Chapter 1: Partnership - General Provisions By the 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. Two or more persons may also form a partnership for the exercise of a profession. (Article 1767) = Contract of Partnership - part + ownership = partnership (co-partnership) - a contract of two or more persons who bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. - partners must have an agreement to donate resources to a common fund. - these resources include money, property, or industry. - it is both a contract and a business organization. - contract is a source of business organization. - a partnership is a business organization in a way that it is meant for purposes of doing business. = Characteristics of Contract of Partnership a. Bilateral - it is entered into by two or more persons and the rights and obligations arising therefrom are always reciprocal. (multilateral) - both/all parties have obligations: * obligation to the partnership * obligation to his co-partner/s + obligation to third persons (e.g. customers, suppliers) b. Consensual - it is perfected by mere consent, that is, upon the express or implied agreement of two or more persons. - need not be in a written agreement, hence, the contract is created verbally. (need not a formal contract)= When would a contract of partnership be a formal contract, and not a consensual contract already? - acontract of partnership becomes a formal contract when a partner contributes an immovable property. - should that happen, the contract of the partnership requires to be in a public instrument and there should be an inventory of the immovable property that is attached to the contract. - failure to comply with these requirements will render the contract void. c. Commutative - the undertaking of each of the partners is considered as the equivalent of that of the others. - profits are equal to each partner even if the contribution is not equivalent to the other. d. Nominate - it has special name or designation in our law. e. Onerous - each of the parties aspires to procure for himself a benefit through the giving of something. - for a consideration; the partners contribute money, property, or industry to a common fund. - you cannot become a partner when you cannot contribute money, property, or industry. - you become a partner onerously, and not gratuitously. f. Principal - it does not depend for its existence or validity upon some other contracts. - can exist independently; not an accessory contract. - opposite: contract of mortgage (this contract needs a contract of loan to be valid) g. Preparatory - it is entered into as a means to an end, i.e. to engage in business or specific venture for the realization of profits with the view of dividing them among the contracting parties.- itis a preparation to do business. (means = partnership; end = business) h. Agency - representation; partners represent each other and the act of one partner is the act of all. -a partnership is characterized by utmost trust and confidence. = Essential Characteristics of a Contract of Partnership 1. There must be a valid contract. - there must be a voluntary agreement among the parties to carry on the business as partners. - a perfectly valid contract = all essential elements are present and are valid. (consent, object, consideration) + Requisites of Validity A. Consent - voluntarily (no intimidation/no force) - intelligently (no partner that is insane, a minor, a retarded individual) - spontaneously (no fraud, undue influence, or error) B. Object - legally and physically possible - determinate or capable of becoming determinate - lawful and existing C. Consideration 2. The parties (two or more persons) must have legal capacity to enter into the contract. - all partners must have legal capacity; you cannot enter into a contract if you do not have legal capacity. = Who are incapacitated to enter into a contract?A. Insane or Demented Persons - suffering from senility and mental retardation. - exemption to the rule: If you enter into the contract during your lucid interval/temporary state of sanity, it will be a valid contract. B. Deaf-Mutes - who do not know how to wirte. - exemption to the rule: Deaf-Mutes who know how to write and do sign language can enter into a contract. (valid contract) C. Idiot, Imbecile, Moron, and Other Retarded Persons - no exemption to the rule. D. Unemancipated Minor - people who are below 18 years old and not free from parental authority. - exemption to the rule: If the minor is free from parental authority. E. Those Suffering from Civil Interdiction - civil interdiction is an additional penalty imposed on persons convicted of a certain crime resulting in deprivation of parental authority, marital authority, of the right to administer his property or to dispose his properties during his lifetime while still serving his jail sentence. 3. There must be a mutual contribution of money, property, or industry to acommon fund. - mutual contribution exists on partnership contract only. 4. The object must be lawful. (Article 1770) - must not be illegal/immoral; if a partnership has an unlawful object, it is considered void. - if such illegality constitutes a crime, the partners will be criminally prosecuted, and the profits, effects, and instruments of the crime will be confiscated in favor of the government.5. The primary purpose must be to obtain profits and to divide the same among the parties. (Community of Benefit/Interest) - this is the main purpose of a contract of partnership. The partnership has a juridical personality separate and distinct from that of each of the partners even in case of failure to comply with the requirements of Article 1722, first paragraph. (Article 1768) a Partnership, A Juridical Person - a partnership is sometimes referred to as a firm or a company, terms that connote an entity separate from its aggregate individual partners. + Article 44, Paragraph 3 - like the corporation, a partnership duly formed under the law is a juridical person to which the law grants a juridical personality separate and distinct from that of each of the partners. + Article 46 - as an independent juridical person, a partnership may enter into contracts, acquire and possess property of all kinds in its name, as well as incur obligations and bring civil or criminal actions in conformity with the laws and regulations of its organizations. - thus, a partnership may be declared insolvent even if the partners are not. It may enter into contracts and may sue and be sued in its firm name or by its duly authorized representative. - it is sufficient that service of summons be served on any partner. - partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for a fraudulent, unfair or illegal purpose. In determining whether a partnership exists, these rules shall apply: (1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons.