UNIT I

GENERAL PROVISIONS
When an individual wanting to start a business sits down to make a
plan, the very first factors he considers are his ability to cash out on the
capital, and the possible return of his investments. He most probably
would have the mindset that bigger investment would earn bigger returns;
but on the flipside, he worries that in case of failure, his losses will likewise
be greater. Then if the profit forecast is promising, he would want it for
himself alone; but if the feasibility is more on the break-even, then he would
likely want to share the risks to someone else. These factors affect his
choice on the form of business organization to put up. The more financially
capable would opt for a sole proprietorship where the lone owner of the
business provides the capital, manages the business, gets all the profits,
and becomes solely liable for the loses in case of business reverses.
When the capital requirement is relatively bigger, the business proponent
would be more open to bringing in another or a few persons to contribute
resources in a partnership, where everything will be shared – capital,
management, profits, and losses. When the business endeavor demands
really large capitalization, the people proposing to establish it would most
probably decide on a private corporation where the capital will be sourced
from “investors” entrusting their money to a group of officers and just wait
for their share in the profits. These are the three major forms of business
organization available to business enthusiast.

Lesson 1. Essential requisites of partnership

Article 1767 of the Civil Code of the Philippines provides that “by the
contract of partnership, two or more persons bind themselves to
contribute money, property of industry to a common fund with the
intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the
exercise of a profession.”

This definition enumerates the essential requisites of a partnership:

 1.1 There must be a valid contract. A valid contract requires that
the contracting parties, who must be of legal capacity, give consent to the
object and the cause or consideration. Once these three (consent, object,
and cause) are present, the contract of partnership binds the contracting
parties or partners.
1.2 There must be a contribution of money, property, or industry
to a common fund. The contract of partnership has for its object the
establishment of a legitimate business. The parties (called partners) agree
to contribute their resources for the objective or purpose of putting up and
operating a business. The contract of partnership gives rise to the
obligation of the partners to contribute money, property, or industry to a
common fund, with the end in view that their contributions will yield profits.
1.3 The partnership is established to earn and divide profits
among partners. A partnership is a business organization, and the
objectives of a business organizations is always to earn profits. Otherwise,
a person would operate a foundation or a charitable institution or
benevolent association.
1.4 The partnership must have a lawful purpose and established
for the common benefit of the partners. A valid contract must have a
lawful object. Thus, a partnership to be valid, must have lawful object or
purpose. Lawful purpose of the partnership are those businesses which
are not prohibited by law, those which are within the commerce of man,
those which are existing, not impossible or fictitious. The profits and
interests of the partnership business must be for the benefit of all the
partners. No partner shall be excluded from the sharing in profits and
partnership interests.
The second paragraph of Art. 1767 provides that a partnership may
be formed for the exercise of a profession. Take note that professional
partnerships are organized for the practice of common professions. This
means that a medical doctor cannot form a partnership with an engineer
because their professions are different. A nutritionist and a pediatrician
may form a professional partnership because their professions are both
under the wider umbrella of health.
Exercise 1.0
Review the general concepts and principles of Contracts. How are
those concepts and principles correlated with Contract of Partnership?

Lesson 2. Characteristics of Contract of Partnership

A contract of partnership has the following characteristics:
1. It is consensual because a contract of partnership is perfected by
consent.
2. It is nominate because it has a name given by law, i.e., Contract of
Partnership.
3. It is bilateral because a partnership requires two or more persons
or partners.
4. It is reciprocal because the rights and obligations of partners are
always reciprocal.
5. It is onerous because the partners must contribute to the
partnership with the aim of earning profits.
6. It is commutative because the liabilities of the partners are
presumed to be equal.
7. It is principal because the contract of partnership is not dependent
on any other contract for its validity or existence.
8. It is preparatory because the contract of partnership gives rise to
various other contracts to be entered into by the partners for the
fulfilment of its purpose or business.

Exercise 2.0
Illustrate the characteristics of the contract of partnership using the
following case:
Kimmy and Chinny agreed to sell textbooks to their classmates.
Kimmy provided the money, P50,000.00, to buy the books, and Chinny
purchased them from a bookshop in Recto, Manila. Kimmy was particularly
negative on travelling to Manila due to the health risks involved due to the
pandemic, and Chinny agreed to take on the health and safety risks as the
purchasing of their products was her contribution. Their estimate was to sell
the books with 20% mark-up as there was no other way their classmates
can buy them as there was no distributor or publishing house outside Metro
Manila which was on lockdown. By the middle of the semester, only 70%
of the books were sold, giving Kimmy and Chinny only break-even sales.
Kimmy revealed that she borrowed the P50,000.00 from a micro-finance
lending cooperative for the purpose of their business. The said loan of
P50,000.00 is not yet paid and earning interest.

