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PARTNERSHIP
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.
Definition 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 profits among themselves.
Elements
- Intention to form a contract of partnership
- Participation in both profits and losses
- Community of interests
Basic Features
- Voluntary agreement
- Association for profit
- Mutual contribution to a common fund
- Lawful purpose or object
- Mutual agency of partners
- Articles must not be kept secret
- Separate juridical personality
Characteristics
- Consensual – perfected by mere consent.
- Bilateral – formed by two or more persons creating reciprocal rights and obligations.
- Preparatory - entered into as a means to an end.
- Nominate – has a special name or designation.
- Onerous – contributions in the form of either money, property and/or industry must be made.
- Commutative – the undertaking of each partner is considered as the equivalent of that of the others.
- Principal – its existence or validity does not depend on some other contract.
Principle of Delectus Personae (choice of persons) – a person has the right to select persons with whom he wants to be associated with in partnership.
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners even in case of
failure to comply with the requirements of Article 1772, first paragraph.
Partnership, a juridical person As an independent juridical person, a partnership may enter into contracts, acquire and possess property of all kinds in its name, as well as incur obligations and bring civil or criminal actions. Thus, a partnership may be declared insolvent even if the partners are not. It may enter into contracts and may sue and be sued in its firm name or by its duly authorized representative. It is sufficient that service of summons be served on any partner.
Partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for a fraudulent, unfair or illegal purpose.
Effect of failure to comply with statutory requirements Under Art 1772 Partnership still acquires personality despite failure to comply with the requirements of execution of public instrument and registration of name in SEC.
Under Arts 1773 and 1775 Partnership with immovable property contributed, if without requisite inventory, signed and attached to public instrument, shall not acquire any juridical personality because the contract itself is void. This is also true for secret associations or societies.
To organize a partnership not an absolute right It is but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose.
Art. 1769. In determining whether a partnership exists, these rules shall apply:
- Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons.
- Co-ownership or co-possession does not of itself establish a partnership, whether such co-ownership or co- possessors do or do not share any profits made by the use of the property.
- 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.
- The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
a. As a debt by installments or otherwise.
b. As wages of an employee or rent to a landlord.
c. As an annuity to a widow or representative of a deceased partner.
d. As interest on a loan, though the amount of payment vary with the profits of the business.
e. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.
In general, to establish the existence of a partnership, all of its essential features or characteristics must be shown as being present. In case of doubt, art.1769 shall apply. This article seeks to exclude from the category of partnership certain features enumerated herein which, by themselves, are not indicative of the existence of a partnership.
Persons not partners as to each other Persons who are partners as between themselves are partners as to third persons. Generally, the converse is true: if they are not partners between themselves, they cannot be partners as to third persons. Partnership is a matter of intention, each partner giving his consent to become a partner. However, whether a partnership exists between the parties is a factual matter. Where parties declare they are not partners, this, as a rule, settles the question between them. But where a person misleads third persons into believing that they are partners in a non-existent
partnership, they become subject to liabilities of partners (doctrine of estoppel).Whether or not the parties call their relationship or believe it to be a partnership is immaterial. Thus, with the exception of partnership by estoppel, a partnership cannot exist as to third persons if no contract of partnership has been entered into between the parties themselves.
Co-ownership or co-possession There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons.
Clear intent to derive profits from operation of business Co-ownership does not of itself establish the existence of a partnership, although it is one of its essential elements. This is true even if profits are derived from the joint ownership. The profits must be derived from the operation of business by the members of the association and not merely from property ownership. The law does not imply a partnership between co-owners because of the fact that they develop or operate a common property, since they may rightfully do this by virtue of their respective titles. There must be a clear intent to form a partnership.
Existence of fiduciary relationship
Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should there be dispute; the remedy of partners is an action for dissolution, termination and accounting. For co-owners it would be one, for instance, for non- performance of contract. People can become co-owners without a contract but they cannot become partners without one.
Persons living together without benefit of marriage Property acquired governed by rules on co- ownership.
Sharing of gross returns not even presumptive evidence of partnership The mere sharing of gross returns alone does not even constitute prima facie evidence of partnership, since in a partnership, the partners share profits after satisfying all of the partnership’s liabilities.