(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property. (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. (4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: (a) As a debt by installments or otherwise; (b) As wages of an employee or rent to a landlord; (c) As an annuity to a widow or representative of a deceased partner; (d) As interest on a loan, though the amount of payment vary with the profits of the business; (e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. (Article 1769) = Where Terms of Contract are Not Clear - in the typical contract of partnership, the parties expressly agree to unite their property and services as co-proprietors on a business for profit, and to share profit in stated proportions. - sometimes, however, the contract between the persons engaged ina business enterprise which is supposed to create a partnership is uncertain in terms, or they have never executed a formal expression of their relations. = Where Existence Disputed - the existence of a partnership may be disputed by an interested party. - the issue as to whether a partnership exists is a factual matter to be decided on the basis of all corcumstances; no single factor usually is controlling.= Persons not Partners as to Each Other - persons who are partners as between themselves are partners as to third persons. Generally, the converse is true, to wit: if they are not partners as between themselves, they cannot be partners as to third persons. a. Intention to Create Partnership - partnership is a matter of intention, each party giving his consent to become a partner. Whether or not the parties call their relationship or believe their relationship a partnership is immaterial. - however, whether a partnership exists between the parties is a factual matter. Where the parties expressly declare they are not partners, this, as a rule, settles the question as between themselves. b. Partnership by Estoppel - a partnership can never exist as to third persons if no contract of partnership, express or implied, has been entered into between the parties themselves. - thus, where persons by their acts, consent or representations have misled third persons or parties into believing that the former are partners in a non-existing partnership, such persons become subject to liabilities of partners to all who, in good faith, deal with them in their apparent relations. = Co-Ownership or Co-Possession - there is co-ownership (or co-possession) whenever the onwership of an undivided thing or right belongs to different persons. a. Clear Intent to Derive Profits from Operations of Business - co-ownership of property does not of itself establish the existence of a partnership, although co-ownership is an essential element of partnership. 1. Two or more persons may become co-owners without a contract (e.g. by inheritance or by law) but they cannot be partners in the absence of contract.2. The law does not imply a partnership between co-owners or co-possessors because of the fact that they develop or operate a common property, since they may rightfully do this by virtue of their respective titles. b. Existence of Fiduciary Relationship - if the parties are partners in the business undertaking, there is a well-defined fiduciary relationship between them as partners. On the other hand, if the parties are merely co-owners, there is no fiduciary relationship between them. - if the parties are partners, the remedy for a dispute or difference between them would be an action for dissolution, termination, and accounting. c. Persons Living Together without Benefit of Marriage - when a man and a woman who are capacitated to marry each other, live exclusively with each other as husband and wife without the benefit of marriage or under a void marriage, their wages and salaries shall be owned by them in equal shares and the property acquired by both of them through their work or industry shall be governed by the rules on co-ownership. (Article 147, Family Code) Sharing of Gross Returns + Not Even Presumptive Evidence of Partnership - the mere sharing of gross returns alone does not even constitute prima facie evidence of partnership, since in a partnership, the partners share profits after satisfying all of the partnership's liabilities. + Reason for the Rule - partner interested in both failures and successes; it is the chance of loss or gain that characterizes a business. Where the contract requires a given portion of gross returns to be paid over, the portion is paid over as commission, wages, rent, etc. + Where there is Evidence Mutual Management - where there is further evidence of mutual management and control, partnership may result.= Receipt of Share in the Profits * When No Such Inference will be Drawn - under paragraph 4 of this article, sharing of profits is not prima facie evidence of partnership in the cases enumerated under the subsections. - in these, cases, the profits are not shared as partner but in some other respects or purpose. The basic test of partnership is whether the business is carried on in behalf of the person sought to be held liable. * Strong Presumptive Evidence of Partnership - an agreement to share both profits and losses tends strongly to establish the existence of a partnership. It is not conclusive, however just prima facie and may be rebutted by other circumstances. * Sharing of Profits as Owner - it is not merely the sharing of profits, but the sharing of them as co-owner of the business or undertaking, that makes one a partner. If the contract states that the parties are partners or co-owners of the business. The courts must look beyond the agreement if it is ambiguous or unclear. = Burden of Proof and Presumption - in accordance with the general rule of evidence, the burden of proving the existence of a partnership rests on the party having the affirmative of that issue. . The existence of a partnership must be proved and will not be presumed. . The law presumes that persons who are acting as partners have entered into a contract of partnership. . When a partnership is shown to exist, the presumption is that it continues in the absence of evidence to the contrary, and the burden of proof is on the person asserting its termination. . One who alleges a partnership cannot prove it merely by evidence of an agreement wherein the parties call themselves partners, since use of the term "partner" in popular sense, or as a matter of business convenience, will not necessarily import an intention that a legal partnership should result. nN o S5. Among other meanings, associate means partner, but a mere employee may also be an "associate." "We" and "us," when used in an editorial sense, are not conclusive of either partnership or employment. 