Law on Partnerships and Private Corporations

Law on Partnerships and Private Corporations Definition of Partnership by the Law: 1. By the contract of partnership 2. Two or more persons bind themselves 3. To contribute money, property, or industry 4. To a common fund 5. With the intention of dividing the profits among themselves ! Two or more persons may form a partnership for the exercise of a profession Concept of Partnership Other definitions -Association - co-ownership -Legal relation - carrying out lawful business -Joint undertaking - in sharing profit and loss -Status - arising out of contract -Organization - for production of income -Entity - distinct and apart from its members ! As a form of business organization, a partnership falls between two extremes of organizational form (single proprietorship and corporation) Partnership for the exercise of a profession ! Strictly speaking, the practice of a profession is not a business or an enterprise for profit; however, the law allows joint pursuit by two or more partners ! The law does not allow individuals to practice a profession as a corporate entity Reason: it defeats the characteristic of a corporation that should not have personal qualifications such as age, good moral character, and college degree Characteristic elements of partnerships 1. Consensual - perfected by mere consent (upon express or implied agreement) 2. Nominate - has a special name in the law 3. Bilateral - rights and obligations between the parties are reciprocal 4. Onerous - parties must give something 5. Commutative - undertakings of the partners are the same or equal 6. Principal - not an accessory or does not depend on another contract for existence and validity 7. Preparatory - entered into as a means to an end ! A partnership contract is a contract of agency

Essential features of partnership 1. There must be a valid contract 2. The parties must have legal capacity to enter into the contract 3. There must be a mutual contribution of money, property, or industry to a common fund 4. The object must be lawful; and 5. The purpose or primary purpose must be to obtain profits and to divide the same among the parties ! It is required that the articles of partnership must not be kept secret among the members; otherwise, the association shall have no legal personality and shall be governed by Civil Code Existence of a valid contract Delectus personae (choice of the person) ! No one can become a member of the partnership without the consent of all the other associates ! Partnerships may be informally created, but then customary to embody the terms of the association in a written document ! A person cannot enter into a contract of prtship solely with himself; there must be at least two competent parties ! Partnerships excludes associations which do not have their origin in a contract, express or implied. ! There is no such thing as a partnership created by law or by operation or implication of law Not Considered Partnership because not created by expressed or implied contract: -Religious societies -Conjugal or community prtship ! A limited prtship cannot be created by mere voluntary agreement alone Legal capacity of parties to enter into a contract ! Before there can be a valid contract, it is essential that the parties have the legal capacity to enter into contract. ! GR: any person may be a partner who is capable under the law of entering into contractual relations ! Any person who cannot legally give consent to a contract cannot be a partner

Persons who cannot give consent: -Unemancipated minors -Insane or demented persons -Deaf-mutes who do not know how to write -Persons who are suffering from civil interdiction -Incompetents who are under guardianship ! Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership ! A married woman may enter into a contract of partnership even without her husband’s consent, but the latter may object under certain conditions ! There is no prohibition against a partnership being a partner in another partnership ! Unless authorized by law, a corporation is without capacity or power to enter into a contract of partnership Reason: in a prtship, a corporation would be bound by the acts of persons who are not its duly appointed and authorized officer and agents, and this is entirely inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively Mutual contribution to a common fund ! Partners must have a proprietary of financial interest in the business Not money, but only representatives of money: -checks -drafts -promissory notes payable to order -other mercantile documents ! There is no contribution of money until they have been cashed ! Property contributed may be real or personal, tangible or intangible ! Credit such as promissory note or other evidence of obligation or even a mere goodwill may be contributed as it is considered property ! Share in the profits by the industrial partner is not salary ! The law does not specify the kind of industry that a partner may contribute ! A limited partner cannot contribute mere industry or services

