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Part I.

PARTNERSHIP

a. Concept of Partnership

A. GENERAL PROVISIONS

Art. 1767, CC. By the contract of partnership two or more


persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.

1. Historical Background
Biblical origins (Gen 13:10-12)

Abraham and Lot made a deal to settle different parts


of the Promised Land
As a result, Abraham lived in Canaan while Lot lived
near Sodom

Babylon (Code of Hammurabi)

Men who wished to make a profit swore an oath of


partnership before the gods
Three degrees of responsibility of a merchant
Payment of damages (Can be exempted from
payment through declaration of force majeure)

China (Tang Dynasty)

Partnerships were formed for the trade of steel


weapons

Rome

Contract of societas
o Two or more parties pool their resources for
a common purpose
o Division of profits and losses
Influenced Spanish Civil Code

Western Europe

Commenda contract (Italy)


o Originated in Venice and Genoa based on
the Islamic qirad contract
o Two parties: a) a commendator, or a
sedentary investor and b) a tractador, or a
traveling merchant to whom the
commendator trusted his goods
o One commenda contract per voyage
o Two types: a) unilateral and b) bilateral
Socit en commandite (France)
o Evolved from the Italian commenda
o Limited liability on the part of the
commendators
o Bigger in scale
Compagna (Italy)
o Based on the societas
o Has separate juridical personality
o Registration requirement in certain
jurisdictions
o Contractual stipulations similar to those in
modern partnership law

Two or more persons may also form a partnership for the


exercise of a profession. (1665a)

Definition of partnership (De Leon, pp. 7-8)


1. A partnership is a contract of two or more competent
persons to place their money, effects, labor and skill, or some
or all of them, in lawful commerce or business and to divide
the profits and bear the losses in certain proportions. (40 Am.
Jur. 126, 474; 68 C.J.S. 398)
2. A partnership is an association of two or more persons to
carry on as co-owners of a business for profit. (Uniform
Partnership Act, Sec. 6)
3. A partnership is a legal relation based upon the express or
implied agreement of two or more competent persons
whereby they unite their property, labor or skill in carrying on
some lawful business as principals for their joint profit.
(Mechem, Elements of the Law of Partnership, p. 1)
4. A partnership is an entity, distinct and apart from the
members composing it, and, for the purpose of which it was
created, it is a person having its own assets and liabilities and
any benefit or liability attaching to a member of the
partnership, results from the partnership relation. (31 Words
and Phrases [1957 ed.], p. 293)

a. Essential Requisites
Art. 1770, CC. A partnership must have a lawful object or
purpose, and must be established for the common benefit or
interest of the partners.
When an unlawful partnership is dissolved by a judicial decree,
the profits shall be confiscated in favor of the State, without
prejudice to the provisions of the Penal Code governing the
confiscation of the instruments and effects of a crime.
(1666a)

i. Valid Contract (De Leon, pp. 12-16)


Partnership relation fundamentally
contractual

a. Sources of Law on Partnership

Three sources of Philippine partnership law (De


Leon, pp. 5-6)

1. Old Civil Code (Spain)


2. Uniform Partnership Act (US)
3. Uniform Limited Partnership Act (US)

2. Nature of Partnerships

Partnership is a voluntary relation created


by agreement of the parties
No such thing as a partnership created by
law or by operation/application of law alone
Religious societies, conjugal partnerships,
etc. are not included
Terms of association are customarily
embodied in a written document known as
Articles of Partnership, which states the
name, nature or purpose, and location of the
firm

Partnership relation fiduciary in nature

Personal relation in which the element of


delectus personae (choice of the person/s)
exists
o Right to choose co-partners

Unless otherwise
stipulated, no one can
become a member without
the consent of all the
other associates

Each member is granted


the right to choose with
whom he will be
associated in the firm
o Power to dissolve partnership

Doctrine of delectus
personae confers the
power, but not necessarily
the right, to dissolve the
partnership

