Finals Reviewer PARTNERSHIP The earliest form of conducting business was the single entrepreneur ownership plan (one

individual). Under this system, growth of the business was limited (limitation of capital, skill or knowledge) and so partnership was developed. Ancient origin of partnership as a business organization Development of partnership often credited to the Romans. Historically, partnership was used long before the Romans. As early as 2300 B.C. the Babylonian system of laws provided for regulation of partnership. Commercia lpartnerships at that time were generally for single transactions or undertakings. Following the Babylonian period, there were clear-cut references to partnerships in Jewish law. The relative newness of the law of partnership Despite its long history of use, there is not a correspondingly long line of precedents and decisions dealing with the subject. This is because English courts of justice scarcely dealt with the subject. Disputes between merchants were disposed of by special courts. The law of merchants In the Middle Ages, merchants had a special and peculiar kind of law that was applicable to them and their legal affairs. During this period, the common law courts of England were slow and methodically exact as to form. Merchants moved more rapidly than the law and required speedier justice. Hence, the special courts. English law of partnership In time the special courts were discontinued and the law courts took over. Chief Justice, Lord Mansfield sought to establish a common law for commercial matters. It was not until the latter years of the 18thcentury that the law of partnership as we know it today began to assume both form and substance. In 1778, Lord Mansfield decided a case that dealt with the rights of partnership. In 1794, William Watson wrote a text on partnership.

Beginning of law of partnership These two sources mark the beginning of printed precedents and the publication of the principles of law in partnerships. Increase in use of partnership and complexity of business brought forth a rapid succession of decisions on partnerships. American Uniform Acts Attempt made in US to secure uniformity of state laws dealing with partnership. The Uniform Partnership Act and the Uniform Limited Partnership Act helped to achieve this uniformity. The Uniform Partnership Act is similar with Englands Partnership Act of 1890. English settlers brought the partnership concept to their new country as part of the common law. Modern partnership law contains a combination of principles and concepts developed from three sources: the Roman law, the law merchant and equity, and the common law courts. Governing law in our jurisdiction Before the new Civil Code, commercial or mercantile partnerships were governed by the Code of Commerce and non-commercial or civil partnerships by the old Spanish Civil Code. The new Civil Code superseded the old Civil Code and expressly repealed in toto the provisions in the Code of Commerce relating to partnerships. Consequently, the new Civil Code provisions are intended to provide all the rules regarding partnerships. There is no more distinction between commercial and civil partnerships. The partnerships contemplated are those formed for private interest or purpose. Sources of our law on partnership The Civil Code provisions on partnership were mostly taken from the old Civil Code and from the USs Uniform Partnership Act and the Uniform Limited Partnership Act. Some provisions were taken from the Code of Commerce as well as from the opinions of civilians. New rules were also formulated by the Code Commission.

Par. 2 relates to the exercise of a profession. CHAPTER 1. GENERAL PROVISIONS Art. 1767. 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. Concept of partnership The above article gives the legal definition of partnership (often called co-partnership) from the viewpoint of a contract. Partnership, however, has also been defined as:1.)An association;2.)A legal relation;3.)A status;4.)An organization;5.)An entity;6.)A joint undertaking. Partnership is a legal concept, but the determination of the existence of a partnership may involve inferences drawn from the circumstances attending its creation and operation. Civil law concept and American concept of partnership distinguished Civil Code American Basis of concept Partnership as a contract: the agreement itself out of which a Partnership as a relation: the result of the contract or partnership is created. agreement; the juridical relation. Possession of separate personality Entity theory: Partnership has a juridical personality of its own, distinct and separate from that of each of the partners. Aggregate theory: No separate juridical personality; merely an extension of its members, a conglomerate of individuals. Tax Consequence Partnerships, except general professional partnerships, are treated for income tax purposes as corporations and subject to tax as such. Partnership not taxed. Individual members severally pay their income taxes, partnership regarded merely as source of income. General Professional Partnership Profession : a group of men pursuing a learned art as a common calling in the spirit of public service no less a public service because it may incidentally be a means of livelihood.] The practice of a profession is not a business or an enterprise for profit. However, the law allows the joint pursuit thereof by two or more persons as partners. It is the individual partners, and not the partnership, who engage in the practice of the profession and are responsible for their own acts as such. The law does not allow the practice of a profession as a corporate entity. Personal qualifications for such practice cannot be possessed by a corporation. Partnership for the practice of law A mere association for non-business purpose Right to practice law not a constitutional right but a privilege or franchise. It cannot be likened to partnerships formed by other professionals or for business. It is not formed for the purpose of carrying on trade or business or of holding property. Thus, use of nomde plume,assumed, or trade name is improper. Distinguished from business It is intimately and peculiarly related to the administration of justice; not a mere money-making trade. Primary characteristics which distinguish it:1.)Duty of public service;2.)Relation as an officer of court to the administration of justice;3.)Highly fiduciary relation to clients;4.)Relation to colleagues at the bar characterized by candor, fairness, etc. Characteristic elements of partnership 1.)Consensual: perfected by mere consent(express/implied);2.)Nominate: has a special name/designation in ourlaw;3.)Bilateral: two or more parties, reciprocal rightsand obligations;4.)Onerous: Each of the parties aspires to procurea benefit through the giving of something;5.)Commutative: undertaking of each partner isconsidered the equivalent of that of the others;6.)Principal: does not depend upon some