Legality of Object ! The object is unlawful when it is contrary to law, morals, good customs, public order, or public policy ! The effect of unlawful object to the contract is void ab initio ! A partnership may be organized for any purpose except that it may not engage in an enterprise for which the law requires a specific form of business organization (banking should only be corporation) Intention to realize and divide profits ! The idea of obtaining pecuniary profit or gain directly as a result of the business to be carried on is the very reason for the existence of a business prtship ! Intention to realize and divide profit is the element that distinguishes the contract of partnership from voluntary religious or social organization ! Even an unprofitable business can be a partnership provided its goal is to obtain profits ! Sharing of profits (principal purpose) need not be the exclusive aim of a partnership Sharing of profits ! One without any right to participate in the profits, cannot be deemed a partner ! The sharing of profits is merely presumptive and not conclusive, even if cogent, evidence of partnership ! There are numerous instances of parties who have a common interest in the profits and losses of an enterprise but who are not partners ! If the division of profits is merely used as a guide to determine the compensation due to one of the parties, such one is not a partner Sharing of losses ! The right to share in the profits carries with it the obligation to share also in the losses ! Where a prtship has been validly created, a subsequent stipulation which excludes one or more partners from any share in the profits (or losses) will not affect its existence. Only the stipulation is void Partnership, a juridical person ! Death of a partner is not a ground for the dismissal of a pending suit against the prtship

Effect of failure to comply with statutory requirements ! In case of failure to comply with statutory requirement when the capital exceeds 3000, such partnership still acquires juridical personality R: most partnerships are created with very small capital to engage in small business and it would be impractical and inconvenient to require the parties to comply with the requirements A. Except Partnership of Estoppel, persons who are not partners as to each other are not partners as to third persons B. Co-ownership or co-possession does not of itself establish a partnership, whether they do or do not share any profits made by the use of the property C. Sharing of gross returns does not of itself establish a partnership, whether or not there is coownership D. Receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, except profits received: D1. As a debt by installments or otherwise D2. As wages of an employee or rent to a landlord D3. As an annuity to a widow or representative of a deceased partner D4. As interest on a loan--amounts of payment vary with the profits of the business D5. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise ! (D) The receiving partner shall not be entitled to receive payment where there are no profits; nor shall he be liable to share any losses incurred bu the prtship ! In general, to establish the existence of a partnership all of its essential features or characteristics must be present A. Persons not partners as to each other ! Persons who are partners as between themselves are partners as to third persons; if they are not partners as between themselves, they cannot be partners as to third persons ! Persons who are partners in fact may not avoid the consequences of the relation by mere denial that they are partners ! Where persons misled third persons or parties into believing that the former are partners in a non-existing

prtship, such persons become subject to liabilities of partners to all who, in good faith, deal with them in their apparent relations B. Co-ownership or co-possession ! Co-ownership of property does not of itself establish the existence of a prtship, although co-ownership is an essential element of prtship C. Sharing of gross returns ! The mere sharing of gross returns alone does not indicate a partnership; must satisfy first its liabilities/ expenses ! If one takes a share as payment of a debt, he is not a partner D. Receipts of share in the profits ! The mere fact of a right under the contract to participate in both profits and losses of a business does not of itself have the effect of establishing a partnership between those engaged therein: where the recipient is a creditor, employee, widow, or seller. The recipient is not entitled to receive payment where there are no profits; nor be liable to share any losses Test and incidents of partnership Typical incidents of partnership: -parties share in P/L -equal rights in management and conduct of business -every partner is an agent of prtship -unlimited liability (except limited) -a fiduciary relation exists between the partners -on dissolution, prtship is not terminated until winding up is completed ! Incidents may be modified by stipulation of the partners subject to the right so third persons dealing with the partnership Partnership distinguished from co-ownership ! There is a co-ownership whenever the ownership of an undivided thing or right belongs to different persons ! Co-ownership is generally created by law

Distinguished: Creation Juridical Personality Purpose Duration Disposal of Interest

Power to act with third persons Effect of Death

Partnership Contract needed Has Realization of profits No limitation May not dispose individual interest for assignee (unless agreed) Partners bind the prtship Dissolution

Co-ownership No contract needed Has none Common enjoyment of the thing or right More than 10 yrs is not allowed May freely do so

Co-owner will not bind other co-owners Not dissolved

Partnership distinguished from conjugal partnership of gains ! Unless otherwise agreed in the marriage settlements, the net gains or benefits obtained by either or both of them during the marriage should be divided equally upon dissolution of marriage or partnership Parties Laws which govern Juridical Personality Commencement

Prtship Either sex Stipulation of the partners Has Moment of execution of contract (unless stipulated) Obtain profits

CPOG Future spouses Governed by law Has none

Date of the celebration of marriage (any stipulation is void) Purpose Regulate the property relations Distribution of According to Shares are divided profits agreement equally Management Shares equally Administration (unless there is belongs to both, appointment) husband’s decision shall prevail Distribution of Interest may be Cannot be Shares disposed disposed during without consent marriage even of others with the consent Partnership distinguished from voluntary associations

