II OBLIGATIONS OF PARTNERS

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1 Chapter II OBLIGATIONS OF PARTNERS CIVIL CODE OF THE PHILIPPINES Art O E R COMMONS OPEN EDUCATIONAL RESOURCES

2 Section 1 Obligations of the Partners amongst 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 the partnership with third persons (4) Relations of the partners with third persons Article 1784 A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679) Partnership is perfected by mere consent and if ALL the requirements are met Notwithstanding the fact that the partners have not given their contributions yet A and B agree to form a partnership that will begin on December 1 and upon the arrival of certain machinery needed by the business. In this situation, are A and B in already in a partnership? As long as the agreement remains executory, then A and B are NOT partners therefore there is no partnership yet. Partners may agree to form a partnership to take effect in the future A and B agree to form a partnership 1.5 years later, with contributions of P100, each. A contributes his share early but when the time comes for B to contribute his share, he refuses and says he no longer wants to partake in the partnership. Can A compel B to contribute his share to the partnership? NO. Because they cannot enforce the contract since it was perfected 1.5 years ago and the contract was only oral. Since the contract was for 1.5 years, it was greater than 1 year and should have been written instead. The Statute of Fraud does not usually apply but to some particular cases such as the example above, it will. If the contribution is immovable property, comply with Article 1773 otherwise the partnership will be void. Article 1785 When a partnership for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will. A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. (n) A partnership with a fixed term/particular undertaking is continued without express agreement - Rights and duties remain the same as they were at termination. If A and B form a partnership to last until December 30, 2011 and A is the manager and they share profits and after December 30, 2011 they continue with their partnership. What happens? A and B retain their rights, meaning A is still the manager and they still share profits If there was express agreement for the term of existence, then when the term expires, the partnership is dissolved and becomes a partnership at will Continuation is when there is NO settlement/liquidation. There must be prima facie evidence, meaning it must be seen on first glance. Article 1786 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 which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a) Article 1787 When the capital or a part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership,

3 and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being the account of the partnership. (n) Article 1788 A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation. The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use. (1682) Suppose A, B and C are partners. A promises to contribute a RED CAR, B promises to contribute GOODS WORTH P50, and C promises to contribute P50, IN CASH on October On October 2011, none of them comply. What happens? A, B and C thus become debtors to the partnership. Suppose B and C contribute their parts but A does not. Can B and C ask for the recission or annulment of the contract? NO. If one of the partners fails to comply with his requirements, then the others can request for specific performance with damages from the defaulting partner A. What are the obligations of A before October 2011? (1) To contribute what he promised (2) To be held liable to answer for eviction if the partnership is deprived of his contribution (3) To take care of the contribution with the diligence of a good father of a family. Suppose A leased the car out and gets it back by December Then A must deliver the car and the fruits (profits from lease) to the partnership because there was a delay. Suppose that after A contributes the car, a 3 rd person, D claims to the real owner of the car and is able to prove so. Then A is held liable for eviction because the partnership is deprived for a specific thing. A is also held liable for damages to BOTH the partnership and to D. What about B? Can the partnership determine the value of the goods he contributed? In Article 1787, it clearly states that the goods SHOULD be appraised by the partnership. If there was no agreement/stipulation, then the partnership shall have the goods appraised by an expert. What if the goods appreciate/depreciate? It will be charged to the partnership s account. What will happen if C fails to comply with his obligation? C will be liable for his contribution plus interest and damages from the date he was supposed to contribute. The same rule will apply if the partners take money from the partnership s funds without everyone s consent. He will however, not be charged for theft or estafa and his obligation will only be to return the money he took plus interest and damages from the time he took the money. When will a partner be held criminally liable? Suppose the partners set aside P10, for payment to one of their creditors. A takes this amount from the fund and is subsequently discovered to have done so. - Then A can be charged for estafa since he misappropriated the money ALREADY SET ASIDE. Article 1789 An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case. (n) An industrial partner contributes his industry - Partnership has the EXCLUSIVE RIGHT to his industry - Prohibited from the engaging in business of ANY kind unless the partnership has expressly permitted him to do so. Suppose that a partnership is engaged in a automobile repair shop. A is the industrial partner (chief mechanic) and works only up to 5PM every working day. Can he go home and work on the partnership s customers autos, even if he says it to the capitalist partners EVERY DAY before he leaves? The law says that there must be EXPRESSED permission, in this situation, all A has is IMPLIED permission. The capitalist partners remedy is therefore to either: (only one) (1) Avail of the benefits from A s business (2) Exclude A from the partnership and demand for damages

