TITLE IX - PARTNERSHIP

Chapter 1
GENERAL PROVISION *
Art. 1767. By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a
profession.

1. History of partnerships
Partnerships as a form of business organization are as ancient as the history of collective human
activity. They were known to exist as early as in ancient Babylonia (2300 B.C.) where Hammurabi's
Code regulated partnerships, ancient Greece, and the Roman Empire. Roman merchants
introduced the partnership throughout Europe particularly in the places which were conquered by
the Roman legions. England was among the countries that adopted the Roman form of partnership
with modifications. The United States followed the English common law form of partnership for
sometime until it codified its own partnership law. Today, the Uniform Partnership Act (UPA) which
governs general partnerships, and the Uniform Limited Partnership Act (ULPA) which governs
limited partnerships, and their respective revisions, are in effect in the United States.
2. Philippine partnership law
The present Civil Code which took effect on August 30, 1950 provides for the rules on partnership
whether civil or mercantile. The rules on civil partnership under the old Civil Code and on
mercantile partnership under the Code of Commerce have been repealed by the new Civil Code
whose provisions were taken from the old Civil Code and from Uniform Partnership Act (UPA) and
the Uniform Limited Partnership Act (ULPA) of the United States.
3. Partnership, concept

Under the Civil Code, a partnership is both a contract and a business organization.

A. As a contract
It is a contract whereby two or more persons bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profits among themselves (Art. 1767) *
A partnership exists when two or more persons agree to place their money, effects, labor, and skill
in lawful commerce or business, with the understanding that there shall be a proportionate sharing
of the profits and losses among them.

B. As a business organization

It has a juridical personality separate and distinct from that of each of the partners. (Art. 1768) It
begins from the moment of the execution of the contract, unless it is otherwise stipulated. (Art.
1784)

Characteristics of a contract of partnership

Essential requisites of partnership

a. There must be a valid contract.

For the existence of a valid contract of partnership, the essential elements of a contract, namely,
consent of the contracting parties, object certain which is the subject matter of a contract,
and cause of the contract, must be present. (Art. 1318) In certain cases, formalities, like a public
instrument, are also required for validity of the contract, such as where immovable property is
contributed. (Art. 1773)

Consent requires that there must be capacity on the part of the parties to enter into a contract.
Hence, minors, insane or demented persons, or deaf-mutes who do not know how to write, cannot
validly enter into a contract of partnership. Artificial persons (also juridical persons) like
partnership and corporation may likewise form a partnership with individuals or other partnerships
or corporations. Under Section 35, par. (f) of the Revised Corporation Code, corporations now
have the express power "Do enter into a partnership, joint venture persons with natural and
juridical

A joint venture (which may be entered into between two corporations) is a form of partnership and
shall be governed by the laws on partnership. (See Marsman Drysdale Land, Inc. vs. Philippine
Geoanalytics, Inc., G.R. No. 183374, June 29, 2010) In the latter case of Narra Nickel Mining vs.
Redmont Consolidated Mines Corp, G.R. No. 195580, April 21, 2014, the Supreme Court held that
"joint ventures" have been deemed to be ‘akin’ to partnerships since it is difficult to distinguish
between joint ventures and partnerships." It said that as a rule, corporations were prohibited from
entering into partnership agreements and could enter only into joint venture agreements with other
corporations or partnerships for certain transactions in order to form "pseudo partnerships". This
rule has now become moot and academic in view of Sec. 35 (f) of the Revised Corporation Code
which expressly grants corporations to enter into both partnerships.

The formation of a partnership must be voluntary. It cannot be imposed on a person because a

partnership is a fiduciary relationship. It operates under the principle of delectus personae.
(Please see discussion of delectus personae in No. 6 hereunder.)

B. There must be a mutual contribution of money, property or industry to a common fund. (Art.
1767)

A partnership is an onerous and a bilateral or multilateral contract because the parties to it are
required to make mutual contributions in money, property or industry. The property may be real
property (such as a building or a piece of land), or personal property which may be tangible (such
as an office equipment like a computer) or intangible (such as patent, goodwill or credit right). The
industry that may be contributed may be physical/manual industry (like that of a car mechanic) or
intellectual industry (like that of a lawyer or an accountant) or a combination of both. A limited
partner, however, may contribute only money and/or property, but not services. (Art. 1845) *

C. It must have a lawful object or purpose. (Art. 1770)

The partners may establish such stipulations, clauses, terms and conditions as they may deem
convenient in forming the partnership. However, such stipulations, etc., which include the object or
purpose of the partnership, should not be contrary to law, morals, good customs, public order or
public policy. (See Art. 1305.) Otherwise, the partnership is void. (See Art. 1409.)
D. The partnership must be established for the common benefit or interest of the partners which is
to obtain profits and to divide the profits among themselves. (Art. 1767, 1770)

The objective of the partnership must be to make profits although it need not be its exclusive
motive. Any profit realized (or losses sustained) shall be shared by the partners in some proportion.
However, in the case of a partnership formed for the exercise of a profession, its main purpose is
not the realization of profits but public service. This is the evident intention of the law in providing a
second sentence for Art. 1767 for such a partnership.

No partnership exists if a person who claims to be a partner has never asked for an accounting
during the time that the partnership was allegedly in existence since the essence of a partnership is
that the partners share in the profits and losses.

6. Delectus personae, concept

Delectus personae (literally, "choice of person") indicates the right that a person has to choose or
select his partners. * Occasionally, a person may be chosen as a partner because of his capability
to give the needed capital contribution. A partnership. however, is a highly personal relationship
and must necessarily be founded on mutual trust and confidence. Thus, mutual choice of partners
is based largely only desirable traits such as business ability, sound judgment, good reputation,
integrity, and experience, all which find expression in the term delectus personae. It is for this
reason that one cannot be admitted into a partnership without the consent of the partners.
7. Advantages of a partnership

A. A partnership is easier to organize since it can be formed by the mere agreement of the
partners and does not entail a high cost of formation.
B. Compared to a corporation, there is less governmental supervision and control in a partnership.
C. It is composed of people who have trust and confidence in one another; hence, one cannot be
admitted into the partnership without the consent of all the partners.
D. In the absence of a contrary agreement, every partner has a voice in the conduct of its
business since each one is considered as an agent of the partnership.

8. Disadvantages of a partnership

A. There is unlimited liability on the part of the general partners who can be held liable even to the
extent of their separate assets.
B. A partnership is easily dissolved since the death, withdrawal, or insolvency of a general
partner, among other causes, dissolves the partnership.
C. A partnership has limited existence because it has no power of succession.
D. It is more difficult to raise huge amount of capital in a partnership since it can be formed only by
people who have trust and confidence in one another.
E. An industrial partner cannot generally engage in a business of his own even if the same is of a
kind different from the partnership business.

Art. 1768. The partnership has a juridical personality separate and

distinct from that of each of the partners, even in case of failure to
comply with the requirements of Art. 1772, first paragraph.
1. Partnership as a juridical person

A partnership has a juridical personality separate and distinct from that of each of the partners.
(Art. 1768). It is a being of legal existence, susceptible of rights and obligations, or of being the
subject of juridical relations. (Roldan vs. Philippine Veterans Board, 105 Phil 1084)
Example: Johnny and Mark are partners in SM company. Here, there are three separate persons.
SM company is a person separate and distinct from Johnny and Mark, with a right to acquire
property, enter into contracts and incur obligations, and be a party to court or other actions
2. Acquisition of juridical personality even in case of failure to comply with the requirements of Art.
1772, first paragraph

Art. 1772, par. 1, provides that in a contract of partnership having a capital of P3,000.00 or more in
money or property, the following requisites must be complied with:

a. The contract shall appear in a public instrument.

b. Such public instrument shall be recorded in the office of the Securities and Exchange
Commission.
If the contract is not in a public instrument, such as when it is entered into orally or the instrument
is a private instrument, or it is in a public instrument but it is not recorded in the office of the
Securities and Exchange Commission, the partnership still acquires juridical personality. (Please
see additional comments under Arts. 1772 and 1773.)

Art. 1769. In determining whether a partnership exists, these rules

shall apply:

(1) Except as provided by Article 1825, persons who are not partners
as to each other are not partners as to third persons;

(2) Co-ownership or co-possession does not of itself establish a

partnership, whether such co-owners or co-possessors do or do not
share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a

partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are
derived;

(4) The 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, but no such
inference shall be drawn if such profits were received in payment:

(a)As a debt by installments or otherwise;

(b)As wages of an employee or rent to a landlord;

(c)As an annuity to a widow or representative of a deceased partner

(d) As interest on a loan though the amount of payment vary with the
profits of the business;

(e) As the consideration for the sale of a goodwill of a business or

other property by installments or otherwise.
1. Rules in determining whether a partnership exists

For a partnership to exist, the requisites mentioned in the discussions in No. 5 under Art. 1767
must be present. Art. 1769 provides for the following additional rules in determining whether a
partnership exists or not:
 a. Persons who are not partners as to each other are not partners as to third persons, except
when they misrepresent themselves as partners to such third persons who suffer damage
on account of the misrepresentation

Example: Johnny and Mark are not actually partners so they are not partners as to each other, they
are not also partners as regards Mr. P, a third person.

If Johnny tells Mr. P that Mark is his partner and Mark does not express any protest or objection to
Johnny's Statement, then Johnny and Mark are considered as partners with respect to Mr. P if the
latter is prejudiced by such misrepresentation. In this case, then they will be both liable if there are
any cases of such misrepresentation made by both of them. So, if Tobias grants a loan to the
ostensible partnership through Arcilla, then he can hold liable not only Arcilla but also Belleza for
the payment of the loan.

b. Co-ownership or co-possession does not of itself establish a partnership, whether or not such
co-owners or co-possessors share in any profits made by the use of the property. However,
where the co-owners contribute or invest additional capital to expand or increase the property
co owned, they are deemed to form an unregistered partnership. (See Obillos vs.
Commissioner of Internal Revenue, G.R. No. L-68118, October 29, 1985.)

Example: Arnulfo and Bertuldo are co-owners of an agricultural lot which they inherited from
Fulgencio, their father. As co owners, each is the owner of the whole lot but at the same time of an
aliquot part of it. Even if Arnulfo and Bertuldo share in the crops produced by the lot, they are not
considered as partners. However, if they use the property inherited or the incomes derived
therefrom as a common fund to produce profits for themselves, they are deemed to have formed
an unregistered partnership.

Example: Johnny and Mark are both co-owner of a Fish pond which they inherited from their father. In
this case, it does not establish any partnership since each of them is the owner of the whole lot of the
fish pond. But if they decided to increase or invest a capital from their inherited fish pond to generate
profits, then they are deemed to form an unregistered partnership.

c. The sharing of gross returns, * i.e., revenues exclusive of deductions for operating expenses,
does not of itself establish a partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the returns are derived.

Example: Onido is the owner of a lot. He engages the services of Bruselas, a broker, to sell the lot,
with the stipulation that if Bruselas obtains a price above P500,000.00 representing the cost to
Onido, the excess, exclusive of any expenses incurred by each, shall be split between them at the
rate of 80% for Onido and 20% for Bruselas. Onido and Bruselas do not become partners by their
mere sharing of the gross returns from the sale of the property.
Example: Giving an example to this, Johnny is a owner of a SM Company and then Mark, a broker,
participates to sell the lot. They stipulated that, if Mark sold the lot for the price of 2 million representing
the cost to Johnny as the excess of it, and the expenses exclusively incurred by each shall be divided
between them. In this case, Johnny and Mark did not become partners but it is just sharing of its gross
returns from the sale of property.
d. The 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. This is based on the rule that one would not be sharing in the profits
of a business unless he is a partner therein. However, no such presumption exists in the
following cases:

1. If the profits were received in payment of a debt.

Example: Ordonio is the owner of a computer shop. He wants to expand his business but does not
have the funds. So he borrows P100,000.00 from Legaspi with the stipulation that the amount of
the loan, together with the interest thereon at 10% per annum, shall be paid by Ordonio at 20% of
his annual net profits until the total amount due is fully paid. Legaspi is not a partner of Ordonio
because his receipt of a share in the net profits in Ordonio's business is only a means by which
Ordonio is paying his loan obligation and the interest thereon to him.

Example: Johnny is the owner of a water refilling station. He has plans to expand his business but he
realizes that he doesn't have enough money or funds. So, he decided to borrow a P500,000 from Mark
having with a stipulation with interest thereon at 20% per annum, he shall pay at 35% of annual net
profits until the borrowed amount due is fully paid. In this scenario, Mark and Johnny did not become
partners because Johnny's receipt of a share of his business is only paying his loan obligation and the
interest to Mark.

(2) If the profits were received as wages to an employee or rent to a landlord.

