Review On Partnership

Law on Partnerships
A REVIEW
What is a Partnership?
Partnership is a contract whereby 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. (Art. 1767.) Two or more persons
may also form a partnership for the exercise of a
profession. (Ibid.)
Characteristics
Partnership is a consensual, nominate, bilateral,
onerous, commutative, principal, and preparatory
contract. (see III. - Contracts.) Strictly speaking,
the practice of a profession is not a business or an
enterprise.
However, the law allows the pursuit thereof by two

or more persons. Such a partnership is called
"general professional partnership.
Nature of Partnership
Partnership is fiduciary in nature, meaning that
the partners must have and confidence in each
other.
Personae delectae (delectus personarum) –

Partnership is based on the fiduciary relation
ship among the partners, a person has right to
select other persons whom he has trust and
confidence to become his partners.
Affectio societatis – active union of persons who
enjoy trust and confidence of each other
A partnership is a juridical person
As an association of persons, a partnership duly formed
under the law has a juridical personality separate and
district form that of each of the partners. Thus, in the
partnership X & Co., in which A and B are the partners,
there are three (3) district persons namely: (1) X &
Co., (2) A, and (3) B. As a consequence of its distinct
legal personality, a partnership may acquire the possess
property, incur obligations, and bring civil or criminal
actions in its own name. (Art. 46.)
Note: There is no prohibition against a partnership being
a partner in another partnership.
Essential Features of a Partnership
1. There must be a valid contract;
2. The parties must have legal capacity to enter into the
contract;
3. There must be a mutual contribution to a common fund of
money (i.e., currency which is legal tender in the
Philippines), property (which may be real or personal,
tangible or intangible such as credit, share of stock), or
industry (which may be personal manual efforts or
intellectual;
4. The Object must be lawful (Art. 1770.); and
5. The purpose or primary purpose must be to obtain profits
and to divide the same or among the partners. (Art. 1767,
1770.)
(1) The definition of partnership under Article 1767
refers to "profits" only and is silent as to "losses."
The reason is that the object of a partnership is
primarily the sharing of profits, while the
distribution of losses is but a "consequence of the
same." (Espiritu & Sibal, Phil. Law on Partnership
[1937.] p.2, citing 11 Manresa 263.)
(2) It is required that the article of partnership must
not be secret among its members. (Art. 1775.)
Effects if articles are kept secret under Article
1775:
 The association here is certainly not a partnership
and therefore not a legal person because anyone of
the members may contract in his own name with
third persons and name in the name of the firm.
 Although, not a juridical entity, it may be sued by
third persons under the common name, it uses,
otherwise said innocent third parties may be
prejudiced.
 However, it cannot sue as such, because it has no legal
personality, and therefore, cannot ordinarily be a party to
a civil action. Moreover the fact that it has no legal
personality as a partnership cannot be invoked by the
partners for the purpose of evading compliance with
obligations contracted by them because they who caused
the nullity of a contract are prohibited from availing of its
benefits.
 Therefore, insofar as innocent third parties are
concerned, the partners can be considered as members of
a partnership; but as between themselves, or insofar as 3rd
persons are prejudiced, only the rules on ownership must
apply. The same rule applies in the case of partnership by
estoppel.
Advantages of Partnership as a Business
Organization
1. It is easy and inexpensive to organize as it is

formed by a simple contract between two or
more persons;
2. The unlimited liability of the partners makes it
reliable from the point of view of the creditor;
3. The combined personal credit of the partners
offers better opportunity for obtaining additional
capital than does the sole proprietorship;
4.The participation in the business by more than
one person makes possible a closer supervision of
all its activities;
5. The direct gain to the partners is an incentive to
close attention to the business;
6. The personal element in the characters of the
partners is retained; and
7. It is generally free from government control.
Disadvantages as an Business
Organization
1. The personal liability for firm debts deters many
from investing capital in it;
2. A partner may be subject to personal liability for
the wrongful acts or omissions of his associates;
3. It also lacks stability due to the ease by which it
may be dissolved;
4. There is divided authority; and
5. There is constant likelihood of dissension and
disagreement when each of the partners has the
same authority in the ,management of the
concern.
Rules in determining whether partnership
exist
Test of determining whether partnership
exists depends upon the contract itself,
express or implied and the intention to
create partnership and in addition:
1) The existence of the common fund
2) Joint interest in the profits
3) Mutual benefit or advantage of partners
HENCE, persons who are not partners as to each
other are not partners as to third persons.
However, when a person represents himself, or
consents to another representing to anyone, as a
partner in an existing partnership or with one or
more persons not actually partners, he is liable
to any such persons to who such representation
has been made, who has, on the faith of such
representation , given credit to the actual or
apparent partnership. (Art. 1825)
Legal effect of the receipt by a person of a share
of the profits of a business
Such receipt is prima facie evidence that he is a

partner in the business. No such inference,
however, shall be drawn if such profits were
received in payment:
 As a debt by installments or otherwise;
 As wages of an employee or rent to a landlord;
 As annuity to a window or representative of a

deceased partner;
Legal effect of the receipt by a person
of a share of the profits of a business
 As interest on a loan though the amount of
payment may vary with the profits of the business;
and
 As the consideration for the sale of goodwill of a
business or other property by installment or
otherwise. (Art. 1769.)
In all the above cases, the profits in the business are

not shared as profits of a partner but in some other
respects.
Co-ownership versus Partnership
There is co-ownership whenever the ownership of
an undivided thing or right belongs to different
persons. (Art. 484.)
Although every partnership is founded on a
community of interest, every community of
interest does not necessarily constitute a
partnership (e.g., The heirs who inherited an
apartment which is leased to third persons are not
partners but merely co-owners although they
share in the profits from the lease of the
property).
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. (1669)
Does sharing of gross returns by persons who
have a joint or common interest in the
property from which the returns are derived
of itself establish a partnership?
No, since in a partnership, the partners share profits

after satisfying all of the partnership's liabilities.
(Arts. 1769, 1812, 1839.)
Effects of unlawful partnership
(1) The contract is void ab initio and the partnership
never existed in the eyes of the law (Art. 1409.);
(2) The profits shall be confiscated in favor of the

