Characteristics of Partnership

From the definition of partnership as provided by Article 1767, we can extract the
characteristics of partnerships which are basically also found in contracts, which are:
• Consensual – You have learned about contracts in your first law course (LAWS 1013),
and you have also learned that a contract is a meeting of minds of the contracting
parties. A partnership, aside from being a type of business organization, is also a
contract. A partnership is perfected by mere consent. This is because of the principle
of delectus personae (literally, “choice of the person”) or delectus personarum (plural)
wherein each partner is entitled to exercise their choice and preference of partners.
• Principal – Principal contracts, as you have learned last school year, are those that can
stand by itself, without dependence on other contracts for validity or existence.
• Bilateral – Bilateral contracts are those wherein all parties are required to give or do
something. A partner will contribute money, property or industry, and in return, he
expects to receive the share of profits from partnership operations. Also, the persons
entering the partnership have rights and obligations that are reciprocal to each other.
• Nominate – Nominate contracts are those that have a name. This contract has a name,
“Partnership”.
• Preparatory – Preparatory contracts are those that used as a means of entering
another contract. If a partnership is hired to audit the financial statements of another
company, that is another contract (an audit engagement) which the partnership would
not have been able to enter into without forming a partnership first.
• Onerous – The contract of partnership is an onerous one because the parties have to
give up something, which is generally the money, property, or industry that they will
contribute.

Essential requisites of partnership

• There must be a valid contract. For the contract of partnership to be valid, the essential
elements of a contract (consent, object, and cause) must be present.
• There must be a mutual contribution of money property, or industry to a common
fund. There is no limit on the monetary contribution; the property to be contributed may
be tangible (may be real or personal) or intangible. Industry may be physical or
intellectual.
• It must have a lawful object or purpose. As you already know, a contract must have
the essential elements present for it to be valid. If any one of these essential elements is
missing, the contract is void. The object of the contract of partnership must be lawful.
Otherwise, it is void.
• The partnership must be established for the common benefit or interest of the
partners. The purpose of an OBP is for the generation of profit, and the partnership
must be established for that purpose, and all partners must share in the profit
generated. Any stipulation that excludes a partner from profit sharing is void. For GPPs,
the primary purpose is the exercise of a common profession. A lawyer, physician, CPA,
 and engineer cannot together form a GPP, because only one of them will be able to
practice his profession, which is in his interest, but not of the other three.

Form of a partnership contract

Generally, a partnership contract can be in any form (oral or written), EXCEPT in the
following cases:

1. If real property is contributed – the partnership contract must be in a public instrument;

an inventory of the said property must be made, signed by the parties and attached to
the public instrument.
2. If the capital of the partnership is Php 3,000 or more (either money, property, or both) –
the partnership contract must be in a public instrument and must be registered with the
Securities and Exchange Commission (SEC).
3. If the partnership is a limited partnership, a certificate signed under oath by the partners
and recorded with SEC is required

Kinds of partnership
 Kinds of partners

a. As to liability
1. General – liable even beyond his contributions to the partnership (i.e. separate
properties)
2. Limited – liable only up to the extent of his capital contributions
b. As to contribution
1. Capitalist – one who contributes money and/or property only
2. Industrialist – one who contributes industry only
3. Capitalist-industrialist – one who contributes money and/or property, and industry
c. Others
1. Managing – one who manages the affairs of the partnership
2. Liquidating – one who takes charge of liquidating the partnership
3. Nominal – not actually a partner, but may be liable as such to third persons
4. Ostensible – known to the public as a partner because he allowed his name to be used
as part of the partnership name.
5. Secret – actually a partner, but that fact is hidden to the public
6. Silent – also an actual partner, but does not participate in the management of the
business (only receives his share in the profits and losses)
7. Dormant – does not participate in the management of the business, and his being a
partner is also hidden from public knowledge.

1.
 Rules in determining the existence of a partnership (Article 1769)

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
co-ownership 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 debt by installments 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
installments or otherwise.

RIGHTS AND OBLIGATIONS OF PARTNERS

A. Among themselves (Arts. 1784 – 1809)

1. To contribute capital
Obligations with respect to contribution of property:

1.
1.
1. to contribute at the beginning of the partnership or at the stipulated time the money,
property or industry which he may have promised to contribute (Art. 1786)
2. To answer for eviction in case the partnership is deprived of the determinate property
contributed (Art. 1786)
3. To answer to the partnership for the fruits of the property the contribution of which he
delayed, from the date they should have been contributed up to the time of actual
delivery (Art. 1786)
4. To preserve said property with the diligence of a good father of a family pending
delivery to partnership (Art. 1163)
5. To indemnify partnership for any damage caused to it by the retention of the same or by
the delay in its contribution (Arts. 1788, 1170)
 What happens when a partner fails to contribute property promised?
•
o
• That partner becomes a debtor of the partnership (Art. 1169)
• Other partners cannot rescind partnership contract by reason of default in contributions.
Their remedy instead would be specific performance with damages from the partner
who defaults. (Art. 1788)

