TOPIC 2: OBLIGATIONS OF THE PARTNERS
(ENGAGE)
Activity 1.
What do you the think are the obligations of the partners in a contract of partnership?
List as much as you can.
(EXPLORE AND EXPLAIN)
OBLIGATION OF PARTNERS TO THE PARTNERSHIP WITH RESPECT TO
CONTRIBUTION OF MONEY OR PROPERTY
With respect to contribution of property, a partner is obliged to:
(1) To contribute, at the beginning of the partnership or at the stipulated time, the
money, property or industry which he undertook to contribute;
(2) In case a specific and determinate thing is to be contributed:
(a) To warrant against eviction in the same manner as a vendor; and
(b) To deliver to the partnership the fruits of the property promised to be
contributed, from the time they should have been delivered, without need of demand
[Article 1786];
(3) In case a sum of money is to be contributed, or in case he took any amount from
the partnership coffers, to indemnify the partnership for:
(a) Interest; and
(b) Damages, from the time he should have complied with his obligation, or
from the time he converted the amount to his own use, respectively [Article 1788].
Article 1788 is an exception to the general rule that in obligations consisting in the
payment of a sum of money, the indemnity for damages consists only in the payment of
interest [Article 2209].
AMOUNT OF CONTRIBUTION
General rule: The partners are obliged to contribute equal shares to the capital of the
partnership.
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Exception: When there is an agreement to the contrary, the contribution shall follow
such agreement [Article 1790].
DETERMINING VALUE OF CONTRIBUTION IN GOODS
To determine the value when the contribution consists, in whole or in part, of goods,
their appraisal must be made:
(1) In the manner prescribed in the partnership contract;
(2) In the absence thereof, by experts chosen by the partners and according to current
prices.
Subsequent changes in the price will be for the benefit or will be suffered by the
partnership [Article 1787].
ADDITIONAL CAPITAL CONTRIBUTION
In case of an imminent loss of the business of the partnership, any partner who refuses
to contribute 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, unless there is an agreement
to the contrary [Article 1791].
Requisites:
(1) There is an imminent loss of the business of the partnership;
(2) The majority of the capitalist partners are of the opinion that an additional
contribution to the common fund would save the business;
(3) The capitalist partner refuses deliberately (not because of financial inability) to
contribute an additional share to the capital; and
(4) There is no agreement that even in case of imminent loss of the business, the
partners are not obliged to contribute.
PROHIBITION AGAINST ENGAGING IN BUSINESS
General rule: A capitalist partner cannot engage for his own account in any operation
which is of the kind of business in which the partnership is engaged. Should he do so, he shall
bring to the common fund any profit accruing to him from his transactions,
while personally bearing all the losses.
Exception: The rule does not apply when there is a stipulation to the contrary [Article
1808].
RISK OF LOSS OF THINGS CONTRIBUTED
In case the contribution consists in the use and fruits of specific and determinate things,
which are not fungible, the risk of loss shall be borne by the partner who owns them.
The partnership bears the risk if the things:
(1) Are fungible;
(2) Cannot be kept without deterioration;
(3) Were contributed to be sold; or
(4) Were brought and appraised in the inventory.
In the last case, the claim is limited to the appraised value of the things.
REMEDY IN CASE OF NON-COMPLIANCE
A partner is guilty of estafa if he misappropriates partnership money or property
received by him for a specific purpose of the partnership. However, mere failure on the part
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of an industrial partner to return to the capitalist partner the capital brought by him into the
partnership is not an act constituting estafa. The action that may be brought to recover the
money is a civil one.
OBLIGATION OF PARTNERS TO THE PARTNERSHIP
WITH RESPECT TO CONTRIBUTION OF INDUSTRY
With respect to contribution of industry, a partner is also obliged to contribute it at the
stipulated time.
PROHIBITION AGAINST ENGAGING IN BUSINESS
General rule: An industrial partner cannot engage in business for himself. Should he
do so, the capitalist partners, as well as industrial partners may either:
(1) Exclude him from the firm; or
(2) Avail themselves of the benefit which he may have obtained.
