Notes on De Leon Partnership
Title IX. - PARTNERSHIP o A duty of public service
o A relation as an officer of the court to the
CHAPTER 1
GENERAL PROVISIONS administration of justice involving
sincerity, integrity and reliability
Art. 1767. By the contract of partnership two or more o A relation to clients in the highest
persons bind themselves to contribute money, property, fiduciary degree
or industry to a common fund, with the intention of o A relation to colleagues of the bar
dividing the profits among themselves. characterized by candor, fairness, and
unwillingness to resort to current
Two or more persons may also form a business methods of advertising and
partnership for the exercise of a profession. encroachment on their practice or dealing
directly with their clients
Concept of partnership – a partnership is a:
Contract Characteristics/ elements of partnership:
Association
Legal relation Consensual – perfected by mere consent express
Status arising out of a contract or implied
Organization
Entity distinct and apart from its members Nominate – special name or designation in law
Joint undertaking to share in profit and loss Bilateral – entered into by two or more persons
Civil law concept and American concept of partnership and the rights and obligations are reciprocal
distinguished Onerous – benefit by giving something
Commutative – undertaking of each partner is
Basis of concept Philippine American
Contract – it is Relation – Anglo considered as equivalent of the others
Possession of the agreement American idea of Principal – does not depend on its existence on
separate itself where out partnership is
personality of which it is based on the other contracts
created result of the Preparatory – means to an end
juridical relation A contract of Agency
Has a separate growing out from
juridical the express or Essential features of partnership:
personality of its implied
own, distinct and agreement of the There must be a valid contract
separate from that parties The parties must have legal capacity to enter into
of each of the
partners No separate the contract
juridical There must be mutual contribution of money,
personality. It is
a mere extension property, industry to a common fund
of its members. The object must be lawful
(although some The primary purpose must be to obtain profits and
state unions
classify the to divide the same among themselves
partnership as a Articles of partnership must not be kept secret
separate entity
among the members otherwise there is no legal
Partnership for the practice of law: personality
A mere association for non-business purpose is in Existence of a valid contract:
the nature of a privilege or franchise
o Cannot use nom de plume, assumed or Partnership relation fundamentally contractual
trade name, as compared to the practice o There is no such thing as partnership
of accountancy created by law or operation of law alone
o Form – oral or written, express or
Distinguished from business – not an ordinary implied subject to the provisions of Art.
money making trade 1771, 1773, and Statute of Frauds. Thus
a member need not sign articles of co-
C c”,) L L E E N partnership to become a member,
election is sufficient
o Articles of partnership – a written
document embodying the terms of the
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Notes on De Leon Partnership
association. It contains: the name, not be deemed as doing business in the
nature, purpose, location of the firm and Philippines hence no license is required
defines the powers, rights, duties and (RA 7042 Foreign Investments Act)
liabilities of the partners among
themselves, their contributions, the Contribution of money, property, or industry:
manner of which the profits and losses
are to share and the procedure of Existence of proprietary interest – they must
dissolving the partnership contribute capital
o Requisites as a contract: consent of at o Money must be in legal tender. Checks,
least 2 parties, object and cause which is drafts, promissory notes payable to order
established and other mercantile documents must be
Partnership relation fiduciary in nature – voluntary cashed to constitute contribution of
association entered into by the associates money
o In general partnership there is the o Property – real, personal, corporeal or
element of delectus personae (choice of incorporeal. Can be licenses, goodwill
the person/s that law gives such wide or credit
authority to one partner to bind another o Industry – active cooperation which may
by contract or otherwise). Delectus be either personal, manual efforts or
personae allows one partner the power intellectual for which the partner
(not the right) to dissolve partnership receives share not merely salary.
Application of principles of estoppel Industrial partner must not be subject to
o A partner holds himself out or permits control. He shall be considered as a
himself to be held out as a partner in an lessor of services if he is subject to the
enterprise in favour of third persons. supervision of other partners
Even if no real partnership exists, they
are bound to third persons by their Proof of contribution – proof that the contribution
conduct was made with the intention of dividing profits
obtained therefrom
Legal capacity of the parties to enter into the contract:
Legality of object – if object is unlawful, contract is
Individuals with legal capacity – no inexistent and void ab initio. The object is unlawful when
unemancipated minors, insane or demented it is contrary to law, morals, good customs, public order, or
persons, deaf mutes who do not know how to public policy
write, persons who are suffering from civil
interdiction, incompetents under guardianship Purpose to obtain profits – the very reason for the existence
of partnership; need not only be the principal, not the
Partnerships – no prohibition against a partnership exclusive claim; there may be incidental, moral, social or
being a partner with another partnership spiritual ends
Corporations – unless authorized by Statute or by Sharing of profits – not necessarily in equal shares; not
its charter, a corporation is without legal capacity conclusive evidence of partnership
or power to enter into a contract of partnership
based on public policy Sharing of losses – necessary corollary of sharing in
o A corporation however may enter into a profits; agreement not necessary
Joint Venture partnerships with another
where the nature of the venture is in line Art. 1768. The partnership has a judicial personality
with the business authorized by its separate and distinct from that of each of the partners,
charter even in case of failure to comply with the requirements
o Where the partnership agreement of Article 1772, first paragraph.
provides that the two partners will
manage the partnership so that the Partnership, a juridical person
management of the corporate interest is
not surrendered the partnership may be A partnership duly formed under the law is a
allowed juridical person to which the law grants a juridical
o Where the entry of the foreign personality separate and distinct. As an
corporation as a limited partner in a independent juridical person, a partnership may:
limited partnership is merely for
investment purposes and it shall not take 2
part in management and control. It shall
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Notes on De Leon Partnership
o Enter into contracts, acquire and possess dependent upon the personal
property of all kinds in its name arrangement or understanding of the
parties. Parties may call themselves
o Incur obligations partners, but their contract may be
o Bring civil or criminal actions in adjudged something different. On the
other hand, parties may expressly
conformity with the laws and regulations stipulate that their contract is not a
of its organizations partnership yet it may still be considered
a partnership based on the legal intention
Art. 1769. In determining whether a partnership exists, Incidents of partnership
these rules shall apply: o Share in the profits and losses
o Equal rights in management and conduct
(1) Except as provided by Article 1825, persons of business (see Art. 1803)
who are not partners as to each other are not o Every partner is an agent of the
partners as to third persons; partnership (Art. 1818)
(2) Co-ownership or co-possession does not of o All partners, except limited partners, are
itself establish a partnership, whether such-co- personally liable for partnership debts
owners or co-possessors do or do not share any with their separate property (see Art.
profits made by the use of the property; 1816)
(3) The sharing of gross returns does not of o There is a fiduciary relationship (see Art.
itself establish a partnership, whether or not 1807)
the persons sharing them have a joint or o Partnership is not terminated upon
common right or interest in any property from dissolution. It continues until the
which the returns are derived; winding up is completed (see Art. 1828)
(4) The receipt by a person of a share of the Presumption and burden of proof
profits of a business is prima facie evidence o Existence of partnership is not
that he is a partner in the business, but no such presumed. It must be proved
inference shall be drawn if such profits were o Persons who are acting as partners are
received in payment: presumed to have entered into a contract
of partnership. The burden of proof is
(a) As a debt by instalments or on the party denying its existence
otherwise; o Once partnership is shown to exist, the
(b) As wages of an employee or rent to presumption is that it continues in the
a landlord; absence of evidence to the contrary. The
(c) As an annuity to a widow or burden of proof is on the person
representative of a deceased partner; claiming its termination
(d) As interest on a loan, though the Use of “partner”
amount of payment vary with the o Person asserting the existence of the
profits of the business; partnership cannot prove it by just
(e) As the consideration for the sale of showing an agreement wherein the
a goodwill of a business or other parties call themselves „partners‟. The
property by instalments or otherwise. use of the word „partners‟ may be just
for convenience and not necessarily to
Rules in determining existence of partnership: show the intention to create a partnership
Overview o „associate‟ means „partner‟, but an
o In general, all essential characteristics of employee may also be an „associate‟
a partnership must be present. Partners
must expressly agree to contribute Persons not partners as to each other:
money, property, or industry as co-
proprietors to carry on a business for Persons who are partners as between themselves
profit, and to share the profits are partners as to third persons. Consequently,
o An essential characteristic, by itself, does persons who are not partners as to each other
not prove the existence of a partnership cannot be partners as to third persons
o In case of doubt, Art. 1769 would apply
General rule: persons who are not partners as to
Test to determine the existence of partnership each other cannot be partners as to third persons
o The terms of the contract would
determine the legal nature of the contract 3
o Legal intention is the crux of partnership
– existence of a partnership not always
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Notes on De Leon Partnership
Exception: if by their acts, consent, Sharing of gross returns – not presumptive evidence of
representations, third persons were led to believe partnership
that they are partners in a non-existing partnership
Reason: because in a partnership, the partners,
Example: A and B are not partners. However, A, being interested in the success and failure of the
with the consent of B, told X that they are business, share in the profits only after satisfying
partners. So as to X, A and B are partners all partnership liabilities
Co-ownership or co-possession:
Sharing of gross profits:
Intention to obtain profits Prima facie evidence of partnership
o In partnership, the profits must be o Sharing of profits and losses is a strong
derived from the operation of a business
or undertaking and not merely from presumptive evidence of a partnership.
property ownership
o There is no presumption of partnership Conversely, lack of such agreement
between co-owners because there must
be a clear intention to a partnership strongly negates the existence of a
Existence of fiduciary relationship partnership
o There is no fiduciary relationship
between co-owners o Sharing of profits and losses is not
o Persons may become co-owners without
a contract. For example, by inheritance. conclusive evidence. This may be
But they cannot be partners without a
contract rebutted by other circumstances
Partnership distinguished from co-ownership When existence of partnership will not be inferred
despite share in the profits
o Profits received as payment of a debt by
instalment or otherwise
Example: A is a creditor of a
partnership X. A was
authorized to manage the
Partnership Co-ownership business. A will receive
Generally created Always created by
Creation by law. It may a contract, either compensation, and a share in the
exist without a express or implied
Juridical contract net profits as payment for the
personality Has a juridical No juridical
Purpose personality personality debt
To obtain profit Common o Profits received as wages of an employee
Duration enjoyment of a
Disposal of No limitation thing. Does not or rent to a landlord
interest necessarily Example: A is an employee of
A partner cannot involve sharing of
Power to act with dispose his interest profits partnership X. instead of a fixed
third persons as to make the Maximum is 10
transferee a years salary, A agreed to receive a
Effect of death partner May dispose his
Partner may bind interest certain percentage of the
the partnership,
unless there is a Co-owner cannot monthly net profits
stipulation to the represent the co- Example: A is the owner of the
contrary ownership
Dissolves the building where partnership X
partnership Does not
necessarily holds its office. As payment for
dissolve the
partnership rent, A will receive a share if the
net profits.
o Profits received as an annuity to a widow
or representative of a deceased partner
Example: A is the widow of a
partner in Partnership X. A will
receive an annuity based on a
certain percentage of the net
profits in exchange for the
continuation of the partnership
without liquidation and
satisfaction of the deceased
partner‟s interest
o Profits received as interest on a loan
Example: A is a creditor of
partnership X. A agreed that the
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Notes on De Leon Partnership
interest on the loan be taken Management Shared equally by Administration
from the net profits all partners unless belongs to both
o Profits received as the consideration for Disposition of one or some are spouses. But
the sale of a goodwill or other property shares appointed husband‟s
by instalments of otherwise managers decision will
Example: A sold a land to prevail in case of
partnership X. A agreed that the Entire interest disagreement
purchase price will be paid out may be disposed
of the net profits even without the Share of each
consent of the spouse cannot be
Partnership distinguished from other legal relationships: other partners disposed of
during the
Distinguished from a labor union marriage, even
o A labor union is an association of with the consent
employees, which exists in whole or in of the other
part, for the purpose of collective
bargaining agreement or dealing with the Distinguished from a voluntary association
employers concerning terms and
conditions of employment Juridical Partnership Voluntary
o The difference between them is the personality association
purpose. The purpose of a partnership is Purpose Has one Does not have
the realization of profits whereas the one
purpose of a labor union is to negotiate Contributions of For pecuniary No such objective
with the employers, collective bargain members profit
There is No contribution,
Distinguished from a business trust Liability of contribution of although fees are
o A trust is when the equitable ownership members money, property usually collected
and the legal title of a property are with or services
two different persons Partnership is Members are
o The difference is that partners are primarily liable to individually
principals and agents of each other. partnership debts liable for debts of
While in trust, the trustee is just a the association,
principal, and not an agent authorized or
subsequently
Distinguished from a Conjugal Partnership of ratified by them
Gains
Parties Partnership CPG Distinguished from a corporation
2 or more Future spouses –
Laws which partners of either man and woman Manner of Partnership Corporation
govern sex creation By agreement of By law or
Juridical Stipulation of the By law Number of the parties operation of law
personality parties incorporators At least 2 persons At least 5
Commencement Has a juridical No juridical Commencement incorporators
personality personality of juridical From the Only from the
Purpose From the moment From the date of personality execution of the date of issuance
of execution of the celebration of contract of of the certificate
contract. The the marriage. Any Powers partnership. The of incorporation
parties may stipulation to the parties may by the SC
stipulate contrary is void stipulate
otherwise otherwise Only those
To obtain profits To regulate Those authorized expressly granted
property relations by the partners by law, and those
during marriage implied from
Distribution of According to their Divide equally those granted and
those incidental
profits agreement or in to its existence
proportion to their 5
capital
contributions
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Notes on De Leon Partnership
Management Every partner is Vested with the Art. 1770. A partnership must have a lawful object or
an agent of the Board of purpose, and must be established for the common
Effect of partnership, if Directors or benefit or interest of the partners.
mismanagement there is no Trustees
agreement as to When an unlawful partnership is dissolved by a
Right of management Suit against judicial decree, the profits shall be confiscated in favor
succession Partner can sue member of the of the State, without prejudice to the provisions of the
Extent of liability the partner who BOD or BOT Penal Code governing the confiscation of the
to third person mismanages must be in the instruments and effects of a crime.
name of the
Transferability of No right corporation Object or purpose of partnership:
interest Has a right
Partners, except The parties possess absolute freedom to choose
Term of existence limited partners, Stockholders the transactions they must engage in. the only
are liable liable only to the limitation is that the object must be lawful and for
Firm name personally and extent of their the common benefit of the partners
subsidiarily subscribed shares
Dissolution Partner cannot Illegality of the object will not be presumed; it
Governing law transfer his Stockholder can must appear to be of the essence of the
interest as to transfer his shares relationship
make the without the
transferee a consent of the Effects of an unlawful partnership:
partner without other
the consent of all stockholders Consequences:
the other partners o The contract is void ab initio and the
For any period as Maximum of 50 partnership never existed in the eyes of
may be agreed by years, extendible the law
the parties for another 50 o The profits shall be confiscated in favour
years of the government
Limited May adopt any o The instruments or tools and proceeds of
partnership name as long as it the crime shall also be forfeited in favour
required to add is not the same as of the government
“Ltd.” To its or similar to any o The contributions of the partners shall
name registered firm not be confiscated unless they fall under
names number 3
At anytime by the Only with the
will of any or all consent of the Juridical decree unnecessary:
of the partners State o A judicial decree is not necessary to
Civil Code Corporation Code dissolve an unlawful partnership
o Third persons who deal with the
Similarities between a partnership and a partnership without being aware of its
illegal purpose or character are protected
corporation unless such knowledge can be presumed
o Both have a juridical personality separate as where the transaction is plainly
unlawful
and distinct from the individuals
Right to return the contribution where partnership is
composing it unlawful:
o Both can act only through agents
o Both are organizations composed of an Art. 1770 does not state whether upon the
dissolution of the unlawful partnership, the
aggregate of individuals amounts contributed are to be returned to the
o Both distribute its profits to those who partners, because it only deals with the disposition
of profits
contribute capital to the business
o Both can be organized only where there The fact that said contributions are not included in
the disposal prescribed for said profits shows that
is law authorizing its organization in consequence of said exclusion, the general rules
of law must be followed and the partners must be
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Notes on De Leon Partnership
reimbursed for the amount of their respective Community of interest between the partners for business
contributions purposes – salient features of an ordinary partnership:
The partner who limits himself to demanding only
the amount contributed by him need not resort to Community of interest in profits and losses
the partnership contract on which to base his claim o Basis of the partnership relation
or action. The manager or administrator of the o However, although every partnership
partnership holding said contribution retains what appears to be founded on a community of
belongs to others, without consideration, for interest, every community of interest
which reason he is bound to return it, and he who does not necessarily constitute a
has paid in his share is entitled to recover it partnership
Right to receive profits where partnership is unlawful: Community of interest in capital employed
o Property used in business may belong to
Art. 1770 permits no action for the purpose of one or more partners so that there is no
obtaining the earnings made by an unlawful joint property other than joint earnings
partnership because the partner will have to base
his action upon the partnership contract which is Community of power in administration
null and without legal existence; and what does o Partners may agree upon concentration of
not exist, cannot be a cause of action management, leaving some of their
members entirely inactive or dormant
Profits earned in the course of the partnership do
not constitute or represent the partner‟s Art. 1771. A partnership may be constituted in any
contribution but are the result of the industry, form, except where immovable property or real rights
business or speculation which is the object of the are contributed thereto, in which case a public
partnership instrument shall be necessary.