4 Capitalist partners are prohibited from engaging in SIMILAR businesses only. Industrial partners have the same remedies as capitalist partners. Article 1790 Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. (n) The partners shall contribute to the capital of the partnership as per their agreement, except if there was no agreement in the first place, in which case, they shall contribute equally. A and B decide to form a partnership and agree to contribute to the capital in the ratio of 60:40, how much should the partners contribute to the partnership? The partners shall contribute in the ratio of 60:40, meaning if their partnership capital is a combined total of P10, then A contributed P6, and B contributed P4, A and B decide to form a partnership but did not say how much the other should contribute, how much should each partner contribute to the partnership? Since the partners did not give any sort of agreement as to the ratio of their capital contribution, we shall assume that they will contribute in equal proportions, meaning if the partnership capital is a combined total of P10, , then each partner contributed P5, Article 1791 If there is no agreement to the contrary, in case of 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 sav4e the venture, shall be obliged to sell his interest to the other partners. (n) If there is an imminent loss in the partnership, the partner who refuses to contribute additional funds, IF HE IS CAPABLE TO DO SO, shall sell his share TO THE PARTNERS, unless he is an industrial partner. - Imminent Loss There is a need for the capitalist partners to contribute additional funds to save the partnership The industrial partner need not do so because he has already given 100% of his efforts If the capitalist partner is WILLING but NOT FINANCIALLY CAPABLE, the article will NOT apply to him because he is already insolvent - Selling of interest Refusal to contribute additional funds to save the partnership means that the partner no longer has any interest in the partnership He should not be allowed to reap the benefits that the other partners have worked hard for because he had not done anything to help anyway He cannot complain of being removed from the partnership because he will be paid what is due to him for his share in the interest of the partnership - Agreement that the partner need not contribute additional funds in cases of loss The capitalist partner will not be required since it was in their agreement in the first place. Note that more contribution to the partnership capital would mean you share more in the profits but this should be voluntary Things to consider: (1) There must be an IMMINENT LOSS (2) The partner who is unwilling to contribute must be SOLVENT/FINANCIALLY CAPABLE (3) There was no agreement that the partners will not have to contribute additional funds in cases of loss If the purpose of additional contribution is simply to raise capital, then this article will not apply. Article 1792 If a partner authorized to manage collects a demandable sum, which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter. The provisions of this article are understood to be without prejudice to the right granted to the debtor by Article 1252, but only if the personal credit of that partner should be more onerous to him. (1684) A and B are in a partnership where A is the managing partner. C owes A a sum of P5, and the partnership a sum of P10, The credit to A is due on September 1 while the partnership s

5 is due on September 15, both debts are due and demandable. A collects from C a total of P3, only and A subsequently issues a receipt in his name. Is the partnership entitled to share in the P3,000.00? Yes but in proportion to their respective debts so A gets P1, and the partnership gets P2, Supposing there was no mention as to who the managing partner is, will the requisites of Article 1792 still be present? Yes, in the absence of information relating to the identity of the managing partner, the assumption shall be that ALL partners are managing partners. If A issues a receipt on the name of the partnership instead, to whose credit will the P3, be put? The entire P3, will go to the partnership. Supposing the credit of A carries 18% while that of the partnership carries only 10%. C pays A and says that the P3, shall be applied to A s credit. Is the partnership entitled to share in the P3, still? No, the debtor is given the right to apply payment to whichever debt is more onerous. Things to remember: The two conditions should be both present in order for the Article to apply, otherwise, the entire amount will go to whoever collects payment from the debtor. (1) 2 debts and both are due and demandable (2) The one collecting should be the managing partner Article 1793 A partner who was 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 have given receipt for his share only. (1685a) In this case, there is only ONE debt but 2 or more debtors, both of which are partners. A and B are partners and C owes the partnership a sum of P10, B is the managing partner but A collects his share in the P10, and C pays A P5, to which A issues a receipt in his name. When B s turn to collect comes, C is already insolvent. What should A do? A shall return his P5, to the partnership and split it with B because C has already become insolvent. Take not that whoever collects doesn t matter as it doesn t make a difference If you get your share early and the other parties cannot get theirs because the debtor has become insolvent, then you must return YOUR share to the partnership so that no one gets more than he should have. Article 1794 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. However, the courts may equitably lessen this responsibility if through the partner s extraordinary efforts in other activities of the partnership, unusual profits have been realized. (1686a) Why compensation will not apply: Compensation will not apply because in compensation, you should be both a debtor and a creditor at the same time. However, the partner here is only a DEBTOR for damages and he cannot compensate using his profits and benefits earned for the partnership because it IS HIS DUTY to do so in the first place. Responsibility may be equitably mitigated by the courts if, through extraordinary efforts of the partner, unusual profits are recognized/realized. A partnership between A and B is engaged in an autoshop business. A customer brought his car in to be painted YELLOW but A bought RED paint instead and the car is painted RED. Damages are suffered by the partnership for P30, due to the repainting. Can A compensate this loss using the profits he earned for the partnership? A cannot compensate it with the profits he earned because it is his obligation to bring profits in the first place. The responsibility of the P30,000.00, however, may be mitigated by the court if by other activities, A is able to bring about unusual or extraordinary profits, meaning, he may be allowed by the courts to pay back just P15, instead. Follows that if the partner is guilty of fraud or damages, he shall be liable for that.

