Partnership Law: A Guide to Personality, Liability, and Dissolution, Study notes of Law of Obligations

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THE CIVIL CODE OF THE PHILIPPINES

THE LAW ON BUSINESS ORGANIZATIONS

[PARTNERSHIP]

INTRODUCTION TO PARTNERSHIP

Spanish Colonial Period

• Started the provisions in business (Code of Commerce)
• Commercial or mercantile partnerships were governed on the basis of the Code of Commerce
• Non-commercial or civil partnerships were governed by the old Spanish Civil Code
  1. Sociedad Regular Colectiva (General Partnership)
  2. Sociedad en Comandita (Limited Partnerships)
  3. Sociedad Anonima (“Corporation”)
  4. Sociedad de Cuentas en Participación (Joint Accounts)
  5. Repealing Law

Sources of our Law on Partnership

• Were mostly taken with or without modifications form the old Civil Code and two American Statutes 1. The Uniform Partnership Act 2. The Uniform Limited Partnership Act

Common Types of Business Organizations

1. Sole Proprietorship
   • “SOLE” = alone, one person only
   • Registered through the DTI
   • Doesn’t need to consider others opinions when making decisions
   • Entitled to all of the business’ profits and debts
2. Partnership
   • Is made up of two or more people
   • The laws do not distinguish between the business and its owners
3. Joint Account
   • One partner can have more power and influence other the other depending on their contribution
4. Cooperative
   • Businesses owned by “member-owners”
   • Autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise

CHAPTER 1: GENERAL PROVISIONS

Article 1767 Concept of Partnership

• A contract wherein two or more persons bind themselves to contribute money, property, or industry with the intention of dividing profits among them Characteristic Elements of Partnership

1. Consensual

• Perfected by mere consent / agreement (express or implied)

2. Nominate

• It has a special name or designation in our law

3. Bilateral

• Since it is entered by two or more persons and the rights and obligation arising therefrom are always reciprocal

4. Onerous

• Each of the parties aspires to procure for himself a benefit through the giving of something

5. Preparatory

• It is entered into as a means to and end
• To engage in business for the resignation of profit Partnership
• Is fiduciary in nature
• It is consensual; hence it is a voluntary association
• We can incorporate the concept of delectus personae

Fiduciary = relationship of trust and confidence between parties delectus personae = the right to choose the partners (involves trust and confidence between partners) ; power (not right) to dissolve the partnership

Essential Features of Partnership

1. There must be a valid contract
   • All the requisites of a valid contract must be present
   • Consent, object, and cause (Article 1318)
2. The parties must have legal capacity

• GR: any person who is capable under the law of entering into contractual obligations may be a partner
• XPN: a. Unemancipated minors = 17 and below b. Insane or demented c. Deaf-mutes who do not know how to write d. Those suffering from civil interdiction e. Persons who are prohibited from giving each other donations i. Ratio Gratuitous ii. e.g. Husband and Wife

3. The object must be lawful

• Object is unlawful if it is contrary to law, morals, good customs, public order, or public policy
• If the object is illegal, the contract is void ab initio and without force and effect

ab initio = from the beginning

4. The primary purpose is to obtain profit and divide it among themselves
   • Sufficient that there is realization of pecuniary profit, even if incidentally used for other aims (e.g. spiritual aim)
   • Sharing of Profits
     • Not necessarily equal in share
     • What is incumbent is that there is a right to share in the profits
   • Sharing of Losses
     • Distribution of losses is also possible and leads to the obligation to share losses
5. There must be mutual contribution a. Money - Legal tender in the Philippines - Does not include negotiable instruments until its cashed out b. Property - Real (land) or personal - Tangible or intangible (may include goodwill of the business)

Incidents of Partnership once Existence is Established

1. Partners share the profits and losses
2. They have equal rights in the management and conduct of the business
3. Every partner is an agent of the partnership, and shall bind other partners by his acts
4. All partners are personally liable for all the debts of the partnership with the separate property
5. A fiduciary relationship exists between parties
   • Relationship wherein one party is place in a position of trust and confidence in relation to another party and acts on their behalf and interests Co-ownership or Co-possession