It would be immoral and unjust for the law to Form of partnership contract:
permit profit from an industry that is prohibited
General rule
The courts will not aid either party to an illegal o No special form is required for the
agreement validity or existence of the contract of
partnership
Effect of partial illegality of partnership business: o The contract may be made orally or in
writing regardless of the value of the
An account of that which is legal may be had contributions
Where, without the knowledge or participation of
When immovable property or real rights are
the partners, the firm‟s profits in a lawful business contributed
have been increased by wrongful acts, innocent o When read together, Articles 1771 and
partners are not precluded as against the guilty 1773 require the execution of a public
partners from recovering their share of profits instrument for the validity of a contract
of partnership whenever immovable
Effect of subsequent illegality of partnership business: property is contributed thereto
o To affect third persons, the transfer of
The happening of an event subsequent to the real property to the partnership must be
making of a valid partnership contract which duly registered in the Registry of
would render illegal the business of the Property of the province or city where
partnership as planned, will not nullify the the property contributed is located
contract
When partnership agreement covered by the
Where the business for which the partnership is Statute of Frauds
formed is legal when the partnership is entered o An agreement to enter a partnership at a
into but afterwards becomes illegal, an accounting future time, which “by its terms is not to
may be had as to the business transacted prior to be performed within a year from the
such time making thereof” is covered by the
Statutes of Frauds
o Such agreement is unenforceable unless
the same be in writing or at least
evidenced by some note or memorandum
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Notes on De Leon Partnership
thereof subscribed by the parties (Art. o But any of the partners is granted the
1403[2a]) right by the law (Articles 1357 and 1358)
to compel each other to execute the
Partnership implied from conduct: contract in a public instrument
Binding effect – a partnership‟s existence may be o This right cannot be availed of if the
implied from the acts or conduct of the parties, as partnership is void under Art. 1773
well as from other declarations, and such implied
contract would be as binding as a written and Purpose of registration – the requirement of public
express contract instrument of public instrument is imposed as a
prerequisite to registration and registration is
Ascertainment of intention of parties necessary as a condition for the issuance of
o In determining whether or not a licenses to engage in business or trade. In this
particular transaction constitutes a way, the tax liabilities of big partnerships cannot
partnership, as between the parties, the be evaded and the public can also determine more
intention as disclosed by the entire accurately their membership and capital before
transaction, and as gathered from the dealing with them
facts and from the language employed by
the parties as well as their conduct, When partnership considered registered
should be ascertained o The only objective of the law is to make
o A partnership may even be created the recorded instrument open to all and to
without any definite intention; the give notice thereof to interested persons
intention of the parties being inferred o The date the partnership papers are
from their conduct and dealings with presented to and left for record in the
each other Commission is considered the effective
date of registration of the articles of
Conflict between intention and terms of contract – partnership
if the parties intend a general partnership, they are
general partners although their purpose is to avoid Art. 1773. A contract of partnership is void, whenever
the creation of such relation immovable property is contributed thereto, if an
inventory of said property is not made, signed by the
Art. 1772. Every contract of partnership having a parties, and attached to the public instrument.
capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which Partnership with contribution of immovable property
must be recorded in the Office of the Securities and
Exchange Commission. Where immovable property, regardless of its
value, is contributed, the failure to comply with
Failure to comply with the requirements of the the following requirements will render the
preceding paragraph shall not affect the liability of the partnership contract void insofar as the contracting
partnership and the members thereof to third persons. parties are concerned:
o The contract must be in a public
Registration of partnership instrument (Art. 1771)
o An inventory of the property contributed
Partnership with capital of 3,000Php or more – must be made, signed by the parties, and
requirements: attached to the public instrument
With regard to third persons, a de facto
partnership or partnership by estoppel may exist
a) the contract must appear in a public instrument, When inventory is not required:
and
An inventory is required only “whenever
b) it must be recorded with the SEC immovable property is contributed”
o However, failure to comply with the Hence, Art. 1773 does not apply in the case of
above requirements does not prevent the immovable property which may be possessed or
formation of the partnership (Art. 1768) even owned by the partnership but not
or affect its liability and that of the contributed by any of the partners
partners to third persons
If personal property, aside from real property, is
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former
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Notes on De Leon Partnership
Importance of making inventory of real property in a But a person may be held liable as a partner or
partnership partnership liability may result in favour of third
persons by reason of estoppel (Art. 1785)
Art. 1773 complements Art. 1771
To show how much is due each partner to Importance of giving publicity to articles of partnership –
for the protection not only of the members themselves but
complete his share in the common fund and how also third persons from fraud and deceit to which they
much is due to each of them in case of liquidation would otherwise be easy victims
The execution of a public instrument of
partnership would be useless if there is no Art. 1776. As to its object, a partnership is either
inventory of immovable property contributed universal or particular. As regards the liability of the
because without its description and designation, partners, a partnership may be general or limited.
the instrument cannot be subject to inscription in
the Registry of Property and the contribution Classification of partnership:
cannot prejudice 3rd persons
As to the extent of its subject matter
Art. 1774. Any immovable property or an interest o Universal partnership or one which refers
therein may be acquired in the partnership name. Title to all the present property or to all profits
so acquired can be conveyed only in the partnership There are 2 kinds of universal
name. partnership
Universal partnership
Acquisition or conveyance of property by partnership of all present property
(Art. 1778)
Since a partnership has a juridical personality Universal partnership
separate from and independent of that of the of profits (Art. 1780)
persons or members composing it (Art. 1768), it is o Particular partnership (Art. 1783)
but logical and natural that immovable property
may be acquired in the partnership name As to liability of the partners
o General partnership – one consisting of
Title so acquired can therefore be conveyed only general partners who are liable pro rata
in the partnership name and subsidiarily liable (Art. 1822-1824)
with their separate property for
The right of a partnership to deal in real as well as partnership debts
personal property is subject to limitations and o Limited partnership – one formed by 2 or
restrictions prescribed by the Constitution and more persons having as members one or
special laws more general partners and one or more
limited partners, the latter not being
Art. 1775. Associations and societies, whose articles are personally liable for the obligations of
kept secret among the members, and wherein any one the partnership (Art. 1843)
of the members may contract in his own name with
third persons, shall have no juridical personality, and As to its duration
shall be governed by the provisions relating to co- o Partnership at will – one in which no
ownership. time is specified and is not formed for a
particular undertaking or venture and
Secret partnerships without juridical personality which may be terminated at anytime by
mutual agreement of the partners, or by
Associations whose articles or agreements are will of any one partner alone; or one for a
kept secret among the members and wherein fixed term or particular undertaking
anyone of them may contract in his own name which is continued by the partners after
with third persons are deprived of juridical the termination of such term or particular
personality for evidently, such associations are not undertaking without express agreement
partnerships (Art. 1785)
o Partnership with a fixed term – one in
As among themselves, they shall be governed by which the term for which the partnership
the provisions relating to co-ownership is to exist is fixed or agreed upon or one
formed for a particular undertaking, and
A member who transacts business for the secret upon the expiration of the term or
partnership in his own name becomes personally completion of the particular enterprise,
bound to third persons unaware of the existence of
such association 9
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the partnership is dissolved, unless Liquidating partner – one who takes charge of the
continued by the partners (Art. 1785) winding up of partnership affairs upon dissolution
As to legality of its existence
o De jure partnership – one which has Partner by estoppel – one who is not really a
complied with all the legal requirements partner, not being a party to a partnership
for its establishment agreement, but is liable as a partner for the
o De facto partnership – one which has protection of innocent third persons; he is one who
failed to comply with all the legal is represented as being in fact a partner, but is not
requirements for its establishment so as between the partners themselves; also known
As to representation to others as partner by implication or nominal partner or
o Ordinary or real partnership – one which quasi-partner
actually exists among the partners and
also as to third persons Continuing partner – one who continues the
o Ostensible partnership or partnership by business of a partnership after it has been
estoppel – one which in reality is not a dissolved by reason of the admission of a new
partnership, but is considered a partner, or the retirement, death, or expulsion of
partnership only in relation to those who, one or more partners
by their conduct or admission, are
precluded to deny or disprove its Surviving partner – one who remains after a
existence partnership has been dissolved by the death of any
As to publicity partner
o Secret partnership – one wherein the
existence of certain persons as partners is Sub-partner – one who, not being a member of the
not avowed or made known to the public partnership, contracts with a partner with
by any of the partners reference to the latter‟s share in the partnership
o Open or notorious partnership – one
whose existence is avowed or made Other classifications
known to the public by the members of
the firm Ostensible partner – one who takes active part and
As to purpose is known to the public as a partner in the business,
o Commercial or trading partnership – one whether or not he has an actual interest in the
formed for the transaction of business firm; he may be an actual partner of a nominal
o Professional or non-trading partnership – partner; if he is not actually a partner, he is subject
one formed for the exercise of a to liability by the doctrine of estoppel
profession
Secret partner – one who takes active part in the
Class of partners – partners are classified according to their business but is not known to be a partner by
interest in the partnership business, or their obligations to outside parties nor held out as a partner by the
the partnership, or liabilities to third persons other partners, although he participates in the
profits and losses of the partnership; he is an
Under the Civil Code: actual partner; he is also an active partner in the
sense that he participates in the management of
Capitalist partner – one who contributed money or the partnership affairs
property to the common fund
Silent partner – one who does not take any active
Industrial partner – one who contributed only his part in the business although he may be known to
industry or personal service be a partner; he need not be a secret partner; if he
withdraws from the partnership, he must give
General or real partner – one whose liability to notice to those persons who do business with the
third persons extends to his separate property; firm to escape liability in the future
may be either a capitalist or industrial partner
Dormant or “sleeping” partner – one who does not
Limited or special partner – one whose liability to take active part in the business and is not known
third persons is limited to his capital contribution or held out as a partner; both a silent and a secret
partner; may retire from the partnership without
Managing partner – one who manages the affairs giving notice and cannot be held liable for
or business of the partnership; may be appointed obligations of the firm subsequent to his
whether in the articles of partnership or after the withdrawal; his only interest in joining the
constitution of the partnership; also known as a partnership would be the sharing of the profits
general or real partner earned
C c”,) L L E E N Original partner – one who is a member of the
partnership from the time of its organization
10
Notes on De Leon Partnership
Incoming partner – a person lately, or about to be Property subsequently acquired by inheritance,
taken into an existing partnership as a member legacy or donation CANNOT be included by
stipulation except the fruits
Art. 1777. A universal partnership may refer to all the
present property or to all the profits. Art. 1780. A universal partnership of profits comprises
all that the partners may acquire by their industry or
Universal partner – either present property or all the profits work during the existence of the partnership.
Art. 1778. A partnership of all present property is that Movable or immovable property which each of the
in which the partners contribute all the property which partners may possess at the time of the celebration of
actually belongs to them to a common fund, with the the contract shall continue to pertain exclusively to
intention of dividing the same among themselves, as each, only the usufruct passing to the partnership.
well as all the profits which they may acquire therewith.
Universal partnership of profits
Partnership of all present property
Ownership of present and future property
Partners contribute all the property which actually o What passes to the partnership are the
belongs to them to a common fund profits or income
There is an intention to divide the property among Profits acquired through chance not included
themselves Fruits of property subsequently acquired not
There is an intention to divide the profits they included (unless stipulated)
may acquire
Art. 1781. Articles of universal partnership, entered
Art. 1779. In a universal partnership of all present into without specification of its nature, only constitute a
property, the property which belongs to each of the universal partnership of profits.
partners at the time of the constitution of the
partnership, becomes the common property of all the Presumption in favour of universal partnership of profits
partners, as well as all the profits which they may
acquire therewith. A universal partnership of property imposes less
obligations on the partners, since they preserve the
A stipulation for the common enjoyment of any other ownership of their separate property
profits may also be made; but the property which the
partners may acquire subsequently by inheritance, Applies only when a universal partnership has
legacy, or donation cannot be included in such been organized
stipulation, except the fruits thereof.
Art. 1782. Persons who are prohibited from giving each
Universal partnership of all present other any donation or advantage cannot enter into
universal partnership.
Comprises all that the partners may acquire by Limitations upon the right to form a partnership – persons
their industry or work during the existence of the prohibited by law to give donations cannot enter into a
partnership universal partnership; each of the partners virtually makes a
donation
The following become the common property of all
partners: Art. 1783. A particular partnership has for its object
o Property which belonged to each of them determinate things, their use or fruits, or specific
at the time of the constitution of the undertaking, or the exercise of a profession or vocation.
partnership
o Profits which they may acquire from the Object of particular partnership
property contributed
Difference between a universal partnership and a
Future properties cannot be contributed particular partnership
o Scope of subject matter
The very essence of partnership requires the Universal: vague and indefinite,
contribution of things determinate with a degree of continuity;
C c”,) L L E E N 11
Notes on De Leon Partnership
Particular: well-defined, have not yet begun the carrying on of its business
or given their contributions)
confined to an undertaking of a
o Predicated on the mutual desire and
single, temporary or ad hoc consent of the parties
nature In effect, its registration in the SEC is not an
essential to give it juridical personality
Business need not be continuing in nature
o An agreement to undertake a particular No time limit prescribed by law for the life of
partnership
piece of work or a single transaction and
The partners MAY stipulate some other date for
immediately divide the profits within the the commencement of the partnership
meaning of partnership as used in law A partnership in fact cannot be predicated on an
o Joint venture: though not a formal agreement to enter into a co-partnership at a future
day unless it is shown that such an agreement was
partnership, it is governed by almost the actually consummated
same rules of partnership Art. 1785. When a partnership for a fixed term or
There is a community of interest particular undertaking is continued after the
termination of such term or particular undertaking
similar to a partnership without any express agreement, the rights and duties of
Has a legal personality separate the partners remain the same as they were at such
termination, so far as is consistent with a partnership at
and district from the parties will.
CHAPTER 2 A continuation of the business by the partners or such
of them as habitually acted therein during the term,
OBLIGATIONS OF THE PARTNERS without any settlement or liquidation of the partnership
affairs, is prima facie evidence of a continuation of the
SECTION 1. - Obligations of the Partners Among partnership.
Themselves
Continuation of partnership beyond fixed term
Relations created by a contract of partnership
Four distinct juridical relations: Partnership with fixed term: one in which the
o Relations among the partners with the terms of its existence has been agreed upon
partnership expressly or impliedly
o Relations of the partners with the o It may be extended or renewed by the
partnership partners by express or implied agreement
o Relations of the partnership with third o In such case, the rights and duties of the
persons with whom it contract partners remain the same
o Relations of the partners with such third o With such continuation, the partnership
persons for a fixed term or particular undertaking
Partnership relationship one of mutual trust and is dissolved and a new one is created
confidence
Fiduciary relationship remains until partnership s Partnership for an indefinite term: an
terminated understanding that the relationship shall continue
Rights and obligations of the partners as to each until the accomplishment of a particular
other are provided on the theory that a partner is undertaking
both a principal and an agent in relation to his co-
partners Partnership with mere expectation: such a hope
o But the relationship between a limited does not establish even by implication a fixed
partner and other partners in a limited term or particular undertaking
partnership does not involve the element
of trust and confidence Art. 1786. Every partner is a debtor of the partnership
for whatever he may have promised to contribute
Art. 1784. A partnership begins from the moment of the thereto.
execution of the contract, unless it is otherwise
stipulated. He shall also be bound for warranty in case of eviction
with regard to specific and determinate things which he
Commencement and term of partnership may have contributed to the partnership, in the same
Partnership is a consensual contract; hence it
exists from the moment of the celebration of the 12
contract by the partners (even when the partners
C c”,) L L E E N
Notes on De Leon Partnership
cases and in the same manner as the vendor is bound proportion of the amount in the
with respect to the vendee. He shall also be liable for the
fruits thereof from the time they should have been distribution of the partnership assets
delivered, without the need of any demand. o Measure of damages: value of the
services wrongfully withheld
Obligations with respect to contribution of property Money or property contributed cannot be withdrawn
without the consent of the partnership or of the other
Obligations of the partners among themselves partners
o To contribute at the beginning of the
partnership the property, money or Art. 1787. When the capital or a part thereof which a
industry partner is bound to contribute consists of goods, their
Failure to contribute property appraisal must be made in the manner prescribed in the
will make the partner a debtor of contract of partnership, and in the absence of
the partnership stipulation, it shall be made by experts chosen by the
Remedy of other partners is partners, and according to current prices, the
specific performance with subsequent changes thereof being for account of the
damages and interest partnership.
o To answer for eviction in case the
partnership is deprived of the determinate Appraisal of goods or property contributed
property contributed
The partner is bound in the same Necessary to determine how much has been
manner as the vendor is bound contributed by the partners
with respect to the vendee
o To answer to the partnership for the fruits Two ways of appraisal: in the manner prescribed
of the property, from the date they should by the contract of partnership and in the absence
have been contributed up to the time of of stipulation, by experts chosen by the partners
actual delivery and according to current prices
No demand needed to put the
partner in default For immovable property: appraisal is made in the
Failure to deliver the property inventory of said property
prejudices the common purpose
of obtaining the greatest Art. 1788. A partner who has undertaken to contribute
possible profits a sum of money and fails to do so becomes a debtor for
o To preserve said property with the the interest and damages from the time he should have
diligence of a good father complied with his obligation.
o To indemnify the partnership for any
damage caused to it by the retention of The same rule applies to any amount he may have
the same or by the delay in its taken from the partnership coffers, and his liability
contribution shall begin from the time he converted the amount to
his own use.
Liability of partner for failure to perform service
stipulated Obligations with respect to contribution of money &
o Partners are generally not entitled to money converted to personal use
charge each other for their services in the
firm business 2 instances involved: money promised but not
o To require a partner to account for the given on time and partnership money converted to
value of his services would be allowing personal use of the partner
compensation to the other members of
the partnership for the services rendered Obligations of the partner under this article
o If a partner neglects to render the o Contribute on the date due the amounts
services by reason of which the he has undertaken to the partnership to
partnership suffered loss, no good reason contribute
can be suggested why the erring partner Liability of guilty partner for
should not be just as responsible for the interest and damages: from the
breach of his agreement time he should have complied
o If the partner is compelled to make good (not from judicial or
the loss, each member will receive his extrajudicial demand)
C c”,) L L E E N 13
Notes on De Leon Partnership
o Reimburse any amount he may have Art. 1791. If there is no agreement to the contrary, in
taken case of an imminent loss of the business of the
The party is guilty of estafa if he partnership, any partner who refuses to contribute an
misappropriates partnership additional share to the capital, except an industrial
money or property partner, to save the venture, shall he obliged to sell his
Mere failure on the part of the interest to the other partners.
industrial partner to return to the
capitalist partner the capital Obligation of capitalist partner to contribute additional
brought by him does not capital
constitute estafa
General rule: capitalist is not bound to contribute
o Pay the agreed or legal interest if he fails to the partnership more than what he agreed to
to pay his contribution on time contribute, but in case of imminent loss, he is
under obligation to contribute additional share to
o Indemnify the partnership for the save the venture
damages caused to it by the delay
Refusal to contribute means he is obliged to sell
Art. 1789. An industrial partner cannot engage in his interest to the other partners
business for himself, unless the partnership expressly
permits him to do so; and if he should do so, the Requisites before a capitalist partner may be
capitalist partners may either exclude him from the obliged to sell his interest
firm or avail themselves of the benefits which he may o Imminent loss of the business
have obtained in violation of this provision, with a right o Majority of the capitalist partners believe
to damages in either case. that an additional contribution to the
common fund would save the business
Obligations of industrial partner o Capitalist partner refuses deliberately
o No agreement that the partners are not
Industrial partner contributes his industry, labor or obliged to contribute in case of an
services to the partnership imminent loss
o Considered as the owner of his services
o Becomes a debtor of the partnership for Reason: refusal of the partner shows his lack of
his partnership acquires exclusive right to interest in the continuance of the partnership
avail itself of his industry
o Action for specific performance is not the Art. 1792. If a partner authorized to manage collects a
proper action demandable sum which was owed to him in his own
name, from a person who owed the partnership another
Prohibition against engaging in business sum also demandable, the sum thus collected shall be
o Absolute and applies whether the applied to the two credits in proportion to their
industrial partner is to engage in the same amounts, even though he may have given a receipt for
business or in any kind of business his own credit only; but should he have given it for the
account of the partnership credit, the amount shall be
Remedies where the industrial partner engages in fully applied to the latter.
business
o Capitalist partners have the right to The provisions of this article are understood to be
exclude him from the firm (with without prejudice to the right granted to the other
damages) debtor by Article 1252, but only if the personal credit of
o Or avail of the benefits (with damages) the partner should be more onerous to him.
