TWO ESSENTIAL ELEMENTS OF A CONTRACT OF PARTNERSHIP: (Article 1770, NCC)

1. Legality of the object

2. Community of benefit or interest of the partners

FORMALITIES NEEDED IN THE CREATION OF PARTNERSHIP

Gen. Rule:
No special form is required for its validity (NCC, Art.1771)
Exception:
If property have been contributed to the partnership:
1. Personal property
a Less than P3,000.00-may be oral
b P3,000 or more-must be in a public instrument; and registered with SEC
(Article 1772, NCC)
2. Real property
Must be:
a. in a public instrument (Article 1771, NCC)
b. with an inventory of said property
i. signed by the parties
ii. attached to the public instrument
iii. registered in the Registry of Property of the province, where the real
property is found to bind third persons
CLASSIFICATION OF PARTNERSHIP
A As to:
1.Object
a. Universal partnership
i. of all present property (Article 1778, NCC)-comprises the following:

 Property which belonged to each of the partners at the time of

the constitution of the partnership
 Profits which they may acquire from all property contributed
ii. of all profits (Article 1780, NCC)- comprises all that the partners may
acquire by their industry or work during the existence of the partnership
b. Particular partnership- one which has for its object, determinate things,
their use and fruits, or a specific undertaking or the exercise of a profession or
a vocation. (Article 1783, NCC)

2.Liability of partners
a. General partnership-one where all partners are general partners who are
liable even with respect to their individual properties, after the assets of the
partnership have been exhausted
b. Limited partnership – One formed by 2 or more persons having as members
one or more general partners and one or more limited partners, the latter not
being personally liable for the obligations of the partnership

3.Duration

a. Partnership at will – Partnership for a particular undertaking or venture

which may be terminated anytime by mutual agreement.

b. Partnership with a fixed period – The term for which the partnership is to
exist is fixed or agreed upon or one formed for a particular undertaking.

4.Legality of existence

a.De jure partnership

b.De facto partnership

5.Representation to others

a. Ordinary or real partnership

b. Ostensible or partnership by estoppel – When two or more persons attempt to

create a partnership but fail to comply with the legal personalities essential for
juridical personality, the law considers them as partners, and the association is
a partnership insofar as it is favorable to third persons, by reason of the
equitable principle of estoppel (MacDonald et. al. v. Nat’l. City Bank of New
York, G.R. No. L‐7991, May 21, 1956)

6.Publicity

a. Secret partnership – Partnership that is not known to many but only as to its
partners.

b. Notorious or open partnership – It is known not only to the partners, but to the
public as well.

7.Purpose

a. Commercial or trading – One formed for the transaction of business.

b. Professional or non‐trading – One formed for the exercise of a profession

KINDS OF PARTNERSHIP

a. Capitalist – Contributes money or property to the common fund

b.Industrial – Contributes only his industry or personal service

rd
c. General – One whose liability to 3 persons extends to his separate or personal property

rd
d.Limited – One whose liability to 3 persons is limited to his capital contribution

e.Managing – Manages the affairs or business of the partnership

f. Liquidating – Takes charge of the winding up of partnership affairs upon dissolution

g. Partner by estoppel – Is not really a partner but is liable as a partner for the protection of
rd
innocent 3 persons

h.Continuing partner – Continues the business of a partnership after it has been dissolved by
reason of the admission of a new partner, retirement,

death or expulsion of one of the

partners

i. Surviving partner – Remains after a partnership has been dissolved by death of any partner

j. Sub‐partner – Is not a member of the partnership; contracts with a partner with reference
to the latter's share in the partnership

k. Ostensible – Takes active part and known to the public as partner in the business

l. Secret – Takes active part in the business but is not known to be a partner by outside
parties

m. Silent – Does not take any active part in the business although he may be known to be
a partner

Dormant – Does not take active part in the business and is not known or held out as a partner

COMMENCEMENT & TERM OF PARTNERSHIP (ART. 1784)

GR:
 Commences from time of execution of contract (NCC Art. 1784)
 No time limit prescribed by law for the life of the partnership

