Atty.

Uribe Lecture Notes: Partnership Page 1 of 9

Characteristics of partnership

Let’s start with a bar examination question.

Bar Q: A, using all his savings in the total amount of P2,000.00, decided to establish a restaurant. B gave P4,000.00 to A as “financial
assistance,” with the agreement that B will have 22% share in the profits of the restaurant. After 22 years, B filed an action to compel A to deliver to him
his share in the profits claiming that he was a partner. A denied that B was his partner. Is B a partner of A?

A: Yes, B was a partner of A because there was a contribution of money to a common fund and there was an agreement to divide the profits
among themselves.

However, Atty. Uribe does not agree with that answer. He agrees with the alternative answer.

Alternative answer: B gave P4,000.00 only as “financial assistance.” It was not a contribution to a common fund. As such, he actually became
a creditor of A. As regards the agreement for the share in profits, the law on partnership is very clear. A sharing in the profits does not necessarily result
in a partnership contract. The sharing may only be a way of compensating the other person. In fact, it can be the mode of the payment of the loan.

As defined, in a contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund
with the intention of dividing the profits among themselves. (1767, 1st par.)

What if two or more persons agree to put up a partnership but they never intended to divide the profits among themselves, would that still be a
valid partnership contract? Yes. The 2nd par. of 1767, two or more persons may also form a partnership for the exercise of a profession.

Even in other contracts, e.g. sale or agency, there would be a need to distinguish particular contract from other contracts or other legal
relationships. The same applies in partnership.

Bar Q: Distinguish partnership from co-ownership.

Creation. Partnership is created by agreement. Co-ownership may be created by agreement or by operation of law.

Purpose. In partnership it is either to divide profits or to exercise a profession. In co-ownership it is merely to collective enjoyment of the
property or right held in common.

Juridical personality. A partnership has a juridical personality, separate and distinct from the individual partners. A co-ownership has no
juridical personality.

Agency or representation. In partnership, unless otherwise agreed upon, each partner is an agent of the other partners and of the partnership.
In co-ownership, as a rule, there is no mutual representation.

Share in profits. In partnership, the sharing may be stipulated upon by the parties and in absence thereof it shall be based on the capital
contribution of the partners. In co-ownership the profits are fixed by law; profits always depend on their proportionate shares.

Effect of death. In partnerships, if it is a general partnership, with the death of one of the general partners, the partnership is dissolved. Co-
ownership is not extinguished by the death of one of the co-owners (the heir of the decedent succeed to the co-ownership).

Essential elements of a contract of partnership

Just like any other contract, it should have the three essential requisites:

(1) consent of the contracting parties,

(2) object certain (in partnership, it is to engage in lawful activity, whether it is a business or a profession); and
(3) cause or consideration (the promise of each partner to contribute money, property or industry).

(Note: From the definition of a partnership alone, you can see that the contract is essentially onerous. Each partner has to contribute either
money, property or industry.)

Consent of the contracting parties

The rules in contracts would be equally applicable. However, just like in sales or lease, there persons who are bared from forming a
partnership.

Bar Q: May the spouses enter into a limited partnership to engage in the realty business with the wife as the limited partner?

A: Yes. Spouses are only prohibited under 1782 from entering into universal partnerships. Therefore, if they form a limited partnership. They
can contribute only P100,000.00 each and that will not be universal partnership, but a particular partnership.

Bar Q: Can a corporation enter into a contract of partnership with an individual or with another corporation?

A: No. As ruled by the Supreme Court in case of Tuason vs. Bolanos, while a corporation may enter into a joint venture, it cannot validly
enter into a contract of partnership. (Note: no discussion was made by the Supreme Court in that case but it is said that the reason for such prohibition is
that under the law on corporations, the business is supposed to be governed or controlled by the board of directors. If such a corporation would enter
into a partnership contract, the other partners may bind the corporation in certain activities without the consent of the board of directors. Another
reason is the investment of the stockholders may be exposed to a risk not contemplated by them.)

Alternative answer: As a rule corporation cannot enter in a contract of partnership, however, they may enter so long as the following
conditions are met:
Atty. Uribe Lecture Notes: Partnership Page 2 of 9

(1) The articles of incorporation allow the corporation to enter into a partnership contract; and
(2) There is a stipulation in the partnership agreement that all the partners will manage the business of the partnership.

This alternative answer is actually based only on an SEC Opinion. So treat this answer with caution!

Aside from spouses and corporations, are they any other persons prohibited from entering into partnership agreements? Yes, those who are
prohibited from giving each other any donation or advantage cannot enter into a universal partnership. (1782) Under 739, they are

(1) Persons who were guilty of adultery or concubinage;

(2) Persons found guilty of the same criminal offense; and
(3) Public officer or his wife, descendants and ascendants, by reason of his office.