- Both can only act through its agents;
- Both are organizations composed of an aggregate of individuals;
- Both distribute profits to those who contribute capital to the business;
- Both can only be organized where there is a law authorizing is organization;
- Partnerships are taxable as corporations.
Art. 1770. 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. Object or purpose of partnership
The provision of the 1 st^ paragraph reiterates 2 essential elements of a contract of partnership:
- Legality of the object; and
- Community of benefit or interest of the partners. The parties possess absolute freedom to choose the transaction or transactions they must engage in. The only limitation is that the object must be lawful and for the common benefit of the members. The illegality of the object will not be presumed; it must appear to be of the essence of the relationship.
Effects of an unlawful partnership
- The contract is void and the partnership never existed in the eyes of the law;
- The profits shall be confiscated in favor of the government;
- The instruments or tools and proceeds of the crime shall also be forfeited in favor of the government;
- The contributions of the partners shall not be confiscated unless they fall under #3.
A partnership is dissolved by operation of law upon the happening of an event which makes it unlawful. A judicial decree is not necessary to dissolve an unlawful partnership. However, advisable that judicial decree be secured. 3rd^ persons who deal w/ partnership w/o knowledge of illegal purpose are protected.
Right to return of contribution where partnership is unlawful Partners must be reimbursed the amount of their respective contributions. The partner who limits himself to demanding only the amount contributed by him need not resort to the partnership contract on which to base his claim or action. Since the purpose for which the contribution was made has not come into existence, the manager or administrator must return it, and he who has paid his share is entitled to recover it.
Right to receive profits where partnership is unlawful Law does not permit action for obtaining earnings from an unlawful partnership because for that purpose, the partner will have to base his action upon the partnership contract, which is null and without legal existence by reason of its unlawful object; and it is self-evident that what does not exist cannot be a cause of action. Profits earned do not constitute or represent the partner’s contribution. He must base his claim on the contract which is void. It would be immoral and unjust for the law to permit a profit from an industry prohibited by it. T he courts will refuse to recognize its existence, and will not lend their aid to assist either of the parties thereto in an action against each other. Therefore, there cannot be no accounting demanded of a partner for the profits which may be in his hands, nor can recovery be had.
Effect of partial illegality of partnership business Where a part of the business is legal and part illegal, a n account of that which is legal may be had. Where, w/o the knowledge or participation of the partners, the firm’s profits in a lawful business has been increased by wrongful acts, the innocent partners are not precluded as against the guilty partners from recovering their share of the profits.
Effect of subsequent illegality of partnership business Contract will not be nullified. Where the business for which the partnership is formed is legal when the partnership is entered into, but afterward becomes illegal, an accounting may be had as to the business transacted prior to such time.
Community of interest between the partners for business purposes The salient features of an ordinary partnership are a community of interest in profits and losses, a community of interest in the capital employed, and a community of power in administration. This community of interest is the basis of the partnership relation. However, although every partnership is founded on a community of interest, e very community of interest does not necessarily constitute a partnership. Property used in the business may belong to one or more partners, so that there is no joint property, other than joint earnings. To state that partners are co-owners of a business is to state that they have the power if ultimate control. But partners may agree upon concentration of management, leaving some of their members entirely inactive or dormant. Only one of these features, profit-sharing, seems to be absolutely essential. But a mere sharing of profits of itself does not of necessity constitute a partnership. The court must consider all the essential elements in light of the facts of the particular case before deciding whether a partnership exists.
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary .Form of partnership contract
General rule No special form required for validity or existence of the contract of partnership. Contract maybe made orally or in writing regardless of the value of the contributions.
Where immovable property or real rights are contributed Execution of public instrument necessary for validity of contract of partnership. To affect 3 rd^ persons, the transfer of real property to the partnership must be duly registered in the Registry of Property.
When partnership agreement covered by the Statute of Frauds An agreement to enter in a partnership at a future time, which by its terms is not to be performed w/in a year from the making thereof is covered by the Statute of Frauds. Such agreement is unenforceable unless it
is in writing or at least evidenced by some note or memorandum.
Partnership implied from conduct Binding effect Existence of partnership may be implied from the acts or conduct of the parties, as well as from other declarations, and such implied contract would be as binding as a written and express contract.