XPN:
 With stipulation for future partnership – parties do not become partners until the agreed
time has arrived or the contingency has happened (subject to Statute of Frauds)

CONTINUATION OF PARTNERSHIP BEYOND FIXED TERM (ART. 1785)

GR:
 Expiration of term fixed or accomplishment of particular undertaking specified will cause
automatic dissolution of the partnership (NCC Art. 1830[1,a])

XPN:
 Partnership may be extended or renewed by express agreement, written or oral, or
impliedly, by the mere continuation of the business after expiration of the term without
settlement or liquidation
 In such case, the rights and duties of the partners remain the same as they were at such
termination but only insofar as is consistent with a partnership at will (NCC, Art. 1785)

OBLIGATIONS OF PARTNERS AMONG THEMSELVES

1. Contribution of property (NCC, Art. 1786)
2. Contribution of money and money converted to personal use (NCC, Art. 1778)
3. Prohibition against engaging in business for himself (NCC, Art. 1789)
4. Contribution of additional capital (NCC, Art. 1791)
5. Managing partner who collects debt (NCC, Art. 1792)
6. Partner who receives share of partnership credit (NCC, Art. 1793)
7. Damages to partnership (NCC, Art. 1794)
8. Keep the partnership books (NCC, art. 1805)
9. Render information (NCC, Art. 1806)
10. Accountable as fiduciary (NCC, Art. 1807)

OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF PROPERTY (ART. 1786)

1. To contribute at the beginning of the partnership or at the stipulated time the money,
property or industry which he may have promised to contribute
2. To answer for eviction in case partnership is deprived of determinate property contributed
3. To answer for the fruits of the property the contribution of which he delayed
4. To preserve the property with the diligence of a good father of the family pending its
delivery
5. To indemnify the partnership for damages caused to it by retention or delay in the
contribution of the property

LIABILITY OF PARTNER FOR FAILURE TO PERFORM SERVICE STIPULATED

GR:
Partners are not entitled to charge each other, or the partnership, for their services in the
business.

XPN:
If the partnership suffers loss because a partner wrongfully withheld his services, he is liable
for such loss (which may include unrealized profits) plus damages.

He may be charged the value of the services withheld or the amount of profit he made by
engaging in another business in violation of the contract.
OBLIGATIONS WITH RESPECT TO THE PARTNERSHIP CAPITAL (ART. 1788)
1. To contribute on the due date the amount he has undertaken to contribute to the
partnership
2. To reimburse any amount he may have taken from the partnership coffers and converted
to personal use
3. Double responsibility in case of damages (justified by the nature of the contract of
partnership)
a. To pay the agreed or legal interest if he fails to pay his contribution on time or converts
partnership money for personal use
b. To indemnify partnership for damages caused by his delay or conversion of money

RULE REGARDING OBLIGATION TO CONTRIBUTE TO PARTNERSHIP CAPITAL (ART. 1790)

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

It is not applicable to an industrial partner unless, besides his services, he has contributed
capital pursuant to an agreement.

LIABILITY OF A CAPITALIST PARTNER TO CONTRIBUTE ADDITIONAL CAPITAL (ART. 1791)

GR: A capitalist partner is not bound to contribute to the partnership more than what he
agreed to contribute.

XPNs:
1. In case of imminent loss of the business; and
2. There is no agreement to the contrary.

He is under obligation to contribute an additional share to save the venture. If he refuses to

contribute, he shall be obliged to sell his interest to the other partners.

REQUISITES BEFORE CAPITALIST PARTNER MAY BE COMPELLED TO SELL HIS INTEREST TO

THE OTHER PARTNERS
1. Imminent loss of the business of the partnership;
2. Majority of the capitalist partners are of the opinion that an additional contribution to the
common fund would save the business;
3. Capitalist partner refuses deliberately to contribute (not due to financial inability);
4. There is no agreement to the contrary.

