SECTION 1

Rights and obligations, in general, of partners inter se.

(1) Partnership relationship essentially one of mutual trust and condence. The
partnership relationship is essentially one of mutual trust and condence, and the law
imposes upon the partners highest standards of integrity and good faith in their dealings
with each other for the benet of the partnership.
(a) Each partner is, in one sense, a trustee and at the same time, a cestui que trust.
He is a trustee to the extent that his duties bind him with respect to his co-partners and the
partnership, and a cestui que trust as far as the duties that rest on his co-partners. (Allen vs.
Steinberg, 223 A.d. 240.) This relationship is as much the same as the one existing between
the principal and agent because, technically, the partnership is the principal and each
partner is an agent of the partnership and every other partners with respect to partnership
affairs.
(b) The many particular rights and duties to each other are, in reality, but aspects of
the broad duciary relation. These particular duties are expressly dened by law subject to
any modifying agreement between the partners themselves (40 Am. Jur. 137, 208.), though
its provisions will not in many cases be effective as to third persons dealing with the
partnership.
(2) Fiduciary relationship remains until partnership terminated. The relation of trust
applies also to matters concerned with the formation of the partnership (Art. 1807.), and
when a partnership is dissolved, the assets of the partnership must still be managed in
accordance with this duciary principle. The obligation of partners to act with the utmost
candor and good faith in their dealings between themselves is not lessened by the existence
of strained relations between them or the existence of any condition which might in and of
itself justify the rms dissolution. The duciary obligation of a partner remains until the
relationship is terminated and the equities between the partners adjusted and satised.
(3) Relationship in a limited partnership. The rights and obligations of the partners as to
each other are provided on the theory that a partner is both a principal and an agent in
relation to his co-partners. (see Art. 1818.) But the relationship between a limited partner
and the other partners in a limited partnership does not involve the element of trust and
condence, as in the case of a general partnership. (see Art. 1866.)
ARTICLE 1784
Since under Article 1784, a partnership commences from the time of execution of the
contract if there is no contrary stipulation as to the date of effectivity of the same, its
registration in the Securities and Exchange Commission is not essential to give it juridical
personality. The birth and life of a partnership is predicated on the mutual desire and
consent of the parties. Unlike a corporation, no time limit is prescribed by law for the life of
partnership. Hence, the partners may x in their contract any term and they shall be bound
to remain under such a relation for the duration of the term barring the occurrence of any of
the events causing dissolution of the partnership before its expiration. (Arts. 1830-1831.)
Rules governing partnership relation.
A general partnership, as distinguished from a limited partnership (see Art. 1843.), may
result from an oral contract except those partnerships by the terms of the agreement are to
be formed by the parties for more than one (1) year from the making thereof, in which case
the partnership agreement must be in writing as required by the Statute of Frauds.
Where a partnership relation results, the law itself xes the incidents of this relation if
the parties fail to do so. This is true although the parties thereto actually call their relation
something other than a partnership or even go as far as to state expressly that they are not
partners.

Persons who have entered into a contract to become partners at some future time or on the
happening of some condition or future contingency do not become partners until or unless
the agreed time has arrived or the condition has happened. As long as the agreement for a
partnership remains inchoate or unperformed, the partnership is not consummated.
Hence, there can be a future partnership which at the moment has no juridical existence yet.
In the absence of express stipulation, evidence is admissible to show the commencement
date as determined by the words, acts or conduct of the parties. Incidentally, the Statute of
Frauds provides that an agreement that by its terms is not to be performed within a year
from the making thereof, must be in writing and signed by the party charged in order to be
enforceable. (Art. 1403[2, a].)

A distinction must be made between a partnership actually consummated and an agreement

to enter into a contract of partnership at a future time. A partnership in fact cannot be
predicated on an agreement to enter into a co-partnership at a future day unless it is shown
that such an agreement was actually consummated.
The death of either party to an executory agreement of partnership prevents the formation
of a rm, since such agreement is based on the continuance of the life of each. Failure to
agree on material terms. A failure of the parties to agree on material terms may not
merely be evidence of the intent of the parties to be bound only in the future, but may
prevent any rights or obligations from arising on either side for lack of complete contract.
ART 1785
In other words, with such continuation, the partnership for a xed term or particular
undertaking is dissolved and a new one, a partnership at will, is created the continued
existence of which will depend upon the will of the partners.. Thus, for example, the manner
of management and pro t-sharing ratio originally agreed upon shall still govern but the
partnership having become a partnership at will may be lawfully terminated at any time by
the express will of all the partners or any of them.
Continuation of partnership for an indenite term. (1) Partnership for a term impliedly xed.
Although the term of a partnership is not expressly xed, an agreement of the parties
may evidence an understanding that the relation should continue until the accomplishment
of a particular undertaking or certain things have been done or have taken place. (a) When
a partner advances a sum of money to a part- nership with the understanding that the
amount contributed is to be loaned to the partnership and is to be repaid as soon as feasible
from the prospective pro ts of the business, the partnership is for the term reasonably
required to repay the loan. The partners may impliedly agree to continue in busi- ness until a
certain sum of money is earned, or one or more partners recoup their investment, or until
certain debts are paid, or until certain property could be disposed of on favor- able terms. In
each of these cases, however, the implied agreement must be proved. (b) In each of the
following cases the court properly held that the partners implied promise was to continue
the partnership for a term reasonably required to allow the partnership to earn suf cient
money to accomplish the understood objective: 1) where the partners borrowed substantial
amounts of money to launch an enterprise and there was an un- derstanding that the loans
would be repaid from partner- ship pro ts (Owen vs. Owen, 119 P. 2d 713.); 2) where one
partner loaned his co-partner money to invest in the partnership with the understanding that

