Partnership Review Notes (undergrad)
De facto partnership
I. Contract of Partnership
It is a contract where two or more persons bind
themselves to contribute money, property or industry
to a common fund, with the intention of dividing profits
among themselves. (Art. 1767)
Characteristics of the contract of partnership
1. Consensual it is perfected by mere consent although such
consent must be manifested in certain cases by proper
formalities.
2. Nominate it is designated by a specific name.
3. Principal its existence does not depend on the life of
another contract.
4. Onerous there are certain contributions that have to be
made.
5. Preparatory in the sense, that after it has been entered
into, other contracts essential in the carrying out of its
purposes can be entered into.
Essential Requisites
1. There must be a valid contract.
The other essential elements of contract
must be present.
There is not required form but the contract is
subject to the provisions of Art. 1771, 1773
and Statute of Frauds.
2. The parties must have legal capacity to enter into the
contract.
3. There must be a mutual contribution of money
property or industry to a common fund.
The common fund may be intangible such as
credit or industry. (Lim Tong Lim v. Phil.
Fishing Gear Industries Inc, November 3,
1999)
4. The object or purpose must be lawful. (Art. 1770)
The object or purpose must be within the
commerce of man, possible and not contrary
to law, morals, good customs, public order or
public policy, otherwise the partnership
contract is VOID AB INITIO. (art. 1409)
If a partnership has several purposes, one of
which is unlawful, the partnership can still
exist so long as the illegal purpose can be
separated from the legal purposes.
5. The primary purpose must be obtain to profits and
divide the same among themselves
6. There must be at least one general partner.
Test of Partnership Existence
WON there is an agreement to contribute money,
property, or industry to a common fund.
WON there is intent of the contracting parties to divide
the profits among themselves.
II. Juridical Personality of a Partnership
It is distinct and separate from that of each of the
partners.
Even if the partnership contract does not appear in a
public instrument and recorded with the SEC, it still
has juridical personality. (1768, 1772 par. 1)
Classification of Partnership
A. As to object
1. Universal Partnership
a. Of all present property
b. Of profits
2. Particular Partnership
B. As to liability
1. General partnership
2. Limited partnership
C. As to duration
1. Partnership at will
2. Partnership with a fixed period
D. As to legality of existence
1. De jure partnership
2.
E. As to representation of others
1. Real partnership
2. Partnership by estoppel (1769, 1825)
F. As to Publicity
1. Secret Partnership
2. Notorious or open Partnership
F. As to purpose
1. Commercial or trading
2. Professional or non-trading
Universal Partnership All Present Property (UPAPP)
One wherein the partners contribute all the property
which actually belong to them to a common fund with
the intention of dividing the same among themselves
as well as all the profits which they may acquire
therewith. (Art. 1778)
Only properties that belonged to each partners at the
time of the constitution of the partnership becomes
common property to all partners. This excluded future
properties. ( Art. 1779)
because partnership demands that the
contributed things must be determinate,
known and certain.
Profits from other sources may become common only
if there is a stipulation to such effect.
Universal Partnership of Profits (UPP)
Comprises 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 partner may possess at the time
of the celebration of the contract. (1780)
This is presumed by law when a universal partnership
has been entered into without specification. (1781)
Reason: UPP imposes less obligations on
the partners since they preserve the
ownership of their separate property.
Note: as rule, universal partnership cannot be entered into by
persons who are prohibited from giving each other donation or
advantage.(Art. 1782 NCC, Art 739 NCC, Art. 87 FC)
The reason is that universal partnership is virtually a donation
to each other of the partners properties or at least their
usufruct. Therefore if persons are prohibited to donate to each
other directly, they cannot be allowed by law to donate
indirectly.
Particular Partnership
It has for its object determinate things, their use or
fruits, or specific undertaking, or the exercise of a
profession or vocation.
III. Kinds of Partners
A. As to Nature of contribution
1. Capitalist contributes money or property
2. Industrial contributes only his industry or personal service.
B. As to Liability
1. General Partner liability to third persons extends to his
separate property
2. Limited Partner liability to third persons is limited to his
capital contribution.
C. As to Management
1. Managing Partner manages the business or affairs of the
partnership.
2. Silent Partner does not take any active part in the
business although he may be known to be a partner.
3. Liquidating Partner takes charge of the winding up of the
partnership affairs upon dissolution.
Capitalist Partner vs. Industrial Partner
Capitalist Partner Industrial Partner
Contribution
Contributes money or Contributes industry.
property.
Prohibition to engage in other business
Cannot generally engage in Cannot engage in any
the same or similar enterprise business for himself.
s that of his firm.
Profits
Shares in the profits Receives a just and equitable
according to agreement share.
thereon; if none, pro rata to
his contribution.
Losses
1. The stipulation as to Exempted as to losses as
losses; between partners, but is liable
2. If none, the to 3rd persons without
agreement as to prejudice to reimbursement
profits, from capitalist partners.
3. If none, pro rata to
contribution.
IV. Obligations of the Partners
Relations Created by a Contract of Partnership
1. Among the partners themselves
2. The partners with the partnership
3. The partnership with the 3rd persons whom it contracts
with.