• Possession of an undivided thing by different persons
• Doesn’t establish a partnership
• General created by law
• Doesn’t have a separate and distinct personality
• Purpose is for the enjoyment of a thing or right which is undivided
• Should not exceed 10 years
• Co-owner may freely dispose individual interest Conjugal Partnership of Gains (CPG)
• A property regime in consideration of marriage where spouses place in a common the fruits and income derived from their separate properties
• Commences on the date of celebration of marriage
• Purpose is to regulate the property relations
• The shares of the spouses are divided equally
• Management of the properties belongs to the spouses jointly Agency
• Contract of agency is one where a person (agent) binds himself to render some service or to do something in representation of another (principal), with the consent or authority of the latter
• The agent is merely a legal extension of the personality of the principal
• An agent only acts within the scope of authority provided

Article 1770 Partnership Object or Purpose

• Must have a lawful object; if unlawful then:

1. Contract is void ab initio
2. Profits shall be confiscated in favor of the government
3. Neither partner has the right to require the division of the profits, if any
4. The instruments or tool and proceeds of the crime shall also be forfeited in favor of the government
5. Contributions of the partners shall not be confiscated unless they fall under Article 1411

Article 1771 Form of Partnership Contract

• GR: no special form is required for the validity or existence of the contract or partnership - The contract may be made orally or in writing regardless of the contribution - A written contract is better to be able to review the stipulations indicated in the contract in case of a disagreement Where immovable property or real rights are contributed
• Required to have inventory
• For a partnership to be valid when immovable property is contributed, the contract must be executed as a public instrument

Public instrument = notarized Immovable Property = e.g. land (must be registered in the registry of deeds)

When partnership agreement covered by Statute of Frauds

• A partnership agreement set to begin more than a year after its made falls under the Statute of Frauds
• It cannot be enforced unless it’s in writing or at least supported by a signed note or memorandum form the parties involved

2. Conveyance of partnership name
   • Title can only be conveyed in the partnership name
   • Conveyed = sale / lease
3. Constitutional limitations and restrictions
   • The right of a partnership to deal in real / personal property is subject to limitations and restrictions prescribed by the Constitution

Article 1775 Secret Partnerships

• Associations whose articles are kept secret among the members and third persons shall have no juridical personality and shall be governed by the rules of co-ownership
• The partnership relation is created only by the voluntary agreement of the partners
  • It is essential that the partners are fully informed not only of the agreement but of all matters affecting the partnership

Article 1776 Classifications of Partnership

1. As to the extent of subject matter
   • Universal partnership or one which refers to all presents to all profits
     • Universal Partnership of All Present Property (Art. 1778)
     • Universal Partnership of Profits (Art. 1780)
   • Particular partnership (Art. 1783)
2. As to liability of partners
   • General Partnership
     • All partners share responsibility of managing the business and are personally liable for its debts
     • This means if the business can’t pay what it owes, creditors can go after the personal assets of any partner
     • Everyone shared profits, losses, and responsibilities equally (unless agreed otherwise)
   • Limited Partnership
     • Invests money but does not take part in management; they only risk losing the money they invested not their personal assets
     • Limited Partners cannot contribute industry
     • Should have at least 1 GP in a 2 person partnership

3. As to its duration
   • Partnership at Will
     • Has no fixed duration or specific end date
     • It continues as long as the partners agree to keep running and can be ended by any partner at any time without needing a reason
     • Contracts are not required but is better to protect the parties
   • Partnership with a Fixed Term
     • Is created for a specific duration or to accomplish particular project
     • It automatically ends when the agreed time is up or the project is completed, unless the partners decide to extend it
4. As to the legality of existence
   • De Jure Partnership
     • One which has complied with all the legal requirements for its establishment
   • De Facto Partnership
     • One which failed to comply with all the requirements
     • Something is missing but they attempted to comply
5. As to representation of others
   • Ordinary or Real Partnership
     • One which failed to comply with all the requirements
     • Something is missing but they attempted to comply
   • Ostensible Partnership
     • “Partnership by estoppel”
     • It occurs when a group is not an actual partnership but is treated as one because their actions or statements lead others to believe a partnership exists
     • Those involved cannot deny the partnership’s existence if doing so would harm someone who relied on that belief
     • “Mislead” / “deceived” the public
6. As to publicity
   • Secret Partnership
     • Is one where the existence of the partnership or the identity of one more partners is kept hidden from the public

