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OBLIGATIONS OF PARTNERS
Obligations of Partners
“Article 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute
thereto.
He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he
may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound
with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been
delivered, without the need of any demand.”
Obligations with respect to contribution of property
(1) To contribute at the beginning of the partnership or at the stipulated time the money, property, or
industry which he may have promised to contribute;
(2) To answer for eviction in case the partnership is deprived of the determinate property contributed;
(3) To answer to the partnership for the fruits of the property the contribution of which he delayed, from the
date they should have been contributed up to the time of actual delivery;
(4) When contribution is in goods, the amount thereof must be determined by proper appraisal of the value
thereof at the time of contribution. After appraisal, the partnership bears the risk or gets the benefit of
subsequent changes in its value.
(5) To preserve said property with the diligence of a good father of a family pending delivery to the
partnership; and
(6) To indemnify the partnership for any damage caused to it by the retention of the same or by the delay
in its contribution.
The money or property contributed by a partner becomes the property of the partnership. It necessarily follows
that the same cannot be withdrawn or disposed of by the contributing partner without the consent or approval
of the partnership or of the other partners.
Failure to contribute property promised
The mutual contribution to a common fund is of the essence of the contract of partnership, for without the
contributions, the partnership is useless. It is but logical that the failure to contribute is to make the partner
automatically a debtor of the partnership even in the absence of any demand.
Under this article, the remedy of the other partners or the partnership is not rescission or cancellation of the
contract of partnership but an action for specific performance with damages and interest from the defaulting
partner who is made a debtor of the partnership for what he has promised to contribute to the partnership,
from the time he should have complied with his obligation.
The partner is bound in the same cases and in the same manner as the vendor is bound with respect to the
vendee. This matter is, therefore, governed by the law on sales.
Under the law on sales, eviction shall take place whenever by a final judgment based on a right prior to the
sale or an act imputable to the vendor, the vendee is deprived of the whole or a part of the thing purchased.
This obligation of warranty in case of eviction is in consequence of the character of the contract of partnership
which is an onerous contract.
Liability of partner for fruits of property in case of delay
From the mere fact that the contribution which a partner ought to deliver does not pass to the common fund
on time, the partnership fails to receive the benefits which the said contribution ought to produce thus
prejudicing the common purpose of obtaining from them the greatest possible profits through some means of
speculation or investment. The injury, therefore, to the partnership is constant.
“Article 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor
for the interest and damages from the time he should have complied with his obligation.

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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 contribution of money and money converted to personal use
This article contemplates two (2) distinct cases. The first paragraph refers to money promised but not given
on time and the second, to partnership money converted to the personal use of the partner.
(1) To contribute on the date due the amount he has undertaken to contribute to the partnership;
(2) To reimburse any amount he may have taken from the partnership coffers and converted to his own use;
(3) To pay the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any
amount from the common fund and converts it to his own use; and
(4) To indemnify the partnership for the damages caused to it by the delay in the contribution or the
conversion of any sum for his personal benefit.

Liability of guilty partner for interest and damages

The guilty partner is liable for both interest and damages not from the time judicial or extrajudicial demand is
made but from the time he should have complied with his obligation or from the time he converted the amount
to his own use, as the case may be.
The double responsibility of the partner is an exception to the general rule in damages that in obligations
consisting in the payment of a sum of money, the indemnity for damages shall be only the payment of interest
agreed upon or, in the absence of stipulation, the legal interest of 12%. It is in harmony with the principle laid
down in Article 1794 that every partner is responsible to the partnership for damages suffered by it through
his fault and is justified by the nature of the contract of partnership.
“Article 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the
capital of the partnership.”
Extent of contribution to partnership capital
The partners can stipulate the contribution of unequal shares to the common fund, but in the absence of such
stipulation, the presumption is that their contribution shall be in equal shares. This principle is just and
reasonable and is consistent with the rule that partners are deemed to have equal rights and obligations.
The above rule is not applicable to an industrial partner unless, besides his services, he has contributed
capital pursuant to an agreement to that effect.
“Article 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 contrite an additional share to the capital, except an industrial partner,
to save the venture, shall be obliged to sell his interest to the other partners.”
Obligation of capitalist partner to contribute additional capital
General Rule: A capitalist partner is not bound to contribute to the partnership more than what he agreed to
contribute.
Exceptions:
(1) When there is an agreement to the contrary; and
(2) In case of imminent loss of the business of the partnership; there is no agreement that even in case of an
imminent loss of the business the partners are not obliged to contribute.
It is to be noted that the industrial partner is exempted from the requirement to contribute an additional share.
Having contributed his entire industry, he can do nothing further.
“Article 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 (2) credits in proportion to their amounts, even though he may have given a receipt for his