Examples: (a). Johnny has a newly opened Barber shop. He hired Mark as barber with the
stipulation that Mark shall receive a monthly salary of P10,000.00 plus 10% of the annual net
profits as his bonus. Mark does not become a partner of Johnny by his mere receipt of a share in
the net profits which is considered as a part of his compensation as an employee of Johnny. What
is being created here is an employer-employee relationship and not a partnership.

b) Ordinanza owns a factory building which he leased to Gaviola, a garment manufacturer. The
parties agreed that Gaviola is to pay Ordinanza 15% of the annual net profits of the business as
rent. No partnership exists between Ordinanza and Gaviola through the mere receipt by Ordinanza
of a portion of the profits as rent. What is created here is a lessor-lessee relationship, not a
partnership.

3) If the profits were received as an annuity to a widow or representative of deceased partner.

If a partnership is dissolved by reason of the death of a partner, and the business of the
partnership is continued without liquidation, the surviving spouse or legal representative of the
deceased partner may, among other options, ask for a share in the profits attributable to the use of
his/her right in the property. (See Art. 1841.) Such profits may be paid in the form of an annuity (a
sum of money payable yearly or at regular intervals) to the deceased partner's surviving spouse or
legal representative who, however, does not become a partner by reason of his/her mere receipt of
a share in the profits.

4) If the profits were received as interest on loan.

Example: (Please see example in No. 1.)

5) If the profits were received as the consideration for the sale of a goodwill (i.e., expected
continuance of public patronage) of a business or other property by installments or otherwise.

Example: Buenafe bought The Sunrise Baker, a bakeshop owned by Salcedo which has been in
operation for the past 15 years in Sunrise Subdivision. The parties agreed that Buenafe would pay
the price of P6,000,000.00 according to the following terms and conditions: P4,500,000.00 for the
lot, building, bakery equipment and other personal properties, to be paid upon execution of the
contract, and P1,500,000.00 for the goodwill of the business, to be paid by Buenafe to Salcedo at
20% of the annual net profits until fully paid. No partnership arose between Buenafe and Salcedo
even during the time that Salcedo receives a share of the profits, which is but a consideration for
the sale of the goodwill of the business to Buenafe

Art. 1770. A partnership must have a lawful object or purpose, and

must be established for the common benefit or interest of the
partners.

When an unlawful partnership is dissolved by a judicial decree, the

profits shall be confiscated in favor of the State, without prejudice to
the provisions of the Penal Code governing the confiscation of the
instruments and effects of a crime.

1. Lawful object or purpose

A partnership must have a lawful object or purpose consistent with the principle that while the
parties to a contract have the freedom to stipulate on its terms, the same should not be contrary to
law, morals, good customs, public order or public policy. (Art. 1306). Although a partnership may
have been lawful at the start, it shall be deemed dissolved if "any event makes it unlawful for the
business of the partnership be carried on, or for the members to carry it on partnership" (Art. 1830,
No. 3)

2. Effects of an unlawful partnership

 a. If the illegality of the partnership constitutes a crime

1. The partnership is void. (Art. 1409) Thus, it has no juridical personality.

2. The partners will be criminally prosecuted. (Art. 1411), and
3. The proceeds of the crime and the instruments or tools with which it was committed
shall be forfeited in favor of the government, unless they be the property of a third person
not liable for the offense, but those articles which are not the subject of lawful commerce shall
be destroyed. (Art. 45, Revised Penal Code)

b. If the illegality of the partnership does not constitute a crime or there has been no criminal
prosecution

1. The partnership is void. (Art. 1409) Thus, it has no juridical personality.

2. The proceeds or profits, but not the contributions of the partners shall be forfeited.

3. Examples of an unlawful partnership

A partnership formed to operate a gambling house or a prostitution house, or to smuggle
goods.

Art. 1771. A partnership may be constituted in any form, except

where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary.

Art. 1772. Every contract of partnership having a capital of three

thousand pesos or more, in money or property, shall appear in a
public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.

Failure to comply with the requirements of the preceding paragraph

shall not affect the liability of the partnership and the members
thereof to third persons.

Art. 1773. A contract of partnership is void, whenever immovable

property is contributed thereto, if an inventory of said property is not
made, signed by the parties and attached to the public instrument.
1. Form of partnership contract

A partnership contract may be entered into in any form (Art. 1771), i.e., oral or written, since it is
a consensual contract. However, a particular form is required in the following cases:

a. Where immovable property or real rights thereto are contributed (regardless of the amount
thereof)
1) The partnership contract must be in a public instrument, and
2) An inventory or listing of the said property must be made, signed by the parties and
attached to the public instrument. (Art. 1773)

This second requirement is satisfied if the inventory is incorporated in the public instrument itself
especially in cases where there are only a few of such immovable property contributed. *

Failure to comply with the above requirements produces the following effects:

1. The partnership contract is void. (Art. 1773)

2. The partnership does not acquire juridical personality.

B. Where the partnership capital is P3,000.00 or more in money or property (without immovable
property)

1) The partnership must be in a public instrument, and

2) Registered with the Securities and Exchange Commission (SEC). (Art. 1771)

Failure to comply with the above requirements produces the following effects:

1) The partnership contract is still valid. Accordingly, the partnership still acquires juridical
personality. (Art. 1768, 1772)
2) The liability of the partnership and members thereof to third persons are not affected.
(Art. 1772)

C. If the partnership is a limited partnership

1. A certificate must be signed and sworn to by the partners, and

2. Recorded with the SEC. (Art. 1844)

Failure to comply with the above requirements produces the following effects:

1) The partnership will be considered a general partnership.

2) The partnership still has a juridical personality.

This is, of course, subject to the rule that if an immovable property was contributed, the partnership
agreement must be in a public instrument and an inventory of the immovable property contributed
must have been made, signed by the parties, and attached to the public instrument. (Note: A
private instrument becomes a public instrument if is acknowledged before a notary public by the
parties to it.)

2. Requirement for registration with the SEC *

While registration with the SEC is not a condition precedent for the acquisition by the partnership of
a juridical personality, still registration is required for the following reasons:
a. The local government under whose jurisdiction the partnership will operate its business
requires such registration for the purpose of the issuance of the business permit of the
partnership. Without such business permit, the partnership will be considered as operating
illegally. Before the filing of the application for business permit, presentation of such registration
is also required for the issuance of the barangay clearance in the place where the partnership
will operate. Such registration will enable the local governments to assess the taxes, license
fees and other liabilities of the partnership.
b. The Revenue District Office of the Bureau of Internal Revenue (BIR) under whose jurisdiction
the partnership will operate its business also requires the of its registration with the SEC
(together with the business permit from the local government) so that the partnership can be
issued a BIR Registration Certificate and be authorized to print receipts and invoices.
Operating a business without these documents (as well as other requirements such as
maintenance of books of accounts duly approved) constitutes a violation of internal revenue
laws. Just like with local governments, registration with the SEC will also enable the BIR to
assess the tax and other liabilities of the partnership. In addition, other government agencies
such as the Department of Labor and the Social Security System may also require such
registration to determine compliance with their rules and regulations.

c. Registration of the partnership with the SEC may also be required by third persons who may
want to know whether the partnership really exists, and to determine the composition of the
partnership, its capitalization and other matters before dealing with it.
(Note: What the SEC issues to the partnership is a Certificate of Recording which is but an
acknowledgment that the articles of partnership are recorded with it.)

Art. 1774. An immovable property or an interest therein may be

acquired in the partnership name. Title so acquired can be conveyed
only in the partnership name.
1. Acquisition of property by a partnership

As a juridical entity (Art. 1768), a partnership may acquire in its own name not only immovable
property or interest in such property, (Art. 1774) but property of all kinds, including movable
property. (See Art. 46.)

2. Conveyance of immovable property acquired in partnership name

Immovable property or any interest in such property acquired by a partnership in its own name can
be conveyed only in the partnership name. (Art. 1774) In certain instances, however, the
immovable may not be under the name of the partnership for some purpose, such as for
convenience. Art. 1819 provides for more specific rules in case an immovable property belonging
to the partnership is in the name of the partnership or in the name of one or more or all of the
partners or of a third person in trust for the partnership, and such property is conveyed, by one or
more or all of the partners, including instances when the conveyance was without express
authority.

Art. 1775. Associations and societies, whose articles are kept secret
among the members, and wherein any one of the members may
contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co-
ownership.
1. When articles are kept secret among the members
A partnership, being a juridical person, transacts business in its own name through the partner or
partners designated as agents of the firm. Third persons intending to deal with a partnership have
a right to know its articles and may even require presentation of its registration with the SEC, for
their own protection. [Please see discussions in No. 2 (c) under Art. 1771, 1772 and 1773] So if an
association or society keeps its articles secret among its members, and each member may
contract in his own name with third persons, it shall have no juridical personality. In such a
case, it shall be governed not by the provisions of partnership, but by those relating to co-
ownership.

2. Suits by or against voluntary association under the provision

a. It cannot sue as such because “(Only natural or juridical persons, or entities authorized by
law may be parties to a civil action." (Rule 3, Sec. 1, Rules of Court)

b. It may be sued as such in its common name to prevent prejudice to third persons. Rule 3, Sec.
15 of the Rules of Court provides "(When two or more persons not organized as an entity with
juridical personality enter into a transaction, they may be sued under the common name by
which they are generally or commonly known."

Art. 1776. As to its object, a partnership is either universal or

particular.

As regards the liability of the partners, a partnership may be general

or limited.
1. Kinds of Partnership
a. As to object
1. Universal partnership

a. Universal partnership of all present property (Art. 1778)*

b. Universal partnership of profits (Art. 1780)*

(2) Particular partnership (Art. 1783)*

b. As to liability of the partners

1) General partnership - One where all the partners are general partners who are liable to the
extent of their separate properties.

2) Limited partnership - One where there is at least one general partner and at least one limited
partner. The general partners are liable to the extent of their separate properties, while the limited
partners are liable only to the extent of their contributions to the firm. (See Art. 1843.).

c. as to duration

1) Partnership for a fixed term (Art. 1785)*

2) Partnership for a particular undertaking (Art. 1785)*

3) Partnership at will (Art. 1785)*

d. Other kinds

1. Partnership by estoppel (Art. 1825)*

*Please see definitions and discussions in corresponding articles.

Kinds of partners

a. As to liability

1) General partner - One who is liable for partnership debts to the extent of his separate property
after all the assets of the partnership have been exhausted. (Art. 1816)

2) Limited partner - One who is liable for partnership debts to the extent of his capital contribution
only (Art. 1843)

3) General-limited partner - One who has all the rights and powers and is subject to all the
restrictions of a general partner, except that in respect to his contribution, he shall have all the
rights against the other members which he would have had if he were not also a general partner.
(Art. 1843). Hence, he shall be liable pro rata to partnership creditors to the extent of his separate
property after the partnership assets have been exhausted, but he can demand reimbursement of
the amount he has paid from the general partners.

b. As to contribution

1) Capitalist partner - One who contributes money and/or property to the common fund. (Art. 1767)

2) Industrial partner - One who contributes his services or industry to the partnership. (Art. 1767,
1789) Such industry may be physical or intellectual industry.

3) Capitalist-industrial partner - One who contributes not only money and/or property, but also
services to the partnership.

c. Other classifications

1. Managing partner - One who manages the business or affairs of the partnership. (See Art.
1800.)
2) Liquidating partner - One who takes charge of the winding up of the affairs of the partnership
after it is dissolved. (See Art. 1836.)
3) Nominal partner - One who is not actually a partner but who may become liable as such to third
persons (such as a partner by estoppel.) (See Art. 1825.)
4) Ostensible partner - One who is active and known to the public as a partner, such as by allowing
his name to be included in the firm name.
5) Secret partner - One whose connection with the partnership is kept from the public.
6) Silent partner - One who has no voice or active part in the management of the business of the
partnership (though he shares in the profits and losses and may be known to the public as a
partner).
7) Dormant partner - One who does not participate in the management of the business and is not
known to the public as a partner, i.e., he is a secret and silent partner.

Art. 1777. A universal partnership may refer to all the present

property or to all the profits. (1672)

Art. 1778. A partnership of all present property is that in which the

partners contribute all the property which actually belongs to them to
a common fund, with the intention of dividing the same among
themselves, as well as the profits which they may acquire therewith.

Art. 1779. In a universal partnership of all present property, the

property which belong to each of the partners at the time of the
constitution of the partnership, becomes the common property of the
partners, as well as all the profits which they may acquire therewith.
A stipulation for the common enjoyment of any other profits may also
be made; but the property which the parties may acquire
subsequently by inheritance, legacy, or donation cannot be included
in such stipulation, except the fruits thereof. (1674a)

Art. 1780. A universal partnership of profits comprises all that the

partners may acquire by their industry or work during the existence of
the partnership.