Ascertainment of intention of parties In determining whether a particular transaction constitutes a partnership, as between the parties, the intention as disclosed by the entire transaction, and as gathered from the facts and from the language employed by the parties as well as their conduct, should be ascertained.
Conflict between intention and terms of contract If the parties intend a general partnership, they are general partners although their purpose is to avoid the creation of such a relation.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission. Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. Registration of partnership
Partnership with capital of P3, 000 or more Requirements:
- The contract must appear in a public instrument;
- It must be recorded or registered w/ the SEC. However, failure to comply w/ the above requirements does not prevent the formation of the partnership or affect its liability and that of the partners to 3rd^ persons. But any partner is granted the right bylaw to compel each other to execute the contract in a public instrument.
Purpose of registration Registration is necessary as a condition for the issuance of licenses to engage in business and trade. In this way, the tax liabilities of big partnerships cannot be evaded and the public can determine more
As to extent of its subject matter
- Universal partnership. (Art. 1777) a. Universal partnership of all present property. (Art. 1778) b. Universal partnership of profits. (Art. 1780)
- Particular partnership. (Art. 1783)
As to liability of the partners General partnership: one consisting of general partners who are liable pro rata and subsidiary and sometimes solidarily w/ their separate property for partnership debts.
Limited partnership: one formed by two or more persons having as members one or more general partners and one or more limited partners, the latter not being personally liable for the obligations of the partnership.
As to duration Partnership at will: one in w/c no time is specified and is not formed for a particular undertaking or venture and w/c may be terminated at any time by mutual agreement of the partners, or by the will of any one partner alone; or one for a fixed term or particular undertaking w/c is continued after the end of the term or undertaking w/o express agreement. Partnership with a fixed term: one w/c the term for w/c the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking.
As to the legality of its existence De jure partnership: one w/c has complied w/ all the legal requirements for its establishment. De facto partnership: one w/c has failed to comply w/ all the legal requirements for its establishment.
As to representation to others Ordinary or real partnership: one w/c actually exists among the partners and also as to 3rd^ persons. Ostensible partnership or partnership or partnership by estoppel: one w/c 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.
As to publicity Secret partnership: one wherein the existence of certain persons as partners is
not avowed or made known to the public by any of the partners. Open or notorious partnership: one whose existence is avowed or made known to the public by the members of the firm.
As to purpose Commercial or trading partnership: one formed or the transaction of business.
Professional or non-trading partnership: one formed for the exercise of a profession.
Kinds of partners Under the Civil Code
- Capitalist partner: one who contributes money or property to the common fund.
- Industrial partner: one who contributes only his industry or personal service.
- General partner: one whose liability to 3 rd^ persons extends to his separate property.
- Limited partner: one whose liability to 3 rd^ persons is limited to his capital contribution.
- Managing partner: one who manages the entity.
- Liquidating partner: one who takes charge of the winding up of partnership affairs upon dissolution.
- Partner by estoppel: one who is not really a partner but is liable as a partner for the protection of innocent 3rd persons. He is one represented as being a partner but who is not so between the partners themselves.
- Continuing partner: one who continues the business of a partnership after it has been dissolved by reason of the admission of a new partner, or the retirement, death or expulsion of one or more partners.
- Surviving partner: one who remains after a partnership has been dissolved by the death of any partner.
- Subpartner: one who, not being a member of the partnership, contracts w/ a partner w/reference to the latter’s share in the partnership.
Other classifications
- Ostensible partner: one who takes active part and known to the public as a partner.
- Secret partner: one who takes active part in the business but is not known to be a partner by outside parties nor held
out as a partner by the other partners. He is an actual partner.
- Silent partner: one who does not take any active part in the business although he may be known to be a partner.
- Dormant partner: one who does not take active part in the business and is not known or held out as a partner. He would be both a silent and a secret partner.
- Original partner: one who is a member of the partnership from the time of its organization.
- Incoming partner: a person lately, or about to be, taken into an existing partnership as a member.
- Retiring partner: one withdrawn from the partnership; a withdrawing partner. Art. 1777. A universal partnership may refer to all the present property or to all the profits.
