Notes on De Leon Title IX.

- PARTNERSHIP CHAPTER 1 GENERAL PROVISIONS

Partnership
o o o A duty of public service A relation as an officer of the court to the admi
nistration of justice involving sincerity, integrity and reliability A relation
to clients in the highest fiduciary degree A relation to colleagues of the bar c
haracterized by candor, fairness, and unwillingness to resort to current busines
s methods of advertising and encroachment on their practice or dealing directly
with their clients
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. Two or more persons may also form a part
nership for the exercise of a profession. Concept of partnership a partnership i
s a:
Contract
Association
Legal relation Status arising out of a contract
Organi
zation Entity distinct and apart from its members
Joint undertaking to share in
profit and loss Civil law concept and American concept of partnership distinguis
hed Philippine Contract it is the agreement itself where out of which it is crea
ted American Relation Anglo American idea of partnership is based on the result
of the juridical relation growing out from the express or implied agreement of t
he parties No separate juridical personality. It is a mere extension of its memb
ers. (although some state unions classify the partnership as a separate entity
o
Characteristics/ elements of partnership:
Consensual perfected by mere consent
xpress or implied Nominate special name or designation in law Bilateral entered
into by two or more persons and the rights and obligations are reciprocal Onerou
s benefit by giving something Commutative undertaking of each partner is conside
red as equivalent of the others Principal does not depend on its existence on ot
her contracts Preparatory means to an end A contract of Agency
Basis of concept

Essential features of partnership:

There must be a valid contract The parties mu
st have legal capacity to enter into the contract There must be mutual contribut
ion of money, property, industry to a common fund The object must be lawful The
primary purpose must be to obtain profits and to divide the same among themselve
s Articles of partnership must not be kept secret among the members otherwise th
ere is no legal personality
Possession of separate personality
Has a separate juridical personality of its own, distinct and separate from that
of each of the partners
Existence of a valid contract: Partnership relation fundamentally contractual o
There is no such thing as partnership created by law or operation of law alone o
Form oral or written, express or implied subject to the provisions of Art. 1771
, 1773, and Statute of Frauds. Thus a member need not sign articles of copartner
ship to become a member, election is sufficient o Articles of partnership a writ
ten document embodying the terms of the
Partnership for the practice of law:
A mere association for non-business purpose
is in the nature of a privilege or franchise o Cannot use nom de plume, assumed
or trade name, as compared to the practice of accountancy Distinguished from bu
siness not an ordinary money making trade

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Notes on De Leon
Partnership
not be deemed as doing business in the Philippines hence no license is required
(RA 7042 Foreign Investments Act) Contribution of money, property, or industry:
Existence of proprietary interest they must contribute capital o Money must be i
n legal tender. Checks, drafts, promissory notes payable to order and other merc
antile documents must be cashed to constitute contribution of money o Property r
eal, personal, corporeal or incorporeal. Can be licenses, goodwill or credit o I
ndustry active cooperation which may be either personal, manual efforts or intel
lectual for which the partner receives share not merely salary. Industrial partn
er must not be subject to control. He shall be considered as a lessor of service
s if he is subject to the supervision of other partners Proof of contribution pr
oof that the contribution was made with the intention of dividing profits obtain
ed therefrom

association. It contains: the name, nature, purpose, location of the firm and de
fines the powers, rights, duties and liabilities of the partners among themselve
s, their contributions, the manner of which the profits and losses are to share
and the procedure of dissolving the partnership o Requisites as a contract: cons
ent of at least 2 parties, object and cause which is established Partnership rel
ation fiduciary in nature voluntary association entered into by the associates o
In general partnership there is the element of delectus personae (choice of the
person/s that law gives such wide authority to one partner to bind another by c
ontract or otherwise). Delectus personae allows one partner the power (not the r
ight) to dissolve partnership Application of principles of estoppel o A partner
holds himself out or permits himself to be held out as a partner in an enterpris
e in favour of third persons. Even if no real partnership exists, they are bound
to third persons by their conduct

Legal capacity of the parties to enter into the contract:

Individuals with legal
capacity no unemancipated minors, insane or demented persons, deaf mutes who do
not know how to write, persons who are suffering from civil interdiction, incom
petents under guardianship Partnerships no prohibition against a partnership bei
ng a partner with another partnership Corporations unless authorized by Statute
or by its charter, a corporation is without legal capacity or power to enter int
o a contract of partnership based on public policy o A corporation however may e
nter into a Joint Venture partnerships with another where the nature of the vent
ure is in line with the business authorized by its charter o Where the partnersh
ip agreement provides that the two partners will manage the partnership so that
the management of the corporate interest is not surrendered the partnership may
be allowed o Where the entry of the foreign corporation as a limited partner in
a limited partnership is merely for investment purposes and it shall not take pa
rt in management and control. It shall
Legality of object if object is unlawful, contract is inexistent and void ab ini
tio. The object is unlawful when it is contrary to law, morals, good customs, pu
blic order, or public policy Purpose to obtain profits the very reason for the e
xistence of partnership; need not only be the principal, not the exclusive claim
; there may be incidental, moral, social or spiritual ends Sharing of profits no
t necessarily in equal shares; not conclusive evidence of partnership Sharing of
losses necessary corollary of sharing in profits; agreement not necessary Art.
1768. The partnership has a judicial personality separate and distinct from that
of each of the partners, even in case of failure to comply with the requirement

s of Article 1772, first paragraph. Partnership, a juridical person

A partnershi
p duly formed under the law is a juridical person to which the law grants a juri
dical personality separate and distinct. As an independent juridical person, a p
artnership may:

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Notes on De Leon o o o
Partnership
dependent upon the personal arrangement or understanding of the parties. Parties
may call themselves partners, but their contract may be adjudged something diff
erent. On the other hand, parties may expressly stipulate that their contract is
not a partnership yet it may still be considered a partnership based on the leg
al intention Incidents of partnership o Share in the profits and losses o Equal
rights in management and conduct of business (see Art. 1803) o Every partner is
an agent of the partnership (Art. 1818) o All partners, except limited partners,
are personally liable for partnership debts with their separate property (see A
rt. 1816) o There is a fiduciary relationship (see Art. 1807) o Partnership is n
ot terminated upon dissolution. It continues until the winding up is completed (
see Art. 1828) Presumption and burden of proof o Existence of partnership is not
presumed. It must be proved o Persons who are acting as partners are presumed t
o have entered into a contract of partnership. The burden of proof is on the par
ty denying its existence o Once partnership is shown to exist, the presumption i
s that it continues in the absence of evidence to the contrary. The burden of pr
oof is on the person claiming its termination Use of partner o Person asserting th
e existence of the partnership cannot prove it by just showing an agreement wher
ein the parties call themselves partners. The use of the word partners may be just f
or convenience and not necessarily to show the intention to create a partnership
o associate means partner, but an employee may also be an associate
Enter into contracts, acquire and possess property of all kinds in its name Incu
r obligations Bring civil or criminal actions in conformity with the laws and re
gulations of its organizations
Art. 1769. In determining whether a partnership exists, these rules shall apply:
(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 d
oes not of itself establish a partnership, whether such-coowners or co-possessor
s do or do not share any profits made by the use of the property; (3) The sharin
g of gross returns does not of itself establish a partnership, whether or not th
e 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 th
e profits of a business is prima facie evidence that he is a partner in the busi
ness, but no such inference shall be drawn if such profits were received in paym
ent: (a) As a debt by instalments or otherwise; (b) As wages of an employee or r
ent 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 p
rofits of the business; (e) As the consideration for the sale of a goodwill of a
business or other property by instalments or otherwise. Rules in determining ex
istence of partnership:
Overview o In general, all essential characteristics of
a partnership must be present. Partners must expressly agree to contribute money
, property, or industry as coproprietors to carry on a business for profit, and
to share the profits o An essential characteristic, by itself, does not prove th
e existence of a partnership o In case of doubt, Art. 1769 would apply Test to d
etermine the existence of partnership o The terms of the contract would determin
e the legal nature of the contract o Legal intention is the crux of partnership
existence of a partnership not always

Persons not partners as to each other:

Persons who are partners as between thems
elves are partners as to third persons. Consequently, persons who are not partne

rs as to each other cannot be partners as to third persons General rule: persons

who are not partners as to each other cannot be partners as to third persons

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Notes on De Leon
Partnership
Sharing of gross returns not presumptive evidence of partnership
Reason: because
in a partnership, the partners, being interested in the success and failure of
the business, share in the profits only after satisfying all partnership liabili
ties
Exception: if by their acts, consent, representations, third persons were led to
believe that they are partners in a non-existing partnership Example: A and B a
re not partners. However, A, with the consent of B, told X that they are partner
s. So as to X, A and B are partners
Co-ownership or co-possession: Sharing of gross profits: Intention to obtain pro
fits o In partnership, the profits must be derived from the operation of a busin
ess or undertaking and not merely from property ownership o There is no presumpt
ion of partnership between co-owners because there must be a clear intention to
a partnership Existence of fiduciary relationship o There is no fiduciary relati
onship between co-owners o Persons may become co-owners without a contract. For
example, by inheritance. But they cannot be partners without a contract Partners
hip distinguished from co-ownership
Partnership Generally created by law. It may exist without a contract Has a juri
dical personality To obtain profit Co-ownership Always created by a contract, ei
ther express or implied No juridical personality Common enjoyment of a thing. Do
es not necessarily involve sharing of profits Maximum is 10 years May dispose hi
s interest

Creation
Juridical personality Purpose
Duration Disposal of interest
No limitation A partner cannot dispose his interest as to make the transferee a
partner Partner may bind the partnership, unless there is a stipulation to the c
ontrary Dissolves the partnership
Power to act with third persons
Co-owner cannot represent the coownership
Effect of death
Does not necessarily dissolve the partnership
Prima facie evidence of partnership o Sharing of profits and losses is a strong
presumptive evidence of a partnership. Conversely, lack of such agreement strong
ly negates the existence of a partnership o Sharing of profits and losses is not
conclusive evidence. This may be rebutted by other circumstances When existence
of partnership will not be inferred despite share in the profits o Profits rece
ived as payment of a debt by instalment or otherwise
Example: A is a creditor of
a partnership X. A was authorized to manage the business. A will receive compen

sation, and a share in the net profits as payment for the debt o Profits receive
d as wages of an employee or rent to a landlord
Example: A is an employee of par
tnership X. instead of a fixed salary, A agreed to receive a certain percentage
of the monthly net profits Example: A is the owner of the building where partner
ship X holds its office. As payment for rent, A will receive a share if the net
profits. o Profits received as an annuity to a widow or representative of a dece
ased partner Example: A is the widow of a partner in Partnership X. A will recei
ve an annuity based on a certain percentage of the net profits in exchange for t
he continuation of the partnership without liquidation and satisfaction of the d
eceased partners interest o Profits received as interest on a loan
Example: A is
a creditor of partnership X. A agreed that the
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Notes on De Leon
Partnership
Management Shared equally by all partners unless one or some are appointed manag
ers Administration belongs to both spouses. But husbands decision will prevail in
case of disagreement Share of each spouse cannot be disposed of during the marr
iage, even with the consent of the other
o
interest on the loan be taken from the net profits Profits received as the consi
deration for the sale of a goodwill or other property by instalments of otherwis
e Example: A sold a land to partnership X. A agreed that the purchase price will
be paid out of the net profits
Disposition of shares
Partnership distinguished from other legal relationships:
Distinguished from a l
abor union o A labor union is an association of employees, which exists in whole
or in part, for the purpose of collective bargaining agreement or dealing with
the employers concerning terms and conditions of employment o The difference bet
ween them is the purpose. The purpose of a partnership is the realization of pro
fits whereas the purpose of a labor union is to negotiate with the employers, co
llective bargain Distinguished from a business trust o A trust is when the equit
able ownership and the legal title of a property are with two different persons
o The difference is that partners are principals and agents of each other. While
in trust, the trustee is just a principal, and not an agent Distinguished from
a Conjugal Partnership of Gains Partnership 2 or more partners of either sex Sti
pulation of the parties Has a juridical personality From the moment of execution
of contract. The parties may stipulate otherwise To obtain profits CPG Future s
pouses man and woman By law No juridical personality From the date of the celebr
ation of the marriage. Any stipulation to the contrary is void To regulate prope
rty relations during marriage Divide equally
Entire interest may be disposed even without the consent of the other partners

Distinguished from a voluntary association Partnership Voluntary association Doe

s not have one No such objective No contribution, although fees are usually coll
ected Members are individually liable for debts of the association, authorized o
r subsequently ratified by them
Juridical personality Purpose Contributions of members
Has one For pecuniary profit There is contribution of money, property or service
s Partnership is primarily liable to partnership debts

Liability of members

Parties

Distinguished from a corporation Partnership By agreement of the parties At leas

t 2 persons From the execution of the contract of partnership. The parties may s

tipulate otherwise Those authorized by the partners Corporation By law or operat

ion of law At least 5 incorporators Only from the date of issuance of the certif
icate of incorporation by the SC
Laws which govern Juridical personality Commencement
Manner of creation Number of incorporators Commencement of juridical personality
Purpose
Powers
Distribution of profits
According to their agreement or in proportion to their capital contributions
Only those expressly granted by law, and those implied from those granted and th
ose incidental to its existence
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Notes on De Leon Management Every partner is an agent of the partnership, if the

re is no agreement as to management Partner can sue the partner who mismanages
Partnership
Vested with the Board of Directors or Trustees Art. 1770. A partnership must hav
e 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 judicia
l decree, the profits shall be confiscated in favor of the State, without prejud
ice to the provisions of the Penal Code governing the confiscation of the instru
ments and effects of a crime. Object or purpose of partnership:
The parties poss
ess absolute freedom to choose the transactions they must engage in. the only li
mitation is that the object must be lawful and for the common benefit of the par
tners Illegality of the object will not be presumed; it must appear to be of the
essence of the relationship
Effect of mismanagement
Right of succession Extent of liability to third person
No right Partners, except limited partners, are liable personally and subsidiari
ly Partner cannot transfer his interest as to make the transferee a partner with
out the consent of all the other partners For any period as may be agreed by the
parties Limited partnership required to add Ltd. To its name At anytime by the wi
ll of any or all of the partners Civil Code
Suit against member of the BOD or BOT must be in the name of the corporation Has
a right Stockholders liable only to the extent of their subscribed shares Stock
holder can transfer his shares without the consent of the other stockholders

Transferability of interest
Effects of an unlawful partnership:
Consequences: o The contract is void ab init
io and the partnership never existed in the eyes of the law o The profits shall
be confiscated in favour of the government o The instruments or tools and procee
ds of the crime shall also be forfeited in favour of the government o The contri
butions of the partners shall not be confiscated unless they fall under number 3
Juridical decree unnecessary: o A judicial decree is not necessary to dissolve
an unlawful partnership o Third persons who deal with the partnership without be
ing aware of its illegal purpose or character are protected unless such knowledg
e can be presumed as where the transaction is plainly unlawful
Term of existence
Firm name
Dissolution
Governing law
Maximum of 50 years, extendible for another 50 years May adopt any name as long
as it is not the same as or similar to any registered firm names Only with the c
onsent of the State Corporation Code

Similarities between a partnership and a corporation o Both have a juridical per

sonality separate and distinct from the individuals composing it o Both can act
only through agents o Both are organizations composed of an aggregate of individ

uals o Both distribute its profits to those who contribute capital to the busine
ss o Both can be organized only where there is law authorizing its organization
Right to return the contribution where partnership is unlawful:
Art. 1770 does n
ot state whether upon the dissolution of the unlawful partnership, the amounts c
ontributed are to be returned to the partners, because it only deals with the di
sposition of profits The fact that said contributions are not included in the di
sposal prescribed for said profits shows that in consequence of said exclusion,
the general rules of law must be followed and the partners must be

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Notes on De Leon
Partnership
Community of interest between the partners for business purposes salient feature
s of an ordinary partnership:
Community of interest in profits and losses o Basi
s of the partnership relation o However, although every partnership appears to b
e founded on a community of interest, every community of interest does not neces
sarily constitute a partnership Community of interest in capital employed o Prop
erty used in business may belong to one or more partners so that there is no joi
nt property other than joint earnings Community of power in administration o Par
tners may agree upon concentration of management, leaving some of their members
entirely inactive or dormant

reimbursed for the amount of their respective contributions The partner who limi
ts himself to demanding only the amount contributed by him need not resort to th
e partnership contract on which to base his claim or action. The manager or admi
nistrator of the partnership holding said contribution retains what belongs to o
thers, without consideration, for which reason he is bound to return it, and he
who has paid in his share is entitled to recover it
Right to receive profits where partnership is unlawful:
Art. 1770 permits no act
ion for the purpose of obtaining the earnings made by an unlawful partnership be
cause the partner will have to base his action upon the partnership contract whi
ch is null and without legal existence; and what does not exist, cannot be a cau
se of action Profits earned in the course of the partnership do not constitute o
r represent the partners contribution but are the result of the industry, busines
s or speculation which is the object of the partnership It would be immoral and
unjust for the law to permit profit from an industry that is prohibited The cour
ts will not aid either party to an illegal agreement

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 instrume
nt shall be necessary. Form of partnership contract:
General rule o No special f
orm is required for the validity or existence of the contract of partnership o T
he contract may be made orally or in writing regardless of the value of the cont
ributions When immovable property or real rights are contributed o When read tog
ether, Articles 1771 and 1773 require the execution of a public instrument for t
he validity of a contract of partnership whenever immovable property is contribu
ted thereto o To affect third persons, the transfer of real property to the part
nership must be duly registered in the Registry of Property of the province or c
ity where the property contributed is located When partnership agreement covered
by the Statute of Frauds o An agreement to enter a partnership at a future time
, which by its terms is not to be performed within a year from the making thereof
is covered by the Statutes of Frauds o Such agreement is unenforceable unless th
e same be in writing or at least evidenced by some note or memorandum

Effect of partial illegality of partnership business:

An account of that which i
s legal may be had Where, without the knowledge or participation of the partners
, the firms profits in a lawful business have been increased by wrongful acts, in
nocent partners are not precluded as against the guilty partners from recovering
their share of profits

Effect of subsequent illegality of partnership business:

The happening of an eve
nt subsequent to the making of a valid partnership contract which would render i
llegal the business of the partnership as planned, will not nullify the contract
Where the business for which the partnership is formed is legal when the partne
rship is entered into but afterwards becomes illegal, an accounting may be had a
s to the business transacted prior to such time

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Notes on De Leon
Partnership
But any of the partners is granted the right by the law (Articles 1357 and 1358)
to compel each other to execute the contract in a public instrument o This righ
t cannot be availed of if the partnership is void under Art. 1773 Purpose of reg
istration the requirement of public instrument of public instrument is imposed a
s a prerequisite to registration and registration is necessary as a condition fo
r the issuance of licenses to engage in business or trade. In this way, the tax
liabilities of big partnerships cannot be evaded and the public can also determi
ne more accurately their membership and capital before dealing with them When pa
rtnership considered registered o The only objective of the law is to make the r
ecorded instrument open to all and to give notice thereof to interested persons
o The date the partnership papers are presented to and left for record in the Co
mmission is considered the effective date of registration of the articles of par
tnership o
thereof subscribed by the parties (Art. 1403[2a]) Partnership implied from condu
ct:
Binding effect a partnerships existence may be implied from the acts or condu
ct 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 intentio
n of parties o In determining whether or not a particular transaction constitute
s a partnership, as between the parties, the intention as disclosed by the entir
e transaction, and as gathered from the facts and from the language employed by
the parties as well as their conduct, should be ascertained o A partnership may
even be created without any definite intention; the intention of the parties bei
ng inferred from their conduct and dealings with each other Conflict between int
ention and terms of contract if the parties intend a general partnership, they a
re general partners although their purpose is to avoid the creation of such rela
tion