6 Article 1795 The risk of specific and determinate things which are not fungible, contributed to the partnership 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 fungible, or cannot be kept without deteriorating, or if they were contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation, the risk of things brought and appraised in the inventory, shall also be borne by the partnership, and in such case the claim shall be limited to the value at which they were appraised. (1687) Refers to rules as to who bears the risks made by contributions If the contribution is determinate and non-fungible but only the use is contributed, when it is lost, then the one who contributes it is liable for it. If fungible things are contributed, the partnership shall be the one to shoulder the risks The partnership shall also be the one to bear the risk for items brought for sale in inventory for appraisal for the value at which they were appraised. Article 1796 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 the risks in consequence of its management. (1688a) Refers to the obligation of the partnership to the partners The partners are merely agents so they are not personally liable except if they are at fault or if they exceeded their expressed authority Obligations of the Partnership: (1) To reimburse any amount disbursed by the partners in behalf of the partnership - Example: A partnership borrows from the bank a sum of P10, for additional funds but cannot pay it back when it is due to be paid back. A pays back the P10, using his personal funds. Should he be reimbursed by the partnership? Yes, the partnership should reimburse A for the sum of P10, PLUS legal interest starting from the date A disbursed the P10, (2) To answer for any obligation contracted in good faith - Example: A partnership needs office supplies so B contracts for P10, worth of supplies. Who will pay for the contract price of P10,000.00? The partnership shall be the one to shoulder the cost as it was made in good faith and B did not overstep his authority. If it was stated that the partners cannot contract for more than P5, worth of supplies and B still contracts for P10,000.00, how much will the partnership pay? The partnership will only pay what was allowed, that is, P5, and B will pay the remaining balance since B overstepped his authority. (3) To answer for risks in management - Example: A partnership is engaged in selling goods and a customer keeps asking for discounts and an argument ensues between the customer, C and the partner A. A gets injured and is brought to the hospital. Who shall shoulder the hospital bills? The partnership shall shoulder the hospital bills as it was during A s time in managing the business that he was injured. Article 1797 The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services, he has contributed capital, he shall also receive a share in the profits in proportion to his capital. (1689a)