Obligations with respect to contribution of money:

1.
1.
a. To contribute on the date fixed the amount he has undertaken to contribute to the
partnership.
b. To reimburse any amount he may have taken from the partnership (and converted to his
own use)
c. To pay for the agreed or legal interest, if he fails to pay his contribution on time or in
case he takes any amount from the common fund and converts it to his own use
d. To indemnify the partnership for the damages caused to it by delay in the contribution or
conversion of any sum for his personal benefits

2. To maintain the trust and confidence given unto him by his partners (fiduciary duty)

As mentioned in Lesson #1, a partnership is built on trust, and therefore each partner
must observe the utmost good faith, fairness, and integrity in his dealings with the other
partners. Each partner cannot:

1.
1.
a. directly or indirectly use partnership assets for his own benefit;
b. carry on a business of the partnership for his private advantage;
c. take any profit secretly;
d. obtain for himself anything that he should have obtained for the partnership (e.g.
business opportunity)
e. carry on another business in competition with the partnership; he cannot avail himself of
knowledge or information which may be properly regarded as the property of the
partnership

Rules in engaging in other businesses

•
o
• Industrial partners cannot engage in any business, unless expressly permitted by the
partnership (Art. 1789)
• Capitalist partners cannot engage in other businesses that are in the same line of
business as theirs (Art. 1808)

Consequences if industrial partner engages in any business: (Art. 1789)

•
o
• He can be removed from the partnership, with damages
• The capitalist partners can avail of the benefit he (industrial partner) obtained from the
other business, with damages

Consequences if capitalist partner engages in any business that competes with

them: (Art. 1808)
•
o
• He may be required to contribute the profits he derived from the other business into the
common fund.
• In case of losses, he shall personally bear it.
• He can be removed from the partnership.

Obligations with respect to contribution of capital (Art. 1790)

•
o
• Partners must contribute equally, unless otherwise stipulated.
• Partners must contribute additional capital in the following cases:
o There is an imminent loss of the business of the partnership
o The majority of the capitalist partners are of the opinion that an additional contribution to
the common fund would save the business
In case a partner deliberately refuses to contribute additional capital, an
obligation to sell his interest to the other partner arises.

Who bears the risk of loss of things contributed? (Art. 1795)

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Week 2: Rights and Obligations of Partners

RIGHTS AND OBLIGATIONS OF PARTNERS

A. Among themselves (Arts. 1784 – 1809)

1. To contribute capital
Obligations with respect to contribution of property:

1.
1.
1. to contribute at the beginning of the partnership or at the stipulated time the money,
property or industry which he may have promised to contribute (Art. 1786)
2. To answer for eviction in case the partnership is deprived of the determinate property
contributed (Art. 1786)
3. To answer to the partnership for the fruits of the property the contribution of which he
delayed, from the date they should have been contributed up to the time of actual
delivery (Art. 1786)
4. To preserve said property with the diligence of a good father of a family pending
delivery to partnership (Art. 1163)
5. To indemnify partnership for any damage caused to it by the retention of the same or by
the delay in its contribution (Arts. 1788, 1170)

What happens when a partner fails to contribute property promised?

•
o
• That partner becomes a debtor of the partnership (Art. 1169)
• Other partners cannot rescind partnership contract by reason of default in contributions.
Their remedy instead would be specific performance with damages from the partner
who defaults. (Art. 1788)

Obligations with respect to contribution of money:

1.
1.
a. To contribute on the date fixed the amount he has undertaken to contribute to the
partnership.
b. To reimburse any amount he may have taken from the partnership (and converted to his
own use)
c. To pay for the agreed or legal interest, if he fails to pay his contribution on time or in
case he takes any amount from the common fund and converts it to his own use
d. To indemnify the partnership for the damages caused to it by delay in the contribution or
conversion of any sum for his personal benefits

2. To maintain the trust and confidence given unto him by his partners (fiduciary duty)

As mentioned in Lesson #1, a partnership is built on trust, and therefore each partner
must observe the utmost good faith, fairness, and integrity in his dealings with the other
partners. Each partner cannot:

1.
1.
a. directly or indirectly use partnership assets for his own benefit;
b. carry on a business of the partnership for his private advantage;
c. take any profit secretly;
d. obtain for himself anything that he should have obtained for the partnership (e.g.
business opportunity)
e. carry on another business in competition with the partnership; he cannot avail himself of
knowledge or information which may be properly regarded as the property of the
partnership
 Rules in engaging in other businesses
•
o
• Industrial partners cannot engage in any business, unless expressly permitted by the
partnership (Art. 1789)
• Capitalist partners cannot engage in other businesses that are in the same line of
business as theirs (Art. 1808)

Consequences if industrial partner engages in any business: (Art. 1789)

•
o
• He can be removed from the partnership, with damages
• The capitalist partners can avail of the benefit he (industrial partner) obtained from the
other business, with damages

Consequences if capitalist partner engages in any business that competes with

them: (Art. 1808)
•
o
• He may be required to contribute the profits he derived from the other business into the
common fund.
• In case of losses, he shall personally bear it.
• He can be removed from the partnership.