government; and
(3) The instrument of tools and proceeds of the

crime shall be forfeited in favor of the
government. (Art. 1770.)
Formalities required for the creation of
a partnership
As a general rule, a partnership may be constituted
in any form (Art. 1771.) except in the following
cases:
Where personal property is contributed and the capital is
P 3, 000 or more. –
 The contract must appear in a public instrument;
and
 It must be registered with the Securities and
Exchange Commission. (Art. 1772.)
Formalities required for the
creation of a partnership
Note: However, failure to comply with the above
requirements does not prevent the establishment
of the partnership as a distinct personality (Art.
1768.) or affect its liability and that of the
partners to third persons (Art. 1772.) because
they are merely for administrative and licensing
purposes.
a partnership
Where immovable property or real rights thereto are
contributed, regardless of value. –
 The contract must appear in a public instrument
(Art. 1771.); and
 An inventory of the property, signed by the
partners, must be attached to the public
instrument (Art. 1773.)
Formalities required for the
creation of a partnership
Note: If the above requirements are not observed
the contract of partnership is void. (Ibid.) They
do not apply where the immovable property is
acquired (not contributed by the partners) by the
partnership. (Agad vs. Mabato. L-24173, June
28, 1968.)
a partnership
In case of limited partnership. –
 The partners must sign and swear to a certificate or
articles of limited partnership which states the
matters prescribed by law; and
 (b) They must file such certificate with the Securities
and Exchange Commission. (Art. 1844.)
Note: If there is no substantial compliance with the
above legal requirements, the partnership becomes a
general partnership.
When contribution consists of goods:
(Art. 1787)
Appraisal of value is needed to determine how
much has been contributed.
 How appraisal is made:
 Firstly, as prescribed by the contract.
 Secondly, in default of the first, by experts
chosen by the partners and at current prices.
 After goods are contributed to the partnership, the
latter bears the risks.
Classification of Partnerships
According to manner of creation
 orally constituted
 constituted in a private instrument
 constituted in public instrument
 registered in the Office of the Securities and
Exchange Commission
Classes of Partnerships
 As to its object:
1. Universal Partnership
2. Particular Partnership
A) Universal partnership of all present property. - one in
which the partners contribute all the properties
which actually belong to each of them at the
time of the constitution of the partnership to a
common fund, with the intention of dividing
the same among themselves as well as the
profits which they may acquire therewith (Art.
1778.); and
 B) Universal partnership of all profits. - one which
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 of the partners
may possess at the time of the celebration of the
contract. (Art. 1780.)
 Articles of universal partnership entered
into without specification of its nature only
constitute a universal partnership of profits
(Art. 1781.)
ALL PROFITS ALL PRESENT PROPERTY
a) Only the usufruct of the properties a) All the property actually
of the partners becomes COMMON belonging to the partners are
PROPERTY (owned by them and the contributed – and said properties
partnership); NAKED OWNERSHIP is become common property
retained by each of the partners. (owned by all partners and by
b) All PROFITS acquired by the the partnership).
INDUSTRY or WORK of the partners b) As a rule, aside from the
become COMMON PROPERTY contributed properties only the
(regardless of whether or not said PROFITS of said contributed
profits were obtained through the COMMON PROPERTY (not other
usufruct contributed. profits)
NOTE: Profits from other sources
may become COMMON, but only
if there is a stipulation to such
effect.
Properties subsequently
acquired by inheritance, legacy
or donation, cannot be included
in the stipulation BUT the fruits
thereof can be included in the
stipulation.)
Note: Persons who are prohibited from giving
each other any donation or advantage
cannot enter into universal partnership of
profits. (Art. 1782.)
Particular partnership. - one which has for its object
determinate things, their use or fruits, or a
specific undertaking, e.g., acquisition of a real
property for the purpose of reselling it at a profit,
or practice of a profession or vocation. (Art.
1783.) So, the carrying on a business of a
continuing nature is not essential to constitute a
partnership.
As to liability of the partners:
(a) General partnership. - one consisting of general partners
who are liable pro rata and subsidiary (Art. 1816.) and
sometimes solidarily (Arts. 1822-1824.) with their
separate property for partnership debts; or
(b) Limited partnership. - one formed by two or more
persons having as members one or more general
partners and one or more limited partners, who as such
are not bound by the obligation of the partnership. (Art.
1843.)
As to duration:
(a)Partnership at will. - one which no time is specified and
is not formed for a particular undertaking or venture and
which may be terminated any time by mutual agreement of
the partners or by the will of one alone (40 Am. Jur. 139.);
or
(b) Partnership with a fixed term. - one in which the term of
period for which the partner is to exist is agreed upon or
one formed for a particular undertaking, and upon the
expiration of that term or completion of the particular
enterprise, the partnership is dissolved, unless continued
by the partners. (Art. 1785.)
As to representation to others:
(a) Ordinary partnership. - one which actually exists

among the partners and also as to third persons;
or
(b) Partnership by estoppel. - one which in reality is
not a partnership, but is considered a partnership
only in relation to those who, by their conduct or
admission, are precluded to deny or disprove its
existence. (Art. 1825.)
Partnership by Estoppel
It is created in two ways:
1. When a 3rd person represents himself to another
person as a partner in an existing partnership and
the true partners did not object to his
representation, then a Partnership by Estoppel is
created among themselves.
2. The other way is when the true partners of an
existing partnership represent a third person did
not object to their representation, then a
partnership by estoppel is created among
themselves.
As to legality of its existence:
(a) De jure partnership. - one which has complied with all
the requirements for its establishment (see Arts. 1772, par.
2; 1773.); or
(b) De facto partnership. - one which has failed to comply
with all the legal requirements for its establishment. (Ibid.)
As to publicity:
(a) Secret partnerships. - one wherein the existence of
certain persons as partners are not made known to the
public by any of the partners; or
(b) Open or notorious. - one whose existence is made known
to the public by the members of the firm.
Classes of partners
As to contributions:
(a) Capital partner. - one who contributes capital. I.e., money
or property, to the common fund (Art. 1767.); or
(b) Industrial partner. - one who contributes industry or
labor. (Art. 1789, 1767.)
As to Liability
(a) General Partner –one whose liability to third person
extends to his separate property. He may be either a
capitalist or industrial partner or both
(b) Limited Partner – one whose liability is limited to his
capital contribution. Also known as a special partner. He
does not participate in the management of the
partnership.
Classes of partners
As to management
(a) Liquidation partner. - one who takes charge of the
winding up of partnership affairs upon dissolution
(Art. 1836.)
(b) Nominal partner or partner by estoppel. - one who is
not really a partner, not being a party to the
partnership agreement, but is made liable as a partner
for the protection of innocent third persons (Art.
1825.);
(c) Real partner. - one who is actually connected with
the business as a partner (Art. 1767.)
Classes of partners
(d) Ostensible partner. - one who is actually
connected with the business as a partner in the
business (Art. 1834, par. 2.);
(e) Dormant partner. - one who does not take
active part in the business and is not known to
the public as a partner; he is both a silent and
secret partner (Ibid.); and
(f) Subpartner. - one who contracts with a
partner with reference to the latter's share in the
partnership. (Art. 1804) He is not really a
partner.
Obligations of the partners among
themselves
There are at least four distinct juridical relations,
namely:
 Relations among partners themselves;
 Relations of the partners with the partnership;
 Relations of the partnership with third persons
with third persons with whom it contracts; and
 Relations of the partners with such third
persons.
themselves
When does a partnership begin?
Since partnership is a consensual
contract, it begins from the moment of the
execution of the contract. The partners,
however, may stipulate some other date for
the commencement of the partnership (Art.
1784). Hence, there can be a future
partnership, which at the moment has no
juridical existence yet.
themselves
Obligations of the partner among themselves and
to the partnership with respect to contribution
of money or property:
 To contribute at the beginning of the
partnership or at the stipulated time the money,
property which he promised to contribute;
It is permissible to contribute unequal shares, if
there is a stipulation to this effect. In the
absence of proof, the shares are presumed
EQUAL.
themselves
 To answer for eviction (as a vendor) in case the
partnership is deprived of the determinate
property contributed;
 To answer to the partnership for the fruits of the
property the contribution of which he delayed,
from the date they should have been
contributed up to the time of actual delivery
without the need of any demand (Art. 1786);
themselves
Obligations of the partner among themselves and
to the partnership with respect to contribution
of money or property:
 To preserve said property with the diligence of a good
father of a family pending a delivery to the partnership
(Art. 1163);
 To indemnify the partnership for nay damage (and also
the legal interest of the promised contribution in money)
caused to it by retention of the same or by the delay in its
contribution (Arts. 1788, 1170)
Obligations of the partners among themselves
Obligations of an Industrial Partner:
 To contribute at the beginning of the partnership or at the
stipulated time the industry which he promised to contribute
(Art. 1786);
 Not to engage in any other business for himself (prohibition is
absolute) unless the partnership expressly permits him to do so;
otherwise-
 The capitalist partners may exclude him from the firm; or they
may avail themselves of the benefits which the industrial partner
may have obtained from other businesses, with a right to damages
in either case. (Art. 1789)
Reason for the prohibition: The industrial partner is a debtor
of the partnership for his work or services. He must therefore
devote his full time to the interest of the partnership.
themselves
Rule on capitalist partner investment in other business:
As a rule, he cannot engage for his own account, in any operation,
which is of the same kind of business in which the partnership is
engaged otherwise -
He shall be liable to the partnership for any profits he obtained from
his transactions; and
 He shall personally bear all his losses (Art. 1808)
Reason for the prohibition: The capitalist partner is likely to
prejudice the partnership by the competition he will offer.
Exceptions are (a) when the business is not the same or similar to that
engaged in by the partnership; or (b) although it is of the same
kind, if there is a stipulation to the contrary.
themselves
Rules in case managing partner collects a demandable
debt from a person who also owes the partnership a
demandable debt:
 The sum collected shall be applied to the two credits in
proportion to their amounts;
 It shall be fully applied to the partnership credit, if the
receipt given is for the account of the same; and
 The debtor however has the right to have the payment
applied to his debt to the partner if it should be more
onerous to him. (Arts. 1792, 1252)
Reason: To prevent the furtherance of a managing partner's
interest to the prejudice of the firm. Note that the law
speaks only of a managing partner.
themselves
A partner who has received, in whole or in part, his share
of a partnership credit, when the other partners have not
collected theirs, shall be obliged, if the debtor should
thereafter become insolvent, to bring to the partnership
capital what he received even though he may have given
receipt for his share only. (Art. 1793)
Example
X owes a firm P 1,000. P, a partner was given his share of
P 500, there being only two partners. Later X becomes
insolvent. P must share the P 500 with the other partner
even if P had given a receipt for his share.
This applies whether the partner has received HIS SHARE
wholly or in part.
themselves
Obligations of a Partner:
 Money converted to personal use. - To pay to the
partnership interest and damages for any sum of money which he
may have taken from the partnership coffers; said liability to begin
from the time of conversion (not demand) of the amount to his
own use (Art. 1788)
 Additional share to capital. - To contribute an additional share
to the capital in case of imminent loss of the business of the
partnership to save the venture; otherwise, he (Except an
industrial partner because having contributed his entire industry
there is nothing more he can do) shall be obliged to sell his
interest to the other partners. (Art. 1791) Reason for the
sanction: The refusing partner reflects his lack of interest in the
continuance of the partnership;
themselves
Obligations of a Partner:
 Indemnity for damages to partnership. - To indemnify the
partnership for damages suffered by it through his fault and he
cannot compensate them with the profits or benefits he may have
earned for the partnership. (Art. 1794) Reason: A partner has an
obligation to secure benefits for the partnership. Hence, the
profits he may have earned pertains as matter of right to the
partnership;
 Information affecting partnership. - To render on demand
true and full information of all things affecting the partnership to
any partner or his legal representative. (Art. 1806) Reason: The
relations between the partners involve trust and confidence; and
 Share in loss. - To share in the loss of the partnership except in
the case of the industrial partner. (Art. 1797)
themselves
Rights enjoyed by a partner:
 To receive his share of the profits of the partnership (Arts.
1797, 1799);
 To participate in the management of the firm, in the absence
of an agreement to the contrary (Arts. 1803, 1810)
 To associate another person (sub-partner) with him in his
share (Art. 1804) – consent of the other partners is not
required. But to make an associate a partner, all must
consent. Reason MUTUAL TRUST IN THE
PARTNERSHIP.
 To have access to, inspect and copy, at any reasonable hour,
any of the partnership books (Art. 1805);
To demand a formal account (even before dissolution) of
the partnership affairs:
If he is wrongfully excluded from the partnership
business or possession of its property;
 If he has such right under the terms of any agreement;
 If a partner receives any benefit or profit which should
pertain to the partnership (see Art. 1807) and
 Whenever other circumstances render it just and
reasonable (Art. 1809);
 To ask for the dissolution and winding up of the
partnership by decree of the court (Art. 1831, infra.);
and
 To ask for the return of his contribution,
provided that the partnership assets are in excess
of all its liabilities. (Art. 1839, Infra.)
 Note: As a rule, a partner is not entitled to a
formal account. Reasons: His rights to know
partnership affairs are amply protected (Art.
1805, 1806, supra.) and furthermore, a formal
account requires considerable time and effort
Rules of failure to contribute and for conversion (Art.
1788)
Cases covered:
 when money promised is not given on time
 when partnership money is converted to the
personal use of the partner.
Coverage of Liability – covers also INTEREST AND
DAMAGES
 Interest at the agreed rate: if none at the legal rate
of 12% per annum
 Damages that may be suffered by the partnership
Note: No need for Demand to put partner in default.
Reason: in case of the contribution, because time is
of the essence: a partnership is formed precisely to
make use of the contributions and this use should
start from its formation, unless a different period
has been set, otherwise the firm is necessarily
deprived of the benefits thereof. Thus the injury is
constant.
In case of conversion, because the firm is deprived
of benefits of the money, from the very moment of
conversion.
PRESUMPTION AS TO THE AMOUNT OF
CONTRIBUTION
Unless there is a stipulation to the contrary, the partners shall
contribute equal shares to the capital of the partnership.
(Art. 1790)
Rules for the distribution of profits and losses among
partners.
Distribution of profits:
The partners share the profits according to their agreement
subject to Article 1799 (see question No. 11, infra.);
If there is no such agreement:
The share of each capitalist partner shall be in proportion to his
capital contribution. This rule is based on the presumed will of
the partners;
The industrial partner shall receive such share, which must be
satisfied first before the capitalist partners shall divide the
profits, as may be just and equitable under the circumstances;
The capitalist-industrial partner shall get a share in the profits,
which must also be satisfied first, as an industrial partner, and
an additional share, in proportion to his contribution from the
balance. (Art. 1797.)
themselves
Distribution of losses:
 The losses shall be distributed according to their