Art. 1778. A partnership of all present property is that in which the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits they may acquire therewith.
Art. 1779. In a universal partnership of all present property, the property which belongs to each of the partners at the time of the constitution of the partnership becomes the common property of all the partners, as well as all the profits which they may acquire there with. A stipulation for the common enjoyment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy or donation cannot be included in such stipulation, except the fruits thereof.
Universal partnership of all present property explained A universal partnership of profits is one w/c 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 w/c each of the partners may possess at the time of the celebration of the contract. In this kind of partnership, the following become the common property of all the partners:
Property w/c belonged to each of them at the time of the constitution of the partnership; Profits w/c they may acquire from the property contributed.
Contribution of future property General rule: future properties cannot be contributed. The very essence of the contract of partnership that the properties contributed be included in the partnership requires the contribution of things determinate. The position of a partner is like that of a donor, and donations cannot comprehend future property. Thus, property subsequently acquired by 1.inheritance; 2. Legacy; or 3. Donation cannot be included by stipulation except the fruits thereof. Hence, any stipulation including property so acquired is void. Profits from other sources (not from properties contributed) will become common property only is there’s a stipulation.
Art. 1780. A universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership. Movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership.
Universal partnership of profits explained A universal partnership of profits is one w/c 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 w/c each of the partners may possess at the time of the celebration of the contract.
Ownership of present and future property The partners retain their ownership over their present and future property. What passes to the partnership are the profits or income and the use or usufruct of the same. Consequently, upon dissolution, such property is returned to the partners who own it.
Profits acquired through chance Since the law only speaks of profits w/c the partners may acquire by their industry or work, profits acquired purely by chance are not included.
forms, and has held that although a corporation cannot enter into a partnership contract, it may, however, engage in a joint venture if the nature of the venture is authorized by its charter.
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679)
Art. 1785. When a contract for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remains the same as they were at such termination, so far as is consistent with a partnership at will.
A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership.
Partnership at will is one in which no term of existence has been fixed and which may be terminated at the will of any partners.
Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand.
Obligations of partners to contribute:
- Shall deliver at the beginning of the partnership or, if a different date has been agreed upon, at the stipulated time the properties he agreed to contribute;
- Shall answer for eviction, in case the partnership is deprived of the ownership of any specific property he contributed;
- Shall answer to the partnership for the fruits of the properties whose delivery he delayed from the date he should
have contributed it up to actual delivery without necessity of any demand;
- Shall preserve said properties with the diligence of a good father of a family pending their delivery to the partnership;
- And shall indemnify the partnership for any damage caused it by the retention of said properties or by the delay in their contribution.
Art. 1787. When the capital or part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the account of the partnership.
Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation.
The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to is own use.
Liability of partner for estafa Failure to return the money taken, there is the element of fraudulent appropriation of the money delivered to a partner with specific instructions for the use of the partnership, then estafa is committed under the Revised Penal Code.
Art. 1789. An industrial partner cannot engage in any business for himself, UNLESS the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case.
Industrial partner is one who contributes his industry or labor in the partnership.
Industrial partner barred from engaging in business
To prevent any conflict of interest between the industrial and the partnership, and to insure faithful compliance by said partner with his prestation.
Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership.
Art. 1791. If there is no agreement to the contrary, in case of an imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall be obliged to sell his interest to the other partners.
Art. 1792. If a partner authorized to manage collects a demandable sum, which was owed to him in his own name, from a person who owned the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter.
The provisions of this article are understood to be without prejudice to the right granted to the debtor by Art. 1252, but only if the personal credit of the partner should be more onerous to him.
Requisites:
- Two existing debts
- Both debts must be demandable
- The one who collected the debt is a partner who is authorized to manage and is actually managing the partnership
Art. 1793. 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. 1794. Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot
compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have been realized.
Partner liable for damages caused the partnership Art. 1794 follows the general rule of contracts that where a person is at fault in the fulfillment of his obligations he shall be liable for the payment of damages. The partner’s fault, however, must be determined in accordance with the circumstances of person, time and place.
Liquidation necessary to ascertain damages It is first necessary that a liquidation of the business thereof be made to the end that the profits and losses may be known and the causes of the latter and the responsibility of the defendant as well as the damages which each partner may have suffered, may be determined.