Requires good faith on the


part of the person seeking
to dissolve the partnership
Involves trust and confidence between
partners

iii. Proprietary Interest (De Leon, pp. 18-23)


Existence of propietary interest

Partnership liability may be imposed upon a


person who holds himself out, or permits
himself to be held out, as a partner in an
enterprise

ii. Legal Capacity/Parties (De Leon, pp. 16-18)


Individuals

Any person capable of entering into contractual


relations may be a partner
Persons who cannot give consent to a contract
of partnership:
o Unemancipated minors
o Insane or demented persons
o Deaf-mutes who do not know how to
write
o Persons suffering from civil interdiction
o Incompetents under guardianship
Persons prohibited from giving each other any
donation/advantage cannot enter into a
universal partnership (Art. 1782, CC)
A married woman may enter into a contract of
partnership without her husbands consent, but
he may object under certain conditions (Art. 73,
CC)

Partnerships

No prohibition against a partnership being


partner in another partnership

Corporations

SC doctrine: Unless authorized by statute or by


its charter, a corporation has no capacity or
power to enter into a contract of partnership
Exceptions:
o Joint venture partnerships where the
nature is in line with the business
authorized by the corporations charter

Partners must contribute capital (ex. money,


property, services) to the common business
Proof of contribution is necessary (Tablason v.
Ballozos)

iv. Legality of the object (De Leon, p. 23)


1. Unlawful partnership

Application of principles of estoppel

Partnership agreement provides that


the two partners will manage the
partnership so management of
corporate interest is not surrendered
Foreign corporation enters as a limited
partner in a limited partnership merely
for investment purposes

Purpose of partnership must be lawful,


otherwise contract is void ab initio
Examples of unlawful partnerships:
o Monopolies or combinations in
restraint of trade
o Gambling partnerships
o Smuggling partnerships

2. Partial illegality of partnership business


3. Subsequent illegality of partnership
business
c. Purpose to Obtain Profit
Profit as raison detre of partnership

Profit motive distinguishes partnership contract


from voluntary religious or social organizations
One without any right to participate in the profits
cannot be deemed as partner

Profit need only be principal, not exclusive, aim

Profit as principal purpose is sufficient even if


there are incidental moral/social/spiritual ends

i. Return of contribution where partnership


is unlawful
d. Sharing of Profits/Losses (De Leon, pp. 2425)
Sharing of profits

Joint interest in profits is necessary, although


not necessarily in equal shares
Any stipulation excluding one or more partners
from any participation in profits/losses is void
Presumptive, but not conclusive, evidence of
partnership

Sharing of losses

Necessary corollary of sharing in profits,


distribution of losses being a consequence
thereof

If only share of each partner in the profits has


been agreed upon, share in losses borne shall be
in the same proportion

4.
5.

ii. Right to receive profits where partnership


is unlawful
3. Determination of Existence of Partnership

6.

Art. 1769, CC. In determining whether a partnership exists,


these rules shall apply:

7.

(1) Except as provided by article 1825, persons who are not


partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself
establish a partnership, whether such-co-owners or copossessors do or do not share any profits made by the use of
the property;

Tests and incidents of partnership

(3) The sharing of gross returns does not of itself establish a


partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which
the returns are derived;
(4) The receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner in the
business, but no such inference shall be drawn if such profits
were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased
partner;
(d) As interest on a loan, though the amount of payment vary
with the profits of the business;

b. Intent of the Parties (De Leon, pp. 29-30)


Intention to create partnership

a. General Rule (De Leon, pp. 28-29, 37, 43-45)

GENERAL RULE: To establish the existence of a


partnership, all of its essential features or
characteristics must be present
In a typical contract of partnership, the parties
expressly agree to unite their property and services
as co-proprietors, and to share their profits
o However, in case of doubt, Art. 1769 applies

Burden of proof and presumption


1.
2.
3.