6. The question of whether or not a partnership exists is not always dependent upon the personal agreement or understanding of the parties. = Tests and Incidents of Partnership - in determining whether a partnership exists, it is important to distinguish between tests or indicia and incidents of partnership. 1. Only those terms of a contract upon which the parties have reached an actual understanding, either expressly or impliedly, may afford a test by which to ascertain the legal nature of the contract. 2. Some of the typical incidents of a partnership are: a. The partners share in profit and losses. b. They have equal rights in the management and conduct of the partnership business. c. Every partner is an agent of the partnership, and entitled to bind the others by his acts. He may also be liable for the entire partnership obligations. d. All partners are personally liable for the debts of the partnership with their separate property except that limited partners are not bound beyond the amount of their investment. e. A fiduciary relation exists between the partners. f. On dissolution, the partnership is not terminated, but continues until the winding up of partnership is completed. Such incidents may be modified by stipulation of the partners. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners.When an unlawful partnership is dissolved by a juridical decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime. (Article 1770) = Effects of an Unlawful Partnership - the following are the consequences of a partnership formed for an unlawful purpose: a. The contract is void ab initio and the partnership never existed in the eyes of the law. (Article 1409) b. The profits shall be confiscated in favor of the government. c. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the government. d. The contributions of the partners shall not be confiscated unless they are used unlawfully as well. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. (Article 1771) = Form of Contract of Partnership - as a general rule, no special form is required for the validity or existence of the contract of partnership. (perfected by mere consent) - the contract may be made orally or in writing, regardless of the value of the contributions. + Where Immovable Property or Real Rights are Contributed - a public instrument is necessary, without stating, that without the public instrument, the contract is void. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in public instrument, which must be recorded in the Office of the Securities and Exchange Commission.Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. (Article 1772) = Registration of Partnership - there are two requirements where the capital of the partnership is 3,000 or more, in money or property, namely: 1. The contract must appear in a public instrument. (notarized) 2. It must be recorded or registered with the Securities and Exchange Commission. - failure to comply with the requirements does not prevent the formation of the partnership or affect its liability and that of the partners to third persons. - any of the partners is granted the right by the law to compel each other to execute the contract in a public instrument. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument. (Article 1773) = Partnership with Contribution of Immovable Property - where immovable property, regardless of its value, is contributed, the failure to comply with the following requirements will render the partnership contract void in so far as the contracting parties are concerned: 1. The contract must be in a public instrument. 2. An inventory of the property contributed must be made, signed by the parties, and attached to the public instrument.Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. (Article 1774) Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership. (Article 1775) As to its object, a partnership is either universal or particular. As regards the liability of the partners, a partnership may be general or limited. (Article 1776) = Classification of Partnership a As to the extent of its subject matter - A partnership may be: a. Universal Partnership - one which refers to all the present property or to all profits. (Article 1777) - there are two kinds of universal partnership: + Universal Partnership of All Present Property (Article 1778) * Universal Partnership of Profits (Article 1780) b. Particular Partnership (Article 1783) 2 As to liability of the partners - It may be: a. General Partnership - one consisting of general partners who are liable pro rata and subsidiarily, sometimes solidarily with their separate property for partnership debts. b. Limited Partnership - one formed by two or more persons having as members one or more general partners and one or more limited partners, the latter not being oersonally liable for the obligations of the partnership.A universal partnership may refer to all the present property or to all the profits. (Article 1777) A partnership of all present property is that in which the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits they may acquire therewith. (Article 1778) In a universal partnership of all present property, the property which belongs to each of the partners at the time of constitution of the partnership, becomes the common property of all the partners, as well as all the profits which they may acquire therewith. A stipulation for the common enjoyment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy, or donation cannot be included in such stipulation, except the fruits thereof. (Article 1779) = Universal