It is believed that industrial partners are also Obligations of managing partner who collects debt
entitled to the remedy
If a person is separately indebted to the
Art. 1790. Unless there is a stipulation to the contrary, partnership and to the managing partner, the
the partners shall contribute equal shares to the capital amount received shall be applied to the two credits
of the partnership. in proportion to their amounts
o But where the managing partner receives
Extent of contribution to partnership capital it for the account of the partnership, the
whole sum is applied to the partnership
The presumption is that their contribution shall be credit only
in equal shares o
The rule does not apply to an industrial partner 14
unless he has contributed capital
C c”,) L L E E N
Notes on De Leon Partnership
Requisites fault, and he cannot compensate them with the profits
o There are at least 2 debts, where the and benefits which he may have earned for the
collecting partner is creditor, and the partnership by his industry. However, the courts may
other, where the partnership is the equitably lessen this responsibility if through the
creditor partner's extraordinary efforts in other activities of the
o Both debts are demandable partnership, unusual profits have been realized.
o The partner who collects is authorized to
manage and actually manages the Obligation of partner for damages to partnership
partnership
Any person guilty of negligence or fraud shall be
Reason: the law safeguards the interest of the liable for damages
partnership by preventing the possibility of their o The partner‟s fault is determined in
being subordinated by the managing partner to his accordance with the nature of the
own interest to the prejudice of other partners obligation and the circumstance of the
person, time and place
The article does not apply where the partner who
collects for his own credit is not authorized to Damages caused by a partner cannot be offset by
manage if the manner of management has not the profits he may have earned for the partnership
been agreed upon and all the partners participate by his industry
in the management, then every partner shall be o The partner has the obligation to secure
considered a managing partner benefits for the partnership
o The partner also has the obligation to
Debtor is given the right to prefer payment of the exercise diligence in the performance of
credit of the partner if it should be more onerous his obligation as a partner
to him o Exception: unusual profits through
extraordinary efforts
Art. 1793. A partner who has received, in whole or in Based on equity
part, his share of a partnership credit, when the other Case to case basis
partners have not collected theirs, shall be obliged, if
the debtor should thereafter become insolvent, to bring Art. 1795. The risk of specific and determinate things,
to the partnership capital what he received even though which are not fungible, contributed to the partnership
he may have given receipt for his share only. so that only their use and fruits may be for the common
benefit, shall be borne by the partner who owns them.
Obligation of partner who receives share of partnership
credit
There is only one credit under this article (that in If the things contribute are fungible, or cannot be kept
favour of the partnership) without deteriorating, or if they were contributed to be
sold, the risk shall be borne by the partnership. In the
Applies whether the partner who receives his absence of stipulation, the risk of the things brought
share is authorized to manage or not and appraised in the inventory, shall also be borne by
the partnership, and in such case the claim shall be
Requisites limited to the value at which they were appraised.
o A partner has received his share of the
partnership credit Risk of loss of things contributed: FIVE cases for the
o Other partners have not collected their determination of the risk of the things contributed to the
shares partnership
o Partnership debtor becomes insolvent
Specific and determinate things which are not
The article is based on the community of interests fungible where only the use is contributed – risk
among the partners of loss borne by the partner because he remains
the owner
Credit collected after dissolution of the
partnership: conflicting views on the more diligent Specific and determinate things the ownership of
partner who collects the portion pertaining to him which is transferred to the partnership – risk of
o Other partners may demand what the loss is for the account of the partnership, as owner
partner has already collected (on the
principle of community and equality) Fungible things which cannot be kept without
o It would be unjust to demand from the deteriorating even if they are contributed only for
diligent partner (the partnership ceased) the use of the partnership – risk of loss is borne by
the partnership
Art. 1794. Every partner is responsible to the
partnership for damages suffered by it through his 15
C c”,) L L E E N
Notes on De Leon Partnership
Things contributed to be sold – partnership bears Rules for distribution of profits and losses
risk of loss for there cannot be any doubt that the
partnership was intended to be the owner Distribution of profits
o The partners share the profits according
Things brought and appraised in the inventory – to their agreement subject to Art. 1816
partnership bears risk of loss because the intention o If there is no such agreement
of the parties was to contribute to the partnership Share of each capitalist partner –
the price of the things contributed with an shall be in proportion to his
appraisal (implied sale making the partnership capital contribution. This rule is
owner of the said things, the price being based on the presumed will of
represented by their appraised value) the partners
Share of industrial partner –
Art. 1796. The partnership shall be responsible to every must be satisfied first before the
partner for the amounts he may have disbursed on capitalist partners divide the
behalf of the partnership and for the corresponding profits. Amount will be based
interest, from the time the expense are made; it shall on what is just and equitable
also answer to each partner for the obligations he may under the circumstances. The
have contracted in good faith in the interest of the share of an industrial partner in
partnership business, and for risks in consequence of its the profits is not fixed, as in the
management. case of capitalist partners,
because it is very difficult to
Responsibility of the partnership to the partners ascertain the value of services
Every partner is an agent of the partnership for the A partner is entitled to receive only his share of the profits
purpose of its business actually realized by the venture
o Partner is not personally liable as long as
he is not at fault Even when assurances of huge profits were made by a
o But the partner is not given the right of partner, in the absence of fraud, the other partner cannot
retention if he is not reimbursed claim right to recover profits promised. This is especially
true when the business was highly speculative and turned
Obligations of the partnership out to be a failure
o Refund amount disbursed by the partner
is behalf of the partnership with interest Hidden risks in any business venture have to be considered
from the time expenses are made
o Answer for the obligation the partner Distribution of losses
may have contracted in good faith o According to the Agreement of the
o Answer for risks in consequences of its Partners, subject to Art. 1799
management o If no agreement, but the contract
provides for the share of the partners in
Art. 1797. The losses and profits shall be distributed in the profits, the share of each in the losses
conformity with the agreement. If only the share of each shall be according to the profit-sharing
partner in the profits has been agreed upon, the share ratio
of each in the losses shall be in the same proportion. However, the industrial partner
shall NOT be liable for losses
In the absence of stipulation, the share of each partner To determine profits or losses,
in the profits and losses shall be in proportion to what all transactions must be
he may have contributed, but the industrial partner considered, not only one
shall not be liable for the losses. As for the profits, the particular transaction
industrial partner shall receive such share as may be o If also no profit-sharing stipulated in the
just and equitable under the circumstances. If besides contract, losses shall be borne by the
his services he has contributed capital, he shall also partners in proportion to their capital
receive a share in the profits in proportion to his contributions
capital. But the purely industrial partner
shall NOT be liable for the
losses
C c”,) L L E E N 16
Notes on De Leon Partnership
Art. 1798. If the partners have agreed to intrust to a o However, although the stipulation is
third person the designation of the share of each one in void, the partnership is otherwise valid
the profits and losses, such designation may be and the profits or losses shall be
impugned only when it is manifestly inequitable. In no apportioned as if there was no stipulation
case may a partner who has begun to execute the on the same
decision of the third person, or who has not impugned If also no profit-sharing
the same within a period of three months from the time stipulated in the contract, losses
he had knowledge thereof, complain of such decision. shall be borne by the partners in
proportion to their capital
The designation of losses and profits cannot be contributions (Art. 1797)
intrusted to one of the partners.
Stipulation, a factor to show no partnership exists
Designation by a 3rd person of share in profits and losses o Where parties expressly stipulate that
there shall be no liability for losses, or
Delegation to a 3rd person – designation of shares where from the nature of the contract, it
in the profits and losses may be delegate to 3rd is clear that a party did not intend to
person by common consent share in the losses, such fact may be an
o Designation must be to 3rd person, and indicator/ factor in determining that no
not to one of the partners. In accordance partnership exists
with rule in contracts that fulfilment of
contract cannot be left to the will of one Where person excluded not intended by parties to
of the contracting parties become a partner
o Prohibition in 2nd paragraph necessary to o Stipulation is valid
guarantee impartiality o When one of several persons engaged in
an enterprise agreed to assist by
Binding force of designation – designation by 3rd advancing money and to share in the
person generally binding unless manifestly losses but not to receive any part of the
inequitable profits, which will be divided among the
o Partner who has begun to execute others exclusively, is not deemed to be a
decision of 3rd person or who fails to partner
impugn the same within 3 months from o But if he represents to others or allows
time he had knowledge of it can no himself to be held as a partner to a 3rd
longer complain person who enters into a contract with
o In this case, partner guilty of estoppel or them believing him to be such partner,
deemed to have given consent or he is liable
ratification to designation
o 3 month period only so operations of Where person excluded from losses is industrial
partnership will not be paralyzed partner
o Naturally valid because Art. 1797
Art. 1799. A stipulation which excludes one or more specifically excludes an industrial
partners from any share in the profits or losses is void. partner from losses
o But this is without prejudice to the rights
Stipulation excluding a partner from any share in profits or of 3rd persons
losses o Industrial partner is excluded because he
cannot withdraw his labor or efforts,
Stipulation generally void, but partnership unlike a capitalist partner. Also when no
subsists profits are realized, then he would have
o In general, law does not allow a worked in vain and has already
stipulation excluding one or more contributed his share in the loss
partners from any share in profits and
losses Where stipulation provides doe unequal shares
Partnership must exist for o Partners are allowed to stipulate for
common benefit and interest of unequal shares in the profits or losses
partners even if their contributions are equal
o Hence, contract excluding one or more o Unless inequality is so gross that it is, in
partners from share contravenes the very effect, a simulated form or attempt to
purpose of a partnership exclude a partner from any share in the
profits or losses
C c”,) L L E E N
Art. 1800. The partner who has been appointed
manager in the articles of partnership may execute all
17
Notes on De Leon Partnership
acts of administration despite the opposition of his Exception is when the powers of the manager are
partners, unless he should act in bad faith; and his specifically restricted
power is irrevocable without just or lawful cause. The
vote of the partners representing the controlling Compensation for services rendered
interest shall be necessary for such revocation of power.
Partner generally not entitled to compensation
A power granted after the partnership has been o Each partner in taking care of the joint
constituted may be revoked at any time. property, managing the partnership
affairs, and directing the partnership
Rights and obligations with respect to management business is practically taking care of his
own interest or managing his own
Two distinct cases of appointments business
o He is not, in the absence of a contract,
Appointment as a manager in the Articles of express or implied, entitled to
Partnership compensation beyond his share of the
o Partner appointed by common agreement profits for services rendered
in articles of partnership may execute all o In the absence of any prohibition in the
acts of administration, but not those of articles of partnership for the payment of
strict ownership, notwithstanding the salaries to general partners, there is
opposition of the other partners, unless nothing to prevent the partners to enter
he should act in bad faith into a collateral verbal agreement to that
o His power is revocable only upon just effect
and lawful cause and upon vote of the
partners representing the controlling Exceptions – in proper cases, the law may imply a
interest contract for compensation
o Reason: revocation represents a change o Employment of a co-partner in a capacity
in the terms of the contract other than that of a partner. – e.g. to
o In case of mismanagement, other partners perform clerical services
may avail of usual remedies, including o Extraordinary neglect on the part of one
application for dissolution of partnership partner to perform his duties, imposing
by judicial decree the entire burden on the remaining
partner
Appointment as manager after the constitution of o To do work for a co-partner outside and
the partnership independent of the co-partnership, and
o Management granted after partnership shall become personally liable therefore
has been constituted independently of the o Partners exempted by terms of
articles may be revoked at any time for partnership from rendering services
any cause whatsoever o Where one partner is entrusted with
o Revocation not founded on change of management and devotes his whole time
will of partners, the appointment not thereto while the other partners attend to
being a condition of the contract their individual business giving no time
o It is merely a contract of agency, which or attention to the business of the firm
may be revoked any time o When one partner is exempt from
rendering personal services and he does
Art. 1800 refers to a partner appointed as manager, and not render such service or where services
to a stranger rendered are extraordinary
As a rule, the partner is not entitled to compensation for his Art. 1801. If two or more partners have been intrusted
services other than his share of the profits with the management of the partnership without
specification of their respective duties, or without a
Scope of power if a managing partner stipulation that one of them shall not act without the
consent of all the others, each one may separately
As a general rule, a partner appointed as manager execute all acts of administration, but if any of them
has all powers of a general agent as well as should oppose the acts of the others, the decision of the
incidental powers necessary to carry out object of majority shall prevail. In case of a tie, the matter shall
partnership in the transaction of its business be decided by the partners owning the controlling
interest.
C c”,) L L E E N
18
Notes on De Leon Partnership
Where respective duties of two or more managing partners Rule where there is opposition by a managing
not specified partner
o Rule that in cases of imminent danger of
Each one may separately perform acts of grave or irreparable injury, a managing
administration partner may proceed alone without
o If one or more managing partners oppose consent of others, does not apply when a
acts of others, decision of majority of the managing partner objects to the proposed
managing partners shall prevail act
Right to oppose can be
exercised only by those Consent of managing partners not necessary in
entrusted with management of routine transactions
partnership and not by any o The authority to purchase carries with it
partner the implied authority to purchase on
o In case of tie, matter shall be decided by credit
vote of partners owning controlling o The requirement of written authority
interest (more than 50% capital refers to formal and unusual written
investment) contract
o If articles do not specify duties of
partners and limitations of management , Art. 1803. When the manner of management has not
one partner has no more powers than the been agreed upon, the following rules shall be observed:
others in the conduct and management of
the business (1) All the partners shall be considered agents
and whatever any one of them may do alone
Requisites for application of rule shall bind the partnership, without prejudice to
o Two or more partners have been the provisions of Article 1801.
appointed as managers
o There is no specification of their (2) None of the partners may, without the
respective duties consent of the others, make any important
o There is no stipulation that one of them alteration in the immovable property of the
shall not act without the consent of all the partnership, even if it may be useful to the
others partnership. But if the refusal of consent by the
other partners is manifestly prejudicial to the
Art. 1802. In case it should have been stipulated that interest of the partnership, the court's
none of the managing partners shall act without the intervention may be sought.
consent of the others, the concurrence of all shall be
necessary for the validity of the acts, and the absence or Rule when manner of management has not been agreed
disability of any one of them cannot be alleged, unless upon
there is imminent danger of grave or irreparable injury
to the partnership. All partners considered managers and agents
All partners shall then have equal rights in the
Where unanimity of action stipulated management and conduct of partnership affairs.
All of them shall be considered managers and
Concurrence necessary for validity of acts agents (Art. 1818)
o Partners may stipulate that none of Effect: whatever any one of them may do alone
managing partners shall act without shall bind partnership
consent of the others o Subject to Art. 1801 that in case of
o Consent can be so indispensable that timely opposition by any partner,
neither absence nor disability of any majority vote shall be needed
partner cannot be used to dispense o In case of tie, matter shall be decided by
requirement vote of partners representing the
The only exception is when controlling interest
there is imminent danger of o Read Art. 1803(1) together with Art.
grave and irreplaceable injury to 1818
the partnership under Art. 1794
C c”,) L L E E N 19
Notes on De Leon Partnership
Unanimous consent required for alteration of immovable Effect: sub-partner does not acquire rights of a
property partner nor is he liable for its debts
Consent here need not be express and may be Reason for the rule:
presumed from the fact of knowledge of the Partnership is based on mutual trust and
alteration without interposing any objection confidence among partners
o Prohibition only applies to In effect a modification of the original contract of
immovable property and the partnership requiring unanimous consent
alteration thereof must be important Prohibition applies even if person associated is
Any important alteration in already a partner
the immovable property of
the partnership is an act of Art. 1805. The partnership books shall be kept, subject
strict dominion to any agreement between the partners, at the principal
Even managing partner place of business of the partnership, and every partner
cannot make such shall at any reasonable hour have access to and may
alteration, notwithstanding inspect and copy any of them.
that it is useful to the
partnership, without the Keeping a partnership books
consent of all partners
o If refusal to give consent is Partner with duty to keep partnership books – Managing or
manifestly prejudicial to interest of Active partner has duty to keep books and make them
the partnership, court intervention available at all times for inspection by members of the firm
may be sought
Consent may be presumed Rights with respect to partnership books
from silence of other
partners who did not oppose Books should be kept at principal place of
to alteration business
o If the alteration is necessary for the
preservation of the property, it To ensure other partner‟s right to free access to
would seem that the consent of the them and to inspect or copy any of them at any
other partners is not required reasonable time, even after dissolution
Art. 1804. Every partner may associate another person Partnership inspection rights are not absolute. He
with him in his share, but the associate shall not be can be restrained from using information gathered
admitted into the partnership without the consent of all for other than partnership purposes
the other partners, even if the partner having an
associate should be a manager. Access to partnership books – reasonable hours on business
days throughout the year and not merely during some
Contract of sub-partnership arbitrary period of a few days by the managing partners
Sub-partnership – a partner may associate another
person with him in his share without the consent Art. 1806. Partners shall render on demand true and
of the other partners full information of all things affecting the partnership
to any partner or the legal representative of any
Nature: deceased partner or of any partner under legal
Partnership formed between a member of a disability.
partnership and a 3rd person for a division of the
profits coming to him from the partnership Duty to render information
enterprise
A partnership within a partnership and is distinct There must be no concealment between the
and separate from the main or principal partners in all matters affecting the partnership
partnership
The information that shall be rendered on demand
Right of person associated with partners share should be used only for a partnership purpose
Sub-partnership agreements do not affect
composition, existence or operation of the firm Partner has either 2 obligations
Sub-partners are partners inter se, but in absence o Give information on demand
of mutual assents of all partners, sub-partner does o Duty of voluntary disclosure of material
not become member of partnership facts within his knowledge relating to
partnership affairs
C c”,) L L E E N
20
Notes on De Leon Partnership
But duty to render information does not apply to Duty to make full disclosure of information
matters appearing in partnership books since belonging to a partnership
partners have right to inspect books o Partner must give undivided loyalty and
complete disclosure of information of all
Good faith requires partner not make any false things affecting the partnership
statement and abstain from any false concealment o Information means information that can
be used for the purposes of the
Art. 1807. Every partner must account to the partnership
partnership for any benefit, and hold as trustee for it
any profits derived by him without the consent of the Duty not to acquire interest or right adverse to
other partners from any transaction connected with the partnership
formation, conduct, or liquidation of the partnership or o Partner may not purchase, lease, or
from any use by him of its property. secure a valuable contract, for his own
benefit, that which the partnership is
Accountability of partner – partner accountable as fiduciary interested
because their relationship involves trust and confidence: o If he does, he hold it in trust for the
each partner is considered in law as the confidential agent benefit of the partnership and must
of the others. The duties of a partner are analogous to account to the firm the profits of the
those of a trustee transaction unless there is consent from
the co-partners
Duties: o Consent must be an “informed consent”
with knowledge of the facts necessary to
Duty to act for common benefit – he cannot, at the give an intelligent consent
expense or detriment of the other partners, use or
apply exclusively to his own individual benefit Art. 1808. The capitalist partners cannot engage for
partnership assets or knowledge or information their own account in any operation which is of the kind
gained as a partner of business in which the partnership is engaged, unless
there is a stipulation to the contrary.