The existence of a partnership must be proved and


will not be presumed
The law presumes that persons who are acting as
partners have entered into a contract of partnership
(Presumption 1)
When a partnership is shown to exist, it is presumed
to continue in the absence of evidence to the
contrary (Presumption 2)

Only those terms of a contract upon which the


parties have reached an actual understanding, either
expressly or impliedly, may afford a test by which to
ascertain the legal nature of the contract
Typical incidents of a partnership
o Partners share in profits and losses
o Equal rights in management and conduct of
partnership
o Every partner is an agent of the partnership
o All partners are personally liable for the
debts of the partnership with their separate
property (EXCEPTION: Limited partners
limited by amount of investment)
o Fiduciary relation
o On dissolution, partnership is not terminated
until winding up of business

Basic test of partnership: Whether the business is carried on


in behalf of the person sought to be held liable

(e) As the consideration for the sale of a goodwill of a


business or other property by installments or otherwise. (n)

Rules to determine existence of partnership

The burden of proof is in the person: a) denying the


existence of the partnership (Presumption 1) or b)
asserting the termination thereof (Presumption 2)
One who alleges a partnership cannot prove it merely
by evidence of an agreement where the parties call
themselves partners, as the use of the term in a
popular sense does not necessarily convey an
intention to create a legal partnership
The term associate may or may not refer to
partners (mere employees may also be associates)
Legal intention is the crux of partnership

Partnership is a matter of intention, each party giving


his consent to become a partner
GENERAL RULE: Where the parties expressly declare
that they are not partners, such settles the question
as between themselves
o However, it is the substance, and not the
name of the arrangement that determines
the legal relation of the parties
o Intention to form a partnership is not always
required
A partnership can never exist as to third persons if no
contract of partnership, express or implied, has been
entered into between the parties themselves
o EXCEPTION: Partnership by estoppel

c. Specific Rules
i. Person not partners to each other not
partners to third persons
ii. Declaration of partner
iii. Co-ownership does not of itself establish a
partnership (De Leon, pp. 30-35)
Clear intent to derive profits from operation of
business

Co-ownership, while it does not of itself


establish a partnership, is an essential element
of partnership
o Two or more persons may become coowners without a contract (ex. testate
succession, donation), but they cannot
be partners in the absence of a contract
o The profits must be derived from the
operation of the business by the
members of the association, and not
merely from property ownership

Partnership vs. business trust


1.

2.

As to relationship between the parties


a. Partnership All members are principals
and agents for each other
b. Trust Trustee is a principal and not an
agent
Only the trustee is empowered to make contracts to
carry on the business and the only one who has legal
title to the property

Partnership vs. co-ownership

Existence of fiduciary relationship

If parties are partners in the business


undertaking = There is a well-defined fiduciary
relationship between them
o Remedy for disputes: Action for
dissolution, termination, and
accounting
If parties are merely co-owners = No fiduciary
relationship
o Remedy for disputes: Other types of
action (ex. action for non-performance
of contract)

Cohabitation (Persons living together without


benefit of marriage)

Before New Civil Code came into effect, socalled common-law partnerships were the
basis of an informal civil partnership
With the enactment of the Family Code, property
co-owned under cohabitation is now governed
by rules on co-ownership

Partnership
Creation

Created by
contract

Generally created
by law

Juridical
personality

Separate and
distinct juridical
personality

No separate
personality

Purpose

Profit

Common
enjoyment of a
thing/right

Duration

No limit

10 years (20 if
stipulated by
testator)

Disposal of
interests

No right to
dispose of
individual interest
without consent
of other partners

Co-owner may
freely dispose of
his individual
interest

Power to act with


third persons

May be
represented by
any partner

Co-owner cannot
represent the coownership

Effect of death

Dissolves
partnership

Does not
necessarily
dissolve coownership

iv. Sharing of gross return does not establish a


partnership (De Leon, pp. 35-36)
Reason for rule

When a business is carried on in a persons


behalf as a partner, he is conceived as being
interested in its successes and its failures
In general, where the contract requires gross
returns to be paid, the portion is given as
commission, wages, rent, etc.
EXCEPTION: Where there is evidence of mutual
management and control, a partnership may
result

v. Receipt of profits prima facie evidence of


being a partner

Partnership v. conjugal partnership of gains (CPG)


Partnership

1.