Art. 1773. A contract of partnership is void, whenever immovable property is con

tributed thereto, if an inventory of said property is not made, signed by the pa
rties, and attached to the public instrument. Partnership with contribution of i
mmovable property
Where immovable property, regardless of its value, is contribu
ted, the failure to comply with the following requirements will render the partn
ership contract void insofar as the contracting parties are concerned: o The con
tract must be in a public instrument (Art. 1771) o An inventory of the property
contributed must be made, signed by the parties, and attached to the public inst
rument With regard to third persons, a de facto partnership or partnership by es
toppel may exist
Art. 1772. Every contract of partnership having a capital of three thousand peso
s 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 li
ability of the partnership and the members thereof to third persons. Registratio
n of partnership Partnership with capital of 3,000Php or more requirements: a) t
he contract must appear in a public instrument, and b) it must be recorded with
the SEC o However, failure to comply with the above requirements does not preven
t the formation of the partnership (Art. 1768) or affect its liability and that
of the partners to third persons

When inventory is not required:

An inventory is required only whenever immovable
property is contributed Hence, Art. 1773 does not apply in the case of immovable
property which may be possessed or even owned by the partnership but not contrib
uted by any of the partners If personal property, aside from real property, is c
ontributed, the inventory need not include the former

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Notes on De Leon
Partnership
But a person may be held liable as a partner or partnership liability may result
in favour of third persons by reason of estoppel (Art. 1785)
Importance of making inventory of real property in a partnership
Art. 1773 compl
ements Art. 1771 To show how much is due each partner to complete his share in t
he common fund and how much is due to each of them in case of liquidation The ex
ecution of a public instrument of partnership would be useless if there is no in
ventory of immovable property contributed because without its description and de
signation, the instrument cannot be subject to inscription in the Registry of Pr
operty and the contribution cannot prejudice 3rd persons
Importance of giving publicity to articles of partnership for the protection not
only of the members themselves but also third persons from fraud and deceit to
which they would otherwise be easy victims Art. 1776. As to its object, a partne
rship is either universal or particular. As regards the liability of the partner
s, a partnership may be general or limited. Classification of partnership:
As to
the extent of its subject matter o Universal partnership or one which refers to
all the present property or to all profits
There are 2 kinds of universal partn
ership Universal partnership of all present property (Art. 1778)
Universal partn
ership of profits (Art. 1780) o Particular partnership (Art. 1783) As to liabili
ty of the partners o General partnership one consisting of general partners who
are liable pro rata and subsidiarily liable (Art. 1822-1824) with their separate
property for partnership debts o Limited partnership one formed by 2 or more pe
rsons having as members one or more general partners and one or more limited par
tners, the latter not being personally liable for the obligations of the partner
ship (Art. 1843) As to its duration o Partnership at will one in which no time i
s specified and is not formed for a particular undertaking or venture and which
may be terminated at anytime by mutual agreement of the partners, or by will of
any one partner alone; or one for a fixed term or particular undertaking which i
s continued by the partners after the termination of such term or particular und
ertaking without express agreement (Art. 1785) o Partnership with a fixed term o
ne in which the term for which the partnership is to exist is fixed or agreed up
on or one formed for a particular undertaking, and upon the expiration of the te
rm or completion of the particular enterprise,
Art. 1774. Any immovable property or an interest therein may be acquired in the
partnership name. Title so acquired can be conveyed only in the partnership name
. Acquisition or conveyance of property by partnership Since a partnership has a
juridical personality separate from and independent of that of the persons or m
embers composing it (Art. 1768), it is but logical and natural that immovable pr
operty may be acquired in the partnership name Title so acquired can therefore b
e conveyed only in the partnership name The right of a partnership to deal in re
al as well as personal property is subject to limitations and restrictions presc
ribed by the Constitution and special laws

Art. 1775. Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with th
ird persons, shall have no juridical personality, and shall be governed by the p
rovisions relating to coownership. Secret partnerships without juridical persona
lity
Associations whose articles or agreements are kept secret among the members
and wherein anyone of them may contract in his own name with third persons are
deprived of juridical personality for evidently, such associations are not partn
erships As among themselves, they shall be governed by the provisions relating t

o co-ownership A member who transacts business for the secret partnership in his
own name becomes personally bound to third persons unaware of the existence of
such association

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Notes on De Leon
Partnership
Liquidating partner one who takes charge of the winding up of partnership affair
s upon dissolution Partner by estoppel one who is not really a partner, not bein
g a party to a partnership agreement, but is liable as a partner for the protect
ion of innocent third persons; he is one who is represented as being in fact a p
artner, but is not so as between the partners themselves; also known as partner
by implication or nominal partner or quasi-partner Continuing partner one who co
ntinues the business of a partnership after it has been dissolved by reason of t
he 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 dis
solved by the death of any partner Sub-partner one who, not being a member of th
e partnership, contracts with a partner with reference to the latters share in th
e partnership

the partnership is dissolved, unless continued by the partners (Art. 1785) As to

legality of its existence o De jure partnership one which has complied with all
the legal requirements for its establishment o De facto partnership one which h
as failed to comply with all the legal requirements for its establishment As to
representation to others o Ordinary or real partnership one which actually exist
s among the partners and also as to third persons o Ostensible partnership or pa
rtnership by estoppel one which in reality is not a partnership, but is consider
ed a partnership only in relation to those who, by their conduct or admission, a
re precluded to deny or disprove its existence As to publicity o Secret partners
hip one wherein the existence of certain persons as partners is not avowed or ma
de known to the public by any of the partners o Open or notorious partnership on
e whose existence is avowed or made known to the public by the members of the fi
rm As to purpose o Commercial or trading partnership one formed for the transact
ion of business o Professional or non-trading partnership one formed for the exe
rcise of a profession

Other classifications
Ostensible partner one who takes active part and is known
to the public as a partner in the business, whether or not he has an actual inte
rest in the firm; he may be an actual partner of a nominal partner; if he is not
actually a partner, he is subject to liability by the doctrine of estoppel Secr
et partner one who takes active part in the business but is not known to be a pa
rtner by outside parties nor held out as a partner by the other partners, althou
gh he participates in the profits and losses of the partnership; he is an actual
partner; he is also an active partner in the sense that he participates in the
management of the partnership affairs Silent partner one who does not take any a
ctive part in the business although he may be known to be a partner; he need not
be a secret partner; if he withdraws from the partnership, he must give notice
to those persons who do business with the firm to escape liability in the future
Dormant or sleeping partner one who does not take active part in the business and
is not known or held out as a partner; both a silent and a secret partner; may
retire from the partnership without giving notice and cannot be held liable for
obligations of the firm subsequent to his withdrawal; his only interest in joini

ng the partnership would be the sharing of the profits earned Original partner o
ne who is a member of the partnership from the time of its organization

Class of partners partners are classified according to their interest in the par
tnership business, or their obligations to the partnership, or liabilities to th
ird persons Under the Civil Code:
Capitalist partner one who contributed money o
r property to the common fund Industrial partner one who contributed only his in
dustry or personal service General or real partner one whose liability to third
persons extends to his separate property; may be either a capitalist or industri
al partner Limited or special partner one whose liability to third persons is li
mited to his capital contribution Managing partner one who manages the affairs o
r business of the partnership; may be appointed whether in the articles of partn
ership or after the constitution of the partnership; also known as a general or
real partner

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10

Notes on De Leon
Partnership
Property subsequently acquired by inheritance, legacy or donation CANNOT be incl
uded by stipulation except the fruits
Incoming partner a person lately, or about to be taken into an existing partners
hip as a member
Art. 1777. A universal partnership may refer to all the present property or to a
ll the profits. Universal partner either present property or all the profits Art
. 1778. A partnership of all present property is that in which the partners cont
ribute all the property which actually belongs to them to a common fund, with th
e intention of dividing the same among themselves, as well as all the profits wh
ich they may acquire therewith. Partnership of all present property
Partners con
tribute all the property which actually belongs to them to a common fund There i
s an intention to divide the property among themselves There is an intention to
divide the profits they may acquire
Art. 1780. A universal partnership of profits comprises all that the partners ma
y acquire by their industry or work during the existence of the partnership. Mov
able 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
wnership of present and future property o What passes to the partnership are the
profits or income Profits acquired through chance not included Fruits of proper
ty subsequently acquired not included (unless stipulated)
Art. 1779. In a universal partnership of all present property, the property whic
h belongs to each of the partners at the time of the constitution of the partner
ship, becomes the common property of all the partners, as well as all the profit
s which they may acquire therewith. A stipulation for the common enjoyment of an
y other profits may also be made; but the property which the partners may acquir
e subsequently by inheritance, legacy, or donation cannot be included in such st
ipulation, except the fruits thereof. Universal partnership of all present
Compr
ises all that the partners may acquire by their industry or work during the exis
tence of the partnership The following become the common property of all partner
s: o Property which belonged to each of them at the time of the constitution of
the partnership o Profits which they may acquire from the property contributed
Art. 1781. Articles of universal partnership, entered into without specification
of its nature, only constitute a universal partnership of profits. Presumption
in favour of universal partnership of profits
A universal partnership of propert
y imposes less obligations on the partners, since they preserve the ownership of
their separate property Applies only when a universal partnership has been orga
nized
Art. 1782. Persons who are prohibited from giving each other any donation or adv
antage cannot enter into universal partnership. Limitations upon the right to fo
rm a partnership persons prohibited by law to give donations cannot enter into a
universal partnership; each of the partners virtually makes a donation Art. 178
3. A particular partnership has for its object determinate things, their use or
fruits, or specific undertaking, or the exercise of a profession or vocation. Ob
ject of particular partnership Difference between a universal partnership and a
particular partnership o Scope of subject matter
Universal: vague and indefinite
, with a degree of continuity;
Future properties cannot be contributed
the contribution of things determinate

The very essence of partnership requires

C c,) L L E E N
11

Notes on De Leon
Partnership
have not yet begun the carrying on of its business or given their contributions)
o Predicated on the mutual desire and consent of the parties In effect, its reg
istration in the SEC is not an essential to give it juridical personality No tim
e limit prescribed by law for the life of partnership The partners MAY stipulate
some other date for the commencement of the partnership A partnership in fact c
annot be predicated on an agreement to enter into a co-partnership at a future d
ay unless it is shown that such an agreement was actually consummated

Particular: well-defined, confined to an undertaking of a single, temporary or a

d hoc nature Business need not be continuing in nature o An agreement to underta
ke a particular piece of work or a single transaction and immediately divide the
profits within the meaning of partnership as used in law o Joint venture: thoug
h not a formal partnership, it is governed by almost the same rules of partnersh
ip
There is a community of interest similar to a partnership
Has a legal persona
lity separate and district from the parties

CHAPTER 2 OBLIGATIONS OF THE PARTNERS SECTION 1. - Obligations of the Partners A

mong Themselves Relations created by a contract of partnership
Four distinct jur
idical relations: o Relations among the partners with the partnership o Relation
s of the partners with the partnership o Relations of the partnership with third
persons with whom it contract o Relations of the partners with such third perso
ns Partnership relationship one of mutual trust and confidence
Fiduciary relatio
nship remains until partnership s terminated Rights and obligations of the partn
ers as to each other are provided on the theory that a partner is both a princip
al and an agent in relation to his copartners o But the relationship between a l
imited partner and other partners in a limited partnership does not involve the
element of trust and confidence Art. 1784. A partnership begins from the moment
of the execution of the contract, unless it is otherwise stipulated. Commencemen
t and term of partnership
Partnership is a consensual contract; hence it exists
from the moment of the celebration of the contract by the partners (even when th
e partners
Art. 1785. When a partnership for a fixed term or particular undertaking is cont
inued after the termination of such term or particular undertaking without any e
xpress agreement, the rights and duties of the partners remain 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 partnersh
ip affairs, is prima facie evidence of a continuation of the partnership. Contin
uation of partnership beyond fixed term
Partnership with fixed term: one in whic
h the terms of its existence has been agreed upon expressly or impliedly o It ma
y be extended or renewed by the partners by express or implied agreement o In su
ch case, the rights and duties of the partners remain the same o With such conti
nuation, the partnership for a fixed term or particular undertaking is dissolved
and a new one is created Partnership for an indefinite term: an understanding t
hat the relationship shall continue until the accomplishment of a particular und
ertaking Partnership with mere expectation: such a hope does not establish even
by implication a fixed term or particular undertaking

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 contri
buted to the partnership, in the same
C c,) L L E E N
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Notes on De Leon
Partnership
proportion of the amount in the distribution of the partnership assets Measure o
f damages: value of the services wrongfully withheld
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 be
en delivered, without the need of any demand. Obligations with respect to contri
bution of property
Obligations of the partners among themselves o To contribute
at the beginning of the partnership the property, money or industry
Failure to c
ontribute property will make the partner a debtor of the partnership Remedy of o
ther partners is specific performance with damages and interest o To answer for
eviction in case the partnership is deprived of the determinate property contrib
uted The partner is bound in the same manner as the vendor is bound with respect
to the vendee o To answer to the partnership for the fruits of the property, fr
om the date they should have been contributed up to the time of actual delivery
No demand needed to put the partner in default Failure to deliver the property p
rejudices the common purpose of obtaining the greatest possible profits o To pre
serve said property with the diligence of a good father o To indemnify the partn
ership for any damage caused to it by the retention of the same or by the delay
in its contribution Liability of partner for failure to perform service stipulat
ed o Partners are generally not entitled to charge each other for their services
in the firm business o To require a partner to account for the value of his ser
vices would be allowing compensation to the other members of the partnership for
the services rendered o If a partner neglects to render the services by reason
of which the partnership suffered loss, no good reason can be suggested why the
erring partner should not be just as responsible for the breach of his agreement
o If the partner is compelled to make good the loss, each member will receive h
is
o
Money or property contributed cannot be withdrawn without the consent of the par
tnership or of the other partners Art. 1787. When the capital or a part thereof
which a partner is bound to contribute consists of goods, their appraisal must b
e made in the manner prescribed in the contract of partnership, and in the absen
ce of stipulation, it shall be made by experts chosen by the partners, and accor
ding to current prices, the subsequent changes thereof being for account of the
Necessary to determine h
partnership. Appraisal of goods or property contributed
ow much has been contributed by the partners Two ways of appraisal: in the manne
r prescribed by the contract of partnership and in the absence of stipulation, b
y experts chosen by the partners and according to current prices For immovable p
roperty: appraisal is made in the inventory of said property

Art. 1788. A partner who has undertaken to contribute a sum of money and fails t
o do so becomes a debtor for the interest and damages from the time he should ha
ve 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 his own use. Obligations with respect to contributio
n of money & money converted to personal use
2 instances involved: money promise
d but not given on time and partnership money converted to personal use of the p
artner Obligations of the partner under this article o Contribute on the date du
e the amounts he has undertaken to the partnership to contribute
Liability of gu
ilty partner for interest and damages: from the time he should have complied (no
t from judicial or extrajudicial demand)

C c,) L L E E N
13

Notes on De Leon o
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 ad
ditional share to the capital, except an industrial partner, to save the venture
, shall he obliged to sell his interest to the other partners. Obligation of cap
italist partner to contribute additional capital
General rule: capitalist is not
bound to contribute to the partnership more than what he agreed to contribute,
but in case of imminent loss, he is under obligation to contribute additional sh
are to save the venture Refusal to contribute means he is obliged to sell his in
terest to the other partners Requisites before a capitalist partner may be oblig
ed to sell his interest o Imminent loss of the business o Majority of the capita
list partners believe that an additional contribution to the common fund would s
ave the business o Capitalist partner refuses deliberately o No agreement that t
he partners are not obliged to contribute in case of an imminent loss Reason: re
fusal of the partner shows his lack of interest in the continuance of the partne
rship
o o
Reimburse any amount he may have taken The party is guilty of estafa if he misap
propriates partnership money or property Mere failure on the part of the industr
ial partner to return to the capitalist partner the capital brought by him does
not constitute estafa Pay the agreed or legal interest if he fails to pay his co
ntribution on time Indemnify the partnership for the damages caused to it by the
delay
Art. 1789. An industrial partner cannot engage in business for himself, unless t
he partnership expressly permits him to do so; and if he should do so, the capit
alist partners may either exclude him from the firm or avail themselves of the b
enefits which he may have obtained in violation of this provision, with a right
to damages in either case. Obligations of industrial partner
Industrial partner
contributes his industry, labor or services to the partnership o Considered as t
he owner of his services o Becomes a debtor of the partnership for his partnersh
ip acquires exclusive right to avail itself of his industry o Action for specifi
c performance is not the proper action Prohibition against engaging in business
o Absolute and applies whether the industrial partner is to engage in the same b
usiness or in any kind of business Remedies where the industrial partner engages
in business o Capitalist partners have the right to exclude him from the firm (
with damages) o Or avail of the benefits (with damages) It is believed that indu
strial partners are also entitled to the remedy

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 owed 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 cre
dit, the amount shall be fully applied to the latter. The provisions of this art
icle are understood to be without prejudice to the right granted to the other de
btor by Article 1252, but only if the personal credit of the partner should be m
ore onerous to him. Obligations of managing partner who collects debt
If a perso

n is separately indebted to the partnership and to the managing partner, the amo
unt received shall be applied to the two credits in proportion to their amounts
o But where the managing partner receives it for the account of the partnership,
the whole sum is applied to the partnership credit only o

Art. 1790. Unless there is a stipulation to the contrary, the partners shall con
tribute equal shares to the capital of the partnership. Extent of contribution t
o partnership capital
The presumption is that their contribution shall be in equ
al shares The rule does not apply to an industrial partner unless he has contrib
uted capital
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Notes on De Leon
Partnership
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 equitab
ly lessen this responsibility if through the partner's extraordinary efforts in
other activities of the partnership, unusual profits have been realized. Obligat
ion of partner for damages to partnership
Any person guilty of negligence or fra
ud shall be liable for damages o The partners fault is determined in accordance w
ith the nature of the obligation and the circumstance of the person, time and pl
ace Damages caused by a partner cannot be offset by the profits he may have earn
ed for the partnership by his industry o The partner has the obligation to secur
e benefits for the partnership o The partner also has the obligation to exercise
diligence in the performance of his obligation as a partner o Exception: unusua
l profits through extraordinary efforts Based on equity
Case to case basis

Requisites o There are at least 2 debts, where the collecting partner is credito
r, and the other, where the partnership is the creditor o Both debts are demanda
ble o The partner who collects is authorized to manage and actually manages the
partnership Reason: the law safeguards the interest of the partnership by preven
ting the possibility of their being subordinated by the managing partner to his
own interest to the prejudice of other partners The article does not apply where
the partner who collects for his own credit is not authorized to manage if the
manner of management has not been agreed upon and all the partners participate i
n the management, then every partner shall be considered a managing partner Debt
or is given the right to prefer payment of the credit of the partner if it shoul
d be more onerous to him

Art. 1793. A partner who has received, in whole or in part, his share of a partn
ership credit, when the other partners have not collected theirs, shall be oblig
ed, if the debtor should thereafter become insolvent, to bring to the partnershi
p capital what he received even though he may have given receipt for his share o
nly. Obligation of partner who receives share of partnership credit
There is onl
y one credit under this article (that in favour of the partnership) Applies whet
her the partner who receives his share is authorized to manage or not Requisites
o A partner has received his share of the partnership credit o Other partners h
ave not collected their shares o Partnership debtor becomes insolvent The articl
e is based on the community of interests among the partners Credit collected aft
er dissolution of the partnership: conflicting views on the more diligent partne
r who collects the portion pertaining to him o Other partners may demand what th
e partner has already collected (on the principle of community and equality) o I
t would be unjust to demand from the diligent partner (the partnership ceased)
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 contr
ibute are fungible, or cannot be kept without deteriorating, or if they were con
tributed to be sold, the risk shall be borne by the partnership. In the absence
of stipulation, the risk of the things brought and appraised in the inventory, s
hall also be borne by the partnership, and in such case the claim shall be limit
ed to the value at which they were appraised. Risk of loss of things contributed
: FIVE cases for the determination of the risk of the things contributed to the

partnership
Specific and determinate things which are not fungible where only th
e use is contributed risk of loss borne by the partner because he remains the ow
ner Specific and determinate things the ownership of which is transferred to the
partnership risk of loss is for the account of the partnership, as owner Fungib
le things which cannot be kept without deteriorating even if they are contribute
d only for the use of the partnership risk of loss is borne by the partnership