Lesson 3. Important principles in contracts of partnership

3.1. Separate and distinct juridical personality
Article 1768 (Civil Code) states that “a partnership has a separate
and distinct personality from that of each of the partners, even in the
case of failure to comply with the requirements of Article 1772, first
paragraph”.
Juridical personality means a non-human legal entity authorized by
law to have duties and rights, or an organization recognized as a legal
person. A partnership is a juridical person. It is an artificial being but it can
perform acts with legal effects and its actions are affected by law. The
persons or partners composing the partnership have legal personality. It is
a basic principle in law that a natural person (human being) must have
legal capacity for him to be capable of performing acts with legal effects.
This means that a person must be of legal age, sane, and, if deaf-mute,
must be literate, to have legal capacity. The partnership has its own legal
personality (juridical personality) separate and distinct from the legal
personality of the partners. For example, Anna and Elsa formed a
partnership and named it Frozen Partnership for the purpose of producing
and selling ice cream and similar products. There are three persons
involved: Anna and Elsa, both natural persons with legal capacity, and
Frozen Partnership, an artificial person with juridical personality.
To illustrate the separate and distinct personality of Frozen from that
of Anna and Elsa: if the Anna and Elsa borrowed money from the bank to
be used as additional capital, the borrower shall be Frozen Partnership and
not Anna or Elsa in their personal capacity. The obligation to pay is on
Frozen. If after due date the loan is unpaid and the bank decides to file a
collection case in court, the case will be The Bank versus Frozen
Partnership. Frozen is an artificial being, it has no flesh and blood, so it
cannot appear in court to testify. Nevertheless, even if Anna and Elsa were
the ones to appear in court, they appeared not in behalf of themselves but
in behalf of Frozen. If required to pay the debt, the money will be taken
from the account of Frozen and not from the pockets of Anna or Elsa, or
both Anna and Elsa.
Article 1768 mentions requirements demanded by Article 1772. In
this latter Article, when the capital of a partnership is Three Thousand
Pesos (P3,000.00) or more, in money’s worth or in the value of property
used as capital contribution, the Contract of Partnership must appear in a
written document and this document must be notarized (so it is called
public instrument), and must be recorded in the Securities and Exchange
Commission (SEC). Again, Art. 1768 states that even if these
requirements are not complied with, the separate personality of the
partnership is not affected.
In the given example, Anna and Elsa did not have a formal contract of
partnership, hence there was no public instrument. Their partnership
agreement was merely verbal. Since there was no written, notarized
contract, no such documents were recorded with SEC. Even in the
absence of such public instrument and recording or registration with SEC,
Frozen Partnership has attained a separate juridical personality and is still
liable to pay the loan to the bank. Anna and Elsa will only become liable to
pay the loan out of their own personal money when Frozen has become
bankrupt and cannot pay the loan.

Exercise 3.1
Mac and Au formed a partnership and put up a Milk Tea Café. They
named their partnership Mac-Au Partnership. Since Mac and Au are best
friends, they never thought of executing a formal Contract of Partnership.
They both contributed P500,000.00, and manage the business together.
During the first year of their business, they divided their P1M profit equally.
During the second year anniversary of Mac-Au Partnership, the partners
decided to have an anniversary promo they dubbed “Two for 2 Promo”
where a pair of customers will get two glasses of milk tea/milk shake each
at a price of only two glasses. Millie and Timmy availed the promo, and
after consuming the milk tea products, were rushed to the hospital for
diarrhea. They spent five days in the hospital and had to pay P100,000.00
total bill. They filed a case against Mac and Au claiming P500,000.00 for
damages.
 Will the case prosper?

2. Fiduciary relationship of partners

3. Purpose of registration
4. Doctrine of Delectus Personae
D. Form of contract of partnership
II. Classification of Partnership
A. Universal Partnership
1. Universal Partnership of all Present Properties
2. Universal Partnership of all Gains
B. Particular Partnership
Summary