Note: The refusal of the partner to contribute his additional share reflects his lack of interest
in the continuance of the partnership (De Leon, 2014). It shall be obliged to sell his interest
to the other partners except if there is an agreement to the contrary (NCC, Art. 1791).

The industrial partner is exempted from the requirement to contribute an additional share.
Having contributed his entire industry, he can do nothing
further (De Leon, 2014).
INDUSTRIAL PARTNER CAPITALIST PARTNER
Prohibition
Absolute: Cannot engage in business for Relative: Cannot engage in business (with
himself unless the partnership expressly same kind of business with the
permits him to do so. partnership) for his own account, unless
there is a stipulation to the contrary.

Remedy
Capitalist partners may: Capitalist partner, who violated shall:
1. Exclude him from the firm, or 1. Bring to the common fund any profits
2. Avail themselves of the benefits which accruing to him from said transaction; and
he may have obtained; 2. Personally bear all losses (NCC, Art.
3. Damages, in either case (NCC, Art. 1808). (2001 BAR)
1789). (2001 BAR)

OBLIGATIONS OF A MANAGING PARTNER WHO COLLECTS PERSONAL RECEIVABLES FROM A

PERSON WHO ALSO OWES THE PARTNERSHIP (ART. 1792)
1. Apply sum collected to 2 credits in proportion to their amounts
2. If he received it for the account of partnership, the whole sum shall be applied to
partnership credit

Requisites:
1. At least 2 debts, one where the collecting partner is creditor and the other, where the
partnership is the creditor
2. Both debts are demandable
3. Partner who collects is authorized to manage and actually manages the partnership

Note: the debtor is given the right to prefer payment of the credit of the partner if it should
be more onerous to him in accordance with his right to application of payment (NCC, Art.
1252)

OBLIGATION OF PARTNER WHO RECEIVES SHARE OF PARTNERSHIP CREDIT (ART. 1793)

To bring to the partnership capital what he received even though he may have given receipt
for his share only

Requisites:
1. A partner has received in whole or in part his share of the partnership credit
2. Other partners have not collected their shares
Art 1795

CONTRIBUTION WHO BEARS THE

RISK?

Specific and determinate things which are not fungible where only PARTNER
the use is contributed.

Specific and determinate things the ownership of which is transferred PARTNERSHIP

to the partnership.

Fungible things or things which cannot be kept without deteriorating PARTNERSHIP

even if they are contributed only for the use of the partnership.

Things contributed to be sold. PARTNERSHIP

Things brought and appraised in the inventory. PARTNERSHIP

Responsibility of the Partnership to a Partner (Art 1796)

(1) Refund amounts disbursed by the partner on behalf of the partnership and for the
corresponding interest from the time the expenses are made.
(2) Answer to each partner for the obligation he may have contracted in good faith in the
interest of the partnership business.
(3) Answer for risks in the consequence of its management.

Rules for Distribution of Profits and Losses (Art 1797)

PROFITS LOSSES

With Agreement According to agreement According to agreement

Without Agreement CP: According to capital CP: 1) According to

contribution agreement on profit-sharing
IP : Receives share that is 2) According to capital
just and equitable contribution
If IP is also CP: According IP : Not liable for the losses
to capital contribution
Delegation by a Third Person of Share in Profits and Losses (Art 1798)
(1) Delegation to a third person
May be delegated by common consent
(2) Binding force of designation by third person
Generally binding unless manifestly inequitable.
Stipulation Excluding a Partner from any Share in Profits or Losses (Art 1799)
-Generally, void
- The partnership, if otherwise valid subsists and the profits or losses shall be appointed as if
there were no stipulation on the same.