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own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully
applied to the latter.”
Obligation of managing partner who collects debt
General Rule: A person may be separately indebted to the partnership and to the managing partner at the
same time. Any sum received by the managing partner shall be applied to the two (2) credits in proportion to
their amounts even though he may have given receipt for his own credit only.
The exception is where the managing partner received the sum for the account of the partnership, in which
case, the whole sum shall be applied to the partnership credit only.
The debtor is given the right to prefer payment of the credit of the partner only if it should be onerous to him.
Exception: Article 1792 does not apply if the collecting partner is not a managing partner there being no basis
for the suspicion that the partner is in bad faith.
Requisites for application of rule
(1) There exist at least two (2) debts, one where the collecting partner is creditor, and the other, where the
partnership is creditor;
(2) Both debts are demandable; and
(3) The partner who collects is authorized to manage and actually manages the partnership.
Reason for applying payment to partnership credit
The law safeguards the interests of the partnership by preventing the possibility of their being subordinated
by the managing partner to his own interest to the prejudice of the other partners. Good faith demands that
the partner vested with the management of the partnership attend more to the interest of the partnership than
to his own and he should not intentionally fail to effect the collection of the credit of the partnership in order to
effect the collection of his own.
The article does not apply where the partner who collects for his own credit only is not authorized to manage
for there can be no ground for suspicion that he may have acted improperly to create an undue advantage to
himself.
“Article 1793. A partner who has received, in whole or in part, his share of a partnership credit, when the other
partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to
the partnership capital what he received even though he may have given receipt for his share only.”
Obligation of partner who receives share of partnership credit
Such partner is obliged, if the debtor should become insolvent, to bring to the partnership capital what he
received even though he may have given receipt for his share only.
The case contemplated under this article is different from that referred to in Article 1792, which treats of two
(2) distinct credits, one in favor of the partnership and another in favor of the managing partner.
In the present article, there is only one (1) credit – credit in favor of the partnership.
Furthermore, the present article applies whether the partner who receives his share of the partnership credit
is authorized to manage or not.
Requisites for application of rule
(1) A partner has received, in whole or in part, his share of the partnership credit;
(2) The other partners have not collected their shares; and
(3) The partnership debtor has become insolvent.
EXAMPLE: D owes partnership X and Co. P4,500. A, a partner, received a share of P1,500 ahead of B and
C, the two (2) other partners. When B and C were collecting from D, the latter was already insolvent.