Prtship Juridical Personality Purpose Contributions of members Liability of members

Has For pecuniary profits Capital Partnership is liable in the first place

Voluntary Association Has none Objective is lacking Fees collected, no contribution of capital Individually liable for the debts

E. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners F. When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to Penal Code governing the confiscation of the instruments and effects of a crime. Effects of an 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 instruments or tools and proceeds of the crime shall also be forfeited in favor of the gov’t 4. The contributions of the partners shall not be confiscated unless they fall under No. 3 ! Such proceeds/instruments or tools shall be confiscated and forfeited in favor of the Govn’t (unless property of a third person not liable) but those articles which are not subject of lawful commerce shall be destroyed Dissolution of unlawful partnership Instances of unlawful object: -creates illegal monopolies or combinations in restraint of trade -carry on gambling -smuggling purposes -leasing furnished apartments to prostitutes -prevent competition in bidding for govn’t contract ! Judicial decree is not necessary to dissolve an unlawful partnership Form of Partnership Contract

GR: no special form is required for the validity or existence of the contract of partnership; the contract may be made orally or in writing regardless of the value of contributions Exp: unless immovable property or real rights are contributed, in which case, requires the the execution of a public instrument. ! To affect third persons, the transfer of real property to the partnership must be duly registered in the Registry of Property of the province or city where the property contributed is located Partnership with capital of 3000 or more 2 Requirements where capital is 3000 or more 1. The contract must appear in a public instrument 2. It must be recorded or registered with SEC ! However, failure to comply with requirements does not prevent the formation of the partnership or affect liability to third persons (you cannot make it an excuse/defense against third persons) ! Any partner is granted the right by the law to compel each other to execute the contract in a public instrument Registration of Partnership ! The recording or registration of the articles or contract of prtship is not for the purpose of giving the partnership a juridical personality. ! The only objective of the law is to make the recorded instrument open to all and to give notice thereof to interested parties Partnership with contribution of immovable property ! Contract of partnership is void if it will not comply with requirement Requirements for contribution of immovable property: 1. The contract must be in a public instrument 2. An inventory of the property contributed must be made, signed by the parties, and attached to the public instrument ! If personal property, aside from real property, is contributed, the inventory need not include the public instrument Acquisition or conveyance of property by partnership ! Immovable property may be acquired in the partnership name

! Title so acquired can be conveyed only in the partnership name Secret Partnerships without juridical personality ! Associations whose articles or agreements are kept secret among the members and wherein anyone of them may contract in his own name with third persons are deprived of juridical personality; NOT PARTNERSHIPS. ! Governed by provisions of Co-ownership ! It is essential that the articles of partnership be given publicity for the protection not only of the members themselves but also third persons Universal partnership of all present property Common property of all the partners: -Property which belonged to each of them at the time of constitution of prtship -Profits they may acquire from the contribution Classifications of Partnership 1. As to subject matter/Object: A. Universal partnership a. universal partnership of all present property b. universal partnership of profits B. Particular partnership 2. As to liability A. General partnership B. Limited partnership 3. As to duration A. Partnership at will B. Partnership with a fixed term 4. As to legality of existence A. De jure partnership B. De facto partnership 5. As to representation to others A. Ordinary or real partnership B. Ostensible Partnership or Partnership by estoppel 6. As to publicity A. Secret partnership B. Open or notorious partnership 7. As to purpose

A. Commercial or trading partnership B. Professional or non-trading partnership Kinds of Partners 1. Under the Civil Code A. Capitalist partner B. Industrial partner C. General partner D. Limited/special partner E. Managing/general/real partner F. Liquidating partner G. Partner by estoppel/ partner by implication/nominal partner/quasi-partner H. Continuing partner I. Surviving partner J. Subpartner 2. Other Classifications A. Ostensible partner - active; known B. Secret partner - active; not known C. Silent partner - not active; may be known D. Dormant/sleeping partner - not active; not known: silent and secret partner E. Original partner F. Incoming partner G. Retiring/withdrawing partner ! All partners in any of these classes are subject to liability for all partnership obligations ! If an ostensible partner is not actually a partner, he is subject to liability by doctrine of estoppel ! Silent partner need not be a secret partner; if he withdraws, he must give notice to persons who do business with the firm to escape liability in the future ! Dormant partner may retire without giving notice and cannot be held liable for the obligations of the firm subsequently; only interest in joining is the sharing of profits Contribution of Future Property GR: future properties cannot be contributed ! Properties contributed included in the partnership requires the contribution of things determinate ! Property subsequently acquired by -inheritance -legacy -donation Cannot be included by stipulation except the fruits. ! Any stipulation including property so acquired is