Art. 1794. Every partner is responsible to the partnership for damages suffered
by it through his
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Notes on De Leon
Partnership
Rules for distribution of profits and losses
Distribution of profits o The partn
ers share the profits according to their agreement subject to Art. 1816 o If the
re is no such agreement
Share of each capitalist partner shall be in proportion
to his capital contribution. This rule is based on the presumed will of the part
ners Share of industrial partner must be satisfied first before the capitalist p
artners divide the profits. Amount will be based on what is just and equitable u
nder the circumstances. The share of an industrial partner in the profits is not
fixed, as in the case of capitalist partners, because it is very difficult to a
scertain the value of services
Things contributed to be sold partnership bears risk of loss for there cannot be
any doubt that the partnership was intended to be the owner Things brought and
appraised in the inventory partnership bears risk of loss because the intention
of the parties was to contribute to the partnership the price of the things cont
ributed with an appraisal (implied sale making the partnership owner of the said
things, the price being represented by their appraised value)
Art. 1796. The partnership shall be responsible to every partner for the amounts
he may have disbursed on behalf of the partnership and for the corresponding in
terest, from the time the expense are made; it shall also answer to each partner
for the obligations he may have contracted in good faith in the interest of the
partnership business, and for risks in consequence of its management. Responsib
ility of the partnership to the partners
Every partner is an agent of the partne
rship for the purpose of its business o Partner is not personally liable as long
as he is not at fault o But the partner is not given the right of retention if
he is not reimbursed Obligations of the partnership o Refund amount disbursed by
the partner is behalf of the partnership with interest from the time expenses a
re made o Answer for the obligation the partner may have contracted in good fait
h o Answer for risks in consequences of its management
A partner is entitled to receive only his share of the profits actually realized
by the venture Even when assurances of huge profits were made by a partner, in
the absence of fraud, the other partner cannot claim right to recover profits pr
omised. This is especially true when the business was highly speculative and tur
ned out to be a failure Hidden risks in any business venture have to be consider
ed Distribution of losses o According to the Agreement of the Partners, subject
to Art. 1799 o If no agreement, but the contract provides for the share of the p
artners in the profits, the share of each in the losses shall be according to th
e profit-sharing ratio
However, the industrial partner shall NOT be liable for l
osses
To determine profits or losses, all transactions must be considered, not o
nly one particular transaction o If also no profit-sharing stipulated in the con
tract, losses shall be borne by the partners in proportion to their capital cont
ributions
But the purely industrial partner shall NOT be liable for the losses

Art. 1797. The losses and profits shall be distributed in conformity with the ag
reement. If only the share of each partner in the profits has been agreed upon,
the share of each in the losses shall be in the same proportion. In the absence
of stipulation, the share of each partner in the profits and losses shall be in
proportion to what he may have contributed, but the industrial partner shall not
be liable for the losses. As for the profits, the industrial partner shall rece
ive such share as may be just and equitable under the circumstances. If besides
his services he has contributed capital, he shall also receive a share in the pr
ofits in proportion to his capital.
C c,) L L E E N

16

Notes on De Leon
Partnership
However, although the stipulation is void, the partnership is otherwise valid an
d the profits or losses shall be apportioned as if there was no stipulation on t
he same
If also no profit-sharing stipulated in the contract, losses shall be bo
rne by the partners in proportion to their capital contributions (Art. 1797) Sti
pulation, a factor to show no partnership exists o Where parties expressly stipu
late that there shall be no liability for losses, or where from the nature of th
e contract, it is clear that a party did not intend to share in the losses, such
fact may be an indicator/ factor in determining that no partnership exists Wher
e person excluded not intended by parties to become a partner o Stipulation is v
alid o When one of several persons engaged in an enterprise agreed to assist by
advancing money and to share in the losses but not to receive any part of the pr
ofits, which will be divided among the others exclusively, is not deemed to be a
partner o But if he represents to others or allows himself to be held as a part
ner to a 3rd person who enters into a contract with them believing him to be suc
h partner, he is liable Where person excluded from losses is industrial partner
o Naturally valid because Art. 1797 specifically excludes an industrial partner
from losses o But this is without prejudice to the rights of 3rd persons o Indus
trial partner is excluded because he cannot withdraw his labor or efforts, unlik
e a capitalist partner. Also when no profits are realized, then he would have wo
rked in vain and has already contributed his share in the loss Where stipulation
provides doe unequal shares o Partners are allowed to stipulate for unequal sha
res in the profits or losses even if their contributions are equal o Unless ineq
uality is so gross that it is, in effect, a simulated form or attempt to exclude
a partner from any share in the profits or losses o
Art. 1798. If the partners have agreed to intrust to a third person the designat
ion of 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 ha
s 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, co
mplain of such decision. The designation of losses and profits cannot be intrust
ed to one of the partners. Designation by a 3rd person of share in profits and l
osses Delegation to a 3rd person designation of shares in the profits and losses
may be delegate to 3rd person by common consent o Designation must be to 3rd pe
rson, and not to one of the partners. In accordance with rule in contracts that
fulfilment of contract cannot be left to the will of one of the contracting part
ies o Prohibition in 2nd paragraph necessary to guarantee impartiality Binding f
orce of designation designation by 3rd person generally binding unless manifestl
y inequitable o Partner who has begun to execute decision of 3rd person or who f
ails to impugn the same within 3 months from time he had knowledge of it can no
longer complain o In this case, partner guilty of estoppel or deemed to have giv
en consent or ratification to designation o 3 month period only so operations of
partnership will not be paralyzed

Art. 1799. A stipulation which excludes one or more partners from any share in t
he profits or losses is void. Stipulation excluding a partner from any share in
profits or losses
Stipulation generally void, but partnership subsists o In gene
ral, law does not allow a stipulation excluding one or more partners from any sh
are in profits and losses
Partnership must exist for common benefit and interest
of partners o Hence, contract excluding one or more partners from share contrav
enes the very purpose of a partnership

Art. 1800. The partner who has been appointed manager in the articles of partner
ship may execute all
C c,) L L E E N
17

Notes on De Leon
Partnership
Exception is when the powers of the manager are specifically restricted
acts of administration despite the opposition of his partners, unless he should
act in bad faith; and his power is irrevocable without just or lawful cause. The
vote of the partners representing the controlling interest shall be necessary f
or such revocation of power. A power granted after the partnership has been cons
tituted may be revoked at any time. Rights and obligations with respect to manag
ement Two distinct cases of appointments
Appointment as a manager in the Article
s of Partnership o Partner appointed by common agreement in articles of partners
hip may execute all acts of administration, but not those of strict ownership, n
otwithstanding the opposition of the other partners, unless he should act in bad
faith o His power is revocable only upon just and lawful cause and upon vote of
the partners representing the controlling interest o Reason: revocation represe
nts a change in the terms of the contract o In case of mismanagement, other part
ners may avail of usual remedies, including application for dissolution of partn
ership by judicial decree Appointment as manager after the constitution of the p
artnership o Management granted after partnership has been constituted independe
ntly of the articles may be revoked at any time for any cause whatsoever o Revoc
ation not founded on change of will of partners, the appointment not being a con
dition of the contract o It is merely a contract of agency, which may be revoked
any time
Compensation for services rendered Partner generally not entitled to compensatio
n o Each partner in taking care of the joint property, managing the partnership
affairs, and directing the partnership business is practically taking care of hi
s own interest or managing his own business o He is not, in the absence of a con
tract, express or implied, entitled to compensation beyond his share of the prof
its for services rendered o In the absence of any prohibition in the articles of
partnership for the payment of salaries to general partners, there is nothing t
o prevent the partners to enter into a collateral verbal agreement to that effec
t Exceptions in proper cases, the law may imply a contract for compensation o Em
ployment of a co-partner in a capacity other than that of a partner. e.g. to per
form clerical services o Extraordinary neglect on the part of one partner to per
form his duties, imposing the entire burden on the remaining partner o To do wor
k for a co-partner outside and independent of the co-partnership, and shall beco
me personally liable therefore o Partners exempted by terms of partnership from
rendering services o Where one partner is entrusted with management and devotes
his whole time thereto while the other partners attend to their individual busin
ess giving no time or attention to the business of the firm o When one partner i
s exempt from rendering personal services and he does render such service or whe
re services rendered are extraordinary

Art. 1800 refers to a partner appointed as manager, and not to a stranger As a r

ule, the partner is not entitled to compensation for his services other than his
share of the profits Scope of power if a managing partner
As a general rule, a
partner appointed as manager has all powers of a general agent as well as incide
ntal powers necessary to carry out object of partnership in the transaction of i
ts business
Art. 1801. If two or more partners have been intrusted with the management of th
e partnership without specification of their respective duties, or without a sti
pulation that one of them shall not act without the consent of all the others, e
ach one may separately execute all acts of administration, but if any of them sh

ould oppose the acts of the others, the decision of the majority shall prevail.
In case of a tie, the matter shall be decided by the partners owning the control
ling interest.
C c,) L L E E N
18

Notes on De Leon
Partnership
Rule where there is opposition by a managing partner o Rule that in cases of imm
inent danger of grave or irreparable injury, a managing partner may proceed alon
e without consent of others, does not apply when a managing partner objects to t
he proposed act Consent of managing partners not necessary in routine transactio
ns o The authority to purchase carries with it the implied authority to purchase
on credit o The requirement of written authority refers to formal and unusual w
ritten contract
Where respective duties of two or more managing partners not specified
Each one
may separately perform acts of administration o If one or more managing partners
oppose acts of others, decision of majority of the managing partners shall prev
ail Right to oppose can be exercised only by those entrusted with management of
partnership and not by any partner o In case of tie, matter shall be decided by
vote of partners owning controlling interest (more than 50% capital investment)
o If articles do not specify duties of partners and limitations of management ,
one partner has no more powers than the others in the conduct and management of
the business Requisites for application of rule o Two or more partners have been
appointed as managers o There is no specification of their respective duties o
There is no stipulation that one of them shall not act without the consent of al
l the others

Art. 1803. When the manner of management has not been agreed upon, the following
rules shall be observed: (1) All the partners shall be considered agents and wh
atever any one of them may do alone shall bind the partnership, without prejudic
e to the provisions of Article 1801. (2) None of the partners may, without the c
onsent of the others, make any important alteration in the immovable property of
the partnership, even if it may be useful to the partnership. But if the refusa
l of consent by the other partners is manifestly prejudicial to the interest of
the partnership, the court's intervention may be sought. Rule when manner of man
agement has not been agreed upon All partners considered managers and agents
All
partners shall then have equal rights in the management and conduct of partners
hip affairs. All of them shall be considered managers and agents (Art. 1818) Eff
ect: whatever any one of them may do alone shall bind partnership o Subject to A
rt. 1801 that in case of timely opposition by any partner, majority vote shall b
e needed o In case of tie, matter shall be decided by vote of partners represent
ing the controlling interest o Read Art. 1803(1) together with Art. 1818

Art. 1802. In case it should have been stipulated that none of the managing part
ners shall act without the consent of the others, the concurrence of all shall b
e necessary for the validity of the acts, and the absence or disability of any o
ne of them cannot be alleged, unless there is imminent danger of grave or irrepa
rable injury to the partnership. Where unanimity of action stipulated
Concurrenc
e necessary for validity of acts o Partners may stipulate that none of managing
partners shall act without consent of the others o Consent can be so indispensab
le that neither absence nor disability of any partner cannot be used to dispense
requirement The only exception is when there is imminent danger of grave and ir
replaceable injury to the partnership under Art. 1794
C c,) L L E E N
19

Notes on De Leon
Partnership
Effect: sub-partner does not acquire rights of a partner nor is he liable for it
s debts
Unanimous consent required for alteration of immovable property
Consent here nee
d not be express and may be presumed from the fact of knowledge of the alteratio
n without interposing any objection o Prohibition only applies to immovable prop
erty and the alteration thereof must be important Any important alteration in th
e immovable property of the partnership is an act of strict dominion Even managi
ng partner cannot make such alteration, notwithstanding that it is useful to the
partnership, without the consent of all partners o If refusal to give consent i
s manifestly prejudicial to interest of the partnership, court intervention may
be sought
Consent may be presumed from silence of other partners who did not opp
ose to alteration o If the alteration is necessary for the preservation of the p
roperty, it would seem that the consent of the other partners is not required Ar
t. 1804. Every partner may associate another person with him in his share, but t
he associate shall not be admitted into the partnership without the consent of a
ll the other partners, even if the partner having an associate should be a manag
er. Contract of sub-partnership
Sub-partnership a partner may associate another
person with him in his share without the consent of the other partners Nature: P
artnership formed between a member of a partnership and a 3rd person for a divis
ion of the profits coming to him from the partnership enterprise A partnership w
ithin a partnership and is distinct and separate from the main or principal part
nership Right of person associated with partners share Sub-partnership agreement
s do not affect composition, existence or operation of the firm
Sub-partners are
partners inter se, but in absence of mutual assents of all partners, sub-partne
r does not become member of partnership
Reason for the rule: Partnership is based on mutual trust and confidence among p
artners
In effect a modification of the original contract of partnership requiri
ng unanimous consent Prohibition applies even if person associated is already a
partner Art. 1805. The partnership books shall be kept, subject to any agreement
between the partners, at the principal place of business of the partnership, an
d every partner shall at any reasonable hour have access to and may inspect and
copy any of them. Keeping a partnership books Partner with duty to keep partners
hip books Managing or Active partner has duty to keep books and make them availa
ble at all times for inspection by members of the firm Rights with respect to pa
rtnership books
Books should be kept at principal place of business To ensure ot
her partners right to free access to them and to inspect or copy any of them at a
ny reasonable time, even after dissolution Partnership inspection rights are not
absolute. He can be restrained from using information gathered for other than p
artnership purposes
Access to partnership books reasonable hours on business days throughout the yea
r and not merely during some arbitrary period of a few days by the managing part
ners Art. 1806. Partners shall render on demand true and full information of all
things affecting the partnership to any partner or the legal representative of
any deceased partner or of any partner under legal disability. Duty to render in
formation
There must be no concealment between the partners in all matters affec
ting the partnership The information that shall be rendered on demand should be
used only for a partnership purpose Partner has either 2 obligations o Give info
rmation on demand o Duty of voluntary disclosure of material facts within his kn
owledge relating to partnership affairs
C c,) L L E E N
20

Notes on De Leon
Partnership
Duty to make full disclosure of information belonging to a partnership o Partner
must give undivided loyalty and complete disclosure of information of all thing
s affecting the partnership o Information means information that can be used for
the purposes of the partnership Duty not to acquire interest or right adverse t
o partnership o Partner may not purchase, lease, or secure a valuable contract,
for his own benefit, that which the partnership is interested o If he does, he h
old it in trust for the benefit of the partnership and must account to the firm
the profits of the transaction unless there is consent from the co-partners o Co
nsent must be an informed consent with knowledge of the facts necessary to give an
intelligent consent
But duty to render information does not apply to matters appearing in partnershi
p books since partners have right to inspect books Good faith requires partner n
ot make any false statement and abstain from any false concealment
Art. 1807. Every partner must account to the partnership for any benefit, and ho
ld as trustee for it any profits derived by him without the consent of the other
partners from any transaction connected with the formation, conduct, or liquida
tion of the partnership or from any use by him of its property. Accountability o
f partner partner accountable as fiduciary because their relationship involves t
rust and confidence: each partner is considered in law as the confidential agent
of the others. The duties of a partner are analogous to those of a trustee Duti
es:
Duty to act for common benefit he cannot, at the expense or detriment of the
other partners, use or apply exclusively to his own individual benefit partners
hip assets or knowledge or information gained as a partner Duty begins during fo
rmation of partnership o The principle of utmost good faith starts even in negot
iations leading to formation of the partnership (Allen v. Steinberg) o Has the o
bligation to account for commissions and discounts received in acquiring propert
y for the future partnership Duty continues even after dissolution of partnershi
p duty to act with utmost good faith continues throughout life of partnership un
til relationship is terminated (includes winding up) Duty to account for secret
and similar profit duty to account as a fiduciary operates to prevent from makin
g a secret profit out of the operation of the partnership and using the partners
hip or knowledge obtained from the partnership in a similar business without the
consent of the other partners Duty to account for earnings accruing even after
termination of partnership if a member of a partnership avails himself of informa
tion obtained by him in the course of the transaction of partnership business wh
ich is within scope of the firms business, and applies it to his own account with
out the consent or knowledge of his copartners, he is liable to account to the p
artnership for any benefit he may obtain from the use of such information

Art. 1808. The capitalist partners cannot engage for their own account in any op
eration which is of the kind of business in which the partnership is engaged, un
less there is a stipulation to the contrary. Any capitalist partner violating th
is prohibition shall bring to the common funds any profits accruing to him from
his transactions, and shall personally bear all the losses. Industrial partner a
bsolute prohibition Capitalist partner relative prohibition
Only prohibited from
engaging for his own account in any operation which is the same or similar to t
he business of the partnership or competes with such If capitalist partner seeks
to do other businesses it must be one that is not connected or competing with p
artnership Cannot engage in business of others in the same line of business as p
artnership

Reason: partnership is fiduciary Exception: consent from partners

C c,) L L E E N
21

Notes on De Leon
Partnership
Right to true and full information of all things affecting the partnership (Art.
1806) Right to a formal account of partnership affairs under certain circumstan
ces (Art. 1809) Right to have the partnership dissolved also under certain circu
mstances (Art. 1830-1831)
Art. 1809. Any partner shall have the right to a formal account as to partnershi
p affairs: (1) If he is wrongfully excluded from the partnership business or pos
session of its property by his co-partners; (2) If the right exists under the te
rms of any agreement; (3) As provided by article 1807; (4) Whenever other circum
stances render it just and reasonable. General rule: during the existence of the
partnership, a partner is not entitled to a formal account of partnership affai
rs Reason: rights of a partner protected in Art. 1805 and 1806 and will cause mu
ch inconvenience and unnecessary waste of time Exception: special and unusual si
tuations under Art. 1809 Example of paragraph 4: partner is assigned abroad for
a long period for the partnership and the other partners hold books during that
time Prescriptive period: right to demand accounting exists as long as partnersh
ip lasts. Prescription starts upon dissolution of partnership when final account
ing is done SECTION 2. - Property Rights of a Partner Art. 1810. The property ri
ghts of a partner are: (1) His rights in specific partnership property; (2) His
interest in the partnership; and (3) His right to participate in the management.
Principal rights:
His rights in specific partnership property (Art. 1811)
His i
nterest in the partnership (Art. 1812) His right to participate in management (A
rt. 1803) Related rights Right to reimbursement for amounts advanced to the part
nership and to indemnification for risks in consequence of management (Art. 1796
) Right to access and inspection of partnership books (Art. 1805)

Partnership property versus Partnership capital

Property is variable and may cha
nge from day to day depending on market value of partnership assets while capita
l is constant counted from the amount fixed by the agreement of the partners alt
hough it may be increased or decreased by unanimous consent of the partners
Prop
erty includes all property of the partnership (original capital contributions, s
ubsequent acquisitions, partnership name, goodwill) while capital only includes
capital contributions from the partners Ownership of certain property Key: depen
ds on intention of the parties controlling factor: No express agreement that pro
perty used by a partnership constitutes partnership property does not make it pa
rtnership property. Depends on intention of the parties (shown by express agreem
ents or acts of particular conduct)
A partner may contribute the use or enjoymen
t of property to the partnership while retaining ownership of property A partner
may hold title to partnership property without it actually belonging to him Gen
eral rule: property acquired with partnership funds is partnership property Exce
ption: unless there is a contrary intention Property acquired after dissolution
but before winding up is separate property; BUT he would be liable to the partne
rship of partnership funds are used Art. 1811. A partner is co-owner with his pa
rtners of specific partnership property. The incidents of this co-ownership are
such that: (1) A partner, subject to the provisions of this Title and to any agr
eement between the partners, has an equal right with his partners to possess spe
cific partnership property for partnership purposes; but he has no right to poss
ess such property for any other purpose without the consent of his partners;
C c,) L L E E N
22