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In this case, even if A had given a receipt for his share only, he can be required to share the P1,500 with B
and C.
The reason for imposing obligation to return is because the debt of D becomes a bad debt. It would be unjust
or unfair for A not to share in the loss with B and C or for him to obtain more and B and C, less. The above
provision is based on the community of interest among the partners, which is one of the underlying principles
of the contract of partnership.
“Article 1794. Every partner is responsible to the partnership for damages suffered by it through his fault, and
he cannot compensate them with the profits and benefits which he may have earned for the partnership by his
industry. However, the courts may equitably lessen this responsibility if through the partner’s extraordinary
efforts in other activities of the partnership, unusual profits have been realized.”
Obligation of partner for damages to partnership
This article follows the general rule applicable to all contacts that any person guilty of negligence or fault in
the fulfillment of his obligation, shall be liable for damages.
The partner’s fault, however, must be determined in accordance with the nature of the obligation and the
circumstances of the person, the time, and the place.
Compensation of damages with profits earned for partnership by guilty partner
(1) Damages not generally subject to set-off – As a general rule, the damages caused by a partner to the
partnership cannot be compensated or offset by the profits or benefits which he may have earned for the
partnership by his industry.
a. The partner has an obligation to secure benefits for the partnership. Hence, the profits which he
may have earned pertain as a matter of law or right to the partnership.
b. He has also the obligation to exercise diligence in the performance of his obligation as a partner.
Consequently, since a partner is a debtor to the partnership for his industry, and at the same time
is obliged to repair the injury which he might have occasioned through his fault, there cannot be
any compensation. Compensation requires that the negligent partner be both a creditor and a
debtor of the partnership.
(2) Exception – If unusual profits are realized through the extraordinary efforts of the partner at fault, the
courts are authorized by the law to equitably mitigate or lessen his liability for damages. This rule rests
on equity. Note that even in this case, the partner at fault is not allowed to compensate the damages
suffered by the profits earned.

“Article 1796. The partnership shall be responsible to every partner for the amounts he may have disbursed in
behalf of the partnership and for the corresponding interest, from the time the expenses 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.”

Responsibility of partnership to partners

In the absence of any stipulation to the contrary, every partner is an agent of the partnership for the purpose
of its business. Hence, the obligations of the partnership to every partner:
(1) To refund amounts disbursed by him on behalf of the partnership plus the corresponding interest from the
time the expenses are made. Here, the law refers to loans or advances made by a partner to the
partnership other than capital contributed by him;
(2) To answer for the obligation he may have contracted in good faith in the interest of the partnership
business; and
(3) To answer for risks in consequence of its management.
Being a mere agent, the partner is not personality liable, provided, however, that he is free from all fault and
he acted within the scope of his authority.

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EXAMPLE: The articles of partnership of X composed of A, B, and C provides that any purchase in excess
of P50,000.00 must first be approved by all the partners. C made a purchase of goods out of his personal
funds for P60,000.00 without the knowledge and approval of A and B. The partnership incurred a loss.
In this case, C is not entitled to be reimbursed for the purchase.
“Article 1797. The losses and profits shall be distributed in the conformity with the agreement. 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 receive 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 profits in proportion to his capital.”
Rules for distribution of profits and losses
This article and the two (2) succeeding ones regulate the distribution of profits and losses among the partners.
They do not refer to the liability of the partners to third persons, which is governed by Article 1816.
(1) Distribution of profits:
a. The partners share the profits according to their agreement subject to Article 1799.
b. If there is no such agreement:
i. The share of each capitalist partner shall be in proportion to his capital contribution. This rule
is based on the presumed will of the partners.
ii. The industrial partner shall receive such share, which must be satisfied first before the capitalist
partners shall divide the profits, as may be just and equitable under the circumstances. The
share of an industrial partner in the profits is not fixed as in the case of the capitalist partners
as it is very difficult to ascertain the value of the services of a person.
EXAMPLE:
1. A, B, and C formed a partnership, whereby each of them contributed P30,000.00. They agreed that
should the partnership realize profits, the same shall be distributed in the following proportions:

A As managing partner 40%

B 30%
C 30%

2. Suppose the contributions of the partners are as follows:

A P30,000.00
B 20,000.00
C 10,000.00
Total P60,000.00

In the absence of stipulation, the share of each of the partners shall be in proportion to his contribution,
that is:

A 3/6
B 2/6
C 1/6

3. If D is an industrial partner, he shall receive such share as may be just and equitable under the
circumstances. Assuming that the partnership makes a profit of P17,000.00, the partners may
determine considering all the circumstances, that D, as industrial partner, is entitled to P2,000.00. The

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balance of P15,000.00 will be divided among A, B, and C in proportion to their respective capital
contributions.