Duty begins during formation of partnership
o The principle of utmost good faith starts Any capitalist partner violating this prohibition shall
even in negotiations leading to formation bring to the common funds any profits accruing to him
of the partnership (Allen v. Steinberg) from his transactions, and shall personally bear all the
o Has the obligation to account for losses.
commissions and discounts received in
acquiring property for the future Industrial partner – absolute prohibition
partnership
Capitalist partner – relative prohibition
Duty continues even after dissolution of
partnership – duty to act with utmost good faith Only prohibited from engaging for his own
continues throughout life of partnership until account in any operation which is the same or
relationship is terminated (includes winding up) similar to the business of the partnership or
competes with such
Duty to account for secret and similar profit –
duty to account as a fiduciary operates to prevent If capitalist partner seeks to do other businesses it
from making a secret profit out of the operation of must be one that is not connected or competing
the partnership and using the partnership or with partnership
knowledge obtained from the partnership in a
similar business without the consent of the other Cannot engage in business of others in the same
partners line of business as partnership
Duty to account for earnings accruing even after Reason: partnership is fiduciary
termination of partnership – “if a member of a
partnership avails himself of information obtained Exception: consent from partners
by him in the course of the transaction of
partnership business which is within scope of the
firm‟s business, and applies it to his own account
without the consent or knowledge of his co-
partners, he is liable to account to the partnership
for any benefit he may obtain from the use of such
information
C c”,) L L E E N 21
Notes on De Leon Partnership
Art. 1809. Any partner shall have the right to a formal Right to true and full information of all things
account as to partnership affairs: affecting the partnership (Art. 1806)
(1) If he is wrongfully excluded from the Right to a formal account of partnership affairs
partnership business or possession of its under certain circumstances (Art. 1809)
property by his co-partners;
Right to have the partnership dissolved also under
(2) If the right exists under the terms of any certain circumstances (Art. 1830-1831)
agreement;
Partnership property versus Partnership capital
(3) As provided by article 1807; Property is variable and may change from day to
day depending on market value of partnership
(4) Whenever other circumstances render it assets while capital is constant counted from the
just and reasonable. amount fixed by the agreement of the partners
although it may be increased or decreased by
General rule: during the existence of the partnership, a unanimous consent of the partners
partner is not entitled to a formal account of partnership Property includes all property of the partnership
affairs (original capital contributions, subsequent
acquisitions, partnership name, goodwill) while
Reason: rights of a partner protected in Art. 1805 and 1806 capital only includes capital contributions from
and will cause much inconvenience and unnecessary waste the partners
of time
Ownership of certain property
Exception: special and unusual situations under Art. 1809
Key: depends on intention of the parties – controlling
Example of paragraph 4: partner is assigned abroad for a factor:
long period for the partnership and the other partners hold
books during that time No express agreement that property used by a
partnership constitutes partnership property does
Prescriptive period: right to demand accounting exists as not make it partnership property. Depends on
long as partnership lasts. Prescription starts upon intention of the parties (shown by express
dissolution of partnership when final accounting is done agreements or acts of particular conduct)
SECTION 2. - Property Rights of a Partner A partner may contribute the use or enjoyment of
property to the partnership while retaining
Art. 1810. The property rights of a partner are: ownership of property
(1) His rights in specific partnership property;
A partner may hold title to partnership property
(2) His interest in the partnership; and without it actually belonging to him
(3) His right to participate in the management. General rule: property acquired with partnership funds is
partnership property
Principal rights:
His rights in specific partnership property (Art. Exception: unless there is a contrary intention
1811)
His interest in the partnership (Art. 1812) Property acquired after dissolution but before winding up is
His right to participate in management (Art. 1803) separate property; BUT he would be liable to the
partnership of partnership funds are used
Art. 1811. A partner is co-owner with his partners of
specific partnership property.
The incidents of this co-ownership are such that:
Related rights (1) A partner, subject to the provisions of this
Right to reimbursement for amounts advanced to Title and to any agreement between the
the partnership and to indemnification for risks in partners, has an equal right with his partners
consequence of management (Art. 1796) to possess specific partnership property for
Right to access and inspection of partnership partnership purposes; but he has no right to
books (Art. 1805) possess such property for any other purpose
without the consent of his partners;
C c”,) L L E E N
22
Notes on De Leon Partnership
(2) A partner's right in specific partnership c. on the death of a partner, his right in
property is not assignable except in connection specific partnership property vests in the
with the assignment of rights of all the partners surviving partners, not the legal
in the same property; representative of the deceased partner.
Executor of deceased partner CANNOT
(3) A partner's right in specific partnership insist on participating in the winding up
property is not subject to attachment or process
execution, except on a claim against the
partnership. When partnership property is d. by agreement, right to possess specific
attached for a partnership debt the partners, or partnership property may be surrendered.
any of them, or the representatives of a If no agreement, equal dominion over
deceased partner, cannot claim any right under partnership property
the homestead or exemption laws;
e. a partnership possession of partnership
(4) A partner's right in specific partnership property is equal to possession of all
property is not subject to legal support under partners. Therefore, cannot acquire by
Article 291. adverse possession. Unless he makes an
adverse claim of title under such
The incidents of this co-ownership are such that: circumstances as will charge his co-
A partner, subject to the provisions of this Title partner with notice of the adverse claim
and to any agreement between the partners, has an
equal right with his partners to possess specific 2. right not assignable – a partner cannot separately
partnership property for partnership purposes; but assign his rights to specific property but all of
he has no right to possess such property for any them can assign their rights in the same property
other purpose without the consent of his partners a. not assignable because cannot determine
A partner‟s right in specific partnership property the extent of beneficial interest in the
is not assignable except in connection with the property until after liquidation
assignment of rights of all the partners in the same b. partner cannot dispose or mortgage
property without consent or approval of the other
A partner‟s right in specific partnership property partners even if he contributed property
is not subject to attachment or execution, except c. consent of all the partners, either express
on a claim against the partnership. When or implied, is the source and limit of a
partnership property is attached for a partnership partner‟s right to deal with partnership
debt, the partners, or any of them, or the property for any but a partnership
representatives of a deceased partner, cannot purpose
claim any right under the homestead or exemption d. not assignable so that it prevents
laws interference by outsiders in partnership
A partner‟s right in specific partnership property affairs. Protects right of other partners
is not subject to legal support under Art. 291 and partnership creditors
e. assignment of specific partnership
Contemplates tangible property (cars, truck, land) but not property is void but assignment of
intangible things (rights to the land of public domain) partnership interest is valid. A retiring
partner may assign his rights in
A partner is a co-owner with his partners but the rules of partnership property to the partner or
co-ownership do not necessarily apply partners continuing the business (Art.
1840)
1. equal right of possession – partners have equal
right to possess specific partnership property for 3. right limited to share of what remains after
partnership purposes partnership debts have been paid
a. if used NOT for personal profit or a. the whole partnership property belongs to
benefit, he must account to the others for the partnership as a juridical person (Art.
the profits derived therefrom 1768) and a partner has no interest in it
b. if partner wrongfully excluded from but his share of what remains after all
possession – right to formal account and partnership debts are paid (Art. 1812)
even apply for judicial decree of b. specific partnership property is not
dissolution subject to attachment, execution,
garnishment or injunction without the
C c”,) L L E E N consent of all partners EXCEPT if it is a
claim against the partnership itself
c. right of the partners to specific
partnership property is not subject to
23
Notes on De Leon Partnership
legal support because property belongs to third person irrespective of the consent of the other
the partnership and not to the partners. partners, in the absence of agreement to the contrary
Partnership interest may be subject to
legal support Partner may convey his whole interest in the partnership
without causing dissolution. However, his assignment does
Art. 1812. A partner's interest in the partnership is his not grant assignee right to:
share of the profits and surplus.
to interfere with the management
The partner‟s interest in the partnership consists of his to require any information or account
share in the undistributed profits during the life of the to inspect any of the partnership books
partnership as an ongoing concern and his share in the
undistributed surplus after its dissolution Partnership is a relation in which delectus personae is an
important element. No one may be introduced into the firm
Profit – excess of returns over expenditure in a transaction as a partner without the unanimous consent of the other
of series of transactions or the net income of the partners
partnership over a given period
Remedy of the other partners if:
Surplus – assets of the partnership after debts and liabilities
are paid and the rights of the partnership are adjusted. dissolution of the partnership is NOT intended
Excess assets over liabilities o partnership may continue. Assigning
partner still has to participate in his
Extent of partner‟s interest is the proportion residue or partnership duties. Dissolution may
balance after an account has been taken of debts and occur if assigning partner neglects his
credits, including the amount paid by the several partners in partnership duties
liquidating firm debts or in making advances to the
partnership. Until that occurs, it is impossible to determine dissolution of the partnership is intended
the extent of a partner‟s interest o operates as a dissolution of the
partnership only when it is clear that the
A partner is not a creditor of the partnership for the amount parties contemplated and intended the
of his share. The interest of a partner is not subject to entire withdrawal from the partnership of
attachment or execution on a judgment recovered against such partners and the termination of the
the individual partner partnership as between the parties
Art. 1813. A conveyance by a partner of his whole The rights of the transferee or assignee are as follows:
interest in the partnership does not of itself dissolve the
partnership, or, as against the other partners in the to receive in accordance with his contract the
absence of agreement, entitle the assignee, during the profits accruing to the assigning partner
continuance of the partnership, to interfere in the
management or administration of the partnership to avail himself of the usual remedies provided by
business or affairs, or to require any information or law in the event of fraud in the management
account of partnership transactions, or to inspect the
partnership books; but it merely entitles the assignee to to receive the assignor‟s interest in case of
receive in accordance with his contract the profits to dissolution
which the assigning partner would otherwise be
entitled. However, in case of fraud in the management to require an account of partnership affairs, but
of the partnership, the assignee may avail himself of the only in case the partnership is dissolved, and such
usual remedies. account shall cover the period from the date only
of the last account agreed to by all the partners
In case of a dissolution of the partnership, the assignee
is entitled to receive his assignor's interest and may Art. 1814. Without prejudice to the preferred rights of
require an account from the date only of the last partnership creditors under Article 1827, on due
account agreed to by all the partners. application to a competent court by any judgment
creditor of a partner, the court which entered the
A partner‟s right in specific partnership property is not judgment, or any other court, may charge the interest
assignable (Art. 1811[2]), but he may assign his interest in of the debtor partner with payment of the unsatisfied
the partnership (Art. 1812) to any of his co-partners or to a amount of such judgment debt with interest thereon;
C c”,) L L E E N and may then or later appoint a receiver of his share of
the profits, and of any other money due or to fall due to
him in respect of the partnership, and make all other
24
Notes on De Leon Partnership
orders, directions, accounts and inquiries which the SECTION 3. - Obligations of the Partners With Regard
debtor partner might have made, or which the to Third Persons
circumstances of the case may require.
Art. 1815. Every partnership shall operate under a firm
The interest charged may be redeemed at any time name, which may or may not include the name of one
before foreclosure, or in case of a sale being directed by or more of the partners.
the court, may be purchased without thereby causing a
dissolution: Those who, not being members of the partnership,
include their names in the firm name, shall be subject to
(1) With separate property, by any one or more the liability of a partner.
of the partners; or
Firm name – name, title or style under which a
(2) With partnership property, by any one or company transacts business
more of the partners with the consent of all the
partners whose interests are not so charged or Importance – necessary to distinguish the
sold. partnership which has a distinct and separate
juridical personality from the individuals
Nothing in this Title shall be held to deprive a partner composing the partnership and from other
of his right, if any, under the exemption laws, as partnerships and entities
regards his interest in the partnership.
General rule: partners may adopt any firm name
a separate creditor of a partner cannot attach or desired. May be last names of the partners or
levy upon partnership property for the satisfaction even fictitious or fanciful names. Signature in the
of his credit (Art. 1811[3]) firm name is in law the signature of all the
partners
because partnership assets are reserved for
partnership creditors (Art. 1827). However, he Use of misleading name – partners cannot use a
can secure a judgment on his credit and then apply name that is “identical of deceptively confusingly
to the proper court for a “Charging Order” subject similar to that of any existing partnership or
the interest of the debtor partner in the partnership corporation or to any name already protected by
(Art. 1812) with the payment of the unsatisfied law or is patently deceptive, confusing or contrary
amount of such judgment with interest thereon to existing laws
with the least interference with the partnership
business and the rights of other partners. Through Use of name of deceased partners
the “Charging Order”, any amount or portion
which would be paid to the debtor partner should General rule: Supreme Court says partnership
instead be given to the judgment creditor CANNOT use name of deceased partners
interest of the debtor partner may be redeemed or Exception: permissible provided that the firm
purchased with the separate property of any one or indicates in all its communications that said
more of the partners, or with the partnership partner is deceased
property but with the consent of all the partners
whose interests are not so charged or sold Persons who, not being a partner, include their name in the
firm name do not acquire the rights of a partner, but they
redemption price should be equal to the actual or shall be liable as a partner insofar as third parties without
market value. Value of partner‟s interest has no notice are concerned. BY ESTOPPEL.
bearing on the redemption price which would
likely be lower since it will be dependent on the Art. 1816. All partners, including industrial ones, shall
amount of the partnership debts be liable pro rata with all their property and after all
the partnership assets have been exhausted, for the
if another partner redeems the partner‟s interest, contracts which may be entered into in the name and
he does not acquire absolute ownership but holds for the account of the partnership, under its signature
it in trust for the debtor-partner due to the and by a person authorized to act for the partnership.
fiduciary relationship However, any partner may enter into a separate
obligation to perform a partnership contract.
C c”,) L L E E N 25
Notes on De Leon Partnership
Partnership liability – partners are principals to the other Stipulation against liability
partners and agents for them and the partnership. They are
liable to third persons who have dealt with one of them in A stipulation among the partners contrary to the
the same way that a principal is liable to third persons who pro rata and subsidiary liability expressly imposed
have dealt with an agent by Art. 1816 is void and of no effect as it affects
the rights of thirds persons. It is valid and
General rule: a partner has the right to make all partners enforceable only as among the partners
liable for contracts he makes for the partnership in the
name and for the account of the partnership Example:
o A, B, and C are partners in a business.
Individual liability – a partner may assume a separate Each of them contributed 10,000Php
undertaking in his name with a third party to perform a each. They stipulated that the liability of
partnership contract or make himself solidarily liable on a A shall not exceed his capital
partnership contract. In this case, he is personally liable contribution
even if the partnership derived benefits from it. o Thus, if the partnership assets have been
exhausted and there still remains an
Partners are liable to creditors (including industrial unpaid balance of 9,000Php in favour of
partners) for obligations contracted in the name and for the creditor D, the latter can still recover
account of the partnership. Liabilities are pro-rata and 3,000Php each from the partners as their
subsidiary stipulation cannot adversely affect him.
However, since the agreement is binding
Pro-rata are the partnership assets have been among the partners, A is entitled to credit
exhausted: from B and C for the amount o 3,000Php
o Understood to mean equally or jointly paid by him to D
and not proportionately which is its
literal meaning. Based on the number of Art. 1818. Every partner is an agent of the partnership
partners and not on the amount of their for the purpose of its business, and the act of every
contributions to the common fund, partner, including the execution in the partnership
subject to adjustment among the partners name of any instrument, for apparently carrying on in
o If a partner has left the country, cannot the usual way the business of the partnership of which
increase the liability of the other partners he is a member binds the partnership, unless the
o Subsidiarily – partners are liable as partner so acting has in fact no authority to act for the
guarantors of the partnership. When the partnership in the particular matter, and the person
assets of the partnership are exhausted, with whom he is dealing has knowledge of the fact that
the private properties of the partners are he has no such authority.
liable
o Industrial partners would also have to An act of a partner which is not apparently for the
pay but may recover from the capitalist carrying on of business of the partnership in the usual
partner unless there is an agreement to way does not bind the partnership unless authorized by
the contrary the other partners.
