Partnership, Agency and

Trust

Charizma I. Cortez-Catague
 Topics
General principles of partnership

Rights and Obligations

Dissolution, Winding Up and Termination

Limited Partnership

Agency

Trust
GENERAL PRINCIPLES OF
PARTNERSHIP
 CONCEPT

● 1767 – by the contract of partnership two

or more persons bind themselves to
contribute money, property, 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
 Practice of Profession

● Strictly speaking, the practice of profession

is not an enterprise for profit.

● It is the individual partners who engage in

the practice of profession and are
responsible for their own acts. The law
does not allow exercise of profession by a
corporate entity or a partnership.
 Article 1767
● Legal definition of partnership

● Civil Code speaks of partnership as a

Contract

● Partnership has a juridical personality of its

own, distinct and separate from that of
each of the partners
 Article 1767
● In our jurisdiction, partnership, except
general professional partnerships, are
treated for income tax purposes as
CORPORATIONS and subject to tax as
such.
 Article 1767
● Paragraph 2 of article 1767 = general
professional partnership

● Article 1767, par. 2 = exercise of a

profession.

● Profession = a group of men pursuing a

learned art as a common calling in the
spirit of public service – no less a public
service because it may be incidentally be a
means of livelihood.
 Partnership for the practice of law
● A mere association for non-business
purpose.

● Cannot be likened to a business because

practice of law is intimately and peculiarly
related to the administration of justice and
should not be considered like an ordinary
“MONEY-making trade”.
Characteristic elements of partnership

● Consensual
● Nominate = it has a special name or
designation in our law
● Bilateral = entered into by 2 or more
persons and the rights and obligations
arising therefrom are ALWAYS reciprocal
● Onerous
● Commutative = the undertaking of each of
the partners is considered as the
equivalent of that of the others
Characteristic elements of partnership

● Principal = because it does not depend for

its existence or validity upon some other
contracts

● Preparatory = entered into as a means to

an end, i.e. to engage in business or
specific venture
 ESSENTIAL FEATURES
1. Valid contract

2. Parties must have legal capacity to

enter into a contract

3. Mutual contribution of money,

property or industry to a common fund
 ESSENTIAL FEATURES

4. Object must be lawful

5. Primary purpose must be to obtain

profits and to divide the same among
the parties
First feature: There must
be a valid contract
 1st Feature: Existence of a
valid contract
● Voluntary relation created by
parties

● Excludes associations not

originating from contracts, express
or implied

● Excludes religious societies,

conjugal partnerships
● Usually covered by articles of
partnership which states the
partnership name, powers, rights,
liabilities, profits and losses
sharing, procedure for dissolving
the PP
 Form of Partnership
● Oral
● Written
● Express
● Implied from the acts and declarations of
the parties, subject to the provisions of
articles 1771 and 1773 and Statute of
Frauds
 Form of Partnership
General Rule:NO special form is
required for the validity of the
contract of partnership
Exceptions:
1.Where immovable property/real rights are contributed
1. Public instrument is necessary
2. Inventory of the property contributed must be made, signed by the parties and attached to the public instrument otherwise it is
VOID
2.Where capital is Php3,000 or more, in money or property
1. Public instrument is necessary
2. Must be registered with SEC
 Form of Partnership
General Rule: NO special form is required for the validity of the contract of partnership

Exceptions:
1.Where immovable property/real rights are
contributed
1. Public instrument is necessary
2. Inventory of the property contributed
must be made, signed by the parties and
attached to the public instrument
otherwise it is VOID
2.Where capital is Php3,000 or more, in money or property
1. Public instrument is necessary
2. Must be registered with SEC
 Form of Partnership
General Rule: NO special form is required for the validity of the contract of partnership
Exceptions:
1.Where immovable property/real rights are contributed
1. Public instrument is necessary
2. Inventory of the property contributed must be made, signed by the parties and attached to the public
instrument otherwise it is VOID

2.Where capital is Php3,000 or

more, in money or property
1. Public instrument is necessary
2. Must be registered with SEC
 Prevailing Principle in
Partnership
● DELECTUS PERSONAE-
literally means “choice of the
persons”. This means no one
becomes a member without the
consent of the partners
 FORM
● GENERAL RULE: May be express or implied, oral or
written