Usufruct = legal right to use and enjoy someone else’s property temporarily, without owning it

A universal partnership involves partners sharing all their property, both what they own at the start and what they acquire during the partnership. However , there are some limitations:

1. Cannot include future inheritance or property
   • Partners cannot include property they expect to inherit in the partnership, unless specifically agreed
2. Personal property
   • Partners can’t include their personal belongings or property that they wish to keep separate from the partnership
3. Public policy and law
   • The partnership must not violate any laws or public policies
   • e.g. It cannot include illegal activities or property obtained unethically

Universal Partnership allows shared ownership of property and profits, but certain personal and future assets, as well as anything against the law, can’t be included.

Article 1781 Presumption in Favor of Universal Partnership of Profits

• If a partnership agreement does not specify whether it includes both property and profits or just profits, the law assumes it is only a partnership of profits. - This is because a partnership of profits is less restrictive, allowing partners to keep ownership of their personal property.
• However, this rule applies only if a universal partnership has been formed. In reality, this type of partnership is rare today, except in cases involving married couples with shared property.

Article 1782 Limitations Upon the Right to Form a Universal Partnership

1. Persons prohibited to give donations
   • Persons who are prohibited by law to give donations cannot enter into a universal partnership for the reason that each of the partners virtually makes a donation

• A partnership formed in violation of this article is null and void

2. Pertinent provisions

• In connection with Article 1782, the following provisions must be noted: a. Article 1767 – Definition of Partnership
• A partnership is formed when two or more persons agree to contribute money, property, or industry with the intention of dividing profits among themselves.
• This provision establishes the basic principle that partnerships require an agreement, whether express or implied. b. Article 1781 – Types of Universal Partnerships
• There are two kinds: a) Universal Partnership of All Present Property – All assets owned by partners at the time of the agreement become part of the partnership. b) Universal Partnership of Profits – Only the profits from present and future businesses are shared; personal assets remain separate.
• Article 1782 applies specifically to the universal partnership of profits when no clear agreement exists. c. Article 1783 – Ownership in a Universal Partnership of Profits
• Partners retain ownership of their individual property.
• Only the income or earnings generated during the partnership are shared.
• This supports the presumption in Article 1782 that people entering into a business without a clear agreement are considered partners in a universal partnership of profits, as it is less restrictive.

Article 1783 Particular Partnership

• Is formed for specific purposes or project
• Focuses on a limited goal, such as running a business for a set period or completing a specific task - Once the purpose is achieved, the partnership ends
• The contributions, risks, and profits are typically tied directly to the agreed-upon project or business - Has a specific undertaking Different Kinds of Partners

CHAPTER 2: OBLIGATION OF THE PARTNERS

Section 1: Obligations of the Partners Among Themselves Juridical Relationship

• A contract of partnership creates 4 juridical relations a. Relations among Partners b. Relations of the Partners with the Partnership c. Relations of the Partnership with Third Persons d. Relations of the Partners with such Third Persons

Article 1784 Commencement of Partnership

1. From the time of execution of contract
   • Partnership = consensual contract
   • GR: exists from the moment of the execution of the contract by the partners
   • XPN: Executory Agreement of Partnership states that may stipulate some other date for the commencement of the partnership - If executed in a later date, they do not become partners until its commencement
2. No time limit to the life of partnership
   • The birth and life of a partnership is predicted on the mutual desire and consent of the parties Rules Governing Partnership Relation
3. Presence of essential requisites for its existence

• For a partnership to exist, it must have the following: a. Agreement b. Common fund or contribution c. Mutual obligation d. Lawful purpose
• Without these elements, no valid partnership exists