Now, if D, aside from his services, contributed P4,000.00m then, he will also share in the balance of
P15,000.00 in proportion to his contribution which is 1/6 (P4,000.00/P64,000.00) or P937.50. A, B, and
C will share P7,031.25, P4,687.50, and P2,343.75, respectively.
(2) Distribution of losses
a. The losses shall be distributed according to their agreement subject to Article 1799.
b. If there is no such agreement, but the contract provides for the share of the partners in the profits,
the share of each in the losses shall be in accordance with the profit-sharing ratio, but the industrial
partner shall not be liable for losses. The profits or losses of the partnership cannot be determined
by taking into account the result of one particular transaction but of all the transactions had.
c. If there is also no profit-sharing stipulated in the contract, then losses shall be borne by the partners
in proportion to their capital contributions, but the purely industrial partner shall not be liable for the
losses.
EXAMPLE:
In the same example, the partners will share in the losses in conformity with their agreement. If they failed to
agree as to the sharing of the losses, the share of each partner in the losses shall be in the same proportion
stipulated with regard to the share of each in the profits, to wit:

A 40%
B 30%
C 30%

If there is also no profit-sharing ratio stipulated, then the losses shall be divided in proportion to their capital
contributions. D, however, being an industrial partner, shall not be liable for losses, but the same shall be borne
by A, B, and C, the capitalist partners. However, if D is also a capitalist partner, then he shall share in the losses
in proportion to his contribution.

Stipulation excluding a partner from any share in profits or losses

General Rule: A stipulation which excludes one or more partners from any share in the profits or losses is void
(Article 1799).

Exception: Article 1797, Paragraph 2 excludes an industrial partner from losses, but he is not exempted from
liability in so far as third persons are concerned. He may, however, recover what he has given to third persons
from the other partners, for he is exempted by law from losses (Article 1817).
Obligations of an Industrial Partner
“Article 1789. An industrial partner cannot engage in business for himself, unless the partnership expressly
permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail
themselves of the benefits which he may have obtained in violation of this provision with a right to damages in
either case.”
An industrial partner is one who contributes his industry, labor, or services to the partnership. He is considered
the owner of his services, which are his contributions to the common fund.
Unless the contrary is stipulated, he becomes a debtor of the partnership his work or services from the moment
of the commencement of the partnership. In effect, the partnership acquires an exclusive right to avail itself
of his industry. Consequently, if he engages in business for himself, such act is considered prejudicial to the
interest of other partners.

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Prohibition against engaging in business

As regards an industrial partner. The prohibition is absolute and applies whether the industrial partner is to
engage in the same business in which the partnership is engaged or in any kind of business. The reason for
the prohibition exists in both cases, which is to prevent any conflict of interest between the industrial partner
and the partnership and to insure the faithful compliance by said partner with his obligation.
As regards capitalist partners. The prohibition extends only to any operation which is of the same kind of
business in which the partnership is engaged unless there is a stipulation to the contrary.
If the industrial partner engages in business for himself, without the express permission of the partnership,
the capitalist partners have the right either to exclude him from the firm or to avail themselves of the benefits
which he may have obtained.
(1) In either case, the capitalist partners have a right to damages. Note that the permission given to the
industrial partner must be express to exempt him from liability.
(2) Although the law mentions only the capitalist partners, it is believed that industrial partners are also
entitled to the remedy granted since they are equally prejudiced by the act of their co-partner engaging
in business for himself.
Management of Partnership
I. Manner of management has been provided for in the partnership agreement

A. When a managing partner has been appointed

“Article 1800. The partner who has been appointed manager in the articles of partnership may execute all 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 for such revocation of power.
A power granted after the partnership has been constituted may be revoked at any time.”
Article 1800 speaks of two (2) distinct cases of appointments:
(1) Appointment as manager in the article of partnership – The partner appointed by common agreement
in the articles of partnership may execute all acts of administration notwithstanding the opposition of
the other partners, unless he should act in bad faith. His power is revocable only upon just and lawful
cause and upon the vote of the partners representing he controlling interest.