Movable or immovable property which each of the partners may

possess at the time of the celebration of the contract shall continue to
pertain exclusively to each, only the usufruct passing to. the
partnership.
1. Kinds of universal partnership

A. Universal partnership of all present property

B. Universal partnership of profits

2. Universal partnership of all present property

a. Concept

This is a partnership in which all the partners contribute all the properties which actually belong to
them to a common fund, with the intention of dividing the same among themselves, as well as the
profits which they may acquire therewith. (Art. 1778)

b. Properties which shall belong to the common fund:

1. Properties belonging to the partners at the time of the constitution of the partnership (present
properties).
2. Profits that may be acquired from the present properties.
3. Properties acquired by each partner after the formation of the partnership but only if stipulated.
The property shall include:

a) The property itself, except that the stipulation does not cover properties acquired by inheritance,
legacy or donation. (not contributed or do not belong)
b) The profits and fruits therefrom, including those from properties acquired by inheritance, legacy
or donation. (Art. 1779)

C. Illustration

A and B entered into a universal partnership of all present property. At the time of the execution of
the partnership, A owned 5 delivery trucks, a warehouse building, and 5 cars, while B owned a five-
hectare fruit and vegetable farm, a tractor, and a poultry farm. During the first year of the
partnership, the following transactions took place:

1) The delivery trucks earned trucking income. /

2). The warehouse earned storage income. /
3) The cars realized revenues from their lease. /
4) Fruits and vegetables were harvested from the farm. /
5) Chickens and eggs were produced from the operations of the poultry farm. /
6) Partner A purchased a commercial building from his own funds. x
(7) Rent was realized from the commercial building. x
8) Partner B inherited a rice field. x
9) Rice was harvested from the rice field. x

Based on the foregoing data, what properties belong to the partnership? The following properties
belong to the partnership:

1. The delivery trucks, warehouse and cars (from Partner A), and the fruit and vegetable farm,
tractor and poultry farm (from Partner B), as these were properties owned by the partners at
time of the establishment of the partnership (present properties) which were deemed
contributed by the partners to the partnership.

2. The trucking income, storage income, lease revenues, fruits and vegetables harvested, and
chickens and eggs, because they are fruits of the present properties. So also is the use of the
tractor.

The following, however, do not belong to the partnership:

1. The commercial lot and building (purchased by Partner A) and the rental therefrom since there
was no stipulation that after-acquired properties shall belong to the partnership. If there was
 such stipulation, both the commercial lot and building and the rental therefrom which represent
their fruits, shall belong to the partnership.

2. The rice field inherited by Partner B, which will not belong to the partnership in any case
because any stipulation on the inclusion of after-acquired properties cannot include properties
acquired by inheritance, legacy or donation. The rice harvested, likewise does not belong to the
partnership, because of the absence of stipulation on the inclusion of after acquired properties.
If there was such stipulation, however, that after-acquired properties shall belong to the
partnership, only the rice harvested will belong to the partnership, but not the rice field
the ownership of which is retained by B.
3. Universal partnership of profits

A. Concept

This comprises all that the partners may acquire by their work or industry during the existence of
the partnership. (Art. 1780)

B. Profits/properties belonging to the common fund

1) Profits acquired by the partners by their work or industry during the existence of the partnership.
(Art. 1780)

Accordingly, profits acquired by the partners without the exertion of physical or intellectual efforts,
such as those acquired by chance or lucrative title (donation or inheritance) are excluded.

2) The usufruct (the use) of the properties belonging to each partner at the time of the constitution
of the partnership. (Art. 1780)

The ownership of the properties (whether movable or immovable) belonging to each partner at the
time of the constitution of the partnership shall pertain exclusively to each partner as only the
usufruct passes to the partnership. (the property itself shall not be included in the
partnership)

3) The profits and fruits from aforementioned (Items 1 and 2) the properties

4) Profits and fruits, if stipulated, of properties acquired by each partner after the constitution of the
partnership.

C. Illustration

A and B entered into a universal partnership of profits. At the time of the execution of the
partnership, A owned 5 delivery trucks and a warehouse building, while B owned a five-hectare
fruit and vegetable farm and a tractor.. During the first year of the partnership, the following
transactions took place:

1) The delivery trucks earned trucking income. /

2) The warehouse earned storage income. /
3) Fruits and vegetables were harvested from the farm. /
4) Partner A purchased a commercial lot and building from his own funds. X
5) Rent income was realized from the commercial building. X
6) Partner B inherited a rice field. X
7) Rice was harvested from the rice field. X
8) Partner A earned a salary as management consultant of several companies outside the
partnership. /
9). Partner B won first prize in the lotto. X

Based on the foregoing data, what properties belong to the partnership? The following properties
belong to the partnership:

1) The trucking income, storage income, and the fruits and vegetables produced, which are
considered fruits of the present properties of the partners at the time of its establishment.
2) The use of the delivery trucks, warehouse, and fruit and vegetable farm.
3) The salary of Partner A which was obtained by his work or industry.

The following, however, do not belong to the partnership:

1) The delivery trucks, warehouse, and fruit and vegetable farm (present properties), whose
ownership is retained by the respective owner partners, as only their use partnership. and fruits
were contributed to the partnership
2) The commercial lot and building which are after acquired properties. If the present properties of
the partners do not belong to the partnership, with more reason should after-acquired properties
not belong to the partnership.
3) The rent income of the commercial lot and building and the rice harvested since there was no
stipulation that fruits of future properties shall be included.
4) The rice field and lotto winnings which were acquired by lucrative title and chance, respectively,
and not by work or industry.

Art. 1781. Articles of universal partnership, entered into without

specification of its nature, only constitute a universal partnership of
profits. (1676)
1. When there is no specification of nature of universal partnership

When the articles of a universal partnership do not specify its nature, such universal partnership
only constitutes a universal partnership of profits. (Art. 1781)

2. Reason for rule

A universal partnership is in effect a donation; hence, if the articles do not indicate its nature,
whether it is a universal partnership of all present property or of profits, it shall be considered as
the latter because it transmits less rights and privileges as only the use and fruits of the partner's
properties are contributed. This is based on the rule that if the doubt in interpretation refers to the
incidents of a gratuitous contract, the less transmission of rights shall prevail.

Art. 1782. Persons who are prohibited from giving each other any
donation or advantage cannot enter into universal partnership. (1677)
1. Prohibition to enter into a universal partnership
Persons who are prohibited from giving each other any donation or advantage cannot enter into a
universal partnership. The following donations are void:

a. Donations between spouses during the marriage, except moderate gifts given on the occasion
of a family rejoicing. The prohibition applies to persons living together as husband and wife
without the benefit of marriage; (Art. 87, Family Code) otherwise, they will be in a better
position than those who are legally married.

b. Those made between persons who were guilty of adultery or concubinage at the time of the
donation. (Art. 789) JOHNNY AND MARIA ARE BOTH LEGALLY MARRIED AND AT THAT TIME
OF DONATION WHERE THEY DONATED EACH OTHER A 5 CONDOMINIUM UNITS, THEY
WERE ALREADY GUILTY OF ADULTERY.

c. Those made between two persons found guilty of the same criminal offense, in consideration
thereof. (Art. 789)

d. Those made to a public officer or his wife, descendants or ascendants, by reason of his office.
(Art. 789)

2. Reason for the prohibition

As previously mentioned, the parties to a universal partnership are in effect making a donation to
each other. Allowing such persons to enter into a universal partnership will be a circumvention of
the prohibition on donations between them. In other words, they may make it appear that they
entered into a universal partnership to hide their actual intention of donating properties or rights to
each other.

Art. 1783. A particular partnership has for its object determinate

things, their use or fruits, or specific undertaking, or the exercise of a
profession or vocation. (1678)

1. Particular partnership, concept

A particular partnership is one whose object or purpose is specifically defined, as distinguished

from a universal partnership which covers a very broad or unlimited scope of activities.

2. Object of a particular partnership

a. Determinate things, as for example, a partnership to engage in the real estate business with
Partner A contributing 2 specific lots, and Partner B contributing 5 specific condominium units.
b. The use or fruits of determinate things, as for example a partnership is formed to engage in the
business of leasing of motor vehicles to third persons, with Partner A contributing the use of 10
specific sedans and Partner B contributing the use of 5 specific vans.

c. Specific undertaking, as for example a partnership is formed for the construction of 5 residential
apartments.
d. Exercise of a profession, as for example, a law firm or an auditing firm

PARTNERSHIP VS. CORPORATION

A partnership is formed when two or more individuals or businesses come together to do
business for profit, and share the ownership, liability and profits of the business.
A corporation, on the other hand, is a separate legal entity, which is owned by
shareholders. It has legal rights and liabilities, and may work for profit or not for profit.
 Chapter 2 - OBLIGATIONS OF THE
PARTNERS
Section 1
Art. 1784. A partnership begins from the moment of the execution of
the contract, unless it is otherwise stipulated. (1679)
1. Acquisition by a partnership of juridical personality

As a rule, a partnership commences to exist upon the execution of the partnership contract. This is
so because a partnership is a consensual contract (a partnership arises when there is a execution of the
contract, since that partnership is a consensual contract. So, from the moment that they execute the contract, there is
already a partnership existing, however they can stipulate another specific date for it to exist) The partners,
however, may stipulate for a different date when the partnership begins to exist. Such rule and
exception apply even if the partnership is registered with the Securities and Exchange Commission
which merely issues a certificate of the recording of the articles of partnership that have been filed
with it. It is different in the case of a corporation which commences to exist on the date stated in the
certificate of incorporation that the Commission issues.

Art. 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)
1. Kinds of partnership as to duration

a. Partnership for a fixed term - One for which a duration is fixed by the partners, such as a
partnership formed for a term of 5 years upon the expiration of which the partnership is deemed
dissolved.

b. Partnership for a particular undertaking - One which is organized for a certain undertaking, such
as a partnership that is formed to sell 50 condominium units, and is deemed dissolved upon the
sale of the last unit.

c. Partnership at will - One that may be terminated at any time by one or more or all of the partners.
It may be:

1) One where the partners did not agree on a definite term or a specific undertaking; or
2) One where the partnership was formed for a fixed term or a specific undertaking and such term
expires or such undertaking is attained, but the business is continued by the partners. The
continuation of the business in such a case produces the following effects:

a) The rights and duties of the partners remain the same as they were at such expiration of the
term or attainment of the undertaking.
b) The absence of settlement or liquidation of the partnership is a prima facie evidence of the
continuation of the partnership.

Art. 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 be liable for the fruits thereof
from the time they should have been delivered, without the need of
any demand. (1681a)
1. Obligations of a partner with respect to contribution of specific things

a. To deliver to the partnership at the time it was constituted or on the date stipulated the property
he has promised to contribute.
b. To take care of the property before its delivery to the partnership with the diligence, as a rule, of
a good father of a family. (Art. 1163)
c. To be liable for damages in case of default.
d. To answer for eviction in case the partnership is deprived of the property he has contributed.

Eviction is the deprivation of the vendee of the whole or part of the thing sold by virtue of a final
judgment based on a right prior to the sale or an act imputable to the vendor. (The partner promised
to contribute to the property, then he did not give the whole or part of the property to the partnership so the
partnership cannot use it) (Art. 1548.) The partner's liability in case of eviction shall be the same
as that of the vendor violating his warranty and consists of the following:

1) The value of the property at the time of eviction.

2) Income or fruits, if the partnership has been ordered to deliver them to the party who won the
suit against it.
3) Cost of suit which caused the eviction, and, in a proper case, those of the suit brought against
the partner for the enforcement of the warranty.
4) Expenses of the contract, if the partnership has paid them, and
5) Damages and interests, and ornamental expenses, if the contribution was made by the partner
in bad faith. (See. Art. 1553, 1555.)

e. To be liable for the fruits of the thing from the time they should have been delivered without the
need of demand. (Art. 1786)

Art. 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, and in the of
stipulation, it shall be made by experts chosen by the partners, and
according to current prices, the subsequent changes thereof being for
the account of the partnership. (n)
1. Appraisal, concept and reason therefor
Appraisal is the act or process of determining the value of a property as of a specific date for a
specific purpose. ( act or process of evaluating a value of a property (such as real estate, a
business, collectible) as of a specific date for a specific purpose) [Sec. 3 (d), Real Property Tax
Code.]. Goods contributed to the capital of a partnership should be appraised to determine the
amount to be credited to the capital account of the partner making the contribution.

2. Manner of appraisal

The goods contributed to the capital of a partnership shall be appraised:

a. According to the manner stipulated in the contract of partnership.

b. In the absence of stipulation, the appraisal shall be made by experts chosen by the partners,
according to current prices.

3. Effect of changes subsequent to contribution

Any improvement or diminution in the value of the goods (if it increases or decreases) after their
appraisal shall be for the account of the partnership. Thus, any decrease in value taking place
after appraisal shall be borne by the partnership, in the same manner that an increase thereof,
shall be for the benefit of the partnership.