Object certain

Again, the object of a partnership is to engage in a lawful activity.

Q: If the object of a partnership is a lawful activity, is the partnership necessarily valid?

A: No. There are specific business activities wherein the law would require a particular business relation, e.g., only a corporation may engage
in the insurance and banking business.

Cause or consideration

The cause in partnership is the promise of the contracting parties to contribute money, property or industry.

Illegal or unlawful partnership

What would be the effect if either the cause or the object of the partnership is illegal? (Examples of unlawful objects are the business of
jueteng, drug trafficking and prostitution. Examples of unlawful causes are the promise of one of the partners to contribute 2 kilos of shabu, or his
service in the prostitution business.) Obviously the partnership contract is void.

Under the law, if a contract is void, it produces no legal effect whatsoever. Therefore an action to compel the distribution of profits will never
prosper. In fact, under the law on partnership, the State will confiscate the profits of such illegal partnership. An action to compel a partner to render an
account would also not prosper. Any action to enforce a void contract will never prosper.

The only question in partnership, in fact in any other contract, is may a party to that void contract at least be able to recover what he
contributed or delivered pursuant to that void contract? As a rule, no, because of the in pari delicto rule under 1411. As the Supreme Court would tell us
consistently, the parties in such a void contract should be left as they are. The Court should not aid them in any way.

What then are the exceptions? The exceptions are provided in for 1411, 1412, 1415 and 1416. Under those circumstances a partner to such
void agreement may be able to recover what he contributed.

There is a very practical article which states that in a contract which is void, a party to such contract may recover what he contributed if he
repudiated the contract before the consummation of the contract and before damage is incurred by a third person.

As early as the case of Agnes vs. Pulistico, the Supreme Court has ruled that a partner may be able to recover what he contributed even if
the partnership is void as the object or cause is unlawful. (Note: the ground used by the Supreme Court was unjust enrichment. This basis should no
longer hold under the NCC because of the in pari delicto rule.)

Formalities

Is an oral contract of partnership a valid and binding contract? As a rule, yes. Even if under 1772 the law provides that every contract of
partnership having a capital of P3,000 or more shall be in a public instrument and must be registered in the SEC. The basis of this conclusion are:

(1) The 2nd par. of 1772 provides that despite failure to comply with the requirements under the preceding paragraph, this is without
prejudice to the liability of the partnership or the partners to third persons. From this article alone, it can be seen that despite non-
compliance with the form, a partnership is created.
(2) 1768 provides that the partnership has a juridical personality separate and distinct from the individual partners even in case of non-
compliance with the requirements under the 1st par. of 1772.

So, after all, an oral contract of partnership shall be valid and binding upon the parties.

However, is there a partnership which requires a particular form for the validity of the partnership agreement? Yes. There is only one scenario.
If one of the partners promises to contribute an immovable, there has to be an inventory of such immovable which must be signed by the contracting
parties. If there is no such inventory, 1773 is very clear, the partnership is void.

An interesting issue therefore would be the following: If there was such an agreement to contribute an immovable and there was an inventory
signed by all the partners, but the partnership agreement itself was not put into writing, what is the status of that partnership contract?
Atty. Uribe Lecture Notes: Partnership Page 3 of 9

Many authors disagree on the answer. The basis of authors in claiming that the partnership is void is 1771. Atty. Uribe does not agree with this
position. He agrees with Profs. Agbayani and Bautista in that despite 1771, as long as there is an inventory of the immovable contributed, the agreement
is valid and binding and the juridical personality will be created. As ruled by the Supreme Court consistently, like in the case of Hernaez vs. de los
Angeles, for a contract to be void for non-compliance with the law as to form, the law itself must provide for the nullity of the contract . It is as clear as
that. Concretely, in antichresis, the NCC states the agreement as to the principal and the interest must be in writing otherwise the antichresis is void. In
fact even in donations, you must have noticed that the donation of an immovable property must be in a public instrument otherwise the donation is void.
Form may be required only for the greater efficacy of the contract. In partnership, the purpose of compliance with form may only be for the prevention of
tax evasion and for the protection of the public.

Juridical personality

As mentioned earlier, a partnership has a juridical personality separate and distinct from the contracting parties. This is consistent with the
entity theory or the legal person theory. (Note: the Uniform Partnership Law of the US adheres to the aggregate theory. Thus, their partnerships have
no juridical personality.)

This has it consequences. A partnership may therefore own property. It can sue and be sued by itself without the partners being impleaded as
defendants. In fact, it may be found guilty of an act of insolvency and thus be dissolved.