(2) Appointment as manager after the constitution of the partnership – The management granted by the
partners may revoked at any time for any cause whatsoever.
It should be noted that Article 1800 refers to a partner, not a stranger, who has been appointed as manager. As
a rule, a partner is not entitled to compensation for his services other than his share of the profits.
B. When two or more managing partners have been entrusted with the management

1. Without specification of their respective duties and without specification that one of them shall not act
without the consent of the others

“Article 1801. If two or more partners have been entrusted with the management of the partnership without
specification of their respective duties, or without a stipulation that one of them shall not act without the
consent of all the others, each one may separately execute all acts of administration, but if any of them
should 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 controlling interest.”

General Rule: Each one may execute all acts of administration.

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Exceptions:
a. Decision of the majority of the managing partners shall prevail; and
b. In case of a tie, decision of the partners having the controlling interest (holds more than 50% of
capital investment) shall prevail, provided they are also managers.

2. Where unanimity of action stipulated

Concurrence necessary for validity of acts – The partners may stipulate that none of the managing
partners shall act without the consent of the others. In such a case, the unanimous consent of all the
managing partners shall be necessary for the validity of their acts. This consent is so indispensable that
neither the absence nor disability of any one of them may be alleged as excuse or justification to
dispense with this requirement.
The only exception is when there is an imminent danger of grave or irreparable injury to the partnership,
in which case, a partner may act alone without the consent of the partner who is absent or under
disability, without prejudice to his liability for damages under Article 1794 (Article 1802).
Rule where there is opposition by a managing partner – The rule which authorizes any of the managing
partners to proceed alone without the consent of the other in case of “imminent danger of grave or
irreparable injury to the partnership” is not applicable when one of the managers, in the exercise of his
right to oppose, objects to the proposed act. The reason is that one of the essential conditions of the
authority conferred on the managing partner is that the management should be with the consent of all
the partners, and since in this case such unanimous consent is manifestly wanting, there is no doubt
that the proposed act is outside the scope of his authority.
Consent of managing partners not necessary in routine transactions – It has been held that where the
business of the partnership is to buy and sell merchandise of all kinds, an industrial partner who is
authorized to “manage, operate and direct the affairs, businesses and activities of the partnership” and
“to make, sign, seal and execute and deliver contracts, documents, x x x upon terms and conditions
acceptable to him duly approved in writing by the capitalist partners,” can purchase “on credit” in the
name of the firm certain goods, regularly purchased by the company without first securing the approval
of the capitalist partners since it is usual or customary to buy and sell on credit. Moreover, the authority
to purchase carries with it the implied authority to purchase on credit.
II. Non-agreement on the manner of management (Article 1803)

A. All partners shall be considered agents and whatever any one of them may do alone binds the
partnership subject to Article 1801.
The partners may fail to designate who among them shall act as manager, either when their contract is
perfected or subsequently. In such a case, all partners shall have equal rights in the management and
conduct of partnership affairs. This is true regardless of the amount of their capital contributions or
extent of their services to the partnership.
All of them shall be considered managers and agents and whatever any one of them may do alone shall
bind the partnership. However, in case of opposition of any partner, the matter shall be settled through
a majority vote. In case of a tie, then the matter shall be decided by the vote of the partners representing
the controlling interest.
B. Unanimous consent is required for any important alteration of immovable property, even if it may be
useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to
the interest of the partnership, the court’s intervention may be sought.
Power of a managing partner:
(1) The minor power to issue receipts;
(2) Authority to purchase on credit;
(3) Authority to secure loans to complete the construction of a “casco” for use in the business and
necessary to carry out the express object of the partnership;

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(4) Authority to dismiss an employee, particularly, when there is a justifiable cause for dismissal as when
the employee hurled at the manager abusive and unsavory remarks in the presence of the customers
of the firm; and
(5) All acts of administration, including the right to sue debtors of the partnership.
Exceptions:
(1) No authority to buy supplies or properties unnecessary for the business;
(2) No authority to sell the business without the consent of all partners; and
(3) No authority to bind the partnership by a contract wholly foreign to its business

REFERENCE:
De Leon, H.S. & De Leon Jr., H.M. (2014). Comments and cases on partnership, agency, and trusts (9th ed.).
Manila: REX Book Store.

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