Exception: He may engage in business for himself when the partnership expressly
permits him to do so.
RIGHT TO APPLY PAYMENT TO PARTNERSHIP CREDIT
General rule: A partner authorized to manage, who collects a demandable sum owed
to him in his own name from a person who also owes the partnership a demandable sum, is
obliged to apply the sum collected to both credits pro rata, even if he issued a receipt for his
own credit only.
Requisites:
(1) There exist at least two debts, one where the collecting partner is creditor, and the
other, where the partnership is the creditor;
(2) Both debts are demandable; and
(3) The partner who collects is authorized to manage and actually manages the
partnership.
Exceptions:
(1) In case the receipt was issued for the account of the partnership credit only,
however, the sum shall be applied to the partnership credit alone.
(2) When the debtor declares, pursuant to Article 1252, at the time of making the
payment, to which debt the sum must be applied, it shall be so applied [Article 1792].
The law, through this rule, safeguards the interests of the partnership by preventing the
possibility of their being subordinated by the managing partner to his own interest, by
intentionally failing to collect partnership credits to collect his own, to the prejudice of the
other partners. This possibility does not exist in case the partner is not authorized to manage
[De Leon (2010)].
RIGHT TO RETURN OF CREDIT RECEIVED
A partner, who is authorized to manage or not, is obliged to bring to the partnership
capital what he received when:
(1) He 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.
This obligation exists even when he issued a receipt for his share only. [Article 1793]
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Ratio: In this case, the debt becomes a bad debt. It would be unfair for the partner who
already collected not to share in the loss of the other partners.
RIGHT TO INDEMNITY FOR DAMAGES
Every partner is responsible to the partnership for damages suffered by it through his
fault.
COMPENSATION OF LIABILITY
General rule: The liability for damages cannot be setoff or compensated by profits or
benefits which the partner may have earned for the partnership by his industry.
Ratio: The partner has the obligation to secure the benefits for the partnership. As
such, the requirement for compensation, that the partner be both a creditor and a debtor of
the partnership at the same time, is not complied with [Article 1278; De Leon (2010)].
Exception: The court may equitably lessen the liability if, through his extraordinary
efforts in other activities of the partnership, unusual profits were realized [Article 1794].
Note, however, that there is still no compensation.
SUIT FOR DAMAGES
Before a partner may sue another for alleged fraudulent management and resultant
damages, liquidation must first be effected to determine the extent of the damage. Without
liquidation of partnership affairs, a partner cannot claim damages.
RESPONSIBILITY OF THE 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. As such, it is responsible to every partner:
(1) For amounts, and the corresponding interest from the time the expenses were
made, which he may have disbursed on behalf of the partnership;
(2) For obligations he may have contracted in good faith in the interest of the
partnership business; and
(3) For risks in consequence of the management of the partnership.
(ELABORATE AND EVALUATE)
Activity 2:
Summarize the obligations of the partners towards their own partnership.
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Assessment:
Discuss the rule to be applied in case there is a necessity for an additional capital
contribution.
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TOPIC 3: OBLIGATIONS OF THE PARTIES AMONG THEMSELVES
(ENGAGE)
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Activity 1.
If you are engaged in a contract of partnership, what could be your responsibilities
towards your other partners?
(EXPLORE AND EXPLAIN)
RIGHTS AND OBLIGATIONS OF PARTNERS INTER SE
RIGHT TO ASSOCIATE ANOTHER IN SHARE
Every partner may associate another person with him in his share. The admission of
the associate to the partnership, however, requires the consent of all the other partners, even
if the partner having an associate is a managing partner [Article 1804].
SUBPARTNERSHIP
The arrangement refers to a contract of subpartnership, which is a partnership within
a partnership, distinct and separate from the main partnership [De Leon (2010)]. The
associate is sometimes referred to as a subpartner. Since admission of the subpartner as a new
partner in the main partnership amounts to a modification of the original contract, it requires
the unanimous consent of the partners.