Notes on De Leon
Partnership
on the death of a partner, his right in specific partnership property vests in t
he surviving partners, not the legal representative of the deceased partner. Exe
cutor of deceased partner CANNOT insist on participating in the winding up proce
ss d. by agreement, right to possess specific partnership property may be surren
dered. If no agreement, equal dominion over partnership property e. a partnershi
p possession of partnership property is equal to possession of all partners. The
refore, cannot acquire by adverse possession. Unless he makes an adverse claim o
f title under such circumstances as will charge his copartner with notice of the
adverse claim right not assignable a partner cannot separately assign his right
s to specific property but all of them can assign their rights in the same prope
rty a. not assignable because cannot determine the extent of beneficial interest
in the property until after liquidation b. partner cannot dispose or mortgage w
ithout consent or approval of the other partners even if he contributed property
c. consent of all the partners, either express or implied, is the source and li
mit of a partners right to deal with partnership property for any but a partnersh
ip purpose d. not assignable so that it prevents interference by outsiders in pa
rtnership affairs. Protects right of other partners and partnership creditors e.
assignment of specific partnership property is void but assignment of partnersh
ip interest is valid. A retiring partner may assign his rights in partnership pr
operty to the partner or partners continuing the business (Art. 1840) right limi
ted to share of what remains after partnership debts have been paid a. the whole
partnership property belongs to the partnership as a juridical person (Art. 176
8) and a partner has no interest in it but his share of what remains after all p
artnership debts are paid (Art. 1812) b. specific partnership property is not su
bject to attachment, execution, garnishment or injunction without the consent of
all partners EXCEPT if it is a claim against the partnership itself c. right of
the partners to specific partnership property is not subject to c.
(2) A partner's right in specific partnership property is not assignable except
in connection with the assignment of rights of all the partners in the same prop
erty; (3) A partner's right in specific partnership property is not subject to a
ttachment or execution, except on a claim against the partnership. When partners
hip property is attached for a partnership debt the partners, or any of them, or
the representatives of a deceased partner, cannot claim any right under the hom
estead or exemption laws; (4) A partner's right in specific partnership property
is not subject to legal support under Article 291. The incidents of this co-own
ership are such that:
A partner, subject to the provisions of this Title and to
any agreement between the partners, has an equal right with his partners to poss
ess specific partnership property for partnership purposes; but he has no right
to possess such property for any other purpose without the consent of his partne
rs A partners right in specific partnership property is not assignable except in
connection with the assignment of rights of all the partners in the same propert
y A partners right in specific partnership property is not subject to attachment
or execution, except on a claim against the partnership. When partnership proper
ty is attached for a partnership debt, the partners, or any of them, or the repr
esentatives of a deceased partner, cannot claim any right under the homestead or
exemption laws
A partners right in specific partnership property is not subject
to legal support under Art. 291 Contemplates tangible property (cars, truck, lan
d) but not intangible things (rights to the land of public domain) 3. A partner
is a co-owner with his partners but the rules of co-ownership do not necessarily
apply 1. equal right of possession partners have equal right to possess specifi
c partnership property for partnership purposes a. if used NOT for personal prof
it or benefit, he must account to the others for the profits derived therefrom b
. if partner wrongfully excluded from possession right to formal account and eve
n apply for judicial decree of dissolution 2.
C c,) L L E E N

23

Notes on De Leon
Partnership
third person irrespective of the consent of the other partners, in the absence o
f agreement to the contrary Partner may convey his whole interest in the partner
ship without causing dissolution. However, his assignment does not grant assigne
e right to:
to interfere with the management to require any information or accou
nt to inspect any of the partnership books
legal support because property belongs to the partnership and not to the partner
s. Partnership interest may be subject to legal support Art. 1812. A partner's i
nterest in the partnership is his share of the profits and surplus. The partners
interest in the partnership consists of his share in the undistributed profits d
uring the life of the partnership as an ongoing concern and his share in the und
istributed surplus after its dissolution Profit excess of returns over expenditu
re in a transaction of series of transactions or the net income of the partnersh
ip over a given period Surplus assets of the partnership after debts and liabili
ties are paid and the rights of the partnership are adjusted. Excess assets over
liabilities Extent of partners interest is the proportion residue or balance aft
er an account has been taken of debts and credits, including the amount paid by
the several partners in liquidating firm debts or in making advances to the part
nership. Until that occurs, it is impossible to determine the extent of a partne
rs interest A partner is not a creditor of the partnership for the amount of his
share. The interest of a partner is not subject to attachment or execution on a
judgment recovered against the individual partner Art. 1813. A conveyance by a p
artner of his whole interest in the partnership does not of itself dissolve the
partnership, or, as against the other partners in the absence of agreement, enti
tle the assignee, during the continuance of the partnership, to interfere in the
management or administration of the partnership business or affairs, or to requ
ire any information or account of partnership transactions, or to inspect the pa
rtnership books; but it merely entitles the assignee to receive in accordance wi
th his contract the profits to which the assigning partner would otherwise be en
titled. However, in case of fraud in the management of the partnership, the assi
gnee may avail himself of the usual remedies. In case of a dissolution of the pa
rtnership, the assignee is entitled to receive his assignor's interest and may r
equire an account from the date only of the last account agreed to by all the pa
rtners. A partners right in specific partnership property is not assignable (Art.
1811[2]), but he may assign his interest in the partnership (Art. 1812) to any
of his co-partners or to a
Partnership is a relation in which delectus personae is an important element. No
one may be introduced into the firm as a partner without the unanimous consent
of the other partners Remedy of the other partners if: dissolution of the partne
rship is NOT intended o partnership may continue. Assigning partner still has to
participate in his partnership duties. Dissolution may occur if assigning partn
er neglects his partnership duties dissolution of the partnership is intended o
operates as a dissolution of the partnership only when it is clear that the part
ies contemplated and intended the entire withdrawal from the partnership of such
partners and the termination of the partnership as between the parties

The rights of the transferee or assignee are as follows:

to receive in accordanc
e with his contract the profits accruing to the assigning partner to avail himse
lf of the usual remedies provided by law in the event of fraud in the management
to receive the assignors interest in case of dissolution to require an account o
f partnership affairs, but only in case the partnership is dissolved, and such a
ccount shall cover the period from the date only of the last account agreed to b
y all the partners

Art. 1814. Without prejudice to the preferred rights of partnership creditors un

der Article 1827, on due application to a competent court by any judgment credit
or of a partner, the court which entered the judgment, or any other court, may c
harge the interest of the debtor partner with payment of the unsatisfied amount
of such judgment debt with interest thereon; and may then or later appoint a rec
eiver 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
C c,) L L E E N
24

Notes on De Leon
Partnership
SECTION 3. - Obligations of the Partners With Regard to Third Persons Art. 1815.
Every partnership shall operate under a firm name, which may or may not include
the name of one or more of the partners. Those who, not being members of the pa
rtnership, include their names in the firm name, shall be subject to the liabili
ty of a partner.
Firm name name, title or style under which a company transacts
business Importance necessary to distinguish the partnership which has a distinc
t and separate juridical personality from the individuals composing the partners
hip and from other partnerships and entities General rule: partners may adopt an
y firm name desired. May be last names of the partners or even fictitious or fan
ciful names. Signature in the firm name is in law the signature of all the partn
ers Use of misleading name partners cannot use a name that is identical of decept
ively confusingly similar to that of any existing partnership or corporation or
to any name already protected by law or is patently deceptive, confusing or cont
rary to existing laws
orders, directions, accounts and inquiries which the debtor partner might have m
ade, or which the circumstances of the case may require. The interest charged ma
y be redeemed at any time before foreclosure, or in case of a sale being directe
d by the court, may be purchased without thereby causing a dissolution: (1) With
separate property, by any one or more of the partners; or (2) With partnership
property, by any one or more of the partners with the consent of all the partner
s whose interests are not so charged or sold. Nothing in this Title shall be hel
d to deprive a partner of his right, if any, under the exemption laws, as regard
s his interest in the partnership.
a separate creditor of a partner cannot attac
h or levy upon partnership property for the satisfaction of his credit (Art. 181
1[3]) because partnership assets are reserved for partnership creditors (Art. 18
27). However, he can secure a judgment on his credit and then apply to the prope
r court for a Charging Order subject the interest of the debtor partner in the par
tnership (Art. 1812) with the payment of the unsatisfied amount of such judgment
with interest thereon with the least interference with the partnership business
and the rights of other partners. Through the Charging Order, any amount or porti
on which would be paid to the debtor partner should instead be given to the judg
ment creditor interest of the debtor partner may be redeemed or purchased with t
he separate property of any one or more of the partners, or with the partnership
property but with the consent of all the partners whose interests are not so ch
arged or sold redemption price should be equal to the actual or market value. Va
lue of partners interest has no bearing on the redemption price which would likel
y be lower since it will be dependent on the amount of the partnership debts if
another partner redeems the partners interest, he does not acquire absolute owner
ship but holds it in trust for the debtor-partner due to the fiduciary relations
hip

Use of name of deceased partners

General rule: Supreme Court says partnership CA
NNOT use name of deceased partners Exception: permissible provided that the firm
indicates in all its communications that said partner is deceased

Persons who, not being a partner, include their name in the firm name do not acq
uire the rights of a partner, but they shall be liable as a partner insofar as t
hird parties without notice are concerned. BY ESTOPPEL. Art. 1816. All partners,

including industrial ones, shall be liable pro rata with all their property and
after all the partnership assets have been exhausted, for the contracts which m
ay be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any p
artner may enter into a separate obligation to perform a partnership contract.

C c,) L L E E N
25

Notes on De Leon
Partnership
Stipulation against liability
A stipulation among the partners contrary to the p
ro rata and subsidiary liability expressly imposed by Art. 1816 is void and of n
o effect as it affects the rights of thirds persons. It is valid and enforceable
only as among the partners Example: o A, B, and C are partners in a business. E
ach of them contributed 10,000Php each. They stipulated that the liability of A
shall not exceed his capital contribution o Thus, if the partnership assets have
been exhausted and there still remains an unpaid balance of 9,000Php in favour
of creditor D, the latter can still recover 3,000Php each from the partners as t
heir stipulation cannot adversely affect him. However, since the agreement is bi
nding among the partners, A is entitled to credit from B and C for the amount o
3,000Php paid by him to D
Partnership liability partners are principals to the other partners and agents f
or them and the partnership. They are liable to third persons who have dealt wit
h one of them in the same way that a principal is liable to third persons who ha
ve dealt with an agent General rule: a partner has the right to make all partner
s liable for contracts he makes for the partnership in the name and for the acco
unt of the partnership Individual liability a partner may assume a separate unde
rtaking in his name with a third party to perform a partnership contract or make
himself solidarily liable on a partnership contract. In this case, he is person
ally liable even if the partnership derived benefits from it. Partners are liabl
e to creditors (including industrial partners) for obligations contracted in the
name and for the account of the partnership. Liabilities are pro-rata and subsi
diary Pro-rata are the partnership assets have been exhausted: o Understood to m
ean equally or jointly and not proportionately which is its literal meaning. Bas
ed on the number of partners and not on the amount of their contributions to the
common fund, subject to adjustment among the partners o If a partner has left t
he country, cannot increase the liability of the other partners o Subsidiarily p
artners are liable as guarantors of the partnership. When the assets of the part
nership are exhausted, the private properties of the partners are liable o Indus
trial partners would also have to pay but may recover from the capitalist partne
r unless there is an agreement to the contrary Exception: o The industrial partn
er to pay losses relates exclusively to the settlement of the partnership affair
s among the partners themselves and has nothing to do with the liabilities of th
e partners to third persons. An industrial partner is not exempted from liabilit
y to third persons for the debts of the partnership

Art. 1818. Every partner is an agent of the partnership for the purpose of its b
usiness, and the act of every partner, including the execution in the partnershi
p name of any instrument, for apparently carrying on in the usual way the busine
ss of the partnership of which he is a member binds the partnership, unless the
partner so acting has in fact no authority to act for the partnership in the par
ticular matter, and the person with whom he is dealing has knowledge of the fact
that he has no such authority. An act of a partner which is not apparently for
the carrying on of business of the partnership in the usual way does not bind th
e partnership unless authorized by the other partners. Except when authorized by
the other partners or unless they have abandoned the business, one or more but
less than all the partners have no authority to: (1) Assign the partnership prop
erty in trust for creditors or on the assignee's promise to pay the debts of the
partnership; (2) Dispose of the good-will of the business; (3) Do any other act
which would make it impossible to carry on the ordinary business of a partnersh
ip; (4) Confess a judgment; (5) Enter into a compromise concerning a partnership
claim or liability; (6) Submit a partnership claim or liability to arbitration;

Art. 1817. Any stipulation against the liability laid down in the preceding arti
cle shall be void, except as among the partners.
C c,) L L E E N
26

Notes on De Leon (7) Renounce a claim of the partnership.

Partnership
o Whether or not the acts are for apparently carrying on, in the usual way, the
business of the partnership, the partnership is not liable to third persons havi
ng actual or presumptive knowledge of the restrictions Even if the partner acted
within the customary business of the partnership, the partnership will not be l
iable to third persons having actual or presumptive knowledge of the restriction
s on the power of the acting partner
No act of a partner in contravention of a restriction on authority shall bind th
e partnership to persons having knowledge of the restriction. Power of partner a
s agent of partnership
As among themselves when a partner performs an act within
the scope of his actual, implied, or apparent authority, he is not only a princ
ipal as to himself, but is also an agent as to his co-partners or to the partner
ship As to third persons limitations upon the authority of any one of the partne
rs are not binding upon innocent persons dealing with the partnership. Third per
sons have the right to assume that every general partner has the power to bind t
he partnership especially those partners acting with ostensible authority, by wh
atever is proper for the transaction in the ordinary and usual manner of the bus
iness of the partnership Reasons: o Third persons have no duty to make inquiries
as to the acting partners authority o There is a presumption that the acting par
tner has authority to bind the partnership The apparent scope of the partners aut
hority is the whole scope of the partnerships customary business o Third parties
should not assume that a partner has unlimited authority o Even simpler for acts
not within the customary business of the partnership, third persons are duty bo
und to make inquiries and the presumption does not apply o

Liability of partner acting without authority as a general rule, the partner who
undertakes to bind his co-partners by a contract without authority is himself p
ersonally liable on such contract. He cannot be admitted to say that he was not
authorized to make a contract, as he is estopped to deny its effect or validity
Art. 1819. Where title to real property is in the partnership name, any partner
may convey title to such property by a conveyance executed in the partnership na
me; but the partnership may recover such property unless the partner's act binds
the partnership under the provisions of the first paragraph of article 1818, or
unless such property has been conveyed by the grantee or a person claiming thro
ugh such grantee to a holder for value without knowledge that the partner, in ma
king the conveyance, has exceeded his authority. Where title to real property is
in the name of the partnership, a conveyance executed by a partner, in his own
name, passes the equitable interest of the partnership, provided the act is one
within the authority of the partner under the provisions of the first paragraph
of Article 1818. Where title to real property is in the name of one or more but
not all the partners, and the record does not disclose the right of the partners
hip, the partners in whose name the title stands may convey title to such proper
ty, but the partnership may recover such property if the partners' act does not
bind the partnership under the provisions of the first paragraph of Article 1818
, unless the purchaser or his assignee, is a holder for value, without knowledge
. Where the title to real property is in the name of one or more or all the part
ners, or in a third person in trust for the partnership, a conveyance executed b
y a partner in the partnership name, or in his own name, passes the equitable in
terest of the partnership, provided the act is one within the authority of the p
artner under the provisions of the first paragraph of Article 1818.

Liability of partnership for acts of partners

Acts for apparently carrying on, i
n the usual way, the business of the partnership (par. 1) the partnership will b
e liable when: o The partner so acting has in fact no authority; and o The third
person has no knowledge of the absence of authority Acts of strict dominion or
ownership (pars. 2 and 3) the partnership is not bound unless: o Authorized by a
ll the other partners; or o The partners have abandoned the business Acts in con
travention of a restriction on authority (par. 4)

C c,) L L E E N
27

Notes on De Leon
Partnership
o D had knowledge of As lack of authority although the sale was made in the usual
course of business
Where the title to real property is in the name of all the partners a conveyance
executed by all the partners passes all their rights in such property. Legal ef
fects of the conveyance of real property belonging to the partnership Depending:
In whose name it is registered; and In whose name it is conveyed
Title in name of one or more partners, conveyance in name of partner or partners
or partners in whose name title stands (par. 3)
Although the parcel of land in
question really belongs to the partnership X & Co., it is, however, registered i
n the name of A and the record does not disclose the right of X & Co. In this ca
se, if A sold the land in his own name to D, title is conveyed to D. the effect
is the same as in par. 1 Title in name of one or more or all partners or a third
person in trust of partnership, conveyance executed in partnership name or in n
ame of partner (par. 4) suppose the parcel of land is in the name of A in trust
for the partnership X & Co. If A sells the land to D in the name of X & Co. or i
n his (As) name, the conveyance will pass only the equitable interest of X & Co.,
A, being a mere trustee of the partnership. The rule is the same as par. 2
Under this article, the real property may be registered or owned in the name of:
The partnership (pars. 1 and 2); One of more but not all the partners (par. 3);
One or more or all the partners, or in a third person in trust for the partners
hip (par. 4.); or All the partners (par. 5)

Under paragraphs 1, 3, and 5, what is conveyed is title or ownership, while unde

r paragraphs 2 and 4, what is conveyed is merely equitable interest Title in par
tnership name, conveyance in partnership name (par. 1)
A, B, and C are partners
in a partnership known as X & Co. A sold a parcel of land registered in the name
of X & Co. to D without express authority The conveyance passes title to D; but
X & Co. can recover the property if (a) the conveyance was not in the usual way
of business; or (b) D had knowledge of the fact that A has no authority even th
ough the conveyance was made in the usual way of business In no may the partners
hip recover if D had, in turn, conveyed the property to E who had no knowledge o
f As lack of actual authority in making the conveyance to D
Title in name of all partners, conveyance in name of all partners (par. 5)
If th
e parcel of land is registered in the name of A, B, and C, conveyance made by al
l of the partners to D will pass title to the property for the law says a conveya
nce by all the partners passes all their rights in such property. The effect obvi
ously would be the same though the sale is not in the usual course of business o
f X & Co.