7 Article 1798 If the partners have agreed to entrust to a third person the designation of the share of each one in the profits and losses, 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 three months from the time he had knowledge thereof, complain of such decision. The designation of losses and profits cannot be entrusted to one of the partners. (1690) Article 1799 A stipulation which excludes one or more partners from any share in the profits or losses is void. (1691) Lays out the rules in the distribution of profits and losses A, B and C are partners with the following capital contributions, P30,000.00, P20, and P10, respectively, where C is a capitalist-industrialist partner. For one year of their operations, their partnership had earned net profits of P17, How shall these profits be divided among the partners? (C is entitled to receive P2, out of the entire P17,000.00) (1) In accordance with any existing agreement between the partners as to how they shall share. (2) If there was no agreement, then the partners shall share on a pro-rata basis (3) The industrial partner shall get what is JUST and EQUITABLE in the circumstances. (BONUS TO PARTNER) P CAPITAL CONTRIBUTION RATIO SHARE IN DISTRIBUTABLE PROFIT BONUS TOTAL SHARE IN PROFITS A P 30, /6 P 7, P 7, B P 20, /6 P 5, P 5, C P 10, /6 P 2, P 2, P 4, TOTAL P 60, /6 P 15, P 2, P 17, The same rules shall apply for losses in the partnership s operations, however the industrial partner shall not share in the losses as there is no way for him to retract his industry and in the event of losses, his efforts would have been for vain and it can thus be said that he has already shared. What is the legal effect of having a stipulation that excludes a partner from sharing in the profits or losses? Under Article 1799, the stipulation shall be void because there must be mutual sharing of profits and losses. Can the partners appoint a 3rd person to designate the division of their profits and losses? Yes and they will not be allowed to question his decisions unless the designation of shares is manifestly inequitable. 2 cases where partners ABSOLUTELY cannot question designated shares by the 3rd parties: (1) When a partner begins to execute the 3rd party s decision (2) When complaints are raised AFTER three months from the point of knowledge of the designation Can the partners designate one of themselves to distribute profits or losses? No, the law prohibits this situation because there may be disparities when it comes to the distribution of net profits. Article 1800 The partner who has been appointed manager in the articles of partnership 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 and lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power. A power granted after the partnership has been constituted may be revoked any time. (1692a) 2 Kinds of Managing Partners: (1) Appointed DURING the Constitution of the Partnership - May execute all administrative acts unless he acted in bad faith. His power may not be revoked unless there is a JUST and LAWFUL cause and the vote of the partners with controlling interest

8 - Even if there are objections as to his decisions coming from the partners, his authority will prevail UNLESS he has acted in bad faith - Acts of administration: ordinary business and administrative transactions - Why can he note be revoked for no reason? Because if you revoke his power, you are in effect changing the terms of the contract of partnership. (2) Appointed AFTER the Constitution of the Partnership - May have his power revoked with or without cause - Decided upon by those partners who own controlling interest in the partnership Article 1801 If two or more partners have been entrusted with the management of the partnership without specification of their respective duties, or without stipulation that one of them shall not act without the consent of the others, each one may separately execute all acts of administration, but if any of them should oppose the acts of the others, the decision of the majority shall prevail. In case of tie, the matter shall be decided by the partners owning the controlling interest. (1693a) Assume that A, B, C and D are all managing partners. A appoints E as a secretary but B objects to this. Is the appointment of E valid? Yes since majority votes are first counted by head. If C&D were the ones to object, and they owned a combined total of 51% of partnership interest, then the appointment will not be valid. However, if B was still the one who objected and he owns 51% of partnership interest, the appointment will still be valid because majority votes are first counted by head. If the partnership cannot make a decision and ends up in a tie (head count and interest), then the partnership is to be dissolved. This will be the only remedy, unless one of the other partners will relent. Article 1802 In case it should have been stipulated that none of the managing partners shall act without the consent of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership. (1694) This is a case wherein two partners, A and B, stipulate that one cannot act without the consent of the other. Thus, there must always be concurrence between the two before any transactions may be entered into, the absence of the other s consent shall not be used as an excuse. Illustrative Case: A sold to B, one of the managing partners of Partnership X, the other being C, a certain number of mining claims without the consent of C. In an action by A to recover the unpaid balance of the purchase price against Partnership X, C claims that the contract is not binding upon the partnership for the reason that under the articles of partnership, there is a stipulation that one of the partners cannot bind the firm by a written contract without the consent of others. Is the transaction made by B binding upon the partnership? According to the Supreme Court, the stipulation applies only to B and C. A has the right to assume that B was authorized to complete the transaction. Therefore, the partnership is liable, and since B violated the terms of contract between himself and C, he is required to reimburse C for the amount C will be paying A on behalf of the partnership, the reason being, it would be unfair to C who had no knowledge of B s transaction to have to pay when he never agreed anyway. The only instance in which a partner may transact without concurrence is when there is imminent danger of grave or irreparable damage to the partnership if he does not do so. However, the party involved must be able to prove so else he shall become liable for what he has done. A and B are in a partnership where they sell fruits, B notices that the fruits in the warehouse are starting to rot so, without consent of A, he sells them. This will be alright because if the fruits rot, then it would have been bad on the part of the partnership.