● EXCEPTIONS: 1771-1773

● 1771 – where immovable property or real rights are

contributed thereto, must be in a public instrument (art.
1771 must be read together with Article 1773 and
COMPLIANCE is absolute an indispensable for
VALIDITY)

● 1772- where capital is P3,000 or more, must be in a

public instrument recorded with SEC
 Article 1772:
Registration of Partnership
● Partnership with capital of Php3000 or more
● The contract must appear in a public instrument
● It must be recorded or registered with the SEC

However, failure to comply with the above requirements does

not prevent the formation of the partnership (art. 1768), or
affect its liability and that of the partners to third persons.

Partners is granted the right by law (art. 1357, 1358) to

compel each other to execute the contract in a public
instrument. (this is not available if the partnership is void
under Article 1773)
 Article 1773
● 1773- when immovable is contributed, there
must be an inventory of the property signed
by the parties and attached to a public
instrument
● MADE, SIGNED BY THE PARTIES and
ATTACHED TO THE PUBLIC INSTRUMENT

● 1403[2]- contract by its terms is not to be

performed within one year from making
thereof (Statute of Frauds) - unenforceable
When inventory is NOT REQUIRED
● Article 1773 does not apply in the case of
immovable property which may be
possessed or even owned by the
partnership but not contributed by any of
the partners.

● Ex. To operate a fishpond (as against TO

ENGAGE IN A FISHPOND BUSINESS)
 If formalities are not
complied with
● VOID partnership as between partners

● BUT, a de facto partnership or

partnership by estoppel exists as to
liability to third persons
 Requisites:
● All the essentials of a valid contract must
be present:
● Consent and capacity of the contracting
parties
● Object which is the subject matter of the
contract
● Cause which is established
 Second Feature: Parties
must have legal capacity to
contract
 Who are permitted to enter into
partnership contract?
● Persons with legal capacity to enter into
the contract
● Partnership – there is no prohibition being
a partner in another partnership
● Corporation – only IF authorized by statute
or by its charter, a corporation is without
capacity or power to enter into a contract of
partnership.
 Disqualified parties
● Unemancipated minors
● Insane or demented persons
● Deaf-mutes who do not know how to read and
write
● Persons who are suffering from civil interdiction
● Incompetents who are under guardianship
● 1782 – persons who are prohibited from giving
each other any donation or advantage cannot
enter into universal partnership
Who are prohibited to donate to one
another?
● Spouses except moderate gifts on the
occasion of family rejoicing (87, FC)
● 739
● Between those guilty of adultery or
concubinage at the time of donation
● Between those found guilty of the same
criminal offense in consideration thereof
● Those made to a public officer or spouse,
descendants and ascendants, by reason of
his office
 Partnership + Partnership =
Partnership
● Partnerships may be partners in another
partnership

● Example: Catague, Catague, Cortez partnership

may enter into another partnership with
Magbanua to form Catague, Catague, Cortez,
Magbanua Partnership or Catague & Catague
may enter into a partnership with Impas &
Impas to form Catague, Catague, Impas, Impas
Partnership
 A + Corp. = no partnership
Corp. + Corp. = No partnership
Partnership + Corp. = no
partnership
● Corporations cannot be partners but
may engage in joint ventures where
the business of the venture is in line
with the business authorized by the
charter (J.M. Tuazon v. Bolanos, 95
Phil 106)
 Bar 1994

● Can 2 corporations organize a general

partnership under the Civil Code?