void ! Profits from other sources (not from properties contributed) will become common property only if there is stipulation Universal Partnership of Profits Explained ! Partners retain their ownership over their present and future property ! What pass to the partnership are the profits and the usufruct of the property ! Upon dissolution, such property is returned to partners who own it ! Profits acquired by the partners through chance (lottery or by lucrative title) without the employment of any physical or intellectual efforts, are not included ! Fruits of property subsequently acquired by the partners do not belong to the partnership ! But those fruits of property subsequently acquired may be included in profits by express stipulation ! Profits acquired by the use of industry or work and usufruct belong to the partnership as a matter of right ! An express stipulation is necessary to exclude any of them Presumption in favor of universal partnership of profits ! Applies only when universal (not particular) partnership has been organized ! When the articles of partnership do not specify its nature, it is presumed to be partnership of profits Reason: less obligations on the partners Limitations upon the right to form a universal partnership ! Persons who are prohibited by law to give donations cannot enter into a universal partnership for the reason that each of the partners virtually makes a donation. ! Partnership formed in violation of this article is null and void; no legal personality acquired ! A husband and wife may enter into a particular partnership or be members there (cannot enter into universal) ! If there is subsequent marriage between partners, it is viewed as dissolution Pertinent Legal Provisions ! Every donation or grant of gratuitous advantage, direct or indirect, between spouses (or live-in partners without valid marriage) during marriage shall be void except moderate gifts for family rejoicing

Donations Void: 1. Made between persons guilty of adultery or concubinage at the time of the donation 2. Made between persons found guilty of the same criminal offense 3. Made to a public offer or his wife, descendants, and ascendants by reason of his office ! In 1, declaration of nullity may be brought by the spouse of the donor or donee; the guilt may be proved by preponderance of evidence Business of Partnership need not be continuing in nature ! The carrying of business of a continuing nature is not essential to constitute a prtship

Chapter 2: Obligations of the Partners Section 1 - Obligations of the Partners among Themselves Relations created by a contract of partnership: 1. Relations among the partners themselves 2. Relations of the partners with the partnership 3. Relations of te partnership with third persons with whom it contracts 4. Relations of the partners with such third persons (1) GR: Partnership begins from the moment of execution of contract EXP: It is otherwise stipulated ! A partnership is a consensual contract; it exists from the moment of the celebration of the contract by partners ! Even when the partners have not yet actually given their contribution, there is partnership, as they pertain to accidental and not essential parts of the contract ! Where a partnership relation results, the law itself fixes the incidents of this relation if the parties fail to do so. ! Partners may stipulate some other date for the commencement of the partnership ! They do not become partners until or unless the agreed time has arrived or condition has happened ! There can be a future partnership which at the moment has no juridical existence yet ! So long as the agreement remains executory, no partnership can be said to exist ! General partnership (not limited) may result from oral contract except those by the terms of the agreement are to be formed for more than 1 year, in which agreement must be in existing as required by Statute of Frauds (2) When a partnership for a fix term or particular undertaking is continued, without any express agreement, the rights and duties of partners remain the same as they were at the termination but only insofar as it is consistent with a partnership at will Continuation without any settlement or liquidation is prima facie evidence of continuation of the partnership.

! Such partnership may be extended or renewed by the partners by express agreement, written or oral, or impliedly, by mere continuation (without any settlement or liquidation) ! With such continuation, the partnership for a fixed term or particular undertaking is dissolved and a new one, partnership at will, is created. ! Continued existence will then depend upon the will of the partners ! GR: Partnership is at will Exp: Unless provided by the partners as for fix term or undertaking Reason for general ruling: partnership relationship is a personal one; law will not force any one to become or continue as a partner (3) 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 as the same manner as the vendor is bound with respect to vendee He shall also be liable for fruits thereof from the time they should have been delivered, without the need of any demand Obligation with respect to contribution of property: 1. To contribute at the beginning or stipulated time what he promised 2. To answer for eviction 3. To answer for the fruits of the contribution from the date they should have been contributed to actual delivery 4. To preserve such property with diligence of a good father of a family 5. To indemnify partnership for any damage caused by retention or delay ! The property contributed by a partner becomes the property of the partnership ! Cannot be withdrawn or disposed of by contributing partner without consent or approval of other partners ! Becomes debtor even in the absence of any demand ! Remedy in eviction, delay, or retention of contribution is not rescission or cancellation of contract of partnership, but: -action for specific performance -damages & interest from the time he should have complied

