Chapter 2 - Obligations of Partners

PATPrelims Reviewer

CHAPTER 2:OBLIGATIONS OF THE PARTNERS

SECTION 1: Obligations of the Partners among Themselves

RELATIONS CREATED BY A CONTRACT OF PARTNERSHIP1. Among the partners themselves2. The partners with the partnership3. The partnership with third persons4. The partners with third persons

*The partnership relationship is essentially on of mutual trust and confidence, the law imposes upon the partners highest standards of integrity and good faith in their dealings with each other. *A partner is both principal and an agent in relation to his co-partners. In a limited partnership, it does not involve the element of trust and confidence, as in the case of general partnership

Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated.

COMMENCEMENT AND TERM OF PARTNERSHIP- Consensual contract- Its registration in the SEC is not essential to give it juridical personality- The birth and life is predicated on the mutual desire and consent of the parties

FUTURE PARTNERSHIP- Partners may stipulate some other date for the commencement of the partnership- It can be in future time or based on happening of some future contingency- It has no juridical personality at the moment

AGREEMENT TO CREATE PARTNERSHIP- This is different from a partnership actually consummated- This is still inchoate

Art. 1785. When a partnership for a fixed term or particular undertaking is continued after the termination of such term or

particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will.

A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. (n)

PARTNERSHIP WITH A FIXED TERM- One which the term of its existence has been agreed upon expressly or impliedly. - The expiration of the term fixed or completion of the undertaking will automatically dissolve the partnership

DISSOLUTION OF PARTNERSHIP- One of the partners may dictate a dissolution at will but he must act in good faith - A partnership with fixed term may be terminated prior to the expiration of the term

PARTNERSHIP FOR A TERM IMPLIEDLY FIXED- An agreement of the parties may evidence an understanding that the relation should continue

until the accomplishment of a particular undertaking or certain things have been done or have taken place

Abad, Bagang & MananquilPage 1 of 35

PATPrelims Reviewer

Art. 1786.

Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.

He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a)

OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF PROPERTY1. To contribute at the beginning of the partnership or at the stipulated time the money, property or industry which he

promised2. To answer for eviction in case the partnership is deprived of the determinate property contributed3. To answer to the partnership for the fruits of the property the contribution of which he delayed 4. To preserve the property with diligence of a good father of a family pending delivery5. To indemnify the partnership for any damage caused to it by the retention of the property or by delay in its contribution

EFFECT OF FAILURE TO CONTRIBUTE PROPERTY PROMISED- It will make the partner ipso jure a debtor of the partnership even in the absence of any demand- The remedy is not rescission but an action for specific performance with damages and interest from the defaulting partner

LIABILITY OF PARTNER IN CASE OF EVICTION- Eviction shall takes place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor,

the vendee (partnership) is deprived of the whole or a part of the thing purchased- Governed by the law on sales (Art. 1547)

LIABILITY OF PARTNER FOR FRUITS OF PROPERTY IN CASE OF DELAY- No demand is necessary- From the time the partner ought to deliver up to the time of actual delivery

LIABILITY OF PARTNER FOR FAILURE TO PERFORM SERVICE STIPULATED- Partners are not entitled to charge each other except when there is a stipulation providing otherwise- If a partner neglects or refuses to render service without justifiable cause, which caused loss to the partnership, he may be

held liable

Art. 1787.

When the capital or a part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for account of the partnership. (n)

APPRAISAL OF GOODS OR PROPERTY CONTRIBUTED- Appraisal is necessary to determine how much has been contributed by the partners- The appraisal is made by:

1. Stipulation2. If there is no stipulation – experts chosen by the partners and according to current prices

Art. 1788.

A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation.

The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use. (1682)

OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF MONEY (PAR. 1) AND MONEY CONVERTED TO PERSONAL USE (PAR. 2)

1. To contribute on the date due2. To reimburse any amount he may have taken for his own use3. To pay the agreed or legal interest, if he fails to pay on time4. To indemnify the partnership for the damages


PATPrelims Reviewer

LIABILITY OF GUILTY PARTNER FOR INTEREST AND DAMAGES- It will start from the time when the partner should have made the contribution or the time he converted the money to his

own use and not to the time of the judicial or extra-judicial demand

LIABILITY OF PARTNER FOR FAILURE TO RETURN PARTNERSHIP MONEY RECEIVED- Estafa (Art 315 of the RPC) – if he misappropriate partnership money or property received by him for a specific purpose- Mere failure to return is not an act under estafa

Art. 1789.

An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case. (n)

INDUSTRIAL PARTNER- The one who contributes his industry, labor, or services to the partnership- He becomes the debtor of the partnership for his work or services- The partnership acquires an exclusive right to avail itself of his industry - Action for specific performance is not available as a remedy because it will amount to involuntary servitude

PROHIBITION AGAINST ENGAGING IN BUSINESS1. Industrial Partner

o Absolute prohibitiono Applies whether he would engage in the same business or noto To prevent any conflict of interest

2. Capitalist Partnero Prohibition only extends to any operation which is of the same kind of business in which the partnership is

engaged

REMEDIES WHERE INDUSTRIAL PARTNER ENGAGES IN BUSINESS- Exclude him from the firm or avail themselves of the benefits which he may obtained- Right to damages- Mere toleration by the partnership will not exempt the industrial partner from liability

Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. (n)

EXTENT OF CONTRIBUTION TO PARTNERSHIP CAPITAL- Partner can stipulate the contribution of unequal shares to the common fund- Absence of stipulation, there is a presumption that the contribution is in equal shares

Art. 1791.

If there is no agreement to the contrary, in case of an imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall he obliged to sell his interest to the other partners. (n)

OBLIGATION OF CAPITALIST PARTNER TO CONTRIBUTE ADDITIONAL CAPITAL GR: capitalist partner is not bound to contribute more than what he agreed to contribute EXPN: imminent loss of the business

- He is under obligation to contribute an additional share to save the venture- If he refuses, he shall be obliged to sell his interest to the other partners

Requisites for application of rule1. Imminent loss of the business2. Majority of the capitalist partners are of the opinion that an additional contribution to the

common fund would save the business3. The partner refuses deliberately


PATPrelims Reviewer

4. There is no agreement *Industrial partner is exempted

Art. 1792.

If a partner authorized to manage collects a demandable sum which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter.

The provisions of this article are understood to be without prejudice to the right granted to the other debtor by Article 1252, but only if the personal credit of the partner should be more onerous to him. (1684)

OBLIGATION OF MANAGING PARTNER WHO COLLECTS DEBTGR: If there is debt to the partnership and to the managing partner, payment shall be applied to both credits proportionately EXPN: it was received for the account of the partnership only

REQUISITE FOR THE APPLICATION OF THE RULE1. There are at least 2 debts; one from the partners and the other to the partnership2. Both debts are demandable3. The partner who collects is authorized to manage and actually manages the partnership

Art. 1793.

A partner who has received, in whole or in part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he received even though he may have given receipt for his share only. (1685a)

OBLIGATIONS OF PARTNER WHO RECEIVES SHARE OF PARTNERSHIP CREDIT- There is only one credit, the credit in favor of the partnership

REQUISITES FOR APPLICATION OF THE RULE1. A partner has received, whole or in part, his share of the partnership credy2. The other partners have not collected their shares3. The partnership debtor has become insolvent

CREDIT COLLECTED AFTER THE DISSOLUTION OF THE PARTNERSHIPQ: would the obligation under art. 1793 for the partner who has collected his share in the partnership credit to share it with the others who have not collected theirs when the debtor becomes insolvent apply after the dissolution of the partnership?

There are commentators who said YES because of the COMMUNITY OF INTEREST AND EQUALITY among partners

But Manresa and Ricci held otherwise.

e.g. After the dissolution of the partnership, the partnership credit will be divided among partners who assume the obligation to COLLECT THEIR RESPECTIVE SHARES

1. It would be unfair and unjust for the MORE DILIGENT partner who has already collected his credit to bear the NEGLIGENCE of the other partners who were unable to collect. It would be unfair for his to suffer their DEFAULT

2. When the partnership is DISSOLVED, the tie that unites the partnership ceases, hence, the obligation under Art. 1793 has no foundation anymore.

Art. 1793 presupposes the existence of a PARTNERSHIP CAPITAL. After dissolution, the shares of each principal partners are returned and hence, there is no more common property or partnership capital.

If at all there remains a COMMON CREDIT among them (credit owned in common) but NOT a partnership capital


PATPrelims Reviewer

Art. 1794.

Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner's extraordinary efforts in other activities of the partnership, unusual profits have been realized. (1686a)

OBLIGATION OF PARTNER FOR DAMAGES TO PARTNERSHIPGR: Every partner is responsible to the partnership for damages suffered by it thru his FAULT and he cannot compensate it with the PROFITS AND BENEFITS which he may have earned for the partnership by his industry

REMEDY OF THE PARTNER HELD LIABLE- The courts may EQUITABLY LESSEN THIS RESPONSIBILITY if thru the EXTRAORDINARY EFFORTS of the partner in OTHER

ACTIVITIES of the partnership, UNUSUAL PROFITS may have been realized

COMPENSATION OF DAMAGES WITH PROFITS EARNED FOR PARTNERSHIP BY GUILTY PARTNERGR: There shall be no compensation

Reason: There are 2 reasons given:

1. The partner is responsible to SECURE BENEFITS for the partnership. Hence, all the profits earned shall pertain as a matter of law or right to the partnership

2. Compensation takes place when the negligent partner is both a creditor and debtor of the partnership. A partner however is a DEBTOR of the partnership for his industry and he shall be liable for the injury suffered by it caused by his fault. Hence, there cannot be any compensation

EXPN: When UNUSUAL PROFITS may have been realized by the partnership thru the extraordinary efforts of the partner, the courts may MITIGATE OR LESSEN the liability for damages

Art. 1795.

The risk of specific and determinate things, which are not fungible, contributed to the partnership so that only their use and fruits may be for the common benefit, shall be borne by the partner who owns them.