Art. 1820. An admission or representation made by any partner concerning partner

ship affairs within the scope of his authority in accordance with this Title is
evidence against the partnership. Effect of admission by a partner
The admission
of a partner made during the existence of the partnership are binding against t
he partnership (and co-partners) when such admissions refer to a matter concerni
ng partnership affairs made within the scope of his authority Examples: o A borr
owed 1,000Php from B in whose favour he executed a promissory note. A made the s
tatement that he was acting for C and that the money was intended for C. C never
authorized A to borrow money from B. The declaration of A that he was

Title in partnership name, conveyance in partners name (par. 2)

le, if the sale was executed by A in his own name to D, the latter
me the owner of the land. He gets only the equitable interest of X
ng that the selling of the land is in the usual course of business
rship D would not be entitled even to the equitable interest if: o
t engaged in the buying and selling of lands; or

C c,) L L E E N
28

In the same examp

does not beco
& Co., assumi
of the partne
X & Co. is no

Notes on De Leon
Partnership
statement may be offered in evidence to show that A and C are partners Art. 1821
. Notice to any partner of any matter relating to partnership affairs, and the k
nowledge of the partner acting in the particular matter, acquired while a partne
r or then present to his mind, and the knowledge of any other partner who reason
ably could and should have communicated it to the acting partner, operate as not
ice to or knowledge of the partnership, except in the case of fraud on the partn
ership, committed by or with the consent of that partner. Notice to, or knowledg
e of, a partner of matter affecting partnership affairs
Notice to, or knowledge
of, any partner of any matter relating to the partnership affairs operate as a n
otice to or knowledge of the partnership except in case of fraud o A third perso
n desiring to give notice to a partnership of some matter pertaining to the part
nership business need not communicate with all the partners. If notice is delive
red to a partner, that is an effective communication to the partnership notwiths
tanding the failure of the partner to communicate such notice or knowledge to hi
s co-partners Article 1821 speaks of three cases of knowledge namely: o Knowledg
e of the partner acting in the particular matter acquired while a partner; o Kno
wledge of the partner acting in the particular matter then present to his mind;
and o Knowledge of any partner who reasonably could and should have communicated
it to the acting partner

acting for C and that the money was intended for C is not admissible against C a
s to make him liable to B o Suppose C said on one occasion in the presence of D
that he received the money or that the contract was entered into by A with his (
Cs) consent, this statement can be testified to by D in a litigation by B against
C o If A was really an agent of C in the transaction, the, whatever is said or
done by A while acting within the scope of his authority is admissible against C
, his principal, the same as if C personally entered into the contract with B o
Assuming that A is a partner and C is the partnership, it is clear, on the same
legal principle, that the statement of A while transacting the business of the p
artnership within the scope of his authority is evidence against the partnership
o Where, however, A acted in his own name and B extended the loan on the person
al credit of A, any admission made by A is not binding on C, the partnership Whe
ther an admission of liability made by a partner binds the partnership depends o
n whether the partner was acting within the scope of express, implied, or appare
nt authority at the time of making the statements or declarations A partner cann
ot by his declaration alone bring a transaction within the scope of the business
when the facts show that it has no connection with partnership business Stateme
nts of a partner bind the partnership only if they are made in the course of, re
lated to, and are material to, the transaction of the partnerships business. A pa
rtnership is a joint affair, and to charge it with liability there must be joint
words or actions. An individual partner cannot do this

Existence of partnership must be proved

Sec 29, Rule 130 RC state that before th
e partnership can be charged with the admission of a partner under Art. 1820, th
e partnership relation must be shown and proof of that fact must be made by evid
ence other than the admission itself However, admissions and declarations made i
n the presence of the person to be charged are admissible to prove the existence
of the partnership o Where A states in the presence of C that A is a partner in
partnership X composed of A and C, and C remains silent, the

While a partner vs. Present to his mind

Pertains to the moment when knowledge was ac
quired. In the first, it was while he was a partner and in the second, before he
became a partner with the presumption that such knowledge was then present in hi
s mind when he became a partner In both cases, it operates as notice to or knowle
dge of the partnership The second case of Knowledge only pertains to an acting p
artner o If B (not an acting partner) acquired knowledge or notice before he bec
ame a partner, then, there is neither notice to nor knowledge of the partnership

C c,) L L E E N
29

Notes on De Leon
Partnership
as well as the legal entity which is the partnership, are all solidarily liable
The injured party may proceed against the partnership or any partner o Since par
tners are solidarily liable, the party aggrieved has his election to sue the fir
m or to sue one or more of its members. He may even single out for suit a partne
r who, personally, was in no wise involved in the commission of the tort or brea
ch of trust
Fraud if the partner or acting partner deliberately did not inform the partnersh
ip for a fraudulent purpose, then such knowledge does not operate as a notice to
or knowledge of the partnership Art. 1822. Where, by any wrongful act or omissi
on of any partner acting in the ordinary course of the business of the partnersh
ip or with the authority of copartners, loss or injury is caused to any person,
not being a partner in the partnership, or any penalty is incurred, the partners
hip is liable therefor to the same extent as the partner so acting or omitting t
o act. Art. 1823. The partnership is bound to make good the loss: (1) Where one
partner acting within the scope of his apparent authority receives money or prop
erty of a third person and misapplies it; and (2) Where the partnership in the c
ourse of its business receives money or property of a third person and the money
or property so received is misapplied by any partner while it is in the custody
of the partnership. Art. 1824. All partners are liable solidarily with the part
nership for everything chargeable to the partnership under Articles 1822 and 182
3. The above 3 article provide for the SOLIDARY LIABILITY of the partners and th
e partnership to third persons
For the wrongful act or omission (Art. 1822) of a
partner acting within the scope of the firms business or with the authority of h
is co-partners; or Breach of trust (Art. 1823) of a partner acting within the sc
ope of the firms business or with the authority of his co-partners

Requisites for liability the following are the requisites for liability under Ar
t. 1822
The partner must be guilty of a wrongful act or omission; and He must be
acting in the ordinary course of business, or with the authority of his co-part
ners even if the act is unconnected with the business
Criminal liability of the partnership partnership liability under Art. 1822 does
not extend to criminal liability, such as embezzlement, where the wrongdoing is
regarded as individual in character. But where a crime is statutory, especially
where it involves a fine rather than imprisonment, even criminal liability may
be imposed Art. 1825. When a person, by words spoken or written or by conduct, r
epresents himself, or consents to another representing him to anyone, as a partn
er in an existing partnership or with one or more persons not actual partners, h
e is liable to any such persons to whom such representation has been made, who h
as, on the faith of such representation, given credit to the actual or apparent
partnership, and if he has made such representation or consented to its being ma
de in a public manner he is liable to such person, whether the representation ha
s or has not been made or communicated to such person so giving credit by or wit
h the knowledge of the apparent partner making the representation or consenting
to its being made: (1) When a partnership liability results, he is liable as tho
ugh he were an actual member of the partnership; (2) When no partnership liabili
ty results, he is liable pro rata with the other persons, if any, so consenting
to the contract or representation as to incur liability, otherwise separately. W
hen a person has been thus represented to be a partner in an existing partnershi
p, or with one or more persons not actual partners, he is an agent of the person
s consenting to such representation to bind them to the same extent and in the s
ame manner as though he

Reason for imposition of wider liability

The reason for the laws imposition of wi
der liability on the partnership with respect to torts and breach of trust is ba
sed on public policy The rule of Respondeat Superior (also called the rule of vi
carious liability) applies to the law of partnership in the same manner as other
rules governing the agency relationship The obligation is solidary because the
law protects him who, in good faith, relied upon the authority is real or appare
nt. This is the reason why under Art. 1824 all partners, whether innocent or gui
lty,

C c,) L L E E N
30

Notes on De Leon
Partnership
When liability pro-rata when there is no existing partnership and all those repr
esented as partners consented to the representation or not all of the partners o
f an existing partnership consented to the representation, then the liability of
the person who represented himself to be a partner or who consented to his bein
g represented as partner, and all those who made and consented to such represent
ation, is joint or pro rata liable When liability separate
When there is no exis
ting partnership and not all but only some of those represented as partners cons
ented to the representation, or none of the partners in an existing partnership
consented to such representation, then the liability will be separate o That of
the person who represented himself as a partner or who consented to his being re
presented as partner, and those who made and consented to the representation, or
that only of the person who represented himself as partner
were a partner in fact, with respect to persons who rely upon the representation
. When all the members of the existing partnership consent to the representation
, a partnership act or obligation results; but in all other cases it is the join
t act or obligation of the person acting and the persons consenting to the repre
sentation. Meaning and effect of estoppel
Estoppel is a bar which precludes a pe
rson from denying or asserting anything contrary to that which has been establis
hed as the truth by his own deed or misrepresentation, either express or implied
Through estoppel, an admission or representation is rendered conclusive upon th
e person making it and cannot be denied or disapproved as against the person rel
ying thereon

When a person a partner by estoppel

Persons who are not partners as to each othe
r are not partners as to third persons (Art. 1709[1]) No one can be held liable
nor claim rights as a partner unless he has given his consent to become such. An
exception to this rule is provided by Art. 1825. due to the doctrine of estoppe
l, one may become liable as a partner even though he is not a partner in fact A
person not a partner may become a partner by estoppel and thus be held liable to
third persons as if he were a partner, when by words or by conduct he: o Direct
ly represents to anyone as a partner in an existing partnership or in a nonexist
ing partnership (with one or more persons not actually partners); or o Indirectl
y represents himself by consenting to another representing him as a partner in a
n existing partnership or in a non-existing partnership In other words, the hold
ing out as partner may be done by the person himself, or by his consent or with
his knowledge. To hold the party liable, the third person must prove such misrep
resentation and that a bona fide reliance by him upon it cause him injury

Estoppel does not create partnership it must be emphasized that Art. 1825 does n
ot create a partnership as between alleged partners. A contract, express or impl
ied, is essential to the formation of a partnership. The law considered them as
partners and the association as a partnership only insofar as it is favourable t
o third persons by reason of the equitable principle of estoppel Liability as pa
rtners may arise contrary to their intentions
The liability as a partner of a pe
rson who holds himself out as a partner, or permits another to do so, is predica
ted on the doctrine of estoppel and on the policy of the law seeking to prevent
frauds upon those who lend their money on the apparent credit of those who are h
eld out as partners o One who has received profits from an apparent partnership
transaction is estopped from denying the relationship on the ground that the par
tnership agreement was void. The question of liability is not what the parties i
ntended by their contract but whether third persons had a right to rely on their
joint credit

When partnership liability results if all the actual partners consented to the r
epresentation, then the liability of the person who represented himself to be a
partner or who consented to such representation and the actual partners is consi
dered partnership liability. This is a case of partnership by estoppel (par. 1[1
]). The person becomes an agent of the partnership and his act or obligation tha
t of the partnership (par. 1[2])
Application of estoppel as between partners the doctrine of estoppel has no appl
ication as between actual partners. Partners become such by agreement and not es
toppel
C c,) L L E E N
31

Notes on De Leon Application of estoppel as to third parties

Partnership
Extends to his separate property for subsequent obligations
those who were alrea
dy partners at the time when the obligations were incurred are liable with their
separate property (Art. 1816). For all the obligations accruing subsequent to t
he admission of the new partner, all the partners are liable with their separate
properties o existing and subsequent creditors have equal rights as against par
tnership property and separate property of previously existing members of the pa
rtnership. As to newly admitted partners, only subsequent creditors have rights
against their separate property Art. 1826 should be read in conjunction with Art
. 1840 which provides liability of persons continuing the business in certain ca
ses. Both sections are based on the principle that where there has been one cont
inuous business the fact that a new partner has been admitted or a partner has c
eased to be connected with it, should not cause confusion as to the claims of th
e creditors on the property employed in the business Also when an incoming partn
er has assumed the obligation of the retiring partner as one of the terms of the
contract, he is liable directly to the old partnership creditors such that the
latter have a right of action against the incoming partner

A person or persons is or are held to be liable as partners because of their rep

resenting themselves to be such, or by allowing others with their consent and kn
owledge, to do so hold them out to be partners. The law will not permit a denial
of such representation where third parties have in the exercise of reasonable d
iligence relied thereon to their detriment However, no one can be charged as a p
artner where the acts relied on for that purpose are neither his own acts, not a
cts of others authorized by or known to him
Elements to establish liability as a partner on ground of estoppel 1. proof by p
laintiff that he was individually aware of the defendants representations as to h
is being a partner or that such representations were made by others and not deni
ed or refuted by the defendant; reliance on such representations by the plaintif
f; and lack of any denial or refutation of the statements by the defendant. Such
denial need not precede plaintiffs acting thereon if the denial was forthcoming
promptly upon hearing of the representations, and if, by prudence and diligence
the plaintiff might have learned of the truth or untruth of the representations

2. 3.

Reason for the rule

The rule making an incoming partner liable even for partners
hip obligations contracted before his admission cannot be considered harsh becau
se the new partner partakes of the benefits of the partnership property and an e
stablished business
Under the Corporation Code, the law makes liable as general partners all persons
who assume to act as a corporation. A de facto partnership among them is created
Art. 1826. A person admitted as a partner into an existing partnership is liable
for all the obligations of the partnership arising before his admission as thou
gh he had been a partner when such obligations were incurred, except that this l
iability shall be satisfied only out of partnership property, unless there is a
stipulation to the contrary. Liability of incoming partners for partnership obli
gations:
Art. 1827. The creditors of the partnership shall be preferred to those of each

partner as regards the partnership property. Without prejudice to this right, th

e private creditors of each partner may ask the attachment and public sale of th
e share of the latter in the partnership assets. Preference of partnership credi
tors in partnership property
Limited to his share in partnership property for existing obligations
when a per
son is admitted as a partner into an existing partnership, he is liable for all
obligations existing at the time of his admission as though he was already a par
tner when such obligations were incurred. For such obligations, his liability is
limited to his share in the partnership property, unless there is a stipulation
to the contrary

With respect to partnership assets, the partnership creditors are entitled to pr

iority of payment The partnership should apply its property to the payment of it
s debts in preference to the claim of any partner or his creditors The rule appl
ies only in the event of the disposition of partnership property among its credi
tors to pay partnership debts
C c,) L L E E N
32

Notes on De Leon
Partnership
o Termination all partnership are completely wound up and finally settled. It si
gnifies the end of the partnership life
Both the partnership and the separate partners thereof may be joined in the same
action
Remedy of private creditors of a partner
The creditors of each partner may ask f
or the attachment and public sale of the share of the latter in the partnership
assets The purchaser at the public sale does not become a partner Art. 1829. On
dissolution the partnership is not terminated, but continues until the winding u
p of partnership affairs is completed. Effects of dissolution:
Partnership not t
erminated dissolution does not automatically result in the termination of the le
gal personality of the partnership, nor the relations of the partners among them
selves who remain as copartners until the partnership is terminated Partnership
continues for a limited purpose a partnership is considered as maintaining a lim
ited existence for the purpose of making good all outstanding engagements, of ta
king and settling all accounts, and collecting all the property, means and asset
s of the partnership existing at the time of dissolution for the benefit of all
interested Transaction of new business prohibited no new partnership business sh
ould be undertaken, but affairs should be liquidated and distribution made to th
ose entitled to the partners interest
CHAPTER 3 DISSOLUTION AND WINDING UP Art. 1828. The dissolution of a partnership
is the change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on as distinguished from the winding up of the bus
iness. Effects of change in membership of a partnership
Dissolution of existing
partnership and formation of a new one any change in the membership of a partner
ship produces, technically, an immediate dissolution of the existing partnership
relation and the formation of a new one, although common business usage speaks
of the admission of a partner to a firm and regards the firm as subsisting so lo
ng as the course of its business is not materially interrupted Transformation of
all partners into incoming partners all persons forming the new partnership upo
n the admission of the new person into the business are incoming partners even tho
ugh the same business had been conducted by the others through the medium of the
partnership Continuance by remaining partners of partnership as before the chan
ge in the relation of the partners will dissolve the partnership but will not di
sturb the continuance by the remaining partners or by the existing and new partn
ers of the business as before
Dissolution refers to the change in partnership relation and not the actual cess
ation of the partnership business Dissolution must be distinguished from a mere
suspension in the conduct of its business or operations Art. 1830. Dissolution i
s caused: (1) Without violation of the agreement between the partners: (a) By th
e termination of the definite term or particular undertaking specified in the ag
reement; (b) By the express will of any partner, who must act in good faith, whe
n no definite term or particular is specified; (c) By the express will of all th
e partners who have not assigned their interests or suffered them to be charged
for their separate debts, either before or after the termination of any specifie
d term or particular undertaking; (d) By the expulsion of any partner from the b
usiness bona fide in accordance with such a power conferred by the agreement bet
ween the partners;

Dissolution, winding up and termination

When a partnership ends, it involves 3 s

tages o Dissolution that point in time when the partners cease to carry on the b
usiness together. It represents the demise of a partnership o Winding up process
of settling the business or partnership affairs after dissolution
C c,) L L E E N
33

Notes on De Leon
Partnership
The statutory enumeration of the causes of dissolution precludes dissolution for
any other causes Effect of sale or assignment by one partner of his entire inte
rest in the partnership to a third person o The dissolution created in such case
is only technical, and not actual, only in the sense that his connection with t
he partnership is terminated
(2) In contravention of the agreement between the partners, where the circumstan
ces do not permit a dissolution under any other provision of this article, by th
e express will of any partner at any time; (3) By any event which makes it unlaw
ful for the business of the partnership to be carried on or for the members to c
arry it on in partnership; (4) When a specific thing which a partner had promise
d to contribute to the partnership, perishes before the delivery; in any case by
the loss of the thing, when the partner who contributed it having reserved the
ownership thereof, has only transferred to the partnership the use or enjoyment
of the same; but the partnership shall not be dissolved by the loss of the thing
when it occurs after the partnership has acquired the ownership thereof; (5) By
the death of any partner; (6) By the insolvency of any partner or of the partne
rship; (7) By the civil interdiction of any partner; (8) By decree of court unde
r the following article. Causes of dissolution
Statutory enumeration exclusive o
Art. 1830, 1831, and 1840 provide for causes of dissolution o Under Art. 1830,
extrajudicial dissolution may be caused without violation of the agreement betwe
en the parties (no. 1) or in contravention of said agreement (no. 2). It may be
voluntary when caused by the will of one or more or all of the parties (nos. 1 a
nd 2) or involuntary when brought about independently of the will of the partner
s or by operation of law (nos. 3-8)
Voluntary dissolution may be o Extrajudicial
(nos. 1-7); or o Judicial (no. 8 in relation to Art. 1831) o The causes provide
d for in Art. 1830 result in the automatic dissolution of the partnership
In Art
. 1840, automatic dissolution takes place when a new partner is admitted or when
a partner retires, withdraws, or is expelled from the partnership There is no a
utomatic dissolution under Art. 1831. Art. 1831 enumerates the grounds for the j
udicial dissolution of the partnership

Dissolution effected without violation of partnership agreement: Four ways by wh

ich a partnership may be dissolved without violation of the partnership agreemen
t: 1. termination of the definite term or particular undertaking
after the expir
ation of the term or particular undertaking, the partnership is automatically di
ssolved without the partners extending the said term or continuing the undertaki
ng. If after said expiration the partners continue the partnership without makin
g a new agreement, the firm becomes a partnership at will by the express will of
any partner a partnership at will may be dissolved at any time by any partner w
ithout the consent of his co-partners without breach of contract, provided, the
said partner acts in good faith. If there is bad faith, the dissolution is wrong
ful good faith will absolve the partner exercising the right to dissolve the par
tnership from liability for damages which result to his co-partners by reason of
his action
for as long as the reason for withdrawal of a partner is not contrar
y to the dictates of justice and fairness, nor for the purpose of unduly causing
harm and damage upon the partnership, bad faith cannot be said to characterized
the act while bad faith cannot prevent the dissolution of a partnership, it can
result in liability for damages by the express will of all partner
may be accom
plished either by an express agreement or by words and acts implying an intentio
n to dissolve must be unanimous
the consent of the partners who have assigned th
eir interests or suffered them to be charged for their separate debts is not req
uired to effect dissolution without
2.