In the case of Campos Rueda vs. Pacific Commercial, the partnership filed a petition for dissolution, but one of the creditors opposed
the petition on the ground that there is no showing that the individual partners are insolvent. The Supreme Court held that the solvency/insolvency of
the individual partners is irrelevant in the dissolution of a partnership. That partnership, having a personality which is separate and distinct, may
commit an act of insolvency regardless of the solvency or insolvency of the individual partners. (Note: if one the partners in a general partnership is
insolvent, there is already a dissolution of the partnership by operation of law under 1830(6).)

Classification of partnership

As to the object of the partnership, if only to distinguish whether a person can enter into a partnership, there is a need to distinguish whether
the partnership is universal or particular. (Note: As mentioned, there are persons who are prohibited from entering into a universal partnership.)

There are two kinds of universal partnership (1777):

(1) Universal partnership of present property; and

(2) Universal partnership of profits.

Under 1781, if the partners agreed to form a universal partnership but failed to state what kind it is, it will be treated as a universal partnership
of profits. Thus, it shall comprise only the result of their work or industry, as opposed to a universal partnership of present property where the individual
partners are deemed to have contributed all their present property. (Note: Not literally “all” because personal effects and property exempt from
execution are not included.)

Term of the partnership

If the partners failed to fix a period, does it mean that the partnership is a partnership at will and may therefore be dissolved by one of the
partners without any liability as long as he acted in good faith? No, because the partnership may be a partnership for a particular undertaking even if
there was no period stated by the parties.

In the one case, the partnership was engaged in the bowling business. A partner dissolved the partnership claiming that it was a partnership at
will. The Supreme Court ruled that even if the partners failed to state a period, the partnership cannot be considered as a partnership at will because
there was a stipulation in the partnership agreement that the debts of the partnership shall be paid out the profits that will be obtained from the bowling
business. Thus, the partnership cannot be dissolved before the payment of debts. This is a partnership for a particular undertaking.

Classification of partners

According to the liability of partners

Partners are classified as:

(1) General; and

(2) Limited (1776).

This classification of partners into general or limited would be relevant only in limited partnerships because in general partnerships all the
partners are general partners.

A general partner is liable for partnership obligations up to their personal property. However, each one of them has the right to participate in
the management of the business of the partnership unless otherwise agreed upon.

On the other hand, a limited partner, as a general rule, cannot be held liable up to his personal property (his liability shall extend only to his
capital contribution) and participate in the management of the business of the partnership. However, as an exception, the limited partner can be held
liable up to his personal properties in the following instances:

(1) When he participates in the management of the business of the partnership;

(2) When his surname appears in the firm name, subject to further exceptions:
a. His surname is the same as that of a general partner; and
b. The surname was already in the firm name even before his entry into the partnership.
(3) When he is both a general and a limited partner in the partnership at the same time (note: As regards the third scenario, the law
provides for the consequences. The limited partner will have all the rights and obligations of a general partner. However, he shall have
Atty. Uribe Lecture Notes: Partnership Page 4 of 9

a right to his contribution as against the other partners which he would he would not have had, had he been a limited partner. In other
words, when it comes to the distribution of assets upon dissolution, he has the priority); and
(4) When there was failure to substantially comply with the formalities required by the law for the formation of limited partnerships (note:
under the law, the agreement will be valid among the partners, however, all of them can be treat as general partners by third persons.
Thus, a third person may hold the limited partner liable as a general partner. The only remedy such limited partner is to seek
reimbursement from the general partners.)

As to the contribution

The partners are classified as:

(1) Capitalist; and

(2) Industrial.

Q: May an industrial partner be a general partner?

A: Yes. A general partner may either be a capitalist or an industrial partner.

Q: However, may an industrial partner be a limited partner?

A: No. A limited partner can only contribute money or property.

Q: Can a partner be both a capitalist and an industrial partner?

A: Yes, he can contribute money/property and industry.

Bar Q: A and B formed a partnership to operate a car repair shop. A contributed money while B contributed his industry. While the car repair
shop was already in operation, A, the capitalist partner, operated a coffee shop beside the car repair shop, and B, the industrial partner, operated a car
accessory store on the other side of the repair shop. May these partners engage in those business activities?

A: As far as A is concerned, yes, because the law only prohibits him from engaging in a similar activity. ( 1808) As far as B is concerned, no,
because he cannot engage in any business in absence of an express grant by the partnership for him to engage in such business. B is supposed to give all
his time to the partnership business. (1789)

Incoming partner

Q: ABC partnership is composed of partners A, B and C. Thereafter, D became a member of the partnership. 6 months after the entry of D as a
partner, a partnership obligation for P3M became due and demandable. Can D be held liable for this obligation?