2. Incidents and consequences of relation

• Once a partnership is formed, certain legal effects apply: a. Separate legal personality b. Binding effect c. Sharing or profits and losses d. Fiduciary duty

Article 1785 Partnership with a Fixed Term

• One where the term of existence has been agreed upon expressly or impliedly Expressly = there is a definite period Impliedly = there is a particular undertaking
• If upon the expiration of the partnership, it may be extended or renewed by the partners expressly or impliedly
• When this happens, this shall create a partnership by will where the continued existence shall depends on the will of the partners

Article 1786 Obligation with Respect to Contribution of Property

1. To contribute at the beginning of the partnership the money, property or industry which had been promised
2. To answer for eviction in case the partnership is deprived of the determinate property contributed
3. To answer to the partnership of 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 Effect of Failure to Contribute Property Promised
4. Effect of failure to comply with #

• The partner who fails to contribute automatically becomes a debtor, even without any demand
• The remedy of the partnership is to recover through an action for specific performance with damages and interest from the defaulting partner

2. Effect of failure to comply with #

• Takes place whenever a final judgement based on a right prior the act imputable to the partner, where the partnership is deprived or part of the thing contributed
• The remedy is that the partnership may recover the proper indemnity

3. Effect of failure to comply with #

• In case of delay the partner shall be liable for the fruits of the property even without demand
• The reason behind this is that the partnership fails to receive the benefits from the contribution it should have received

• This is absolute and applied whether the IP engages in the same business to the partnership or any other business
• The partnership will be concerned if the IP will become the competition of their business. Remedies where Industrial Partner Engages in Business

1. Right of Capitalist Partners

• They have the right to exclude him or;
• Have the right to avail themselves of the benefits which he may have obtained

2. Individual Partners

• The law only mentions CPs, it is believed that IPs are also entitled to the remedy granted XPN: CP gives express permission to the IP to exempt from liability

Article 1790 Extent of Contribution to Partnership Capital

• GR: the partners shall contribute equal shares
• XPN: when there is a stipulation on the contribution of unequal shares; but is not applicable to IPs
• XPN to XPN: unless beside this services, the IP contributed capital pursuant to the agreement

Article 1791 Contribution of Additional Capital

• GR: capitalist partner is not bound to contribute additional capital
• XPN: when there is an agreement to the contrary
• In case of imminent loss of the business, and there is not agreement to the contract, capitalist partners are obliged to contribute additional shares to save the business
• If the CP refuses, he is obliged to sell his interest in the partnership to other partners (ratio: lack of interest of the CP to continue in the partnership)
• The IP is exempted to contribute additional shares Requisites for Application of Rule

1. There is an imminent loss of the business
2. Majority of the capitalist partners are of the opinion that additional capital contribution could save the business
3. The capitalist partner refuses deliberately to contribute additional share

4. There is no agreement that even in the case of imminent loss of the business, the partners are not obliged to contribute

Article 1792 Obligation of Managing Partner who Collects Debt

• GR: where a person is separately indebted to the (a) partnership and to the (b) managing partner at the same time, any sum by the MP shall be applied to the two credits in proportion to their amounts
• XPN: where the MP received the sum for the account of the partnership
  • This shall result to the whole sum to be applied to the partnership credit only
• The law safeguards the interests of the partnership by preventing the possibility of their interest being subordinated to the own interests of the MP. Requisites of the Application of the Rule

1. There exist at least 2 debts, one due to the partnership and the other due to the MP
2. Both debts are demandable
3. The partner who collected the debts is authorized to manage and actually manage the partnership

Article 1793 Obligation of Partner who Receives Share of Partnership Contract

• This applies whether or not the partner who receives his share is authorized to manage or not Requisites of Application of Rule

1. A partner has received, in whole or in part, his share of the partnership credit
2. The other partners have not collected their share
3. The partnership debtor becomes insolvent

Insolvent = cannot pay debts when they are due

Article 1794 Obligation of Partners for Damages to the Partnership

• Any person guilty of negligence is liable of fault in the fulfillment of an obligation is liable for damages
• GR: the damages caused by a partner to the partnership cannot be compensated for offset by the profits he earned for the partnership