agreement subject to Article 1799 (see question No.11.
infra.);
 If there is no such agreement, but the contract provides
for the share of the partners in the profits, the share of
each in the losses shall be in accordance with the profits-
sharing ratio; but the industrial partner shall not be liable
for losses. The term "losses" implies that there are no
profits.
themselves
May a partner be excluded from any
share in the profits or losses?
No. Any such stipulation is void. (Art.
1700.) Reason: The partnership must exist
for the common benefit and interest of the
partners. (Art. 1770.)
But a stipulation exempting the industrial partner
from the losses is naturally valid since the law
itself excludes him from losses. (Art. 1797.)
Reasons.
Unlike a capitalist partner who can withdraw his
capital, an industrial partner cannot withdraw
the work already done by him; and
Furthermore, in the event of loss, then an
industrial partner has labored in vain and in a
real sense, he has already contributed his share in
the loss.
EXAMPLE: A, B, and C formed a partnership, whereby each of
them contributed P 20,000.00. They agreed that should the
partnership realize profits, the same shall be distributed in the
following proportions:
A as managing partner …………………………… 40%
B ….. ……………………………………………… 30%
C ……..…………………………………………… 30%
In this case, the partners shall share the profits in conformity
with their agreement. If there is no agreement with respect to
the share of each partner, then, they shall share the profits
equally.
Suppose, the contributions of the partners are as follows:
 A …………………………………….. P 30,000.00
 B ……………………………….. 20,000.00
 C ………………………………………. 10,000.00
Total ………………………………… P 60,000.00
In the absence of stipulation the share of each of the partners shall be in
proportion to his contribution, that is:
A …………………………………………………….. P 3/6
B ……………………………………………………. 2/6
C ……………………………………………………. 1/6
If D is an industrial partner he shall receive such share as may be just
and equitable under the circumstances. Assuming that the partnership
makes a profit of P 17,000.00, the partners may determine considering
all the circumstances, that D, as industrial partner, is entitled to P
2,000.00. The balance of P 15,000.00 will be divided among A, B, and
C in proportion to their respective capital contributions: P 7,500.00, P
5,000.00, and P 2,500.00 respectively.
Now, if D, aside from his services, contributed P 12, 000.00, then, he will
also have a share in the balance of P 15,000.00 in proportion to his
contribution, which is 3/15 (P 12,000.00 P 6,000.00) or P 3,000.00,
while A, B, and C will share P 6,000.00, P 4,000.00, and P 2,000.00,
respectively.
Distribution of losses:
 The losses shall be distributed according to their agreement subject to
Article 1799 (see question No.11. infra.);
 If there is no such agreement, but the contract provides for the share
of the partners in the profits, the share of each in the losses shall be in
accordance with the profits-sharing ratio; but the industrial partner
shall not be liable for losses. The term "losses" implies that there are
no profits.
EXAMPLE: In the same example, the partners will share in the losses in
conformity with their agreement. If they failed to agree as to the
sharing of losses, the share of each partner in the losses shall be in the
same proportion stipulated with regards to the share of each in the
profits, to wit:
A …………………………………………………….. 40%
B …………………………………………………….. 30%
C ……………………………………………………. 30%
 If there is also no profit-sharing ratio stipulated, then the
losses shall be divided in proportion to their capital
contributions. D, however, being an industrial partner, shall
not be liable for losses but the same shall be borne by A, B,
and C, the capitalist partner, then he shall share in the losses
in proportion to his contribution.
The designation of profit and loss sharing may be entrusted to a
third person. The designation made by the third person is
binding upon the partners unless such is MANIFESTLY
INEQUITABLE. If, however the designation by third person
is annulled, the share of the partners in the profits and losses
shall be in proportion to their capital contribution.
The designation made by third person although inequitable
could no longer be impugned or cancelled:
a) If the partner has begun to execute the decision of the third
person.
b) If he does not impugn or cancel such designation within
three months from the time he had knowledge thereof.
(Art. 1798)
themselves
Rules Governing Management of
Partnership: Obligations of the partners
among themselves
Where the manager is appointed in the articles of
partnership:
 Extent of Power. - He may execute acts of