A: The obligation may have been incurred before or after the entry of D into the partnership. If it was incurred after his admission, there is no
question that if he is a general partner he can be held liable up to his personal property. But if this obligation was incurred prior to his entry, he can be
held liable only to the extent of the partnership property which would include his capital contribution, unless there is a stipulation to the contrary.
(1826)

1792

Q: X is indebted to ABC partnership in the amount of P100,000.00. X is also a debtor of A, one of the partners, in the amount of P50,000.00.
X delivered P30,000.00 to A. Should this P30,000.00 be distributed in proportion to the debts to A and to the partnership?

A: The answer would depend on who A is. If A is a limited partner, there will be no distribution of the sum paid because 1792 would only apply
if the partner to who payment was made is a managing partner. A limited partner normally has no participation in the managing of the business of the
partnership.

Q: Assuming that A is the managing partner, is it possible for A to retain the entire P30,000.00?

A: Yes, if his debt is already due and demandable and that of the partnership is not. 1792 would only apply if both debts are due and
demandable.

Q: If both debts were already due and demandable, is it possible for the partnership to have the right to the entire P30,000.00?

A: Yes, if A receipted the amount in the name of the partnership.

Q: If A receipted the P30,000.00 in his own name, may he be entitled to retain the entire sum?

A: Yes, if the debt to A is more onerous and X chose to have the payment applied to this debt.

Q: What will happen if both debts are of the same burden?

A: There will be a proportionate distribution of the payment. P20,000.00 to the partnership and P10,000.00 to A.

Property rights

Under 1810 there are three major property rights:

(1) Rights in specific partnership property;

Atty. Uribe Lecture Notes: Partnership Page 5 of 9

(2) Interest in the partnership; and

(3) Right to participate in the management.

(Note: There are other property rights which are considered minor like the right to have access to the books of the partnership, the right to
demand for a formal accounting, etc. However, a demand for a formal accounting cannot be done at any time. There are specific conditions under
1809. The reason for this is a partner has access to the books.)

Right in specific partnership property

Under 1811, a partner is a co-owner with his partners, not with the partnership, of specific partnership property. But how can the partners be
co-owners of property which they do not own since it is the partnership which owns the property? Some authors would say that the problem with this
article is that is was copied from the Uniform Partnership Act of the US under which a partnership has no juridical personality. They are right in that
respect. However, the 2nd sentence of 1811 provides that this co-ownership has its own incidents. In other words, this is not the ordinary co-ownership
under Property law. That is why other authors refer to it as “co-ownership sui generis.”

In property law, if two persons are co-owners of a parcel of land, can a co-owner dispose of his interest without the knowledge or consent of the
other co-owner? Yes. However, under the law on partnerships, with regard to specific partnership property, there can be no valid assignment of rights to
specific partnership property by only one partner. In order to be valid, all of the partners must assign their interest (1811 (2)).

Q: May a creditor of a co-owner of a parcel of land levy upon the interest of such co-owner?

A: Yes.

Q: However, in partnership, can a creditor of a partner levy upon a partner’s right in specific partnership property?

A: No (1811 (3)). Only partnership creditors can levy upon partnership assets.

Interest in the partnership

What is this interest? Simply put, it is the partner’s share in the profits and surplus (1812). (Note: As opposed to rights in specific partnership
property, interest in the partnership can be validly assigned by a partner without the knowledge or consent of the other partners)

How do you determine a partner’s the share in the partnership:

(1) According to stipulation. The partners are free to agree on any proportion in the sharing. However, if one of the partners was excluded in
the sharing of the profits, the partnership remains valid but the stipulation regarding the sharing is void.
(2) According to capital contribution. If one of the partners is an industrial partner, his share shall be determine according to the value of the
service he rendered. After the industrial partner receives his share, the balance is distributed among the other partners in accordance to
their capital contribution.

Bar Q: A, B and C formed a partnership and agreed on an equal share in the profits. Later on, C assigned his whole interest to X. Profits were
then declared in the amount of P360,000.00. X demanded his right to participate in the management of the partnership and his share in profits of the
partnership. Are his claims valid?

A: As to his claim to participate in the business, he has no such right as an assignee. Under 1813, the assignee, unless otherwise agreed upon
by the other partners, would have no right to participate in the management of the business. He will not even have access to the books of the partnership.
His only rights would be to receive whatever the assigning partner would have received in the distribution of profits and surplus. Thus, X is entitled to
P120,000.00.