If the things contribute are fungible, or cannot be kept without deteriorating, or if they were contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation, the risk of the things brought and appraised in the inventory, shall also be borne by the partnership, and in such case the claim shall be limited to the value at which they were appraised. (1687)

GR: the risk of SPECIFIC AND DETERMINATE THINGS, which are NOT FUNGIBLE, contributed to the partnership so that only their USE AND FRUITS are for the common benefit shall be borne by the PARTNER who owns it

GR: The following shall be borne by the partnership:1. When the thing contributed is FUNGIBLE 2. Thing which cannot be kept without deteriorating3. Contributed to be sold

EXPN:1. When the thing promised has NOT YET BEEN DELIVERED to the partnership 2. When the loss is due to the fault of any of the partners, in which case, the said partner shall be liable for damages to the

partnership in accordance with Art. 1794

GR: When the thing brought is appraised in the inventory, the STIPULATION of the parties will governEXPN: When there is no stipulation, then the risk shall be borne by the PARTNERSHIP and in which case, the value appraised shall be the limit of the claim

RISK OF LOSS OF THINGS CONTRIBUTED1. Risk of SPECIFIC AND DETERMINATE THINGS which are NOT FUNGIBLE where THE USE is the only

thing contributed- Risk of loss: The OWNER of the thing because he remains to be the owner


PATPrelims Reviewer

2. Risk of SPECIFIC AND DETERMINATE THINGS which are NOT FUNGIBLE where THERE IS A TRANSFER OF OWNERSHIP- Risk of loss: shall be borne by the PARTNERSHIP- Reason: because the ownership is transferred to the partnership (res perit domino)

3. FUNGIBLE THINGS (right term should be consumable) or THINGS WHICH CANNOT BE KEPT WITHOUT DETERIORATING even if ONLY THE USE is contributed

- Risk of loss: PARTNERSHIP- Reason: because the ownership is intended to be transferred because USE IS IMPOSSIBLE without such transfer because the

thing is CONSUMMED OR IMPAIRED- E.G. Oil, rice, wine

4. WHERE THE THING CONTRIBUTED IS TO BE SOLD- Risk of loss: Partnership- Reason: because the partnership cannot sell it without it being the owner

5. THINGS BROUGHT AND APPRAISED IN THE INVENTORY- Risk of loss: Partnership- Reason: because it is to be presumed that the parties intended the PRICE to be contributed to the partnership for the thing

appraised. Hence, the PRICE is deemed as the appraised valueThere is in effect an IMPLIED SALE

- The parties contributed the PRICE to buy the land (appraised) belonging to the partner

*this article presupposes actual or constructive delivery

Art. 1796.

The partnership shall be responsible to every partner for the amounts he may have disbursed on behalf of the partnership and for the corresponding interest, from the time the expense are made; it shall also answer to each partner for the obligations he may have contracted in good faith in the interest of the partnership business, and for risks in consequence of its management. (1688a)

GR: Every partner is AN AGENT of the partnership for purposes of its businessEXPN: when there is a stipulation to the contrary

RESPONSIBILITY OF HE PARTNERSHIP TO THE PARTNERS1. Obligation to REFUND THE AMOUNT disbursed by the partner in behalf of the partnership PLUS interest from the time the

expenses WERE CONTRACTED (and not from the time of DEMAND)o Here, the law contemplates A LOAN OR ADVANCES MADE by partner AND not the capital contributed by him

2. To answer for the OBLIGATIONS contracted by the partner in GOOD FAITH in the interest of the partnership business3. Answer for the risks in consequence of its management

Art. 1797.

The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital. (1689a)

GR: The profits and losses shall be distributed in conformity with the agreement (PROFITS AND LOSSES AGREED UPON)EXPN:

1. If only the share in the profits are agreed upon, the share in the losses shall also be in the same proportion


PATPrelims Reviewer

2. If there is no agreement as to the share in the losses and profits, then, each partner shall have a share in the same in proportion to what he may have contributed BUT:

Exception to the exception:1. The INDUSTRIAL PARTNER shall not be liable for the losses2. The industrial partner shall be entitled to a share in the profits as may be JUST AND EQUITABLE under the circumstances 3. If the industrial partner, ASIDE FROM HIS SERVICES, contributed capital, he shall also receive a share in the profits in

proportion to his capital

THE RULES IN DISTRIBUTION OF PROFITSa. If there is an agreement

- The share of the partners in the profits shall be in accordance with their agreement- So if they agreed that it shall be 50-50, so be it- Subject to Art. 1799 which provides that a STIPULATION which excludes any partner from the share in the profits and losses

shall be void

b. If there is no agreement

o CAPITALIST PARTNERS

- The share of the capitalist partners shall be in proportion to their CAPITAL CONTRIBUTION - So it depends on HOW MUCH they have given in the partnership (if A contributed P3000 and B contributed only P1000,

then, A should receive twice as much)- BASIS: Presumed WILL of the parties

2. INDUSTRIAL PARTNERS

- Their share must be that which is JUST AND EQUITABLE under the circumstances - Their share must be satisfied first before the CAPITALIST PARTNERS divide the profits- Their share, LIKE THAT PERTAINING TO THE CAPITALIST PARTNERS, is not fixed because it is very hard to ascertain the value

of one’s services

NB: Art. 140 of the Code of Commerce: The industrial partner is placed in the same position as that of a capitalist partner in the distribution (the industrial partner having the SMALLEST INTEREST”

THE RULES IN DISTRIBUTION OF LOSSES1. If there is an AGREEMENT OR STIPULATION, then, the distribution of the losses shall be in accordance with the agreement

subject to Art. 17992. If there is NO AGREEMENT BUT THERE IS A STIPULATION AS TO THE PROFITS, then, the distribution of the losses shall also

be in accordance with the PROFIT-SHARING RATIO

- Note that the INDUSTRIAL PARTNER shall not be liable for any losses

Q: WHAT ARE THE TRANSACTIONS THAT MUST BE TAKEN INTO ACCOUNT TO DETERMINE THE PROFITS AND LOSSES?

All the transactions must be taken into consideration NOT JUST one transaction to determine the profits and losses

3. If there is NO AGREEMENT AND THERE IS NO AGREEMENT AS TO THE SHARING OF THE PROFITS- The sharing of the losses shall be in proportion to their CAPITAL CONTRIBUTION - Note also that the INDUSTRIAL PARTNER shall not be liable for any losses- SHARING OF LOSSES: If there is an AGREEMENT as to the distribution of the losses, then, that will

govern


PATPrelims Reviewer

- If there is no agreement AS TO THE DISTRIBUTION OF THE LOSSES, then, they shall share the losses BASED ON THE STIPULATED PROFIT-SHARING RATIO (share in the losses = stipulated sharing in the profits)

- If there is NO AGREEMENT ALSO AS TO THE PROFIT-SHARING RATION, then, the losses shall be in PROPORTION to their CAPITAL CONTRIBUTION

- But the industrial partner shall not be liable for the losses. A, B and C shall bear the losses (being capitalist partners)- But, if D, an industrial partner, is also a capitalist partner, then, he shall share in the losses in proportion to his contribution

NB: Whether or not there is a stipulation, the INDUSTRIAL PARTNER shall not be liable for the losses

Art. 1798.

If the partners have agreed to intrust to a third person the designation of the share of each one in the profits and losses, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision.

The designation of losses and profits cannot be intrusted to one of the partners. (1690)

DESIGNATION BY A THIRD PERSON OF SHARE IN PROFITS AND LOSSESGR: if the partner has entrusted to a 3rd person the DESIGNATION OF THE SHARE OF EACH PARTNER IN the profits and losses, the

same may be impugned only IF IT IS MANIFESTLY INEQUITABLE EXPN: In no case may such decision be impugned if:

1. The partner has BEGUN the execution of the designation2. He did not impugn the designation in the sharing of the profits within a period of 3 months from the time he had

knowledge thereofNB: The designation of the profits and losses cannot be left to any of the partners

BINDING EFFECT OF THE DECISION OF THE 3RD PERSONGR: The designation by the 3rd person of the sharing in the profits and losses among partners is BINDING EXPN: When the designation is MANIFESTLY INEQUITABLE Exception to the exception: But even if the designation is MANIFESTLY INEQUITABLE in the following cases, the designation cannot anymore be impugned:

1. When the partner has begun the execution of the designation 2. When the partner fails to impugn the designation within a period of 3 months Basis for the exception to the exception: Because the partner is guilty of ESTOPPEL, or may be deemed to have given his consent or ratification

NB: Remedy of partners: Have it changed or if there is no more recourse, go to court and have the decision stricken out – my opinion

Art. 1799.

A stipulation which excludes one or more partners from any share in the profits or losses is void. (1691)

STIPULATIONS EXCLUDING A PARTNER FROM ANY SHARE IN PROFITS OR LOSSES- The stipulation is generally void but the partnership will subsist- The parties expressly stipulate that there shall be no liability for losses, or were fro the nature of the contract, it is clear that

a party did not intend to share in the losses, such fact may be a factor in determining that no partnership exist- The one excluded fro any share in the profits or losses is not intended by the parties to become a partner- It is valid to stipulate that an industrial partner is excluded from losses- Parties can stipulate unequal shares

Art. 1800.

The partner who has been appointed manager in the articles of partnership may execute all acts of administration despite the opposition of his partners, unless he should act in bad faith; and his power is irrevocable without just or lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power.

A power granted after the partnership has been constituted may be revoked at any time. (1692a)


PATPrelims Reviewer

RIGHTS AND OBLIGATIONS WITH RESPECT TO MANAGEMENTGR: A partner who has been appointed a MANAGER in the ARTICLES OF PARNTERSHIP may EXECUTE ALL ACTS of administration

despite the opposition of his co-partners (provided he is in GF)EXPN: But if he acts in BAD FAITH and there is an opposition, he may not execute such acts

Gen rule on revocation: The power (to execute all acts of admin) may not be revoked UNLESS:1. There is JUST OR LAWFUL CAUSE and2. The vote of the partners representing the CONTROLLING INTEREST is had

Exception: Powers granted AFTER THE CONSTITUTION OF THE PARTNERSHIP may be revoked at any time

TWO DISTINCT CASES OF APPOINTMENTS UNDER ART 18001. Appointment as manager in the ARTICLES OF PARNTERSHIP- Here, the partner appointed as managing partner by common agreement in the Articles of Partnership may execute all acts

of administration (and not acts of strict of ownership under Art. 1818 par. 3)- He may execute such acts of admin EVEN WITH the opposition of the other partners

Exception: Unless he acted in bad faith- His appointment as manger may be REVOKED ONLY IF:

o There is just and lawful causeo The vote of the partners constituting the controlling interest is had

Because the revocation is deemed to be a CHANGE IN THE TERMS OF THE CONTRACT. The appointment made is considered as one of the conditions of the contract and can therefore be changed only with the consent of ALL the partners including the appointee.

2. Appointment as manager AFTER the constitution of the partnership- If a partner is designated as a MANAGER after the articles of partnership is constituted, then, the appointment may be

revoked at ANY TIME, FOR ANY CAUSE- Reason: Because in this case, the appointment is not a condition of the contract and therefore, the revocation is not

founded on a CHANGE OF THE WILL OF THE PARTNERS. There is merely a CONTRACT OF AGENCY which may be revoked anytime

- But, for there to be revocation, there should be a vote of a majority of the partners, having the CONTROLLING INTEREST

SCOPE OF THE POWER OF THE MANAGING PARTNERGR: the managing partner has ALL THE POWERS OF A GENERAL AGENT and those INCIDENTAL POWERS necessary to carry out the object of the partnership EXPN: When the power of the managing partner is restricted

COMPENSATION FOR SERVICES RENDEREDGR: He is NOT entitled to an additional compensation BEYOND his share in the profits of the business

Reason: because EACH PARTNER (in the absence of an agreement) assumes the duty to give his TIME, ATTENTION and SKILL to manage the affairs of the partnership. In his managing the partnership, he in effect is taking care of his own interest and property. Thus, even if his services is greater in proportion than the rest because he is the managing partner; or because his co-partners are ill, his only compensation is his share in the PROFITS

EXPN: 1. The law may IMPLY a contract for compensation

a. When the partner is made to do something NOT in the fulfillment of his duties in the partnership or not related to the partnership business

b. When the partner employs his co-partner for him to do something for him OUTSIDE OF AND INDEPENDENT of the partnership business

c. When the partner is guilty of EXTRAORDINARY NEGLIGENCE in which case, the burden of management is shifted to the other partner (the latter shall be entitled to compensation)

d. Where the partner is EXEMPT from rendering services in which case, he may demand payment for services he rendered OR WHERE THE SERVICES rendered were EXTRAORDINARY


PATPrelims Reviewer

e. When the managing partner is OVERBURDENED with work because he devotes all his time and attention to the partnership while his co-partners are busy with their individual business in which case, an UNUSUAL CONDITION presents itself and he may thus demand compensation

f. Where there is WILFUL failure on the part of the managing partner to fulfill his duty in which case the other partners are burdened to perform such

2. The parties may agree that there would be payment of compensation

* If there is no PROHIBITION AS THIS REGARD in the Articles of Partnership, then, compensation may be agreed to be given to a GENERAL PARTNER

Art. 1801.