9 Article 1803 When the manner of management has not been agreed upon, the following rules shall be observed: (1) All of the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of article (2) None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court s intervention may be sought. (1695a) If there is no agreement as to who will be the managing partners, during constitution and after constitution of the partnership, then the assumption shall be that ALL the partners are managing partners, without prejudice to Article 1801, meaning Article 1801 will then apply to their case. The second paragraph of this article provides that the partners cannot simply alter immovable property owned by the partnership without the consent of the other partners because this is NOT an act of administration but of OWNERSHIP. Note that consent here is no qualified, so it may be expressed or it may be implied. Suppose A, B, C and D are in a partnership where the managing partner is not specified and A decides to put up a warehouse in a piece of land owned by the partnership without consent of other partners because he believes it to be useful and beneficial to the partnership. His partners come over, once the warehouse is finished, to look at it and did not object to its existence. Was this valid? Yes, since the partners did not object, then there is IMPLIED consent. Since consent was never qualified in the article, it is assumed that implied consent is enough. Suppose before A builds the warehouse, he asks for the consent of the other partners, who refuse to give it. When A tries to convince them and asks why they refuse to give consent, they simply say that they do not want it to be there, making their objection manifestly prejudicial, meaning, there is really no reason for their objection, what then, is the remedy of A in this situation? A may bring the matter to court. If the court finds the other partners of having no solid reason to object, it may compel the other partners to give their consent. Article 1804 Every partner may associate another person with him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager. (1696) Refers to SUBPARTNERSHIP A, B and C are in a partnership wherein A is the managing partner. A enters into a contract with D that states D will receive 50% of A s share in partnership profits. Can A do this even without the consent of the other partners? Yes, because a sub-partnership will not affect the composition of the partnership and D will not be able to interfere with the partnership s management anyway. When are you required to share your partnership profits with 3 rd persons? When you contract with 3 rd persons because perhaps in some past event you needed money and they provided you with it, and in your contract, it was agreed upon that you will share in the partnership profits. The 3 rd person can also opt to receive ALL profits. Can D become a partner without the consent of the other partners, if he associates with the managing partner? No, D would need to get the consent of all partners because this would change the partnership composition. Article 1805 The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at any reasonable hour have access to and may inspect and copy any of them. (n) The partnership books shall be kept in the following places, in order: (1) In accordance with partnership agreements (2) If there were no agreements, then the partnership books shall be kept in the principal place of business of the partnership (ex: headquarters) Each partner will have access to ALL partnership books. When will the partner be allowed to access the partnership books?

10 The partner is allowed to access partnership books during REASONABLE HOURS OF BUSINESS (8am-5pm), according to the law. The one who is keeping the partnership books cannot state when it can be inspected. Article 1806 Partners shall render on demand true and full information of all things affecting the partnership to any partner or legal representative of any deceased partner or of any partner under legal disability. (n) The article does not mean that the partners need wait for demands before disclosing information, when they get hold of the information, they should disclose it immediately, although additional details may be demanded. If information is not disclosed and it is found out later on, the partner/s who did not disclose such will be held liable for it and be charged for misrepresentation. Suppose A, B and C are in a partnership wherein A is sent to inspect partnership property in Mindanao. A realizes that the property contains oil deposits and does not disclose this information to B and C. He also lies and says that the property is completely useless for their business and offers to buy B and C s interests in the partnership. When A is the only one holding the business, he develops the land and gains substantial profits from the oil deposits. B and C later on learn about the information A kept hidden from them and demand that they be given their shares in the oil profits. The question now is, can B and C, after having sold their interests in the partnership, still share in the profits? Yes, they will be allowed to share in the profits because the information regarding oil deposits was present when they sold their share to A, just that it was hidden from them. Article 1807 Every partner must account to the partnership for any benefit, and hold as 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. (n) A partner who receives benefits or profits derived without consent of others shall account for it as the partnerships. If particular property is mortgaged and foreclose, the partner who uses personal funds is able to get the property back will not become the new owner, he will only be its trustee. If the partner gets the property back after ONE year from the 3 rd party involved, then it shall become his as it was a private transaction, so long as he uses his own funds. A and B are partners engaged in the operation of a cinema business. The theater was mortgaged to C who foreclosed the mortgaged debt. A, in his own behalf, redeemed the property with his own private funds. Subsequently, A files a petition for the cancellation of the old title of the partnership and the issuance of a new title in HIS name alone. Did A become the absolute owner of the property? No, the law says that he will only hold the property as the trustee and will be entitled to reimbursement plus interest from the time he redeemed the property. Article 1808 The capitalist partners cannot engage for their own account in any operation which is of the kind of business in any operation which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary. Any capitalist partner violating this prohibition shall bring to the common fund any profits accruing to him from his transaction, and shall personally bear all the losses. (n) The article is with regards to a capitalist partner engaging in other businesses. Is the capitalist partner allowed to engage in other businesses aside from the one he has with the partnership? Yes, as long as the business he engages in is something dissimilar or different from the of the partnership s. What will happen if the capitalist partner violates the law regarding his ability to engage in other businesses? Then he shall have to bring the profits he gained from the other business to the partnership and be liable for losses suffered by the partnership. Why is the capitalist partner not allowed to engage in a similar line of business?