MANAGING PARTNER
Each partner in a general partnership has a right to an equal voice in the conduct and
management of the partnership business.
2 Distinct Cases of Appointments (Art 1800)
(1) Appointment as manager in the articles of partnership
May execute all acts of administration notwithstanding the opposition of the other
partners, unless he should act in bad faith.
Revocable only upon just and lawful cause and upon the vote of the partners
representing the controlling interest
(2) Appointment as manager after the constitution of the partnership
May be revoked at any time for any cause whatsoever
Scope of Power
General Rule: The partner appointed as manager has all the powers of a general agent as
well as all the incidental powers necessary to carry out the object of the partnership in the
transaction of the business.
Exceptions: When the powers of the manager are specifically restricted or expressly
withheld; A managing partner cannot also exercise powers which are neither necessary nor
incidental to carry out the object of the partnership

Compensation for Services Rendered

General Rule: Partner not entitled to compensation
Exception: The law may imply a contract for compensation:
(1) A partner engaged by his co-partners to perform services not required of him in
fulfillment of the duties which the partnership relation imposes and in a capacity
other than that of a partner.
(2) When there is extraordinary neglect on the part of one partner to perform his duties
toward the firm’s business, thereby imposing the entire burden on the remaining
partner.
(3) One partner may enjoy his co-partner to do work for him outside of and independent
of the co-partnership, and become personally liable therefor.
(4) Partners exempted by the terms of the partnership from rendering services to the firm
may demand pay for services rendered.
(5) Where one partner is entrusted with the management of the partnership business and
devotes his whole time and attention thereto at the instance of the other partners
who are attending to their individual business and giving no time or attention to the
business of the firm.
(6) Where one partner is exempted from the duty if rendering personal services to the
concerned, if he afterwards does render such services at the instance and request of
his co-partners; or where the services are extraordinary.
Where Respective Duties of Two or More Managing Partners Not Specified (Art 1801)
Each one may separately perform acts of administration
If any of the managers oppose:
 Majority Rule
 In case of tie: persons owning controlling interest prevail
Requisites:
(1) Two or more partners have been appointed as managers.
(2) There is no specification of their respective duties.
(3) There is no stipulation that one of them shall not act without the consent of all the
others.
Where Unanimity Of Action Stipulated (Art 1802)
 The concurrence of all shall be necessary for the validity of the acts.
 The absence or disability of anyone of them cannot be alleged unless there is
imminent danger of grave or irreparable injury to the partnership.
 Consent of managing partners not necessary in routine transactions.
When the Manner of Management Has Not Been Agreed Upon (Art 1803)
(1) All partners are considered managers and agents.
Whatever any one of them may do shall alone shall bind the partnership.
(2) Important alteration in the immovable property even if it may be useful to the
partnership.
Should be done with the consent of the others.
If refusal of consent by the other partners is manifestly prejudicial, court’s
intervention may be sought.
Contract of Subpartnership (Art 1804)
 Every person may associate another person in his share. Associate is sometimes
referred as a subpartner.
 For a partner to have an associate in his share, consent of the other partners is not
required.
 For the associate to become a partner, all must consent.
Keeping of Partnership Books (Art 1805)
(1) Partner with Duty to Keep Partnership Books
Primarily rests on the managing partner or active partner or the particular partner
given record-keeping duties.
(2) Rights with Respect to Partnership Books
Subject to any agreement to the contrary, the partnership books should be kept at the
principal place of business.
Each partner has a right to free access and to inspect or copy at any reasonable time.
(3) Access to Partnership Books
Exercised at “any reasonable hour”.
Duty to Render Information (Art 1806)
Not only is a partner bound to give information on demand, he is under the duty if
voluntary disclosure of material facts within his knowledge relating to or affecting partnership
affairs.
Good faith not only requires that a partner should not make any false statement but
also that he should abstain from any concealment.

Partner Accountable as Fiduciary (Art 1807)

(1) Duty to act for common benefit.

(2) Duty begins during formation of partnership.
(3) Duty continues even after dissolution of partnership.
(4) Duty to account for secret and similar profits.
(5) Duty to account for earnings accruing even after termination of partnership.
(6) Duty to make full disclosure of information belonging to partnership.
(7) Duty not to acquire interest or right adverse to partnership.

Prepared by:
Joy Duran
Carmela Carrascal
Frances Doloiras

Source: Comments and Cases on Partnership, Agency, and Trusts

2014 Edition
Hector S. De Leon and Hector M. De Leon, Jr.