Right to participate in the management

Bar Q: W, X, Y and Z formed a partnership. W and X contributed industry. Y contributed P50,000.00. Z contributed P20,000.00. In a
meeting, the partners unanimously agreed to designate W and X as managing partners. There was no statement as to their respective duties. Neither was
there a statement that one shall not act without the consent of the other. Thereafter, two persons applied for two positions, secretary and accountant. W
and X appointed the secretary over the opposition of Y and Z. The accountant was appointed by W concurred by Z and opposed by X and Y. Would the
appointments bind the partnership?

A: As regards the secretary, his appointment is merely an act of administration. Since it was made by both of the managing partners, the
appointment binds the partnership. However, as far as the accountant is concerned, note that the appointment made by W, a managing partner, was
opposed by X, another managing partner. So there is a tie which will be resolved by the partners with the controlling interest. Since the controlling
interest is determined by the capital contribution of the partners, Y has the controlling interest. Since Y opposed the appointment, this appointment will
not bind the partnership.

Management arrangements

The management arrangements are provided in 1800, 1801, 1802 and 1803.

(1) Only one managing partner. He can execute any act of administration even over the opposition of the other partners. (1800)
(2) Two or more managing partners:
a. Solidary – without specification of their respective duties or without stipulation that one shall not act without the consent of all.
(1801)
b. Joint – it is stipulated that none of the managing partners shall act without the consent of all others. Thus, every decision must
be unanimous. The absence or disability of one of the managing partners is not a valid reason for not obtaining his consent
unless there is imminent danger of grave or irreparable damage. It is also known as “management by consensus.” (1802)
(3) No management agreement. Each partner is considered as an agent of the partnership. (1803)
Atty. Uribe Lecture Notes: Partnership Page 6 of 9

A managing partner may be removed but the manner of his removal would depend on whether he was constituted as such in the articles of
partnership or he was merely appointed after the constitution of the partnership. If he was constituted as a managing partner in the articles of
partnership, he can only be validly removed under two conditions:

(1) There has to be just cause; and

(2) He must be removed by the partners with the controlling interest.

If he was merely appointed after the constitution of the partnership, he can be validly removed even without just cause provided it was made by those
partners having controlling interest.

Rights and obligations of partners among themselves

Basically a partner has three obligations:

(1) To make good his promised contribution;

(2) His fiduciary duties; and
(3) To participate in the losses.

To make good his promised contribution

In order to know the remedies that may be availed of by the other non-defaulting partners and the partnership you have to know first what was
promised by such defaulting partner, whether money, property or industry.

If the partners promised to contribute money without specifying their respective shares, the law provides that they shall contribute equally. So
if there are 4 partners who will contribute a total of P1M, they will have to contribute P250,000.00 each.

If a partner failed to make good his promised contribution of a sum of money, then he can be held liable by the non-defaulting partners as to
the amount promised plus interest and damages. If no rate was stipulated by the parties, it will be the legal rate which is 12% (this is a forebearance in
money). Normally in obligations involving a sum of money, with regard to damages incurred by the other party, the liability will only be payment of
interest. But in partnership, the defaulting partner is also liable to pay damages. Thus the non-defaulting partners may file an action for specific
performance.

However, may the non-defaulting partners opt to rescind the partnership agreement? In the case of Sancho vs. Lizaraga, the Supreme
Court ruled that rescission is not a remedy of the non-defaulting partners. Under the law on partnership, the defaulting partner is considered a debtor of
the partnership. Therefore, that provision prevails over the general rule in obligations and contracts under 1191 wherein rescission would be a remedy in
case of serious breach.

On the other hand, if a partner promised to contribute money, you have to consider what was really contributed. Was it the property itself or
mere its use. It would matter because if ownership was to be contributed, the partner has the obligation to deliver and transfer ownership and to warrant
the thing. Thus, before delivery, the partner bears the loss of the thing. On the other hand, if what was contributed was only the use and enjoyment of the
property, like the use of a building, the risk of loss will be with the contributing partner. This is because delivery was not meant to transfer ownership.
Res perit domino. But this is just the rule. There are exceptions:

(1) When the thing contributed is fungible;

(2) When the thing cannot be kept without deteriorating;
(3) It was contributed by a partner to be sold; or
(4) When there is an appraised value of the property.

In these cases, it will be the partnership which will bear the loss of the property in its possession. Again, specific performance is a remedy in this
instance.

If a partner who promised to contribute industry, failed in his obligation, would specific performance be a remedy? No. The remedy of the non-
defaulting partners is to demand the value of the service plus damages.