administration (not ownership) despite the
opposition of his partners unless he acts in bad
faith;
themselves
Therefore:
a) To remove him for JUST cause, the controlling partners
( controlling financial interest) should vote to OUST HIM
(See Art. 1800, par 1);
b) To remove him WITHOUT CAUSE or FOR AN UNJUST
CAUSE, there must be UNANIMITY (including his own
vote)
Reason: Revocation will amount to change in the terms of
the contract of partnership. For just or lawful cause, the
vote of the controlling partners (controlling financial
interest) is necessary to oust him.
themselves
Extent of Power:
a) If he acts in GOOD faith, he may do all acts of
Administration (not ownership) despite the
opposition of his partners.
b) If in BAD faith, he cannot ( however, he is
presumed to be acting in good faith; moreover
if he is really is in bad faith the controlling
interest should remove him.)
themselves
Where manager is appointed orally or in an instrument
other than the articles of partnership:
Extent of Power. - The partner appointed as
manager after constitution of the partnership may
also perform acts of administration;
Revocation of Power. - The power may be revoked at
anytime with or without just cause. Removal
should be done by controlling interest.
Reason: The appointment is mere delegation of
power.
Where there are two or more managing partners whose respective duties
are not specified.
Extent of Power.- Each one may separately perform acts of
administration;
In case of opposition by any of the managers. - The decision of
the majority of the managers (per head) shall prevail. In case
of tie, the matter shall be decided by the managing partners
owning the controlling interest (more than 50% of the
investment) (Art. 1801);
Where two or more managing partners with stipulation
that none of them shall act without the consent of the
others.
Extent of Power. - The concurrence of all is
necessary for the validity of their acts; and the
absence or incapacity of any manager cannot be
alleged as an excuse to dispense with this
requirement.
Exception. -When there is imminent danger of
grave or irreparable injury to the partnership
(Art. 1802);
Revocation of Power. - Same as letter (a) and (b) as
the case may be.
Where the manner of management has not been agreed upon:
Extent of Power. - All the parties shall be considered
as agents of the partnership whose acts shall bind the
partnership;
None of the partners may make alterations in the
immovable property of the partnership even if it may
be useful to the firm. In case of dispute, the
partners may seek the intervention of the court.
In case of Opposition by a partner. - The decision of
the majority of the partners shall prevail. In case of
tie, the partners representing the controlling interest
shall decide the matter. (Art. 1801)
themselves
The obligations of the partnership to the partners?
To refund amounts disbursed by a partner in behalf of the
partnership plus the corresponding interest from the time
the expenses are made;
 To answer for the obligations he may have contracted in good
faith in the interest of the partnership business; and
 To answer for risks in consequence of its management. (Art.
1796.)
Note: A partner is a mere agent of the partnership for the
purpose of the business in the absence of any stipulation to
the contrary. (Art. 1818.) Hence, he is not personally
liable.
PROPERTY RIGHTS OF A PARTNER
His rights in specific
partnership property;
His interest in the
partnership; and
His right to participate
in the management.
(Art. 1810.)
Nature of a partner's right in specific
partnership property?
A partner is a co-owner with his partners of
specific partnership property. The incidents of
this rule are:
 A partner, subject to legal provision on
partnership and to any agreement between the
partners, has an equal right to possess specific
partnership property, but for partnership
purposes only;
 His right in specific partnership property is not
assignable. Reason: The extent of his beneficial
interest in the property cannot be determined until
after liquidation of partnership affairs. However, the
rights of all the partners to the same property may
be assigned by them;
 His right in said property is not subject to
attachment or execution except on a claim against
the partnership and not to the partner; and
 The property is not subject to legal support due
from a partner. (Art. 1811.)
Partnership property from partnership capital.
The distinctions are:
Partnership property is variable - its value may vary from day to
day with changes in the market value of the partnership assets,
while partnership capital is constant - it remains unchanged as
the amount fixed by agreement of the partners, and is not
affected by fluctuations in the value of partnership property;
and
 Partnership property includes not only the original capital
contributions of the partners, but all property subsequently
acquired on account of the partnership or with partnership
funds, while partnership capital represents the aggregate of
the individual contributions made by the partners. (Babb &
Martin, Business Law, p.240.)
What does the partner's interest in the partnership
consist of?
It consists of his share in the profits while the partnership is on
going and in the surplus after its dissolution. (Art. 1812.)
Is the partner's interest in the partnership
assignable?
This interest may be assigned. Such assignment, however, does
not make the assignee or transferee a partner. Reason: No
one can become a partner without the consent of the other
partners. The right of the assignee (among others) is to
receive the profits accruing to the assigning partner.
Property Rights of the Partner
Effects of Conveyance by Partner of His Whole Interest in the
Partnership (Art. 1813)
a. If a partner conveys ( assigns, sells, donates) his WHOLE
interest in the partnership ( his share in the profits and surplus),
either two things may happen:
1. the partnership may still remain
2. The partnership is dissolved.
However, such conveyance DOES NOT itself dissolve the firm,
therefore the general partnership remains.
b. The assignee does not necessarily become a partner. The assignor
is still the partner, with a right to demand accounting and
settlement.
The assignee cannot interfere in the management or administration of the
partnership business or affairs.
The assignee cannot demand
1. Information
2. Accounting
3. Inspection of the partnership’s book
RIGHTS OF THE ASSIGNEE
a. To get whatever profits the assignor-partner would have obtained.
b. To avail himself of the usual remedies in case of fraud in the
management.
c. To ask for annulment of the contract of assignment if he was induced to
enter into it thru vices of consent.
d. To demand accounting – but only if the partnership is dissolved, but
even then, the account cover the period only from the date of the last
accounting which had been agreed by the partners (Art. 1813 2nd par.
With respect to the partner's interest in the
partnership, who enjoy preference - his creditors or
the partnership creditors?
The interest in the surplus is available for the satisfaction
of the separate debts of the partners (Art. 1814.) subject
to the preferred rights of the partnership creditors as
regards partnership property. (Art. 1824.) This means
that they have to be paid first from partnership property
before the separate or private creditors of each partners
of each partner.
Without prejudice to the preferred rights of partnership
creditors under Article 1827, on due application to a
competent court by any judgment creditor of a partner, the
court which entered the judgment, or any other court, may
charge the interest of the debtor partner with payment of the
unsatisfied amount of such judgment debt with interest
thereon, and may then or latter appoint a receiver of his share
of the profits, and of any other money due or to fall due to
him in respect of the partnership, and make all other orders,
directions, accounts and inquiries which the debtor partner
might have made, or which the circumstances of the case may
require.
The interest charged of a general partner may be
redeemed at anytime before foreclosure by the
separate property by one or more partners or by
the partnership property by one or more
partners with the consent of all the partners
whose interest are not charged.
Example : A, B and C are partners A personally owes X
a sum of money. X sues A, and obtains a final judgment
in this favor. But A has no money. What can X do?
He can charge the interest of partner A by asking the
same court ( or any other court possessed of
jurisdiction. Charged means to attach or levy upon his
interest in the partnership for payment of his unpaid
liabilities. Note: while a partner’s interest in the
partnership ( his share in the profits or surplus) may be
charged or levied upon but his interest in specific
partnership property as a rule cannot be attached.
When charging order is applied for and granted, the court MAY at the
same time or later appoint a receiver of the partner’s share in the
PROFITS or other MONEY due him. The receiver appointed is
entitled to any relied necessary to conserve the partnership purpose.
Thus, he may nullify all efforts to assign specific partnership
property.
REDEMPTION OF THE CHARGE INTEREST +
1.The charge may be redeemed or bought at any time BEFORE
FORECLOSURE
2. AFTER FORECLOSURE, it may still be bought with the separate
property ( one or more of the partners) or with the
partnership’s property with consent of all partners.
Note that if it is the limited partner’s interest
that is subject to charging order of his
creditor, it may be redeemed by the separate
property of the general partner but not
of the PARTNERSHIP’S PROPERTY
( Article 1862)
OBLIGATIONS OF THE PARTNERS WITH
REGARDS TO THIRD PERSONS
Give the effects of the inclusion in the firm name