11 Because he might take advantage of the information in the partnership or of their clients, resulting in a conflict of interest between himself and the other partners. The capitalist partner can engage in a business similar to the partnership if there was a stipulation in the contract of partnership and if the business he operates exists in a different area or place. Article 1809 Any partner shall have the right to a formal account as to partnership affairs: (1) If he is wrongfully excluded from the partnership business or possession of its property by his co-partners (2) If the right exists under the terms of any agreement (3) As provided by Article 1807 (4) Whenever other circumstances render it just and reasonable. (n) General Rule: During existence, a partner is not required to demand for an accounting because his interest is already protected by two Articles of the law, Article 1805 and Article But for specific cases, the law provides that he can DEMAND for an accounting of the partnership books. 4 Cases where a partner can demand for an accounting: (1) When he is wrongfully excluded from the partnership operations (business and property possession) (2) If the right exists under their agreement (3) Under Article 1807 (4) Other circumstances which render it just and reasonable. Section 2 Property Rights of a Partner Article 1810 The property rights of a partner are: (1) His rights in specific partnership property (2) His interest in the partnership (3) His right to participate in the management. (n) The partner has the following rights: (1) Right to the ownership of partnership property (2) Right to his interest in the partnership (3) Right to participate in partnership management Article 1811 A partner is co-owner with his partners of specific partnership property. The incidents of this co-ownership are such that: (1) A partner, subject to the provisions of this Title and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners; (2) A partner s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property; (3) A partner s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws; (4) A partner s right in specific partnership property is not subject to legal support under Article 291. (n) The partners are considered co-owners of specific partnership property If A, B and C are partners who own specific property under the partnership s name, what are their rights? (1) They can use it for partnership business purposes (2) They cannot use it for personal purposes WITHOUT the consent of others. Why can t A simply assign his right with respect to the partnership s property? (1) It doesn t belong to him (2) The extent of his interest with regards to the property cannot be determined before dissolution The partnership can altogether assign a 3 rd party with the right to use the property for partnership business purposes.

12 The right of the partners as to the property is not subject to attachment unless it is a claim against the partnership due to the reason that any one partner is not the owner of it. Under Article 291, the specific partnership property cannot be used as the subject of legal support because it does not belong to any one of the partners. Article 1812 A partner s interest in the partnership is his share of the profits and surplus. (n) The article defines what the partner s interest in the partnership is. What is the partner s interest in the partnership? (1) DURING operations, the partner s interest is his share in profits and losses (2) AFTER operations/liquidation/dissolution, his interest is in the surplus of partnership assets after all debts have been cleared. Interest can be subject to attachment or execution because it belongs to the partner, not the partnership. Article 1813 A conveyance by a partner of his whole interest in the partnership does not of itself dissolve the partner, or, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled. However, in case of fraud in the management of the partnership, the assignee may avail himself of the usual remedies. In case of dissolution of the partnership, the assignee is entitled to receive his assignor s interest and may require an account from the date only of the last account agreed to by all the partners. (n) How can a partner convey his interest in the partnership without getting the partnership dissolved? (1) By selling it to a 3 rd person (2) By donating it to a 3 rd person (3) By using it as security on a loan from a 3 rd person D offers to buy A s interest of P50, for P1,000, and A agrees to sell his interest. What happens now? D becomes the assignee and A becomes the assignor but the partnership will not be dissolved because his interest in profits and surplus is the one being sold. A will also continue to be the partner but D will be the one to receive his profits. This is similar to sub-partnerships, so the consent of others is not required for interest to be conveyed. The assignee does not have any say in the management Rights of the Assignee: (1) He shall get the assignor s share in profits/surplus (2) He may avail of legal remedies of the partners in cases of fraud by the assignor (3) He can demand for an accounting upon dissolution but only starting from the date of the last accounting undertaken by the partnership (4) Can ask for the dissolution of the partnership if it has reached the end term or anytime if the partnership is one at will, because he is interested in the surplus. The assignee, however, cannot become a partner without the consent of the other partners because it will entail a change in the partnership s composition. Article 1814 Without prejudice to the preferred rights of a partnership creditor under Article 1827, on due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require. The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court, may be purchased without thereby causing dissolution: (1) With separate property, by any one or more of the partners