Art. 1788. A partner who undertakes 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)
1. Obligations of a partner with respect to contribution of money (when he failed to contribute a
sum of money)
a. To deliver to the partnership at the time it was constituted or on the date stipulated the money he
has promised to contribute to the partnership.
b. To pay interest on the amount he had promised to contribute from the time he should have
complied with his obligation.
c. To pay damages suffered by the partnership by reason of his default. (Art. 1788)

2. Obligations of a partner with respect to amount appropriated

a. To reimburse to the partnership the amount that he has taken from the partnership coffers.
b. To pay interest on the amount he had converted for his own use from the time of conversion.
c. To pay the damages suffered by the partnership by reason of the conversion. (Art. 1788)

The foregoing obligations shall be without prejudice to any criminal action that may be instituted
against him by the partnership by reason of the conversion of the funds for his own use.
Art. 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)
1. Right of an industrial partner to engage in business apart from the partnership business - Can a
industrial partner enter or engage in another business apart from the partnership ? no.

An industrial partner cannot engage in business for himself unless the partnership
expressly permits him to do so. (Art. 1789) The prohibition applies even if the business he will
engage in is of a kind that is different from the partnership business.

2. Reason for the prohibition

The partnership is the owner of the services of the industrial partner, which are his contribution to
the common fund of the partnership. Accordingly, he must devote all his industry to the partnership;
otherwise, the partnership business would be prejudiced not only because his attention will be
divided between the two businesses, but that he may also give priority or preference to his own
business over that of the partnership.

3. Effect if the industrial partner engages in business for himself without the express permission of
the partnership

The capitalist partners may avail themselves of any of the following remedies:

a. Exclude him from the partnership business, with a right to damages.

This will, of course, result in the dissolution of the partnership (since the capitalist partner excluded him,
which is the industrial partner, that causes the partnership business to dissolve) as the industrial partner ceases
to be associated in the carrying on of the partnership business. (See Art. 1828.)

b. Avail themselves of the benefits obtained from the business he engaged in, with a right to
damages. (Art. 1789)

4. Example: Peanut Vulcanizing Shop is a partnership composed of partners Johnny, Jake, Jay,
Mark and Renato. Johnny is an industrial partner who manages the partnership, while the rest are
capitalist partners.

a. May Johnny engage for himself in the business of dealing in computers without the consent of
the partnership?

Answer:
No, even if the business he intends to engage in is of a kind different from the partnership
business. This is so because the partnership is the owner of his services. Otherwise, the capitalist
partners may expel him from the partnership or avail themselves of the benefits obtained by
Johnny from his own business, with a right to damages on the part of the capitalist partners in
either case.

b. How about Jake? May he engage in the business of dealing in computers without the consent of
the partnership? Answer:

Yes, Jake, being a capitalist partner, may engage in such business for his own account even
without the consent of the partnership because it is of a kind different from the partnership
business. However, Jake cannot engage in the same Vulcanizing Shop business without the
consent of the partnership because it will appear that he will be unfairly competing with the
partnership business. Otherwise, he will be required to bring to the common fund any profits
accruing to him from his transaction, and he shall personally bear all the losses. (See Art. 1808.)

Art. 1790. Unless there is a stipulation to the contrary, the partners

shall contribute equal shares to the capital of the partnership. (n)
1. Obligation of partners to contribute equal shares

The partners are obliged to contribute equally to the capital of the partnership, unless they agree to
contribute different. amounts. This provision does not apply to those designated as industrial
partners whose contribution to the partnership is their services, unless they are also capitalist
partners at the same time.

2. Example

A, B and C agreed to form a partnership with a total capitalization of P90,000.00. In the absence of
stipulation, each one shall contribute P30,000.00.

Art. 1791. If there is no agreement to the contrary, in case of an

imminent loss of the business of the partnership, any partner who
refuses to contribute an additional share to the capital, except an
industrial partner, to save the venture, shall be obliged to sell his
interest to the other partners. (n)
1. Obligation to contribute additional capital - (pertains only to CAPITALIST PARTNERS)

In case of an imminent loss of the business of the partnership, each partner is obliged to
contribute additional share to the capital to save the business. This obligation, however, does
not apply to the following:

a. Industrial partners.
b. Capitalist partners who, by agreement, are not required to give additional contribution to
the capital.
2. Effect if capitalist partner refuses to contribute unless exempt under No. 1 (b) above

Such partner shall be obliged to sell his interest to the other partners, unless his financial condition
does not permit him to make such additional contribution. The sale by such partner of his interest in
the firm may justify the other partners to bring about the dissolution of the partnership. [See Art.
1813 and Art. 1830, par. 1 (c)], though the remaining partners may continue the business. (since
partnership is fiduciary, they have to do what it takes to save the partnership business)

Art. 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 the partner should be more onerous to him. (1684)
1. Rule when payment is made by a third person who owes separate demandable debts to the
partnership and to the partner authorized to collect the credits of the partnership

a. If the partner authorized to receive payment issues the receipt of the partnership, payment
shall be applied in entirety to the partnership credit.
b. If the partner authorized to receive payment issues his own receipt, payment shall be
applied to the two credits proportionately

This is so because the partner should not place his interest ahead of that of the partnership

2. When payment is applied in its entirety to the partner's credit

a. When the debt is owed by the third person to a partner not authorized to collect the
credits of the partnership.
b. When the debt to the partnership is not yet due.
c. When the debt owed by the third person to the partner authorized to receive payment is
more onerous to the debtor and the latter avails himself of the right to apply the payment
to such debt.
3. Illustration
Paro-paro Enterprises is a partnership composed of Partner A, B, C, Dand E. Partner A is the
manager who is authorized to collect the credits of the partnership. Mark, a third person, owes
Partner A amounting to P20,000.00 (/45,000) and Paro-paro Enterprises for P30,000.00 (/65,000).
Both debts are due Mark tenders payment of P20,000.00 (/35,000) to Partner A in payment of his
debt to the latter.

1) To which credit will the payment be applied if Partner A issues his own receipt?

To both Partner A and Paro-paro’s credit proportionately at P8,000.00 (20,000/50.000 X

P20,000.00) (45k/110k x 35k = 14,318.18) and P12,000.00 (30,000/50,000 x P20,000.00)
(65k/110k x 35k = 20,681.18), respectively. Partner A, as the partner authorized to collect the
credits of the partnership should not place his interest before that of the partnership.

2) Will your answer be the same if PArtner A issues the receipt of the partnership?
No. In such a case, the payment will be applied in its entirety to the partnership credit. Here,
Partner A can no longer be accused of preferring his interest to that of the partnership.

b. In (a) above, when will the payment be applied in its entirety to Mansueto's credit? Answer:

1. If Partner A is not the partner authorized to collect the credits of the partnership. Here,
Mansueto cannot be accused of preferring his interest to that of the partnership

2. If Partner A’s credit is already due, while that of the partnership is not yet due. Here, payment
of the partnership credit cannot yet be demanded from Mark even if partner A is the partner
authorized to collect the credits of the partnership.

3. If the debt of Mark to Partner A is more onerous to Mark, i.e.. more burdensome to Mark, such
as when it is interest-bearing while his debt to the partnership is not, and Mark chooses to
apply the payment to such more onerous debt, which right is available to him under Art. 1252.

Art. 1793. A partner 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 have given receipt for his share only. (1685a)
1. Application of the provision

This provision applies if the following requisites are present:

a. The partners have agreed to divide a partnership credit among themselves.

b. The partnership has not been dissolved.

If the partnership has been dissolved, the provision will not apply because the community of
interest among the partners no longer exists. Hence, the partner who has collected his share is not
obliged to bring the amount to the partnership capital.

c. A partner has collected his share of the credit.

d. The other partners have not collected their respective shares by reason of the debtor's
insolvency.

2. Reason for bringing amount collected to the partnership capital

A partnership is formed for the common benefit of the partners. Accordingly, the partner who
has collected his share of the credit must share such benefit with the other partners. (so, even if
the partner already collected his share of the credit, he shall be obliged to share his
benefited among his partners)

3. Example: Johnny, Jake, and Jay are partners in JJJ Company. The partners decided to share
proportionately among themselves a partnership receivable amounting to P12,000.00 from Mark,
and each one has the authority to collect a share of P4,000.00. Johnny was able to collect his
share, but when Jake and Jay demanded payment of their respective shares from Mark, he could
no longer pay them because he was already insolvent. In this case, Johnny must bring to the
partnership capital the amount of P4,000.00 that he had collected so that Jake and Jay will be able
to share in it. Conclusively, Johnny will have such an obligation even if he issued his own receipt
for the amount he had collected.

Art. 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, unusual
profits have been realized.
1. Liability of a partner for damages suffered by the partnership due to his fault
A partner shall be liable to the partnership for damages suffered by it through his fault. This
liability cannot be compensated with the profits and benefits which he may have earned for
the partnership by reason of his industry. This is to ensure that a partner will exercise
reasonable care and skill in carrying out his duties. The liability, while it cannot be totally
eliminated, may however be equitably reduced by the courts if unusual profits have been realized
by the partnership in other activities through the extraordinary efforts of the partner at fault.

2. Example
Johnny was given authority by his co-partners to invest some of the partnership funds in certain
shares of stock. Without consulting the stockbroker of the partnership as mandated by a resolution
which the partners had previously adopted, Johnny purchased 1,000 shares of a mining firm. The
price of the shares soon declined and the partnership had to dispose of them at substantial loss. In
this case, Johnny has the obligation to the partnership for the loss it sustained. He shall be
responsible for the loss even if he may have earned profits for the partnership by reason of his
industry.

Now, If Johnny, however, earned unusual profits for the partnership through his extraordinary
efforts in other activities, such as when he was able to substantially increase the market share of
the goods produced by the partnership, he will still be liable for damages, (but may however be
equitably reduced by the courts) but this time, such liability may be equitably reduced by the courts.

Art. 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 of which they were appraised. (1687)
1. The partnership shall bear the risk of loss for the following contributions of partners:

a. Fungible things or those that cannot be kept without deteriorating.

Fungible goods refer to interchangeable goods such as grain, oil, etc., that allow one to be
replaced by another without loss of value.

b. Things contributed to be sold.

c. Things brought and appraised in the inventory, unless the contrary was stipulated
2. When partner bears risk of loss

The partner bears the risk of loss 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.

It may be noted that when only the use of the thing is contributed by a partner, the loss of the thing
will result in the automatic dissolution of the partnership since he is deemed not to have contributed
anything to the partnership. (See Art. 1830, par. 4.)

Art. 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 aiso 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. (1688a).
1. Obligation of partnership to partners

a. To pay to the partner for the amounts he may have disbursed on behalf of the partnership with
interest from the time the expenses were made.

Thus, if a partner advanced the payment of electric bills or taxes owed by the partnership, the firm
must reimburse him for such payment with interest from the time it was made.

b. To pay for the obligations which a partner may have contracted in good faith in the interest of the
partnership business.

For example, the partnership must answer for a credit purchase of goods made by a partner in
good faith in the conduct of the partnership business.
c. To answer for risks in consequence of the management of the partnership business.

For example, a partner bought goods for P50,000.00 A day later, the price of the goods dropped to
P30,000.00 The loss of P10,000.00 shall be borne by the partnership provided the partner was free
from all fault in making the purchase.
2. Reason for the rule

Each partner, in the absence of any agreement, is an agent of the partnership in the pursuit of its
business.

Art. 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)
1. Rules on division of profits and losses
a. If all the partners are capitalist partners
1. Profits and losses shall be divided according to their agreement.
2. If only the sharing of the partners in the profits has been agreed upon, the share of each
partner in the losses shall be in same proportion as the share of each in the profits.
3. In the absence of both, the share of each partner in the profits and losses shall in proportion
to his capital contribution.

Example:

JJJM Company is a partnership composed of JOhnny, Jake, Jay and Mark. Johnny contributed
P50,000.00; Jake, P30,000.00; Jay, P15,000.00; and Mark, P5,000.00. During the year, BEST
Company realized a net profit of P10,000.00.

1. Assuming that the partners stipulated in the articles of partnership that profits would be divided
in the ratio of 5:2:2:1. Johnny’s share would be P5,000.00; Jake, P2,000.00; Jay, P2,000.00;
and Mark, P1,000.00.

2. If the partners did not have a profit-sharing agreement, the profit shall be divided according to
the ratio of their capital contribution. Thus, Johnny’s share would be P5,000.00; Jake,
P3,000.00; Jay, P1,500.00; and Mark, P500.00.

