MODULE 1 : LAW ON PARTNERSHIP

AE2: Business Law and Regulation

Claire Barias Siongco

BWEST COLLEGE
Gomez Extension, Lucena City, Philippines
bwestcollege@yahoo.com.ph
(042) 710-39-90
“A great place where knowledge power, skills and competence are nurtured”

GENERAL PROVISIONS
MODULE 1 : LAW ON PARTNERSHIP
DEFINITION

• A partnership exist when two or more persons, agree to place their money, effects, labor, and
skill in lawful commerce or business, with the understanding that there should be a
proportionate sharing of the profits and losses among them
ESSENTIAL REQUISITES

1. Valid Contract;
2. Contribution of money, property or industry to a common fund;
3. Organized for gain or profit; and
4. Have a lawful object or purpose and must be established for the
common benefit or
interest of the parties
FORM OF CONTRACT OF PARTNERSHIP

GENERAL RULE:
• No form is required. Thus the contract may be oral or in writing.
EXCEPTION:
• If real properties or real rights in real properties are contributed regardless of the
value. A public
instrument is needed; otherwise, the contract of partnership is void.
PARTNERSHIP HAVING A CAPITAL OF P3,000 OR MORE (PERSONAL
PROPERTY ONLY)

• The contract of partnership must appear in a public instrument and must

be recorded in the office of the SEC.
• Take note that non-compliance with the requirement of execution in a
public instrument
will not make the contract void.
• Hence, it is still valid
PURPOSE OF REGISTRATION

• The registration is to “set a condition for the issuance of licenses

to engage in business or trade.
• In this way, the tax liabilities of big partnership cannot be evaded,
and the public can also determine more accurately their
membership and capital before dealing with them.”
CHARACTERISTICS
1. Consensual
2. Commutative
3. Principal
4. Bilateral
5. Onerous
6. Nominate
7. Preparatory
DOCTRINE OF DELECTUS PERSONAE

• The right to choose with whom a person wishes to

associate himself.
RULES IN DETERMINING WHETHER A PARTNERSHIP EXISTS

1. Person who are not partners as to each other are not partners as to third
persons
2. Co-ownership or co-possession does not of itself establish a partnership
3. The sharing of gross returns does not of itself establish a partnership
4. The receipt by a person of the profits of a business is prima facie evidence
that he is a partner in the business
PARTNERSHIP VS. CO-OWNERSHIP
PARTNERSHIP VS. ASSOCIATION
EFFECTS OF UNLAWFUL PARTNERSHIP

1. The contract is void from the very beginning;

2. The profits shall be confiscated in favor of the government;
3. The instruments or tools and proceeds of the crime shall be
forfeited in favor of the government; and
4. The contributions of the partners shall not be confiscated unless
they fall under no. 3
CLASSIFICATION OF PARTNERSHIP

• As to object
• According to liability
• According to duration
• According to representation to others
• According to legality of its existence
AS TO OBJECT
1. Universal partnership
a. Universal partnership of all
present property
b. Universal partnership of all
profits
2. Particular partnership
UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY
The contribution of the partners here are the following:
1. All the properties actually belonging to the partners; and
2. The profits acquired with said properties.

Future properties cannot be included because:

1. As a rule, contracts regarding successional rights cannot be made;
2. A partnership demands that the contributed things be determinate, known, and certain;
3. A universal partnership of all present properties really implies a donation, and it is will- known
that generally, future property cannot be donated.
UNIVERSAL PARTNERSHIP
UNIVERSAL PARTNERSHIP (ART. 1762)
Persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership.
• A universal partnership is virtually a donation to each other of the partner’s
properties (or at least, their usufruct).
• Therefore if persons are prohibited to donate to each other, they should not
be allowed to do indirectly what the law forbids directly.
UNIVERSAL PARTNERSHIP (ART. 1762)
EFFECT OF VIOLATIONS OT ART. 1762

1.The partnership is null and void and its

nullity may be raised anytime.
2.NO legal personality was ever acquired.
ACCORDING TO LIABILITY

1.General partnership
2.Limited partnership
ACCORDING TO DURATION

1.Partnership at will
2.Partnership with a fixed term
3.Partnership for a particular undertaking
ACCORDING TO REPRESENTATION
TO OTHERS

1. Ordinary partnership
2. Partnership by estoppel
ACCORDING TO LEGALITY OF ITS EXISTENCE
1. De Jure partnership
2. De Pacto partnership
OBLIGATIONS OF THE PARTNERS
MODULE 1 : LAW ON PARTNERSHIP
KINDS OF PARTNERS