If two or more partners have been intrusted with the management of the partnership without specification of their respective duties, or without a stipulation that one of them shall not act without the consent of all the others, each one may separately execute all acts of administration, but if any of them should oppose the acts of the others, the decision of the majority shall prevail. In case of a tie, the matter shall be decided by the partners owning the controlling interest. (1693a)

GR: If 2 or more partners were instructed with the management of the partnership BUT there was no SPECIFICATION of their duties or WITHOUT stipulation that ONE OF THEM shall not act WITHOUT THE CONSENT of the others, then they may SEPARATELY execute all acts of administration

EXPN: However if any of them (other managing partners) should oppose the acts of the others:

1. The decision of a majority shall prevail2. In case of tie, the decision of the partners owning the controlling interest shall prevail

Q; WHAT DECISION WILL PREVAIL IN CASE OF OPPOSITION?1. First, the matter shall be decided by the MAJORITY of the managing partners2. In case of a tie, the matter shall be decided by the partners having the controlling interest (more than 50% of the capital

investment)

THE REQUISITES FOR THE APPLICATION OF THE RULE1. 2 OR MORE partners have been appointed as managing partners2. There is no specification of their respective duties3. There is no stipulation that one may not act without the consent of the others

*If there is no specification as re the respective duties of the partners, then, one may not have MORE POWERS than the other managing partners in the conduct and management of the partnership

*But if there is a SPECIFICATION OF DUTIES, then, the partner’s (in charged) decision will prevail over the others

Art. 1802.

In case it should have been stipulated that none of the managing partners shall act without the consent of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership. (1694)

GR: In case where there is a stipulation that no MANAGING PARTNER may act without the consent of ALL the partners, the CONCURRENCE OF ALL shall be necessary for the validity of their acts

Gen rule 2: And the ABSENCE or DISABILITY of the partner may not be alleged as an excuse or justification Exception:

1. The same may be an excuse or justification if there is an IMMINENT DANGER OF GRAVE OR IRREPARABLE INJURY to the partnership


PATPrelims Reviewer

2. Where the partnership is engaged in the BUY AND SELL BUSINESS where it is USUAL AND CUSTOMARY TO BUY AND SELL ON CREDIT – Smith, Bell and Co. v. Aznar

NB:

1. The partners may stipulate in their ARTICLES OF PARTNERSHIP that no managing partner may act without the consent of all the other managing partners

Q; WHAT THEN IS REQUIRED IN SUCH CASE?The UNANIMOUS consent of all the managing partners is necessary for the validity of their acts

Q; WHAT IS THE EFFECT OF SUCH REQUIREMENT OF UNANIMITY OF CONSENT?The consent of ALL THE MANAGING PARTNERS are so INDISPENSABLE such that the absence or disability of the partners may not be interposed as an excuse or justification to dispense with such a requirement

Exception: Where there is IMMINENT DANGER of GRAVE OR IRREPARABLE INJURY TO THE PARNTERSHIP then one managing partner may act EVEN without the consent of the ABSENT OR DISABLED without prejudice to his liability under Art. 1794

2. The EXCEPTION under Art. 1802 will not apply where there is an OPPOSITION on the part of the other managing partners Reason: One of the essential conditions of the authority conferred on the managing partner is that the MANAGEMENT should be with the consent of ALL THE PARTNERS

Q; WHAT IF SUCH CONSENT IS WANTING?If such unanimous consent is wanting, then, the proposed act is OUTISIDE HIS AUTHORITY

Art. 1803.

When the manner of management has not been agreed upon, the following rules shall be observed:

(1) All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of Article 1801.

(2) None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court's intervention may be sought. (1695a)

The standing of the partners in case they failed to indicate the manner of management- In case of their failure to indicate either in the Articles of Partnership or subsequent contract WHO SHALL MANAGE the

affairs of the partnership, then ALL THE PARTNERS shall have EQUAL RIGHTS in the conduct and management of the partnership affairs. ALL OF THEM shall be MANAGERS AND AGENTS and any act done by them alone shall BIND THE PARTNERSHIP subject, however to the provision of Art. 1801 in case of TIMELY OPPOSITION on the part of any partner in which case, the MAJORITY VOTE shall be had for the PRESUMED INTENT OF THE PARTIES is that they shall all manage REGARDLESS of their capital contribution. In case of a tie, then, the CONTROLLING INTEREST’S decision will prevail

Q: HOW MANY PARTNERS SHOULD CONCEDE AS RE THE IMPORTANT ALTERATION OF IMMOVABLE PROPERTY?Unanimous consent is necessary so that ANY IMPORTANT ALTERATION to the immovable property may be made.

Q: HOW SHOULD THE CONSENT BE GIVEN?The consent need not be express. It may be implied from the fact that ACTUAL KNOWLEDGE was acquired and no opposition from the other partners was made

Q: DOES THE PROHIBITION APPLY TO MOVABLE PROPERTY?No, it only applies to immovable property because of the greater importance of this kind of property

Q: IS ANY ALTERATION CONTEMPLATED?No, it must be an IMPORTANT ALTERATION in immovable property. Any important alteration constitutes an act of STRICT DOMINION.


PATPrelims Reviewer

Q: MAY THE MANAGING PARTNER MAKE ANY IMPORTANT ALTERATION IN THE IMMOVABLE PROPERTY?No, even the managing partner may not make any important alteration in the immovable property WITHOUT THE CONSENT of the other partners

Exception: If the refusal of consent by any partner is MANIFESTLY PREJUDICIAL to the interest of the partnership, then, the intervention of the court may be sought so that important alterations to the immovable property may be made.

NB: The consent may be presumed from the failure to make any opposition

Q: WHAT IF THE ALTERATION IS NECESSARY FOR THE PRESERVATION?The law speaks of alteration that is useful to the partnership. Hence, when the alteration is necessary for its preservation, then, the consent of the other partners is not necessary

Q: A, B AND C FORMED A PARTNERSHIP FOR A TRANSPORTATION BUSINESS. THERE WAS NO AGREEMENT AS RE THE MANNER OF MANAGEMENT. A CONTRACTED A DEBT FOR SUPPLIES. ARE THE PARTNERSHIP AND THE PARTNERS LIABLE FOR THE INDEBTEDNESS?

Yes. Where there was no agreement was re the manner of management, each partner is considered as an AGENT of the partnership. A must be deemed to have an authority to contract the debt in as much as he incurred the same in the prosecution of the partnership business – Bachrach v. La Protectora

Q: IN THE ARTICLES OF PARTNERSHIP, THE PARNTERS ARE NOT GIVEN THE AUTHORITY TO ENTER INTO CONTRACTS. IT IS THE DEPARTMENT THRU A RESO OF 6 MEMBERS THAT COULD SO ENTER INTO SUCH CONTRACT. A 3 RD PERSON SEEKS ENFORCEMENT OF A CONTRACT ENTERED INTO BY ONE OF THE PARTNERS. IS THE PARTNERSHIP BOUND?

No. The partners may be empowered to contract in the name of the partnership ONLY if there is no provision as re the management of the partnership. In this case, the articles did so provide. The partners are not empowered to enter into contracts. Hence, the department cannot be bound without a resolution adopted by it in a meeting – Council of Red Men v. Veterans Army

Art. 1804.

Every partner may associate another person with him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager. (1696)

GR: Every partner may ASSOCIATE another person with him in his share BUT such associate shall NOT be admitted into the partnership without the consent of ALL THE OTHER PARTNERS, even if the partner having an associate may be the MANAGER

Q: WHAT IS THE RULE PROVIDED FOR UNDER ART. 1804?

That every partner may associate with another person, known as the SUBPARTNER, as re his share (partner’s share) even without the consent of the other partners

Q: WHAT IS THE PARTNERSHIP FORMED BETWEEN A MEMBER OF A PARNTERSHIP AND A 3RD PERSON?A SUBPARTNERSHIP. The manner by which the profits are to be divided between the members of the subpartnership or that one of the members shall receive the entire profits is immaterial as re the formation of the subparntership

Q: IS THE SUBPARTNERSHIP = MAIN PARTNERSHIP?No. it could be said that it is a partnership within a partnership. It is a distinct and separate partnership from that of the main partnership

Q: DOES A SUBPARTNER AUTOMATICALLY BECOME A MEMBER OF THE PARTNERSHIP?No. A subpartnership agreement does not in any wise AFFECT the composition, existence and operations of the firm. But the subpartners are partners INTER SE but the subpartner does not become a member of the firm WITHOUT the mutual assent of all the partners EVEN if they know of the existence of the subpartnership agreement

Q: DOES THE SUBPARTNER ACQUIRE THE RIGHTS OF A PARNTER AS WELL AS THEIR OBLIGATONS?NO. Not being a member of the partnership, then, he does not acquire the rights of the partners and neither does he become indebted for the partnership’s debts


PATPrelims Reviewer

Art. 1805.

The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at any reasonable hour have access to and may inspect and copy any of them. (n)

GR: The partnership books shall be kept1. In the place agreed upon by the partners2. In the absence of agreement, at the PRINCIPAL PLACE of business of the partnership

GR: Every partner shall have AT A REASONABLE HOUR access to and may INSPECT AND COPY any of them

Q: WHO HAS THE OBLIGATION OF KEEPING THE BOOKS OF THE PARTNERSHIP?The managing or the active partner has the obligation to keep a TRUE AND CORRECT books of accounts and such books shall at all times be open for inspection by the other partners

Q; WHAT COULD BE PRESUMED AS RE THE BOOKS?1. The partners have knowledge of the contents of the books 2. The books state accurately the state of accounts of the partnership

Q: WHAT ARE THE RIGHTS OF THE PARTNERS AS RE THE PARTNERSHIP BOOKS?Generally, the partnership books should be kept at the principal place of business (subject to an agreement to the contrary) so that the partners may:1. Access2. Inspect3. Copy any of them

Q: WHY ARE THEY GIVEN SUCH RIGHT?1. Each partner has a right to a TRUE AND FULL INFORMATION of the partnership accounts and activities2. Each partner is a CO-OWNER of the partnership properties, including the partnership books, and they also have EQUAL

RIGHTS in the management of the partnership affairs so that the books should not be kept under the sole control and custody of just one partner

NB: The books should not be transferred without the consent of the other partners

Q: IS THE RIGHT TO THE BOOKS OF THE PARTNERSHIP ABSOLUTE?No. It may be restrained. Hence, it may be used only for partnership purposes

Q; MAY THE PARTNERS ACCESS THE BOOKS AT ANY HOURNo. they may access it at any REASONABLE HOUR ONLY. This phrase has been interpreted to mean that it may be accessed at any REASONABLE HOUR ON ANY BUSINESS DAY THROUGHOUT THE YEAR and not merely on ARBITRARY DAYS chosen by the managing partners

Art. 1806.