Fiduciary duty

The fiduciary duty refers to the duty to observe utmost honesty, good faith, fairness and integrity in dealing with each other. Take note that this
obligations starts as early as the negotiation stage.

The test in determining whether there was a violation of this duty is to determined whether a partner has advantaged himself at the
partnerships expense. Proof of evil motive is not required.

Until when does this duty last? Normally, this duty last until the termination of the partnership. However, a partner may be liable for breach of
the fiduciary duty even after termination. In the case of Pang Lim vs. Lo Seng, the Supreme Court held that even if the breach was made after the
termination of the partnership, if the foundation of the breach was laid during the existence of the partnership, that can still be considered a breach of
fiduciary duty.

To participate in the losses

What will be the share of the partner in the losses of the partnership? You first have to consider whether or not there was a stipulation as to
losses.

Q: Partners A, B and C agreed upon a sharing in the losses in the proportion of 5:3:2 respectively. Is this a valid stipulation?

A: Yes.
Atty. Uribe Lecture Notes: Partnership Page 7 of 9

Q: Would your answer change if C were an industrial partner?

A: Yes. (Some authors disagree but Atty. Uribe says ‘yes.’ Who are we to deny the industrial partner a share in the losses?)

Q: If one of the partners was excluded in the sharing of the losses, what would be the status of this stipulation?

A: It depends on who was excluded. If the partner excluded is a capitalist partner, that stipulation is void. But if the partner excluded is an
industrial partner, it depends again. As among the partners, this stipulation is valid among them. On the other hand, as to third persons, this stipulation
is void.

What if there was no stipulation as to the sharing in the losses or such stipulation was void? The first scenario is that there is an agreement as
to profits. If there is such an agreement, the sharing in the profits will be the same basis for the sharing in the losses. If A is entitled to 90% of the profits
of the partnership while B and C are entitled to 5% each, then the losses will also be distributed in the same proportion.

The next scenario is that there is no stipulation both as to losses and profits. In this case, their sharing in the losses will depend on their capital
contribution. Thus, under this scenario, the industrial partner will not share in the losses. But take note that under 1816, even if he is excluded from
sharing in the losses, it does not apply to third persons. Third persons can still hold industrial partners liable for contractual obligations of the
partnership.

Q: Assuming that the assets of the partnership are not sufficient to cover its liabilities, what will be the nature of the liability of the partners,
solidary or joint?

A: The answer depends on the nature of their liability. For contractual obligations, as a rule, the partners will only be jointly liable. However,
under 1824, if the obligation arose from a tortuous or wrongful act under 1822 and 1823, all the partners shall be solidarily liable with the partnership.
Refer to the case of Island Sales, Inc. vs. United Pioneers.

Obligation of partners with regard to third persons

Basically the question here is, when would a contract entered into by a partner bind the partnership? For example: A partner went to a
furniture shop and bought a set of furniture for P150,000.00. If the price remains unpaid, can the seller demand payment from the partnership?

The answer depends on whether the contract was entered into in the name and for the account of the partnership, under its signature, by a
partner who is authorized to enter in such contract. If the contract was in the name of the partner, he alone should be liable for the purchase price. The
real problem lies in determining whether the partner had the authority to bind the partnership when the contract was entered into in the name and for
the account of the partnership. Normally, when a partner enters in a contract, there is no partnership resolution. Thus, whether or not a contract would
bind the partnership depends on the nature of the act of such partner and the nature of the business of the partnership.

Concretely, if a partner bought a set of SCRA in the name of the partnership, would that contract bind the partnership? Again, it depends not
only on the act of the partner but also on the business of the partnership. What if the business of the partnership is a restaurant. It appears that the
contract would not bind the partnership. However, the seller may raise the defense that he had no knowledge of the nature of the business of the
partnership. Is that a valid defense? No. The Supreme Court would tell us that third parties contracting with a partnership has the obligation to know at
least the nature of the business of the partnership. He can even demand for the presentation of the articles of partnership.

However, if it was a law firm which bought the SCRA, that act of buying a set of SCRA would be considered as an act for apparently carrying on
in the usual way the business of the partnership. Therefore, that contract would bind the partnership. But would this hold true even if the partner who
bought the SCRA was not authorized by the partners? Yes. What if another partner was designated to make the purchase? The contract still binds the
partnership so long as the third person was not aware of such agreement of the partnership. Again, that act is an act apparently for carrying on the
business of the partnership in the usual way. So if what a partner in a law firm bought was a set of heavy burners for a restaurant, that definite is not an
act for carrying on the business of the partnership. Therefore that act requires the consent of the partners in order to bind the partnership.