! Such case conforms with vendor-vendee analogy, thus governed by law on sales ! Obligation of warranty in case of eviction is in consequence of the character of the contract of partnership which is an onerous contract ! As a general rule, a demand by the creditor is necessary before a debtor will be bound to comply with his obligation (4) When the capital which a partner is bound to contribute consists of goods (or other kinds of property--no law prohibits), their appraisal must be: -made in the manner prescribed in the contract -in the absence of stipulation, made by experts chosen by partners According to current prices, subsequent changes thereof being for the account of the partnership ! In the absence of stipulation, the share of each partner in the P/L is in proportion to what he may have contributed ! Partnership bears the risk or gets the benefit of subsequent changes in value ! In case of immovable property,: -the appraisal is made in the inventory of said property -otherwise may be made as to 1787 ↑ (5) Partner becomes a debtor for interest and damages if he has: -undertaken to contribute a sum of money and fails → from the time he should have complied -taken any amount from the partnership coffers → from the time he converted the amount to his own use Obligation to partnership capital: 1. To contribute on the date due 2. To reimburse amount he had taken for his own use 3. To pay agreed or legal interest 4. To indemnify partnership for damages caused ! The guilty partner is liable for both interest and damages not from the time judicial or extrajudicial demand is made

! As general rule, in obligations consisting of payment of sum of money, indemnity for damages shall only be the payment of interest agreed upon or 6% legal interest when no stipulation (partnership is an exception: damages and interest) (6) GR: Industrial partner cannot engage in business for himself EXP: unless the partnership EXPRESSLY permits him to do so Violation: either... -exclude him from the firm -avail themselves of the benefits which he may have obtained in violation of this provision Plus damages for either one ! Remedies also applies to industrial partner if the capitalist violates provision ! Owner of the industrial services is the industry partner which are his contribution ! He becomes debtor of the partnership of his services the moment of the commencement of the prtship. ! Industrial partner cannot engage in any same or different type of business: reason is to insure faithful compliance ! Capitalist partner cannot engage in the same kind of business, unless there is stipulation (7) GR: Partners shall contribute equal shares to the capital of partnership EXP: Unless there is stipulation ! Such is just and consistent with the rule that partners are deemed to have equal rights and obligations ! Not applicable to an industrial partner unless, besides his services, he has contributed capital pursuant to an agreement to that effect (8) GR: In case of imminent loss of the business, any partner who refuses to contribute adt’l capital (except industrial partner) to save the venture, shall be obliged to sell his interest other partners EXP: If there is agreement to the contrary ! GR: a capitalist partner is not bound to contribute to the partnership more than what he agreed to contribute ! EXP: in case of imminent loss, obliged to contribute adt’l share; if he refuses, shall be obliged to sell his interest to other partners

Requisites for application of adt’l capital for capitalist 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 adt’l contribution to the common fund would save the business 3. The capitalist partner refuses (deliberately not because of his financial inability) to contribute an adt’l share to the capital 4. There is no agreement that even in case of an imminent loss of the business the partners are not obliged to contribute ! The industrial partner is exempted from the requirement to contribute adt’l share in case of imminent loss. ! The refusal of the partner to contribute his adt’l share reflects his lack of interest in the continuance of the partnership ! Reason: It would be unjust for him to remain and reap the benefits of efforts of the others while he himself refuses to help ! Remedy: incidentally for both partners--the partner who refuses to contribute is paid while the other partners are relieved from burden of continuing with him (9) If managing partner collects a demandable sum which was owed to him, from a person who also owed the partnership another sum also demandable, the collected amount shall be applied to two credits in proportion to their amounts even though he may have given a receipt for his own credit only But if the receipt is to the partnership, the amount is fully applied thereto. The debtor is given the right to prefer payment to the partner if it should be more onerous to him ! If no receipt, apply to the partnership ! The collecting partner should be a MANAGING partner Requisites for application of sum of money: 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 3. The partner who collects is authorized to manage and actually manages the partnership