the money would be repaid from partnership pro ts (Vangel vs. Vangel, 254 P. 2d 919.); 3)
where one partner contributed all the capital, the other contributed his services, and it was
understood that upon the repayment of the contributed capital from partnership pro ts the
partner who contributed his services would receive a one-third interest in the partnership
assets (Mervyn Investment Co. vs. Beber, 194 P 1037.); and 4) where the parties entered
into a joint venture to build and operate a motel until it could be sold upon favorable and
mutually satisfactory terms. (Shannon vs. Hudson, 325 P. 2d 1022.) (2) Partnership with
mere expectation that business will be pro table. Where the understanding to which
defendant (the partner who contended that the partnership created was for a term) testi ed
was no more than a common hope that the partnership earnings would pay for all the
necessary expenses, such a hope does not establish even by implication a xed term or
particular undertaking as required by Article 1785. The mere expectation that the business
would be successful and that the partners would be able to recoup their investment is not
suf cient to create a partnership for a term. All partnerships are ordinarily entered into with
the hope or expectation that they will be pro table, but that alone does not make them all
partnerships for a term and obligate the partners to continue in the partnership until all the
losses over a period of many years may have been recovered. (Cohen vs. Cohen, 119 P. 2d
713.)
(Art. 1788.) Article 1191, which refers to resolution of reciprocal obligations in
general, is not applicable. Articles 1786 and 1788 specically refer to the contract of
partnership in particular; and it is a well-known principle that special provisions prevail over
general provisions.
Article 1838, however, allows rescission or annulment of a partnership contract on the
ground of fraud or misrepresentation committed by one of the parties thereto.
Liability of partner in case of eviction. The partner is bound in the same cases and in the
same manner as the vendor is bound with respect to the vendee with regard to speci c and
determinate things which he may have contributed to the partnership. This matter is,
therefore, governed by the law on sales. Under the law on sales, eviction shall take place
whenever by a nal judgment based on a right prior to the sale or an act imputable to the
vendor, the vendee is deprived of the whole or a part of the thing purchased.2 This
obligation of warranty in case of eviction is in consequence of the character of the contract
of partnership which is an onerous contract. (Art. 1767.)
Liability of partner for fruits of property in case of delay.
Here, again, no demand is necessary to put the partner in default.
2Art. 1547. In a contract of sale, unless a contrary intention appears, there is: (1) An implied
warranty on the part of the seller that he has a right to sell the thing at the time when the
ownership is to pass, and that the buyer shall from that time have and enjoy the legal and
peaceful possession of the thing; (2) An implied warranty that the thing shall be free from
any hidden faults or defects, or any charge or encumbrance not declared or known to the
buyer. This article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or law, for the
sale of a thing in which a third person has a legal or equitable interest. (n) Art. 1548.
Eviction shall take place whenever by a nal judgment based on a right prior to the sale or
an act imputable to the vendor, the vendee is deprived of the whole or of a part of the thing
purchased. The vendor shall answer for the eviction even though nothing has been said in
the contract on the subject. The contracting parties, however, may increase, diminish, or
suppress this legal ob- ligation of the vendor. (1475a) x x x x x x x x x Art. 1557. The
warranty cannot be enforced until a nal judgment has been ren- dered, whereby the
vendee loses the thing acquired or part thereof. (1480) Art. 1558. The vendor shall not be
obliged to make good the proper warranty, unless he is summoned in the suit for eviction at
the instance of the vendee.