of the name of a person who is not a partner.
They are:
Such person does not acquire the rights of a partner (Art.
1767.); and
 He shall be subject to the liability of a partner (Art.
1815.) in so far as third persons without notice are
concerned.
What is the nature of the liability of partners to third
persons for partnership contracts?
The liability of all the partners, including industrial ones, is:
 Pro rata. - This must be understood to mean equally or
jointly and not proportionately because the pro-rating is
based on the number of partners and not in the amount of
their contribution subject to adjustment among them (see
question No. 13 [3], Chap.3.); and
 Subsidiary. - The partners become personally liable only after
all the partnership assets have been exhausted. (Art. 1816.)
Any stipulation against the liability laid down above is
enforceable only as among the partners but is void as to
third persons. (Art. 1817.)
Note: The exemption of the industrial
partner to pay losses relates exclusively
to the settlement of partnership affairs
among themselves. (Compania
Maritima vs. Muñoz, 9 Phil. 326.)
Article 1818:
When a partner can bind or cannot bind the firm:
a) The fact that the partner is an agent;
b) The instances when he can bind the partnership
c) The instances when he cannot bind the partnership;
d) The instances when he cannot bind the partnership ( in
which case should he enter into the contract, he alone, and
not the firm nor the partner) would be liable.
Agency of a Partner
It has been truthfully aid that a partnership is a contract of
MUTUAL AGENCY, each partner acting as a principal on
his own behalf, and as an agent for his co-partners or the
firm.
WHEN CAN A PARTNER BIND THE PARTNERSHIP
a) When he is expressly authorized or impliedly authorized:
b) When he acts in behalf and in the name of the partnership.
Instances of Implied Authorization:
1. When the other partners do not object, although they have
knowledge of the act;
2. When the act is for apparently carrying on in the usual way
of the business of the partnership. ( THIS IS BINDING TO
THE FIRM EVEN IF THE PARTNER WAS NOT REALLY
AUTHORIZED, PROVIDED THAT THE THIRD PARTY
IS IN GOOD FAITH)
What acts of a partner will be binding on a partnership
with respect to third persons?
(1) Acts for apparently carrying on in the usual way the business of
the partnership. - Unless the partner has in fact no authority
and the third person has knowledge of that fact;
(2) Acts not apparently for carrying on in the usual way the business
of the partnership. -When authorized by the other partners;
(3) Acts of strict dominion or ownership. –
 when authorized by the other partners;
 when the other partners have abandoned the business; or
 when effect by all of them; and
4) Acts in contravention of a restriction on
authority. - Unless the third person has
knowledge of such restriction, whether or
not the acts are apparently carrying on in the
usual way the business of the partnership.
(Art. 1818.)
Note: "Usual way" means usual for the
particular partnership or usual for similar
partnerships. (Crane, Law on Partnership, p.
190.)
Example:
A, and B are partners in buying and selling automobiles. A, by
partner’s agreement was authorized to BUY automobiles on a
cash basis , never on an INSTALLMENT PLAN. One day , A
bought on credit or on the installment plan a car from X, a
client. X did not know of A’s lack of authority. A’s purchase was
made on behalf and in the name of partnership. In the given
example, partnership is bound because although A was not really
authorized, still for apparently carrying on in the usual way the
business of the partnership. A impliedly authorized and X was
in good faith. Had X known of A’s actual lack of authority , the
answer would not be bound.
instances of acts of strict dominion or ownership.
.
 Assignment of partnership property in trust for creditors or
on the assignee's promise to pay the debts of the partnership;
 Disposal of the goodwill of the business;
 Any act which would make it impossible to carry the
ordinary business of the partnership;
 Confession of judgement;
 Compromise concerning a partnership claim or liability;
 Submission or partnership claim or liability to arbitration;
and
 Renunciation of a claim of the partnership. (Ibid.)
CONVEYANCE AND REGISTRATION OF REAL
PROPERTY OF PARTNERSHIP ( Art. 1819)
A. If title is in the name of the partnership
I. If the partner is authorized to sell the real
property and the sale is made in the name of the
partnership, the buyer gets a valid title.
II. If the partner is without authority and he sells
the property in the name of the partnership, the
partnership may recover the land from the buyer.
 Exceptions ( meaning the partnership can no longer
recover the property from the buyer)
1. When the partner’s acts in the usual way of business and
the buyer does not know of the partner’s lack of
authority, or
2. When the property has already been validly conveyed
to a third party in good and for value.
a. If the partner sells the property in his own name and in
the usual way of business and with authority, the buyer
does not get valid title, but only the “equitable interest”.
What is equitable interest? It is not a legal title but a fair,
just and right title to the property based on the
principle of equity
b. If the partnership’s property is in the name of one or more but
not all the partners, and the record does not disclose the right of
the partnership, if sold by sold by the partner in his name, title
is conveyed to the buyer, but the partnership has the right to
recover the property.
Exception:
(1) If the seller’s act does not bind the partnership as when the
partner’s act in the usual way of business and the buyer does not
know of the partner’s lack of authority. – no recovery
(2) When the buyer is in good faith and for value, without
knowledge of partner’s lack of authority.- no recovery
c. If the property is registered in the name of
a third person in trust of the partnership:
- If the registered trustee sells the
partnership property, the buyer gets only
the equitable interest
Example:
Par. 1
A, B , C and D are partners of firm “Edimus.” A parcel of land
registered under name “Edimus” was sold by A on behalf and in
the name of the firm “Edimus” but without express authority.
The purchaser is X Does he become the owner?
Answer: Ordinarily YES but the firm may get back the land
unless:
a. The firm is engaged in the buying and selling of land
( consequently, the act of A is usual”;
b. X had in turn sold the same land to Y for value and Y did not
know of A’s actual lack of authority. (This is the case even
when the selling of the land was not for apparently carrying
on the business in the usual ways) Thus in the case presented,
the firm cannot get back the land. Reason: Because the
property has in turn been conveyed by the grantee X…. To a
holder for value (Y) without the knowledge that the partner,
in making the conveyance, has exceeded his authority.
2. Example : Paragraph 2
A, B , C and D are partners of firm “Edimus.” engaged in
the buying and selling of land. A parcel of land
registered under name “Edimus” was sold by A on in his
own name. Does the buyer become the owner of the
land? If not what right does the buyer have?
Ans: the buyer does not become the owner of the land.
However, he gets the equitable interest of the firm
insofar as the land is concerned, because after all the
selling of the land was in the usual course of business. Of
course, the buyer may later on ask for the reformation
of the contract, so that now, the seller’s name would
appear to be that of Edimus, provided of course that the
other partners would not object. ( they would object of
course if indeed A did not have actual authority to sell,
unless the buyer did not know of such lack of authority.)
If the contract be thus reformed, it is clear that the buyer
has also been given title. Note: If the partnership had
not been engaged in the purchase and sale of land, the
buyer would not even be entitled to the equitable
interest.
Example o Par. No. 3
A, B , C and D are partners in the real estate firm “Edimus.”
Although a certain parcel of land really belonged to the
firm, it was registered in the name of A and B. A and B
sold, in their name, the land to X. May the firm get back
the land?
Ans: Since the firm is engaged in the real estate business the
act of selling the land was for carrying in in the usual way
the firm’s business. So, the firm cannot get back the land,
for title thereto has been conveyed to X.
Question: Suppose in the preceding problem A and B had
not been expressly disauthorized by the firm to sell land,
would your answers remain the same?
Ans: It depends:
a. If X had been in good faith, that is, he head no
knowledge of the lack of authority, the answer would be
the same ( 1st par. Art. 18181)
b. If X had been in Bad Faith, the firm can get back the land
unless X in turn had sold the property to Y who is in good
faith. (Here the assignee Y of the purchaser X is a holder
for value without knowledge.’)
Example of Par. 4
A, B , C and D are partners in the real estate firm
“Edimus.” A certain parcel of land was in the name of
“A” in trust for the firm Edimus.”
a) If A sells the land to X in the name of Edimus, will X
become owner?
Ans: No, what X gets will only be the equitable interest
of the firm.
b) If A sell the land to X in his (A’s) own name, will X
become the owner?
Ans.: No what X gets will also be only the equitable
interest of the firm.
Reason: It is clear in both instances that under the
registry records A is only the trustee.
Example of Par. 5
A, B , C and D are partners in the real estate firm
“Edimus.” A certain parcel of land was registed not
in the name of the firm but in the name of A, B, C
and D. If A, B, C and D will sell the land to X, will X
become the owner, or will he have only the
equitable interest?
Ans: X will get the title. Consequently, he becomes
the owner, for the law says that “where the title to
real property is in the names of all the partners, a
conveyance executed by all the partners passes all
their rights in such property ( Art. 1819, par. 5). The
phrase “all their rights” includes ownership because
under Art. 1811 – “A partner is co-owner with his
partners of specific partnership property.”
Admission or Representation Made By a Partner (Art. 1820)
generally, an admission by a partner is an admission
against the partnership under the conditions given:
a) The admission must concern partnership affairs
b) Within the scope of authority
c) Admission must be made during the existence of the
partnership.
d) Proof of the existence of the partnership.
Restriction on the Rule:
a) Admissions made before dissolution are binding only
when the partner has authority to act on the particular
matter.
b) Admissions made after dissolution are binding only if
the admissions were necessary to wind up the business.
Reason: If the admission is not the “act of the partnership (
thru the partner), it should not be evidence against it.”
The words “ within the scope of authority produce this
result..
Needless to say an admission made by a former partner,
made after he has retired from the partnership is NOT
evidence against the firm.
When is previous admission ( not present court

testimony) of a partner admissible against the
partnership?
When it was made WITHIN the scope of the
partnership and DURING its existence, provided of
course that the existence of the partnership is first
proved by other evidence than such act or
declaration.
Cases where notice to or knowledge of a partner
constitutes notice to or knowledge of the
partnership.
Notice to any partner of any matter relating to
partnership affairs;
 Knowledge of the partner acting in the particular
matter acquired while a partner;
 Knowledge of the partner acting in the particular
matter then present to his mind; and
 Knowledge of any other partner who reasonably
could and should have communicated it to the
acting partner. (Art. 1821.)
But there is no notice to or knowledge of the
partnership in the case of fraud on the partnership
committed by or with the consent of the partner.
(Ibid.)
Effect of Notice to a Partner
In general, notice to a partner is notice to the partnership,
that is, a partnership cannot claim ignorance if a partner
knew. But this rule has restrictions and qualifications.
Notice to a partner, given while already a partner is a
notice to the partnership provided it relates to
partnership affairs.
Effect of knowledge although No Notice is given