RIGHT TO ACCESS PARTNERSHIP BOOKS
The partnership books shall be kept at the place agreed upon by the partners. Without
such agreement, they shall be kept at the principal place of business of the partnership. Every
partner shall, at any reasonable hour, have access to and may inspect and copy any of them.
[Article 1805]
BASIS OF RIGHT
Since a partner is a co-owner of partnership properties, which include the books, and
has a right to participate in the management of its affairs, the books should not be in the
exclusive custody or control of any one partner [De Leon (2010)].
REASONABLE HOUR
"Any reasonable hour" has been interpreted to mean reasonable hours on business
days throughout the year, not merely during some arbitrary period of a few days chosen by
the managing partner.
RIGHT TO A FORMAL ACCOUNT
Any partner shall have the right to a formal account as to partnership affairs:
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(1) If he is wrongfully excluded from the partnership business or possession of its
property by his copartners;
(2) If the right exists under the terms of any agreement;
(3) If, without his consent, a partner has derived profits from any transaction connected
with the formation, conduct, or liquidation of the partnership or from any use of partnership
property;
(4) Whenever other circumstances render it just and reasonable [Article 1809].
ACCRUAL OF RIGHT
General rule: The right to a formal account of partnership affairs accrues only when
the partnership is dissolved. Ample protection is already provided.
Exceptions: In special and unusual cases under Article 1809, formal accounting may
be demanded even before dissolution.
PERSON OBLIGED
The obligation to account rests on the managing or active partner (or, after dissolution,
in the liquidating or surviving partner).
PRESCRIPTION OF ACTION
The right, on the part of the other partners, to demand an accounting exists while the
partnership exists. The prescriptive period begins to run only upon the dissolution when the
final accounting is done.
NATURE OF ACTION
The action for accounting is an action in personam, regardless of the incidental fact
that some of the assets of the partnership are real property.
(ELABORATE AND EVALUATE)
Activity 2:
Illustrate (draw) or attach a picture of the concept of a reasonable hour. Explain your
answer.
Assessment:
Summarize the obligations each partners among themselves.
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TOPIC 4: PROPERTY RIGHTS OF PARTNERS
(ENGAGE)
Activity 1.
In your own opinion, can a partner purchase a property in his/her own name? Why
or why not?
(EXPLORE AND EXPLAIN)
PROPERTY RIGHTS OF PARTNERS
IN GENERAL
The property rights of a partner are:
(1) Rights in specific partnership property;
(2) Interest in the partnership; and
(3) Right to participate in the management [Article 1810].
OWNERSHIP OF CERTAIN PROPERTY
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(1) The ownership of property used by the partnership depends on the intention of the
parties, which may be drawn from an express agreement or their conduct.
(a) A partner may allow the property to be used by the partnership without
transfer of ownership, contributing only the use or enjoyment thereof.
(b) He may also hold title to partnership property, without acquiring ownership
thereof [Article 1819].
(2) Property acquired by a partner with partnership funds is presumed to be partnership
property.
(3) The same presumption also arises when the property is indicated in the partnership
books as partnership asset.
(4) Other factors may be considered to determine ownership of the property.
RIGHTS IN SPECIFIC PROPERTY
The partners are co-owners of specific partnership property. As such:
(1) A partner has an equal right with his partners to possess such property for
partnership purposes. For other purposes, the consent of his partners is necessary. If the
partner is excluded, he may ask for:
(a) Formal accounting [Article 1809]; or
(b) Dissolution by judicial decree [Article 1831].
(2) A partner's right in such property is not assignable, except when all the partners
assign their rights in the same property.
(3) The right is not subject to attachment or execution, except on claim against the
partnership. Also, in case of such attachment, the partners, or any of them, or the
representatives of a deceased partner, cannot claim any right under the homestead or
exemption laws;
(4) The right is also not subject to legal support under Article 291 [Article 1811].
A partner's right in specific property cannot be separately assigned, since it is
impossible to determine the extent of his beneficial interest in the property until after the
liquidation of partnership affairs.