3.
C c,) L L E E N
34

Notes on De Leon
Partnership
dissolves the partnership because in either case, the partner cannot fulfil his
undertaking o the partner bears the loss Death of any partner because of the par
tners death, there is dissolution o the partnership by operation of law
status of
partnership the subsequent legal status is that of a partnership in liquidation
, and the only rights inherited by the heirs are those resulting from the said l
iquidation liquidation of its affairs entrusted to the surviving partners or to
liquidators appointed by them
continuation of business without liquidation a cla
use in the article of co-partnership providing for the continuation of the firm
notwithstanding the death of one of the partners is legal Under the rules of the
SEC, the heirs of a deceased partner may be admitted as partners when so author
ized by the articles of partnership To reflect the substitution, the articles mu
st be amended Insolvency of any partner or of the partnership
must be adjudged b
y a court insolvency of partner the insolvency of a partner subjects his interes
t in the partnership to the right of his creditors. Art. 1816 is also violated.
Thus, by his insolvency, the partnerships credit is impaired
insolvency of partne
rship such renders the partnerships property in the hands of the partners liable
for the satisfaction of partnership obligations resulting in their inability to
continue the business, which practically amounts to dissolution o reconveyance b
y the assignee of the properties of the partnership after the termination of ins
olvency proceedings has the effect of restoring the partnership to its status qu
o Civil interdiction of any partner civil interdiction deprives the offender dur
ing the time of his sentence of the right to manage his property and dispose of
such property one who is without capacity to manage his own property should not
be allowed to manage partnership property Right to expel a partner in the absenc
e of an express agreement to that effect, there exists NO right or power of any
member, or even the majority of the members, to expel all other members of the f
irm at will. Nor can they at will forfeit the share or interest of a member or m
embers and compel him/ her to quit
breach of the partnership agreement. They are not given the right to have a voic
e or vote in the dissolution of the partnership 4. by expulsion of any partner m
ust be made in good faith, and strictly in accordance with the power conferred b
y the agreement between the partners the partner expelled in bad faith can claim
damages
Dissolution effected in contravention of partnership agreement
dissolution may b
e for any cause or reason o any partner may cause the dissolution at any time wi
thout the consent of his copartners for any reason which he deems sufficient by
expressly withdrawing therefrom even though the partnership was entered into for
a definite term or particular undertaking. Such dissolution is a contravention
of the agreement a partner guilty of wrongful dissolution is not given the right
to wind up partnership affairs
power of dissolution always exists o the right o
f a partner to dissolve is inseparably incident to every partnership and there c
an be no indissoluble partnership delectus personae allows the partners to have
the power, although not necessarily the right to dissolve the partnership
an unj
ustified dissolution by a partner can subject him to a possible action for damag
es Business becomes unlawful dissolution may be caused involuntarily when a supe
rvening event makes the business itself of the partnership unlawful of makes it
unlawful for the partners to carry it on together Loss of specific thing
loss be
fore delivery the partnership is dissolved because there is no contribution inas
much as the thing to be contributed cannot be substituted with another loss afte
r delivery the partnership assumes the mist of the thing having acquired ownersh
ip thereof. The partners may contribute additional capital to save the venture
l
oss where only use or enjoyment contributed if only the use or enjoyment of the
thing is contributed, its loss before or after delivery,
C c,) L L E E N

35

Notes on De Leon
Partnership
On application by a partner
insanity o an insane person is incapacitated to ente
r into a contract. The insanity must materially affect the capacity of the partn
er to perform his contractual duties as a partner
incapacity o courts have the p
ower to decree dissolution of the partnership because of incapacity of a partner
which materially affects his ability to discharge the duties imposed by his par
tnership contract o the incapacity must be lasting from which the prospect of re
covery is remote since every partnership must be presumed to be entered into, su
bject to the common incidents of life such as temporary illness, infirmity or in
sanity misconduct and persistent breach of partnership agreement o such acts def
eat and materially affect and obstruct the purpose of the partnership o where th
e quarrels and disagreements are of such a nature and to such extent that all co
nfidence and cooperation between the parties have been destroyed, or where one o
f the parties, by his misbehaviour, materially hinders a proper conduct of the p
artnership business
business can be carried on only at a loss o the partnership
may be dissolved by decree of court when it becomes apparent that it is unprofit
able with no reasonable prospects of success o where a partnership has lost all
its capital, or had become insolvent, or that the enterprise for which it had be
en organized had been concluded or utterly abandoned, a provision in the article
s of partnership prohibiting the dissolution of the partnership except by the co
nsent and agreement of 2/3 of its partners, can in no wise limit or restrict the
right of a less number of the partners to affect the dissolution through judici
al intervention or otherwise other circumstances o examples are abandonment of t
he business, fraud in the management of the business, refusal without justifiabl
e cause to render accounting of partnership affairs, etc. On application by a pu
rchaser of a partners interest

partner guilty of extreme and gross faults there may be extreme and gross faults
which would work a forfeiture, especially where there was an extreme emergency
for a partner to perform his duty, and to be prompt and faithful industrial part
ners, engaging in business for himself Art. 1789 applies power expressly given b
y agreement power is not validly exercised if it is shown to have been exercised
unfairly and without regard to the general interest of the partnership
Art. 1831. On application by or for a partner the court shall decree a dissoluti
on whenever: (1) A partner has been declared insane in any judicial proceeding o
r is shown to be of unsound mind; (2) A partner becomes in any other way incapab
le of performing his part of the partnership contract; (3) A partner has been gu
ilty of such conduct as tends to affect prejudicially the carrying on of the bus
iness; (4) A partner wilfully or persistently commits a breach of the partnershi
p agreement, or otherwise so conducts himself in matters relating to the partner
ship business that it is not reasonably practicable to carry on the business in
partnership with him; (5) The business of the partnership can only be carried on
at a loss; (6) Other circumstances render a dissolution equitable. On the appli
cation of the purchaser of a partner's interest under Article 1813 or 1814: (1)
After the termination of the specified term or particular undertaking; (2) At an
y time if the partnership was a partnership at will when the interest was assign
ed or when the charging order was issued. Grounds for dissolution by decree of c
ourt Dissolution of a partnership may be decreed judicially on application eithe
r:
by a partner in the cases mentioned in par (1) nos. 1-5; or
by the purchaser
or assignee of a partners interest under par. (2) nos. 1 and 2
C c,) L L E E N
36

Notes on De Leon
Partnership
Liability and authority of a partner as to co-partners: Liability of partners
ri
ght to contribution o the article refers to dissolution caused by AID o the new
contract entered by the acting partner after dissolution generally will bind the
partner after dissolution generally will bind the partners. Hence, each partner
is liable for his share of any liability created by the acting partner as if th
e partnership has not been dissolved Partners authority to act for the partnershi
p general rule o the authority of a partner as it affects the partnership is not
deemed terminated by dissolution
exceptions o when the acting partner has knowl
edge of the dissolution of the partnership brought by the act of the partner, pa
rtners authority ceases. This is to protect the remaining partners who have no kn
owledge of the dissolution o also, the partners authority ceases when he has know
ledge of the death or insolvency of a partner. This rule discards the fiction th
at everybody is presumed to have knowledge of the death or insolvency of a partn
er Art. 1834. After dissolution, a partner can bind the partnership, except as p
rovided in the third paragraph of this article: (1) By any act appropriate for w
inding up partnership affairs or completing transactions unfinished at dissoluti
on; (2) By any transaction which would bind the partnership if dissolution had n
ot taken place, provided the other party to the transaction: (a) Had extended cr
edit to the partnership prior to dissolution and had no knowledge or notice of t
he dissolution; or (b) Though he had not so extended credit, had nevertheless kn
own of the partnership prior to dissolution, and, having no knowledge or notice
of dissolution, the fact of dissolution had not been advertised in a newspaper o
f general circulation in the place (or in each place if more than one) at which
the partnership business was regularly carried on.
Art. 1832. Except so far as may be necessary to wind up partnership affairs or t
o complete transactions begun but not then finished, dissolution terminates all
authority of any partner to act for the partnership: (1) With respect to the par
tners: (a) When the dissolution is not by the act, insolvency or death of a part
ner; or (b) When the dissolution is by such act, insolvency or death of a partne
r, in cases where article 1833 so requires; (2) With respect to persons not part
ners, as declared in article 1834. Effect of dissolution on partners authority: S
cope of partners authority general rule o every partner is considered as the agen
t of the partnership with authority to bind the partnership and the partners o h
owever, the dissolution terminates the actual authority of the partners to under
take new businesses except only as regards to those acts incident to the liquida
tion or completion of unfinished transactions
exceptions o as regards co-partner
s: the authority of a partner to bind the co-partners immediately ceases when th
e dissolution is NOT caused by the Act, Insolvency or Death (AID) of a partner.
Otherwise, when the cause of dissolution is by AID, termination of authority dep
ends on whether the acting partner has knowledge of the dissolution o as regard
3rd persons: the partners authority continues with respect to the contracts enter
ed by the acting partner Art. 1833. Where the dissolution is caused by the act,
death or insolvency of a partner, each partner is liable to his co-partners for
his share of any liability created by any partner acting for the partnership as
if the partnership had not been dissolved unless: (1) The dissolution being by a
ct of any partner, the partner acting for the partnership had knowledge of the d
issolution; or (2) The dissolution being by the death or insolvency of a partner
, the partner acting for the partnership had knowledge or notice of the death or
insolvency.
C c,) L L E E N
37

Notes on De Leon
Partnership
Effect of notice to 3rd persons
3rd persons have no notice o The authority of a
partner to bind the partnership with 3rd persons apparently continues for the pr
otection of innocent 3rd persons rd
3 persons have notice o Notice may either be
actual or constructive o The partnership liability to 3rd persons is limited on
ly to transactions which are necessary to liquidate the partnership
Specific eff
ects of notice to 3rd persons o As regard persons who extend credit to the partn
ership prior to dissolution, the creditor must have notice of the dissolution to
relieve the partnership from liability o As to persons who did not extend credi
t but has notice of dissolution, constructive notice is enough to relieve the pa
rtnership from liability o Notice of dissolution is unnecessary except where the
partner has no authority to liquidate the partnership affairs. 3rd persons deal
ing with such partner is protected under this article o Distinction must be made
between a partner who has no notice of the other partners insolvency to bind the
partnership and right of third persons to claim the validity of contracts. The
first is granted by law but the innocent 3rd party is not given similar protecti
on. The rationale is that the 3rd person must know the status of the insolvent p
artner o In case of death, no distinction is made. Death is not considered to be
notice whether to surviving spouse or as to third persons Character of notice o
As to prior dealers: notice must be actual o A prior dealer is one who has exte
nded credit on the faith of the partnership, through confidence in the solvency
and probity of the firm o As to all others: notice may be constructive (e.g. pub
lication in local newspaper) Dormant partners o The liability of a dormant partn
er as regard contracts entered during the dissolution shall be limited only to h
is share in the partnership assets o Notice of dormant partners withdrawal need n
ot be given to 3rd persons since he was never known or held out as a partner.
The liability of a partner under the first paragraph, No. 2, shall be satisfied
out of partnership assets alone when such partner had been prior to dissolution:
(1) Unknown as a partner to the person with whom the contract is made; and (2)
So far unknown and inactive in partnership affairs that the business reputation
of the partnership could not be said to have been in any degree due to his conne
ction with it. The partnership is in no case bound by any act of a partner after
dissolution: (1) Where the partnership is dissolved because it is unlawful to c
arry on the business, unless the act is appropriate for winding up partnership a
ffairs; or (2) Where the partner has become insolvent; or (3) Where the partner
has no authority to wind up partnership affairs; except by a transaction with on
e who: (a) Had extended credit to the partnership prior to dissolution and had n
o knowledge or notice of his want of authority; or (b) Had not extended credit t
o the partnership prior to dissolution, and, having no knowledge or notice of hi
s want of authority, the fact of his want of authority has not been advertised i
n the manner provided for advertising the fact of dissolution in the first parag
raph, No. 2 (b). Nothing in this article shall affect the liability under Articl
e 1825 of any person who, after dissolution, represents himself or consents to a
nother representing him as a partner in a partnership engaged in carrying busine
ss. Authority to bind the partnership with 3rd persons and notice requirements:
Scope of Art. 1834:
Art. 1834 covers the following cases: o Instances when a par
tner continues to bind the partnership even after dissolution (par. 1 nos. 1 and
2) o Instances when he cannot bind the partnership after dissolution (par. 3 no
s. 1, 2, and 3)
C c,) L L E E N
38

Notes on De Leon
Partnership
Raise money to pay off debts Incur obligations to complete existing contracts or
preserve the partnership assets Incur expenses necessary in the conduct of liti
gation
Hence, the principle of estoppel cannot apply to hold the dormant partner liable
Art. 1835. The dissolution of the partnership does not of itself discharge the
existing liability of any partner. A partner is discharged from any existing lia
bility upon dissolution of the partnership by an agreement to that effect betwee
n himself, the partnership creditor and the person or partnership continuing the
business; and such agreement may be inferred from the course of dealing between
the creditor having knowledge of the dissolution and the person or partnership
continuing the business. The individual property of a deceased partner shall be
liable for all obligations of the partnership incurred while he was a partner, b
ut subject to the prior payment of his separate debts. Discharge of partners liab
ility
The dissolution does not itself discharge the existing liability of the pa
rtners unless there is consent from the creditor Art. 1836. Unless otherwise agr
eed, the partners who have not wrongfully dissolved the partnership or the legal
representative of the last surviving partner, not insolvent, has the right to w
ind up the partnership affairs, provided, however, that any partner, his legal r
epresentative or his assignee, upon cause shown, may obtain winding up by the co
urt. Liquidating or winding up: Manner of liquidation
Judicial the court has con
trol and direction of liquidation Extrajudicial the liquidation is done by the p
artners without the intervention of the court Nature of action An action for the
liquidation is a personal action Persons authorized to liquidate
The partner de
signated by agreement In the absence of agreement, all partners who have not wro
ngfully dissolved the partnership
The legal representative of the last surviving
spouse when all the partners are already dead o The duty of liquidating its aff
airs devolves upon the surviving member or his legal representative Powers of li
quidating partner Enter into new contracts as regard liquidation affairs
Art. 1837. When dissolution is caused in any way, except in contravention of the
partnership agreement, each partner, as against his co-partners and all persons
claiming through them in respect of their interests in the partnership, unless
otherwise agreed, may have the partnership property applied to discharge its lia
bilities, and the surplus applied to pay in cash the net amount owing to the res
pective partners. But if dissolution is caused by expulsion of a partner, bona f
ide under the partnership agreement and if the expelled partner is discharged fr
om all partnership liabilities, either by payment or agreement under the second
paragraph of Article 1835, he shall receive in cash only the net amount due him
from the partnership. When dissolution is caused in contravention of the partner
ship agreement the rights of the partners shall be as follows: (1) Each partner
who has not caused dissolution wrongfully shall have: (a) All the rights specifi
ed in the first paragraph of this article, and (b) The right, as against each pa
rtner who has caused the dissolution wrongfully, to damages breach of the agreem
ent. (2) The partners who have not caused the dissolution wrongfully, if they al
l desire to continue the business in the same name either by themselves or joint
ly with others, may do so, during the agreed term for the partnership and for th
at purpose may possess the partnership property, provided they secure the paymen
t by bond approved by the court, or pay any partner who has caused the dissoluti
on wrongfully, the value of his interest in the partnership at the dissolution,
less any damages recoverable under the second paragraph, No. 1 (b) of this artic
le, and in like manner indemnify him against all present or future partnership l
iabilities. (3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the second paragrap
h, No. 2, all the rights of a partner under the first paragraph, subject to liab
ility for damages in the second paragraph, No. 1 (b), of this article.

C c,) L L E E N
39

Notes on De Leon
Partnership
1. Right of the partner who has not caused the dissolution wrongfully
To have th
e partnership applied for the payment of its liabilities and to receive in cash
his share of the surplus To be indemnified for damages caused by the partner gui
lty of the wrongful dissolution
To continue the business in the same name during
the agreed term of the partnership, by themselves or jointly with others
To pos
sess partnership property should they decide to continue the business Right of t
he partner who wrongfully caused the dissolution of the partnership If the busin
ess is not continued by the other partners, to have the partnership property app
lied to discharge its liabilities and to receive in cash his share of the surplu
s less damages caused by his wrongful dissolution If the business is continued:
To have the value of his interest in the partnership at the time of the dissolut
ion ascertained and paid in cash or secured by bond approved by court To be rele
ased from all existing or future liabilities of the partnership
(b) If the business is continued under the second paragraph, No. 2, of this arti
cle, the right as against his copartners and all claiming through them in respec
t of their interests in the partnership, to have the value of his interest in th
e partnership, less any damage caused to his co-partners by the dissolution, asc
ertained and paid to him in cash, or the payment secured by a bond approved by t
he court, and to be released from all existing liabilities of the partnership; b
ut in ascertaining the value of the partner's interest the value of the good-wil
l of the business shall not be considered. Right of partner to application of pr
operty on dissolution The right of the partners to have the partnership property
applied to discharge partnership liabilities and the surplus if any, depends on
whether the dissolution is caused: o Without violation of the partnership agree
ment o In violation of the partnership agreement Rights where dissolution not in
contravention of agreement
Unless otherwise agreed, the rights of each partner
in case of dissolution without violation of partnership agreement are as follows
: o To Whom It May Concern: have the partnership property applied to discharge t
he liabilities of the partnership o To have the surplus, if any, applied to pay
in case the net amount owing to the respective partners When the dissolution is
caused by expulsion of a partner bona fide, such expelled partner may be dischar
ged from all partnership liabilities either by payment or by agreement between h
im, the partnership creditors, and the other partners - He shall have the right
only to receive in cash the next amount due him from the partnership If the diss
olution is proper, no partner is liable for any loss sustained as a result of th
e dissolution Rights where dissolution in contravention with agreement - When th
e partnership is dissolved in violation of the partnership agreement, the rights
of the partner vary depending upon whether he is the innocent or the guilty par
tner
2.
Note:
Innocent partners have more rights than guilty partners Guilty partners are made
liable for damages caused by their wrongful dissolution In ascertaining the val
ue of the interest, the value of the goodwill of the business is not considered
If the innocent partner decides to buy the guilty partners interest, they may con
tinue the partnership business under the same firm name The guilty partner is en
titled to the appraised value of the business less the damages recoverable by th
e innocent partners
Art. 1838. Where a partnership contract is rescinded on the ground of the fraud
or misrepresentation of one of the parties thereto, the party entitled to rescin
d is, without prejudice to any other right, entitled: (1) To a lien on, or right
of retention of, the surplus of the partnership property after satisfying the p

artnership liabilities to third persons for any sum of money paid by him for the
purchase of an interest in the partnership and for any capital or advances cont
ributed by him; (2) To stand, after all liabilities to third persons have been s
atisfied, in the place of the creditors of the partnership for any payments made
by
C c,) L L E E N
40

Notes on De Leon
Partnership
the right to enforce the contributions specified in the preceding number. (6) An
y partner or his legal representative shall have the right to enforce the contri
butions specified in No. 4, to the extent of the amount which he has paid in exc
ess of his share of the liability. (7) The individual property of a deceased par
tner shall be liable for the contributions specified in No. 4. (8) When partners
hip property and the individual properties of the partners are in possession of
a court for distribution, partnership creditors shall have priority on partnersh
ip property and separate creditors on individual property, saving the rights of
lien or secured creditors. (9) Where a partner has become insolvent or his estat
e is insolvent, the claims against his separate property shall rank in the follo
wing order: (a) Those owing to separate creditors; (b) Those owing to partnershi
p creditors; (c) Those owing to partners by way of contribution. Liquidation and
distribution of assets of dissolved partnership
The process of winding up consi
sts of reducing the property to cash and distributing the proceeds
The property
must be liquidated and distributed to those entitled thereto Partners severally
have the implied authority to sell partnership property and collect obligations
due to the partnership These powers may be delegated to one or more of their num
bers as liquidating partner or partners Rules in settling accounts between partn
ers after dissolution
The following rules are subject to variation by agreement
of the partners either in their original partnership agreement or in a dissoluti
on agreement: 1. assets of the partnership partnership property
contribution of
all liabilities in accordance with Art. 1797 order of application of assets
the
partnership assets shall be applied to the satisfaction of the liabilities of th
e partnership in the following order first, those owing to the partnership credi
tors
him in respect of the partnership liabilities; and (3) To be indemnified by the
person guilty of the fraud or making the representation against all debts and li
abilities of the partnership. Rights of a partner to rescind contract of partner
ship If one is induced by fraud or misrepresentation to become a partner, the co
ntract is voidable or annullable
If the contract is annulled, the injured partne
r is entitled to restitution Right of the injured partner where partnership cont
ract is rescinded
This article speaks of the rights of the injured partner where
the partnership contract is rescinded on the ground of fraud or misrepresentati
on The rights are as follows o Right on a lien on or retention of the surplus of
the partnership property after satisfying partnership liabilities for any sum o
f money paid or contributed by him o Right to subrogation in place of partnershi
p creditors after payment of partnership liabilities o Right to indemnification
by the guilty partner against all debts and liabilities of the partnership Art.
1839. In settling accounts between the partners after dissolution, the following
rules shall be observed, subject to any agreement to the contrary: (1) The asse
ts of the partnership are: (a) The partnership property, (b) The contributions o
f the partners necessary for the payment of all the liabilities specified in No.
2. (2) The liabilities of the partnership shall rank in order of payment, as fo
llows: (a) Those owing to creditors other than partners, (b) Those owing to part
ners other than for capital and profits, (c) Those owing to partners in respect
of capital, (d) Those owing to partners in respect of profits. (3) The assets sh
all be applied in the order of their declaration in No. 1 of this article to the
satisfaction of the liabilities. (4) The partners shall contribute, as provided
by article 1797, the amount necessary to satisfy the liabilities. (5) An assign
ee for the benefit of creditors or any person appointed by the court shall have
2.
C c,) L L E E N
41