Obligations with respect to contribution of capital (Art. 1790)

•
o
• Partners must contribute equally, unless otherwise stipulated.
• Partners must contribute additional capital in the following cases:
o There is an imminent loss of the business of the partnership
o The majority of the capitalist partners are of the opinion that an additional contribution to
the common fund would save the business
In case a partner deliberately refuses to contribute additional capital, an
obligation to sell his interest to the other partner arises.

Who bears the risk of loss of things contributed? (Art. 1795)

Contribution Who bears the risk?

Specific and determinate things
which are not fungible where only Partner
the use is contributed
 Specific and determinate things the
ownership of which is transferred to Partnership
the partnership
Fungible things Partnership
Things contributed to be sold Partnership
Things brought and appraised in
Partnership
the inventory
Specific and determinate things
which are not fungible where only Partner
the use is contributed

Rules for distribution of profits and losses:

With agreement: As agreed

Without agreement (silent):

1.
1.
1. Capitalist partners share in the profits in proportion with their respective capital
contributions. Industrialist partners are given a just and equitable share.
2. If profit sharing is stipulated, apply the same for losses.
3. If there is no profit sharing stipulated,
a. Losses are distributed according to capital contributions
b. Industrialist partners are not liable for losses
A stipulation which excludes one or more partners from any share in the profits
and losses is void.

Obligation of managing partners who collects debt from person who also owed
the partnership (in cases where there are at least 2 debts, one where the
collecting partner is creditor and the other, where the partnership is the creditor;
where both debts are demandable; and where the partner who collects is
authorized to manage and actually manages the partnership)
•
o
• Apply sum collected to 2 credits in proportion to their amounts
• If he received it for the account of partnership, the whole sum shall be applied to
partnership credit

Obligation of partner who receives share of partnership credit

•
o
• to bring to the partnership capital what he has received even though he may have given
receipt for his share only, provided:
o A partner has received in whole or in part, his share of the partnership credit
o The other partners have not collected their shares
o The partnership debtor has become insolvent
B. Property rights of a partner (Arts. 1810 – 1814)

1.
1.
1. His rights in specific partnership property
2. His interest in the partnership
3. His right to participate in the management.
Nature of partner's right in specific partnership property
•
o
• a partner has an equal right to possession which is not assignable and such right is
limited to the share of what remains after partnership debts have been paid.
Nature of partner's right in the partnership
•
o
• a share in the profits and surplus

C. To third persons (Arts. 1815 – 1827)

1.
1.
1. Every partnership shall operate under a firm name. Persons who include their names in
the partnership name even if they are not members shall be liable as a partner
2. All partners shall be liable for contractual obligations of the partnership with their
property, after all partnership assets have been exhausted:
a. Pro rata
b. Subsidiary
3. Admission or representation made by any partner concerning partnership affairs within
scope of his authority is evidence against the partnership
4. Notice to partner of any matter relating to partnership affairs operates as notice to
partnership, except in case of fraud:
a. Knowledge, of partner acting in the particular matter, acquired while a partner
b. Knowledge of the partner acting in the particular matter then present to his mind
c. Knowledge of any other partner who reasonably could and should have communicated
it to the acting partner
5. Partners and the partnership are solidarily liable to 3rd persons for the partner's tort or
breach of trust
6. Liability of incoming partner is limited to:
a. His share in the partnership property for existing obligations
b. His separate property for subsequent obligations
7. Creditors of partnership preferred in partnership property & may attach partner's share
in partnership assets
8. Every partner is an agent of the partnership

Power of Partner as Agent of the Partnership

Effects of Conveyance of Real Property Belonging to Partnership

 Assignment of Interest in Partnership
Assignment is subject to three (3) conditions:

1.
1.
1. made in good faith
2. for fair consideration
3. after a fair and complete disclosure of all important information as to its value
Rights of an Assignee:

1.
1.
1. Get whatever assignor-partner would have obtained
2. Avail usual remedies in case of fraud in the management
3. Ask for annulment of contract of assignment if he was induced to join through any of the
vices of consent
4. Demand an accounting (only in case of dissolution)

Responsibility of the Partnership to the Partners

1.
1. To refund the amounts disbursed by partner in behalf of the partnership +
corresponding interest from the time the expenses are made (loans and advances
made by a partner to the partnership aside from capital contribution)
2. To answer for obligations partner may have contracted in good faith in the interest of the
partnership business
3. To answer for risks in consequence of its management