It is also not subject to support precisely because it is a property of the partnership and
not of the individual partners.
INTEREST IN THE PARTNERSHIP
A partner's interest in the partnership is his share of the profits and surplus [Article
1812]. This interest is subject to support and may be assigned.
RIGHTS OF ASSIGNEE
Assignment by a partner of his whole interest in the partnership does not, of itself:
(1) Dissolve the partnership; or
(2) Entitle the assignee to:
(a) Interfere in the management or administration of the partnership business
or affairs;
(b) Require information or account of partnership; or
(c) Inspect the partnership books.
It merely entitles the assignee to:
(1) Receive the profits to which the assigning partner was entitled;
(2) In case of fraud in management, avail himself of the usual remedies;
(3) In case of dissolution:
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(a) Receive his assignor's interest; and
(b) Require an accounting from the date only of the last account agreed to by
all the partners [Article 1813].
CHARGING OF PARTNERSHIP INTEREST BY PERSONAL CREDITOR OF
PARTNERS
Partnership creditors are preferred over the personal creditors of the partners as regards
partnership property [Article 1827].
However, on due application by any judgment creditor of a partner, a competent court
may:
(1) Charge the interest of the partner for the satisfaction of the judgment debt;
(2) Appoint a receiver of the share of the profits and of any other money due or to fall due to
the partner; and
(3) Make all other orders, directions, accounts and inquiries, which the debtor partner might
have made, or which the circumstances may require.
The interest charged may be redeemed before foreclosure or, in case of sale directed
by the court, may be purchased without causing dissolution:
(1) With separate property, by one or more of the partners; or
(2) With partnership property, by one or more of the partners, will consent of all,
except the debtor partner.
The partner debtor is not deprived of his right under exemption laws. [Article 1814]
CHARGING ORDER
A charging order subjects the interest in the partnership of the debtor partner with the
payment of an unsatisfied amount of a judgment debt against him, with the least interference
with the partnership business and the rights of the partners. By virtue of the order, any amount
or portion thereof which the partnership would otherwise pay to the debtor partner is instead
given to the judgment creditor [De Leon (2010)].
RIGHT TO PROFITS AND OBLIGATION FOR LOSSES
RULES FOR DISTRIBUTION OF PROFITS AND LOSSES
The distribution of profits and losses shall be in accordance with the following rules
(1) They shall be distributed in conformity with the agreement.
(2) If only the share in profits has been stipulated, the share in the losses shall be in the
same proportion.
(3) In the absence of any stipulation:
(a) The share in the profits of the capitalist partners shall be in proportion to
their contributions.
(b) The losses shall be borne by the capitalist partners, also in proportion to the
contributions;
(c) The share of the industrial partners in the profits is that share as may be just
and equitable. If he also contributed capital, he will receive a share of the profits in
proportion to his contribution; and
(d) The industrial partner, who did not contribute capital, is not liable for losses
[Article 1797].
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DESIGNATION OF SHARE BY THIRD PERSONS
The designation of the share of each one in the profits and losses can be delegated to
a third person, in which case, it cannot be impugned:
(a) Unless it is manifestly inequitable;
(b) The partner impugning it has begun to execute the designation; or
(c) The partner has not impugned it within 3 months from the time he had knowledge
thereof.
The designation cannot be delegated to one of the partners [Article 1798].
EXCLUSION OF PARTNER FROM SHARE
A stipulation excluding one or more partners from any share in the profits or losses is
void [Article 1799].
With reference to the industrial partner, since the law itself excludes him from losses,
a stipulation exempting him from the losses is naturally valid since if the partnership fails to
realize profits, he can no longer withdraw his work or labor. He cannot but share in the loss.
OBLIGATION TO RENDER INFORMATION
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 [Article 1806].
BASIS OF OBLIGATION
This obligation arises from the mutual trust and confidence among partners. Thus,
there must be no concealment between them in all matters affecting the partnership [De Leon
(2010].