If JJJM Company instead suffered a loss of P10,000.00, such loss shall be divided among the
partners as follows:
1. If the partners stipulated in the articles of partnership that losses would be divided in the ratio
of 4:3:2:1, Johnny’s share would be P4,000.00; Jake, P3,000.00; Jay, P2,000.00; and Mark,
P1,000.00.

2. If the partners did not have any agreement as to the division of losses, but they have an
agreement as to the sharing in the profits in the ratio of 5:2:2:1 as shown in the preceding
example on profit-sharing, Johnny’s share in the loss would be P5,000.00; Jake, P2,000.00;
Jay, P2,000.00; and Mark, P1,000.00.
3. the sharing in the profits in the ratio of 5:2:2:1 as shown in the preceding example on profit-
sharing, Johnny’s share in the loss would be P5,000.00; Jake, P2,000.00; Jay, P2,000.00;
and Mark, P1,000.00.

Note: The ratios or capital contributions have been converted into fractions or percentages by
adding the figures as follows: 5+ 2+2+1=10; thus, 5/10, 2/10. 2/10, and 1/10: 4 +3 + 2 + 1 = 10;
thus, 4/10, 3/10, 2/10, and 1/10; P50,000.00 + 30.000.00+ 15,000.00 + 5,000.00 = P100,000.00;
thus, P50,000.00 over P100,000.00 is 50%; P30,000.00/P100,000.00 is 30%;
P15,000.00/P100,000.00 is 15% and P5,000.00/P100,000.00 is 5% The profit or loss. multiplied by
the fraction or percentage, as the case may be, will have for its product the amount of the share of
each partner in the profit or loss.

b. If aside from the capitalist partners, there is also an industrial partner (or there are industrial
partners)
1. Profits

a. The profits shall be divided according to their agreement.

b. In the absence of any agreement thereon, the industrial partner shall first receive a just and
equitable share of the profits, and thereafter, each capitalist partner shall share in the profits in
proportion to his capital contribution.

Example: IDOL Enterprises is a partnership composed of partners Ismael, Daluz, Ortiz and
Lanuza. Ismael is an industrial partner who manages the partnership, while Daluz, Ortiz and
Lanuza are capitalist partners with contributions of P50,000.00, P30,000.00, a.d P20,000.00,
respectively.

Assuming that IDOL Enterprises realized a profit of P10,000.00, and the partners have an
agreement that profits shall be divided in the ratio of 3:4:2:1, then Ismael's share is P3,000.00;
Daluz, P4,000.00; Ortiz, P2,000.00; and Lanuza, P1,000.00.

If the partners did not have any profit-sharing agreement, Ismael shall be given an equitable share
to be decided by the partners, say P3,000.00; the balance of P7,000.00 shall be divided among the
three capitalist partners according to the ratio of their capital contribution as follows: Daluz,
P3,500.00 (50%); Ortiz, P2,100.00 (30%); and Lanuza, P1,400.00 (10%).

Note: There is an opinion that the old law, still applies to determine the equitable share of the
industrial partner. Under the old law, the equitable share of the industrial partner is equivalent to
that of the capitalist partner with the least capital contribution. However, this may be unfair to the
industrial partner especially if the least capital contribution is so small that it does not reflect a just
and equitable compensation of his services.
2) Losses

a. The industrial partner shall not share in the losses.

b. The capitalist partners shall share in the losses as follows:

1. According to their agreement.

2. In the absence of any agreement thereon, each capitalist partner shall share in the losses in
the same proportion as the share of each in the profits.
3. In the absence of both, each capitalist partner shall share in the losses in proportion to his
capital contribution.

Example: Assume that IDOL Enterprises sustained a loss of P14,000.00. Such loss shall be
divided among Daluz, Ortiza and Lanuza according to their agreement. Thes, if Daluz, Ortiz and
Lanuza agreed to divide losses in the ratio of 4:2:1, Daluz's share is P8,000.00; Ortiz, P4,000,00;
and Lanuza, P2,000.00. Ismael, as an industrial partner, will not share in the loss.

If the partners did not have any agreement as to the division of losses, but there is one as to
profits, say 2:5:1:1, then such a ratio will be used in dividing the loss among the partners, but
excluding Ismael, the industrial partner. So Daluz's share will be P10,000.00 (5/7); Ortiz, P2,000.00
(1/7); and Lanuza, P2,000.00 (1/7).

In the absence of any agreement among the partners as to their sharing in both profits and losses,
then the loss of P14,000.00 shall be divided among Daluz, Ortiz and Lanuza, the capitalist
partners. according to the ratio of their capital contribution as follows: Daluz, P7,000.00 (50%) ;
Ortiz, P4,200.00 (30%), and Lanuza, P2,800.00 (20%). Ismael, being an industrial partner, will not
share in the loss.

c. If aside from the capitalist partners, there is also a capitalist industrial partner (or there are
capitalist-industrial partners)

1. Profits

a. The profits shall be divided according to their agreement.

b. In the absence of any agreement thereon, the profits shall be divided as follows:

1. The capitalist-industrial partner shall first receive a just and equitable share of the profits in his
capacity as industrial partner.
2. Thereafter, each capitalist partner, including the capitalist-industrial partner in his capacity as
capitalist partner, shall share in the profits in proportion to his capital contribution.
2) Losses
 a. Losses shall be divided among the partners, including the capitalist-industrial partner in his
capacity as a capitalist partner, according to their agreement.
b. In the absence of any agreement thereon, losses shall be divided among the partners
including the capitalist-industrial partner in his capacity as capitalist partner, according to
the ratio of their capital contribution.
c. In both of the above cases of loss, the capitalist-industrial partner shall not share in the
losses in his capacity as industrial partner.

Note: If aside from the capitalist partners, there is also a capitalist-industrial partner (or there are
capitalist-industrial partners), the profits and losses shall divided in accordance with procedure in
the previous illustrations, except that the capitalist-industrial partner will not share in the losses in
his capacity as an industrial partner.

Art. 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)
1. Designation of share in the profits and losses by a third person

If the designation of the share of the partners in the profits and losses has been entrusted to a third
person, the same shall be binding upon the partners and may be impugned only when it is
manifestly inequitable. However, even if such designation is manifestly inequitable, it can no longer
be impugned:

a. By a partner who has begun to execute it; or

b. By any partner if three months had already lapsed from them time he obtained knowledge
thereof. (Art. 1798)

The partner who has implemented the designation of the profits and losses by a third person is
already estopped from questioning it, while the person who failed to question the designation after
the lapse of three months is deemed to have waived his right to question it by reason of not making
a timely objection thereto.

2. Designation of share in the profits and losses entrusted to one of the partners

The designation of the sharing in the profits and losses entrusted to one of the partners is void
(Art. 1798). Accordingly. the profits and losses shall be divided among the partners as if there was
no stipulation thereon; hence, according to the ratio of their capital contribution.
Art. 1799. A stipulation which excludes one or more partners from any
share in the profits or losses is void. (1691)
1. Exclusion of one or more partners from sharing in the profits and losses

A stipulation excluding one or more partners from sharing in profits and losses is void (Art. 1799)
for the reason that a partnership is established for the common benefit or interest of the partners.
(Art. 1770); hence, the partners must share in the benefits and losses in some proportion. The
exception is in the case of an industrial partner who may be validly excluded from losses by
stipulation of the capitalist partners since the law itself provides that he shall not be liable for
losses. (Art. 1797)

Art. 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 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 partnership has been constituted may be

revoked at any time. (1692a)
1. When a partner is appointed as manager in the articles of partnership

a. Scope of authority of the managing partner

The managing partner may execute all acts of administration despite the opposition of his partners
unless he acts in bad faith

b. Revocation of the appointment of the managing partner

1. With just or lawful cause

His appointment can be revoked by the vote of the partners owning the controlling interest.
2. Without just or lawful cause (his power is irrevocable since his consent is included)
His appointment can be revoked only with the consent of all the partners including the managing
partner because such revocation would be a novation of the articles of partnership (11 Manresa
381; See also Art. 1927.)

2) When a partner has been appointed manager after the partnership has been constituted

The appointment of the managing partner made after the constitution of the partnership is usually
done through a resolution adopted by the partners.

a. Scope of authority
The managing partner may execute all acts of administration, but in case of opposition by the other
partners, the partner owning the controlling interest may resort to voting for his removal as
manager. (he has all the power but if incase of opposition of the other partners will result him for removal as a manager since the
partner owns the controlling interest)
b. Revocation of the authority of the managing partner
He may be removed with or without just or lawful cause by the vote of the partners owning the
controlling interest. This is so because such a partner is only an agent whose authority may be
revoked at any time by his principal which is the partnership. (See Art. 1920.)

Art. 1801. If two or more partners have been entrusted with the
management of the partnership without specification of their
respective duties, or without a stipulation that one of them shall not
act without the consent of all 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 a tie, the matter shall be decided by the partners owning the
controlling interest. (1693a)
1. Application of the provision.
a. Two or more partners have been appointed as managers.
b. There is no specification of their respective duties or there is no stipulation that one of them
shall not act without the consent of the others.

2. Scope of authority

Each manager may separately execute acts of administration.

3. Rule in case of opposition by the other managers.

a. The decision of the majority of the managing partners shall prevail (per head),
b. In case of a tie, the vote of the managing partners owning the controlling interest shall
prevail.

Note: There is a contrary opinion stating that the tie should be resolved by including the vote of
the partners who own the controlling interest although they were not appointed as managers

However, this view is not shared by some authors for the following reasons:

a. Those not appointed as managers are deemed to have waived their right to participate in the
management of the partnership; hence, they cannot take part in resolving the tie.
b. If this view were adopted, there would be no difference any more between a situation where all
the partners are considered as managers under Art. 1803 and when not all the partners are
managers under Art. 1801, in case of a tie

4. Example

FORTUNE Construction Company is composed of the following partners with their respective
capital contributions: Fermin, P10,000.00; Olvida, P20,000.00; Rayos, P30,000.00; Toribio,
P40,000.00; Ubaldo, P50,000.00; Nervida, P300,000.00; and Escaler, P500,000.00. Fermin,
Olvida, Rayos, Toribio and Ubaldo have been appointed as managers without any specification as
to their respective duties. Fermin wants to buy 50 pieces of steel from Hercules Steel Corporation,
but Toribio opposes it.

a. Supposing that when the matter was put to a vote, Olvida and Rayos sided with Fermin, while
Ubaldo sided with Toribio. Whose group will prevail? The group of Fermin or the group of
Toribio? Answer:
The group of Fermin will prevail because they constitute the majority among the managing
partners. This is true even if the group of Toribio owns the controlling interest among the managing
partners.

b. Supposing that Rayos abstained from voting thereby creating a tie among the managing
partners (Fermin and Olvida vs. Toribio and Ubaldo), how shall the conflict be resolved?
Answer: Toribio and Ubaldo will prevail because they own the controlling interest among the
managing partners.

Art. 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)
1. Application of the provision

a. Two or more partners have been appointed as managers.

b. There is a stipulation that none of the managing partners shall act without the consent of
the others.

2. Rules of management under the provision

a. The concurrence or consent of all shall be necessary for the validity of the acts, i.e., unanimity is
required. (can act only with the consent of all managing partners)
b. The absence or disability of any one of them cannot be alleged, i.e., the decision on the act to be
performed shall be deferred until such partner becomes present or his disability ceases, unless
there is imminent danger of grave or irreparable injury to the partnership, in which case, the
present or able partners may decide by themselves.

3. Example: Johnny, Jake, Jay, Julia and Mark are partners in (Pineapple fruits and Juice
Company) FARMS Agri-business Ventures Company, a contract supplier of All day Super MARKet
, in the production of mangoes. Johnny, Jake and Jay were appointed as managers with the
stipulation that none of them should act without the consent of the others. On the date of delivery of
the harvested Pineapple to a SuperMarket, a landslide occurred making transport impossible for a
couple of days. A local buyer wanted to buy the Pineapples but only Julia and Mark were around to
decide. If further delay in the disposition of the harvested Pineapple would result in losses to the
partnership, then the unanimous vote of the managing partners need not be obtained. Hence, Julia
and Mark may decide for the partnership to sell the pineapples to the local buyer.