Art. 1795. The risk of specific and determinate things, which are not fungible, contributed to the partnership so that only their use and fruits may be for the common benefit, shall be borne by the partner who owns them.
If the things contributed are fungible, or cannot be kept without deteriorating, or if they were contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation, the risk of things brought and appraised in the inventory, shall also be borne by the partnership, and in such case the claim shall be limited to the value at which they were appraised.
Risk of Specific and determinate things The risk of specific and determinate things which are not fungible, like a boat, only the use of which is contributed, shall be borne by the partner as the ownership thereof is not transferred to the partnership. This follows the general rule that the thing perished with the owner.
Things fungible or perishable If the things contributed are fungible or cannot be kept without deteriorating
the share of each one in the profits and losses, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision.
The designation of profits and losses cannot be entrusted to one of the partners.
Reason for the provision Admittedly, the designation of profits and losses cannot be entrusted to one of the partners as the fulfillment of a contract cannot be left to one of the contracting parties. It may, however, be entrusted to a third person by common interest.
Art. 1799. A stipulation which excludes one or more partners from any share in the profits or losses is void.
Stipulation to exclude a partner from profits and losses is void The law does not allow a provision in the contract of partnership excluding one or more partners from sharing in the profits and losses. The reason is that a partnership is organized for the common benefit or interest of the partners.
Reason for exclusion of industrial partner An industrial partner is not liable for losses because if the partnership fails to realize any profits, the industrial partner would have contributed his labor in vain. Furthermore, the industrial partner cannot withdraw the work already done by him for the partnership.
Art. 1800. The partner who has been appointed manager in the articles of the partnership may execute all acts of the administration despite the opposition of his partners, unless he should act in Bad faith., and his powers is irrevocable without the just or lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power. A power granted after the partnership has constituted may revoked at any time. Each partner has a right to an equal voice in the conduct of the partnership business. This right is not dependent on the amount or size of the
partner’s capital contribution.
Appointed as manager after the constitution of the partnership Partner appointed in arts of partnership may execute all acts of administration notwithstanding the opposition of the other partners, unless he should act in bad faith. His power is revocable only upon just and lawful cause and upon the vote of the partners representing the controlling interest. Reason : revocation represents change in terms of contract. In case of mismanagement: Usual remedies allowed by law including dissolution.
Appointment as manager after the constitution of the partnership Appointment may be revoked at any time for any cause what so ever.
Reason : revocation not founded on a change of will on the part of the partners. Appointment not condition of contract. It is merely a simple contract of agency, which may be revoking at any time. It is believe that the vote for revocation must also represent the controlling interest.
Scope of the power of the managing partner General rule : partner appointed as manager has all the powers of a general agent as well as all the incidental powers necessary to carry out the object of the partnership in the transaction of its business. Exception : When powers of manager is specifically restricted. A managing partner may not bind the partnership by contract foreign to its business.
Compensation for service rendered Partner Generally not entitle to compensation, In the absence of an agreement to the contrary, each member of the partnership assumes the duty to give his time, attention, and skill to the management of its affairs, as may be reasonably necessary to the success of the common enterprise; and for this service a share of the profits is his only compensation. In managing partnership affairs, a partner is practically taking care of his own interest or managing his own business. In the absence of any prohibition in the arts. Of partnership for the payment of salaries to general partners, there is
nothing to prevent the partners to enter into a collateral verbal agreement to that effect. EXCEPTIONS: In proper cases, the law may imply a contract for compensation;
- A partner engaged by his co-partners to perform services not required of him in fulfilment of the duties and in capacity other than that of a partner.
- When there is extraordinary neglect on the part of one partner to perform his duties, imposing entire burden on remaining partner.
- One partner may employ the other to do work for him outside of and independent of the co-partnership.
- Partners exempted by terms of partnership from rendering services may demand pay for services rendered.
- Where one partner is entrusted with management and devotes his whole time and devotion at the instance of the other partners who are attending to their individual business and giving no time or attention to the partnership business.