! The provision does not apply if the collecting partner is not a managing partner ! Reason is for the managing partner to attend more to the interest of the partnership than his own. ! Where the manner of management has not been agreed upon and all the partners participate int he management of partnership, then every partner shall be considered a managing partner ! If the personal credit of the partner is more onerous (has higher interest rate), debtor can prefer the payment to him. (10) A partnership 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 given receipt for his share only. ! The provision is based on the community of interest among the partners Requisite of application: 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 3. The partnership debtor has become insolvent (11) GR: 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. EXP: Court may equitably lessen/mitigate this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have been realized. ! No compensation/offsetting ! Any person guilty of negligence or fault in the fulfillment of his obligation, shall be liable for damages ! No compensation; for compensation requires that the negligent partner be both a creditor and a debtor of the partnership; partner is a debtor for the industry, and debtor for the damages

(12) The risk of specific and determinate things which are not fungible, contributed so that only their use and fruits may be for the common benefit, shall be borne by the partner who owns them If the things contributed are (1) fungible, or (2) cannot be kept without deteriorating, or (3) if contributed to be sold, the risk shall be borne by the partnership GR: risk of things brought and appraised in the inventory is borne by the partnership; and that claim shall be limited to the value at which they were appraised EXP: if there is stipulation to the contrary ! Fungible means interchangeable or capable of substitution 5 Cases shown; partnership borne the risk except 1: 1. Specific and determinate things which are not fungible and only the use is contributed - borne by partner 2. Specific and determinate things the ownership transferred to the partnership 3. Fungible things or things which cannot be kept without deteriorating even if contributed only for the use of the partnership 4. Things contributed to be sold 5. Things brought and appraised in the inventory ! The above cases presuppose that the things contributed have been delivered actually or constructively to the partnership; before delivery, the risk of loss is borne by the partner ! If the loss is due to the fault of any partner, shall be liable for damages (13) The partnership shall be responsible to every partner for the amounts he may have disbursed on 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 the Partnership to partners: 1. To refund amounts disbursed plus the corresponding interest from the time expenses are

made (not from date of demand) 2. To answer obligation the partner contracted in good faith 3. To answer risk in consequence of the management ! Being a mere agent, the partner is not personally liable, provided that he is free from all fault and acted within the scope of his authority (abide the rules of the partnership) (14) P/L shall be distributed in conformity with the agreement If only the share of profit is agreed upon, share in the loss shall be the same proportion Absence of stipulation, share in P/L is in proportion to contribution Industrial partner is not liable for losses If, besides his services, he has contributed capital, he shall also receive a share in the profits proportioned to his capital ! Industrial partner shall receive just and equitable share, which must be satisfied first before the capitalist partners divide the profits ! If Industrial partner has capital, two shares. 1st is for his industry that should be satisfied first. 2 nd is for his capital proportion on the remaining profit for others ! Industrial partner is not liable for losses (15) If the partners have agreed to entrust to a third person the designation of the share of each one in the P/L, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of 3 months from the time he had knowledge thereof, complain of such decision The designation of P/L cannot be entrusted to one of the partners ! The article follows the general rule in contracts that the fulfillment of a contract cannot be left to the will of one of the contracting parties alone. ! The partner in the 1st paragraph is guilty of estoppel or to have given his consent or ratification to the designation ! The reason for short period of 3 months to impugn is to forestall any paralyzation in the operation of prtship

(16) A stipulation which excludes one or more partners from any share in the P/L is void Types of such stipulations: 1. Stipulation generally void, but partnership subsists P/L shall be apportioned as if there were no stipulation 2. Stipulation, a factor to show no partnership exists When parties expressly stipulate that there is no liability for losses By nature of contract, it is clear that a party did not intend to share in losses 3. Where partner excluded is industrial partner Naturally valid ! Reason for exempting industrial: because he cannot withdraw the work or labor already done by him; if there are losses, he labored in vain, thus, already contributed his share in the loss ! GR: stipulation for unequal shares for P/L is valid EXP: unless, if the unequality is so gross that is, in effect, a simulated form or attempt to exclude a partner from any share in the P/L: stipulation is void (17) the partner who has been appointed manager in the articles of prtship 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 prtship has been constituted may be revoked at any time ! Unless otherwise agreed, each partner in a general partnership has a right to an equal voice in the conduct and management of the business and this right is not dependent on amount or size of the partner’s contribution or services Constituted in articles of partnership (before) GR: manager may execute all acts administration notwithstanding the opposition EXP: unless he acted in bad faith