Exception: Except when authorized by the other partners or unless
o The industrial partner to pay losses they have abandoned the business, one or more but less
relates exclusively to the settlement of than all the partners have no authority to:
the partnership affairs among the partners
themselves and has nothing to do with (1) Assign the partnership property in trust for
the liabilities of the partners to third creditors or on the assignee's promise to pay
persons. An industrial partner is not the debts of the partnership;
exempted from liability to third persons (2) Dispose of the good-will of the business;
for the debts of the partnership (3) Do any other act which would make it
impossible to carry on the ordinary business of
Art. 1817. Any stipulation against the liability laid a partnership;
down in the preceding article shall be void, except as (4) Confess a judgment;
among the partners. (5) Enter into a compromise concerning a
partnership claim or liability;
C c”,) L L E E N (6) Submit a partnership claim or liability to
arbitration;
26
Notes on De Leon Partnership
(7) Renounce a claim of the partnership. o Whether or not the acts are for apparently
carrying on, in the usual way, the
No act of a partner in contravention of a restriction on business of the partnership, the
authority shall bind the partnership to persons having partnership is not liable to third persons
knowledge of the restriction. having actual or presumptive knowledge
of the restrictions
Power of partner as agent of partnership
o Even if the partner acted within the
As among themselves – when a partner performs customary business of the partnership,
an act within the scope of his actual, implied, or the partnership will not be liable to third
apparent authority, he is not only a principal as to persons having actual or presumptive
himself, but is also an agent as to his co-partners knowledge of the restrictions on the
or to the partnership power of the acting partner
As to third persons – limitations upon the Liability of partner acting without authority – as a general
authority of any one of the partners are not rule, the partner who undertakes to bind his co-partners by
binding upon innocent persons dealing with the a contract without authority is himself personally liable on
partnership. Third persons have the right to such contract. He cannot be admitted to say that he was
assume that every general partner has the power to not authorized to make a contract, as he is estopped to deny
bind the partnership especially those partners its effect or validity
acting with ostensible authority, by whatever is
proper for the transaction in the ordinary and usual Art. 1819. Where title to real property is in the
manner of the business of the partnership partnership name, any partner may convey title to such
property by a conveyance executed in the partnership
Reasons: name; but the partnership may recover such property
o Third persons have no duty to make unless the partner's act binds the partnership under the
inquiries as to the acting partner‟s provisions of the first paragraph of article 1818, or
authority unless such property has been conveyed by the grantee
o There is a presumption that the acting or a person claiming through such grantee to a holder
partner has authority to bind the for value without knowledge that the partner, in
partnership making the conveyance, has exceeded his authority.
The apparent scope of the partner‟s authority is Where title to real property is in the name of the
the whole scope of the partnership‟s customary partnership, a conveyance executed by a partner, in his
business own name, passes the equitable interest of the
o Third parties should not assume that a partnership, provided the act is one within the
partner has unlimited authority authority of the partner under the provisions of the first
o Even simpler – for acts not within the paragraph of Article 1818.
customary business of the partnership,
third persons are duty bound to make Where title to real property is in the name of one or
inquiries and the presumption does not more but not all the partners, and the record does not
apply disclose the right of the partnership, the partners in
whose name the title stands may convey title to such
Liability of partnership for acts of partners property, but the partnership may recover such
property if the partners' act does not bind the
Acts for apparently carrying on, in the usual way, partnership under the provisions of the first paragraph
the business of the partnership (par. 1) – the of Article 1818, unless the purchaser or his assignee, is a
partnership will be liable when: holder for value, without knowledge.
o The partner so acting has in fact no
authority; and Where the title to real property is in the name of one or
o The third person has no knowledge of the more or all the partners, or in a third person in trust
absence of authority for the partnership, a conveyance executed by a partner
in the partnership name, or in his own name, passes the
Acts of strict dominion or ownership (pars. 2 and equitable interest of the partnership, provided the act is
3) – the partnership is not bound unless: one within the authority of the partner under the
o Authorized by all the other partners; or provisions of the first paragraph of Article 1818.
o The partners have abandoned the
business 27
Acts in contravention of a restriction on authority
(par. 4)
C c”,) L L E E N
Notes on De Leon Partnership
Where the title to real property is in the name of all the o D had knowledge of A‟s lack of authority
partners a conveyance executed by all the partners although the sale was made in the usual
passes all their rights in such property. course of business
Legal effects of the conveyance of real property belonging Title in name of one or more partners, conveyance in name
to the partnership of partner or partners or partners in whose name title stands
(par. 3)
Depending:
Although the parcel of land in question really
In whose name it is registered; and belongs to the partnership X & Co., it is, however,
In whose name it is conveyed registered in the name of A and the record does
not disclose the right of X & Co. In this case, if A
Under this article, the real property may be registered or sold the land in his own name to D, title is
owned in the name of: conveyed to D. the effect is the same as in par. 1
The partnership (pars. 1 and 2); Title in name of one or more or all partners or a
One of more but not all the partners (par. 3); third person in trust of partnership, conveyance
One or more or all the partners, or in a third executed in partnership name or in name of
partner (par. 4) – suppose the parcel of land is in
person in trust for the partnership (par. 4.); or the name of A in trust for the partnership X & Co.
All the partners (par. 5) If A sells the land to D in the name of X & Co. or
in his (A‟s) name, the conveyance will pass only
Under paragraphs 1, 3, and 5, what is conveyed is title or the equitable interest of X & Co., A, being a mere
ownership, while under paragraphs 2 and 4, what is trustee of the partnership. The rule is the same as
conveyed is merely equitable interest par. 2
Title in partnership name, conveyance in partnership name Title in name of all partners, conveyance in name of all
(par. 1) partners (par. 5)
A, B, and C are partners in a partnership known as If the parcel of land is registered in the name of A,
X & Co. A sold a parcel of land registered in the B, and C, conveyance made by all of the partners
name of X & Co. to D without express authority to D will pass title to the property for the law says
“a conveyance by all the partners passes all their
The conveyance passes title to D; but X & Co. can rights in such property.” The effect obviously
recover the property if (a) the conveyance was not would be the same though the sale is not in the
in the usual way of business; or (b) D had usual course of business of X & Co.
knowledge of the fact that A has no authority even
though the conveyance was made in the usual way Art. 1820. An admission or representation made by any
of business partner concerning partnership affairs within the scope
of his authority in accordance with this Title is evidence
In no may the partnership recover if D had, in against the partnership.
turn, conveyed the property to E who had no
knowledge of A‟s lack of actual authority in Effect of admission by a partner
making the conveyance to D
The admission of a partner made during the
Title in partnership name, conveyance in partner‟s name existence of the partnership are binding against
(par. 2) the partnership (and co-partners) when such
admissions refer to a matter concerning
In the same example, if the sale was executed by partnership affairs made within the scope of his
A in his own name to D, the latter does not authority
become the owner of the land. He gets only the
equitable interest of X & Co., assuming that the Examples:
selling of the land is in the usual course of o A borrowed 1,000Php from B in whose
business of the partnership favour he executed a promissory note. A
made the statement that he was acting for
D would not be entitled even to the equitable C and that the money was intended for C.
interest if: C never authorized A to borrow money
o X & Co. is not engaged in the buying and from B. The declaration of A that he was
selling of lands; or 28
C c”,) L L E E N
Notes on De Leon Partnership
acting for C and that the money was statement may be offered in evidence to
intended for C is not admissible against show that A and C are partners
C as to make him liable to B
o Suppose C said on one occasion in the Art. 1821. Notice to any partner of any matter relating
presence of D that he received the money to partnership affairs, and the knowledge of the partner
or that the contract was entered into by A acting in the particular matter, acquired while a
with his (C‟s) consent, this statement can partner or then present to his mind, and the knowledge
be testified to by D in a litigation by B of any other partner who reasonably could and should
against C have communicated it to the acting partner, operate as
o If A was really an agent of C in the notice to or knowledge of the partnership, except in the
transaction, the, whatever is said or done case of fraud on the partnership, committed by or with
by A while acting within the scope of his the consent of that partner.
authority is admissible against C, his
principal, the same as if C personally Notice to, or knowledge of, a partner of matter affecting
entered into the contract with B partnership affairs
o Assuming that A is a partner and C is the
partnership, it is clear, on the same legal Notice to, or knowledge of, any partner of any
principle, that the statement of A while matter relating to the partnership affairs operate as
transacting the business of the a notice to or knowledge of the partnership except
partnership within the scope of his in case of fraud
authority is evidence against the o A third person desiring to give notice to a
partnership partnership of some matter pertaining to
o Where, however, A acted in his own the partnership business need not
name and B extended the loan on the communicate with all the partners. If
personal credit of A, any admission made notice is delivered to a partner, that is an
by A is not binding on C, the partnership effective communication to the
Whether an admission of liability made by a partnership notwithstanding the failure of
partner binds the partnership depends on whether the partner to communicate such notice
the partner was acting within the scope of express, or knowledge to his co-partners
implied, or apparent authority at the time of
making the statements or declarations Article 1821 speaks of three cases of knowledge
A partner cannot by his declaration alone bring a namely:
transaction within the scope of the business when o Knowledge of the partner acting in the
the facts show that it has no connection with particular matter acquired while a
partnership business partner;
Statements of a partner bind the partnership only o Knowledge of the partner acting in the
if they are made in the course of, related to, and particular matter then present to his
are material to, the transaction of the partnership‟s mind; and
business. A partnership is a joint affair, and to o Knowledge of any partner who
charge it with liability there must be joint words reasonably could and should have
or actions. An individual partner cannot do this communicated it to the acting partner
Existence of partnership must be proved “While a partner” vs. “Present to his mind”
Sec 29, Rule 130 RC state that before the Pertains to the moment when knowledge was
partnership can be charged with the admission of a acquired. In the first, it was while he was a partner
partner under Art. 1820, the partnership relation and in the second, before he became a partner with
must be shown and proof of that fact must be the presumption that such knowledge was then
made by evidence other than the admission itself “present in his mind” when he became a partner
However, admissions and declarations made in the In both cases, it operates as notice to or
presence of the person to be charged are knowledge of the partnership
admissible to prove the existence of the
partnership The second case of Knowledge only pertains to an
o Where A states in the presence of C that acting partner
A is a partner in partnership X composed o If B (not an acting partner) acquired
of A and C, and C remains silent, the knowledge or notice before he became a
partner, then, there is neither notice to
C c”,) L L E E N nor knowledge of the partnership
29
Notes on De Leon Partnership
Fraud – if the partner or acting partner deliberately did not as well as the legal entity which is the partnership,
inform the partnership for a fraudulent purpose, then such are all solidarily liable
knowledge does not operate as a notice to or knowledge of The injured party may proceed against the
the partnership partnership or any partner
Art. 1822. Where, by any wrongful act or omission of o Since partners are solidarily liable, the
any partner acting in the ordinary course of the party aggrieved has his election to sue
business of the partnership or with the authority of co- the firm or to sue one or more of its
partners, loss or injury is caused to any person, not members. He may even single out for
being a partner in the partnership, or any penalty is suit a partner who, personally, was in no
incurred, the partnership is liable therefor to the same wise involved in the commission of the
extent as the partner so acting or omitting to act. tort or breach of trust
Art. 1823. The partnership is bound to make good the Requisites for liability – the following are the requisites for
loss: liability under Art. 1822
(1) Where one partner acting within the scope The partner must be guilty of a wrongful act or
of his apparent authority receives money or omission; and
property of a third person and misapplies it;
and He must be acting in the ordinary course of
(2) Where the partnership in the course of its business, or with the authority of his co-partners
business receives money or property of a third even if the act is unconnected with the business
person and the money or property so received
is misapplied by any partner while it is in the Criminal liability of the partnership – partnership liability
custody of the partnership. under Art. 1822 does not extend to criminal liability, such
as embezzlement, where the wrongdoing is regarded as
Art. 1824. All partners are liable solidarily with the individual in character. But where a crime is statutory,
partnership for everything chargeable to the especially where it involves a fine rather than
partnership under Articles 1822 and 1823. imprisonment, even criminal liability may be imposed
The above 3 article provide for the SOLIDARY Art. 1825. When a person, by words spoken or written
LIABILITY of the partners and the partnership to third or by conduct, represents himself, or consents to
persons another representing him to anyone, as a partner in an
existing partnership or with one or more persons not
For the wrongful act or omission (Art. 1822) of a actual partners, he is liable to any such persons to
partner acting within the scope of the firm‟s whom such representation has been made, who has, on
business or with the authority of his co-partners; the faith of such representation, given credit to the
or actual or apparent partnership, and if he has made
such representation or consented to its being made in a
Breach of trust (Art. 1823) of a partner acting public manner he is liable to such person, whether the
within the scope of the firm‟s business or with the representation has or has not been made or
authority of his co-partners communicated to such person so giving credit by or
with the knowledge of the apparent partner making the
Reason for imposition of wider liability representation or consenting to its being made:
The reason for the law‟s imposition of wider (1) When a partnership liability results, he is
liability on the partnership with respect to torts liable as though he were an actual member of
and breach of trust is based on public policy the partnership;
(2) When no partnership liability results, he is
The rule of Respondeat Superior (also called the liable pro rata with the other persons, if any, so
rule of vicarious liability) applies to the law of consenting to the contract or representation as
partnership in the same manner as other rules to incur liability, otherwise separately.
governing the agency relationship
When a person has been thus represented to be a
The obligation is solidary because the law protects partner in an existing partnership, or with one or more
him who, in good faith, relied upon the authority persons not actual partners, he is an agent of the
is real or apparent. This is the reason why under persons consenting to such representation to bind them
Art. 1824 all partners, whether innocent or guilty, to the same extent and in the same manner as though he
C c”,) L L E E N 30
Notes on De Leon Partnership
were a partner in fact, with respect to persons who rely When liability pro-rata – when there is no existing
upon the representation. When all the members of the partnership and all those represented as partners consented
existing partnership consent to the representation, a to the representation or not all of the partners of an existing
partnership act or obligation results; but in all other partnership consented to the representation, then the
cases it is the joint act or obligation of the person acting liability of the person who represented himself to be a
and the persons consenting to the representation. partner or who consented to his being represented as
partner, and all those who made and consented to such
Meaning and effect of estoppel representation, is joint or pro rata liable
Estoppel is a bar which precludes a person from When liability separate
denying or asserting anything contrary to that
which has been established as the truth by his own When there is no existing partnership and not all
deed or misrepresentation, either express or but only some of those represented as partners
implied consented to the representation, or none of the
partners in an existing partnership consented to
Through estoppel, an admission or representation such representation, then the liability will be
is rendered conclusive upon the person making it separate
and cannot be denied or disapproved as against the o That of the person who represented
person relying thereon himself as a partner or who consented to
his being represented as partner, and
When a person a partner by estoppel those who made and consented to the
representation, or that only of the person
Persons who are not partners as to each other are who represented himself as partner
not partners as to third persons (Art. 1709[1])
Estoppel does not create partnership – it must be
No one can be held liable nor claim rights as a emphasized that Art. 1825 does not create a partnership as
partner unless he has given his consent to become between alleged partners. A contract, express or implied, is
such. An exception to this rule is provided by Art. essential to the formation of a partnership. The law
1825. due to the doctrine of estoppel, one may considered them as partners and the association as a
become liable as a partner even though he is not a partnership only insofar as it is favourable to third persons
partner in fact by reason of the equitable principle of estoppel
A person not a partner may become a partner by Liability as partners may arise contrary to their intentions
estoppel and thus be held liable to third persons as
if he were a partner, when by words or by conduct The liability as a partner of a person who holds
he: himself out as a partner, or permits another to do
o Directly represents to anyone as a partner so, is predicated on the doctrine of estoppel and on
in an existing partnership or in a non- the policy of the law seeking to prevent frauds
existing partnership (with one or more upon those who lend their money on the apparent
persons not actually partners); or credit of those who are held out as partners
o Indirectly represents himself by o One who has received profits from an
consenting to another representing him as apparent partnership transaction is
a partner in an existing partnership or in a estopped from denying the relationship
non-existing partnership on the ground that the partnership
agreement was void. The question of
In other words, the holding out as partner may be liability is not what the parties intended
done by the person himself, or by his consent or by their contract but whether third
with his knowledge. To hold the party liable, the persons had a right to rely on their joint
third person must prove such misrepresentation credit
and that a bona fide reliance by him upon it cause
him injury Application of estoppel as between partners – the doctrine
of estoppel has no application as between actual partners.
When partnership liability results – if all the actual partners Partners become such by agreement and not estoppel
consented to the representation, then the liability of the
person who represented himself to be a partner or who 31
consented to such representation and the actual partners is
considered partnership liability. This is a case of
partnership by estoppel (par. 1[1]). The person becomes an
agent of the partnership and his act or obligation that of the
partnership (par. 1[2])
C c”,) L L E E N
Notes on De Leon Partnership
Application of estoppel as to third parties Extends to his separate property for subsequent obligations
A person or persons is or are held to be liable as those who were already partners at the time when
partners because of their representing themselves the obligations were incurred are liable with their
to be such, or by allowing others with their separate property (Art. 1816). For all the
consent and knowledge, to do so hold them out to obligations accruing subsequent to the admission
be partners. The law will not permit a denial of of the new partner, all the partners are liable with
such representation where third parties have in the their separate properties
exercise of reasonable diligence relied thereon to o existing and subsequent creditors have
their detriment equal rights as against partnership
property and separate property of
However, no one can be charged as a partner previously existing members of the
where the acts relied on for that purpose are partnership. As to newly admitted
neither his own acts, not acts of others authorized partners, only subsequent creditors have
by or known to him rights against their separate property
Elements to establish liability as a partner on ground of Art. 1826 should be read in conjunction with Art.
estoppel 1840 which provides liability of persons
continuing the business in certain cases. Both
1. proof by plaintiff that he was individually aware sections are based on the principle that where
of the defendant‟s representations as to his being a there has been one continuous business the fact
partner or that such representations were made by that a new partner has been admitted or a partner
others and not denied or refuted by the defendant; has ceased to be connected with it, should not
cause confusion as to the claims of the creditors
2. reliance on such representations by the plaintiff; on the property employed in the business
and
Also when an incoming partner has assumed the
3. lack of any denial or refutation of the statements obligation of the retiring partner as one of the
by the defendant. Such denial need not precede terms of the contract, he is liable directly to the
plaintiff‟s acting thereon if the denial was old partnership creditors such that the latter have a
forthcoming promptly upon hearing of the right of action against the incoming partner
representations, and if, by prudence and diligence
the plaintiff might have learned of the truth or Reason for the rule
untruth of the representations
Under the Corporation Code, the law makes liable as The rule making an incoming partner liable even
general partners “all persons who assume to act as a for partnership obligations contracted before his
corporation.” A de facto partnership among them is created admission cannot be considered harsh because the
new partner partakes of the benefits of the
Art. 1826. A person admitted as a partner into an partnership property and an established business
existing partnership is liable for all the obligations of
the partnership arising before his admission as though Art. 1827. The creditors of the partnership shall be
he had been a partner when such obligations were preferred to those of each partner as regards the
incurred, except that this liability shall be satisfied only partnership property. Without prejudice to this right,
out of partnership property, unless there is a stipulation the private creditors of each partner may ask the
to the contrary. attachment and public sale of the share of the latter in
the partnership assets.