Art. 1801. If two or more partners have been intrusted with the management of the partnership without the specification of their respective duties or without the stipulation that one of them shall not act without the consent of all others, each one separately execute all acts of administration, but if anyone of them should oppose the act of each other, the decision of the majority shall prevail. In the case of tie the partners owning the controlling interest shall decide the matter. Where respective duties of two or more managing partners not specifies.
Each one may separately perform acts of administration
- If one or more of the managing partners shall oppose the acts of the others, then the decision of the majority of the managing partners shall prevail. Right to oppose can be exercise only by those entrusted with mgt.
- In case of tie, matter shall be decided by the vote of the partners owning the controlling interest.
REQUISITES FOR APPLICATION OF RULE
- Two or more partners have been appointed as managers;
- There is no specification of their
respective duties;
- There is no stipulation that one of them shall not act without the consent of all the others.
ART. 1802 In case it should have been stipulated that none of the managing partner shall act without the consent of the others, the concurrence of all shall be necessary for validity of the acts, and the absence or disability of any one of them cannot alleged, unless there is imminent danger of grave or irreparable injury to the partnership.
When unanimity of action stipulated concurrence necessary for validity of acts The partners may stipulate that none of the managing partners shall act without the consent of the others. In such a case, the unanimous consent of all the managing partners shall be necessary for the validity of their acts. This consent is so indispensable that neither absence nor disability of any one of them may allege as excuse to dispense with requirement. Exception: When there is imminent danger of grave or irreparable injury to the partnership then a partner may act alone without consent of partner who is absent or under disability.
Consent of managing partners not necessary in routine transactions The requirement of written authority refers evidently to formal and unusual written contracts.
Art. 1803. When the manner of management has not agreed upon, the following rules shall observed:
- All partners shall be considered agents and whatever any one of them may do alone shall bind the partnership without prejudice to the provision of article 1801
- None of the partners may, without the consent of others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership, but if there ids refusal of the consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may be sought.
partner or of any partner under legal disability. Duty to render information, there must be no concealment between partners in all matters affecting the partnership. Information must use only for partnership purpose. Not just on demand but partner also has duty of voluntary disclosure. However, duty to render info does notarise with respect to matters appearing in partnership books since each partner has the right to inspect those. Good faith not only requires that a partner should not make a false statement but also that he should abstain from any false concealment.
Art. 1807. Every partner must account the partnership for any benefit, and hold as trustee for it any profits derived from him without the consent of the partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of his property.
The relation between the partners is essentially fiduciary involving trust and confidence, each partner considered in law, as he is, in fact, the confidential agent of the others. The duties of a partner are analogous to those of a trustee.
Duty to act for common benefit Cannot use and apply exclusively to own individual benefit partnership assets or results of knowledge and info gained in character of partner. Managing partners particularly owe a fiduciary duty to inactive partners.
Duty begins during the formation of partnership Principle of good faith applies not only during partnership but during the negotiations leading to the formation of the partnership. Also, a person who agreed w/ another to form a partnership has the obligation to account for commissions and discounts received in acquiring property for the future partnership.
Duty continues even after the dissolution of the partnership Duty of partner to act w/ utmost good faith towards his co-partners continues throughout the entire life of the partnership even after dissolution for whatever reason or whatever means, until the relationship is terminated,
i.e. the winding up of partnership affairs is completed.
Duty to account for secret and similar profits The duty of a partner to account as a fiduciary operates to prevent from making a secret profit out of the operation of the partnership and from carrying on the business for his private advantage or a business in competition w/ the firm w/o consent of other partners. Violation may be ground for dissolution.
Duty to account for earnings accruing even after termination of partnership If a partner uses info obtained by him from the partnership for his own account w/o the consent of the other partners, he is liable to account for any benefit he might obtain.
Duty to make full disclosure of information belonging to partnership A partner is also subject to the fiduciary duty of undivided loyalty and complete disclosure of info of all things affecting the partnership. By Information is meant information, which can be used for the purposes of the partnership. Info cannot use for a partner’s private gain – even if after termination.
Duty not to acquire interest or right adverse to partnership If partner does, he holds it in trust for the benefit of the partnership and must account to the firm for the profits of the transaction, unless it appears that the others consented
Art. 1808. The Capitalist partners cannot engage for their own account in any operation, which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary. Any capitalist partner violating this prohibition shall bring to the common funds any profit accruing to him from his transactions, and shall personally bear all the losses.
