as an outside creditor?

Interest A: The assignee steps into the shoes of the partner thus
-it consists of the partners proportionate share in the after the payment to the partnership creditor, the
undistributed profits during the life of the partnership and payment to the assignee shall follow.
his share in the undistributed surplus after the dissolution

There is profit and surplus upon dissolution and 2. To avail himself of the usual remedies provided by law
settlement of property debts and payment of credit to in the event of fraud in the management
partners and distribution of contribution then surplus --run after managing partner

The right of each partner to the share of profits and 3. To receive the assignors interest in case of dissolution;
losses
4. To require an account of partnership affairs, but only in
Personal Property of the partner case the partnership is dissolved and shall cover the
-Once the interest or the share has been given period from the date only of the last account agreed to by
-Can be used by the partner as long as not contrary to all the partners.
law, public policy, etc. -no dissolution, no right to ask for an accounting
-accounting before is not included
Art. 1813. Right of a partner in assigning his interest
over the partnership
20 | Partnership

5. To ask for annulment of the contract of assignment if


he was induced to enter into it thru any of the vices of Redemption of the Interest Charged
consent or if he himself was incapacitated to give
consent (minor, insane). Redemption
- the extinguishment of the charge or attachment
on the partner s interest in the profits.
Remedy when one of the partners or partnership when
one of the partner assigns his interest, How is this redemption made?
Can they go after the assigned shares?
The partnership/partners may repeat all purchase of 1. The charge may be redeemed or bought at anytime
equity, not to dissolution BEFORE foreclosure; or

2. If there is court order, AFTER foreclosure, it may still


1814. Judicial Remedy of a Personal Creditor of a be bought, with:
debtor-partner with respect to the partner
share/surplus a. separate property, by any one or more of the partners,
including the partner who assigned;
Allows the separate creditors to seize upon the property
rights of a partner without having disrupt the operations b. partnership property provided with consent of all the
of the partnership other partners, does not need the consent of the partner
who assigned
How does this happen?
e.g. A, B and C are partners. A personally owes X a sum Q: May the partner still avail himself of the exemption
of money. X sues A, and obtains a final judgment in this laws regarding his interest in the partnership?
favor.
But A has no money. What can X do? A: Yes, because in a sense, this is his private property.
Thus can be used as a defense in cases of attachment of
X may go to the same court (or any other court execution,
possessed of jurisdiction) He cannot however avail himself of the exemption laws
and ask that As interest in the partnership be charged insofar as his interest in specific partnership property is
(attached, or levied upon) for the payment to him (X) of concerned.
whatever has not yet been paid him with interest thereon.
Art. 1797. Sharing of Profits and Losses
The court may even appoint receiver who may receive
the profits. The share in profits and surplus is merely inchoate ---
mere expectancy, this is transferrable or assignable
NOTE: While a partners interest in the partnership This cannot be demanded even if promised,
(his share in the profits or surplus) may be charged or
levied upon, his interest in a specific partnership property Whatever profits should be earned, those will be
cannot be attached. distributed.

What the court may appoint a receiver, the receiver: Q: How do you determine the extent of the interest?
1. will receive in behalf of the creditor the payments;
2. has the right to demand payment from partners who A: The share of a partner is in proportionate with the
has existing credits against the partnership for their residue or balance after the credits and debts of the
existing loans; partnership have been taken into account
3. Make all other orders, directions, accounts and other
inquiries Q: On dissolution, who do you determine the extent?

A: After dissolution and the partnership accounts have


been settled, what will only be given are net profits
September 30, 2015
Rules on Profit Sharing
Partnership creditors are entitled to priority over
partnership assets (including the partners interest in the 1. Based on the Agreement
profits), that is, the separate creditors will get only after
the firm creditors have been satisfied. If no agreement
21 | Partnership

2. Share in proportion to their respective contribution, After two (2) years there was a loss of P30K
Capitalist Partner
A 40 % of P30K = P12K
3. The Industrial Partner (IP) shall receive just and B 30 % of P30K = P9K
equitable share based on the circumstances C 20 % of P30K = P6K
-The IP share shall be given first before the share to the D 10 % of P30K = P3K
Capitalist Partners
Although there was no agreement on loss sharing, there
4. Both Capitalist and Industrial Partner was agreement of profit sharing--- Go to Rule # 2

a. Determine his just and equitable share D will also share in the loss because of the profit sharing
agreement. His exemption to the loss is immaterial due
b. Distribute share on the profits based on the to the agreement.
contribution
Q: The Industrial Partner is exempt from loss, how can
Rules on Loss Sharing he recover?