1. AS TO CONTRIBUTION
2. AS TO LIABILITY
3. AS TO MANAGEMENT
4. AS TO THIRD PERSONS
5. AS TO MEMBERSHIP
6. AS TO CONTINUATION OF THE
BUSINESS AFFAIRS AFTER
DISSOLUTION
7. AS TO THE NATURE OF MEMBERSHIP
8. AS TO STATE OF SURVIVORSHIP
9. AS TO EFFECT OF EXPULSION
10. AS TO VALUE OF CONTRIBUTION
KINDS OF PARTNERS
As to contribution
1. Capitalist partners
2. Industrial partners
3. Capitalist-industrial partners
KINDS OF PARTNERS
As to liability
1. General partners
2. General partners
KINDS OF PARTNERS
As to management
1. Managing partners
2. Silent partners
3. Liquidating partners
KINDS OF PARTNERS
As to membership
1. Real partners
2. Partnership by estoppel
KINDS OF PARTNERS
As to continuation of business affairs after dissolution
1. Continuing partners
2. Discontinuing partners
KINDS OF PARTNERS
As to the nature of membership
1. Original partners
2. Incoming partners
3. Retiring partners
KINDS OF PARTNERS
As to state of survivorship
1. Surviving partners
2. Deceased partners
KINDS OF PARTNERS
As to effect of expulsion
1. Expelled partners
2. Expelling partners
KINDS OF PARTNERS
As to the value of the contribution
1. Majority of the partners
2. Nominal partners
OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES
OBLIGATIONS OF THE PARTNERS
LEGAL RELATIONS CREATED BY A CONTRACT OF PARTNERSHIP

1. Relations between partners;

2. Relations between the partners on one hand and the partnership
on the other hand;
3. Relations between the partners on one hand and the third
persons on the other hand;
4. Relations between the partnership and the third persons
EXAMPLES OF OBLIGATIONS AND RIGHTS OF A PARTNERS
EXAMPLES OF OBLIGATIONS AND RIGHTS OF A PARTNERS
OBLIGATION OF EVERY PARTNER
1. The obligation to contribute what had been promised.
2. The obligation to deliver the fruits thereof
3. Obligation to warranty
MANNER OR APPRAISAL (ART. 1787)
1. By stipulation; or
2. In the absence of stipulation, by experts chosen by the
partners according to the
current prices.
ESSENCE OF PARTNERSHIP (ART. 1788)

It is a settled rule that where a partner who has undertaken to contribute a sum of
money fails to do so, he becomes a debtor of the partnership for whatever he may have
promised to contribute and for interests and damages from the time he should have
complied with his obligation. Being a contract of partnership, each partner must share in
the profit and losses of the venture.
ESSENCE OF PARTNERSHIP (ART. 1788)

Cases covered of the liability

1. Money promised by a partner is not given on time; and
2. Money of the partnership is converted to partner’s own use.
ESSENCE OF PARTNERSHIP (ART. 1788)

Demand is not necessary

1. In the case of contribution, because time is of the essence, a partnership is
formed precisely to make use of the contributions, and this use should start
from its formation, unless a different period has been set; otherwise the firm is
necessarily deprived of the benefits thereof. Thus, injury is constant.
2. In the case of conversion, demand is also not necessary, even if no actual
injury results, the liability exists, because the article is absolute.
CAPITALIST PARTNER VS. INDUSTRIAL PARTNER
CAPITALIST PARTNER VS. INDUSTRIAL PARTNER
• The capitalist partners may exclude the industrial partner from the
partnership plus damages; or
• The capitalist partners may avail themselves of the benefits which the
industrial partner may have obtained plus damages.
OBLIGATIONS OF CAPITALIST PARTNER TO CONTRIBUTE ADDITIONAL CAPITAL

GENERAL RULE:
Ø Capitalist partners are not bound to contribute additional capital.
EXCEPTIONS:
Ø Stipulation
Ø In case of imminent loss of the business of the partnership to save the
venture. IF the capitalist partner refuse to contribute additional capital, they
shall be obliged to sell their interest to the other capitalist partners who are
willing to contribute additional capital.
OBLIGATION OF MANAGING PARTNER WHO COLLECTS
DEBT
Requisites:
• The existence of at least 2 debts (one where the managing
partner is the creditor and the other where the partnership is the
creditor); and
• Both sums are demandable.
OBLIGATION OF MANAGING PARTNER WHO COLLECTS DEBT

ART. 1792 VS. ART. 1793

ART. 1794 – DAMAGES SUFFERED BY THE PARTNERSHIP THROUGH THE FAULT OF
A PARTNER

Rule

• Damages suffered by the partnership through the fault or negligence of a

partner are not generally subject to set-off with the profit and benefits which
that partner may have earned for the partnership by his industry.
Mitigation of liability by the courts
• In case of a partner’s extra ordinary efforts in other activities of the
partnership, unusual profits have been realized
RISK OF LOSS (ART. 1795)

1. Specific and determinate things which are not fungible

2. Fungible things
3. Things contributed to be sold
4. Things brought and appraised in the inventory
OBLIGATION OF THE PARTNERSHIP TO EVERY PARTNER