Prohibition against partner engaging the business Prohibition relative – Prohibition against capitalist partner to engage in business is relative, unlike the industrial partner who is absolutely prohibited from engaging in any business for himself. Capitalist partner is only prohibited from engaging for his own account in any operation which is the same
as or similar to the business in which the partnership is engaged and which is competitive w/ said business VIOLATION – Obligation to bring to common fund any profits derived and in case of losses, he shall bear them alone. Partners, however, by stipulation may permit it. The law permits him to carry on a business not connected or competing with that of the partnership. Law is silent on whether he can engage in same line of business for the account of another. Prohibition still applies because of fiduciary position imposing duties of utmost good faith. He may not carry on any other business in rivalry w/ the partnership.
Reason for prohibition Fiduciary nature of relationship imposes obligation of utmost good faith. Rule prevents use of info obtained in course of transaction of partnership business or because of connection w/ firm regarding business secrets and clientele of firm to its prejudice.
Art. 1809. Any partner shall have the right to a formal account as partnership affairs:
- If he is wrongfully excluded from the partnership business or possession of its property by his co-partner;
- If the right exists under the terms of any agreement;
- Provided by article 1807;
- Whenever other circumstances render it just and reasonable, Right of the partner to a formal account.
General rule: During existence of partnership, a partner is not entitled to a formal account of partnership affairs. Reason: rights of partner amply protected in arts1805 and 1806. In addition, it would cause much inconvenience and unnecessary waste of time.
Exception: In the special and unusual situations enumerated under art. 1809. Right of partner to demand an accounting w/o bringing about dissolution is a necessary corollary to right to share in profits. A formal account is a necessary incident to the dissolution of the partnership.
Art. 1810. The property rights of a partner are:
- His rights in specific partnership property;
- His interest in the partnership;
- His right to participate in the management, extent of property rights of a partner.
Principal Rights
- Rights in specific partner property;
- Interest in partnership;
- Right to participate in management.
RELATED RIGHTS
- Right to reimbursement for amounts advanced to partnership and to indemnification for risks inconsequence of management (art. 1796).
- Right of access and inspection of partnership books (art. 1805).
- Right to true and full information of all things affecting partnership (art. 1806).
- Right to formal account of partnership affairs under certain circumstances (art. 1809).
- Right to have partnership dissolved also under certain conditions (arts. 1830- 1831).
Partnership property and partnership capital distinguished Partnership property
Partnership capital Changes value
Variable : its value may vary from day today w/ changes in market value
Constant : it remains unchanged as the amount is fix by agreement of the partners, and is not affected by fluctuations in the value of the partnership property, although it may be increased and decreased by
Right not assignable - A partner cannot separately assign his right to specific partnership property but all of them can assign their rights in the same property.
Reasons for non-assignability:
- It prevents interference by outsiders in partnership affairs;
- It protects the right of other partners and partnership creditors to have partnership assets applied to firm debts;
- It is often impossible to determine the extent of a partner’s beneficial interest in a particular partnership asset. Reason for impossibility: Each partner, having a beneficial interest in the partnership property considered as a whole, has a beneficial interest in each part. Where, however, none of the above reasons apply, an authorized assignment by a partner of his right in specific partnership property is void, but it may be regarded as a valid assignment of the partner’s interest in the partnership. The law allows a retiring partner to assign his rights in partnership property to the partner(s) continuing the business.
Right limited to share of what remains after partnership debts has been paid Strictly speaking, no particular partnership property or any specific or an aliquot part thereof can be considered the separate or individual property of any partner. The whole of partnership property belongs to the partnership considered as a juridical person, and a partner has no interest in it but his share of what remains after all partnership debts are paid. Consequently, specific partnership property is not subject to attachment, execution, garnishment, or injunction, w/o the consent of all the partners except on a claim against the partnership. For the same reason that the property belongs to the partnership, the partners cannot claim any right under the homestead or exemption laws when it is attached for partnership debts. However, a judgment creditor may levy upon a partner’s interest in the partnership itself because it is actually his property, by means of a “charging order.” The right of the partners to specific partnership property is not subject to legal support since the property belongs to the
partnership and not to the partners. However, their interest in the partnership is. The method of reaching a judgment debtor’s interest in partnership property is specifically set forth in art.1814.