Liability of incoming partners for partnership obligations:
Preference of partnership creditors in partnership property
Limited to his share in partnership property for existing
obligations With respect to partnership assets, the partnership
creditors are entitled to priority of payment
when a person is admitted as a partner into an
existing partnership, he is liable for all obligations The partnership should apply its property to the
existing at the time of his admission as though he payment of its debts in preference to the claim of
was already a partner when such obligations were any partner or his creditors
incurred. For such obligations, his liability is
limited to his share in the partnership property, The rule applies only in the event of the
unless there is a stipulation to the contrary disposition of partnership property among its
creditors to pay partnership debts
C c”,) L L E E N
32
Notes on De Leon Partnership
Both the partnership and the separate partners o Termination – all partnership are
thereof may be joined in the same action completely wound up and finally settled.
It signifies the end of the partnership life
Remedy of private creditors of a partner
Art. 1829. On dissolution the partnership is not
The creditors of each partner may ask for the terminated, but continues until the winding up of
attachment and public sale of the share of the partnership affairs is completed.
latter in the partnership assets
Effects of dissolution:
The purchaser at the public sale does not become
a partner Partnership not terminated – dissolution does not
automatically result in the termination of the legal
CHAPTER 3 personality of the partnership, nor the relations of
the partners among themselves who remain as co-
DISSOLUTION AND WINDING UP partners until the partnership is terminated
Art. 1828. The dissolution of a partnership is the change Partnership continues for a limited purpose – a
in the relation of the partners caused by any partner partnership is considered as maintaining a limited
ceasing to be associated in the carrying on as existence for the purpose of making good all
distinguished from the winding up of the business. outstanding engagements, of taking and settling
all accounts, and collecting all the property, means
Effects of change in membership of a partnership and assets of the partnership existing at the time of
dissolution for the benefit of all interested
Dissolution of existing partnership and formation
of a new one – any change in the membership of a Transaction of new business prohibited – no new
partnership produces, technically, an immediate partnership business should be undertaken, but
dissolution of the existing partnership relation and affairs should be liquidated and distribution made
the formation of a new one, although common to those entitled to the partners‟ interest
business usage speaks of the admission of a
partner to a firm and regards the firm as subsisting Dissolution refers to the change in partnership relation and
so long as the course of its business is not not the actual cessation of the partnership business
materially interrupted
Dissolution must be distinguished from a mere suspension
Transformation of all partners into incoming in the conduct of its business or operations
partners – all persons forming the new partnership
upon the admission of the new person into the Art. 1830. Dissolution is caused:
business are “incoming partners” even though the
same business had been conducted by the others (1) Without violation of the agreement between
through the medium of the partnership the partners:
Continuance by remaining partners of partnership (a) By the termination of the definite
as before – the change in the relation of the term or particular undertaking
partners will dissolve the partnership but will not specified in the agreement;
disturb the continuance by the remaining partners (b) By the express will of any partner,
or by the existing and new partners of the business who must act in good faith, when no
as before definite term or particular is specified;
(c) By the express will of all the
Dissolution, winding up and termination partners who have not assigned their
interests or suffered them to be
When a partnership ends, it involves 3 stages charged for their separate debts, either
o Dissolution – that point in time when the before or after the termination of any
partners cease to carry on the business specified term or particular
together. It represents the demise of a undertaking;
partnership (d) By the expulsion of any partner
o Winding up – process of settling the from the business bona fide in
business or partnership affairs after accordance with such a power
dissolution conferred by the agreement between
the partners;
C c”,) L L E E N 33
Notes on De Leon Partnership
(2) In contravention of the agreement between The statutory enumeration of the
the partners, where the circumstances do not causes of dissolution precludes
permit a dissolution under any other provision dissolution for any other causes
of this article, by the express will of any
partner at any time; Effect of sale or assignment by one partner of his
(3) By any event which makes it unlawful for entire interest in the partnership to a third person
the business of the partnership to be carried on o The dissolution created in such case is
or for the members to carry it on in only technical, and not actual, only in the
partnership; sense that his connection with the
(4) When a specific thing which a partner had partnership is terminated
promised to contribute to the partnership,
perishes before the delivery; in any case by the Dissolution effected without violation of partnership
loss of the thing, when the partner who agreement: Four ways by which a partnership may be
contributed it having reserved the ownership dissolved without violation of the partnership agreement:
thereof, has only transferred to the partnership
the use or enjoyment of the same; but the 1. termination of the definite term or particular
partnership shall not be dissolved by the loss of undertaking
the thing when it occurs after the partnership after the expiration of the term or
has acquired the ownership thereof; particular undertaking, the partnership is
(5) By the death of any partner; automatically dissolved without the
(6) By the insolvency of any partner or of the partners extending the said term or
partnership; continuing the undertaking. If after said
(7) By the civil interdiction of any partner; expiration the partners continue the
(8) By decree of court under the following partnership without making a new
article. agreement, the firm becomes a
partnership at will
Causes of dissolution 2. by the express will of any partner
Statutory enumeration exclusive a partnership at will may be dissolved at
o Art. 1830, 1831, and 1840 provide for any time by any partner without the
causes of dissolution consent of his co-partners without breach
o Under Art. 1830, extrajudicial dissolution of contract, provided, the said partner
may be caused without violation of the acts in good faith. If there is bad faith,
agreement between the parties (no. 1) or the dissolution is wrongful
in contravention of said agreement (no. good faith will absolve the partner
2). It may be voluntary when caused by exercising the right to dissolve the
the will of one or more or all of the partnership from liability for damages
parties (nos. 1 and 2) or involuntary which result to his co-partners by reason
when brought about independently of the of his action
will of the partners or by operation of law for as long as the reason for withdrawal
(nos. 3-8) of a partner is not contrary to the dictates
Voluntary dissolution may be of justice and fairness, nor for the
o Extrajudicial (nos. 1-7); or purpose of unduly causing harm and
o Judicial (no. 8 in relation to Art. 1831) damage upon the partnership, bad faith
o The causes provided for in Art. 1830 cannot be said to characterized the act
result in the automatic dissolution of the while bad faith cannot prevent the
partnership dissolution of a partnership, it can result
In Art. 1840, automatic in liability for damages
dissolution takes place when a
new partner is admitted or when 3. by the express will of all partner
a partner retires, withdraws, or may be accomplished either by an
is expelled from the partnership express agreement or by words and acts
There is no automatic implying an intention to dissolve
dissolution under Art. 1831. must be unanimous
Art. 1831 enumerates the the consent of the partners who have
grounds for the judicial assigned their interests or suffered them
dissolution of the partnership to be charged for their separate debts is
not required to effect dissolution without
C c”,) L L E E N
34
Notes on De Leon Partnership
breach of the partnership agreement. dissolves the partnership because in either case,
They are not given the right to have a the partner cannot fulfil his undertaking
voice or vote in the dissolution of the
partnership o the partner bears the loss
4. by expulsion of any partner Death of any partner – because of the partner‟s death, there
must be made in good faith, and strictly is dissolution o the partnership by operation of law
in accordance with the power conferred
by the agreement between the partners status of partnership – the subsequent legal status
the partner expelled in bad faith can is that of a partnership in liquidation, and the only
claim damages rights inherited by the heirs are those resulting
from the said liquidation
Dissolution effected in contravention of partnership
agreement liquidation of its affairs – entrusted to the
surviving partners or to liquidators appointed by
dissolution may be for any cause or reason them
o any partner may cause the dissolution at
any time without the consent of his co- continuation of business without liquidation – a
partners for any reason which he deems clause in the article of co-partnership providing
sufficient by expressly withdrawing for the continuation of the firm notwithstanding
therefrom even though the partnership the death of one of the partners is legal
was entered into for a definite term or
particular undertaking. Such dissolution Under the rules of the SEC, the heirs of a deceased partner
is a contravention of the agreement may be admitted as partners when so authorized by the
a partner guilty of wrongful articles of partnership
dissolution is not given the right
to wind up partnership affairs To reflect the substitution, the articles must be amended
power of dissolution always exists Insolvency of any partner or of the partnership
o the right of a partner to dissolve is must be adjudged by a court
inseparably incident to every partnership insolvency of partner – the insolvency of a partner
and there can be no indissoluble subjects his interest in the partnership to the right
partnership of his creditors. Art. 1816 is also violated. Thus,
delectus personae – allows the by his insolvency, the partnership‟s credit is
partners to have the power, impaired
although not necessarily the insolvency of partnership – such renders the
right to dissolve the partnership partnership‟s property in the hands of the partners
an unjustified dissolution by a liable for the satisfaction of partnership
partner can subject him to a obligations resulting in their inability to continue
possible action for damages the business, which practically amounts to
dissolution
Business becomes unlawful o reconveyance by the assignee of the
dissolution may be caused involuntarily when a properties of the partnership after the
supervening event makes the business itself of the termination of insolvency proceedings
partnership unlawful of makes it unlawful for the has the effect of restoring the partnership
partners to carry it on together to its status quo
Loss of specific thing Civil interdiction of any partner
loss before delivery – the partnership is dissolved civil interdiction deprives the offender during the
because there is no contribution inasmuch as the time of his sentence of the right to manage his
thing to be contributed cannot be substituted with property and dispose of such property
another one who is without capacity to manage his own
loss after delivery – the partnership assumes the property should not be allowed to manage
mist of the thing having acquired ownership partnership property
thereof. The partners may contribute additional
capital to save the venture Right to expel a partner – in the absence of an express
loss where only use or enjoyment contributed – if agreement to that effect, there exists NO right or power of
only the use or enjoyment of the thing is any member, or even the majority of the members, to expel
contributed, its loss before or after delivery, all other members of the firm at will. Nor can they at will
forfeit the share or interest of a member or members and
C c”,) L L E E N compel him/ her to quit
35
Notes on De Leon Partnership
partner guilty of extreme and gross faults – there On application by a partner
may be extreme and gross faults which would insanity
work a forfeiture, especially where there was an o an insane person is incapacitated to enter
extreme emergency for a partner to perform his into a contract. The insanity must
duty, and to be prompt and faithful materially affect the capacity of the
partner to perform his contractual duties
industrial partners, engaging in business for as a partner
himself – Art. 1789 applies incapacity
o courts have the power to decree
power expressly given by agreement – power is dissolution of the partnership because of
not validly exercised if it is shown to have been incapacity of a partner which materially
exercised unfairly and without regard to the affects his ability to discharge the duties
general interest of the partnership imposed by his partnership contract
o the incapacity must be lasting from
Art. 1831. On application by or for a partner the court which the prospect of recovery is remote
shall decree a dissolution whenever: since every partnership must be
presumed to be entered into, subject to
(1) A partner has been declared insane in any the common incidents of life such as
judicial proceeding or is shown to be of temporary illness, infirmity or insanity
unsound mind; misconduct and persistent breach of partnership
(2) A partner becomes in any other way agreement
incapable of performing his part of the o such acts defeat and materially affect and
partnership contract; obstruct the purpose of the partnership
(3) A partner has been guilty of such conduct o where the quarrels and disagreements are
as tends to affect prejudicially the carrying on of such a nature and to such extent that
of the business; all confidence and cooperation between
(4) A partner wilfully or persistently commits a the parties have been destroyed, or where
breach of the partnership agreement, or one of the parties, by his misbehaviour,
otherwise so conducts himself in matters materially hinders a proper conduct of
relating to the partnership business that it is the partnership business
not reasonably practicable to carry on the business can be carried on only at a loss
business in partnership with him; o the partnership may be dissolved by
(5) The business of the partnership can only be decree of court when it becomes apparent
carried on at a loss; that it is unprofitable with no reasonable
(6) Other circumstances render a dissolution prospects of success
equitable. o where a partnership has lost all its
capital, or had become insolvent, or that
On the application of the purchaser of a partner's the enterprise for which it had been
interest under Article 1813 or 1814: organized had been concluded or utterly
abandoned, a provision in the articles of
(1) After the termination of the specified term partnership prohibiting the dissolution of
or particular undertaking; the partnership except by the consent and
(2) At any time if the partnership was a agreement of 2/3 of its partners, can in no
partnership at will when the interest was wise limit or restrict the right of a less
assigned or when the charging order was number of the partners to affect the
issued. dissolution through judicial intervention
or otherwise
Grounds for dissolution by decree of court other circumstances
o examples are abandonment of the
Dissolution of a partnership may be decreed judicially on business, fraud in the management of the
application either: business, refusal without justifiable cause
to render accounting of partnership
by a partner in the cases mentioned in par (1) nos. affairs, etc.
1-5; or
On application by a purchaser of a partner‟s interest
by the purchaser or assignee of a partner‟s interest
under par. (2) nos. 1 and 2
C c”,) L L E E N 36
Notes on De Leon Partnership
Art. 1832. Except so far as may be necessary to wind up Liability and authority of a partner as to co-partners:
partnership affairs or to complete transactions begun
but not then finished, dissolution terminates all Liability of partners
authority of any partner to act for the partnership: right to contribution
o the article refers to dissolution caused by
(1) With respect to the partners: AID
o the new contract entered by the acting
(a) When the dissolution is not by the partner after dissolution generally will
act, insolvency or death of a partner; bind the partner after dissolution
or generally will bind the partners. Hence,
(b) When the dissolution is by such act, each partner is liable for his share of any
insolvency or death of a partner, in liability created by the acting partner as if
cases where article 1833 so requires; the partnership has not been dissolved
(2) With respect to persons not partners, as Partner‟s authority to act for the partnership
declared in article 1834. general rule
o the authority of a partner as it affects the
Effect of dissolution on partner‟s authority: partnership is not deemed terminated by
dissolution
Scope of partner‟s authority exceptions
general rule o when the acting partner has knowledge of
o every partner is considered as the agent the dissolution of the partnership brought
of the partnership with authority to bind by the act of the partner, partner‟s
the partnership and the partners authority ceases. This is to protect the
o however, the dissolution terminates the remaining partners who have no
actual authority of the partners to knowledge of the dissolution
undertake new businesses except only as o also, the partner‟s authority ceases when
regards to those acts incident to the he has knowledge of the death or
liquidation or completion of unfinished insolvency of a partner. This rule
transactions discards the fiction that everybody is
exceptions presumed to have knowledge of the death
o as regards co-partners: the authority of a or insolvency of a partner
partner to bind the co-partners
immediately ceases when the dissolution Art. 1834. After dissolution, a partner can bind the
is NOT caused by the Act, Insolvency or partnership, except as provided in the third paragraph
Death (AID) of a partner. Otherwise, of this article:
when the cause of dissolution is by AID,
termination of authority depends on (1) By any act appropriate for winding up
whether the acting partner has knowledge partnership affairs or completing transactions
of the dissolution unfinished at dissolution;
o as regard 3rd persons: the partner‟s (2) By any transaction which would bind the
authority continues with respect to the partnership if dissolution had not taken place,
contracts entered by the acting partner provided the other party to the transaction:
Art. 1833. Where the dissolution is caused by the act, (a) Had extended credit to the
death or insolvency of a partner, each partner is liable partnership prior to dissolution and
to his co-partners for his share of any liability created had no knowledge or notice of the
by any partner acting for the partnership as if the dissolution; or
partnership had not been dissolved unless: (b) Though he had not so extended
credit, had nevertheless known of the
(1) The dissolution being by act of any partner, partnership prior to dissolution, and,
the partner acting for the partnership had having no knowledge or notice of
knowledge of the dissolution; or dissolution, the fact of dissolution had
(2) The dissolution being by the death or not been advertised in a newspaper of
insolvency of a partner, the partner acting for general circulation in the place (or in
the partnership had knowledge or notice of the each place if more than one) at which
death or insolvency. the partnership business was regularly
carried on.
C c”,) L L E E N
37
Notes on De Leon Partnership
The liability of a partner under the first paragraph, No. Effect of notice to 3rd persons
2, shall be satisfied out of partnership assets alone when 3rd persons have no notice
such partner had been prior to dissolution: o The authority of a partner to bind the
partnership with 3rd persons apparently
(1) Unknown as a partner to the person with continues for the protection of innocent
whom the contract is made; and 3rd persons
(2) So far unknown and inactive in partnership 3rd persons have notice
affairs that the business reputation of the o Notice may either be actual or
partnership could not be said to have been in
any degree due to his connection with it. constructive
o The partnership liability to 3rd persons is
The partnership is in no case bound by any act of a
partner after dissolution: limited only to transactions which are
(1) Where the partnership is dissolved because necessary to liquidate the partnership
it is unlawful to carry on the business, unless Specific effects of notice to 3rd persons
the act is appropriate for winding up
partnership affairs; or o As regard persons who extend credit to
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind the partnership prior to dissolution, the
up partnership affairs; except by a transaction creditor must have notice of the
with one who:
dissolution to relieve the partnership
(a) Had extended credit to the
partnership prior to dissolution and from liability
had no knowledge or notice of his want o As to persons who did not extend credit
of authority; or
(b) Had not extended credit to the but has notice of dissolution, constructive
partnership prior to dissolution, and,
having no knowledge or notice of his notice is enough to relieve the
want of authority, the fact of his want
of authority has not been advertised in partnership from liability
the manner provided for advertising o Notice of dissolution is unnecessary
the fact of dissolution in the first
paragraph, No. 2 (b). except where the partner has no authority
to liquidate the partnership affairs. 3rd
Nothing in this article shall affect the liability under
Article 1825 of any person who, after dissolution, persons dealing with such partner is
represents himself or consents to another representing
him as a partner in a partnership engaged in carrying protected under this article
business. o Distinction must be made between a
Authority to bind the partnership with 3rd persons and partner who has no notice of the other
notice requirements: partner‟s insolvency to bind the
Scope of Art. 1834: partnership and right of third persons to
Art. 1834 covers the following cases:
o Instances when a partner continues to claim the validity of contracts. The first
bind the partnership even after is granted by law but the innocent 3rd
dissolution (par. 1 nos. 1 and 2)
o Instances when he cannot bind the party is not given similar protection. The
partnership after dissolution (par. 3 nos. rationale is that the 3rd person must know
1, 2, and 3)
the status of the insolvent partner
C c”,) L L E E N o In case of death, no distinction is made.
Death is not considered to be notice
whether to surviving spouse or as to third
persons
Character of notice
o As to prior dealers: notice must be actual
o A prior dealer is one who has extended
credit on the faith of the partnership,
through confidence in the solvency and
probity of the firm
o As to all others: notice may be
constructive (e.g. publication in local
newspaper)
Dormant partners
o The liability of a dormant partner as
regard contracts entered during the
dissolution shall be limited only to his
share in the partnership assets
o Notice of dormant partner‟s withdrawal
need not be given to 3rd persons since he
was never known or held out as a partner.