of

! His power is revocable only: -upon just and lawful cause -upon the vote of the controlling interest Appointed after constitution of partnership ! He may be revoked at any time for any cause Reason: revocation is not founded on a change of will of the partners; appointment not being a condition of the contract ! It should be noted that the provision is applicable to a partner only not a stranger. ! A partner is not entitle to compensation for his services other than his share of the profits

Relations created by a contract of partnership

Remedies where industrial partner engages in business Extent of contribution to partnership capital

Commencement of Partnership

Executory agreement of partnership

Obligation of capitalist additional capital

partner

to

contribute

Requisites for application of rule Continuation of partnership beyond fixed term Reason for the sanction Obligations with respect to contribution of property Obligation of managing partner who collects debt Effect of failure to contribute property promised

Reason for applying payment to partnership credit

Liability of partner in case of eviction

Right of debtor to application of payment

Liability of partner for fruits of property in case of delay

Obligation of partner who receives partnership credit

Appraisal of goods of property contributed

Requisites for application of rule

share of

Reason for imposing obligation to return Obligations with respect to contribution of money converted to personal use Obligation of partner for damages to partnership Liability of guilty partner for interest and damages

Compensation of damages with profits earned for partnership by guilty partner

Obligations of industrial partner Risk of loss of things contributed Prohibition against engaging in business

Responsibility of partnership to partners

Rules for distribution of profits and losses Designation of share in profits and losses by a third person Binding force of designation by third person Stipulation excluding partner from any share in profit or losses Reason for exemption of industrial partner from losses Stipulation providing for unequal shares in profits or losses

Rights and obligations with respect to management Scope of power of a managing partner Compensation for services rendered Powers of two or more managing partners whose respective

ENUMERATION: Characteristic elements of partnership 1. Consensual 2. Nominate 3. Bilateral 4. Onerous 5. Commutative 6. Principal 7. Preparatory Essential features of partnership 1. There must be a valid contract 2. The parties must have legal capacity to enter into the contract 3. There must be a mutual contribution of money, property, or industry to a common fund 4. The object must be lawful; and 5. The purpose or primary purpose must be to obtain profits and to divide the same among the parties Not Partnership because of no creation upon expressed or implied contract: -Religious societies -Conjugal or community partnerships Persons who cannot give their consent: -Unemancipated minors -Insane or demented persons -Deaf-mutes who do not know how to write -Persons who are suffering from civil interdiction -Incompetents who are under guardianship Forms of Contribution -Money -Property -Industry Distinction between Partnership & Co-ownership -Creation -Juridical Personality -Purpose -Duration -Disposal of interests -Power to act with third persons -Effect of Death

Circumstances not used to determine whether one is a Partner through a Share of Profits received as Payment of: 1. As a debt by installments 2. As wages of an employee or rent to a landlord 3. As an annuity to a widow or representative of a deceased partner 4. As interest on a loan, though the amounts of payment vary with the profits of the business 5. As the consideration for the sale of a goodwill of a business or other property by installment s or otherwise Distinction between Partnership Association -Juridical Personality -Purpose -Contribution of members -Liability of members

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Voluntary

Effects of an 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 instruments or tools and proceeds of the crime shall also be forfeited in favor of the gov’t 4. The contributions of the partners shall not be confiscated unless they fall under No. 3

MIDTERM Section 3 - Obligations of the Partners with Regard to Third Persons (1) Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners. Those who include their names in the firm name, but not being members of the partnership shall be subject to the liability of a partner. ! A partnership must have a firm name under which it will operate ! A firm name is necessary to distinguish the partnership from the individuals composing it and other partnership ! Such firm name must be registered with the Bureau of Commerce (now DTI) ! Firm name: -individual partner -surnames of all partner -surname of one or more of the members with the addition ‘and Company’ -individual names wholly distinct from the names of any of the members ! Firm name should not be identical with or deceptively similar to a name which was previously adopted by any other entity, or interfere with the rights of others, or is contrary to law ! Partnership cannot continue to use in its firm name the names of deceased partners ! In the choice of a firm name, no false, misleading or assumed name shall be used. ! The continued use of the name of a deceased partner is permissible provided that the firm indicates in all communications that said partner is deceased ! Persons who include their names in the firm (but not being partners) do not acquire the rights of a partner, but under 1815 (estoppel), they shall be subject to the liability of a partner insofar as third persons without notice are concerned. ! Art 1815 (estoppel) does not cover: -third persons who represents himself to be a partner (1825) -limited partner who allows his name to be included in the firm name (1846) -a person continuing the business of a partnership after dissolution, uses the name of dissolved