Partnership of all Present Property - a partnership which comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of a movable or immovable property which each of partners may posses at the time of the celebration of the contract. - in this kind of partnership, the following become the common property of all the partners: (1) property which belonged to each of them at the time of the constitution of the partnership (2) profits which they may acquire from the property contributed © Contribution of Future Property - as a general rule, future properties cannot be contributed. - property subsequently acquired by inheritance, legacy, or donation cannot be included by stipulation except the fruits thereof. (void) - profits from other sources (not from properties contributed) will becomecommon property only if there is a stipulation. A universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership. Movable or immovable property which each of the partners may possess at the time of celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership. (Article 1780) = Universal Partnership of Profits - one which comprisess all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property which each of the partners may possess at the time of the celebration of the contract. © Ownership of Present and Future Property - the partners retain their ownership over their present and future properties. - upon dissolution, such properties are returned to the partners who own it the respective properties. © Profits Acquired by Chance - profits acquired by the partners through chance, such as lottery or by lucrative title without employment of any physical or intellectual efforts, are not included. © Fruits of Property Subsequently Acquired - fruits of property subsequently acquired by the partners do not belong to the partnership. - such profits may, however, be included by express stipulation.Articles of universal partnership, entered into without specification of its nature, only constitute a universal partnership of profits. (Article 1781) = Presumption in favor of Universal Partnership of Profits - this partnership imposes less obligation in the partners, since they preserve the ownership of their separate property. Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. (Article 1782) m Persons who cannot enter a Universal Partnership but can enter a Particular Partnership - Husband and wife (Family Code) - Persons who were guilty of adultery or concubinage at the time of formation of partnership - Persons who were guilty of the same criminal offense - Public officer or his wife, descendants or ascendants and another person by reason of the public officer's position (Article 739, NCC) o Article 87 of the Family Code - Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts, which the spouses may give to each other on the occasion of any family rejoicing. - The prohibition shall also apply to persons living together as husband and wife without a valid marriage. A particular partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. (Article 1783) Kinds of Partnership a. General Partnership - partnership where all the partners are liable to the extent of their separate property after the partnership assets havebeen exhausted. b. Limited Partnership - partnership where there is at least one general partner and at least one limited partner who is liable to the extent of his investment in the partnership. c. Partnership by Estoppel (Nominal Partnership) - partnership which is not partnership but is considered as one with respect to those who, by reason of their conduct or admission, are precluded from denying its existence. d. Partnership by Prescription - partnership which is established by the lapsing of time. e. De Jure Partnership - partnership that exists both in fact and in law. f. De Facto Partnership - partnership that exists in fact but not in law. g. Partnership with a Fixed Term - one for which a period for its duration i is fixed by the partners. h. Partnership for a Particular Undertaking - one which is organized for a certain undertaking which, when attained, will cause the termination of the partnership. i. Partnership at Will - where no period is fixed by the parties for its duration. Kinds of Partners a. General Partner - one who is liable for partnership debts to the extent of his separate property after all the assets of the partnership have been exhausted. b. Limited Partner - one who is liable for partnership debts to the extent of his capital contribution only. c. General-Limited Partner - one who has all the rights and powers and is subject to all the restrictions of a general partner, except that, in respect to his contribution, he shall have the rights against the other members which he would have had if he were not also a general partner. d. Capitalist Partner - one who contributes money or property to the common fund.e. Industrial Partner - one who contributes his services or industry to the partnership. f. Capitalist-Industrial Partner - one who contributes not only money and property, but also his services to the partnership. g. Managing Partner - manages the business or affairs of the partnership. h. Liquidating Partner - takes charge of the winding up of the affairs of the partnership after itis dissolved. . Nominal Partner (Partner by Estoppel) - not actually a partner but who may become liable as such to third persons. . Ostensible Partner - one who is active in management of partnership business and known to the public as a partner, such as by allowing his name to be included in the firm name. k. Secret Partner - one whose connection with the partnership is kept from the public. |. Silent Partner - one who has no voice in the management of the business. m. Dormant Partner - who does not participate in the management of the business and not known to the public as a partner. n. Quasi-Partner - one who is no longer a lartner of business but has left his capital in the business as loan. He receives interest on such as long as the loan is not paid off. o. Retiring Partner - one who decided to leave the partnership after reaching the age of retirement. p. Newly Admitted Partner - a partner accepted by the present partners in an existing partnership. q. Substituted Limited Partner - a person admitted to all the rights of a limited partner who has died or has assigned his interest in a partnership.