Therefore there are acts which are for carrying on the usual business of the partnership but the are also acts which are not within the apparent
authority of a partner. For example: Would buying shares of stock for partnership engaged in the business of a restaurant by within the apparent
authority of a partner? Of course not. Therefore, without the consent of the partners, that act would not bind the partnership. Also, a contract wherein a
partner binds the partnership as a guarantor when the business of the partnership is not suretyship, would not be a valid and binding contract.

Finally, under 1818, there are certain acts in where the law requires the unanimous consent of all the partners for a contract to bind the
partnership like disposing the good will of the partnership; contesting a judgment; renouncing a claim of the partnership; etc.

Dissolution, winding-up and termination of the partnership

These three concepts are separate from each other. Upon dissolution, the partnership is not deemed terminated. It will still have to go through
the process of winding-up the affairs of the business of the partnership before the partnership is terminated.

So when would there be a dissolution of the partnership? For example: two partners married each other, would that result in the dissolution of
the partnership? No.

Under the law there will be a dissolution when there is a change in the relation of the partners caused by any of the partners ceasing to be
associated with the carrying on of the business of the partnership. That will result in the dissolution of the partnership. But may there be a dissolution
notwithstanding the fact that no partner ceased to be so associated? Despite the definition of dissolution under 1828, the answer is yes. There is one
scenario, the admission of a new partner. With the admission of a new partner, under 1840, the partnership is dissolved.

So what is the effect of the dissolution of the partnership? Again, it does not result in the termination of the partnership. It shall only start the
winding-up process. Effectively, this will terminate the authority of all partners to bind the partnership except if that act is necessary for the winding-up
of the business of the partnership or the act is necessary to complete a business which was then begun but was not finished. If the partnership was to
construct a road or even just a bridge, it would not be right for the partnership to cease purchasing materials. They still have to buy materials, hire
laborers, etc. So, those acts, even if done after the dissolution, would still bind the partnership.
Atty. Uribe Lecture Notes: Partnership Page 8 of 9

The next question would be what are the causes of the dissolution of a partnership?

The law itself would classify the causes of dissolution into the following:

(1) Extra-judicial:
a. Voluntary.
i. With violation of the partnership agreement.
ii. Without violation of the partnership agreement.
b. Involuntary.
(2) Judicial (necessarily it is voluntary).

Concretely, expiration of the period or termination of a particular undertaking agreed upon would be an extra-judicial, voluntary, and without
violation of the agreement. (Note: One author would claim that this should fall under involuntary but all others would not agree with him because the
fixing of the term is by agreement of the parties therefore it is voluntary.) The other one is by the will of one of the partners. The partnership may be
dissolved without liability on the part of the partner if:

(1) The partnership is a partnership at will; and

(2) He dissolved the partnership in good faith.

Those are the two requirements in order for a partner to be able to dissolve the partnership without liability.

Bar Q: A, B and C agreed to form a partnership for a period of 5 years. After two years, C assigned his own interest to Philip. The two
remaining partners realizing that they would not be able to deal with Philip, decided to dissolve the partnership. On the other hand, Philip, not knowing
of the dissolution of the partnership, filed a petition for the dissolution of the partnership with the court. Was the partnership dissolved by the act of the
two partners? Assuming that the partnership was not dissolved by the act of the two partners, may the action filed by Philip prosper?

A: The express will to dissolve made by of all the partners who have not assigned their interest or suffered them to be charged for their
separate debts, is a cause for the dissolution of the partnership. Therefore the two remaining partners validly dissolved the partnership. On the other
hand, as far as Philip is concerned, his action will not prosper. With the assignment of the interest of a partner to another person, that does not make the
assignee a partner in the partnership without the consent of the other partners. Thus, Philip has no personality to file an action for the dissolution of the
partnership.

In involuntary, extra-judicial dissolution, one of the cause is supervening illegality. For example: If one of the partners in the partnership was
elected as senator, would that dissolve the partnership by operation of law? No. Even if it is a partnership of lawyers? Still no. Because under the
Constitution, members of Congress are only prohibited from personally appearing before tribunals. They are not prohibited from the private practice of
profession. Thus, in the letterhead of the law firms of these members of Congress, you would merely see a notation that they are on-leave.

But if a partner in a law office was appointed as a cabinet secretary, would that result in the dissolution of the partnership by operation of law?
Yes. Under the Constitution, members of the cabinet are prohibited from the private practice of their profession. A classic example would the firm of
Carpio, Villaraza and Cruz. Appointment to the judiciary of a partner in a law firm would also dissolve the partnership.

What is a partner to a law office was elected as Governor. Would that dissolve the partnership? Yes. Under the LGC, local chief executives are
prohibited from the private practice of profession. But the Vice-Governor is not prohibited.