Art. 1803. When the manner of management has not been agreed
upon, the following rules shall be observed: (1) All 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 1801. (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)
1. Rule when management has not been agreed upon

a. All the partners shall be considered agents of the partnership, i.e., all of them are
managers.
However, none of them 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 to give
consent by one of the partners is manifestly prejudicial to the interest of the partnership, the court's
intervention may be sought. (Art. 1803)

b. Whatever any one of them may do alone shall bind the partnership.
c. In case of opposition of the other partners, the following rules shall be observed:
1) The decision of the majority shall prevail.
2) In case of a tie, the decision of the partners owning the controlling interest shall prevail. (Art.
1801, 1803)

2. Example: AYALA Enterprises, a partnership engaged in the trading of sporting goods, is

composed of Johnny, who contributed P40,000.00; Jay, P50,000.00; Jake. P60,000.00; Jen,
P70,000.00; Mark, P80,000.00; Leno, P200,000.00; and Mino, P300,000.00. The partners did not
designate who among themselves shall be the manager. Accordingly, all the partners are
considered as agents or managers of the partnership. Whatever any one of them may do alone
shall bind the partnership.

a. If Pascasio buys baseball equipment from Everlast Company in behalf of POLARIS Enterprises,
the purchase will bind the firm because Pascasio is an agent of the partnership.

a. If Johnny buys basketball equipment from JYG Company in behalf of AYALA Enterprises, the
purchase will bind the firm because Johnny is an agent of the partnership.

b. Assume that the planned purchase by Johnny from JYG Company is opposed by Jay. When the
matter was put to a vote, Jake, Jen and MArk sided with Johnny, while Leno and Mino sided with
Jay. Who will prevail? The group of Johnny (since it is composed of 4 partners who constitute the
majority), or the group of Jay (composed of only 3 partners but who own the controlling interest)?
Answer: The group of Johnny because in case the act of a partner is opposed by another or the
others, the decision of the partners who constitute the majority shall prevail.

c. Suppose MArk abstained from voting thereby creating a tie between the group of Johnny and
that of Jay, who will prevail?
Answer: The group of JAy because in case of a tie, the decision of the partners who own the
controlling interest will prevail.

d. Suppose the firm owns a building composed of two floors. On the first floor are the store and
the offices of Pascasio and Oropesa, while on the second floor are the offices of Liwag, Apolto,
 Rabino, Isidro and Samulde. If Liwag desires to expand the space for the store due to
increasing business by dismantling the offices of Pascasio and Oropesa and renovating the
second floor so that it will house the offices of all the partners, Liwag may do so by getting the
consent of the other partners since none of them may make an important alteration of
partnership immovable property without the consent of the other partners. In case the
opposition by any of the partners will result in loss of business and which is manifestly
prejudicial to POLARIS Enterprises, then Liwag may seek the aid of the court so that such
renovation may be effected.

Art. 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. (1686a)
1. Right of a partner to associate another person with him his share
A partner may enter into an agreement with another person to associate the latter in his share
which is his personal property (sub-partner). Such agreement is a matter between the partner and
the associate. There is no privity (A RELATION) of contract between the partnership, on one hand, and
the partners and his associate, on the other hand, with respect to such arrangement. Hence, the
associate does not become a partner unless all the other partners consent in view of the
principle of delectus personae that characterizes a contract of partnership. This is true even if
the partner having an associate is a manager.

2. Example
Melchor, Gaspar and Baltazar are partners. Melchor, who has a share of one-third in the
partnership, entered into a contract with Torrente (third person) whereby he assigned one-half of
his share to the latter, without the consent of Gaspar and Baltazar. The deed of assignment
between Melchor and Torrente is a contract that involves just the two of them. Torrente does not
become a partner since the consent of all the partners is required for him to be admitted
into the partnership. Hence, Torrente does not acquire the rights of a partner. He cannot
therefore inspect the partnership books or participate in the management of the firm. (pwede niya
itransfer yung interest niya sa sub partner pero between only the two of them only lang yon, he cannot acquired rights in the partnership
and he must get all the consent of the other partners)

Art. 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)
1. Partner's right to inspect books
Every partner has an inherent right as a co-owner of the business to have access to partnership
books (which typically include records of the partnership's financial transactions and each partner's capital contributions.) and
inspect and copy any of them. As co-owner, he is entitled to obtain true and full information
concerning partnership affairs. (Art. 1806) This right is important to a managing partner in order
that he may be able to discharge his functions effectively. For him and the other partners, this right
is also important for the purpose of determining or checking their fair share in the firm's profit.
2. Where partnership books are kept
The books shall be kept at the principal place of business unless there is an agreement among
the partners that they shall be kept elsewhere.

3. Time of inspection
Every partner has a right to inspect the partnership books at reasonable hours (business hours or
working days) on any business day throughout the year. The managing partners cannot restrict the
exercise of such right to some arbitrary period of a few days. (Pardo vs. Hercules Lumber Co. and
Ferrer, 47 Phil 964)

Art. 1806. Partners shall render on demand true and full information
of all things affecting the partnership to any partner or the legal
representative of any deceased partners or of any partner under legal
disability. (n)
1. Partners' obligation to render information
Each partner has an obligation to render on demand true and full information of all things affecting
the partnership to any partner or the legal representative of any deceased partners or of any
partner under legal disability. (Art. 1806) The relationship between partners is founded on mutual
trust and confidence; for this reason, it is incumbent upon all of them disclose to one another
matters affecting the partnership.

Art. 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)
1. Partners obligation in respect to benefits or profits
Every partner has an obligation to account and hold as trustee for the partnership any
benefit or profits derived by him without the consent of the other partners from:

a. Any transaction connected with the formation, conduct or liquidation of the partnership
b. Any use by him of partnership property.

2. Example
A, a partner in the firm ABC and Company, used the firm's delivery truck without the consent of the
other partners in hauling the personal effects of X who was moving to a new subdivision. A
received P4,000.00 for the services he had rendered. B and C, his co-partners, claimed that the
amount belonged, and must be accounted by A, to the partnership. A, however, disputed the claim
of B and C by saying that he merely availed himself of his right as co-owner of specific partnership
property. Is A correct?

Answer: No, A is not correct. A partnership is a personal relationship that requires the highest
degree of good faith and loyalty on the part of its members. Accordingly. A should not take
advantage of the firm by making profits out of the use of partnership property without the consent
of his co-partners. He is a trustee who must account such profits to the partnership. Besides, a
partner can use only a specific partnership property for partnership purposes only, and not for any
other purpose, except with the consent of his co-partners.

Art. 1808. The capitalist partners cannot engage for their own account
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 provision shall bring to the

common funds any profits accruing to him from his transactions, and
shall personally bear all losses. (n)
1. Right of capitalist partner to engage in business apart from the partnership business

a. If the business he will engage in is of a kind different from the partnership business, he can
engage in such business without getting the consent of the partnership or the other partners.
b. If the business he will engage in is of the same kind as the partnership business, he cannot
engage in such business unless there is a stipulation among the partners allowing him to
engage in such business. Otherwise, he will be unduly competing with the partnership.

2. Effect if a capitalist partner engages in the same kind of business without the consent of the
other partners
a. The capitalist partner shall bring to the common fund any profits accruing to him from his
transaction.
b.He shall personally bear all the losses.

The author submits that such losses refer not only to those he incurred in his own business, but
also to those sustained by the partnership as a result of the competition he had caused upon the
partnership business.

3. Example: (Please refer to the example under Art. 1789.)

Art. 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)

1. Accounting, concept

An accounting is a statement showing the financial transactions and dealings of the partnership
and the status of its assets.

2. Partner's right to a formal account of partnership affairs,

Any partner shall have the right to a formal account of partnership affairs in the following cases: (can
he ask for a formal account any time? He cannot because it is a tedious work and will directly affect the business)

a. If he is wrongfully excluded from the partnership business or possession of the partnership

property by his co-partners.
b. If the right exists under the terms of any agreement.
c. With respect to benefits or profits derived by a partner without the consent of his co-partners
from any transaction connected with the formation, conduct or liquidation of the partnership or
from the use by him of partnership property. (Art. 1807)
d. Whenever other circumstances render it just and equitable

Section 2

PROPERTY RIGHTS OF A PARTNER

Art. 1810. The property rights of a partner are (1) His rights in specific
partnership property; (2) His interest in the partnership; (3) and His
right to participate in the management. (n)

1. Property rights of a partner

a. Right in specific partnership property
The property refers not only to those originally contributed by the partners but also to those
acquired or made or manufactured by the partnership itself. Thus, if a partner contributed a delivery
truck and the partnership purchased a computer, both the delivery truck and the computer are
specific partnership property. If the partnership made some furniture for use in its office, the same
is also specific partnership property.
b. Interest in the partnership
A partner's interest in the partnership is his share of the profits and surplus. (Art. 1812)

c. Right to participate in the management

Unless otherwise agreed upon by the partners, each partner has an equal right to manage and
conduct the partnership business. As such, a partner acts as agent for both the partnership and
each partner.

What is specific partnership property?

- Specific Partnership Property not only pertains to contributuons of the partners but also the acquired
and manufactured by the partnership.

Where did it come from?

- it comes from the properties acquired by the partnership

What are the relations of the partners?

- partners are considered owners of the specific partnership property and they shall have the equal right
to possess or manage since they are considered all partners as co-owner

Partner's interest
- It refers to his economic interest in the firm. Specifically, it consists of his share in the profits and
surplus.

Difference of profits and surplus

- Profit can further be referred to as the net income generated by a company, while surplus can be
divided into the profit distributed to the owners and the profit which remains undistributed. Surplus
happens on the dissolution of the partnership and used to pay for the partnership creditors.
Art. 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, any of them, or the or 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)
1. Right in specific partnership property

A partner is a co-owner with his partners of specific partnership property. (Art. 1811) This special
form of co ownership is called tenancy in partnership, where each partner is a co-owner of the
entire partnership property and not the sole owner of any part of it. This co-ownership has the
following incidents:

a. Each partner has an equal right to possess and use specific partnership for partnership
purposes, but not for any other purpose unless the other partners consent.

Example: Valdez, Imperial and Palanca are partners in VIP Limousine Services Company, which
owns and rents out chauffeur-driven luxury cars. The services of the company were engaged to
provide a bridal car. Valdez, Imperial or Palanca may possess and drive the car for such purposes.
However, none of them may possess and use/drive any of the company's cars for his family's
pleasure trip or other personal purpose without the consent of the other partners.

b. A partner's right in specific partnership property is not assignable

Except in connection with the assignment of rights all the partners in the same property, a partner's
right in specific partnership property may not be assigned or transferred by sale, pledge, mortgage
or otherwise. This is so because a partner's beneficial interest in partnership property cannot be
readily determined until after the partnership has been dissolved and its affairs liquidated.
Secondly, if assignment were allowed, then the assignee would have some right to possess the
property. This will be prejudicial to the partnership because it would take away its right to use the
property whenever it is needed. *

Example: Thus, in the preceding example, Valdez, Imperial or Palanca cannot assign, say by sale,
his right in any of the cars or other property of VIP Limousine Service Company, to a third person,
except where the three of them assign their right in the same car or other property, in favor of the
same third person. (WHY IS NOT ASSIGNABLE? It may deprived the partnership of its use in the partnership property)

c. A partner's right in specific partnership property is not subject to attachment or execution

A partner's right in specific partnership property is not subject to attachment (i.e., taking and
bringing the property into the custody of the law), by the personal creditor of a partner. Neither is
such right subject to execution, (i.e., selling the property at public auction to satisfy the claim of a
judgment creditor of a partner). imposed

The right, however, may be attached or levied upon in execution, by partnership creditors. In such
a case, none of the partners may claim any right under homestead and exemption laws to which he
may be personally entitled because the property is owned by the partnership and not the individual
partners.
(It may be subject to attachment or execution only with respect to partnership debts because that right on specific partnership property
pertains only to the use and possession thereof with respect only to partnership purposes, a partner cannot specifically own a property
of a partnership because it is the partnership that own the property, so a partner’s right cannot be subject to any attachment for a
personal debt)

d. A partner's right in specific partnership property is not subject to legal support.

A partner's right in specific property is not subject to legal support under Art. 195 of the Family
Code (which repealed Art. 291 of the Civil Code) which enumerates the persons who are obliged to
support each other. This is so because the obligation to give support is personal in character.

Thus, the spouse or children of a partner cannot ask for any allowances against the partner's right
in specific partnership property even for their sustenance. (same situation in letter c, personal debts of the partner
cannot subject the partnership property for his obligation to support his family.)

Art. 1812. A partner's interest in the partnership is his share of the

profits and surplus. (n)
1. Partner interest in the partnership

A partner's interest in the partnership is his economic interest in the firm. More specifically, it
consists of his share in the profits and surplus. (Art. 1812) Surplus refers to the funds and other
assets of the partnership after the partnership has been dissolved and its liabilities have been
settled. A partner's interest in the partnership is personal property that may be conveyed or
transferred to others, (Art. 1813) (Profit can further be referred to as the net income generated by a company, while
surplus can be divided into the profit distributed to the owners and the profit which remains undistributed.) (A partner's interest is his own
personal property, so he can do anything with it.)
Art. 1813. A conveyance by a partner of his whole interest in the
partnership does not of itself dissolve the partnership, 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 a 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.
1. Conveyance of a partner's interest

A partner may voluntarily assign, sell, donate or in any other way convey his interest in the
partnership to third persons. He may even use such interest as collateral for a personal debt
although in such a case, there is no alienation of the interest.