● Can a corporation and an individual form

a general partnership?
Third Feature: Contribution
of money, property or
industry to a common fund
 What can be contributed

● Money – currency which is the legal tender

in the Philippines; checks, drafts, PN must
be encashed

● Property – real or personal, corporeal or

incorporeal

● Industry – active cooperation, the work of

the party associated. In absence of money
or property or in concurrence with the two
The object must be lawful
 Unlawful object

● Contrary to law, morals, good customs,

public order, public policy (1306)

● Effect if object is unlawful: NO

partnership arises

● Examples: to create illegal monopolies,

carry on gambling, engage in smuggling,
to lease furnished apartments for
government contracts
 Legality of the object

● A partnership is dissolved by operation of

law upon the happening of an event which
makes it unlawful

● Profits and instruments and tools and

proceeds of the crime shall be confiscated in
favor of the government
 Legality of the object
● If the partnership is void, partners cannot
sue to collect earnings made by an
unlawful partnership

● Partial illegality – can collect as to

earnings emanating from partial legality
 Fourth Feature: Object
must be to obtain profits
 Purpose to obtain profits
● The idea of gaining pecuniary
profit is the very reason for the
existence of a partnership. This
element distinguishes the contract
of partnership from voluntary
religious or social organizations
(Council of Red Men v. Veterans
Army, 7 Phil 685)
 Sharing of profits/losses
● Sharing is not necessarily in equal shares

● Sharing is PRESUMPTIVE not

CONCLUSIVE evidence of partnership

● Sharing of profits = sharing of losses

 Sharing of profits/losses
● A stipulation which excludes one or more
partners from any participation in the profits (or
losses) is VOID. Article 1799

● The object of partnership is primarily sharing of

profits, while the distribution of losses is but a
consequence of the same… the right to share in
the profit carries with it the duty to contribute to
the losses, if any.
 NO PRESUMPTION OF PARTNERSHIP
FROM RECEIPT OF PROFITS IF:
1. As debt by installment
2. As wages or rent
3. As annuity
4. As interest on loan
5. As consideration for sale of goodwill of
business/other property by installments
PERSONALITY
OF A
PARTNERSHIP
 Article 1768

● 1768 – the partnership has a juridical

personality separate and distinct
from that of each of partners even in
case of failure to comply with the
requirements of Article 1772, first
paragraph.
 Effect of failure to comply
with statutory requirements
● 1772, 1st paragraph – if capital is
P3,000 or more, must appear in a
public instrument and recorded with
SEC

● Even if no compliance with above

requirement, shall not affect liability
of PP as to 3rd persons
Effect of failure to comply with statutory
requirements
● However, under Articles 1773 and 1775,
the partnership shall not acquire any
juridical personality because the contract
itself is VOID.
 Partnership Liability

GENERAL RULE:
Partners cannot be sued for
partnership liability.
 Partnership Liability

EXCEPTIONS:

● Exhausted partnership property = partners

can be held liable on a pro rata basis OR
● the legal fiction of a different juridical
personality is being used for fraudulent,
unfair or illegal purpose (Aguila v. CA, 316
SCRA 246)
 Article 1769
Indicators of Partnership
(Rules to determine existence of
partnership)
In case of doubt, this article will
apply.
 Indicators of Partnership

●Except as provided under 1825,

persons who are not partners as to
each other are not partners as to 3rd
persons
Note: it is the SUBSTANCE and not
the name of the arrangement
between them which determines
their legal relation toward each
other.
 Indicators of Partnership

● 1825 – where persons by their acts,

consent or representations have misled
3rd persons into believing that the
former are partners in a non-existing
partnership, such persons become
subject to liabilities of partners to all
who, in good faith, deal with them in
their apparent relations.
 Indicators of Partnership

● Co-ownership or co-possession
does not by itself establish a
partnership, where the co-owners
or co-possessors do not share any
profits made by the use of the
property
 Indicators of Partnership

● 2 isolated transactions whereby 2 parcels

of land were purchased then another 3
parcels were bought and sold the same a
few years thereafter did not make them
partners. There must be a clear intent
to form a partnership (Pascual v. CIR,
166 SCRA 560)
 Co-ownership v. Partnership

● Partnership : Heirs agreed, after

partition to use common properties
and income therefrom as a common
fund with the intention of making
profit in proportion to their shares in
the inheritance (Ona v. CIR, 45
SCRA 74)
 Co-ownership v. Partnership

● Where the original purpose was to

divide the lots for residential purposes but
discovering that this plan was not feasible
the children resold the same to dissolve
the co-ownership. The division of
profits was merely incidental to the
dissolution of the co-ownership.
There was no partnership to speak of
(Obillo v. CIR, 139 SCRA 436)
 Indicators of Partnership

● The sharing of gross returns does

not by itself establish a partnership,
whether or not the persons sharing
have a joint or common right or
interest in any property from which
the returns are derived
 Indicators of Partnership

● In partnership, there is a sharing of

both profits and losses.
 Gross Returns v. Net
Profits
● If A, B and C entered into a transaction
which yielded P1 Million in earnings and
they divided the same among themselves,
they shared gross returns.