38
Notes on De Leon Partnership
Hence, the principle of estoppel cannot Raise money to pay off debts
apply to hold the dormant partner liable Incur obligations to complete existing contracts or
Art. 1835. The dissolution of the partnership does not of preserve the partnership assets
itself discharge the existing liability of any partner. Incur expenses necessary in the conduct of
A partner is discharged from any existing liability upon litigation
dissolution of the partnership by an agreement to that
effect between himself, the partnership creditor and the Art. 1837. When dissolution is caused in any way,
person or partnership continuing the business; and except in contravention of the partnership agreement,
such agreement may be inferred from the course of each partner, as against his co-partners and all persons
dealing between the creditor having knowledge of the claiming through them in respect of their interests in
dissolution and the person or partnership continuing the partnership, unless otherwise agreed, may have the
the business. partnership property applied to discharge its liabilities,
and the surplus applied to pay in cash the net amount
The individual property of a deceased partner shall be owing to the respective partners. But if dissolution is
liable for all obligations of the partnership incurred caused by expulsion of a partner, bona fide under the
while he was a partner, but subject to the prior partnership agreement and if the expelled partner is
payment of his separate debts. discharged from all partnership liabilities, either by
payment or agreement under the second paragraph of
Discharge of partner‟s liability Article 1835, he shall receive in cash only the net
The dissolution does not itself discharge the amount due him from the partnership.
existing liability of the partners unless there is
consent from the creditor When dissolution is caused in contravention of the
partnership agreement the rights of the partners shall
Art. 1836. Unless otherwise agreed, the partners who be as follows:
have not wrongfully dissolved the partnership or the
legal representative of the last surviving partner, not (1) Each partner who has not caused
insolvent, has the right to wind up the partnership dissolution wrongfully shall have:
affairs, provided, however, that any partner, his legal
representative or his assignee, upon cause shown, may (a) All the rights specified in the first
obtain winding up by the court. paragraph of this article, and
(b) The right, as against each partner
Liquidating or winding up: who has caused the dissolution
wrongfully, to damages breach of the
Manner of liquidation agreement.
Judicial – the court has control and direction of (2) The partners who have not caused the
liquidation dissolution wrongfully, if they all desire to
Extrajudicial – the liquidation is done by the continue the business in the same name either
partners without the intervention of the court by themselves or jointly with others, may do so,
during the agreed term for the partnership and
Nature of action for that purpose may possess the partnership
An action for the liquidation is a personal action property, provided they secure the payment by
bond approved by the court, or pay any
Persons authorized to liquidate partner who has caused the dissolution
The partner designated by agreement wrongfully, the value of his interest in the
In the absence of agreement, all partners who partnership at the dissolution, less any
have not wrongfully dissolved the partnership damages recoverable under the second
The legal representative of the last surviving paragraph, No. 1 (b) of this article, and in like
spouse when all the partners are already dead manner indemnify him against all present or
o The duty of liquidating its affairs future partnership liabilities.
devolves upon the surviving member or (3) A partner who has caused the dissolution
his legal representative wrongfully shall have:
(a) If the business is not continued
Powers of liquidating partner under the provisions of the second
Enter into new contracts as regard liquidation paragraph, No. 2, all the rights of a
affairs partner under the first paragraph,
subject to liability for damages in the
C c”,) L L E E N second paragraph, No. 1 (b), of this
article.
39
Notes on De Leon Partnership
(b) If the business is continued under 1. Right of the partner who has not caused the
the second paragraph, No. 2, of this
article, the right as against his co- dissolution wrongfully
partners and all claiming through To have the partnership applied for the
them in respect of their interests in the
partnership, to have the value of his payment of its liabilities and to receive in
interest in the partnership, less any cash his share of the surplus
damage caused to his co-partners by To be indemnified for damages caused by the
the dissolution, ascertained and paid to
him in cash, or the payment secured by partner guilty of the wrongful dissolution
a bond approved by the court, and to To continue the business in the same name
be released from all existing liabilities
of the partnership; but in ascertaining during the agreed term of the partnership, by
the value of the partner's interest the
value of the good-will of the business themselves or jointly with others
shall not be considered. To possess partnership property should they
Right of partner to application of property on dissolution decide to continue the business
The right of the partners to have the partnership
property applied to discharge partnership 2. Right of the partner who wrongfully caused the
liabilities and the surplus if any, depends on
whether the dissolution is caused: dissolution of the partnership
o Without violation of the partnership If the business is not continued by the other
agreement
o In violation of the partnership agreement partners, to have the partnership property
Rights where dissolution not in contravention of agreement applied to discharge its liabilities and to
Unless otherwise agreed, the rights of each partner
in case of dissolution without violation of receive in cash his share of the surplus less
partnership agreement are as follows:
o To Whom It May Concern: have the damages caused by his wrongful dissolution
partnership property applied to discharge If the business is continued:
the liabilities of the partnership
o To have the surplus, if any, applied to To have the value of his interest in the
pay in case the net amount owing to the
respective partners partnership at the time of the dissolution
When the dissolution is caused by expulsion of a partner ascertained and paid in cash or secured
bona fide, such expelled partner may be discharged from
all partnership liabilities either by payment or by agreement by bond approved by court
between him, the partnership creditors, and the other
partners To be released from all existing or future
- He shall have the right only to receive in cash the liabilities of the partnership
next amount due him from the partnership
Note: Innocent partners have more rights than guilty
If the dissolution is proper, no partner is liable for any loss partners
sustained as a result of the dissolution
Guilty partners are made liable for damages
Rights where dissolution in contravention with agreement caused by their wrongful dissolution
- When the partnership is dissolved in violation of the
partnership agreement, the rights of the partner In ascertaining the value of the interest, the value
vary depending upon whether he is the innocent or of the goodwill of the business is not considered
the guilty partner
If the innocent partner decides to buy the guilty
partner‟s interest, they may continue the
partnership business under the same firm name
The guilty partner is entitled to the appraised
value of the business less the damages recoverable
by the innocent partners
Art. 1838. Where a partnership contract is rescinded on
the ground of the fraud or misrepresentation of one of
the parties thereto, the party entitled to rescind is,
without prejudice to any other right, entitled:
(1) To a lien on, or right of retention of, the
surplus of the partnership property after
satisfying the partnership liabilities to third
persons for any sum of money paid by him for
the purchase of an interest in the partnership
and for any capital or advances contributed by
him;
(2) To stand, after all liabilities to third persons
have been satisfied, in the place of the creditors
of the partnership for any payments made by
C c”,) L L E E N 40
Notes on De Leon Partnership
him in respect of the partnership liabilities; the right to enforce the contributions specified
and in the preceding number.
(3) To be indemnified by the person guilty of (6) Any partner or his legal representative shall
the fraud or making the representation against have the right to enforce the contributions
all debts and liabilities of the partnership. specified in No. 4, to the extent of the amount
which he has paid in excess of his share of the
Rights of a partner to rescind contract of partnership liability.
If one is induced by fraud or misrepresentation to (7) The individual property of a deceased
become a partner, the contract is voidable or partner shall be liable for the contributions
annullable specified in No. 4.
If the contract is annulled, the injured partner is (8) When partnership property and the
entitled to restitution individual properties of the partners are in
possession of a court for distribution,
Right of the injured partner where partnership contract is partnership creditors shall have priority on
rescinded partnership property and separate creditors on
individual property, saving the rights of lien or
This article speaks of the rights of the injured secured creditors.
partner where the partnership contract is rescinded (9) Where a partner has become insolvent or
on the ground of fraud or misrepresentation his estate is insolvent, the claims against his
separate property shall rank in the following
The rights are as follows order:
o Right on a lien on or retention of the
surplus of the partnership property after (a) Those owing to separate creditors;
satisfying partnership liabilities for any (b) Those owing to partnership
sum of money paid or contributed by him creditors;
o Right to subrogation in place of (c) Those owing to partners by way of
partnership creditors after payment of contribution.
partnership liabilities
o Right to indemnification by the guilty Liquidation and distribution of assets of dissolved
partner against all debts and liabilities of partnership
the partnership
The process of winding up consists of reducing
Art. 1839. In settling accounts between the partners the property to cash and distributing the proceeds
after dissolution, the following rules shall be observed,
subject to any agreement to the contrary: The property must be liquidated and distributed to
those entitled thereto
(1) The assets of the partnership are:
(a) The partnership property, Partners severally have the implied authority to
(b) The contributions of the partners sell partnership property and collect obligations
necessary for the payment of all the due to the partnership
liabilities specified in No. 2.
These powers may be delegated to one or more of
(2) The liabilities of the partnership shall rank their numbers as liquidating partner or partners
in order of payment, as follows:
Rules in settling accounts between partners after
(a) Those owing to creditors other than dissolution
partners,
(b) Those owing to partners other than The following rules are subject to variation by
for capital and profits, agreement of the partners either in their original
(c) Those owing to partners in respect partnership agreement or in a dissolution
of capital, agreement:
(d) Those owing to partners in respect
of profits. 1. assets of the partnership
(3) The assets shall be applied in the order of partnership property
their declaration in No. 1 of this article to the contribution of all liabilities in
satisfaction of the liabilities. accordance with Art. 1797
(4) The partners shall contribute, as provided
by article 1797, the amount necessary to satisfy 2. order of application of assets
the liabilities. the partnership assets shall be
(5) An assignee for the benefit of creditors or applied to the satisfaction of the
any person appointed by the court shall have liabilities of the partnership in
the following order
C c”,) L L E E N first, those owing to the
partnership creditors
41
Notes on De Leon Partnership
second, those owing to to those owing to
partners other than for partners by way of
capital and profits such contribution
as loan given by the
partners or advances Art. 1840. In the following cases creditors of the
for business expenses dissolved partnership are also creditors of the person or
partnership continuing the business:
third, those owing for
the return of the capital (1) When any new partner is admitted into an
contributed by the existing partnership, or when any partner
partners retires and assigns (or the representative of the
deceased partner assigns) his rights in
fourth, the share of the partnership property to two or more of the
profits due to each partners, or to one or more of the partners and
partner (if any) one or more third persons, if the business is
continued without liquidation of the
3. right of a partner where the assets are partnership affairs;
insufficient (2) When all but one partner retire and assign
if the assets enumerated in no. 1 (or the representative of a deceased partner
are insufficient, the deficit is a assigns) their rights in partnership property to
capital loss which requires the remaining partner, who continues the
contribution like any other loss business without liquidation of partnership
any partner, legal representative affairs, either alone or with others;
shall have the right to enforce (3) When any partner retires or dies and the
the contributions of the partners business of the dissolved partnership is
provided in Art. 1797 continued as set forth in Nos. 1 and 2 of this
if any of the partner does not article, with the consent of the retired partners
pay the share of his loss, the or the representative of the deceased partner,
remaining partners have to pay but without any assignment of his right in
but they can sue the non-paying partnership property;
partner for indemnification (4) When all the partners or their
representatives assign their rights in
4. liability of the deceased partner‟s partnership property to one or more third
individual property persons who promise to pay the debts and who
the individual property of a continue the business of the dissolved
deceased partner shall be liable partnership;
for his share of the contributions (5) When any partner wrongfully causes a
necessary to satisfy the dissolution and the remaining partners
liabilities of the partnership continue the business under the provisions of
incurred while he was a partner article 1837, second paragraph, No. 2, either
alone or with others, and without liquidation of
5. priority to payment of partnership the partnership affairs;
creditors/ partner‟s creditors (6) When a partner is expelled and the
when the partnership property remaining partners continue the business
and the individual partner‟s either alone or with others without liquidation
properties are in the possession of the partnership affairs.
of the court for distribution
partnership creditors shall first The liability of a third person becoming a partner in the
be paid from partnership partnership continuing the business, under this article,
property and separate creditors to the creditors of the dissolved partnership shall be
from the individual properties of satisfied out of the partnership property only, unless
the partners there is a stipulation to the contrary.
6. distribution of property of insolvent When the business of a partnership after dissolution is
partner continued under any conditions set forth in this article
if the partner is insolvent, his the creditors of the dissolved partnership, as against the
individual property shall be separate creditors of the retiring or deceased partner or
distributed as follows:
first, to those owing to 42
his separate creditors
then to those owing to
the partnership
creditors
C c”,) L L E E N
Notes on De Leon Partnership
the representative of the deceased partner, have a prior right in the property of the dissolved partnership;
right to any claim of the retired partner or the provided that the creditors of the dissolved partnership
representative of the deceased partner against the as against the separate creditors, or the representative
person or partnership continuing the business, on of the retired or deceased partner, shall have priority
account of the retired or deceased partner's interest in on any claim arising under this article, as provided
the dissolved partnership or on account of any Article 1840, third paragraph.
consideration promised for such interest or for his right
in partnership property. Rights of retiring or of legal representative of deceased
partner when business is continued
Nothing in this article shall be held to modify any right
of creditors to set aside any assignment on the ground when a partner retires or dies and the business is
of fraud. continued without settlement of accounts, the
retiring partner or the legal representative of the
The use by the person or partnership continuing the deceased partner shall have the following rights:
business of the partnership name, or the name of a o to have the value of the interest of the
deceased partner as part thereof, shall not of itself retiring partner or deceased partner in the
make the individual property of the deceased partner partnership ascertained as to the date of
liable for any debts contracted by such person or dissolution
partnership. o to receive as an ordinary creditor the
amount equal to the value of his share in
Dissolution of partnership by change in membership the dissolved partnership with interest, or
the change in the relation of the partners results in at his option, in lieu of the interest, the
the dissolution of the partnership profits attributable to the use of his right
it may take place when a new partner is admitted,
or when a partner retires or dies, when a partner if the surviving partners continue the business
withdraws or is expelled from the partnership, or without the consent of the deceased partner‟s
when partners assign their rights to third persons estate, they do so without any risk to the estate
any change in membership dissolves the
partnership and creates new partnership if the estate consents to the continuation of the
business, he, in effect, becomes a new partner and
Right of creditors of dissolved partnership would be answerable to all the debts and losses
this article deals with the rights of the creditors arising from the death of the deceased partner but
when the partnership is dissolved by a change of only to the extent of the decedent‟s share in the
membership and its business is continued by a partnership‟s assets
former partner either alone or with a new partner,
without liquidation of the partnership affairs Art. 1842. The right to an account of his interest shall
in such case, the law makes the creditors of accrue to any partner, or his legal representative as
dissolved partnership, also the creditors of the against the winding up partners or the surviving
person or partnership continuing the business partners or the person or partnership continuing the
the purpose of the law is to maintain the business, at the date of dissolution, in the absence of any
preferential rights of the old creditors to the agreement to the contrary.
partnership property as against separate creditors o
the partners Accrual to a partner‟s right to account of his interest
Art. 1841. When any partner retires or dies, and the the right to account for the value of the partner‟s
business is continued under any of the conditions set interest accrues to any partner or his legal
forth in the preceding article, or in Article 1837, second representative after dissolution in the absence of
paragraph, No. 2, without any settlement of accounts as an agreement to the contrary
between him or his estate and the person or partnership
continuing the business, unless otherwise agreed, he or the right of a partner as owner of an interest to an
his legal representative as against such person or account and, in due liquidation, to a payment of
partnership may have the value of his interest at the the amount of his interest, may be exercised as
date of dissolution ascertained, and shall receive as an against:
ordinary creditor an amount equal to the value of his o the winding partner
interest in the dissolved partnership with interest, or, at o the surviving partner
his option or at the option of his legal representative, in o the person or partnership continuing the
lieu of interest, the profits attributable to the use of his business
C c”,) L L E E N 43
Notes on De Leon Partnership
When liquidation is not required: the limited partner has the same type of liability as a
stockholder in a corporation
as a general rule, when the partnership is there is no prohibition for a limited partner to engage in a
dissolved, a partner or legal representative is business for himself
entitled to payment of what may be due after
liquidation in the absence of statutory restriction, a limited partner may
carry on any business which could be carried on by a
no liquidation is necessary if there is already a general partnership
settlement or an agreement of what he shall
receive Business reasons and purposes of statutes authorizing
formation of limited partnerships
CHAPTER 4
to secure capital from others for one‟s business
LIMITED PARTNERSHIP and still retains control
Art. 1843. A limited partnership is one formed by two to share in the profits of a business without the
or more persons under the provisions of the following risk of personal liability
article, having as members one or more general
partners and one or more limited partners. The limited Differences between a general and a limited partnership
partners as such shall not be bound by the obligations
of the partnership. General Partnership Limited Partnership
Concept of limited partnership 1. personally liable for 1. liability extends only to his
this article defines a limited partnership partnership obligations capital contribution
the correct usage of the term confines it to the
form of business association composed of one or 2. when the manner of 2. has no share in the
more general partners and one or more special management has not been management of a limited
partners, the latter not being personally liable for agreed upon, all general partnership. His rights are
the partnership debts partners have equal right in limited to those enumerated
the management of the in Article 1851
Characteristic of limited partnership business whether or not the
a limited partnership is formed by compliance general partner has made any 3. must contribute cash or
with the statutory requirements capital contribution property to the partnership
one or more general partners control the business but not services
and are personally liable to the creditors 3. may contribute money,
one or more limited partners contribute to the property, industry to the 4. not a proper party to
capital and share in the profits but do not partnership proceedings by or against a
participate in the management of the business and partnership unless he is also a
are not personally liable for partnership 4. a general partner‟s interest general partner or where the
obligations beyond their capital contributions to the partnership may not be objects of the proceedings is
the limited partners may ask for the return of their assigned as to make the to enforce a limited partner‟s
capital contributions under the conditions assignee a new partner right against or liability to the
prescribed by law without the consent of the partnership
the partnership debts are paid out of the common other partners although he
fund and the individual properties of the general may associate a third person 5. a limited partner‟s interest
partners with him in his share is freely assignable
limited partnership is composed of 2 classes of partners: 5. the name of the general 6. the limited partner‟s name
general and limited partner may appear in the as a general rule, must not
firm name appear in the firm name
the liability of the limited partner is limited to the amount
of money he has put into the partnership 6. prohibited in engaging in 7. can engage in business
business similar to that of the since he is considered merely
it is an exception to the general rule that all partners partnership as a contributor to the
including the industrial partners are liable pro rata of all partnership
their property for partnership debts 7. retirement, death,
insolvency of a general 8. retirement, death,
partner dissolves the insolvency of a limited
partnership partner does not dissolve the
partnership
C c”,) L L E E N 44
Notes on De Leon Partnership
Art. 1844. Two or more persons desiring to form a A limited partnership is formed if there has been
limited partnership shall: substantial compliance in good faith with the foregoing
requirements.