The assignment does not purport (claim) to transfer an interest in the partnership, but only a future
contingent right to a portion of the ultimate residue as the assignor may become entitled to receive
by virtue of his proportionate interest in the capital.

2. Effects of conveyance of a partner's interest

a. The conveyance does not of itself dissolve the partnership. However, the partners who
have not assigned their interest may be justified in bringing about the dissolution of the
partnership. [See Art. 1830, par. 1 (c).]
b. The transferring partner shall continue to be a partner and shall enjoy the rights and be
subject to the liabilities of a partner.

The assignee or transferee of the partner's interest does not become a partner unless all the other
partners give their consent thereto. Thus, not being a partner, he has no right to:

1) Interfere in the management of the business;

2) Require any information of partnership transactions: and
3) Inspect partnership books.

3. Rights of Assignee
The rights of the assignee of a partner's interest shall be limited to the following:

a. To receive the profits to which the assigning partner would otherwise be entitled.
b. To avail himself of the usual remedies in case of fraud in management.
c. In case the partnership is dissolved, to require an account from the date only of the last
account agreed to by all the partners.
Art. 1814. Without prejudice to the preferred rights of partnership
creditors 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 may require.

The interest charged may be redeemed at any time before

foreclosure, or in case of sale being directed by the court, may be
purchased without thereby causing a dissolution:

(1) With separate property, by any one or more of the partners; or

(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)
1. Charging of a partner's interest
The judgment creditor of a partner may ask the court to issue a charging order, i.e., an order
attaching or levying the interest of a partner, for the satisfaction of the amount of the judgment.
such charging order is allowed, partnership creditors enjoy preference over a partner's property
rights including his interest in the partnership. (Art. 1827) Thus, an individual partner's judgment
creditor will receive payment only after partnership liabilities have been satisfied.

Example: Johnny, Mark, Jay and Jake are partners in HYPER & SM Enterprises. Mr. P, a personal
creditor of Johnny, sues the latter and obtains a judgment against him. Mr. P may ask the court to
issue a charging order against Johnny’s interest in the partnership to satisfy his claim. Even if the
court issues the order, however, creditors of HYPER & SM Enterprises enjoy priority over Mr. P’s
claim.

2. Appointment of a receiver and other orders

In issuing the charging order, the court may:

a. Appoint a receiver of the partner's share of the profits, and of any other money due or to fall
due to him in respect of the partnership, and
b. Make all other orders, directions, accounts, or inquiries which the debtor partner might have
made, or which the circumstances of the case may require. (sale of partner’s interest)
 3. Redemption of the interest charged
Redemption refers to the payment of the amount due in order to discharge the lien on the interest
charged. The interest charged may be redeemed at any time before foreclosure, or in case of sale
directed by the court:

a. With the separate property of any one or more of the other partners, or
b. 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.

Such redemption will allow the partners to eliminate the potential threat of dissolution which may be
applied for by a purchaser of a partner's interest in the case of a partnership at will. (See Art. 1831,
par. 2.).

4. Availment by a partner of exemption laws

The partner whose interest is charged may avail himself of the exemption laws since such interest
is his personal property.

Section 3
OBLIGATIONS OF THE PARTNERS WITH
REGARD TO THIRD PERSONS
Art. 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 names in

the firm name shall be subject to the liability of a their partner. (n)
1. Requirement of a firm name

As a juridical entity, a partnership must have a name by which it will be identified and
distinguished not only from the partners composing it, but also from third persons and
other entities. It is by such name that the partnership will transact its business. It may or may not
include the name of one or more of the partners.

2. Effect if a third person allows his name to be included in the firm name

A person who, not being a member of the partnership, includes his name in the firm name shall
be subject to the liability of a partner. (Art. 1815) This is intended to protect third persons who
transact business with the partnership believing that he is a partner. Such person, however, shall
not have the rights of a partner such as the right to participate in management, receive a share of
the profits, and inspect the partnership books.
The use by a partnership of the name of a deceased person is allowed provided the consent of his
or her estate has been given. (Per SEC Memorandum Circular No. 21, Series of 2013) Under Art.
1842, the use by the person or partnership continuing the business of the name of a deceased
partner does not of itself make the individual property of the deceased partner liable for any debts
contracted by such person or partnership.
Example: Ping pong ball and Sons is a partnership composed of Johnny Ball, Mark Ball and Jake
Ball, which are the sons of Pinpong ball. Pingpong ball is well-known in the business community
and although he has retired from active business, he allowed his name to be included in the firm
name to boost the business of the partnership formed by his sons. Here, Ping pong ball shall be
subject to the liabilities, but shall not be entitled to the rights, of a partner.

Art. 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)

Art. 1817. Any stipulation against the liability laid down in the
preceding article shall be void, except as among the partners. (n)
1. Nature of contractual liability of partners to third persons

a. Pro rata - The liability of the partners here after the partnership assets have been
exhausted is equal (joint) and not proportionate because it is meant to be imposed upon all
the partners including an industrial partner whose proportionate share cannot be
determined in the absence of a profit and loss sharing agreement because he has no
capital.

b. Subsidiary - Each partner (including the industrial partner) shall be liable with his separate
property after all the partnership assets have been exhausted.
2. Partners liable
All general partners whether:

A. Capitalist, or
B. Industrial partner.

3. Status of stipulation exempting a partner from liability to third persons

Any stipulation exempting a partner from liability to third persons shall be void as regards such
third persons, but valid among the partners. Such stipulation, however, will not totally exempt a
partner from liability because his contribution will still be subject to the payment of liabilities. This is
to reconcile Art. 1817 with Art. 1799 which declares void any stipulation excluding a partner from
losses, except in the case of an industrial partner.
If there is such stipulation and/or there is an industrial partner, liabilities to third persons shall be
paid as follows:
a. The assets of the partnership shall first be used to pay the liabilities.
b. If the partnership assets are not sufficient, the liabilities shall be paid equally from the
separate assets of the partners including the industrial partner.
c. Thereafter, the partners not exempted from subsidiary liability shall reimburse according
to their profit and loss agreement or if incase of the absence of the agreement it shall be in
the ratio of their capital contribution, whichever is applicable, to the following partners the
amount paid by them from their separate assets:

1) Industrial partner whom the law exempts from losses, as distinguished from liabilities. *
2) General partners exempted from liability to third persons by reason of stipulation among the
partners.

Under Art. 1839 (6), any partner or his legal representative shall have the right to enforce
contributions from his co-partners to the extent of the amount which he has paid in excess of his
share of the liability.

Examples:
a. TONI Company is a partnership composed of Torio, Ocampo, Nolasco and Ireneo. Torio
contributed P20,000.00; Ocampo, P35,000.00; and Nolasco, P45,000.00. Ireneo is an industrial
partner. The partnership owes P100,000.00 to third persons, but it has assets of only
P60,000.00. In paying the liabilities, the assets of P60,000.00 shall be used leaving a balance
of P40,000.00 which shall be divided equally among the four partners at P10,000.00.
Thereafter, settlement shall be made among the partners as follows:

Payment to creditors Actual share in liability Over (under)

payment

Torio P 10,000 P8,000 P 2,000

Ocampo 10,000 14,000 (4,000)

Nolasco 10,000 18,000 (8,000)

Ireneo 10,000 None 10,000

On the basis of their capital contribution, Torio's actual share in the liability is P8,000.00 (20% of
P40,000.00): P14,000.00 (35% of P40,000.00); and Nolasco, P18,000.00 (45% of P40,000.00).
Ireneo has no share in the liability being an industrial partner. Thus, Ocampo must give P4,000,00
and Nolasco P8,000.00 (kasi yung sobrang bayad ni nolasco na 8k at 4k ni ocampo should be given as reimbursement for
ireneo and torio), to return Torio's overpayment of P2,000.00 and Ireneo's payment of P10,000.00.
b. Espino, Arnaldo, Ramones and Lopez are partners in EARL Company. Espino contributed
P20,000.00; Armaldo P10,000.00; Ramones, P30,000.00; and Lopez, P40,000.00 The partners
agreed that Espino shall be exempted from liability to third persons. The partnership owes
P90,000.00 to third persons, but it has assets of only P50,000.00. In paying the liabilities, the
assets of P50,000.00 shall be used leaving a balance of P40,000.00 which shall be divided
equally among the four partners at P10,000.00. Thereafter, settlement shall be made among
the partners as follows:

Payment to creditors Actual share in liability Over (under)

payment

Espino P 10,000 None P 10,000

Arnaldo 10,000 P 5,000 5,000

Ramones 10,000 15,000 5,000

Ireneo 10,000 20,000 (10,000)

On the basis of their capital contribution, Arnaldo should be (P10,000.00/P80,000.00 of liable only
for P5,000.00 P40,000.00); Ramones for P15,000.00 (P30,000.00/P80,000.00 of P40,000.00); and
Lopez, P20,000.00 (P40,000.00/P80,000.00 of P40,000.00). Espino, who is exempted from liability
to third persons by stipulation, will not share in the liability. Ramones and Lopez must give
P5,000.00 and P10,000.00, respectively, to return Espino's payment of P10,000.00 and Arnaldo's
overpayment of P5,000.00.

Art. 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 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 on 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 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 a claim of the partnership.

No act of a partner in contravention of a restriction or authority shall

bind the partnership to persons having knowledge of the restriction.
(n)
1. When partnership liable to third persons for acts of partners
a. When a partner is authorized to act for the partnership, whether or not the act is for apparently
carrying on in the usual way the business of the partnership.
b. If the partner is not authorized to act for the partnership but the act is for apparently carrying on
in the usual way the business of the partnership and the third person was not aware of the
partner's lack of authority.

Here, a third person would not normally inquire into a partner's authority if the latter is performing
an act that is in line with the partnership business. As to him, the partner he is transacting with
appears to have the authority to perform the act.
2. When partnership not liable to third persons for acts of partners
a. When although the act is for apparently carrying on in the usual way the business of the
partnership, the partner is not authorized to act for the partnership and the third person has
knowledge of the partner's lack of authority.

Here, the third person is being penalized for being in bad faith

b. When the partner is not authorized to act for the partnership and the act is not for apparently
carrying on in the usual way the business of the partnership.

It is immaterial whether the third person was aware or not of the partner's lack of authority. Here, it
is incumbent upon the third person to inquire into the partner's authority because the latter is
performing an act that deviates from the partnership business.

Example: Mickey Shoes Store is a partnership composed of Johnny, Mark, Jay, Jake and Mr. P.
Johnny was appointed as manager of the partnership. During the year, Mark was given authority
by all the partners to buy an equipment for the partnership. No other authority was given to the
other partners.

a. Any purchase or sale of a pair of shoe by Johnny is binding upon Mickey Store because
Johnny is authorized to do so she being the managing partner who can perform acts that
are for carrying on the business of the partnership.

b. A purchase of a car by Mark is binding upon Mickey Store although such act is not for
apparently carrying on in the usual way the business of the partnership because she was
_authorized to make the purchase or buy an equipment.

c. A sale by Jay of a pair of shoes to Renato is binding also upon Mickey Store although Jay was
not authorized to make the sale provided that Renato was not aware of Jay’s llack of authority
because such act is for apparently carrying on in the usual way the business of the partnership.
If Thelma was aware of Jay’s lack of authority, the partnership will not be bound because in this
case, Thelma's bad faith.

d. A purchase of a car by Jake for Mickey Store will not be binding upon the partnership because
Jake was not given the authority to transact such business and the act is not for apparently
carrying on in the usual way the partnership. business. Whether or not the seller was aware of
Jake’s lack of authority is of no importance.

3. Acts not considered for apparently carrying on

The following are acts which are not for apparently carrying on in the usual way the business of the
partnership and may not be performed by a partner unless he is authorized by all the partners, or
the other partners have abandoned the business: (ACTS OF RESTRICT OWNERSHIP, all the partner must consent
the other partners)

a. Assignment of the partnership property in trust for creditors or on the assignee's promise to
pay the debts of the partnership.

Here, possession of partnership property will be ceded to the creditors or assignee, and will
frustrate the conduct of the business of the partnership because it will be deprived of the use of the
property.

b. Disposition of the goodwill of the business.

This also frustrates business because it deprives the partnership of the public patronage of its
business, which is prejudicial to the partnership.

c. Doing of any other act which would make it impossible to carry on the ordinary business of the
partnership.
The reason is obvious. The purpose for which the partnership was formed which is to engage in
business will be defeated.

d. Confession of a judgment.
The confession of a judgment by a partner results in the bargaining away of the right of the
partnership to a day. in court, and may be prejudicial to the partnership.

e. Entering into a compromise concerning a partnership claim or liability.

In a compromise (which is an act of ownership), a partner will be making concession of partnership
claim or liability that may not be to the best interests of the partnership.

f. Submission of a partnership claim or liability to arbitration.