Partners shall render on demand true and full information of all things affecting the partnership to any partner or the legal representative of any deceased partner or of any partner under legal disability. (n)

DUTY TO RENDER INFORMATIONGR: The partners shall render ON DEMAND TRUE AND FULL INFORMATION of all things affecting the partnership to any PARTNER, OR THE LEGAL REPRESENTATIVE of a deceased partner or of a partner under LEGAL DISABILITY

Q: WHAT IS THE REASON FOR THE DUTY TO RENDER INFORMATION?Mutual trust and confidence requires that there be no CONCEALMENT AMONG PARTNERS. Hence, there is a duty to render true and full information of all things affecting the partnership

Q: LIMITATION?The information must be used only for the partnership purpose


PATPrelims Reviewer

Q: MAY THERE BE A DUTY TO RENDER INFORMATION ONLY WHERE THERE IS DEMANDNo. It does not mean that there may not be an obligation to render VOLUNTARY DISCLOSURE of material facts affecting or relating to the partnership affairs.

Q; WHEN WILL THERE BE NO DUTY TO RENDER INFORMATION?Where the information already appears in the partnership books because it is open to inspection

NB: good faith not only requires that there be no FALSE STATEMENT. It also requires that there be no concealment among partners – Poss v. Gottlieb

Art. 1807.

Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. (n)

GR:1. Every partner must account to the partnership FOR ANY BENEFIT2. And hold as TRUSTEE for the partnership any PROFITS derived by him in any transaction connected with the FORMATION,

CONDUCT or LIQUIDATION OF THE PARNTERSHIP or FROM ANY USE BY HIM of his property

Q: WHAT IS THE NATURE OF THE RELATIONSHIP BETWEEN AND AMONGST PARTNERS?Fiduciary relationship, that is, of trust and confidence. Each partner is considered in law to be the CONFIDENTIAL AGENT of the others

Q: NATURE OF THE DUTY OF THE PARNTERS?Analogous to the duties of the TRUSTEE

Q: WHAT IS THE DUTY OF EACH PARTNER WHEN HE TRANSACTS ANY PARTNERSHIP BUSINESS?He should always act for the COMMON BENEFIT in all transactions affecting the partnership affairs. He cannot use or apply exclusively for his own benefit the PARTNERSHIP ASSETS and the results of the knowledge gained for his individual benefit

NB: The managing partner has the fiduciary duty to inactive partners

Q: TRANSACTION?Doing or performing something. It was given a broad meaning – more of the justice of the case demanded rather than

Art. 1808.

The capitalist partners cannot engage for their own account in any operation which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary.

Any capitalist partner violating this prohibition shall bring to the common funds any profits accruing to him from his transactions, and shall personally bear all the losses. (n)

Q: When is capitalist partner PROHIBITED from engaging in other business?When he is engaged in any business which is the same or similar to the business in which the partnership is engaged

Q: What is the obligation of the partner that violates this prohibition?1. Bring to the common fund any profits he derived from his transactions2. If there are losses, the partner should bear it alone

Art. 1809.

Any partner shall have the right to a formal account as to partnership affairs:

(1) If he is wrongfully excluded from the partnership business or possession of its property by his co-partners;

(2) If the right exists under the terms of any agreement;

(3) As provided by article 1807;


PATPrelims Reviewer

(4) Whenever other circumstances render it just and reasonable. (n)

GR: During the existence of the partnership, a partner is NOT entitled to a formal account of partnership affairsReason:

1. This right is already protected by Art. 1805 and Art. 18062. This may cause much inconvenience and unnecessary waste of time

EXPN:1. He is wrongfully excluded from the partnership2. If it exist under any agreement3. Provided under Art. 18074. Whenever circumstances render it just and reasonable

Q: To whom does the obligation to account rests?MANAGING OR ACTIVE PARTNER and a special task of the SURVIVING PARTNER

Q: When does prescription begins to run?It will run from the time of the DISSOLUTION OF THE PARTNERSHIP when the final accounting is done

Q: What kind of action is an action for accounting?It is an ACTION IN PERSONAM because it is an action against a person for the performance of a personal duty on his part. It is only incidental that part of the assets of the partnership subject to accounting or under liquidation happen to be real property.


PATPrelims Reviewer

SECTION 2: Property Rights of a Partner

Art. 1810.

The property rights of a partner are:

(1) His rights in specific partnership property;

(2) His interest in the partnership; and

(3) His right to participate in the management. (n)

EXTENT OF PROPERTY RIGHTS OF A PARTNERA. Principal Rights

1. His rights in specific partnership property2. His interest in the partnership3. His right to participate in the management

B. Related Rights1. Right to reimbursement for amounts advanced to the partnership and to indemnification for risks in consequence of

management2. Right of access and inspection of partnership books3. Right to true and full information of all things affecting the partnership4. Right to a formal account of partnership affairs under certain circumstances5. Right to have the partnership dissolved under certain circumstances

Q: What is the difference between partnership property and partnership capital?PARTNERSHIP PROPERTY IS VARIABLE, its value may vary from day to day, while PARTNERSHIP CAPITAL IS CONSTANT, and is not affected by fluctuations although it may be increased or diminished by unanimous consent of the partners. Partnership property not only includes the original capital contributions but all the PROPERTY SUBSEQUENTLY ACQUIRED BY THE PARTNERSHIP with the use of the partnership funds, including partnership came and the goodwill of the partnership. Partnership capital represents the AGGREGATE OF THE INDIVIDUAL CONTRIBUTIONS made by the partners.

Q: What are the rules regarding the OWNERSHIP of certain property?1. GR: The PROPERTY USED BY THE PARTNERSHIP constitutes partnership property

EXPN: Express agreement to the contrary*The partner may only contribute the use of the property not the ownership

2. GR: Property ACQUIRED BY A PARTNER with the use of partnership funds is PRESUMED PARTNERSHIP PROPERTYEXPN: If it is acquired AFTER DISSOLUTION BUT BEFORE WINDING UP of the partnership affairs it would be considered his but is liable to account to the partnership for the funds used

3. Property carried in the partnership books is strongly inferred as partnership property

4. The fact that the income generated by the property is received by the partnership or the taxes are paid by the partnership is evidence that the partnership is the owner of the said property

Art. 1811.

A partner is co-owner with his partners of specific partnership property.

The incidents of this co-ownership are such that:

(1) A partner, subject to the provisions of this Title and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners;

(2) A partner's right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property;

(3) A partner's right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws;


PATPrelims Reviewer

(4) A partner's right in specific partnership property is not subject to legal support under Article 291. (n)

NATURE OF A PARTNER’S RIGHT IN SPECIFIC PARTNERSHIP PROPERTY- A partner does not own any part of the partnership property although he does have rights in specific partnership assets- Art 1811 contemplates tangible property- None of the partners can possess and use the specific partnership property other than for “partnership purposes” without

the consent of other partners- If any partner made use of the partnership property he must account to the others the profits or benefits he derived from

such use- On the death of a partner, his rights in specific partnership property is vested in the surviving partners not the legal

representatives of the deceased partner except when he was the last surviving partner- A partner cannot separately assign his right to specific partnership property but all of them can assign their rights in the

same propertyo He cannot assign individually because it is impossible to determine the extent of his beneficial interest in the

property until after the liquidation of partnership affairso It also prevents interference by outsiders in partnership affairs, protects the rights of other partners and

partnership creditor to have partnership assets applied to firm debts- The law allows a retiring partner to assign his rights in partnership property to the partner or partners continuing the

business- Specific partnership property is not subject to attachment, execution, garnishment, or injunction without the consent of all

partners except on a claim against the partnership- Specific partnership property is also not subject to legal support but the partner’s interest in the partnership is subject to

legal support

Art. 1812.

A partner's interest in the partnership is his share of the profits and surplus. (n)

NATURE OF PARTNER’S INTEREST IN THE PARTNERSHIP- The partner’s interest in the partnership consists of his proportional share in the undistributed profits during the life of the

partnership and his share in the undistributed surplus after its dissolutiono Profit – excess of returns over expenditure in a transaction or series of transactions, the net income of the

partnership for a given period of timeo Surplus – assets of the partnership of after partnership debts and liabilities are paid and settled and the rights of

the partners among themselves are adjusted; excess of assets over liabilities- Nothing is to be considered as the share of a partner but his proportion of the residue or balance after an account has been

taken of the debts and credits- A partner is not a creditor of the partnership for the amount of his share

Art. 1813.

A conveyance by a partner of his whole interest in the partnership does not of itself dissolve the partnership, or, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled. However, in case of fraud in the management of the partnership, the assignee may avail himself of the usual remedies.

In case of a dissolution of the partnership, the assignee is entitled to receive his assignor's interest and may require an account from the date only of the last account agreed to by all the partners. (n)

EFFECT OF ASSIGNMENT OF PARTNER’S WHOLE INTEREST IN PARTNERSHIPGR1: A partner’s RIGHT IN SPECIFIC PARTNERSHIP PROPERTY is not assignableGR2: He may assign his INTEREST IN THE PARTNERSHIP to any of his co-partners or to a third person

without the consent of other partnersEXPN: agreement to the contrary

*The assignment will not divest the assignor of his status and rights as a partner nor operate as dissolution of the partnership


PATPrelims Reviewer

The assignment made to the third person does not grant the assignee the right:1. To interfere in the management2. To require any information or account3. To inspect any partnership books

RIGHTS OF THE ASSIGNEE 1. To receive in accordance with his contract the profits accruing to the assigning partner2. To avail himself of the usual remedies provided by law in the event of fraud in the management3. To receive the assignor’s interest in case of dissolution4. To require an account of partnership affairs, but inly in case the partnership is dissolved

Art. 1814.

Without prejudice to the preferred rights of partnership creditors under Article 1827, on due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; 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 orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.

The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court, may be purchased without thereby causing a dissolution:

(1) With separate property, by any one or more of the partners; or

(2) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold.

Nothing in this Title shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his interest in the partnership. (n)

REMEDIES OF SEPARATE JUDGMENT CREDITOR OF A PARTNER- While a separate creditor of a partner cannot attach or levy upon specific partnership property for the satisfaction of his

credit because partnership assets are reserved for partnership creditors, he can secure a judgment on his credit and then apply to the proper court for a CHARGING ORDER, subjecting the interest of the debtor partner in the partnership

- By virtue of the charging order, any amount or portion thereof which the partnership would otherwise pay to the debtor-partner should instead be given to the judgment-creditor

- This is an exclusive remedy so writ of execution will not be proper

REDEMPTION OR PURCHASE OF INTEREST CHARGED- The interest of the debtor-partner so charged may be redeemed or purchased with the separate property of any one or

more of the partners, or with partnership property but with the consent of all the partners whose interests are not so charged or sold

- The redeeming non-debtor partner does NOT ACQUIRE ABSOLUTE OWNERSHIP over the interest but HOLDS IT IN TRUST for him consistent with principles of fiduciary relationship


PATPrelims Reviewer

Section 3: Obligations of the Partners with Regard to Third Persons

Art. 1815.

Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner. (n)

REQUIREMENT OF A FIRM NAMEFirm – the name, title, or style under which a company transacts businessImportance:

1. It is necessary to distinguish the partnership which has a distinct and separate juridical personality from the individuals composing the partnership

2. To distinguish it from other partnerships

GR: The partners may adopt any firm name desiredProvided:

1. It is not misleadingo Partners cannot use a name that is to mislead the public by passing itself off as another partnership or corporation,

or its goods or services as those of such other company2. Use of name of deceased partners is allowed as long as it is indicated that said partner is already deceased

LIABILITY FOR INCLUSION OF NAME IN FIRM NAME- Persons who not being partners, include their name in the firm name do NOT ACQUIRE THE RIGHTS OF A PARTNER but is

SUBJECT TO LIABILITY of a partner in so far as THIRD PERSONS WITHOUT NOTICE are concerned

Art. 1816.

All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. (n)

LIABILITY FOR CONTRACTUAL OBLIGATIONS OF THE PARTNERSHIP

GR: After all the partnership assets have been exhausted, all the partners, including the industrial ones, shall be liable for all the contracts which may have been entered into in the name, for the account of the partnership and under its signature and by a person authorized to act for the partnership EXPN: Any partner MAY ENTER INTO A SEPARATE OBLIGATION to perform a partnership contract

Q: WHO SHALL BE LIABLE FOR CONTRACTUAL OBLIGATIONS OF THE PARTNERSHIP?GR: the partnership shall shoulder the obligations

Q: MAY 1 PARTNER MAKE ALL THE PARTNERS LIABLE FOR THE OBLIGATION OF THE PARTNERSHIP?Yes, a partner may, by entering into a contract in the name and for the account of the partnership hold ALL THE PARNTERS liable for the partnership obligation.

Reason: A partner is a PRINCIPAL WITH RESPECT TO HIS CO-PARNTERS and at the same time an AGENT OF THE OTHERS AND OF THE PARNTERSHIP. If he contracts with a 3rd person, he binds not only the partnership but also the partners, JUST LIKE AN OBLIGATION CONTRACTED BY AN AGENT – the principal shall be liable

Q: MAY A PARTNER BE “PERSONALLY” BE LIABLE?Yes. He may assume an undertaking in his own name or bind himself solidarily with the partnership to fulfill the obligation to a 3rd person.


PATPrelims Reviewer

NATURE OF THE INDIVIDUAL LIABILITY OF THE PARTNERS1. All the debts and obligations of the partnership are also the DEBTS AND OBLIGATIONS of each individual

member of the firm2. NATURE OF THE LIABILITY:

a. Pro rata – equally or jointly (not proportionately) – Basis of pro-rating: No. of the members of the firm and NOT the amount of their contributions

b. Subsidiary – because they become PERSONALLY LIABLE ONLY after the partnership assets have already been EXHAUSTED - They are held as the GUARANTORS of the partnership creditors to the EXTENT that the partnership

assets won’t be sufficient to cover the debts (Art. 2047 – By guaranty, a person called the guarantor binds himself to the CREDITOR to fulfill the obligation of the principal debtor in case he fails to do so)

- They may be JOINED as PARTY DEFENDANTS in the same action against the partnership SUBJECT to the right of the partners to PRIOR EXHAUSTION

c. Personal – NB: under Art. 127 of the Code of Commerce, all members of the GENERAL PARTNERSHIP shall be PERSONALLY AND SOLIDARILY LIABLE with their properties (the Code Commission did not subscribe to the solidary liability because it is the source of the fear and reluctance for the formation of the partnership

NB: Sec. 21, Corporation Code (BP 68) – All persons (NOT STOCKHOLDERS/MEMBERS) who act as a CORP knowing it to be without authority to do so shall be liable AS GENERAL PARTNERS for the DEBTS, LIABILITIES and DAMAGES incurred as a result thereof

Q; MAY THE INDUSTRIAL PARTNER BE RELIEVED FROM SHARING IN THE LIABILITY?No. He is generally exempt from contributing for the LOSSES of the partnership BUT NOT FOR THE LIABILITIES. The EXEMPTION from losses relates exclusively to the SETTLEMENT OF THE PARTNERSHIP affairs among the partners AND not to their LIABILITY TO 3RD PERSONS for the debts of the partnership (Compania Maritima v. Munoz)

NB: The industrial partner may seek reimbursement from the capitalist partners for the share that he has given Exception: Agreement to the contrary

*In a partnership, gains and losses are balanced. But as re the industrial partner, what matters is the FINAL ADJUSTMENT OF THE LOSSES AND THE ASSETS of the partnership (so that, if there are still properties remaining, the PRIMARY AND DIRECT RESPONSIBILITY of the partnership shall preclude any recourse against any of the partners)

Q; IS THERE A CONFLICT BETWEEN ART. 1797 AND ART. 1816?None. Art. 1816 refers to LIABILITIES while Art. 1797 refers to LOSSES. The mere fact that a company was unable to pay its debts on time does not mean that it is operating at a loss. It may be expecting credits in the future which may be MORE than the losses – Pacific Commercial Co. v. Aboitiz and Martinez

Art. 1817.

Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners. (n)

GR: Any STIPULATION against any liability provided under Art. 1816 shall be VOIDEXPN: Stipulation against liability as AGAINST THEMSELVES

Points to remember:1. Any stipulation contrary to the PRO RATA AND SUBSIDIARY LIABILITY provided under Art.

1818 in so far as it affects 3rd persons shall be VOID and of no effect2. It is VALID AN ENFORCEABLE among the partners


PATPrelims Reviewer

Art. 1818.

Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.

An act of a partner which is not apparently for the carrying on of business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.

Except when authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:

(1) Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership;

(2) Dispose of the good-will of the business;

(3) Do any other act which would make it impossible to carry on the ordinary business of a partnership;

(4) Confess a judgment;

(5) Enter into a compromise concerning a partnership claim or liability;

(6) Submit a partnership claim or liability to arbitration;

(7) Renounce a claim of the partnership.

No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction. (n)

GR: Every partner is AN AGENT OF THE PARTNERSHIP for the purpose of its business and EVERY ACT of the partner, including the execution in the partnership name of any instrument FOR APPARENTLY CARRYING ON IN THE USUAL WAY THE BUSINESS OF THE PARTNERSHIP, BINDS the partnership

EXPN:1. The partner so acting has IN FACT no authority to act for the partnership in the particular matter2. The person with whom he is dealing with has KNOWLEDGE of the fact that he has no such authority

GR 2: An act of the partnership WHICH IS NOT APPARENTLY FOR CARRYING OUT THE BUSINESS OF THE PARTNERSHIP shall NOT bind the partnership

Exception: When he is AUTHORIZED by the other partners

GR 3: ALL the partners MAY BE THE ONLY ONES who may do the following acts:1. Assign the partnership property in trust for the creditors or on the assignee’s promise to pay the debts of the

partnership2. Dispose of the goodwill of the business3. Do any other act which would make it impossible to carry on the ordinary business of the partnership 4. Confess judgment5. Enter into a compromise concerning partnership claim or liability6. Submit partnership claim or liability to arbitration7. Renounce a claim of the partnership

EXPN:1. Unless authorized by the other partners2. The other partners ABANDONED THE BUSINESS

GR 4: No act of the partner in CONTRAVENTION of a restriction on authority WITH THE KNOWLEDGE of the persons whom he is dealing with SHALL BIND the partnership


PATPrelims Reviewer

POWER OF PARTNER AS AGENT OF PARTNERSHIPGR: All partners have EQUAL RIGHTS with re to the management and conduct of the business of the partnershipEXPN: Where there is an agreement to the contrary

a. As to THEMSELVES - If the act of the partner is within the scope of his actual, implied or apparent authority, he is not only a

PRINCIPAL as to himself but also an AGENT to his co-partners or partnership as a whole. Hence, his act BINDS the partnership

- Basis: LAW ON AGENCY (applies to law on partnership). The latter is a branch of the former

b. As to 3rd PERSONS GR: Any LIMITATION ON THE AUTHORITY of the partner will NOT bind INNOCENT 3RD PERSONS who have the

right to assume that the GENERAL PARTNER whom he is dealing with has AUTHORITY to bind the partnership with respect to its business (especially the ostensible partner)

1. The 3rd person has NO DUTY TO MAKE INQUIRIES AS TO ACTING PARTNER’S AUTHORITY- 3rd person is not bound to make inquiries whether the partner with whom he is dealing with has the

authority of the other partners- The public is not required to inquire as re the agreements had between the partner- The regular business procedure does not require the 3rd person to inquire from time to time if the

partner has the authority and bears the consent of the other partners- His KNOWLEDGE THAT HE IS A PARNTER is ENOUGH

2. There is a PRESUMPTION that the acting partner has the authority to BIND the partnership

General presumptions:a. Every partner is an AGENT OF THE FIRMb. That he has the AUTHORITY to bind the firm- This PRESUMPTION is enough for the 3rd person to hold the firm liable for the transactions entered into

by a member acting in its behalf and within his authority – Litton v. Hill and Ceron

3. The 3RD PERSON has NO RIGHT TO ASSUME THAT THE ACTING PARTNER HAS AN UNLIMITED AUTHORITY

LIABILITY OF PARTNERSHIP FOR ACTS OF PARTNERS1. Acts for apparently carrying in the usual way the business of the partnership

GR: Since a partner is AN AGENT OF THE PARTNERSHIP, he has the power to do such acts with BINDING EFFECT even if he in fact has no authority

EXPN: The partnership will not be liable ONLY if: (the 2 requisites below are met)a. The partner so acting has no authority, ANDb. The 3rd person has knowledge of the fact that the partner he is dealing with has no authority

*NB: Usual way – usual for a PARTICULAR PARTNERSHIP or for similar partnership Par. 1 refers to Acts of ADMINISTRATION ONLY

2. Acts of strict dominion or ownershipGR: Any power not expressly delegated to a partner is presumed to be WITHHELD


PATPrelims Reviewer

Q: IN CASE THE ACT IS NOT FOR THE CARRYING IN THE USUAL WAY THE BUSINESS OF THE PARTNERSIP, IS THE LATTER BOUND?

GR: NoEXPN:

1. When the acts are AUTHORIZED by ALL the other partners2. If the partners HAVE ABANDONED the business

Points: 1. Par. 3 enumerates the acts WHICH ARE BEYOND the implied powers of each partner 2. It shows the LIMITATIONS on the authority of the partners to bind the partnership

Q: IF THE PARTNER WOULD LIKE TO ENTER INTO A CONTRACT BEYOND THE SCOPE OR ONJECT OF THE PARTNERSHIP OR IN RE TO THE PARTNERSHIP PROPERTY, WHAT MUST HE DO?