1. Based on the Agreement A: Since he is exempted, he can recover from the P3K
from the other partners. Therefore he still does not bear
2. If there is stipulation on the profit sharing ratio but no the loss
agreement as to loss sharing--- use the profit sharing
ratio if there is no profit sharing agreement--- he is purely
exempted.
If there is profit sharing agreement and the Industrial
Partner is entitled to profit ratio, he becomes liable to the Art. 1798. Designation of Share to Profits and Losses
share, but this shall be borne out by the other Partners. to be made by Third Persons

3. If no profit or loss sharing agreement--- --- not a partner


it will now depend on the contribution of the partner
One partner cannot upon his discretion designate the
4. If there is no profit or loss sharing agreement--- share to avoid partiality
The Industrial Partner shall be exempt from loss
The third persons should be followed by the partners
Reason: While capitalist partners can withdraw their unless:
capital, the industrial partner cannot withdraw any labor The designation by 3rd party is manifestly
or industry he had already exerted. inequitable/unfair
Moreover, he already has shared in the losses in that, if
the partnership shows no profit, this means that he has When designation by third party cannot be question even
labored in vain. if manifestly inequitable:

1. if the aggrieved partner has already begun to


Situation execute/implement the decision of distribution of profits;

Sharing of Profits 2. or if he has not impugned/questioned the same within


A 40 % a period of three months from the time they had
B 30 % Capitalist Partner knowledge of the designation.
C 20 %
D 10 % - Industrial Partner e.g. X made a designation today, but A partner only
came to know the designation during the distribution, he
Suppose the Partnership had a profit of an amount of may impugned during or within three (3) months
P50, 000
This Article is preposterous, disagreement to simple
A 40 % of 50K = P20K matter of determining in profit sharing---bequeaths the
B 30 % of 50K = P15K fiduciary relationship between the partners
C 20 % of 50K = P10K
D 10 % of 50K = P5K
22 | Partnership

Art. 1799 Stipulation Excluding a Partner from Profits Absence of an agreement, it shall be kept in the principal
or Losses place of business

GR: stipulation excluding one or more partners from any This book shall be kept by the managing partner or a
share in the profits or losses is VOID partner designated to hold the book
If none, any active partners in the partnership
Exc: stipulation is on the exempting of the industrial
partner excludes from losses. When can they access?
The law expressly provides the exemption, At any reasonable hour/business hours, business days
a stipulation exempting the industrial partner from losses throughout the year
is naturally valid.
This presupposes a going partnership, and not in the
Effect of the void stipulation exempting a partner from process of dissolution
profits or losses:
The Partnership will still subsist as if the stipulation was If in the process of dissolution/dissolved:
not made, the profits will then be distributed according to Only the courts may direct the partner to access on the
their contributions. books.
Although the books belong to all the partners, still no
Unequal Sharing of Profits is allowed even if the single partner is duty-bound to continue the place of
contributions were equal because what will always follow business for the benefit of the others.
shall be the agreement A purchaser of the firms goodwill is not duty-bound to
keep the books for the inspection of the former partners.
Other Rights (Sanderson v. Cooke)

Art. 1767. Reimbursement of Expenses made on A partner cannot use the information he obtain from the
behalf o the partnership books for non-partnership purposes

The Partner has the right to demand reimbursement from Value of the Partnership Books
the partnership
Facts stated can be used an admission that can be
Art. 1813 Right to assignment introduced as evidence against the keeper or maker of
the books or records.
Art. 1804. Right to associate of a Partner
e.g. Question on the distribution of profits, the partner
Associate of Partner may access the partnership books and check all the
profits distributed to the partners---this can be presented
a. For a partner to have an associate in his share, as evidence
consent of the other partners is not required.
If it is proven that the entries had been placed therein as
b. For the associate to become a partner, ALL must a result of fraud or mistake---this cannot be introduced as
consent evidence