It may be that no notice has been given, but knowledge
has been somehow acquired. (Thus, while, nobody
made any notification still the partner perhaps because
of analysis or deduction came to know of something.)
Is this knowledge of a partner also considered
knowledge o the partnership?
Knowledge of the partner is also knowledge of the firm
provided:
a) The knowledge was acquired by a partner who is acting
in the particular matter involved. (NOTE: The knowledge
may have been acquired while already a partner, or even
PRIOR TO THAT TIME, provided he still remembers the
same, that is, present to his mind.)
b) Or the knowledge may have been acquired by a partner
not acting in the particular matter involved. But here it is
essential that the partner having knowledge had reason to
believe that the fact related to a matter which had some
possibility of being the subject of the partnership
business, and then only if he was so situated that he could
communicate it to the partner acting in the particular
matte before such partner gives binding effect to his act.
The words ‘ who reasonably could and should have
communicated it to the acting partner’s accomplishment
this result.
Problem:
P acquired some knowledge about S’s credit before P became
a partner. Later P became a partner, and one day S had a
transaction with the firm. P never conveyed the information
he knew t o the firm although he could have done so.
Another partner R was the person who dealt with S’s
transaction. Nobody else in the firm knew what P already
knew. Question: Is P’s knowledge also the knowledge of
the partnership?
Ans: No because P was not the partner acting in the
particular matter involved. He had acquired he knowledge
BEFORE he became a partner, not afterwards. The words
present in his mind (remembered) do not apply, for they
apply only to the person ACTING in the particular matter.
Where the knowledge or notice has been received by the
partner before he became a partner acting in the particular
matter, there is no doubt that there has been neither
knowledge of nor notice to the partnership.
What is the nature of the liability to third persons
of the partners for non-contractual debts arising
from their individual acts?
All the partners are solidarily liable with the partnership
for everything chargeable to the partnership in the
following cases:
 Where (a) by any wrongful act or omission of any partner
(b) acting in the ordinary course of business or with the
authority of his co-partners, loss of injury is caused to any
person, not being a partner in the partnership, or penalty
is incurred (Art. 1822; e.g., negligent operation of a
vehicle by a partner which result in a traffic accident);
Reference to torts or quasi-delicts
 Where (a) one partner acting within the scope of his
apparent authority receives money or property of a
third person, and (b) misapplies it; and
 Where (a) the partnership in the course of its
business (b) receives money or property is
misapplied by any partner (d) while it is the custody
of the partnership. (Art. 1823.)
Reference; Liability of Partnership for
Misappropriation.
Under Art. 1824, all partners are liable solidarily with
the partnership for everything chargeable under
Articles 1822 to Art. 1823.
When Firm and the Other partners are not liable:
a. If the wrongful act or omission was not done within the
scope of the partnership business and for its benefit.
b. If the act or omission was not wrongful (See Art. 1822
which uses the term “ wrongful”)
c. If the act or omission, although wrongful, did not make the
partner concerned liable himself.
d. If the wrongful act or omission was committed after the
firm had been dissolved ( stopped its business) and the
same was not in connection with the process of winding
up.
What is the nature of the liability to third persons
of the partners for non-contractual debts arising
from their individual acts.
All the partners are solidarily liable with the partnership
for everything chargeable to the partnership in the
following cases:
 Where (a) by any wrongful act or omission of any partner
(b) acting in the ordinary course of business or with the
authority of his co-partners, loss of injury is caused to any
person, not being a partner in the partnership, or penalty
is incurred (Art. 1822; e.g., negligent operation of a
vehicle by a partner which result in a traffic accident);
 Where (a) one partner acting within the scope of his
apparent authority receives money or property of a
third person, and (b) misapplies it; and
 Where (a) the partnership in the course of its
business (b) receives money or property is
misapplied by any partner (d) while it is the custody
of the partnership. (Art. 1823.)
How may a person become a partner by estoppel?
(1) By representing himself as a partner in an existing

partnership or in a non-existing partnership (i.e., with one or
more persons, not actual partners); or
(2) By consenting to another making such representation.

(Art. 1825.)
Who will be liable to third persons who acted in good
faith when a person is falsely represented as a
partner in an actual or apparent partnership?
They are:
 The partner by estoppel;

 Those who consented to such representation; and
 The partnership itself if all the actual partners consented to
the representation. (Ibid.) This is a case of partnership by
estoppel.
Note: Estoppel does not create a partnership as between the

alleged partners. A contract is essential to the formation of a
partnership. (Art. 1767.)
Rule on the liability of the partners for partnership obligations
where a person is admitted as a partner in an existing
partnership.
When a person is admitted as a partner into an existing
partnership, he is liable for all obligations existing at the
time of his admission as though he was already a partner
when such obligations were incurred. Such obligations
shall be satisfied only out of the partnership property,
unless there is a stipulation to the contrary. (Art. 1826.)
Those who were already partners at the time when the

obligations were incurred are liable with their separate
property. (Art. 1816.) For all the obligations accruing
subsequent to the admission of the new partner, all the
partners are liable with their separate properties.
What is the extent of the liability of a person admitted
as a partner into an existing partnership?
(1) As to partnership debts contracted before his

admission. - He is liable only up to the amount of
his contribution or his share in the partnership
property unless there is a stipulation to the
contrary; and
(2) As to partnership debts contracted after his

admission. - He is liable with his separate property
if partnership assets are not sufficient. (Art. 1826.)
Art. 1827. The creditors of the partnership shall be
preferred to those of each partner as regards the
partnership property. Without prejudice to this right,
the private creditors of each partner may ask the
attachment and public sale of the share of the latter in
the partnership assets.
Reason for the Preference of Partnership Creditors
After all the partnership is a juridical person with
whom the creditors have contracted. Moreover the
assets of the partnership must be first exhausted.
Reasons why individual creditors may still attach the
partner’s share: After all the remainder ( after paying
partnership obligations) really belongs to the partner.
Note” the purchaser at the public sale does not
necessarily become a partner.
Sale by a Partner of His Share to a Third Party
If a partner sells his share to a third party, but the
firm itself still remains solvent, creditors of the
partnership cannot assail the validity of the sale by
alleging that it is made in fraud of them, since they
have not rally been prejudiced.
DISSOLUTION AND WINDING UP
Define dissolution.
Dissolution is the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying on of the
business. (Art. 1828.) It is that point in time when the partners
cease to carry on business together.
Is the partnership terminated on dissolution?
No, it continues until the winding up to partnership affairs is
completed. (Art. 1829.) The principal significance of dissolution is
that thereafter no new partnership business should be undertaken,
but affairs should be liquidated and distribution made to those
entitled to the partner's interest. (Crane, Law on Partnership,
p.223.)
(1) Winding up is the process of settling the business or affairs

of the partnership after dissolution (Ibid., p.320.) after
which the existence of the partnership is terminated.
(2) ) Termination is that point in time when all the
partnership affairs are wound up or completed, and the
partnership ceases to exist for all purposes.
What are the causes for the dissolution of a
partnership?
They are:
 Without violation of partnership agreement:
a. Termination of the agreed term of the particular undertaking;
b. By the express will of any partner who must act in good faith
(otherwise, the partner will be liable for damages), when no
definite term or particular undertaking is specified;
What are the causes for the dissolution of a
partnership?
c. By the express will of all partners except those:

who have assigned their interest; or
suffered them to be charged for their separation debts, and
d. By expulsion of any partner. Reason: It has the effect of