2.

As to purpose
a. Partnership Pecuniary gain
b. Labor union a) Collective bargaining and
b) dealing with employers
No one may become a partner without the consent of
all the other partners

CPG

Parties

Created by
voluntary
agreement
between two
partners

Arises from
agreement
between future
spouses

Governing laws

Governed by
stipulation of
parties

Governed by law

Juridical
personality

Has juridical
personality

No juridical
personality

4. Partnership compared to other forms of


association or business entities (De Leon, pp. 4556)
Partnership vs. labor union

Co-ownership

Commencement

Purpose

Distribution of
profits

Management

Disposition of
shares

Begins from the


moment of the
execution of the
contract, unless
stipulated
otherwise

Commences
precisely on the
date of the
celebration of the
marriage

Profit

Regulates
property relations
during marriage

Profits are
divided either:
a) according to
agreement of
partners or b) in
proportion to
their respective
capital
contribution

Equal division of
shares of
spouses in
profits

Shared equally
by all partners

Husbands
decision prevails
in case of
disagreement

Partners whole
interest may be
disposed of
without other
partners
consent

Share of each
spouse cannot
be disposed of
during the
marriage

Creation

Created by mere
agreement of
parties

Created by law or
by operation of
law

Number of
incorporators

May be
organized by only
two persons

Requires at least
five incorporators
(EXCEPTION:
Corporation sole)

Commencement
of juridical
personality

Execution of
contract of
partnership

Date of issuance
of certificate of
incorporation from
SEC

Powers

May exercise any


power authorized
by partners

Powers are limited


to: a) those
granted by law; b)
implied from those
granted; or c)
incident to
corporations
existence

Management

Every partner is
an agent of the
partnership

Power of
management is
vested in board of
directors/trustees

Effect of
mismanagement

Partner can sue


co-partner for
mismanagement

Suit against
member of board
of
directors/trustees
must be in the
name of the
corporation

Right of
succession

No right of
succession

Has right of
succession

Extent of liability
to third persons

Partners (except
limited partners)
are liable
personally and
subsidiarily for
partnership debts
to third persons

Stockholders are
liable only to
extent of
subscribed shares

Transferability of
interest

Partner cannot
transfer interest
without consent
of all other
partners under
principle of
delectus
personarum

Stockholder can
generally transfer
his shares without
the other
stockholders
consent

Term of
existence

May be for any


period of time
stipulated

Up to 50 years

Firm name

Limited
partnership
required by law

May adopt any


firm name
provided it is not
the same as or

Partnership vs. voluntary association


Partnership

Voluntary
association

Juridical
personality

Has juridical
personality

No juridical
personality

Purpose

Profit

Not necessarily
for profit

Contributions of
members

Contribution of
capital

No contribution
of capital (though
fees are collected
for maintenance
purposes)

Liability of
members

Partnership is
liable for debts of
firm

Members are
individually liable

Partnership vs. corporation


1. Distinctions
Partnership

Corporation

to add Ltd. to
name

similar to any
registered firm
name

Dissolution

May be dissolved
at any time by
the will of any or
all of the partners

May only be
dissolved with the
States consent

Governing law

Civil Code

Corporation Code

2. Similarities
a.
b.
c.
d.
e.
f.

Separate and distinct juridical personality


Can only act through agents
Composed of an aggregate of individuals
(EXCEPTION: Corporation sole)
Distributes profits to those who contribute capital
(NOTE: Industrial partners also share in profits)
Organized in accordance with an authorizing law
Partnerships are taxable as corporations