Subpartner does not affect the partnership, if the


partnership has a debt, this subpartner is not affected.
The subpartner shall also receive profit from the share of
the partner with whom he associated with

Reasons:
1. mutual/fiduciary trust is the basis of partnership;
2. change in membership is a modification or novation of Oct. 9, 2015
the contract of partnership. Art. 1806. Right to the true and full information

Art. 1805. Right of the partners to access the books Reason: fiduciary nature of the partnership, a partner
and records of the Partnership must not conceal all transactions and even the condition
of partnership property
Subject to the agreement where such books shall be kept
Who Can Demand Information:
23 | Partnership

a. any partner a. the violator shall bring to the partnership all the profits
illegally obtained
b. legal representative of a deceased partner b.but he shall personally bear the net losses.
-the legal representative may look into the profits c. The violator can be ousted from the firm on the ground
obtained by the partnership and know the share/interest of loss of trust and confidence, particularly if the violation
of the deceased of the partner to his estate is repeated after due warning.

c. legal representative of any partner under legal Art. 1809 Right to Formal Accounting
disability
GR: There is formal accounting when the partnership is
Art. 1807. Duty to Account going towards dissolution

Reason: The fiduciary relations between the partners are Exc:


relationships of trust and confidence which must not be
abused or used to personal advantage. There shall be formal accounting anytime

When a partner enters for his own benefit or use 1. If he is wrongfully excluded from the partnership
partnership funds for his own benefit, he has a duty to: business or possession of its property by his co-partners;
-in order to see the benefits that were derived by the
1. account for all the benefits and profits he will derive out partnership during a transaction or use of partnership
of the transaction; property
-he may also look at the books of the partnership
2. purchase in his name, he shall be considered as a
trustee for the partnership 2. If the right exists under the terms of any agreement;

Q: When should trust relations exist? 3. A transaction was kept secret, there was use of
A: During the life of the partnership until termination partnership funds so that there is a fair standing between
the partners
If entered into transactions before partnership, there
should be trust relations 4. Whenever other circumstances render it just and
reasonable.
A partner is prevented from using information obtained, e.g. A partner who was outside of the country
attained and learned information that might be used to
business transaction----any profits derived from the There is the right to demand as long as the partnership is
information during the partnership--- should be accounted in existence
to the partnership
Prescription begins to run only upon the dissolution of the
Art. 1808 Business Prohibition on Capitalist Partner partnership when the final accounting is done

The capitalist partner is prohibited from engaging for his If there is no objection made before dissolution, the
own account in any operation same or similar business partner waives the right to question the discrepancies in
that may result in competition an accounting.

Instances When There Is No Prohibition If there is a timely objection, there can be another formal
objection
a. When it is expressly stipulated that the capitalist
partner can so engage himself. Remedy if denied the right to accounting:
b. When the other partners expressly allow him to do so. File an application for dissolution, this right is an
c. When the other partners impliedly allow him to do so. important and there is loss of fiduciary trust and
e.g. When ALL of them are likewise violating the article confidence
d. When the company ceases to be engaged in business
e. When the general-capitalist partner becomes merely a An action for accounting, asking that the assets of the
limited partner in a competitive enterprise for after all, a partnership be accounted for, sold and distributed
limited partner does not manage. according to the agreement of the partners is a personal
action (De Leon)
Effect of Violation:
Obligations of the Partners to Third Parties
24 | Partnership

Art. 1815 Operation under a Firm Name Reason: for making this partner a nominal partner is to
(Mandatory) protect the right of third persons

A firm name is necessary to distinguish the partnership When does Art. 1815 not apply?
which has a distinct and separate juridical personality
from the individuals composing the partnership and from 1. To Limited Partners because they
other partnerships and entities. -do not have the rights of a general partner but has same
obligation
Rules: A partnership may adopt any name, -his liability is limited only up to his contributions
it may be: -the third person cannot run after such partner

1. the name of an individual partner, the surnames of all 2. Persons who continues the partnership even of
the partners, or the surname of one or more of the dissolved
members with the addition of and Company, -the partnership or other partner will not be liable