decreasing the number of partners. The partner expelled in
bad faith can claim damages;
2. In violation of partnership agreement:
(a) By the express will of any partner at any time (with or without
justifiable cause). Reasons: A partner cannot be compelled to
remain in the firm against his will;
3. By any event making it unlawful for the partnership or
members thereof to continue the business
4. By loss of specific thing which a partner had promised to
contribute before delivery. Reasons: There is no contribution.
If only the use of enjoyment of the thing is contributed, the
partner having reserved the ownership thereof, the loss of
the same before or after delivery dissolves the partnership.
Reason: The partner bears the loss and, thereof, he is
considered in default with respect to his contribution;
5. By the death of any partner. Reason: It causes a decrease in the number
of partners;
6. By the insolvency of any partner or the partnership. Reason: The
business of a partnership requires ability to meet financial obligation to
creditors;
7. By the civil interdiction of any partner. Reason: It results in his incapacity
to enter into dispositions of property inter vivos (i.e., during his
lifetime); and
8. By judicial decree in cases provided by law. (Art. 1830.)
 Note: Civil interdiction deprives the offender during the time of his
sentence or imprisonment of the right to manage his property and to
dispose of the same by any act to take effect during his lifetime. (see
Art. 34, Revised Penal Code.)
cases when the court may decree a dissolution
of the partnership.
In the following instances:
On the application by or for a partnership:
 In case of a partner's insanity;
 When a partner becomes incapable of performing his part of
the partnership contract;
 When a partner is guilty of conduct tending to effect
prejudicially the business;
 In case a partner willfully or persistently commit a breach of
the partnership agreement or such misconduct which makes it
no longer practicable to carry on the business with him.
 When the business can only be carried on at a loss; and
 Other circumstances making dissolution equitable (like fraud
in the render accounting or to allow inspection of
partnership's books, etc.)
cases when the court may decree a dissolution of the
partnership.
On the application by a purchaser of a partner's interest (under

Arts. 1813, 1814, supra.)
 After the termination of the specified term or particular
undertaking; or
 At any time if the firm was a partnership at will when the
interest was assigned or the charging order was issued. (Art.
1831.)
eEfect of dissolution on the authority of partners to
act for the partnership?
General rule. - Dissolution terminates all authority of any

partner to act for the partnership.
Exceptions:
 When necessary to wind up partnership affair; and
 When necessary to complete transactions begun but not then
finished. (Art. 1832.)
The effects in case new contracts are entered into by a
partner with third persons after dissolution.
(1) As among the partners themselves. - The other partners are not
bound (although they may be liable to third persons -
when the dissolution is not by the act, insolvency, or death of a
partner (e.g., expiration of the term);
 when the dissolution is by the act of any partner (e.g.,
resignation) and the partner acting for the partnership had
knowledge of the dissolution; and
 when the dissolution is by the death or insolvency of a partner
and the partner acting for the partnership had knowledge or notice
of the death or dissolution. (see Art. 1833.)
What acts or transactions will bind a partnership even
after dissolution?
 Acts appropriate for winding up;
 Acts appropriate for completing unfinished at dissolution; and
 Transactions which would bind the partnership if dissolution
had not taken place provided the third person-
 Had extended credit to the partnership prior to dissolution;
 Had not extended credit but had known of the partnership
prior to dissolution and having no knowledge or notice of
dissolution, the fact of dissolution had not been advertised in
the newspaper of general circulation in the place at which the
partnership was regularly carried on. (Art. 1834)
Cases is a partnership not bound by any act of a partner
after dissolution?
 In the following cases:
 When the partnership is dissolved because it is unlawful to
carry on the business unless the act is appropriate for winding
up partnership affairs;
 Where the partners has become insolvent; or
 Where the partner has no authority to wind up partnership
affairs except as otherwise provided by law.
two ways of winding up a dissolved partnership?
 Judicially - under the control and direction of the proper
court upon cause shown by any partner, his legal
representative or his assignee; or
 Extra judicially - by the partner themselves without
intervention of the court. (Art. 1836)
No partner can perform new acts which will the
partnership during the dissolution stage EXCEPT:
a) Acts necessary for the winding up purposes;
b) Acts necessary for complete unfinished business of the
Partnership.
However, if the dissolution is due to the act, insolvency or
death (AID) of a partner, the other partner can still
bind the partnership with contracts entered after the
dissolution of the partnership provided the partner so
acting has no knowledge of the AID or dissolution of
the contract by reason of any of the AID at the time of
the perfection of the contract. (Art. 1833)
What are the rights of each partner in case of
dissolution without violation of partnership
agreement?
 Unless otherwise agreed =
 To have the partnership properties applied to discharge the
liabilities of partnership; and
 To have the surplus, if any, applied, to pay in cash the net
amount owing to the respective partners, (Art. 1837)
What are the rights of the innocent partners in case of
dissolution in violation of partnership agreement?
 They are:
 to have partnership property applied for the payment of its
liabilities;
 To receive in cash their share of the surplus;
 To be indemnified for damages caused by the partner guilty of
wrongful dissolution;
 To continue the business in the same name during the agreed term
of the partnership by themselves or jointly with others; and
 To possess partnership property should they decide to continue
the business.
What are the rights of the partner who wrongfully
caused the dissolution?
They are:
If the business is not continued by the other partners. -
 To have partnership property applied to discharge its
liabilities; and
 To receive in cash his share of the surplus less damages caused
by his wrongful dissolution.
What are the rights of the partner who wrongfully
caused the dissolution?
If the business is continued. -
 To have the value of his interest in the partnership (but the
value of the goodwill of the business is not considered) at the
time of dissolution ascertained and paid in cash or secured by
bond approved by the court; and
 To be released from the existing and future liabilities of the
partnership.
What are the rights of the injured partner where the
partnership is rescinded on the ground of fraud?
 Right of a lien or retention of the surplus of partnership property
after satisfying partnership liabilities for any sum of money
contributed or paid by him;
 Right to subrogation in the place of partnership creditors after
payment of partnership liabilities;
 Right of indemnification by the guilty partner against all debts and
liabilities of the partnership; and
 Such other rights to which he is entitled under other provisions of
law. (Art. 1838)
Distribution of partnership assets
after dissolution
Assets of the partnership. - They are:
 Partnership property (including goodwill); and

 Contribution of the partners necessary for the
payment of all liabilities in accordance with
Article 1797
after dissolution
Order of application of the assets. - The partnership asset shall
be applied to the satisfaction of the liabilities of the
partnership in the following order:
 First, those owing to the partnership's creditors;
 Second, those owing to partners other than for capital and
profits such as loans given by the partners or advances for
business expenses;
 Third, those owing for the return of the capital contributed
by the partners; and
 Lastly, the share of the profits, if any, due to each partner.
after dissolution
Right of a partner where assets are insufficient. - If the assets
enumerated in No. 1, any partner of his legal representative
(to the extent of the amount which he has paid in excess of
his share of the liability), or any assignee for the benefit of
creditors or any person appointed by the court, shall have the
right to enforce the contributions of the partners provided in
Article 1797.
Liability of deceased partner's individual property. - The
individual property of a deceased partner shall be liable for
his share of the contribution necessary to satisfy the liabilities
of the partnership incurred while he was a partner. ( Arts.
1816, 1835, par. 3)
after dissolution
 Priority of payment of partnership creditors/partner's creditors.-
When partnership property and the individual properties of the
partners are in possession of the court for distribution,
partnership creditors from the individual properties of the
partners.
Distribution of property of insolvent partner. - If a partner is
insolvent, his individual property shall be distributed as follows:
 First, to those owing to separate creditors; and
 Then to those owing to partnership creditors; and
 Lastly, to those owing to partners by way of contribution. (Art.
1839)
LIMITED PARTNERSHIP
Define a Limited Partnership:
A limited partnership is one formed by two or more persons in

accordance with the provisions of the law, having as members
one or more general partners and one or more limited
partners. (Art. 1843)
LIMITED PARTNERSHIP
Give the characteristics of a limited partnership:
 A limited partnership is formed by compliance with the statutory
requirements;
 One or more general partners control the business and are
personally liable to creditors;
 One or more limited partners contribute to the capital and share
in the profits but do not participate in the management of the
business and are not personally liable for partnership obligations;
and
 The partnership debts are paid out of the common fund and the
individual properties of the general partners.
Note: The liability of a limited partner is an exception to the general
rule that all partners including industrial partner are liable pro-
rata with all their property for partnership debts. (Art. 1816)
What is the purpose of the law in authorizing the
formation of limited partnership.
The purpose is to bring into trade and commerce funds of those not
inclined to engage in that business, who are disposed to furnish
capital upon such limited liability with a view to the share of
profits which might be expected to result to them from its use.
State the essential requirements for the formation of a
limited partnership.
 The certificate or articles of limited partnership which states the
matters enumerated in Article 1844 must be signed and sworn to;
and
 Such certificate must be filed for record in the Securities and
Exchange Commission (Art. 1844)
Note: A strict compliance with the legal requirements is not