Liability of partner for failure to perform service stipulated. Is a partner who fails to perform
the personal services which he has stipulated to render to the partnership, liable to the other
partners for the value of the services? (1) Partner generally not liable. Unless there is a
special agreement to that effect, the partners are not entitled to charge each other, or the
partnership of which they are members, for their services in the rm business. The doctrine
seems to be that every partner is bound to work to the extent of his ability for the bene t of
the whole, without regard to the services of his co- partners, however unequal in value or
amount, and to require a partner to account for the value of his services would be, in effect,
allowing compensation to the other members of the partnership for the services they
rendered.3 (2) Exception. The general rule that partners are not entitled to compensation
for their services is inapplicable where the reason of it fails. (a) If a partner neglects or
refuses, without reasonable cause, to render the service which he agreed to perform by
reason of which the partnership suffered loss, no good reason can be suggested why the
erring partner should not be just as responsible for the breach of his agreement to render
personal service to the partnership as for the breach of any other stipulation in the
partnership contract.
(b) If the partner is compelled to make good the loss, each member of the rm, including
himself, will receive his proportion of the amount in the distribution of the partner- ship
assets, and in no just sense can this be regarded as com- pensation for the services
individually rendered. The proper measure of damages in such case is the value of the
services wrongfully withheld. (Ibid.) (c) If under the circumstances of the case the proper
measure of the damages or loss (which may include unrealized pro ts) is the value of the
services wrongfully withheld, then the defendant should be charged this value. If the
defendant had made pro t by engaging in other business in violation of the contract, he is
liable to account for the same. (Ibid.)
Unless there is a stipulation xing a different time, this obligation of a partner to give his
promised contribution arises from the commencement of the partnership, that is, upon
perfection of the contract.
In a case, a partner in a construction venture, who, contrary to the terms of the
partnership, failed to contribute his share in the capital of the partnership, was ordered by
the court to reimburse his co-partner whatever amount the latter invested in or spent for the
partnership on account of the construction projects. (Uy vs. Puzon, 79 SCRA 598 [1977]; see
Moran, Jr. vs. Court of Appeals, 133 SCRA 88 [1984].)
Liability of partner for failure to return partnership money received. (1) Where fraudulent
misappropriation committed. A partner is guilty of estafa (Art. 315, Revised Penal Code.) if
he misappropriates partnership money or property received by him for a speci c purpose of
the partnership. (Liwanag vs. Court of Appeals, 281 SCRA 1225 [1997].) (2) Where there was
mere failure to return. The mere failure on the part of an industrial partner to return to the
capitalist
4Now 12%. 5Under Article 2200 of the Civil Code, indemni cation for damages shall
compre- hend not only the value of the loss suffered, but also that of the pro ts which the
obligee failed to obtain. In other words, lucrum lessans is also a basis for indemni cation.
(Uy vs. Puzon, 79 SCRA 598 [1977].)
Art. 1788 OBLIGATIONS OF THE PARTNERS Obligations of the Partners Among Themselves
PARTNERSHIP98
partner the capital brought by him into the partnership is not an act constituting the crime of
estafa. The money having been received by the partnership, the business commenced and
pro ts accrued, the action that lies with the partner who furnished capital for the recovery
of his money is a civil one arising from the partnership contract for a liquidation of the

partnership and a levy on its assets if there should be any. (U.S. vs. Clarin, 17 Phil. 84
[1910]; see also People vs. Alegre, 48 O.G. 534 [1952].) In this case, there was mere failure
on the part of the industrial partner to liquidate partnership affairs and to account to persons
interested the amounts respectively due them. A partner is guilty of estafa if he fraudulently
appropriates partnership property delivered to him, with speci c directions to apply it to
partnership purposes. (People vs. Campos, supra.)
An action for specic performance to compel the partner to perform the promised work or
service is not available as a remedy because this will amount to involuntary servitude which,
as a rule, is prohibited by the Constitution. (Art. III, Sec. 18[2] thereof.)

1793
He who has various debts of the same kind in favor of one and the same creditor, may
declare at the time of making the payment, to which of them the same must be applied.
Unless the parties so stipulate, or when the application of payment is made by the party for
whose bene t the term has been constituted, application shall not be made as to debts
which are not yet due.
Credit collected after dissolution of the partnership. Does the obligation of the partner to
bring to the partnership capital what he has collected refer only to that collected during the
existence of the partnership, or does it also refer to that collected after the dissolution of the
same? (1) Obligation to bring amount collected to the partnership fund. For example,
upon the dissolution of the partnership, a partnership credit is divided among the partners in
such a manner that each partner assumes the responsibility of collecting the portion
pertaining to him. One of them who is more diligent collects the share corresponding to him
before the debtor becomes insolvent. May the other partners demand that he bring
Art. 1793
105
to the partnership fund what he had been able to collect and that said amount so collected
be divided among the partners in proportion to their respective shares? Some commentators
answer this question in the af rmative, basing their answer in the community and equality
which ought to exist among all the partners. (2) Contrary view. Manresa and Ricci
believed otherwise. Their reasons are: (a) It would not be just that he who has been diligent
and collected his quota should suffer the consequence of the negligence of his associates,
thus making him responsible for the default of the latter. (b) Upon the dissolution of the
partnership, the tie that unites the partnership ceases. This being the case, the reason for
the obligation disappears. Article 1793 presupposes that there exists a partnership capital.
Upon the dissolution of the partnership and the return to each principal of what he
contributed, the community of interest between them disappears altogether and it cannot
be said that there is still a partnership capital or common property. If a common credit
remains among the partners after the dissolution of the partnership, there would be among
them a mere simple credit owned in common but not a partnership credit. (Espiritu and
Sibal, op. cit., citing 11 Manresa 352-353.)