(1) Sign and swear to a certificate, which shall
state - Limited partnership not created by mere voluntary
agreement
(a) The name of the partnership,
adding thereto the word "Limited"; the creation of a limited partnership is a formal
(b) The character of the business; proceeding and is not a mere voluntary agreement
(c) The location of the principal place as in the case of a general partnership
of business;
(d) The name and place of residence of requirements given by statute must be followed so
each member, general and limited that public notice may be given to all who desire
partners being respectively designated; to know the essential features of the partnership
(e) The term for which the partnership
is to exist; a limited partnership is formed if there is
(f) The amount of cash and a substantial compliance in good faith with the
description of and the agreed value of requirements set forth in the last paragraph of Art.
the other property contributed by each 1844; otherwise, the partnership becomes a
limited partner; general partnership in which case all the members
(g) The additional contributions, if become liable as general partners
any, to be made by each limited
partner and the times at which or Requirements for formation of a limited partnership
events on the happening of which they a limited partnership cannot be constituted orally
shall be made; 2 essential requirements for the formation of a
(h) The time, if agreed upon, when the limited partnership
contribution of each limited partner is o Certificate of articles of the limited
to be returned; partnership which states the matters
(i) The share of the profits or the other enumerated in the articles must be signed
compensation by way of income which and sworn to
each limited partner shall receive by o Such certificate must be filed on record
reason of his contribution; in the office of the SEC
(j) The right, if given, of a limited The purpose of the of the filing of the certificate is
partner to substitute an assignee as to give an actual and constructive notice to
contributor in his place, and the terms potential creditors and persons dealing with the
and conditions of the substitution; partnership of the limited liability of the limited
(k) The right, if given, of the partners partners
to admit additional limited partners;
(l) The right, if given, of one or more of Presumption of a general partnership
the limited partners to priority over A partnership transacting business is a prima facie
other limited partners, as to a general partnership
contributions or as to compensation by Those who seek protection accorded to by the law
way of income, and the nature of such to limited partnerships must show due compliance
priority; to the statutory requirements of Art. 1844
(m) The right, if given, of the
remaining general partner or partners Art. 1845. The contributions of a limited partner may
to continue the business on the death, be cash or property, but not services.
retirement, civil interdiction, insanity
or insolvency of a general partner; and Limited partner‟s contribution
(n) The right, if given, of a limited Medium
partner to demand and receive o a limited partner is not allowed to
property other than cash in return for contribute services
his contribution. o he can contribute only money or
property; otherwise he shall be
(2) File for record the certificate in the Office considered an industrial AND general
of the Securities and Exchange Commission. partner, in which case, he shall not be
exempted from personal liability
C c”,) L L E E N o a partner may be general partner and a
limited partner in the same partnership at
the same time provided that this fact shall
45
Notes on De Leon Partnership
be stated in the certificate provided for in Art. 1848. A limited partner shall not become liable as a
Art. 1844. a limited partner may not be general partner unless, in addition to the exercise of his
an industrial partner in view of Art. 1845 rights and powers as a limited partner, he takes part in
which requires that a limited partner must the control of the business.
be a capital contributor
Time – the contribution of each limited partner Liability of limited partner for participating in management
must be paid before the formation of the limited of partnership
partnership, although with respect to the
additional contributions they may be paid after the Important: take part in the management
limited partnership has been formed Bare grant of apparent control to a limited partner
Art. 1846. The surname of a limited partner shall not is not sufficient to make limited partner liable as
appear in the partnership name unless: general partner
“control of business”: active participation in the
(1) It is also the surname of a general partner, management of the partnership business
or
(2) Prior to the time when the limited partner o Not mere giving of advice
became such, the business has been carried on o Business carried on by a board of
under a name in which his surname appeared.
directors chosen by the limited partners
A limited partner whose surname appears in a o Appointee of limited partner becomes
partnership name contrary to the provisions of the first
paragraph is liable as a general partner to partnership directing manager of the firm
creditors who extend credit to the partnership without o Limited partner purchases entire property
actual knowledge that he is not a general partner.
of the partnership and carries on the
Effect where the surname of the limited partner appears in business in his own name
the partnership name o Party to a contract with creditors
The limited partner violating this article is liable, Art. 1849. After the formation of a lifted partnership,
as a general rule, to partnership creditors, without, additional limited partners may be admitted upon filing
however, the rights of a general partner with an amendment to the original certificate in accordance
respect to third persons with actual knowledge with the requirements of Article 1865.
that he is only a limited partner
Admission of additional limited partners
Art. 1847. If the certificate contains a false statement, There should be proper amendment to the
one who suffers loss by reliance on such statement may certificate
hold liable any party to the certificate who knew the Signed and sworn to by all of the partners
statement to be false: Filed with SEC pursuant to Art. 1865
(1) At the time he signed the certificate, or Art. 1850. A general partner shall have all the rights
(2) Subsequently, but within a sufficient time and powers and be subject to all the restrictions and
before the statement was relied upon to enable liabilities of a partner in a partnership without limited
him to cancel or amend the certificate, or to file partners. However, without the written consent or
a petition for its cancellation or amendment as ratification of the specific act by all the limited
provided in Article 1865. partners, a general partner or all of the general
partners have no authority to:
Liability for false statement in certificate
Liability imposed is merely statutory penalty (1) Do any act in contravention of the
Does not make the limited partner a general certificate;
partner for all purposes (2) Do any act which would make it impossible
Requisites to carry on the ordinary business of the
o He knew the statement to be false at the partnership;
time he signed the certificate (but having (3) Confess a judgment against the
time to cancel or amend it, he failed to do partnership;
so) (4) Possess partnership property, or assign
o Person seeking to enforce liability relied their rights in specific partnership property,
upon the false statement for other than a partnership purpose;
o The person suffered a loss (5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless
C c”,) L L E E N the right so to do is given in the certificate;
(7) Continue the business with partnership
property on the death, retirement, insanity,
civil interdiction or insolvency of a general
46
Notes on De Leon Partnership
partner, unless the right so to do is given in the o Receive the return of his contribution
certificate. provided the partnership assets are in
excess of all its liabilities
Rights, powers and liabilities of a general partner
Right of control/ unlimited personal liability Art. 1852. Without prejudice to the provisions of
o Entire control of business subject to all Article 1848, a person who has contributed to the
liabilities and restrictions capital of a business conducted by a person or
o In the absence of an agreement to the partnership erroneously believing that he has become a
contrary, he is not entitled to limited partner in a limited partnership, is not, by
compensation for his services beyond his reason of his exercise of the rights of a limited partner,
share of the profits a general partner with the person or in the partnership
Acts of administration/ acts of strict dominion carrying on the business, or bound by the obligations of
o No power to do the specific acts under such person or partnership, provided that on
Art. 1850 ascertaining the mistake he promptly renounces his
o Beyond the scope of the authority if a interest in the profits of the business, or other
general partner compensation by way of income.
Other limitations
o General partners have no power to bind Status of partner where there is failure to create limited
limited partners beyond the latter‟s partnership
investment
o No power to act beyond the purpose of This article grants exemption from liability in
the partnership favour of one who has contributed to the capital of
a business, with the mistaken belief that there is
Art. 1851. A limited partner shall have the same rights only a limited partnership
as a general partner to:
Sometimes the limited partnership exists in spite
(1) Have the partnership books kept at the of the failure of the firm to comply with the law
principal place of business of the partnership,
and at a reasonable hour to inspect and copy Limited partner is merely made liable for the debts
any of them; of the firm as if he were a general partner
(2) Have on demand true and full information
of all things affecting the partnership, and a Status of person erroneously believing himself to
formal account of partnership affairs whenever be a limited partner
circumstances render it just and reasonable; o If the person has contributed capital, he is
and not personally liable as a general partner
(3) Have dissolution and winding up by decree On ascertaining the mistake, he
of court. renounces his interest in the
profits
A limited partner shall have the right to receive a share His surname does not appear in
of the profits or other compensation by way of income, the partnership name
and to the return of his contribution as provided in He does not participate in the
Articles 1856 and 1857. management of the business
o Necessity of renouncing his interest
Rights of a limited partner Renunciation before the partner-
Improper on the part of general partners may not ship has become liable to 3rd
give a limited partner greater rights than the law persons
what his contract grants him o Obligation to pay back profits and
Specific rights compensation already received
o To require the partnership books be kept Renunciation should be on the
at the principal place of business profits or compensation not yet
o Inspect and copy at a reasonable hour paid for
partnership books The other view says that the
o Demand a formal account most that the statute could have
o Ask for dissolution and winding up by intended was to put partnership
decree of court creditors
o Receive a share of the profits
Status of heirs of a deceased partner
o Right to elect to become general partner
may be exercised
The heirs may disregard the
limitation and elect to become a
C c”,) L L E E N 47
Notes on De Leon Partnership
collective or general partner o Transacting other business
(choice is personal) o Receiving a pro rata share of the
o Right when given in articles of
partnership may be waived partnership assets with general creditors
Heirs cannot be compelled to
become general partners against Prohibited transactions
their wishes o Receiving or holding as collateral
Art. 1853. A person may be a general partner and a security any partnership property
limited partner in the same partnership at the same o Receiving any payment, conveyance or
time, provided that this fact shall be stated in the
certificate provided for in Article 1844. release from liability if it will prejudice
A person who is a general, and also at the same the right of third persons
time a limited partner, shall have all the rights and Any violation will give rise to
powers and be subject to all the restrictions of a general
partner; except that, in respect to his contribution, he the presumption that it has been
shall have the rights against the other members which
he would have had if he were not also a general partner. to defraud partnership creditors
Preferential rights of 3rd persons
o Designed to prevent illegal competition
between the limited partner and creditors
of the partnership for the assets of the
partnership in case there is insufficiency
of partnership assets
One person as general and limited partner Art. 1855. Where there are several limited partners the
Such fact must be stated in the certificate members may agree that one or more of the limited
o Rights and powers are those of a general partners shall have a priority over other limited
partner partners as to the return of their contributions, as to
o With respect to his contribution as their compensation by way of income, or as to any other
limited partner, he is a limited partner matter. If such an agreement is made it shall be stated
insofar as other partners are concerned in the certificate, and in the absence of such a statement
While he is not relieved from personal liability to all the limited partners shall stand upon equal footing.
3rd persons for partnership debts, he is entitled to
recover from the general partners in the amount he Preferred limited partners
has paid to such 3rd persons Priority over other limited partners as to the
In settling accounts after dissolution, he has following:
priority over general partners in the return of their o Return of their contributions
respective contributions o Compensation by way of income
o Any other matter
Art. 1854. A limited partner also may loan money to In the absence of any agreement, all the limited
and transact other business with the partnership, and, partners shall stand on equal footing
unless he is also a general partner, receive on account of
resulting claims against the partnership, with general Art. 1856. A limited partner may receive from the
creditors, a pro rata share of the assets. No limited partnership the share of the profits or the compensation
partner shall in respect to any such claim: by way of income stipulated for in the certificate;
provided that after such payment is made, whether
(1) Receive or hold as collateral security and from property of the partnership or that of a general
partnership property, or partner, the partnership assets are in excess of all
(2) Receive from a general partner or the liabilities of the partnership except liabilities to limited
partnership any payment, conveyance, or partners on account of their contributions and to
release from liability if at the time the assets of general partners.
the partnership are not sufficient to discharge
partnership liabilities to persons not claiming Compensation of limited partner
as general or limited partners. Right to compensation is subject to the condition
that the partnership assets will still be in excess of
The receiving of collateral security, or payment, partnership liabilities after such payment
conveyance, or release in violation of the foregoing o 3rd party creditors have priority over the
provisions is a fraud on the creditors of the partnership. limited partner‟s rights
Liabilities to the limited partners for their
Loan and other business transactions with limited contributions and to general partners are not
partnership included in determining partnership liabilities
Allowable transactions 48
o Granting loans to the partnership
C c”,) L L E E N
Notes on De Leon Partnership
Art. 1857. A limited partner shall not receive from a When return a matter of right
general partner or out of partnership property any part On the dissolution of the partnership; or
of his contributions until: Upon arrival of the date specified in the certificate
of the return; or
(1) All liabilities of the partnership, except After the expiration of the six months‟ notice in
liabilities to general partners and to limited writing given by him to the other partners if no
partners on account of their contributions, time is fixed in the certificate for the return of the
have been paid or there remains property of contribution or for the dissolution of the
the partnership sufficient to pay them; partnership
(2) The consent of all members is had, unless
the return of the contribution may be rightfully Right of limited partner to cash in return for contribution
demanded under the provisions of the second General rule: under the 3rd paragraph, even if a
paragraph; and limited partner has contributed property, he has
(3) The certificate is cancelled or so amended as only the right to demand and receive cash for his
to set forth the withdrawal or reduction. contribution.
Exceptions:
Subject to the provisions of the first paragraph, a o When there is a stipulation to the
limited partner may rightfully demand the return of his contrary in the certificate; or
contribution: o Where all the partners (general and
limited) consent to the return other than
(1) On the dissolution of a partnership; or in the form of cash
(2) When the date specified in the certificate for
its return has arrived, or When limited partner may have partnership dissolved
(3) After he has six months' notice in writing to The 4th paragraph provides for additional grounds
all other members, if no time is specified in the for the dissolution of the partnership upon petition
certificate, either for the return of the of a limited partner:
contribution or for the dissolution of the o When his demand for the return of his
partnership. contribution is denied although he has a
right to such return; or
In the absence of any statement in the o When his contribution is not paid
certificate to the contrary or the consent of all although he is entitled to its return
members, a limited partner, irrespective of the nature because the other liabilities of the
of his contribution, has only the right to demand and partnership have not been paid or the
receive cash in return for his contribution. partnership property insufficient for their
payment
A limited partner may have the partnership dissolved The limited partner must first ask the other
and its affairs wound up when: partners to have the partnership dissolved; if they
refuse, then he can seek the dissolution of the
(1) He rightfully but unsuccessfully demands partnership by judicial decree
the return of his contribution, or
(2) The other liabilities of the partnership have Art. 1858. A limited partner is liable to the partnership:
not been paid, or the partnership property is
insufficient for their payment as required by (1) For the difference between his contribution
the first paragraph, No. 1, and the limited as actually made and that stated in the
partner would otherwise be entitled to the certificate as having been made; and
return of his contribution. (2) For any unpaid contribution which he
agreed in the certificate to make in the future
Requisites for return of contribution of limited partner at the time and on the conditions stated in the
All liabilities of the partnership have been paid or certificate.
if they have not been paid, the assets of the
partnership are sufficient to pay the liabilities; A limited partner holds as trustee for the partnership:
The consent of all members (general and limited)
has been obtained except when the return may be (1) Specific property stated in the certificate as
rightfully demanded; and contributed by him, but which was not
The certificate is cancelled or so amended as to set contributed or which has been wrongfully
forth the withdrawal or reduction of the returned, and
contribution
C c”,) L L E E N 49
Notes on De Leon Partnership
(2) Money or other property wrongfully paid Specific property of the partnership which had
or conveyed to him on account of his been wrongfully returned to him;
contribution.
Money wrongfully paid or conveyed to him on
The liabilities of a limited partner as set forth account of his contribution; and
in this article can be waived or compromised only by
the consent of all members; but a waiver or Other property wrongfully paid or conveyed to
compromise shall not affect the right of a creditor of a him on account of his contribution
partnership who extended credit or whose claim arose
after the filing and before a cancellation or amendment Requisites for waiver or compromise of liabilities
of the certificate, to enforce such liabilities. Waiver or compromise is made with the consent
of all the partners; and
When a contributor has rightfully received the The waiver or compromise does not prejudice
return in whole or in part of the capital of his partnership creditors who extend credit or whose
contribution, he is nevertheless liable to the partnership claim arose before the cancellation or amendment
for any sum, not in excess of such return with interest, of the certificate
necessary to discharge its liabilities to all creditors who
extended credit or whose claims arose before such Liability for return of contribution lawfully received
return. The limited partner is liable to the partnership for
the return of contribution lawfully received by
Liabilities of a limited partner: him to pay creditors who extended credit or whose
To the partnership – liability of limited partners is claim arose before such return. His liability of
to partnership, not the creditors of the partnership course, cannot exceed the sum received by him
To partnership creditors and other partners – a with interest
limited partner is liable for partnership obligations
when: Art. 1859. A limited partner's interest is assignable.
o Contributes services; A substituted limited partner is a person
o Allows his surname to appear in the
name of the firm admitted to all the rights of a limited partner who has
o Fails to have false statement in certificate died or has assigned his interest in a partnership.
corrected when he knew it to be false
o Takes part in control of business An assignee, who does not become a substituted
o Receives partnership property as limited partner, has no right to require any information
collateral security, payment, conveyance, or account of the partnership transactions or to inspect
or release in fraud of partnership the partnership books; he is only entitled to receive the
creditors share of the profits or other compensation by way of
o Failure to substantially comply with legal income, or the return of his contribution, to which his
requirements of formation of limited assignor would otherwise be entitled.
partnership
To separate creditors – creditor of limited partner An assignee shall have the right to become a
may also apply for a “charging order” subjecting substituted limited partner if all the members consent
the interest in the partnership of the debtor partner thereto or if the assignor, being thereunto empowered
for the payment of his obligation by the certificate, gives the assignee that right.
Liability for unpaid contribution An assignee becomes a substituted limited
Limited partner is liable not only for the partner when the certificate is appropriately amended
difference between the amount of his actual in accordance with Article 1865.
contributions and that stated in the certificate as
having been made but also for any unpaid The substituted limited partner has all the
contribution he agreed to make at a future time rights and powers, and is subject to all the restrictions
and liabilities of his assignor, except those liabilities of
Liability as trustee – limited partner considered as trustee which he was ignorant at the time he became a limited
for the partnership for: partner and which could not be ascertained from the
certificate.
Specific property stated in the certificate as
contributed by him but which he had not The substitution of the assignee as a limited
contributed; partner does not release the assignor from liability to
the partnership under Articles 1847 and 1848.
Effect of change in the relation of limited partners
Does not necessarily dissolve the partnership. No
limited partner, however, can withdraw his
contribution until all liabilities to creditors are
paid
C c”,) L L E E N 50
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