● Partnership is not established

Gross Returns v. Net Profits

● If A, B & C entered into a transaction

which yielded P1 Million and their
expenses amount to P200,000, if they
share the net amount of P800,000, that
is indicative of the existence of a
partnership
 Indicators of Partnership

● GENERAL RULE: The receipt

by a person of a share in the
profits of a business is prima
facie evidence that he is a
partner in the business
 EXCEPTIONS:
If profit was payment for:
● For a debt by installment or
otherwise
● As wages by an employee or rent to
a landlord
● As an annuity to a widow or
representative or a deceased
partner
 EXCEPTIONS:
If profit was payment for:

● As interest on a loan, though the

amount may vary with profits of the
business
● As consideration for the sale of a
goodwill of a business or other
property by installments or
otherwise
 Other indicators of the
existence of a partnership
● Partners share in the profits and losses

● Equal rights in the management and

conduct of the partnership business

● Every partner is an agent of the

partnership. Each can bind the other
partners by his acts for the purpose of
the business
 Other indicators of the
existence of a partnership

● All partners are personally liable for the debts

of the partnership with their respective
property except that limited partners are not
bound beyond their investment

● A fiduciary relation exists among partners

● On dissolution, the partnership is not

terminated but continues until winding up is
completed
 No valid and legal partnership if:
● No compliance with 1773 – when immovable is
contributed if there is no inventory signed by the
parties and attached to the public instrument

● 1775- associations and societies whose articles are

kept secret among the members and where any
one of the members may contract in his own name
with 3rd persons shall have NO JURIDICAL
PERSONALITY and shall be governed by laws on
co-ownership
 PARTNERSHIP VS
OTHER CONTRACTS
Partnership v. Business Trust

● In partnership, the partners are all

principals and agents for each other

● In trust, the trustee is only a principal and

is not an agent. Only the trustee is the
one empowered to make contracts to
carry on the business affairs. (remember:
parties in trust are beneficiary and
trustee)
 Partnership v. Co-ownership
Always created by a K Created by law
Personality separate NO separate and
and distinct from the distinct personality
partners
Purpose is realization Common enjoyment
of profits even without profit
sharing
No limit in duration Cannot exceed 10
years
 Partnership v. Co-ownership
If partner sells his interest A co-owner may freely
to another, the latter dispose of his interest
DOES not become a partner,
UNLESS agreed upon by the partners

A partner may bind the A co-owner cannot

partnership absent any represent the co-
stipulation to the contrary ownership

Death of a partner results Death of a co-owner does

in dissolution not necessarily lead to
dissolution
 Partnership v. Co-ownership
May be dissolved at any May be dissolved anytime
time by the will of any or by the will of any or all of
all of the partners the co-owners

# of incorporators: # of incorporators:
minimum of 2 persons minimum of 2 persons
Partnership v. Conjugal Partnership

Composed of Between future

partners of either sex spouses

Governed by Governed by law

stipulation of parties
Has juridical Has no juridical
personality personality
 Partnership v. Conjugal
Partnership
Begins from execution Starts on the date of
of the contract celebration of marriage
Purpose is to obtain Purpose is to regulate
profits the property relations
of the spouses
Distribution of profits Shares of the spouses
are divided based on in the profits are
the agreement of the divided equally
partner
Partnership v. Conjugal Partnership

Management is Administration
shared equally among belongs to both
partners unless one is spouses jointly
appointed manager

Whole interest may be The share of a spouse

disposed without cannot be disposed
consent of other without consent of
partners the other
Partnership v. Corporation
Created by mere Created by law or
agreement of the operation of law
parties
Organized by 2 or At least five
more persons incorporators except a
corporation sole
Starts from execution Starts to exist from
of the K date of issuance of
certificate of
incorporation of the
SEC
Partnership v. Corporation