Notes on De Leon
Partnership
to those owing to partners by way of contribution
3.
4.
5.
6.
second, those owing to partners other than for capital and profits such as loan
given by the partners or advances for business expenses
third, those owing for t
he return of the capital contributed by the partners fourth, the share of the pr
ofits due to each partner (if any) right of a partner where the assets are insuf
ficient
if the assets enumerated in no. 1 are insufficient, the deficit is a cap
ital loss which requires contribution like any other loss
any partner, legal rep
resentative shall have the right to enforce the contributions of the partners pr
ovided in Art. 1797 if any of the partner does not pay the share of his loss, th
e remaining partners have to pay but they can sue the non-paying partner for ind
emnification liability of the deceased partners individual property the individua
l property of a deceased partner shall be liable for his share of the contributi
ons necessary to satisfy the liabilities of the partnership incurred while he wa
s a partner priority to payment of partnership creditors/ partners creditors
when
the partnership property and the individual partners properties are in the posse
ssion of the court for distribution partnership creditors shall first be paid fr
om partnership property and separate creditors from the individual properties of
the partners distribution of property of insolvent partner if the partner is in
solvent, his individual property shall be distributed as follows:
first, to thos
e owing to his separate creditors then to those owing to the partnership credito
rs
Art. 1840. In the following cases creditors of the dissolved partnership are als
o creditors of the person or partnership continuing the business: (1) When any n
ew partner is admitted into an existing partnership, or when any partner retires
and assigns (or the representative of the deceased partner assigns) his rights
in partnership property to two or more of the partners, or to one or more of the
partners and one or more third persons, if the business is continued without li
quidation of the partnership affairs; (2) When all but one partner retire and as
sign (or the representative of a deceased partner assigns) their rights in partn
ership property to the remaining partner, who continues the business without liq
uidation of partnership affairs, either alone or with others; (3) When any partn
er retires or dies and the business of the dissolved partnership is continued as
set forth in Nos. 1 and 2 of this article, with the consent of the retired part
ners or the representative of the deceased partner, but without any assignment o
f his right in partnership property; (4) When all the partners or their represen
tatives assign their rights in partnership property to one or more third persons
who promise to pay the debts and who continue the business of the dissolved par
tnership; (5) When any partner wrongfully causes a dissolution and the remaining
partners continue the business under the provisions of article 1837, second par
agraph, No. 2, either alone or with others, and without liquidation of the partn
ership affairs; (6) When a partner is expelled and the remaining partners contin
ue the business either alone or with others without liquidation of the partnersh
ip affairs. The liability of a third person becoming a partner in the partnershi
p continuing the business, under this article, to the creditors of the dissolved
partnership shall be satisfied out of the partnership property only, unless the
re is a stipulation to the contrary. When the business of a partnership after di
ssolution is continued under any conditions set forth in this article the credit

ors of the dissolved partnership, as against the separate creditors of the retir
ing or deceased partner or
C c,) L L E E N
42

Notes on De Leon
Partnership
right in the property of the dissolved partnership; provided that the creditors
of the dissolved partnership as against the separate creditors, or the represent
ative of the retired or deceased partner, shall have priority on any claim arisi
ng under this article, as provided Article 1840, third paragraph. Rights of reti
ring or of legal representative of deceased partner when business is continued
w
hen a partner retires or dies and the business is continued without settlement o
f accounts, the retiring partner or the legal representative of the deceased par
tner shall have the following rights: o to have the value of the interest of the
retiring partner or deceased partner in the partnership ascertained as to the d
ate of dissolution o to receive as an ordinary creditor the amount equal to the
value of his share in the dissolved partnership with interest, or at his option,
in lieu of the interest, the profits attributable to the use of his right if th
e surviving partners continue the business without the consent of the deceased p
artners estate, they do so without any risk to the estate if the estate consents
to the continuation of the business, he, in effect, becomes a new partner and wo
uld be answerable to all the debts and losses arising from the death of the dece
ased partner but only to the extent of the decedents share in the partnerships ass
ets
the representative of the deceased partner, have a prior right to any claim of t
he retired partner or the representative of the deceased partner against the per
son or partnership continuing the business, on account of the retired or decease
d partner's interest in the dissolved partnership or on account of any considera
tion promised for such interest or for his right in partnership property. Nothin
g in this article shall be held to modify any right of creditors to set aside an
y assignment on the ground of fraud. The use by the person or partnership contin
uing the business of the partnership name, or the name of a deceased partner as
part thereof, shall not of itself make the individual property of the deceased p
artner liable for any debts contracted by such person or partnership. Dissolutio
n of partnership by change in membership the change in the relation of the partn
ers results in the dissolution of the partnership
it may take place when a new p
artner is admitted, or when a partner retires or dies, when a partner withdraws
or is expelled from the partnership, or when partners assign their rights to thi
rd persons any change in membership dissolves the partnership and creates new pa
rtnership Right of creditors of dissolved partnership
this article deals with th
e rights of the creditors when the partnership is dissolved by a change of membe
rship and its business is continued by a former partner either alone or with a n
ew partner, without liquidation of the partnership affairs in such case, the law
makes the creditors of dissolved partnership, also the creditors of the person
or partnership continuing the business the purpose of the law is to maintain the
preferential rights of the old creditors to the partnership property as against
separate creditors o the partners Art. 1841. When any partner retires or dies,
and the business is continued under any of the conditions set forth in the prece
ding article, or in Article 1837, second paragraph, No. 2, without any settlemen
t of accounts as between him or his estate and the person or partnership continu
ing the business, unless otherwise agreed, he or his legal representative as aga
inst such person or partnership may have the value of his interest at the date o
f dissolution ascertained, and shall receive as an ordinary creditor an amount e
qual to the value of his interest in the dissolved partnership with interest, or
, at his option or at the option of his legal representative, in lieu of interes
t, the profits attributable to the use of his

Art. 1842. The right to an account of his interest shall accrue to any partner,
or his legal representative as against the winding up partners or the surviving
partners or the person or partnership continuing the business, at the date of di

ssolution, in the absence of any agreement to the contrary. Accrual to a partners

right to account of his interest
the right to account for the value of the part
ners interest accrues to any partner or his legal representative after dissolutio
n in the absence of an agreement to the contrary the right of a partner as owner
of an interest to an account and, in due liquidation, to a payment of the amoun
t of his interest, may be exercised as against: o the winding partner o the surv
iving partner o the person or partnership continuing the business

C c,) L L E E N
43

Notes on De Leon When liquidation is not required:

Partnership
the limited partner has the same type of liability as a stockholder in a corpora
tion there is no prohibition for a limited partner to engage in a business for h
imself in the absence of statutory restriction, a limited partner may carry on a
ny business which could be carried on by a general partnership Business reasons
and purposes of statutes authorizing formation of limited partnerships
to secure
capital from others for ones business and still retains control
to share in the
profits of a business without the risk of personal liability Differences between
a general and a limited partnership General Partnership
1. personally liable for partnership obligations 2. when the manner of managemen
t has not been agreed upon, all general partners have equal right in the managem
ent of the business whether or not the general partner has made any capital cont
ribution 3. may contribute money, property, industry to the partnership 4. a gen
eral partners interest to the partnership may not be assigned as to make the assi
gnee a new partner without the consent of the other partners although he may ass
ociate a third person with him in his share 5. the name of the general partner m
ay appear in the firm name 6. prohibited in engaging in business similar to that
of the partnership 7. retirement, death, insolvency of a general partner dissol
ves the partnership

as a general rule, when the partnership is dissolved, a partner or legal represe

ntative is entitled to payment of what may be due after liquidation no liquidati
on is necessary if there is already a settlement or an agreement of what he shal
l receive
CHAPTER 4 LIMITED PARTNERSHIP Art. 1843. A limited partnership is one formed by
two or more persons under the provisions of the following article, having as mem
bers one or more general partners and one or more limited partners. The limited
partners as such shall not be bound by the obligations of the partnership. Conce
pt of limited partnership
this article defines a limited partnership the correct
usage of the term confines it to the form of business association composed of o
ne or more general partners and one or more special partners, the latter not bei
ng personally liable for the partnership debts Characteristic of limited partner
ship a limited partnership is formed by compliance with the statutory requiremen
ts one or more general partners control the business and are personally liable t
o the creditors
one or more limited partners contribute to the capital and share
in the profits but do not participate in the management of the business and are
not personally liable for partnership obligations beyond their capital contribu
tions the limited partners may ask for the return of their capital contributions
under the conditions prescribed by law
the partnership debts are paid out of th
e common fund and the individual properties of the general partners limited part
nership is composed of 2 classes of partners: general and limited the liability
of the limited partner is limited to the amount of money he has put into the par
tnership it is an exception to the general rule that all partners including the
industrial partners are liable pro rata of all their property for partnership de
bts
Limited Partnership
1. liability extends only to his capital contribution 2. has no share in the man
agement of a limited partnership. His rights are limited to those enumerated in
Article 1851 3. must contribute cash or property to the partnership but not serv
ices 4. not a proper party to proceedings by or against a partnership unless he
is also a general partner or where the objects of the proceedings is to enforce
a limited partners right against or liability to the partnership 5. a limited par
tners interest is freely assignable 6. the limited partners name as a general rule
, must not appear in the firm name 7. can engage in business since he is conside

red merely as a contributor to the partnership 8. retirement, death, insolvency

of a limited partner does not dissolve the partnership
C c,) L L E E N
44

Notes on De Leon
Partnership
A limited partnership is formed if there has been substantial compliance in good
faith with the foregoing requirements. Limited partnership not created by mere
voluntary agreement
the creation of a limited partnership is a formal proceeding
and is not a mere voluntary agreement as in the case of a general partnership r
equirements given by statute must be followed so that public notice may be given
to all who desire to know the essential features of the partnership a limited p
artnership is formed if there is substantial compliance in good faith with the r
equirements set forth in the last paragraph of Art. 1844; otherwise, the partner
ship becomes a general partnership in which case all the members become liable a
s general partners Requirements for formation of a limited partnership a limited
partnership cannot be constituted orally
2 essential requirements for the forma
tion of a limited partnership o Certificate of articles of the limited partnersh
ip which states the matters enumerated in the articles must be signed and sworn
to o Such certificate must be filed on record in the office of the SEC The purpo
se of the of the filing of the certificate is to give an actual and constructive
notice to potential creditors and persons dealing with the partnership of the l
imited liability of the limited partners Presumption of a general partnership
A
partnership transacting business is a prima facie a general partnership Those wh
o seek protection accorded to by the law to limited partnerships must show due c
ompliance to the statutory requirements of Art. 1844 Art. 1845. The contribution
s of a limited partner may be cash or property, but not services. Limited partne
rs contribution Medium o a limited partner is not allowed to contribute services
o he can contribute only money or property; otherwise he shall be considered an
industrial AND general partner, in which case, he shall not be exempted from per
sonal liability o a partner may be general partner and a limited partner in the
same partnership at the same time provided that this fact shall
Art. 1844. Two or more persons desiring to form a limited partnership shall: (1)
Sign and swear to a certificate, which shall state (a) The name of the partners
hip, adding thereto the word "Limited"; (b) The character of the business; (c) T
he location of the principal place of business; (d) The name and place of reside
nce of each member, general and limited partners being respectively designated;
(e) The term for which the partnership is to exist; (f) The amount of cash and a
description of and the agreed value of the other property contributed by each l
imited partner; (g) The additional contributions, if any, to be made by each lim
ited partner and the times at which or events on the happening of which they sha
ll be made; (h) The time, if agreed upon, when the contribution of each limited
partner is to be returned; (i) The share of the profits or the other compensatio
n by way of income which each limited partner shall receive by reason of his con
tribution; (j) The right, if given, of a limited partner to substitute an assign
ee as contributor in his place, and the terms and conditions of the substitution
; (k) The right, if given, of the partners to admit additional limited partners;
(l) The right, if given, of one or more of the limited partners to priority ove
r other limited partners, as to contributions or as to compensation by way of in
come, and the nature of such priority; (m) The right, if given, of the remaining
general partner or partners to continue the business on the death, retirement,
civil interdiction, insanity or insolvency of a general partner; and (n) The rig
ht, if given, of a limited partner to demand and receive property other than cas
h in return for his contribution. (2) File for record the certificate in the Off
ice of the Securities and Exchange Commission.
C c,) L L E E N
45

Notes on De Leon
Partnership
Art. 1848. A limited partner shall not become liable as a general partner unless
, in addition to the exercise of his rights and powers as a limited partner, he
takes part in the control of the business. Liability of limited partner for part
icipating in management of partnership
Important: take part in the management
Ba
re grant of apparent control to a limited partner is not sufficient to make limi
ted partner liable as general partner control of business: active participation in
the management of the partnership business o Not mere giving of advice o Busine
ss carried on by a board of directors chosen by the limited partners o Appointee
of limited partner becomes directing manager of the firm o Limited partner purc
hases entire property of the partnership and carries on the business in his own
name o Party to a contract with creditors Art. 1849. After the formation of a li
fted partnership, additional limited partners may be admitted upon filing an ame
ndment to the original certificate in accordance with the requirements of Articl
e 1865. Admission of additional limited partners There should be proper amendmen
t to the certificate Signed and sworn to by all of the partners
Filed with SEC p
ursuant to Art. 1865 Art. 1850. A general partner shall have all the rights and
powers and be subject to all the restrictions and liabilities of a partner in a
partnership without limited partners. However, without the written consent or ra
tification of the specific act by all the limited partners, a general partner or
all of the general partners have no authority to: (1) Do any act in contraventi
on of the certificate; (2) Do any act which would make it impossible to carry on
the ordinary business of the partnership; (3) Confess a judgment against the pa
rtnership; (4) Possess partnership property, or assign their rights in specific
partnership property, for other than a partnership purpose; (5) Admit a person a
s a general partner; (6) Admit a person as a limited partner, unless the right s
o to do is given in the certificate; (7) Continue the business with partnership
property on the death, retirement, insanity, civil interdiction or insolvency of
a general

be stated in the certificate provided for in Art. 1844. a limited partner may no
t be an industrial partner in view of Art. 1845 which requires that a limited pa
rtner must be a capital contributor Time the contribution of each limited partne
r must be paid before the formation of the limited partnership, although with re
spect to the additional contributions they may be paid after the limited partner
ship has been formed
Art. 1846. The surname of a limited partner shall not appear in the partnership
name unless: (1) It is also the surname of a general partner, or (2) Prior to th
e time when the limited partner became such, the business has been carried on un
der a name in which his surname appeared. A limited partner whose surname appear
s in a partnership name contrary to the provisions of the first paragraph is lia
ble as a general partner to partnership creditors who extend credit to the partn
ership without actual knowledge that he is not a general partner. Effect where t
he surname of the limited partner appears in the partnership name
The limited pa
rtner violating this article is liable, as a general rule, to partnership credit
ors, without, however, the rights of a general partner with respect to third per
sons with actual knowledge that he is only a limited partner Art. 1847. If the c
ertificate contains a false statement, one who suffers loss by reliance on such
statement may hold liable any party to the certificate who knew the statement to
be false: (1) At the time he signed the certificate, or (2) Subsequently, but w
ithin a sufficient time before the statement was relied upon to enable him to ca
ncel or amend the certificate, or to file a petition for its cancellation or ame
ndment as provided in Article 1865. Liability for false statement in certificate
Liability imposed is merely statutory penalty
Does not make the limited partner
a general partner for all purposes
Requisites o He knew the statement to be fal

se at the time he signed the certificate (but having time to cancel or amend it,
he failed to do so) o Person seeking to enforce liability relied upon the false
statement o The person suffered a loss
C c,) L L E E N
46

Notes on De Leon
Partnership
o Receive the return of his contribution provided the partnership assets are in
excess of all its liabilities
partner, unless the right so to do is given in the certificate. Rights, powers a
nd liabilities of a general partner
Right of control/ unlimited personal liabili
ty o Entire control of business subject to all liabilities and restrictions o In
the absence of an agreement to the contrary, he is not entitled to compensation
for his services beyond his share of the profits
Acts of administration/ acts o
f strict dominion o No power to do the specific acts under Art. 1850 o Beyond th
e scope of the authority if a general partner Other limitations o General partne
rs have no power to bind limited partners beyond the latters investment o No powe
r to act beyond the purpose of the partnership Art. 1851. A limited partner shal
l have the same rights as a general partner to: (1) Have the partnership books k
ept at the principal place of business of the partnership, and at a reasonable h
our to inspect and copy any of them; (2) Have on demand true and full informatio
n of all things affecting the partnership, and a formal account of partnership a
ffairs whenever circumstances render it just and reasonable; and (3) Have dissol
ution and winding up by decree of court. A limited partner shall have the right
to receive a share of the profits or other compensation by way of income, and to
the return of his contribution as provided in Articles 1856 and 1857. Rights of
a limited partner Improper on the part of general partners may not give a limit
ed partner greater rights than the law what his contract grants him
Specific rig
hts o To require the partnership books be kept at the principal place of busines
s o Inspect and copy at a reasonable hour partnership books o Demand a formal ac
count o Ask for dissolution and winding up by decree of court o Receive a share
of the profits
Art. 1852. Without prejudice to the provisions of Article 1848, a person who has
contributed to the capital of a business conducted by a person or partnership e
rroneously believing that he has become a limited partner in a limited partnersh
ip, is not, by reason of his exercise of the rights of a limited partner, a gene
ral partner with the person or in the partnership carrying on the business, or b
ound by the obligations of such person or partnership, provided that on ascertai
ning the mistake he promptly renounces his interest in the profits of the busine
ss, or other compensation by way of income. Status of partner where there is fai
lure to create limited partnership This article grants exemption from liability
in favour of one who has contributed to the capital of a business, with the mist
aken belief that there is only a limited partnership
Sometimes the limited partn
ership exists in spite of the failure of the firm to comply with the law
Limited
partner is merely made liable for the debts of the firm as if he were a general
partner Status of person erroneously believing himself to be a limited partner
o If the person has contributed capital, he is not personally liable as a genera
l partner
On ascertaining the mistake, he renounces his interest in the profits
His surname does not appear in the partnership name He does not participate in t
he management of the business o Necessity of renouncing his interest Renunciatio
n before the partnership has become liable to 3rd persons o Obligation to pay ba
ck profits and compensation already received Renunciation should be on the profi
ts or compensation not yet paid for
The other view says that the most that the s
tatute could have intended was to put partnership creditors
Status of heirs of a
deceased partner o Right to elect to become general partner may be exercised
Th
e heirs may disregard the limitation and elect to become a
C c,) L L E E N
47

Notes on De Leon
Partnership
Transacting other business Receiving a pro rata share of the partnership assets
with general creditors Prohibited transactions o Receiving or holding as collate
ral security any partnership property o Receiving any payment, conveyance or rel
ease from liability if it will prejudice the right of third persons
Any violatio
n will give rise to the presumption that it has been to defraud partnership cred
itors Preferential rights of 3rd persons o Designed to prevent illegal competiti
on between the limited partner and creditors of the partnership for the assets o
f the partnership in case there is insufficiency of partnership assets o o
o
collective or general partner (choice is personal) Right when given in articles
of partnership may be waived Heirs cannot be compelled to become general partner
s against their wishes

Art. 1853. A person may be a general partner and a limited partner in the same p
artnership at the same time, provided that this fact shall be stated in the cert
ificate provided for in Article 1844. A person who is a general, and also at the
same time a limited partner, shall have all the rights and powers and be subjec
t to all the restrictions of a general partner; except that, in respect to his c
ontribution, he shall have the rights against the other members which he would h
ave had if he were not also a general partner. One person as general and limited
partner
Such fact must be stated in the certificate o Rights and powers are tho
se of a general partner o With respect to his contribution as limited partner, h
e is a limited partner insofar as other partners are concerned
While he is not r
elieved from personal liability to 3rd persons for partnership debts, he is enti
tled to recover from the general partners in the amount he has paid to such 3rd
persons
In settling accounts after dissolution, he has priority over general par
tners in the return of their respective contributions Art. 1854. A limited partn
er also may loan money to and transact other business with the partnership, and,
unless he is also a general partner, receive on account of resulting claims aga
inst the partnership, with general creditors, a pro rata share of the assets. No
limited partner shall in respect to any such claim: (1) Receive or hold as coll
ateral security and partnership property, or (2) Receive from a general partner
or the partnership any payment, conveyance, or release from liability if at the
time the assets of the partnership are not sufficient to discharge partnership l
iabilities to persons not claiming as general or limited partners. The receiving
of collateral security, or payment, conveyance, or release in violation of the
foregoing provisions is a fraud on the creditors of the partnership. Loan and ot
her business transactions with limited partnership Allowable transactions o Gran
ting loans to the partnership