2. the individual names wholly distinct from the names of 3. If the person misrepresents himself as a partner---
any of the members partner by estoppels

3. name purely fanciful or fictitious Q: If a partnership changes its name, will the rights
acquired be passed to the new partnerhip?
Conditions in the use of the firm name:
A: Case Sharruf and Co. v. Baloise Fire Insurance Co.
1. It should not use misleading name (64 Phil. 258)

-The partners cannot use a name that is identical or Facts: Sharruf and Eskenazi, partners under the name Sharruf
and Co., insured for P40,000 their goods. Later, the name was
deceptively confusingly similar to that of any existing
changed to Sharruf and Eskenazi. The in sured goods were
partnership or corporation or to any other name already subsequently burned, but the in surance company re fused to
protected by law or is patently deceptive, confusing or pay on the ground that its name, having been changed, the
contrary to existing laws, as to mislead the public by partnership now had no ju ridical personality to sue, nor did it
passing itself off as another partnership or corporation, or have insurable interest in the goods.
its goods or services as those of such other company.
e.g. Starbucks case Held: The change of name was made in good faith, not having
been done to defraud the insurance company. Moreover,
composition of the partnership remained the same. Therefore,
the firm can collect the in surance indemnity.
2. It should not use of the name of Deceased Partner
Re: Code of Professional Responsibility
Art.1816. Limited Liability of Partners for Contractual
Obligations
The continued use of the name of a deceased partner is
permissible provided that the firm indicates in all its Payment of Contractual obligations entered into by the
communications that said partner is deceased. partnership and being a member of the partnership the
industrial partner shall also be liable in the contractual
3. Use of false or assumed name obligation
-any transactions entered into using the fictitious name
shall be unaffected and considered valid The partners are joint/pro-rata and subsidiary liable
Joint: A third persons may run after any of the partners
Additional Requirement re: Partnership Name: for his share, cannot get the whole amount, depending
Registered with the Department of Trade and Industry on the agreement between the partners
(DTI), to avoid similar names
Art. 1797. Industrial Partner is exempt from losses
Liability of Strangers Who Include Their Names
Art. 1824. Solidary liability re: Torts and Misappropriation
Persons who, not being partners, include their names in
the firm name do not acquire the rights of a partner but, Rules in respect to contractual liabilities
they shall be subject to the liability of a nominal partner 1. Partnership assets must be first exhausted
insofar as third persons without notice are concerned. Primarily liable: Partnership
Third persons may run after this partner .
25 | Partnership

A and D may be exempt and they may be refunded from


If the partnership assets are not enough B and C
2. The Partners shall be subsidiarily liable pro-rata for the
net contractual liabilities to the extent of their personal A capitalist partner A who is exempt from a sharing in
properties the contractual obligation is only exempt beyond what he
contributed, therefore, the P150K is the partnership
Art. 1817. Stipulations exempting a partner from assets which already included the contribution of A,
sharing in the contractual obligations with respect a in this P150K he cannot claim exemption,
third persons shall be VOID, what A will be exempted shall be P50K.
A cannot claim a return of his contribution
But respect to the partners, it shall be valid
Obligations of non-partners
e.g. A capitalist partner shall be exempted from sharing
in the contractual obligation Art. 1825. Partner/ship by estoppel
--- VOID with respect to a third person, the third person
may run after the partnership to fulfil the obligation Estoppel
--- with respect to parties, since the stipulation is valid, -a person is prevented from denying or alleging a fact in
the Capitalist may not share see example below consequence of his previous acts

Alpha Partnership How is a partnership by estoppel created?


borrowed an amount of P200K from Z 1. A third person allows himself to be represented as a
Upon maturity Partnership Assets: P150K partner as in an existing or non-existing partnership and
Balance: P50K--- considered as a loss he did not object, he:
Division: between the four partners a. directly represents himself to anyone as a partner in
an existing partnership or in a non-existing partnership
A- Capitalist P50K/4= P12,500 and the partners did not object; or
B- Capitalist P50K/4= P12,500 b. Indirectly represents himself by consenting to another
C- Capitalist P50K/4= P12,500 representing him as a partner in an existing partnership
D- Industrial P50K/4= P12,500 or in a non-existing partnership.