1. To refund the amounts a partner may have disbursed on behalf of the

partnership plus the interest from the time the expenses were made.
2. To answer to each partner for obligations, he may have contracted
into in good faith in the interest of the partnership, and for the risks in
consequence of its management.
RULES FOR DISTRIBUTION OF PROFITS AND LOSSES

DISTRIBUTION OF PROFITS

1. According to agreement
2. If there is no agreement
a. Capitalist partner
• In proportion to what he may have contributed in the partnership.
b. Industrial partner
• That which is just and equitable under the circumstances.
RULES FOR DISTRIBUTION OF PROFITS AND LOSSES
DISTRIBUTION OF LOSSES

1. According to agreement
2. If there is no agreement
a. Capitalist partner
• In proportion to what he may have contributed in the partnership.
b. Industrial partner
• Not liable for losses
RULES FOR DISTRIBUTION OF PROFITS AND LOSSES
THIRD PERSON DESIGNATING THE SHARE OF PARTNERS IN THE
PROFIT
AND LOSSES

GENERAL RULE:
• It is valid.
EXCEPTION:
• It is not valid, and it may be questioned if it is manifestly inequitable, unless:
• A partner began to execute the decision of the third person; and
• A partner has not questioned the said decision of the third person within a
period of three months from the time he had knowledge thereof.
RULES FOR DISTRIBUTION OF PROFITS AND LOSSES (ART. 1799)

GENERAL RULE:
• A stipulation excluding one or more partners from any share in profits and
losses is void. Take note that what is void is the stipulation and not the contract
of partnership.
Hence, the profits and losses shall be distributed as if there was no agreement.

EXCEPTION:
• An industrial partner is not liable for losses unless he waives his rig
RULES FOR DISTRIBUTION OF PROFITS AND LOSSES (ART. 1799)

• WHY AN INDUSTRIAL PARTNER IS NOT LIABLE FOR LOSSES?

1. While capitalist partners can withdraw their capital, the industrial partner
cannot withdraw any labor or industry he had already exerted.

2. He already has shared in the losses in that, if the partnership shows no profit,
this means that he has labored in vain.
WHO SHALL MANAGE THE PARTNERSHIP?

• Either one, some or all of the partners designated as managing partner/s

either in the articles of partnership or after the contract of partnership had
already been constituted. If there is no agreement, management is vested in
all of the partners.
WHO SHALL MANAGE THE PARTNERSHIP?

• TWO MODES OF APPOINTMENT

1. Appointment as manager in the articles of partnership; or
2. Appointment as manager made in an instrument other than
the articles of partnership
WHO SHALL MANAGE THE PARTNERSHIP?

1. Appointment as manager in the articles of partnership

GENERAL RULE
• Power is irrevocable without just or lawful cause.
EXCEPTION
• To remove him for just cause, vote of the partners having
controlling interest is necessary.
• To remove him without just cause, there must be unanimity
including his own vote.
WHO SHALL MANAGE THE PARTNERSHIP?

1. Appointment as manager in the articles of partnership

EXTENT OF POWER:
• If he acts in good faith, he may do all acts and administration
despite the opposition of his partners
• If he acts in bad faith, he cannot do any act of administration
WHO SHALL MANAGE THE PARTNERSHIP?
2. Appointment as manager made in an instrument other than the articles of
partnership.

RULE:
• The power may be revoked at any time, with or without just cause by the
partners owning the controlling interest.
EXTENT OF POWER:
• The manager can do all acts of administration
WHO SHALL MANAGE THE PARTNERSHIP?

WHEN TWO OR MORE MANAGERS HAVE BEEN ENTRUSTED WITH THE

MANAGEMENT

REQUISITES:
• Two or more partners are managers;
• There is no specification of respective duties;
• There is no stipulation requiring unanimity, that is, that one of them
shall not act without the consent of the others.
WHO SHALL MANAGE THE PARTNERSHIP?

WHEN TWO OR MORE MANAGERS HAVE BEEN ENTRUSTED WITH THE

MANAGEMENT

GENERAL RULE
• Each one may separately execute all acts of administration.
EXCEPTIONS: IF ANY OF THE MANAGERS SHALL OPPOSE
• The decision of the majority (per head) of the managing partners
shall prevail.
• In case of a tie, the decision of the managing partners owning the
controlling interest (more than 50%) shall prevail.
WHO SHALL MANAGE THE PARTNERSHIP?

RULES WHEN MANNER OF MANAGEMENT HAS NOT BEEN AGREED UPON

1. All the partners shall be considered as managers

2. For important alterations in immovable property, unanimity is required.
WHO CAN DEMAND TRUE AND FULL INFORMATION?

1. Any partner
2. Legal representative of any deceased partner; and
3. Legal representative of any partner under legal disability
EFFECT OF VIOLATION OF ART. 1808

1. The capitalist partner shall bring to the common fund any

profits accruing to him; and
2. The capitalist partner shall personally bear all the losses.
INDUSTRIAL PARTNER VS. CAPITALIST
PARTNER