necessary. It is sufficient that there is substantial compliance in
good faith. If there is no substantial compliance, the partnership
becomes general partnership.
What must be contributed by a limited partner?
The contribution of a limited partner may be cash or property but
not services (Art. 1845); otherwise, he shall be considered an
industrial partner, in which case, he shall not be exempted from
personal liability.
In general, what are the rights, powers and liabilities of
a general partner in a limited partnership?
A general partner has all the rights and powers and is subject to all
restrictions of a partner in a partnership without limited
partners. However, acts of strict dominion or ownership (e.g.,
admitting a new partner; continuing the business on death, etc.
of a general partner; acts in contravention of the certificate,
etc.) are beyond the scope of the authority without the written
consent or at least ratification of all the limited partners. (Art.
1850)
Enumerate the rights of a limited partner.
 To require that the partnership books be kept at the principal place
of business of the partnership (Art. 1805);
 To inspect and copy at a reasonable hour partnership books or any
of them;
 To demand true and full information of all things affecting the
partnership (Art. 1806);
 To demand a formal account of partnership affairs whenever
circumstances render it just reasonable (Art. 1809);
 To ask for dissolution and winding up by decree of court (Art.
1857)
 To receive a share of the profits or other compensation by way of
income (Art. 1856) and
 To receive the return of his contribution provided the partnership
assets are in excess of all its liabilities (Art. 1857)

 Note: The rights of a limited partners are necessarily lesser than
those of a general partner.
State the liabilities that a partner may incur in favor of the
partnership.
He is liable for any unpaid contribution:
 The difference between the contribution as actually made and that

stated in the certificate as having been made; and
 The amount he agreed to make at a future time stated in the
certificate.
He holds as trustee:
 Specific property stated in the certificate as contributed by him but

which he had not contributed or had been wrongfully returned; and
 Money or other property wrongfully paid or conveyed to him on
account of his contribution. (Art. 1858)
May the above liabilities of a limited partner be waived or
comrpomised?
Yes provided that the waiver or compromise-
 is made with the consent of all the parties; and
 does not prejudice the partnership creditors who extended credit or
whose claims arise before the cancellation or amendment of the
certificate.
10. May a person be both a general and a limited partner in
the same partnership?
Yes, provided that the fact is stated in the certificate signed and sworn to
and recorded in the SEC.
 He shall have all the rights, powers and liabilities of a general partner;
hence he liable with his separate property to third person;
 With respect to his contribution, he would have the right of a limited
partner in so far as the other partners are concerned (Art. 1853)
LIMITED PARTNERSHIP
Give the requisites for the return of contribution of a
limited partner
 All liabilities of the partnership have been paid, or if they have
not yet been paid, the assets of the partnership are sufficient
to pay such liabilities to limited partners on account of their
contribution and to the general partners are not considered;
 The consent of all the members has been obtained except
when the return may be rightfully demanded; and
 The certificate is cancelled or so amended as to set forth the
withdrawal or reduction of the contributions. (Art. 1857)
LIMITED PARTNERSHIP
 When is a return of contribution of a limited partner a
matter of right?
 The requisites in No. 13 (1) & (2) have been duly complied with
 On the dissolution of the partnership;

 Upon the arrival of the date specified in the certificate for the
return; or
 After the expiration of the 6 months' notice in writing given by
him to the other partners if no time is fixed in the certificate for
the return of the contribution or for the dissolution of the
partnership.
LIMITED PARTNERSHIP
Who is preferred limited partner?
A preferred limited partner is one given preference over other
limited partners as to -
 Return of contribution;
 Compensation by way of income;
 Any other matter by an agreement stated in the certificate of
limited partnership (Art. 1855)
LIMITED PARTNERSHIP
What is a substituted limited partner?
 A substituted limited partner is a person admitted to all the rights
of a limited partner who has died or has assigned his interest in a
partnership (Art. 1859).
Give the requisites in order that the assignee may become
a substituted limited partner?
 All the members must consent to the assignee becoming a
substituted limited partner or the limited partner, being
empowered by the certificate must give the assignee the right to
become a limited partner;
 The certificate must be amended in accordance with Article 1865;
 The certificate as amended must be registered in the SEC.
 Instances that will show that a limited partner is a mere
contributor or practically a stranger in the limited
partnership;
 The surname of the limited partner shall not appear in the partnership
name unless it is also a surname of a general partner or prior to the
time when the limited partner became such, the business had been
carried on under a name in which his surname appeared (Art. 1846);
 A limited partner cannot participate in the management of the
partnership business (Art. 1848);
 He may grant loans to and transact other business with the
partnership (Art. 1854);
 He can demand under certain conditions, the return of his
contribution (Art. 1857);
 He is not (unless he is also a general partner) a proper party to a suit
by or against the limited partnership unless the suit is to enforce a
limited partner's right against or liability to the partnership (Art.
1866); and
 The retirement, death, insolvency, insanity or civil interdiction of a
limited partnership as long as there remains a limited partner (Art.
1860)
After the dissolution, how shall the liabilities of a limited
partnership be settled:
In the following order:
 Those due to creditors, including limited partners, except those on
account of their contributions in the order of priority as provided by
law (Arts. 1854, 1856, 1857 (1))
 Those due to limited partners in respect to their share of the profits
and other compensation by way of income on their contribution;
 Those due to limited partners for the return of the capital
contribution;
 Those due to general partners in respect to profits; and
 Those due to general partners for the return of the capital
contributed. (Art. 1863)
Note: In the absence of any statement in the certificate as to the share of
the profits which each partner shall receive by reason of his
contribution (Art. 1844, par. 1 (I) ) and subject to any subsequent
agreement, limited partners share in the partnership assets in respect
to their claims for capital and profits in proportion to the respective
amounts of such claims. (Art. 1863)
When shall the certificate of limited partnership be
cancelled or amended?
 The certificate shall be cancelled:
 When the partnership is dissolved; or
 All the limited partners cease to be such (Art. 1846)
Reason: A limited partnership cannot exist without any limited
partner.
In all other cases (e.g., change in name of partnership, addition or
substitution of a limited partner, etc.) , only an amendment of
the certificate is required.
State the requirements for the amendment or
cancellation of a certificate.
 The amendment must be in writing;
 It must be signed and sworn to by all the members including
the new members and the assigning limited partner in case of
substitution or addition of a limited or general partner; and
 The certificate, as amended must be filed for record in the
SEC (Art. 1865)
 The cancellation of the certificate has been duly amended, the
amended certificate shall thereafter be for all purposes the
certificate of the partnership. (Art. 1844)
THE END

Review On Partnership

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Review On Partnership

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Law on Partnerships

However, the law allows the pursuit thereof by two

Personae delectae (delectus personarum) –

1. It is easy and inexpensive to organize as it is

Such receipt is prima facie evidence that he is a

 As wages of an employee or rent to a landlord;

 As annuity to a window or representative of a

In all the above cases, the profits in the business are

No, since in a partnership, the partners share profits

(2) The profits shall be confiscated in favor of the

(3) The instrument of tools and proceeds of the

(a) Ordinary partnership. - one which actually exists

 The losses shall be distributed according to their

 Extent of Power. - He may execute acts of

Give the effects of the inclusion in the firm name

When is previous admission ( not present court

Effect of knowledge although No Notice is given

(1) By representing himself as a partner in an existing

(2) By consenting to another making such representation.

 The partner by estoppel;

Note: Estoppel does not create a partnership as between the

Those who were already partners at the time when the

(1) As to partnership debts contracted before his

(2) As to partnership debts contracted after his

(1) Winding up is the process of settling the business or affairs

c. By the express will of all partners except those:

d. By expulsion of any partner. Reason: It has the effect of

On the application by a purchaser of a partner's interest (under

General rule. - Dissolution terminates all authority of any

 Partnership property (including goodwill); and

A limited partnership is one formed by two or more persons in

Note: A strict compliance with the legal requirements is not

He is liable for any unpaid contribution:

 The difference between the contribution as actually made and that

 Specific property stated in the certificate as contributed by him but

 On the dissolution of the partnership;

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