othercontract for its existence/validity;7.)Preparatory: entered into as a means to an end.A partnership contract, in its essence, is a contract of agency. Essential features of partnership 1.)There must be a valid contract; 2.)Parties must have legal capacity to enter into the contract; 3.)Mutual contribution of money, property, or industry to a common fund; 4.)Object must be lawful; 5.)Primary purpose: to obtain profits and to divide them among the parties. It is also required that the articles of partnership must not be kept secret among the members; otherwise, the association shall have no legal personality and shall be governed by the provisions relating to co-ownership. Existence of a valid contract Partnership relation fundamentally contractual Partnership is a voluntary relation created by agreement of the parties. Actually, the partnership relation is not the contract itself, but the result of the contract. Form The relation is evidenced by the terms of the contract which may be oral or written, express or implied from the acts and declarations of the parties. Articles of partnership While the partnership relation may be informally created and its existence proved by the manifestations of the parties, it is customary to embody the terms of the association in a written document known as Articles of Partnership. Requisites Since partnership is contractual, all the essentials of a valid contract must be present:

1.)Consent and capacity of parties;2.)Object;3.)Cause. A person cannot enter into a contract of partnership solely by himself; there must be two contracting parties. For a partnership to be valid , there must be a valid consideration existing as between the partners. Each surrenders to the partnership some sort of contribution. Partnership relation fiduciary in nature Partnership is a form of voluntary association entered into by the associates. It is a personal relation in which the element of delectus personae exists, involving as it does trust and confidence between the partners. Membership requires the consent of all. Its fiduciary nature and the liability of each partner for the acts of the others require that each person be granted the right to choose with whom he will be associated with. Among partners, mutual agency arises and the doctrine of delectus personae allows them to have the power to dissolve the partnership. Any partner may, at his sole pleasure, dictate dissolution at will. He must , however, act in good faith or hell be liable for damages. Application of principles of estoppel Partnership liability may be imposed when one holds himself out, or permits himself to be held out, as a partner. There is no actual or legal partnership relation but merely a partnership liability imposed by law in favor of third persons. Legal capacity of the parties to enter into the contract Individuals General rule: any person who is capable of entering into contractual relations may be a partner. The following cannot:1.)Minors;2.)Insane or demented persons;3.)Deaf-mutes who do not know how to write;4.)Persons who are suffering from civil interdiction;5.)Incompetents who are under guardianship. Persons who are prohibited from giving each other any donation cannot enter into a universal partnership.

Partnerships There is no prohibition against a partnership being a partner in another partnership. All the members of the constituent partnerships will be held liable to the creditors of the combined partnership. Corporations Unless authorized by statute or by its charter, a corporation is without capacity or power to enter into a contract of partnership. This is based on public policy, since in a partnership the corporation would be bound by the acts of persons who are not its duly appointed and authorized agents and officers ,which would be entirely inconsistent with the policy that the corporation shall manage its own affairs separately and exclusively. Exceptions: 1.)Joint ventures where the nature of the venture is in line with the business authorized by its charter .2.)Partnership agreement provides that the two partners will manage the partnership so that the management of corporate interest is not surrendered. 3.)Entry of foreign corp as a limited partner in a limited partnership merely for investment purposes. Contribution of money, property, or industry to a common fund Existence of proprietary interest The partners must have a proprietary interest in the business or undertaking, that is, they must contribute capital which may be money, or property, or their services, or both, to the common business. Money Legal tender in the Phils. Property Real or personal, corporeal or incorporeal. Industry Active cooperation, the work of the party associated.

Proof of contribution Proof is necessary that there be contribution of money, property, or industry to a common fund with the intention of dividing the income or profits obtained therefrom. If only one partner gives, no enforceable contract exists. Legality of the object The object is unlawful when it is contrary to law, morals, good customs, public order, or public policy. If purpose unlawful, no partnership can arise as the contract is inexistent and void ab initio Purpose to obtain profits The very reason for existence of partnership The idea of obtaining pecuniary profit or gain is the very reason for the existence of a partnership. Need only be the principal, not exclusive aim pecuniary profit need not be the exclusive aim. It is sufficient that it is the principal purpose even if there are, incidentally, other ends. Sharing of profits Not necessarily in equal shares There must be intention to divide the profits but not necessarily in equal shares. There must be a joint interest in the profits. A stipulation which excludes a partner from any participation in the profits is void. Not conclusive evidence of partnership The sharing of profits is merely presumptive and not conclusive evidence of partnership. Sharing of losses Necessary corollary of sharing in profits The right to share in the profits carries with it the duty to contribute to the losses, if any. A community in losses is a necessary corollary of a participation in profits. Agreement not necessary