May exercise power Only powers expressly

authorized by the granted by law or
partners implied therefrom may
be exercised
Governed by the Civil Governed by the Revised
Corporation Code of the
Code Philippines

When management is Board of directors or

not agreed on, every trustees does business
partner is an agent of and manages its affairs
the partnership
Partnership v. Corporation
Partners are liable Stockholders are liable to
subsidiarily and the extent of shares
personally
Partner cannot transfer Stockholders can
interest to make transfer interest without
assignee a partner the consent of others
Limited partnership must May adopt any firm name
have “Ltd.” to its name provided it is not the
same or similar as an
existing one
Partnership v. Corporation
Has no right of Has right of succession
succession

May be dissolved at any Can only be dissolved

time by the will of any or with the State’s consent
all the partners
Partners can sue a co- Suit must be in the
partner who name of the corporation
mismanages
SIMILARITIES BETWEEN
PARTNERSHIP AND CORPORATION

1. Both have juridical personality separate and

distinct from that of the individuals composing
it
2. Both can only act through agents
3. Both organizations are composed of an aggregate of
individuals (except corporation sole)
4. Both distribute profits to those who contribute capital to the
business
5. Both can only be organized when there is a law authorizing
their organization
6. Both are taxable as a corporation
SIMILARITIES BETWEEN
PARTNERSHIP AND CORPORATION
1. Both have juridical personality separate and distinct from that of the individuals composing it

2. Both can only act through agents

3. Both organizations are
composed of an aggregate of
individuals (except corporation
sole)
4. Both distribute profits to those who contribute capital to the business
5. Both can only be organized when there is a law authorizing their organization
6. Both are taxable as a corporation
SIMILARITIES BETWEEN
PARTNERSHIP AND CORPORATION
1. Both have juridical personality separate and distinct from that of the individuals composing it
2. Both can only act through agents
3. Both organizations are composed of an aggregate of individuals (except corporation
sole)

4. Both distribute profits to those who

contribute capital to the business
5. Both can only be organized when there
is a law authorizing their organization
6. Both are taxable as a corporation
EFFECTS OF UNLAWFUL
PARTNERSHIP
1. The contract is void ab initio and the
partnership never existed in the eyes of
the law
2. The profits shall be confiscated in favor
of the government
3. The instrument or tools and proceeds of the crime shall also be forfeited
in favor of the government
4. The contribution of the partners shall not be confiscated unless they fall
under No.3
EFFECTS OF UNLAWFUL
PARTNERSHIP
1. The contract is void ab initio and the partnership never existed in the eyes
of the law
2. The profits shall be confiscated in favor of the government

3. The instrument or tools and

proceeds of the crime shall also be
forfeited in favor of the government
4. The contribution of the partners shall
not be confiscated unless they fall
under No.3
Classification of
Partnerships
 Classification

● As to extent of subject matter

● As to liability of partners
● As to duration
● As to legality of existence
● As to representation as to other persons
● As to publicity
● As to purpose
As to extent of subject matter

1. Universal partnership – refers to all

present property or to all profits (1777)
a. Universal partnership of all present
property (1778)
b. Universal partnership of profits (1780)

2. Particular partnership (1783) – the object

is determinate things, their use or fruits, or
a specific undertaking or the exercise of a
profession or vocation
 Universal partnership of all
present property (1778)
● Partners contribute all the property they own
to a common fund

● Properties become the common property of

all partners including the profits therefrom

● Excludes properties acquired subsequently

by inheritance, legacy or donation, EXCEPT
the fruits
 Universal Partnership of Profits
(1780)
● PROFITS – those acquired by partners'
industry or work during the partnership

● Includes usufruct of the movables or

immovables

● Excludes movables or immovables

possessed at the time of the contract AND
profits acquired though chance
 Universal Partnerships
● Articles of universal partnership
without specifying the nature shall
be deemed universal partnership
of profits (1781)