4. The partners with such 3rd persons
Obligations of Partners Among Themselves
A. With respect to contribution of property
1. To contribute what has been promised.
The law says that every partner is a debtor of the
partnership for whatever he may have promised to
contribute thereto. (Art. 1786)
In case partner fails to contribute the remedy is to
collect what was owed plus damages.(Sancho vs.
Lizarraga, 55 Phil. 601) But if defaulting partner is
already dead, rescission may prosper. (Pabaln v.
Velez, 22 Phil. 29)
2. To warrant property contribute in case of eviction.
The law provides that he shall also be bound for
warranty in case of eviction with regard to specific and
determinate things which he may have contributed to
the partnership. (Art. 1786)
The warrant only refers to the things already
contributed.
3. To deliver the fruits of thereof from the time they should have
been delivered without the need of any demand. (Art. 1786)
In case of bad faith on the part of the partner he is
liable for the fruits produced and those that could
have been produced.( Manresa)
Note: When contribution is in goods, the amount thereof must
be determined by proper appraisal of the value thereof at the
time of the contribution. (Art. 1787)
4. To preserve the property with the diligence of a good father
of a family pending delivery to the partnership. (Art. 1163)
5. To indemnify for any damages caused by the retention of the
property or by delay in its contribution. (Art. 1788 & 1170)
B. With respect to contribution of money and money converted
to personal use
1. To contribute on the date due the amount promised to be
given. (1788)
Here the liability arises from the commencement of
the partnership, unless otherwise stipulated.
2. To reimburse any amount he may have taken from the
partnership coffers and converted to his own personal use.
(1788)
3. To pay the agreed legal interest , if he fails to contribute at
the promised time or converted the money for personal use.
4. To indemnify the partnership for any damages incurred due
to delayed contribution or conversion.
For conversion, the liability arises from the time he
converted the amount for his own use.
Partner may be guilty of estafa if there is fraudulent
misappropriation.
C. Obligation Not to Engage in other business for himself.
1. Industrial Partner
Gen. rule: He cannot engage in any business for
himself.
Exception: the partnership expressly permits him to
do so.
If he should do so: the rule is that the other partners
either opt for his exclusion from the firm or avail of the
benefits which the erring partner may have obtained
plus damages in both instance.(1789)
This is the rule even if the business is not a
competition because as an industrial partner
all his industry is supposed to be given only
to the partnership.
The prohibition applies to a capitalist-
industrialist partner.
2. Capitalist Partner
The prohibition extends only to any operation which is
of the same or similar kind of business in which the
partnership is engage, unless there is a stipulation to
the contrary. (1808)
The test is possibility of unfair competition.
Violation of the general rule may result to his ouster
and ultimately the dissolution of the firm.
D. Obligation to Contribute Capital and Additional Capital
1. Contribution to Partnership Capital
Gen. Rule: It depends upon the stipulation of parties.
In the absence of stipulation , the presumption is that
the contribution shall be in equal shares.
2. Contribution of Additional capital
Gen Rule: A partner is not bound to contribute
additional capital.
Exception: In case of imminent loss of the business
and there is no agreement to the contrary, capitalist
partners are under obligation to contribute an
additional share to save the venture.
o If he refuses, he shall be obliged to sell his
interest in the partnership to other partners.
(1791)
E. Obligation of the Managing Partner who Collects Debt.
Gen. Rule: any sum received shall be applied to the
two credits in proportion to their amounts even though
he may have given a receipt for his own credit only.
o This follows that in case the managing
partner gave receipt under the partnership
name, the whole amount shall be credited to
the firms credit only. (except where he
received it entirely for the account of the
partnership. Art. 1792)
The debtor is given the right to prefer payment of the
credit of the partner only if should be more onerous to
him.
This rule applies only if the creditor partner is a
managing partner.
F. Obligation of Partner who receives share in partnership
credit.
Such partner is obliged to bring to the partnership
capital what he received even though he may have
given receipt for his share only, if the debtor becomes
insolvent.
Reason: when the debtor becomes
insolvent, the debt in favor of the partnership
becomes a bad debt and is a loss which
must be borne by all the partners.
This rule does not apply where the partnership is
already dissolved because at this time, there is no
more partnership capital.
G. Obligation of Partner for Damages
Gen. Rule: Every partner is responsible to the
partnership for damages suffered by it through his
fault and he cannot compensate them with profits and
 benefits which he may have earned for the
partnership by his industry. (1794)
o there cannot be compensation because in
compensation it requires that the 2 persons
are reciprocally debtors and creditors of
each other.
However, equity may mitigate liability if there be extra
ordinary efforts resulting in extraordinary profits.
(1794)
In the event of the death of the negligent partner, suit
for recovery may be had against his estate. (See Po
Yeng Cheo v. Lim Ka Yam, 44 Phil.646)
H. Duty to Render Information (1806)
I. Duty to account for any benefit and hold as trustee
unauthorized profits (1807)
V. Rules For Distribution of Profits and Losses