There must be another conference of authority, express or implied, apart from the authority which is derived from his character of being a partner (2nd par. of At. 1818)

e.g. Where the partnership is engaged in selling mangoes, the act of the partner in selling dresses will not bind the partnership or ANY CONTRACT entered into after such business is concluded

3. If the purposes or object of the firm is LIMITED OR SPECIAL, the 3rd person has no right to obtain credit on the faith of the firm in relation to an object that is foreign to its business

3. Acts in contravention of the restriction on authority GR: the partnership will not be liable to the 3rd person if the latter has ACTUAL OR PRESUMPTIVE KNOWLEDGE of

the RESTRICTION on the authority of the partner WHETHER OR NOT the act is for the carrying in the usual way of the business

DEFENSES OF AN ERRING PARTNERo When a partner enters into a contract without AUTHORITY:

With respect to 3rd persons, that partner as well as the partnership shall be liable because the 3rd person has no obligation to make an inquiry

With respect to the partnership, the erring partner is PERSONALLY LIABLE even if he used the partnership name to enter into the contract

o He cannot argue that: He merely ATTEMPTED TO BIND THE PARTNERSHIP but he failed (so as to avoid his act) He cannot argue against the 3rd person that he has no authority as HE IS ESTOPPED from denying such

authority

Art. 1819.

Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner's act binds the partnership under the provisions of the first paragraph of article 1818, or unless such property has been conveyed by the grantee or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority.

Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of the first paragraph of Article 1818.

Where title to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, but the partnership may recover such property if the partners' act does not bind the partnership under the provisions of the first paragraph of Article 1818, unless the purchaser or his assignee, is a holder for value, without knowledge.


PATPrelims Reviewer

Where the title to real property is in the name of one or more or all the partners, or in a third person in trust for the partnership, a conveyance executed by a partner in the partnership name, or in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of the first paragraph of Article 1818.

Where the title to real property is in the name of all the partners a conveyance executed by all the partners passes all their rights in such property. (n)

Par. 1: Title over the property under the partnership + conveyance is made by a partner in the PARTNERSHIP NAMEGR: The partnership may recover the propertyEXPN:

1. When the act of the partner binds the partnership in acc with par. 1 of Art. 18182. When the grantee or any person claiming thru such grantee has already passed the property to a HOLDER FOR

VALUE without knowledge that the partner, in making the conveyance has exceeded his authority

Par. 2: Title over the property in the firm’s name + conveyance made by the partner in his NAMEGR: The conveyance will convey the EQUITABLE INTEREST in the partnership PROVIDED that the partner acted within the

scope of his authority

Q: EQUITABLE INTEREST/TITLEOne that is not recognized in law but only in EQUITYOne that is IIMPERFECT OR UNENFORCEABLE in law but because of equitable principles, may be converted into a legal title or interest

Par. 3: Title is in the name of ONE or MORE but NOT ALL the partners, and the records do not disclose the right of the partnership + The conveyance made by the partners (in whose name the title over the property is)GR: The partnership may recover the property EXPN:

1. When the act of the partner binds the partnership in acc with par. 1 of Art. 18182. When the grantee or any person claiming thru such grantee has already passed the property to a HOLDER FOR

VALUE without knowledge that the partner, in making the conveyance has exceeded his authority

Par. 4: Title in the name of ONE or MORE or ALL of the partners or 3rd person in TRUST for the partnership + CONVEYANCE made either in the name of the firm or in the name of the partnersGR: The conveyance will convey the EQUITABLE INTEREST in the partnership PROVIDED that the partner acted within the scope of his authority

Par. 5: Title in the partners name + conveyance made by ALL the partnersGR: Their interest over the property will be conveyed

Points:1. Ownership over the property – that which is shown in the MUNIMENT OF TITLE2. The real property is usually in the PARTNERSHIP name if it belongs to the partnership

NB: But in one way or another, the partnership may not hold the title but the partners know that it is a partnership property

3. Any property purchased thru partnership funds = partnership property (presumption) UNLESS a contrary intention appears

4. Art. 1819 – legal effects of the conveyance of partnership property depending on:a. In whose name the property is registeredb. Who made the conveyance


PATPrelims Reviewer

Q: IN WHOSE NAME MAY THE PROPERTY BE REGISTEREDa. Partnershipb. One or more but not all the partnersc. One or more or all of the partners or in the 3rd person in trust for the partnership d. All the partners

5. Par. 1, 3 and 5 – conveys title or ownershipPar. 2, and 4 – only EQUITABLE INTEREST

6. Conveyance – includes the power to MORTGAGE (unlike in the rule on agency where the special power to sell does not include the power to mortgage) – Santiago Syjuco, Inc. v. Castro

7. INNOCENT PURCHASERS WITHOUT NOTICEGR: the innocent purchasers should be protected NOTWITHSTANDING THE FACT that the partner making the

conveyance has no authority to do so

a. LEGAL TITLE (partner) while the EQUITABLE TITLE (partnership) – the buyer in good faith and for value without notice will acquire title because it is safe to PRESUME that the possession or interest of the partnership is SUBORDINATE TO and CONSISTENT with the record of title

b. Where A (partner who has no authority to sell the land) conveyed the land to B and the latter sold it to C- Here, even if A does not have the authority to sell, under par. 1, the partnership may not recover the property

from C who has no notice or knowledge that A has no authority to convey the land- If the land is not yet sold, hence, still with B, B has a right to retain the title (being the grantee) UNLESS he

knows that A has no authority to sell c. The buyer need not have the ACTUAL OR CONSTRUCTIVE KNOWLEDGE of the trust or any condition limiting the

authority of the partner concerned - Notice of the interest of the partnership in a property is not had by a knowledge of the fact that legal title is in

the name of the member of the partnership. The buyer will be protected

8. AUTHORIZATION OR RATIFICATION OF CONVEYANCEGR: A partner may be authorized by the others to convey the real property of the firm or even if the partner conveyed

the property without authority, the partners may ratify the act of the partner

Q: HOW SHOULD THIS AUTHORITY OR RATIFICATION BE PROVED?GR: Convincingly because this will not be presumed (so, this will be used by the partner so that he won’t

PERSONALLY be liable)EXPN:a. After the lapse of so many years after the act of conveyance, the authority will be presumed

Q; HOW SHOULD THE AUTHORIZATION BE MADE?a. Varied opinions – some say in writing however there are instances where partners become bound because of

PAROL authority given (e.g. Hey sherry you may sell this land!-oral)b. When a partner executes a deed of sale IN THE PRESENCE of his co-partners under a PAROL AUTHORITY – held:

Execution of the deed by ALL the partners c. IMPLIED from the partnership business – e.g. where the partnership is engaged in the

buy and sell of real estate, the contract executed to sell the property is presumed valid

Q: HOW MAY RATIFICATION BE MADEa. When A executed a deed of sale, and B thereafter, ADOPTED the actb. Knowingly deriving benefits from the contract


PATPrelims Reviewer

c. Inferred from the fact that they are present during the execution and deliveryd. Acting under the contract

Art. 1820.

An admission or representation made by any partner concerning partnership affairs within the scope of his authority in accordance with this Title is evidence against the partnership. (n)

GR: An ADMISSION OR REPRESENTATION made by a partner concerning the partnership affairs and within the scope of his authority shall be an EVIDENCE AGAINST THE PARTNERSHIPPoints:1. GENERALLY, a person shall not be BOUND by the ACT, ADMISSION, STATEMENT or AGREEMENT made by another

WITHOUT HIS KNOWLEDGE OR CONSENTException: But he may be bound by virtue of the existing RELATION between them

2. GR: Admissions by a party and testified to by a 3rd person will be an EVIDENCE AGAINST THE FORMERException: An admission made by a party may be received against ANOTHER if the former is acting as an AGENT for the latter

NB: This is the basis for the rule under Art. 1820 that when a partner makes an admission during the existence of the partnership, the latter as well as the co-partners will be bound by the admission if the admission:

a. Pertains to the partnership affairsb. The admission is within the authority of the partner making the admission

3. But where the admission is made by a party on his behalf alone, then, the same shall only be used against him

Q: MAY THE ADMISSION MADE BY A PARTNER AFTER THE DISSOLUTION BE RECEIVED AGAINST THE OTHER PARTNERS?Yes, provided that the admission has something to do with the winding up of the partnership affairs

Points: For the admission of the partner to bind the partnership, the following must concur:

1. The partner making the admission must be acting within the scope of his authority at the time of making the declaration

2. The statement is made in the COURSE OF, RELATED TO AND MATERIAL TO THE TRANSACTION OF THE BUSINESS OF THE PARTNERSHIP

3. The partnership relation must be shown before the partnership can be charged with the admission of a partner under Art. 1820

4. The proof of such relation must be established by an evidence OTHER THAN THE ADMISSION itself

e.g. If C denies the existence of a partnership, then B, in the above example must show the existence of the partnership other than by the admission made by A to him. Otherwise, such admission will not bind C.

Exception: The ADMISSION made by a partner may be used to establish the partnership relations if the party to be charged by such admission is present at the time of the making of the declaration

e.g. If A made a statement to the effect that he and C are partners, and C did not react (as in fact he is present), then, the admission made by A that partnership X and Co exists may be admitted to show that A and C are partners

5. Any admission made by a partner at the time when HE WAS NO LONGER A PARNTER will not be admissible in evidence against the partnership – Congco v. Triliana


PATPrelims Reviewer

Art. 1821.

Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the partnership, except in the case of fraud on the partnership, committed by or with the consent of that partner. (n)

GR: Notice to or KNOWLEDGE of any partner of any matter relating to the partnership affairs operates as notice to or knowledge of the partnership

EXPN: Except in case of fraud on the partnership committed by or with the consent of that partner

Points:1. A 3rd person desiring to notify the partnership as regards any matter relating to the partnership affairs need NOT

notify ALL the partners2. It is enough that he notifies 1 or ANY of the partners.

- This is an effective communication even if the partner to whom the information was communicated to FAILED or NEGLECTED to communicate such knowledge or notice to the other co-partners

Q: CASES OF KNOWLEDGE UNDER ART. 1821?1. Knowledge of a partner acting on a particular matter ACQUIRED while a partner2. Knowledge of a partner acting on a particular matter then PRESENT to his mind3. Knowledge of ANY OTHER PARTNER who could and should have communicated it to the acting partner

Art. 1822.

Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. (n)

Art. 1823.

The partnership is bound to make good the loss:

(1) Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and

(2) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. (n)

Art. 1824.