Note: Persons who are prohibited from

giving each other any donation
cannot enter into universal
partnerships (1782)
 Universal Partnerships
● Spouses cannot enter into a universal
partnership but may enter into a particular
partnership. The marriage did not dissolve the
limited partnership. What the law prohibits is
for them to enter into universal partnership
since this would be a circumvention of the
prohibition against donation (CIR v. Suter, 27
SCRA 152)
 PARTICULAR PARTNERSHIP
Has for its objects:
a.Determinate things
b.Their use or fruits
c.Specific undertaking
d.Exercise of profession or vocation
 As to liability of partners

● General partnership – partners are liable

pro rata and subsidiarily (1816) and
sometimes solidarily (1822-1824) with
their separate property for partnership
debts

● Limited partnership – two or more are

general partners while one or more are
limited partners who are not liable for the
partnership’s obligations (1843)
 Liability in a
General Partnership
● GENERAL RULE: partners cannot be
held liable for liability of the
partnership

● EXCEPTION: After partnership

properties have been exhausted, all
partners, including industrial ones
shall be liable pro rata with all their
property (1816)
 Liability in a
General Partnership
● EXCEPTION: loss or injury
caused by a wrongful act or
omission of a partner which was
authorized by the co-partners, the
PP shall be liable to the same
extent as the partner so acting
(1822)
 Liability in a
General Partnership
● EXCEPTION: If there is mis-
application of any money or property
either by a partner so authorized or by
the PP, the PP shall be bound to make
good the loss
•

● EXCEPTION: when a partner or the

partnership itself receives money or
property and misapplies it, partners
shall be solidarily liable (1822-1824)
 As to duration

● Partnership at will – no time is specified

and is not formed for a particular purpose,
may be terminated at any time or by will of
1 partner alone (1785)

● Partnership with a fixed term – time is

fixed and for a particular undertaking,
upon completion of term of termination of
undertaking the partnership is dissolved
As to legality of existence

● De jure – complied with all legal

requirements

● De facto - failed to comply with

legal requirements
As to representation to others

● Ordinary and real partnership – actually

exists between partners and also as to 3rd
persons
● Ostensible or partnership by estoppel
– in reality is not a partnership but is
considered as a partnership only in
relation to those who, by their conduct or
admission are precluded to deny or
disprove its existence
 AS TO PUBLICITY
● SECRET PARTNERSHIP – one wherein
the existence of certain persons as
partners is not avowed or made known to
the public by any of the partners
● OPEN OR NOTORIOUS PARTNERHIP –
one whose existence is avowed or made
known to the public by members of the firm
 AS TO PURPOSE
● COMMERCIAL OR TRADING
PARTNERSHIP – one formed for the
transaction of business
● PROFESSIONAL OR NON-TRADING
PARTNERSHIP – one formed for the
exercise of a profession
KINDS OF PARTNERS
 Kinds of Partners

● Capitalist partner – one who contributes

money or property to the common fund

● Industrial partner – one who contributes

only his industry or personal service

● General partner – one whose liability to 3rd

persons extends to his personal property
 Kinds of Partners
● Limited partner – one whose liability to 3rd persons
is limited to his capital contribution

● Managing partner – one who manages the affairs

or business of the partnership; appointed either in
the articles of partnership or after the constitution of
the partnership

● Liquidating partner – one who takes charge of the

winding up of partnership affairs upon dissolution
 Kinds of Partners

● Partner by estoppel or quasi partner– one

who is not really a partner but is liable as a
partner for the protection of innocent 3rd
persons

● Continuing partner – one who continues to

be a partner after dissolution by reason of
admission of a new partner, or retirement,
death or expulsion of one or more partners
 Kinds of Partners

● Surviving partner – one who remains after

a partnership has been dissolved by
death of a partner

● Subpartner – one who is not a member of

the partnership but contracts with a
partner with reference to the latter’s share
in the partnership
 KINDS OF PARTNERS

● OSTENSIBLE PARTNER – one who takes

active part and known to the public as partner
in the business
● SECRET – one who takes active part in the
business but is not known to be a partner by
outside parties
 KINDS OF PARTNERS
● SILENT – one who does not take any
active part in the business although he
may be known to be
● DORMANT – one who does not take active
part in the business and is not known or
held out as a partner