Q: If on maturity who will be liable? How is representation made?


A: Alpha partnership 1. Orally
2. In writing
Remedy of D: 3. In the conduct of the partners
The 50K is considered as a loss, D also has to pay to Z,
D may go after A, B, and C for the refund of the P12, 500 Rules as to partner/ship by estoppel (De Leon):

Suppose there is a stipulation 1. Partnership by estoppel=Partnership liability


A- Capitalist 40% If by reason of the representation by the third persons
B- Capitalist 30% and ALL the partners did not object/
C- Capitalist 30% The representation made by the partnership was not
D- Industrial exempted objected by the partner was not objected
-There was a transaction and partnership liability arises
Z may still run after D, as this stipulation is void as to Z, -The third person may run after primarily the partnership,
third person, if there is balance, the partners and the partner by
but between Alpha Partnership, this stipulation is valid, estoppel, subsidiary
D may run after A, B and C 2. Equal or pro-rata share to the partners who consented
AND the person who represented himself

When there is no existing partnership and all those


Suppose there is a stipulation represented as partners consented to the representation,
A- Capitalist exempted OR not all of the partners of an existing partnership
B- Capitalist 50% consented to the representation
C- Capitalist 50%
D- Industrial exempted

For Z, this is Void, he may run after A, B, C and D,


26 | Partnership

e.g. ABC Partnership, D I am part of the partnership, Sharing between A, B and C could be equally or pro-rata
ABC heard, A objected to this representation by D, ABC depending on the agreement
represented that D is partner and D objected.
Q: Does the admission of a new partner dissolve the old
3. Separate liability of those who consented or the person firm and create a new one? (Reason for Art. 1826)
who represented himself A: Yes, since the old firm is dissolved, the previous or the
old creditors are given preference or protected.
When there is no existing partnership and some of those
represented as partners consented to the representation, Art. 1827 Preference of Credits of the Partnership
OR none of the partners in an existing partnership
consented to such representation. 1. The partnership creditors shall have first priority over
partnership assets
Estoppel does not create partnership
E.g. Dissolution and there is liquidation
To invoke liability: Alpha Partnership
Third persons should be innocent--- they are not aware B, C and D
of such partner/ship by estoppel Partnership Assets: P200K
Liabilities:
Burden of proof: Partnership creditors
The creditor, or whoever alleges the existence of a X P50K
partner or partnership by estoppel has the burden of Y P100K
proving the existence of the misrepresentation and the Z P50K
innocent reliance on it.
Partnership borrowed money from Partner B= P100K
Art. 1826. Obligations of subsequently admitted
partners The first that shall be paid out from the partnership
assets shall be partnership creditors, X, Y and Z
GR: A newly admitted partner shall be liable also for
obligations already existing before he was admitted, the 2. Personal Assets
extent of his liability is limited to his share in the
partnership property
Exc: there is a stipulation, that a newly admitted partner e.g.
will still share in the obligations beyond his contribution
Alpha Partnership, B, C and D
Example. Partnership Asset= P150K
Partnership Creditor= P200K
Alpha Partnership Balance= P50K
A, B, C Partners The balance shall be distributed between B, C and D
Oct. 9, 2015: Loan of 200K from Z C has a personal credit of P50K from P
Dec. 31, 2015: Maturity of the loan Personal Asset: P30K
Nov. 1, 2015: Admission of D to the Alpha Partners
with P20K Case of C:
C shall pay first P with his P30K before his share on the
Q: Who will be liable of the obligation of 200K from Z? P50K
A: Alpha Partnership
Remedy of the Personal Creditor:
If the partnership assets is able, okay! Cannot attach the partnership asset
But if Partnership assets as of Dec. 31, 2015: P160K
Balance: P40K You can attach the interest of the partner over the share
in the profits and surplus of the partner

Q: What happened to the P20K?


A: It was included in the P160K partnership assets as of
Dec. 31, 2015

Therefore, the balance of P40K shall be only shared


between A, B and C unless there is a stipulation