Art. 1812. A partner’s interest in the partnership is his share of the profits and surplus.
Share of profits and surplus – The partner’s interest in the partnership consists of his share in the undistributed profits during the life of the partnership as a going concern and his share in the undistributed surplus after its dissolution.
Profits: the excess of returns over expenditure in a transaction or series of transactions; or the net income of the partnership for a given period.
Surplus: the assets of the partnership after partnership debts and liabilities are paid and settled and the rights of the partners among themselves are adjusted. It is the excess of assets over liabilities. If the liabilities are more than the assets, the difference represents the extent of the loss.
Art.1813. A conveyance by a partner by his whole interest in the partnership does not of itself dissolve the partnership, or, against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of the partnership transactions, or to inspect the partnership books; however it merely entitles the assignee to receive the accordance with his contract, the profits to which the assigning partner would otherwise be entitled.
In case of fraud in the management of the partnership, the assignee may avail himself of the usual remedies. In case of dissolution of the partnership, the assignee is entitle to receive his assignor’s interest and may require an account from the date only of the last account agreed to by all partners. Effect of assignment of partner’s whole interest in partnership.
A partner’s right in specific partnership property is not assignable but he may assign
his interest in the partnership to any of his co-partners or to a third Person irrespective of the consent of the other partners, in the absence of agreement to the contrary.
Rights withheld from assignee
- To interfere in the management.
- To require any information or account.
- To inspect any of the partnership books.
No one can be compelled to be partners w/ someone else. The assignment does not divest the assignor of his status and rights as a partner nor operate as dissolution. The law, however, provides the non- assigning collaborates w/ a ground for dissolving the partnership if they so desire.
Remedy of other partners Dissolution of partnership not intended – Many partnership agreements are made merely as security for loans, the assigning partner never intending to destroy the partnership relation. If the assigning partner neglects his duties after assignment, the other partners may dissolve the partnership under art. 1830. Dissolution of partnership intended – A partner’s conveyance of his interest in the partnership operates as dissolution of the partnership only when it is clear that the parties contemplated and intended the entire withdrawal from the partnership of such partner and the termination of the partnership as between the partners.
Rights of assignee of partner’s interest
- To receive in accordance w/ his contract the profits accruing to the assigning partner;
- To avail himself of the usual remedies provided by law in the event of fraud in the management;
- To receive the assignor’s interest in case of dissolution;
- To require an account of partnership affairs, but only in case the partnership is dissolved, and such account shall cover the period from the date only of the last account agreed to by all partners. The purchaser of a partner’s interest may apply to the court for dissolution after the termination of the specified term or undertaking or at any time if the partnership is one at will.
Art. 1814. Without prejudice to the
preferred rights of the partnership creditors on due application to a competent court by any judgement creditor of the partner, the court which entered the interest of the debtor partner with payment of the unsatisfied amount of such judgement debt with the interest thereon; and may then or later 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 and accounts and inquiries which the debtor partner might have made, or which circumstances of the case may require. The interest charged may redeem at any time before foreclosure, or in any case of a sale being directed by the court, may be purchase without thereby causing dissolution:
- With separate property, by any one or more of the partners;
- With partnership property, by any one or more of the partners with the consent of all the partners a whose interest are not so charged or sold, nothing in this title shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his interest in the partnership.
Application for a charging order after securing judgement on his credit While a separate creditor of a partner cannot attach or levy upon specific partnership property for the satisfaction of his credit because partnership assets are reserved for partnership creditors, he can secure a judgment on his credit and then apply to the proper court for a “charging order”, subjecting the interest of the debtor partner in the partnership w/ the payment of the unsatisfied amount of such judgment w/ interest thereon w/ the least interference w/ the partnership business and the rights of the other partners. By virtue of the charging order, any amount or portion thereof w/c the partnership would otherwise pay to the debtor-partner should instead be given to the judgment creditor. This remedy, however, is w/o prejudice to the preferred rights of partnership creditors whose claims should be satisfied first.
Availability of other remedies Art. 1814 have made this an exclusive