Art. 1855. Where there are several limited partners the members may agree that o
ne or more of the limited partners shall have a priority over other limited part
ners as to the return of their contributions, as to their compensation by way of
income, or as to any other matter. If such an agreement is made it shall be sta
ted in the certificate, and in the absence of such a statement all the limited p
artners shall stand upon equal footing. Preferred limited partners
Priority over
other limited partners as to the following: o Return of their contributions o C
ompensation by way of income o Any other matter
In the absence of any agreement,
all the limited partners shall stand on equal footing Art. 1856. A limited part
ner may receive from the partnership the share of the profits or the compensatio
n by way of income stipulated for in the certificate; provided that after such p

ayment is made, whether from property of the partnership or that of a general pa

rtner, the partnership assets are in excess of all liabilities of the partnershi
p except liabilities to limited partners on account of their contributions and t
o general partners. Compensation of limited partner
Right to compensation is sub
ject to the condition that the partnership assets will still be in excess of par
tnership liabilities after such payment o 3rd party creditors have priority over
the limited partners rights Liabilities to the limited partners for their contri
butions and to general partners are not included in determining partnership liab
ilities
C c,) L L E E N
48

Notes on De Leon
Partnership
When return a matter of right
On the dissolution of the partnership; or
Upon arr
ival of the date specified in the certificate of the return; or After the expira
tion of the six months notice in writing given by him to the other partners if no
time is fixed in the certificate for the return of the contribution or for the
dissolution of the partnership Right of limited partner to cash in return for co
ntribution General rule: under the 3rd paragraph, even if a limited partner has
contributed property, he has only the right to demand and receive cash for his c
ontribution. Exceptions: o When there is a stipulation to the contrary in the ce
rtificate; or o Where all the partners (general and limited) consent to the retu
rn other than in the form of cash When limited partner may have partnership diss
olved
The 4th paragraph provides for additional grounds for the dissolution of t
he partnership upon petition of a limited partner: o When his demand for the ret
urn of his contribution is denied although he has a right to such return; or o W
hen his contribution is not paid although he is entitled to its return because t
he other liabilities of the partnership have not been paid or the partnership pr
operty insufficient for their payment
The limited partner must first ask the oth
er partners to have the partnership dissolved; if they refuse, then he can seek
the dissolution of the partnership by judicial decree Art. 1858. A limited partn
er is liable to the partnership: (1) For the difference between his contribution
as actually made and that stated in the certificate as having been made; and (2
) For any unpaid contribution which he agreed in the certificate to make in the
future at the time and on the conditions stated in the certificate. A limited pa
rtner holds as trustee for the partnership: (1) Specific property stated in the
certificate as contributed by him, but which was not contributed or which has be
en wrongfully returned, and
Art. 1857. A limited partner shall not receive from a general partner or out of
partnership property any part of his contributions until: (1) All liabilities of
the partnership, except liabilities to general partners and to limited partners
on account of their contributions, have been paid or there remains property of
the partnership sufficient to pay them; (2) The consent of all members is had, u
nless the return of the contribution may be rightfully demanded under the provis
ions of the second paragraph; and (3) The certificate is cancelled or so amended
as to set forth the withdrawal or reduction. Subject to the provisions of the f
irst paragraph, a limited partner may rightfully demand the return of his contri
bution: (1) On the dissolution of a partnership; or (2) When the date specified
in the certificate for its return has arrived, or (3) After he has six months' n
otice in writing to all other members, if no time is specified in the certificat
e, either for the return of the contribution or for the dissolution of the partn
ership. In the absence of any statement in the certificate to the contrary or th
e consent of all members, a limited partner, irrespective of the nature of his c
ontribution, has only the right to demand and receive cash in return for his con
tribution. A limited partner may have the partnership dissolved and its affairs
wound up when: (1) He rightfully but unsuccessfully demands the return of his co
ntribution, or (2) The other liabilities of the partnership have not been paid,
or the partnership property is insufficient for their payment as required by the
first paragraph, No. 1, and the limited partner would otherwise be entitled to
the return of his contribution. Requisites for return of contribution of limited
partner All liabilities of the partnership have been paid or if they have not b
een paid, the assets of the partnership are sufficient to pay the liabilities;
T
he consent of all members (general and limited) has been obtained except when th
e return may be rightfully demanded; and The certificate is cancelled or so amen
ded as to set forth the withdrawal or reduction of the contribution
C c,) L L E E N
49

Notes on De Leon
Partnership
Specific property of the partnership which had been wrongfully returned to him;
Money wrongfully paid or conveyed to him on account of his contribution; and Oth
er property wrongfully paid or conveyed to him on account of his contribution
(2) Money or other property wrongfully paid or conveyed to him on account of his
contribution. The liabilities of a limited partner as set forth in this article
can be waived or compromised only by the consent of all members; but a waiver o
r compromise shall not affect the right of a creditor of a partnership who exten
ded credit or whose claim arose after the filing and before a cancellation or am
endment of the certificate, to enforce such liabilities. When a contributor has
rightfully received the return in whole or in part of the capital of his contrib
ution, he is nevertheless liable to the partnership for any sum, not in excess o
f such return with interest, necessary to discharge its liabilities to all credi
tors who extended credit or whose claims arose before such return. Liabilities o
f a limited partner:
To the partnership liability of limited partners is to part
nership, not the creditors of the partnership
To partnership creditors and other
partners a limited partner is liable for partnership obligations when: o Contri
butes services; o Allows his surname to appear in the name of the firm o Fails t
o have false statement in certificate corrected when he knew it to be false o Ta
kes part in control of business o Receives partnership property as collateral se
curity, payment, conveyance, or release in fraud of partnership creditors o Fail
ure to substantially comply with legal requirements of formation of limited part
nership To separate creditors creditor of limited partner may also apply for a ch
arging order subjecting the interest in the partnership of the debtor partner for
the payment of his obligation Liability for unpaid contribution Limited partner
is liable not only for the difference between the amount of his actual contribu
tions and that stated in the certificate as having been made but also for any un
paid contribution he agreed to make at a future time Liability as trustee limite
d partner considered as trustee for the partnership for: Specific property state
d in the certificate as contributed by him but which he had not contributed;
Requisites for waiver or compromise of liabilities Waiver or compromise is made
with the consent of all the partners; and
The waiver or compromise does not prej
udice partnership creditors who extend credit or whose claim arose before the ca
ncellation or amendment of the certificate Liability for return of contribution
lawfully received The limited partner is liable to the partnership for the retur
n of contribution lawfully received by him to pay creditors who extended credit
or whose claim arose before such return. His liability of course, cannot exceed
the sum received by him with interest Art. 1859. A limited partner's interest is
assignable. A substituted limited partner is a person admitted to all the right
s of a limited partner who has died or has assigned his interest in a partnershi
p. An assignee, who does not become a substituted limited partner, has no right
to require any information or account of the partnership transactions or to insp
ect the partnership books; he is only entitled to receive the share of the profi
ts or other compensation by way of income, or the return of his contribution, to
which his assignor would otherwise be entitled. An assignee shall have the righ
t to become a substituted limited partner if all the members consent thereto or
if the assignor, being thereunto empowered by the certificate, gives the assigne
e that right. An assignee becomes a substituted limited partner when the certifi
cate is appropriately amended in accordance with Article 1865. The substituted l
imited partner has all the rights and powers, and is subject to all the restrict
ions and liabilities of his assignor, except those liabilities of which he was i
gnorant at the time he became a limited partner and which could not be ascertain
ed from the certificate. The substitution of the assignee as a limited partner d
oes not release the assignor from liability to the partnership under Articles 18
47 and 1848. Effect of change in the relation of limited partners
Does not neces
sarily dissolve the partnership. No limited partner, however, can withdraw his c

ontribution until all liabilities to creditors are paid

C c,) L L E E N
50

Notes on De Leon
Partnership
Right of executor on death of a limited partner
All the rights for purposes of s
ettling the affairs of the limited partner; and The right to constitute the dece
aseds assignee as substituted limited partner (if deceased was empowered to so as
sign under the certificate) Art. 1862. On due application to a court of competen
t jurisdiction by any creditor of a limited partner, the court may charge the in
terest of the indebted limited partner with payment of the unsatisfied amount of
such claim, and may appoint a receiver, and make all other orders, directions a
nd inquiries which the circumstances of the case may require. The interest may b
e redeemed with the separate property of any general partner, but may not be red
eemed with partnership property. The remedies conferred by the first paragraph s
hall not be deemed exclusive of others which may exist. Nothing in this Chapter
shall be held to deprive a limited partner of his statutory exemption. Rights of
creditors of limited partner Apply to court for charging order on limited partn
ers interest in the partnership Art. 1863. In setting accounts after dissolution
the liabilities of the partnership shall be entitled to payment in the following
order: (1) Those to creditors, in the order of priority as provided by law, exc
ept those to limited partners on account of their contributions, and to general
partners; (2) Those to limited partners in respect to their share of the profits
and other compensation by way of income on their contributions; (3) Those to li
mited partners in respect to the capital of their contributions; (4) Those to ge
neral partners other than for capital and profits; (5) Those to general partners
in respect to profits; (6) Those to general partners in respect to capital. Sub
ject to any statement in the certificate or to subsequent agreement, limited par
tners share in the partnership assets in respect to their claims for capital, an
d in respect to their claims for profits or for compensation by way of income on
their contribution respectively, in proportion to the respective amounts of suc
h claims.
Rights of assignee of limited partner
Assignee is only entitled to receive the s
hare o the profits or other compensation by way of income or the return of the c
ontribution to which the assignor would otherwise be entitled. He has no right t
o require any information or account of the partnership transactions or to inspe
ct partnership books The assignee acquires all the rights of the limited partner
only when he becomes a substituted limited partner When assignee may become sub
stituted limited partner (requisites):
All the members must consent to the assig
nee becoming a substituted limited partner or the limited partner, being empower
ed by the certificate, must give the assignee the right to become a limited part
ner; The certificate must be amended;
The certificate as amended must be registe
red in the SEC Liability of substituted partner and assignor Substituted limited
partner is liable for all the liabilities of his assignor except only those of
which he was ignorant at the time he became a limited partner and which could no
t be ascertained from the certificate Art. 1860. The retirement, death, insolven
cy, insanity or civil interdiction of a general partner dissolves the partnershi
p, unless the business is continued by the remaining general partners: (1) Under
a right so to do stated in the certificate, or (2) With the consent of all memb
ers. Effect of retirement, death, etc. of a general partner
Dissolution of partn
ership. If limited partner, does not dissolve partnership unless he is the only
limited partner If the business is continued by the remaining partners under the
rights given in the certificate or with the consent of all members, no dissolut
ion but the certificate must be amended for limited partners to still avail of l
imited liability Art. 1861. On the death of a limited partner his executor or ad
ministrator shall have all the rights of a limited partner for the purpose of se
tting his estate, and such power as the deceased had to constitute his assignee
a substituted limited partner. The estate of a deceased limited partner shall be
liable for all his liabilities as a limited partner.
C c,) L L E E N

51

Notes on De Leon
Partnership
Priority in the distribution of partnership assets
The partnership liabilities s
hall be settled in the following order: o Those due to creditors, including limi
ted partners, except those on account of their contributions, in the order of th
e priority as provided by law; o Those due to limited partners in respect to the
ir share of the profits and other compensation by way of income on their contrib
utions; o Those due to limited partners for the return of the capital contribute
d; o Those due to general partners other than that for capital and profits; o Th
ose due to general partners in respect to profits; o Those due to general partne
rs for the return of the capital contributed Partnership creditors are entitled
to foist distribution, followed by limited partners who take priority over gener
al partners
Note that in general partnership, the claims of the general partners
in respect of capital enjoy preference over those in respect of profits Shares
of limited partners in partnership assets
In the absence of any statement in the
certificate as to the share of the profits which each partner shall receive by
reason of his contribution and subject to any subsequent agreement, limited part
ners share in the partnership assets in respect to their claims for capital and
profits in proportion to the respective amounts of such claims This proportional
sharing by the limited partners takes place where the partnership assets are in
sufficient to pay such claims Priority of claims of limited partners
The members
of a limited partnership, as among themselves, may include in the partnership a
rticles an agreement for priority of distribution on the winding up of partnersh
ip affairs. Such agreement ordinarily becomes controlling as between the partner
s themselves. In the absence of any contrary agreement, all the limited partners
stand upon equal footing
The claims of limited partners for profits and other c
ompensation by way of income and return of capital contributions rate ahead with
respect to all claims of general partners. For claims arising from individual l
oans to, or other business transactions with, the partnership, other than for ca
pital contributions, the limited partner is placed in the same category as a non
-member creditor. If return is made to a limited partner of his contribution bef
ore creditors are paid, he is under
Dissolution of a limited partnership Causes o Misconduct of a general partner o
Fraud practiced on the limited partner by the general partner o Retirement, deat
h, etc. of a general partner o When all the limited partners ceased to be such o
Expiration of the term for which partnership was to exist o Mutual consent of t
he partners before the expiration of the firms original term
Suit for dissolution
o A limited partner may bring a suit for the dissolution of the firm, an accoun
ting, and the appointment of a receiver when the misconduct of a general partner
or the insolvency of the firm warrants it. Similarly, creditors of a limited pa
rtnership are entitled to such relief where the firm is insolvent o A limited pa
rtner may have the partnership dissolved and its affairs wound up when he rightf
ully but unsuccessfully demands the return of his contribution, or the other lia
bilities of the partnership, except liabilities to general partners and to limit
ed partners on account of their contributions, have not been paid, or the partne
rship property is insufficient for their payment, and the limited partner would
otherwise be entitled to the return of his contribution Notice of dissolution o
When the firm is dissolved by the expiration of the term fixed in the certificat
e, notice of the dissolution need not be given since the papers filed and record
ed in the SEC are notice to all the world of the term of the partnership. Where,
however, the dissolution is by the express will of the partners, the certificat
e shall be cancelled, and a dissolution of the partnership is not effected until
there has been compliance with the requirements in this respect Winding up o Wh
en a limited partnership has been duly dissolved, the general partners have the
right and power to wind up its affairs. It is not the duty of the limited partne
r or of the representatives of a limited partner to care for or collect the asse
ts of the firm

C c,) L L E E N
52

Notes on De Leon
Partnership
(2) Be signed and sworn to by all members, and an amendment substituting a limit
ed partner or adding a limited or general partner shall be signed also by the me
mber to be substituted or added, and when a limited partner is to be substituted
, the amendment shall also be signed by the assigning limited partner. The writi
ng to cancel a certificate shall be signed by all members. A person desiring the
cancellation or amendment of a certificate, if any person designated in the fir
st and second paragraphs as a person who must execute the writing refuses to do
so, may petition the court to order a cancellation or amendment thereof. If the
court finds that the petitioner has a right to have the writing executed by a pe
rson who refuses to do so, it shall order the Office of the Securities and Excha
nge Commission where the certificate is recorded, to record the cancellation or
amendment of the certificate; and when the certificate is to be amended, the cou
rt shall also cause to be filed for record in said office a certified copy of it
s decree setting forth the amendment. A certificate is amended or cancelled when
there is filed for record in the Office of the Securities and Exchange Commissi
on, where the certificate is recorded: (1) A writing in accordance with the prov
isions of the first or second paragraph, or (2) A certified copy of the order of
the court in accordance with the provisions of the fourth paragraph; (3) After
the certificate is duly amended in accordance with this article, the amended cer
tified shall thereafter be for all purposes the certificate provided for in this
Chapter. Requirements for amendment and cancellation of certificate
Requirement
s to amend o Amendment must be in writing; o It must be signed and sworn to by a
ll the members; and o The certificate, as amended, must be filed for record in t
he SEC Requirements to cancel o The same as the requirements to amend o If cance
llation is ordered by the court, certified copy of such order shall be filed wit
h the SEC
Approval by Commission is not required for either case

an obligation to reimburse such payments, with interest, so far as necessary to

satisfy claims of creditors In the event of insolvency of the partnership, its c
reditor takes preference over both general and limited partners
Art. 1864. The certificate shall be cancelled when the partnership is dissolved
or all limited partners cease to be such. A certificate shall be amended when: (
1) There is a change in the name of the partnership or in the amount or characte
r of the contribution of any limited partner; (2) A person is substituted as a l
imited partner; (3) An additional limited partner is admitted; (4) A person is a
dmitted as a general partner; (5) A general partner retires, dies, becomes insol
vent or insane, or is sentenced to civil interdiction and the business is contin
ued under Article 1860; (6) There is a change in the character of the business o
f the partnership; (7) There is a false or erroneous statement in the certificat
e; (8) There is a change in the time as stated in the certificate for the dissol
ution of the partnership or for the return of a contribution; (9) A time is fixe
d for the dissolution of the partnership, or the return of a contribution, no ti
me having been specified in the certificate, or (10) The members desire to make
a change in any other statement in the certificate in order that it shall accura
tely represent the agreement among them. When certificate shall be cancelled or
amended
The certificate shall be cancelled, not merely amended: o When the partn
ership is dissolved other than by reason of the expiration of the term of the pa
rtnership o When all the limited partners cease to be such. A limited partnershi
p cannot exist as such if there are no more limited partners (Art. 1843) In all
other cases, only an amendment of the certificate is required (Art. 1864, Nos. 1
-10) Art. 1865. The writing to amend a certificate shall: (1) Conform to the req
uirements of Article 1844 as far as necessary to set forth clearly the change in
the certificate which it is desired to make; and

C c,) L L E E N
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Notes on De Leon
Partnership
Art. 1867. A limited partnership formed under the law prior to the effectivity o
f this Code, may become a limited partnership under this Chapter by complying wi
th the provisions of Article 1844, provided the certificate sets forth: (1) The
amount of the original contribution of each limited partner, and the time when t
he contribution was made; and (2) That the property of the partnership exceeds t
he amount sufficient to discharge its liabilities to persons not claiming as gen
eral or limited partners by an amount greater than the sum of the contributions
of its limited partners. A limited partnership formed under the law prior to the
effectivity of this Code, until or unless it becomes a limited partnership unde
r this Chapter, shall continue to be governed by the provisions of the old law.
Provisions for existing limited partnerships
A limited partnership formed under
the former law may become a limited partnership by complying with the provisions
of Art. 1844, provided the certificate sets forth the information required by A
rt. 1867. until or unless it becomes a limited partnership under this chapter, i
t shall continue to be governed by the provisions of the old law
Art. 1866. A contributor, unless he is a general partner, is not a proper party
to proceedings by or against a partnership, except where the object is to enforc
e a limited partner's right against or liability to the partnership. Limited par
tner, a mere contributor A limited partner is a mere contributor. He is practica
lly a stranger in the limited partnership whose liability is limited to his inte
rest in the firm, without any right and power to participate in the management a
nd control of the business. Relationship between limited partner and partnership
is not one of trust and confidence Parties to action by or against partnership
Since limited partners are not principals in partnership transactions, their lia
bility, as a general rule, is to the partnership, not the creditors of the partn
ership. For the same reason, they have no right of action against 3rd persons ag
ainst whom the partnership has any enforceable claim When limited partner a prop
er party Where the object to enforce limited partners individual rights against t
he partnership, and to recover damages for violation of such right
When it is a
proceeding to enforce his liability to the partnership Creditors may go against
him if he had withdrawn sums from the capital of the firm with outstanding debts
on a voluntary dissolution Nature of limited partners interest in form
Limited p
artners contributions are not a loan and he is not a creditor of the firm because
of such contribution
Limited partners contribution is not a mere investment
Limi
ted partner is, in a sense, an owner, which in interest in the capital if the fi
rm and its business as such, but he has no property right in the firms assets; bu
t in accordance with statutory provisions, a limited partner may be a co-owner w
ith his partners of partnership property, holding as a tenant in partnership and
his interest may be defined as a tenancy in partnership Limited partners interes
t is in personal property, and it is immaterial whether the firms assets consist
of realty or tangible or intangible personality
The nature of the limited partne
rs interest in the firm amounts to a share in the partnership assets after its li
abilities have been deducted and a balance struck. The interest is a chose in ac
tion, and hence intangible personal property
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