13 (2) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold Nothing in this Title shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his interest in the partnership. (n) Refers to a partner who obtained a loan from a 3 rd person and was unable to repay such. For example, PARTNER A failed to pay CREDITOR C a sum of P50,000.00, so C files against A, knowing that A, being a partner, will receive his interest. C wins the case but A is still unable to pay, so C asks that A s interest be attached so that it goes to C and cancels out A s debt. - Done to protect C s interest - Attached interest can be redeemed using the property of the partners or the partnership s property, as long as all partners consent to this, and are given reimbursement from the defaulting partner - Amount charged must e sufficient to pay the loan plus legal interest SECTION 3 Obligations of the Partners as to 3 rd Persons Article 1815 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, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner. (n) Firm names are required for partnerships because they are juridical persons in need of separate names so that they are distinguishable from the partners and other partnerships. The name can come from any of the partners or 3 rd persons. If a 3 rd person s name is used with his consent, then he shall be liable as a partner without the rights of a partner because the partnership uses his name. Partnership name must be registered with the (DTI) DEPARTMENT OF TRADE AND INDSUTRY because if there was already such an existing name, there might be cases of duplication. You cannot choose the name of a deceased partner as his death caused the partnership s dissolution. Sample General and Limited Partnership Names: (1) GENERAL A & Company (2) LIMITED A, Ltd. Article 1816 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 and for the account 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. (n) Article 1817 Any stipulation against the liability laid down in the preceding article shall be void, expect as among the partners. (n) As to 3 rd persons, ALL partners are liable pro-rata and subsidiary, but as to each other, they are liable in proportion to their capital contribution. Examples: (1) A, B and C are in a partnership where C is the industrial partner and a sum of P26, is owed to D. A and B contributed P15, and P5, respectively. How shall the debt be shared? As to D, the partners will share equally in the debt left after exhausting all assets (P6,000.00) so they will each have to pay P2, regardless of C being an industrial partner. If C is insolvent, or if B died, or if A has left the country, the liability of the partners cannot be increased. As to each other, they are liable in proportion to their capital contribution, so B and C will be reimbursed by A. (2) A, B, C, D and E are sued in court but E is later cleared of his charges. The court orders A, B, C and D to pay their creditor, but C moves to reconsider that all should be charged, but this move was denied. Can A, B, C and D alone be liable for the debt? According to the Supreme Court, the 4 partners cannot alone be liable for the debt because in excluding E, they have increased the other partners liability and this is prohibited by the law.

14 The law states that the liability of the partners cannot be increased such that they shoulder the liability of another partner. (3) What if there was an agreement that stated B is only liable up to P5,000.00? How will A, B and C share in their liability? The stipulation shall be void as to 3 rd persons, so they will still share pro-rata. Anyway, B and C will be reimbursed by A, because as among themselves, the stipulation is valid and C is an industrial partner. Article 1818 Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has no knowledge of the fact 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. Except when authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to: (1) Assign the partnership property in trust for creditors or o the assignee s promise to pay the debts of the partnership (2) Dispose of the goodwill of the business (3) Do any other act which would make 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 a claim of the partnership No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction. (n) Qualifies the authority of partners. Authority must be in the usual course of business. Transactions beyond a partner s authority is binding if it is in the usual course of business because the 3 rd person is assumed to have no knowledge of his lack of authority. When are transactions not binding? (1) When a transaction is not in the usual course of business and has no consent from all other partners (2) When the 3 rd person had knowledge of the lack of authority of the acting partner Article 1819 Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner s act binds the partnership under the provisions of Article 1818, or unless such property has been conveyed by the grantee or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority. Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of Article Where title to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, but the partnership may recover such property if the partner s act does not bind the partnership under Article 1818, unless the purchaser of his assignee, is a holder for value without knowledge. Where title to real property is in the name of one or more or all partners, or in a 3trd person in trust for the partnership, a conveyance executed by a partner in the partnership name, or in his name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under Article Where title to real property is in the names of all the partners a conveyance executed by all the partners passes all their rights in such property. (n) Refers to the conveyance of immovable property