partnership or name of deceased partner as part thereof. (2) All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. ! GR: a partner has the right to make all partners liable for contracts he makes for the partnership in the name and for the account of the partnership EXP: partner may enter into separate undertaking in his name for the partnership ! A partner may assume a separate undertaking with a third party in his name to perform a partnership contract or make himself solidarily liable on a partnership contract. ! The partner is personally bound by his contract even if only the partnership is show to have derived benefits from it ! the debts and obligations of the partnership are, in substance, also the debts and obligations of each individual member of the firm. ! The liability to creditor is pro rata and subsidiary ! Pro rata, in law, means equally or jointly and not proportionately: pro-rating is based on the number of partners and not on the amount of their contributions ! Liability of one of the party that cannot be enforced (if he, for example, left the country) or condoned by the creditor cannot increase the liability of the other partners ! It is subsidiary because the partners become personally liable only after all the partnership assets have been exhausted (unless a particular partner assumes a separate obligation to perform partnership contract or make himself solidarily liable on the contract) ! GR: Industrial partner also has to pay, but he can recover the amount he has paid from the capitalist partners EXP: unless there is an agreement to the contrary. ! Neither on principle of law or justice can the industrial partner be relieved from liability to third persons for debts of the partnership ! The inability of a partnership to pay a debt to a third

party does not necessarily mean that business has been operated at a loss. ! Industrial Partners -losses: exempted -liability to third persons: not exempted (3) Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners ! GR: A stipulation among the partners contrary to the pro rata and subsidiary liability is void as it affects the rights of third persons EXP: it is valid and enforceable only as among the partners ! They must each pay an equal amount; then, as to their liking, subsequently rearrange the amount paid among themselves. (4) Every partner binds the partnership, unless the partner acting: -has no authority to act for the partnership in the particular matter; AND -the person with whom he is dealing has knowledge of that he has no such authority An act of a partner which is not apparently for the carrying on of business of the partnership in the usual way does not bind the partnership unless authorized by the other partners; abandoned the business. One or more, but less than all (not all) partners have no authority to: 1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership 2. Dispose of the goodwill of the business 3. Do nay othr act which wold make it impossible to carry on the ordinary business of a partnership 4. Confess a judgment 5. Enter into a compromise concerning a partnership claim or liability 6. Submit a partnership claim or liability to arbitration 7. Renounce (waive) a claim of the partnership Except when authorized by the other partners or unless they have abandoned the business. No act of a contravening partner shall bind the partnership to persons having knowledge of the

restriction. ! In the absence of an agreement to the contrary, all partners have equal rights in the management and conduct of the partnership business; each partner has the implied authority to do all things necessary to carry out the ordinary business of the partnership. ! Each partner is regarded as both a principal and an agent ! Apparent authority is based on the doctrine of estoppel ! The relation of partners to third persons is thus founded on the doctrine of mutual agency ! Limitations upon the authority of any one of the partners are not binding upon innocent third persons who have the right to assume that every general partner has power to bind the partnership especially those partners acting with ostensible authority ! Third persons are not bound to ascertain whether or not the partner with whom the transaction is made has the consent of the other partners; his knowledge is enough that he is contracting with a partner ! Third parties should not assume that a partner has unlimited authority. ! Generally, a partner has no authority to do the acts: -assign property in trust for creditors -dispose goodwill -other acts which would make it impossible to carry on the ordinary business -confess judgment -enter into compromise -submit a partnership claim to arbitration -waive a claim of partnership ! When a third party deals with a partner who has no express, implied, or apparent authority, the partnership is not liable for his acts unless the other partners ratify or are estopped (has knowledge of transaction) from asserting the partner’s lack of authority 2 Requisites in order that the partnership will not be liable: 1. The partner so acting has, in fact, no authority; 2. The third person knows that the acting partner has no authority