OBLIGATION TO ACCOUNT AND ACT AS TRUSTEE
Every partner must account to the partnership for any benefit, and hold as a trustee for
it any profits derived by him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the partnership or from any use by
him of its property [Article 1807].
BASIS OF OBLIGATION
This obligation also arises from the fiduciary nature of the partnership relation, and
operates to prevent a partner from making a secret profit out of the partnership. Note that the
obligation extends from the formation to the liquidation of the partnership.
OPERATION OF THE PARTNERSHIP
FIRM NAME
Every partnership shall operate under a firm name, which may or may not include the
name of one or more of the partners.
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Those who, not being members of the partnership, include their names in the firm
name, shall be subject to the liability of a partner [Article 1815].
RIGHT TO CHOOSE FIRM NAME
General rule: The partners may adopt any firm name desired.
Exceptions:
(1) They cannot use a name that is "identical or deceptively or confusingly similar to
an existing [partnership] or corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws" [Section 18, Corporation Code].
(2) Use of names of deceased partner in law firms is "permissible provided that the firm
indicates in all its communications that said partner is deceased" [Rule 3.02, Code of
Professional Responsibility].
MANAGEMENT OF THE PARTNERSHIP
Management of the partnership is primarily governed by the agreement of the partners
in the articles of partnership. It may be managed by:
(1) All the partners; or
(2) A number of partners appointed as managers, which may be appointed:
(a) In the articles of partnership; or
(b) After constitution of the partnership.
POWERS OF A MANAGING PARTNER
General rule: The partner designated as manager in the articles may execute all acts of
administration despite opposition by the other partners.
Exception: He cannot do so when he acts in bad faith.
REVOCATION OF POWER OF MANAGING PARTNER
The powers of the managing partner may be revoked:
(1) If appointed in the articles of partnership, when:
(a) There is just or lawful cause for revocation; and
(b) The partners representing the controlling interest revoke such power.
(2) If appointed after the constitution of the partnership, at any time and for any cause
[Article 1800].
MANAGEMENT BY TWO OR MORE PARTNERS
When there are two or more managing partners appointed, without specification of
their duties or without a stipulation on how each one will act:
(1) Each one may separately execute all acts of administration.
(2) If any of them opposes the acts of the others, the decision of the majority prevails.
(3) In case of a tie, the partners owning the controlling interest will decide [Article
1801].
Requisites:
(1) Two or more partners have been appointed as managers;
(2) There is no specification of their respective duties; and
(3) There is no stipulation that one of them shall not act without the consent of all the
others.
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STIPULATION ON UNANIMITY OF MANAGING PARTNERS
In case there is a stipulation that none of the managing partners shall act without the
consent of others, the concurrence of all is necessary for the validity of the acts.
The absence or disability of one cannot be alleged, unless there is imminent danger of
grave or irreparable injury to the partnership. [Article 1802]
MANAGEMENT WHEN MANNER NOT AGREED UPON
When there is no agreement as to the manner of management, the following rules
apply:
(1) All the partners are considered agents (mutual agency). Whatever any one does
alone binds the partnership, unless there is a timely opposition to the act, under Article 1801.
(2) Any important alteration in the immovable property of the partnership, even if
useful to the partnership, requires unanimity. If the alteration is necessary for the preservation
of the property, however, consent of the others is not required [De Leon (2010)].
If the refusal is manifestly prejudicial to the partnership, court intervention may be
sought [Article 1803].
INSTANCES OF MUTUAL AGENCY
(1) Partners can dispose of partnership property even when in partnership name
[Article 1819].
(2) An admission or representation made by any partner concerning partnership affairs
is evidence against the partnership [Article 1820].
(3) Notice to any partner of any matter relating to partnership affairs is notice to the
partnership [Article 1821].
(4) Wrongful act or omission of any partner acting for partnership affairs makes the
partnership liable [Article 1822].
(5) Partnership is bound to make good losses for wrongful acts or misapplications of
partners [Article 1823].
(ELABORATE AND EVALUATE)
Activity 2:
Draw your own firm name. What are the do’s and don’ts in making a firm name.
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