All partners are liable solidarily with the partnership for everything chargeable to the partnership under Articles 1822 and 1823. (n)

GR: The partners are merely PERSONALLY AND SUBSIDIARILY liable

Points:1. LIABILITY ARISING FROM PARTNER’S TORT OR BREACH OF TRUST

a. Art. 1822-1824 establishes the SOLIDARY liability of the partners and the partnership for the WRONGUL ACT OR OMISSION (tort) or BREACH OF TRUST by any partner ACTING within the SCOPE OF THE PARTNERSHIP BUSINESS OR WITH AUTHORITY FROM THE OTHER PARTNERS

NB: 1. If the partner acts BEYOND the scope of the partnership business, the latter is not

bound by said act by virtue of Art. 1818 unless authorized by the other partners2. If the partner is NOT authorized by the other partners, then, the partnership will

not be liable – supplied by me


PATPrelims Reviewer

b. This is TRUE even if the partners DID NOT PARTICIPATE IN, RATIFY OR HAD NO KNOWLEDGE of the said act or omission

c. Remedy: This is without prejudice to the co-partners’ right to ask for reimbursement from the guilty partner

2. Art. 1816 v. Art. 1822-1824a. Art 1816 – the liability is SUBSIDIARY

Art. 1822-1824 – the liability of the partners is SOLIDARY

b. Art. 1816 – the liability of the partners is FOR THE CONTRACTUAL PARTNERSHIP OBLIGATIONS to 3rd personsArt. 1822-24 – the liability of the partners arises from the LIABILITY OF THE PARTNERSHIP for the wrongful act or omission of any partner

NB: It is called TORT if the act or omission does not constitute a crime or felony punishable by law

Q: WHAT IS THE NATURE OF THE LIABILITY OF THE PARNTERS IN CASE OF WORKMEN’S COMPENSATION CASES?Liwanag and Reyes v. Workmen’s Compensation Commission – it should be solidary

Q: WHAT IS THE REASON FOR THE IMPOSITION OF A WIDER LIABILITY IN CASE OF TORT AND BREACH OF TRUST?Public policy. The principle of RESPONDEAT SUPERIOR or rule on vicarious liability equally applies in the case of a partnership as it applies to the law on agency

Q: WHAT IS THE REASON FOR THE SOLIDARY LIABLITY?Because the law protects a person who IN GOOD FAITH, relied on the authority of the partner, whether that authority is REAL OR APPARENT. Hence, under Art. 1824, whether guilty or innocent, the other partners shall be solidarily liable – Munasque v. CA

Q: WHO MAY BE IMPLEADED BY THE AGGRIEVED PARTYSince the liability is SOLIDARY, the partner has his ELECTION to:

1. Sue the partnership2. Sue just ONE partner – even the one who has no knowledge of the tort or breach3. Sue one or more partners

Q: REQUISITES FOR THE LIABILITY UNDER ART. 1822?1. The partner must be guilty of any WRONGUL ACT OR OMISSION2. That partner must be acting IN THE ORDINARY COURSE OF BUSINESS or with the AUTHORITY of the other co-

partners EVEN if the act is not RELATED to the business

Q: MAY A NON-ACTING PARTNER BE HELD CRIMINALLY LIABLE FOR THE CRIMINAL ACTS OF HIS CO-PARNTER?No.

Q: WHEN THEN MAY HE BE HELD CRIMINALLY LIABLE?In case where the partnership is engaged in an unlawful business and he knows of it or consents thereto

3. LIABILITY UNDER ART. 1822 as a RULE does not include CRIMINAL LIABILITYReason: this is personal and individual in character

e.g. Where a partner is guilty of embezzlement, the other partner cannot be disbarred or disciplined if he has no KNOWLEDGE, DID NOT CONSENT TO, OR PARTICIPATED in the criminal act


PATPrelims Reviewer

Exception: There may be criminal responsibility in case where the crime is STATUTORY and where the penalty is FINE rather than imprisonment

e.g. A partner is also held criminally liable because of his co-partner’s illegal blasting

MISAPPLICATION OF MONEY OR PROPERTY OF A 3RD PERSONCases contemplated under Art. 1823

1. The partnership shall be liable for the losses suffered by a 3rd person whose money or property was misappropriated by a partner who received it within the scope of his authority

2. Or by ANY OTHER PARTNER AFTER the money or property has been received by the partnership and while in its custody

Art. 1825.

When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such persons to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made:

(1) When a partnership liability results, he is liable as though he were an actual member of the partnership;

(2) When no partnership liability results, he is liable pro rata with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately.

When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. When all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the persons consenting to the representation. (n)

Q: ESTOPPEL/EFFECTS THEREOF- Estoppel is a BAR which precludes a person from DENYING OR ASSERTING ANYTHING contrary to that which

has been established as the TRUTH by his own deed or representation, either EXPRESS OR IMPLIED- Through estoppel, an admission or representation is rendered CONCLUSIVE with respect to the person

making it and cannot be denied or disapproved as against the person relying thereon

Q: MAY A PERSON BE HELD LIABLE AS A PARTNER EVEN IF HE IS NOT A PARTNER IN FACT?GR: Persons who are not partners to each other are not partners as to 3rd persons. Hence, one may not be liable

or claim any right as a partner UNLESS he consent to his being a partnerEXPN: Art. 1825 (because of the doctrine of estoppel)

Q: HOW MAY A PERSON BE HELD LIABLE AS A PARTNER BY ESTOPPEL?A person, not otherwise a partner may be held liable as a partner by estoppel and thus may be held liable to 3rd persons relying on such representation when:

1. He DIRECTLY REPRESENTS himself as a PARTNER of an EXISTING PARTNERSHIP or of a NON-EXISTING PARTNERSHIP (with one or more person who are not actual partners)

2. He INDIRECTLY REPRESENTS himself by consenting to another representing him as a partner in an existing partnership or in a non-existing partnership

Therefore, he may become a partner by estoppel by:1. Representing himself as a partner2. By consent or knowledge


PATPrelims Reviewer

Q: HOW TO HOLD A PERSON LIABLE AS A PARTNER BY ESTOPPEL1. Prove the misrepresentation2. Prove that because of such BONAFIDE (GF) RELIANCE, he suffered injury thereby

Q: WHEN WILL PARTNERSHIP LIABILITY RESULT?When ALL the ACTUAL PARTNERS consent to the representation by a person that he is a partner or in a case where the latter consents to his being represented as such, the LIABILITY incurred by such person as well as that of the ACTUAL PARTNERS – partnership liability.

NB: This gives rise to a PARTNERSHIP BY ESTOPPEL. The person will be considered as an AGENT OF THE PARTNERSHIP and his act or obligation shall be that of the partnership (note that the partnership shall be responsible for all the expenses incurred by the partner) - So, in this case, the PARTNERSHIP WILL BE LIABLE. Thereafter, the partners will be liable with their separate

properties (JOINT and SUBSIDIARY)

Q: WHEN IS THE LIABILITY CONSIDERED AS PRO RATA?a. In case where THERE IS NO ACTUAL OR EXISTING PARTNERSHIP – all those represented as partners and

those who made such representation shall be liable jointly or pro rata (e.g. A, B, C and D are not partners. A and B represented C and D as their alleged partners. C and D contracted P1000). Here, A, B, C and D shall each be held liable for P250

b. In case where NOT ALL OF THE PARTNERS of an EXISTING PARTNERSHIP consented to the representation – then, the partner by estoppel and the partners who made or consented to such representation by the former will be held liable pro rata or jointly (e.g. A, B and C are partners in an existing partnership. A consented to D’s representation of himself as a partner. D contracted a loan of P1000. In this case, A and D shall each be liable for P500. B and C will not be liable as well as the partnership because they did not consent to the representation by D)

Q: WHEN IS THE LIABILITY SEPARATE a. When there is no existing partnership AND not ALL BUT ONLY SOME of the persons consented to the

representationo Then, only those who represented themselves or consented to such representation will be liableo As well as those who made or consented to such representation

b. In case of an EXISTING PARNTERSHIP AND none of the partners consented to such representationo Then, only those who represented themselves or consented to such representation will be liableo As well as those who made or consented to such representation

Q: DOES ESTOPPEL CREATE A PARTNERSHIP?No. estoppels does not create a partnership. A contract, express or implied is necessary in order to form a partnership

NB: The law only considers them as partners and the association as a partnership in so far as it is favorable to the 3rd person by reason of the equitable principle of ESTOPPEL – Mcdonald v. National City Bank of NY

NB: Therefore, ACTUAL PARTNERSHIP is one thing and LIABILITY as partners is another thing. The LIABILITY (as partners) is created merely in favor of persons who in good faith relied on such representation and EXTENDED credit to the ACTUAL OR APPARENT PARTNERSHIP

Q: MAY LIABILITY AS A PARTNER ARISE CONTRARY TO THE INTENTION OF THE PARTIES?Yes.


PATPrelims Reviewer

The partnership LIABILITY (of a person who holds himself out or who permits others to represent him as a partner) arose because of:

a. Estoppelb. Principle of law to prevent fraud upon those persons who lend their money upon reliance to the credit of those

persons who held themselves as partners

Points:1. One may be held liable as a partner even if this is contrary to his intention2. One WHO HAS RECEIVED BENEFITS OR PROFITS in lieu of a partnership transaction CANNOT deny that there is

no partnership because the agreement is voidNB: Partnership liability does not depend upon the contract between the parties but whether or not the 3rd

person has a right to rely on their joint credit 3. One who incurs partnership liability does not acquire the rights of a partner

Q: WILL THE DOCTRINE OF ESTOPPEL APPLY IN THE CASE OF ACTUAL PARTNERS?No. The doctrine will not apply between and among them because they become partners not because of ESTOPPEL but because of their CONTRACT.

It is true that a single or more partners may become liable for a GREATER EXTENT than that allowed in the partnership agreement, but this is only:

a. A ground as amongst the partners to DISSOLVE THE PARNTERSHIPb. ESTOPPEL will only apply with respect to a 3rd person in order to protect his interest (because the

representations were detrimental to him)

Q: WHEN DOES THE DOCTRINE OF ESTOPPEL APPLY THEREFORE?With respect to 3rd persons who relied on the representation of another as a partner to their detriment. The law will not allow the denial of such representation because this will prejudice the 3rd person

NB: There is a dictum to the effect that where the representation is so PUBLIC and OPEN such that a PRESUMPTION is created that the 3rd person in fact relied upon it

Q: HOW TO PROVE THAT A PERSON HELD HIMSELF OUT AS A PARTNERIt is a question of fact and must be established by evidence. It is a case to case basis

Points:1. No one can be held liable as a partner where the acts imputed are NOT his own or where such acts came from

persons whom he did not so authorize or he DOES NOT KNOW2. Mere SUPPOSITION, BELIEF OR UNDERSTANDING that a person is a partner (generally held, supposed and

believed and understood as such) is not sufficient proof that he is a partner

NB: Art. 1834 v. Art. 1825 – Under Art. 1834, there is NO PARTNERSHIP BY ESTOPPEL. There is merely a PARTNERSHIP LIABILITY which continues because of lack of termination

Q: DOES ESTOPPEL APPLY BETWEEN ACTUAL PARTNERS?No. Because they become as such by agreement.

NB: Note however that a single partner or 2 or more partners may become liable to 3rd persons TO A GREATER EXTENT than that provided in the partnership agreement. (this only goes to show that estoppels applies only between a PARTNER and a 3RD PERSON)


PATPrelims Reviewer

Q: WHAT THEN IS THE SIGNIFICANCE OF ESTOPPEL BETWEEN ACTUAL PARTNERSShould a partner agree with a 3rd person to be liable for a greater liability, this will be a ground for DISSOLUTION of the partnership.

Q: HOW ABOUT AS TO 3RD PERSONS?3rd persons may use estoppels as a defense in order to get their claim.

NB: A person or persons may be a partner (or partners) by representing themselves to be such or by allowing others, with their consent and knowledge to be represented as such.

Basis: The law will not permit a DENIAL OF SUCH REPRESENTATION (as a partner) where 3rd persons have relied on the same (in the exercise of reasonable diligence) to their detriment

Q: HOW DO YOU PROVE THAT ONE HAS RELIED ON THE REPRESENTATION OF ANOTHER?There is a dictum to the effect that the holding out as a partner may be so PUBLIC AND OPEN and this creates the presumption that the 3rd person relied upon it.