With regard to loss of the specific thing before delivery, if it what was supposed to be contributed was a building but before delivery it was
burned, then there would be an involuntary dissolution of the partnership.

With regard to death of any partner, the premise of the discussion is that the partnership is a general partnership. However, what if the partner
who died was a partner in a limited partnership, would that dissolve automatically the partnership? It depends on who this partner was, whether he was
a general or a limited partner. If he was a general partner, as a rule, the partnership is dissolved. By way of exception, they may agree in the articles of
partnership that they may continue the business of the partnership even after the death of any general partner; or even without such agreement, all the
surviving partners agreed to continue with the business of the partnership. On the other hand, if the partner who died was a limited partner, that does
not result in the dissolution of the partnership. In fact, the executor or administrator of the estate of the decedent limited partner would have the right to
appoint a substitute limited partner. Anyway, he doesn’t have any participation in the management of the business of the partnership.

In judicial causes, with regard to insanity or incapacity, it should be permanent in character and such must affect the performance of the
obligation of such partner with respect to the partnership business.

With regard to gross misconduct, under the law not every kind of misconduct could be the basis of a petition for dissolution. Mere want of
courtesy will not affect the business of the partnership adversely. Also, a limited partner becomes a limited partner in another partnership, was not
considered as a valid ground for dissolution. A limited partner has not participation in the management of the business, thus there is no conflict of
interest. So what may be considered as gross misconduct? The following are included:

(1) Wrongful expulsion.

(2) Refusal to allow a partner to participate in the management of the business of the partnership notwithstanding such partner’s authority to
participate.
(3) Refusal of the managing partner to distribute profits when there is such obligation.
(4) Misappropriation of the assets of the partnership.

With regard to the business of the partnership can only be carried on at a loss, just because the partnership has incurred losses for the past
three years does not necessarily mean that it can be the basis of the dissolution of the partnership. For example, the other partners may prove that in this
particular year there is a good possibility that the business of the partnership will now be able to recover. However, even if losses were incurred for only
one year and one of the partners can prove that there is really no hope for the business of the partnership, that can be a valid ground.
Atty. Uribe Lecture Notes: Partnership Page 9 of 9

Other circumstances include grave quarrels among the partners. Mere petty quarrels are not included. However, if because of those petty
quarrels, dissention starts to arise among the partners, affecting the conduct of the business of the partnership, that can be a valid basis for dissolution.

Upon the dissolution of the partnership, and there were assets left, the next question is how and to whom may these assets be distributed?

The law provides the order of preference among certain groups of people:

(1) Partnership creditors who are not partners.

(2) Partnership creditors who are partners.
(3) Capitalist partners with respect to their contribution.
(4) Partners with respect to the profits.

Q: A contributed P100,000.00, B contributed P50,000.00, C constituted his industry. At the time of dissolution, the total assets of the
partnership was P1M and the total liabilities was P900,000.00. Would the industrial partner have a share after payment of partnership liabilities?

A: No. The remaining P100,000.00 will be divided among the capitalist partners to cover their capital contribution. Since, there is no surplus
profits, C will not get a share.

If the assets of the partnership are not sufficient to cover its liabilities, as general partners they can be held liable up to their personal property.
But take note that they will be liable jointly.

Q: A, B and C contributed P100,000.00, P50,000.00 and P50,000.00 respectively. P1M partnership assets and P1.9M partnership liabilities.
Assuming there was not agreement with regard to their share in the losses and profits of the partnership, how will the partners share the losses?

A: The losses will be based on their capital contribution. A-50%, B-25% and C-25%.

Q: What if A was insolvent, would B and C be liable for A’s share?

A: No, because their liability is joint.

In case an insolvent partner has both partnership creditors and separate creditors, the law provides that the separate creditors shall be given
preference. The residue, if any, shall be given to the partnership creditors.

Limited partnership

Just a few points in limited partnership.

For a limited partnership to be established there has to be at least one limited partner and at least one general partner.

As mentioned a while ago, the law required certain formalities. There are statutory requirements for the establishment of a limited
partnership. Concretely, under 1844 there has to be a certificate signed and sworn to by the contracting parties. And this certificate must be filed for
record with the SEC. This certificate requires a lot but substantial compliance is sufficient.

The problem is the lack of substantial compliance with the formalities prescribed by law. Even if there was no substantial compliance, the
agreement of the partners to form a limited partnership is a valid and binding agreement among themselves, however as to third persons, all of them
may be held liable as if all of them were general partners. Thus a limited partner may be held liable up to his personal property. His remedy would be to
seek reimbursement from the general partners.