It is not necessary for the parties to agree on a system of sharing losses, for the obligation is implied from the partnership relation. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. Generally, a stipulation which excludes one or more partners from any share in the profits or losses is void. Art. 1768. 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 art. 1772, 1stparagraph. Partnership, a juridical person 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. 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. Effect of failure to comply with statutory requirements Under art. 1772 Partnership still acquires personality despite failure to comply with the requirements of execution of public instrument and registration of name in SEC. Under arts. 1773 and 1775 Partnership with immovable property contributed, if without requisite inventory, signed and attached to public instrument, shall not acquire any juridical personality because the contract itself is void. This is also true for secret associations or societies. To organize a partnership not an absolute right

It is but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. Art. 1769. In determining whether a partnership exists, these rules shall apply: 1.)Except as provided by art. 1825, persons who are not partners as to each other are not partners as to 3rdpersons; 2.)Co-ownership or co-possession does not of itself establish a partnership, whether such co-ownership or co-possessors do or do not share any profits made by the use of theproperty; 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. Rules to determine existence of partnership In general, to establish the existence of a partnership, all of its essential features or characteristics must be shown as being present. In case of doubt, art.1769 shall apply. This article seeks to exclude from the category of partnership certain features enumerated therein which, by themselves, are not indicative of the existence of a partnership.

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: if they are not partners between themselves, they cannot be partners as to third persons .Partnership is a matter of intention, each partner giving his consent to become a partner. However, whether a partnership exists between the parties is a factual matter. Where parties declare they are not partners, this, as a rule, settles the question between themselves. But where a person misleads third persons into believing that they are partners in a non-existent partnership, they become subject to liabilities of partners (doctrine of estoppel).Whether or not the parties call their relationship or believe it to be a partnership is immaterial. Thus, with the exception of partnership by estoppel, a partnership cannot exist as to third persons if no contract of partnership has been entered into between the parties themselves. Co-ownership or co-possession There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. Clear intent to derive profits from operation of business Co-ownership does not of itself establish the existence of a partnership, although it is one of its essential elements. This is true even if profits are derived from the joint ownership. The profits must be derived from the operation of business by the members of the association and not merely from property ownership. The law does not imply a partnership between coowners because of the fact that they develop or operate a common property, since they may rightfully do this by virtue of their respective titles. There must be a clear intent to form a partnership. Existence of fiduciary relationship Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should there be dispute, the remedy of partners is an action for dissolution, termination and accounting. For co-owners it would be one, for instance,for non-performance of contract. People can become co-owners without a contract but they cannot become partners without one.

Persons living together without benefit of marriage Property acquired governed by rules on co-ownership. 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 partnerships 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 of mutual management Where there is further evidence of mutual management and control, partnership may result. Receipt of share in the profits 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. When no such inference will be drawn Underpar. 4 of art. 1769, sharing of profits is not prima facie evidence of partnership in the cases enumerated under subsections (a) (e). 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. 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 partner. Test: Does the recipient have an equal voice as proprietor in the conduct and control of the business? Does he own a share of the profits as

proprietor of the business producing them? One must have an interest with another in the profits of a business as profits. Burden of proof and presumption 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 those acting as partners have entered into a contract of partnership. Where the law presumes the existence of partnership, the burden of proof is on the party denying its existence. When a partnership is shown to exist, the presumption is that it continues and the burden of proof is on the person asserting its termination .One who alleges partnership cannot prove it merely by evidence of an agreement using the term partner. Non-use of the term, however, is entitled to weight. The question of whether a partnership exists is not always dependent upon the personal arrangement or understanding of the parties. Parties intending to do a thing which in law constitutes partnership are partners. Legal intention is the crux of partnership. Parties may call themselves partners but their contract may be adjudged something quite different. Conversely, parties may expressly state that theirs in not a partnership yet the law may determine otherwise on the basis of legal intent. However, courts will be influenced to some extent by what the parties call their contract. Tests and incidents of partnership In determining whether a partnership exists, it is important to distinguish between tests or indicia and incidents of partnership. 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. Some of the typical incidents of a partnership are: 1.)The partners share in profits and losses. 2.) They have equal rights in the mgt and conduct of the partnership business.

3.)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. 4.)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. 5.)A fiduciary relation exists between the partners. 6.)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. Partnership distinguished from a labor union Partnership Labor Union Purpose To enable its members, as principals, to conduct a lawful business, trade, or profession for pecuniary gain of partners, and no one may become a partner w/o consent of all. Collective bargaining; dealing with employers concerning terms and conditions of employment. Partnership distinguished from a business trust Partnership Trust Agency All members are principals and agents for each other. Trustee is only a principal and is not an agent. Ownership of property Partners are co-owners of specific partnership property. Beneficiary has equitable ownership of property while trustee owns legal title to such property. Partnership distinguished from co-ownership Partnership Co-ownership Creation Always created by contract, whether express or implied. Generally created by law. It may exist even w/o a contract.