Q: HOW TO PROVE THAT ONE HAS REPRESENTED HIMSELF OUT OR ALLOWED SOMEONE TO REPRESENT HIM AS SUCHThis is a QUESTION OF FACT and each case depends upon its own merits

Points: (on how to prove that one is a partner by estoppel)1. One cannot be a PARTNER BY ESTOPPEL if the acts relied upon is NOT his or that of the others who are not

authorized by him or known to him2. NOT SUFFICIENT EVIDENCE: The mere fact that it is generally SUPPOSED, BELIEVED OR UNDERSTOOD that he is a

PARTNER3. Art. 1834 last par – not a PARTNERSHIP BY ESTOPPEL but PARTNERSHIP LIABILITY (for lack of termination)

Q: ARE THE PROVISIONS OF THE CIVIL CODE APPLICABLE TO A DE FACTO PARTNERSHIP?Yes. Note that the law RECOGNIZES a defectively organized partnership as DE FACTO for purposes of 3rd persons. Hence, although the de facto partnership HAS NO LEGAL PERSONALITY OR JURIDICAL EXISTENCE, the Civil Code provisions on partnership apply. Hence, it must also have the attribute of DOMICILE.

Note:1. A de facto partnership has no JURIDICAL PERSONALITY but the law RECOGNIZES its DE FACTO EXISTENCE (as 3rd

persons will be prejudiced)2. It also has domicile, hence, the Civil Code provisions on partnership apply

Q: WHERE IS THE DOMICILE OF A DE FACTO PARTNERSHIP?Where it conducts its business.

NB: Registration of a chattel mortgage in its place of business is valid – Peralta v. Manalang

Q: WHAT ARE THE ELEMENTS NECESSARY TO ESTABLISH LIABILITY OF A PARTNER BY ESTOPPEL?1. Proof by the plaintiff that he is INDIVIDUALLY AWARE of the representations made by the defendant or the

representations made of him2. There should be RELIANCE on such representations3. LACK OF DENIAL OR REFUTATIONS OF THE STATEMENTS by the defendant

NB: It is not necessary that the denial precede the reliance of the plaintiff (if the denial should come promptly after it was heard)


PATPrelims Reviewer

Q: IS IT NECESSARY TO PROVE THAT THE DEFENDANT IS FINANCIALLY CAPABLE?No.

NB: Sole reliance is not necessary with respect to dealings involving the one representing or represented

LIABILITY AS GENERAL PARTNERS OF PERSONS WHO ASSUME TO ACT AS A CORPORATIONQ: WHAT DOES THE LAW SAY OF THE LIABILITY OF PERSONS WHO ASSUMT TO ACT AS A CORPORATION KNOWING IT TOBE WITHOUT AUTHORITY TO DO SO?

Under Sec . 21 of BP Blg. 68: All persons WHO ASSUME TO ACT as a corporation KNOWING it to be without authority to do so shall be liable as GENERAL PARTNERS on all DEBTS, LIABILITIES AND DAMAGES incurred or arising thereon.

Q; IS IT A DEFENSE FOR THE CORPORATIO TO STATE THAT IT HAS NO CORPORATE PERSONALITY?No. Under the same section, it was provided that: “provided however that when any such OSTENSIBLE CORPORATION is sued on any of its transaction or on any tort committed by it, it shall not be allowed to interpose the defense of lack of corporate personality

Q: WHAT THEN IS THE LIABILITY OF PERSONS WHO ATTEMPT BUT FAIL TO FORM A CORPORATION?Their liability shall be that of a GENERAL PARTNER. In this case, a DE FACTO PARTNERSHIP is formed among them

Q: WHO SHALL BE LIABLE AS GENERAL PARTNERS?Only the ACTIVE MEMBERS of the attempted corporation.

NB: Under Sec. 21, it was stated that the persons WHO ASSUME TO ACT as a corporation shall be liable as GENERAL PARTNERS

Q: HOW ABOUT THE STOCKHOLDER?There shall be NO PERSONAL LIABILITY because he has not participated in the corporation

Art. 1826.

A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary. (n)

GR: A person admitted INTO AN EXISTING PARTNERSHIP shall be liable for ALL THE OBLIGATIONS of the partnership BEFORE HIS ADMISSION as though he had been a partner when such obligation was incurred, EXCEPT that his liability shall be satisfied only out of the partnership property Exception: When there is a stipulation to the contrary

Q: DOES A PERSON WHO IS ADMITTED AS A PARNTER INTO AN EXISTING PARTNERHIP BECOME LIABLE FOR THE DEBTS CONTRACTED BY THE LATTER BEFORE HE ENTERED?

Yes. As expressly provided under Art. 1826

Q: WHAT IS THE CATCH?GR: His liability therefore is limited only to his share in the partnership propertyException: When there is a STIPULATION (that his other properties may be attached for that purpose) to the contrary

NB: Hence, the newly accepted partner’s credit may not be garnished in order to satisfy the credit of the old creditors


PATPrelims Reviewer

Q: IS THE LIABILITY OF THE PARTNERS LIMITED TO THEIR PARTNERSHIP PROPERTY ONLY?No. We need to qualify.1. For obligations contracted and existing at the time that they are already partners, they shall be liable with:

a. Their partnership property, ANDb. Separate property

2. For obligations already existing at the time when a person is admitted as a partner, his liability is limited to his PARTNERSHIP PROPERTY. However for subsequent obligations contracted (after he has become a partner), he shall also be liable with his partnership property AND separate property

NB: Such obligation may have been incurred thru a contract entered into before he becomes a partner

Q: WHAT THEN ARE THE RIGHTS OF THE EXISTING AND SUBSEQUENT CREDITORS?We must qualify.1. As to persons who are already PARTNERS AT THE TIME THE OBLIGATION WAS CONTRACTED – existing and

subsequent creditors EQUAL RIGHTS to BOTH the SEPARATE PROPERTY AND PARTNERSHIP PROPERTIES (of the previously existing partners)

2. As to those who are newly-admitted partners – ONLY subsequent partners have RIGHTS to the separate properties of newly admitted partners

NB: Art. 1826 should be read with Art. 1840

Q: WHAT HAVE THE 2 PROVISIONS ACCOMPLISHED?Art. 1826 and Art. 1840 are based on the principle that WHERE THERE IS ONE CONTINUING BUSINESS, the mere fact that NEW PARTNERS ARE ADMITTED or that SOME PARTNERS ceased to be partners should not cause (as before) the CONFUSION as re the claims of creditors with re to the PROPERTIES EMPLOYEDIN THE BUSINESS.

Hence, regardless of the TIME when the creditors became partners and the exact combinations of the partners, THE CREDITORS shall have EQUAL RIGHTS with respect to the partnership property

Q: IF AN INCOMING PARTNER HAS ASSUMED THE OBLIGATION OF THE RETIRING PARTNERS, DO THE OLD CREDITORS HAVE A CAUSE OF ACTION AGAINST THE FORMER?

Yes, if the assumption is that the contract is made for the benefit of the creditors

Basis: Art. 1311 par. 2 of the Civil Code which provides that if a contract should contain a stipulation IN FAVOR OF A 3RD PERSON, he may demand its fulfillment provided that he has communicated his acceptance to the obligor before its revocation. Mere incidental benefit or interest is not sufficient. The contracting parties must have CLEARLY AND DELIBERATELY conferred a favor in favor of 3rd persons

Q: ISN’T ART. 1826 HARSH?No. This is so because the newly admitted partners will partake of the benefits of the partnership property and the ESTABLISHED BUSINESS. He may in fact obtain FULL KNOWLEDGE of the debts of the partnership and he may therefore protect himself by demanding its settlement or liquidation.

NB: This is not afforded to the creditors

Q: WHAT IS THE LIABILITY OF THE RETIRING OR WITHDRAWING PARTNER WITH RESPECT TO OBLIGATIONS CONTRACTED?

It depends ON THE TIME WHEN THE CONTRACT was executed – whether while he was still a partner or after the notice of his retirement was served


PATPrelims Reviewer

1. If the retiring partner serves the notice of his withdrawal AND THEREAFTER, the partnership incurs an obligation – the RETIRING PARTNER SHALL NOT BE LIABLE therefore

NB: His liability for existing obligations (incomplete) will remain

2. If the contract was executed AT THE TIME WHEN HE WAS STILL A PARTNER and AFTER HE RETIRES OR AFTER THE SERVICE OF HIS NOTICE OF RETIREMENT, THE GOODS WERE DELIVERED – the retiring partner shall be LIABLE

NB: In short, if the CONTRACT was entered into while he is still a partner, it is immaterial whether the goods are delivered AFTER his retirement

Q: HOW ABOUT THE INCOMING PARTNER?GR: An incoming partner shall NOT be PERSONALLY LIABLE (with his separate properties) for the obligations

existing BEFORE he becomes a partner. EXPN: Where the contract was entered into BEFORE he became a partner but the goods were delivered AFTER

he already becomes a partner, he shall be liable therefore

NB: Hence, the creditor may sue both the RETIRING PARTNER AND THE INCOMING PARTNER for the goods delivered AFTER the former retires and AFTER the latter becomes a partner, the CONTRACT entered into being in effect at the time when the RETIRING PARTNER has not yet tendered his notice of retirement and AT THE TIME when the incoming partner is NOT yet a partner

Art. 1827.

The creditors of the partnership shall be preferred to those of each partner as regards the partnership property. Without prejudice to this right, the private creditors of each partner may ask the attachment and public sale of the share of the latter in the partnership assets. (n)

GR: The CREDITORS of the PARTNERSHIP shall be preferred to those of each of the partners AS REGARDS THE PARTNERSHIP PROPERTY

Without prejudice to this right, the PRIVATE CREDITORS of each partner may ask for the ATTACHMENT AND PUBLIC SALE of the share of the partners in the partnership assets

Q:WHO WILL BE PREFERRED WHEN THE PARTNERSHIP PROPERTY IS TO BE DISPOSED?GR: The CREDITORS OF THE PARTNERSHIP shall be preferred over that of the partners’ or the partners’ claims

Reason: The partnership being a separate and distinct legal entity shall be deemed to apply its properties in the payment of its OWN debts rather than first defraying the debts of the partners

NB: This rule applies only in the disposition of the partnership assets

Q: WHO MAY BE SUED BY THE CREDITORS OF THE PARTNERSHIP?Both the partnership and the partners may be sued in ONE ACTION but note that the PRIVATE PROPERTIES of the partners may not be taken UNTIL AND UNLESS the properties of the partnership have first been exhausted.

Q: WHAT THEN IS THE REMEDY OF THE PRIVATE CREDITORS OF THE PARTNERS?Art. 1827 provides that “without prejudice to the RIGHT TO PREFERENCE of the partnership creditors, the creditors of the partners may ask the ATTACHMENT AND PUBLIC SALE of the latter’s share in the partnership assets


Chapter 2 - Obligations of Partners

Documents

term of partnership

term partnership

contract of partnership

vendee partnership

partnership affairs

partnership relationship

n partnership

limited partnership