This also results in the bargaining away of the right of the partnership to a day in court, and may be
prejudicial to the partnership.

g. Renunciation of a claim of the partnership.

Here, a partner has no right to deprive the partnership of a claim that rightfully belongs to the firm
and not to him.
Art. 1819. Where title to real property is in the partnership name, any
partner may convey title to such property by 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
the first paragraph 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 the first
paragraph of Article 1818.

Where title real property is in name of one or 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 the provisions of
the first paragraph of Article 1818, unless the purchaser or his
assignee, is a holder for value, without knowledge.

Where the title to real property is in the name of one or more or all
the partners, or in a third person in trust for the partnership, a
conveyance executed by a partner in the partnership name, or 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 the first paragraph of Article 1818.

Where the 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)
1. Application of the provision

Art. 1819 applies to conveyance, including cases where it was not expressly authorized, of real
property which may be in the name of:
a. The partnership.
b. One or more but not all the partners and the record does not disclose the right of the
partnership.
c. One or more or all the partners in trust for the partnership.
d. Third person in trust for the partnership.
e. All the partners.
(ANG MAGBEBENTA KUNG SINO YUNG MAY-ARI OR KANINO NAKAREHISTRO, THEN IBENTA MO KUNG KANINO
NAKAREHISTRO O NAKAPANGALAN; TITLE NG OWNER AN D NG SELLER DAPAT PAREHO)
2. Rules on conveyance

a. Title to real property is in the name of the partnership and the conveyance was
executed by a partner in the name of the partnership without express authority. (Art.
1819, par. 1)

1. Effect
The conveyance passés title to the transferee.

2. When partnership may recover the property

The partnership may recover the property in the following cases:

a) If the act is not apparently for carrying on in the usual way the business of the
partnership. or
b) The third person has knowledge of the partner's lack of authority even if the
act is apparently for carrying on in the usual way the business of the partnership.

3. When partnership may not recover the property

The partnership may no longer recover the property even if the act is not
apparently for carrying on in the usual way the business of the partnership if the
property has been conveyed by the grantee to a holder for value without
knowledge that the partner in making the conveyance had exceeded his
authority.

4. Example
JIKJIK Company is composed of partners Jake, Jay, Mark and Johhny. A parcel
of land in the name of JIKJIK Company is sold by Jake without express authority
in the name of JIKJIK Company to the third person named MR.P. Here, title to
the property passes to MR.P. JIKJIK Company may recover the parcel of land if:

a. JIKJIK COMPANY is not engaged in the buying and selling of land, or

b. Even if it is engaged in the buying and selling of land, but MR.P was aware of Jake’s
lack of authority.
 If incase Mr. P has sold the land to another person, an innocent purchaser for
value without knowledge or exceeding the knowledge of Jake’s lack of authority,
then JIKJIK Company can no longer recover such land.
b. Title to real property is in the name of one or more but not all the partners but the
record does not disclose the right of the partnership and the conveyance was executed
in the name of the partner or partners in whose name the title stands without express
authority. (Art. 1819, par. 3)

The effect and rules on recovery and non-recovery are the same as in paragraph
1 of Art. 1819.

Example: In the same example earlier, if the parcel of land is in the name of Jake
and Jay and the record does not disclose the right of JIKJIK Company, any
conveyance of the land by Jay and Jake in their own name to Mr. p without
express authority passes title to the property to Thomas. WISE Company may
recover the parcel of land it

1. It is not engaged in the buying and selling of land, or

2. Even if it is engaged in the buying and selling of land. but Thomas was aware
of Walter and Irwin's lack of authority.

If Me. P has sold the land to Peter, an innocent purchaser for value without
knowledge of Walter and Irwin's lack of authority, WISE Company can no longer
recover such land.

C. Title to real property is in the name of the partnership and the conveyance was executed
by a partner in his own name without express authority. (Art. 1819, par.2)

1. Effect
The transferee does not become the owner of the real property. However,
equitable interest (i.e., all the beneficial interest in the property like the use
thereof and the enjoyment of its fruits, but not the title) passes to him (transferee) if
the following elements are present:

a) The act is for apparently carrying on in the usual way the business of the
partnership, and
b) The third person has no knowledge of the partner's lack of authority in making
the conveyance.

2. When equitable interest in the property does not pass to the transferee
Even equitable interest does not pass to the transferee if:
a. The act is not for apparently carrying on in the usual way the business of the
partnership, or
b. The third person has knowledge of the partner's lack of authority in making the
conveyance.

3) Example
In the same example for paragraph 1 where title to the parcel of land is in the
name of WISE Company, if Walter sells the land in his own name without express
authority to Thomas, title to the land does not pass to Thomas. However,
equitable interest in the property passes to Thomas if:

a. WISE Company is engaged in the buying and selling of land, and

b. Thomas was not aware of Walter's lack of authority.

Even equitable interest does not pass to Thomas if: WISE Company is not engaged in
the buying and selling of land, or if Thomas was aware of Walter's lack of authority.

D. Title to real property is in the name of one or more or all the partners or in a third
person in trust for the partnership, and the conveyance was executed by a partner the
name of the partnership or in his own name without express authority (Art. 1819, par. 4)

The effects are the same as in paragraph 2 of Art. 1819.

Example:

Assume that the parcel of land is in the name of Walter and Irwin in trust for
WISE Company, and the conveyance of the land was made by Walter in the
name of the partnership to Thomas without express authority. this case, title to
the property does not pass to Thomas In However, Thomas acquires equitable
interest if:

1) WISE Company is engaged in the buying and selling of land, and 2) Thomas
was not aware of Walter's lack of authority.

Even equitable interest does not pass to Thomas if WISE Company is not
engaged in the buying and selling of land, or if Thomas was aware of Walter's
lack of authority Note: Where only the equitable interest passes (as in Art 1819,
pars. 2 and 4), a subsequent deed or legal action, including reformation, may be
resorted to by the parties as remedy.

E. Title to real property is in the name of all the partners and the conveyance was executed
by all the partners in their names. (Art. 1819, par. 5)

1) Effect

The conveyance passes all their rights in the property. This is so because all the
partners gave their consent to the transaction.
 2) Example

If the parcel of land is in the name of all the partners, namely, Walter, Irwin, Scott
and Edgar, and they sell the property in their names, to Thomas, all their rights in
the property are passed on to Thomas.

Art. 1820. An admission or representation made by any partner

concerning partnership affairs within the scope of his authority in
accordance with this Title is evidence against the partnership. (n)
1. Effect of admission or representation made by a partner

Any admission or representation made by a partner is evidence against the partnership if

the following requisites are present:

a. The admission or representation must concern partnership affairs.

b. It must be made within the scope of the authority of the
c. partner making the admission or representation. It must be made during the existence of the
partnership.

If the admission or representation was made after the partnership has been dissolved, the
admission representation is not evidence against the partnership. or

d. The existence of the partnership must be shown by evidence other than by such admission or
representation. (Art. 1821; Sec. 29, Rule 130, Rules of Court)

2. Example:
Alfredo, a partner in ABC Sales Company, was driving after office hours the firm's delivery truck
when it rammed into the car of Termulo on account of Alfredo's negligence. Alfredo told Termulo
at the time of the accident that he was on his way to purchase from a wholesaler some goods
ordered by a customer of the firm for urgent delivery the following day. The admission by
Alfredo against the interest of ABC Company may be used as evidence against it. ABC
Company cannot escape liability by alleging that Alfredo was acting beyond the scope of the
partnership business when he was driving the firm's delivery truck after office hours.

Art. 1821. Notice to any partner of any matter relating to

partnership affairs, and the knowledge of the partner acting on the
particular matter, acquired while a partner or then present to his
mind, and the knowledge of any other partner who reasonably could
and should have communicated it to the acting partner, operate as
notice to or knowledge of the partnership, except in the case of a
fraud on the partnership, committed by or with the consent of that
partner. (n)
1. Notice to a partner

Notice to any partner relating to partnership affairs is notice to the partnership. Example:
Marbella, Alonso, Zulueta and Ebdane are partners in MAZE Enterprises with Marbella as the
managing partner. Topacio filed a complaint against MAZE Enterprises. Summons (court order
directing that the complaint be answered within a certain period) and a copy of the complaint
were served upon the partnership through Alonso who failed to notify Marbella of the service to
him of the summons and the complaint. As a result, Topacio moved that MAZE Company be
declared in default for its failure to answer the complaint within the period mentioned in the court
order. MAZE Company, through Marbella, opposed the motion on the ground that the summons
and the complaint were not served upon the firm in view of the fact that Alonso was not the
managing partner, and thus, was not authorized to receive court orders. Is MAZE Company
correct? Answer:

No, MAZE Company is not correct. The summons served upon Alonso is deemed a notice to
the partnership. The law is clear that notice to any partner relating to partnership affairs is notice
to the partnership even if such partner was not the managing partner.

2. Knowledge of a partner

a. Knowledge of a partner acting on the particular matter

Such knowledge is also knowledge of the partnership if he acquired the same:

1. While already a partner, or

2. Before his admission to the partnership, provided the same was still present to his mind,
i.e., he still remembered it when he was performing the act.

b. Knowledge of any other partner (i.e., partner not acting on the particular matter)

Such knowledge is also knowledge of the partnership provided the following requisites are
present:

1) He acquired the same while already a partner, and

2) He could and should have reasonably communicated the information to the partner acting on
the particular matter. (Art. 1821)

Note: Knowledge of a partner not acting on the particular matter obtained by him before he
became a partner is not deemed knowledge of the partnership.

Example:

Prime Lots Realty Company, a partnership composed of Alvez, Nicdao and Origenes, was
formed on February 1, 2010. On March 1, 2016, Alvez learned that the firm's 2-hectare lot
located in Laguna was being claimed by Yandoc. On October 1, 2018, Alvez, on authority from
the partnership, sold the lot to Zuniga. When Yandoc learned of the sale, he brought a
complaint for eviction against Zuniga. The court rendered judgment against Zuniga. Zuniga now
seeks to recover damages from Prime Lots Realty for violation of its warranty against eviction.
 a. Was the knowledge of Alvez obtained by him on March 1, 2016 considered knowledge
of the partnership so as to hold the firm liable for damages (aside from other liabilities)
for the eviction?

Answer: Yes, knowledge by Alvez who was the partner acting on the particular matter obtained
by him while already a partner is deemed knowledge of the partnership. Hence, the firm is liable
for damages aside from other charges by reason of the eviction.

b. Suppose the knowledge on the claim of Yandoc to the lot was obtained by Alvez in 2009
when Alvez was not yet a partner as the partnership had not yet been formed at that
time, would such knowledge be considered knowledge of the partnership so as to make
the firm liable for damages to Zuniga?

Answer: Yes, but only if the matter was then present to the mind of Alvez, i.e., he remembered
it, when he sold the lot to Zuniga. Otherwise, the firm would not be liable for damages. The firm
would of course still be liable for other charges by reason of the eviction.

c. Suppose the knowledge on the claim of Yandoc to the lot was obtained instead by
Nicdao (who was not the partner authorized to make the sale) on March 1, 2016, would
such knowledge be knowledge of the partnership so as to make it liable for damages to
Zuniga?

Answer: Yes, but only if Nicdao could and should have reasonably communicated the
information to Alvez who was the one authorized to make the sale. Knowledge of a partner not
acting on the particular matter obtained by him while already a partner is deemed knowledge of
the partnership if such partner could and should have relayed the information to the partner
acting on the particular matter. If Nicdao obtained such knowledge in 2009 when he was not yet
a partner, such knowledge on his part is not deemed knowledge of the partnership.

Note: Knowledge implies bad faith; hence, the liability for damages, aside from other liabilities
for the eviction. However, if there is no such knowledge, the liabilities in case of eviction will
only be value of the property, income or fruits, cost of suit, and expenses of the contract. Please
refer to the comments in No. 1 (d) under Art. 1786 for liabilities in case of eviction.

3. When notice to or knowledge of a partner is not deemed notice to or knowledge of the

partnership

Notice to or knowledge of a partner is not deemed notice to or knowledge of the partnership

in case of fraud on the partnership:

a. Committed by the partner having notice or knowledge, or

b. Consented to by such partner having notice or knowledge. (Art. 1821)
 Thus, in the example in No. 1, the summons served on Alonso is not deemed a summons
on the partnership if Alonso connived with Topacio not to relay the matter to Marbella so
that MAZE Company would be declared in default.

Art. 1822. Where, by any wrongful act or omission of any partner

acting in the ordinary course of the business of the partnership
or with authority of his co-partners, loss or injury is caused to
any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act. (n)

Art. 1823. The partnership is bound to make good the loss: (1)
Where one partner acting within the scope of his apparent
authority receives money or property of a third person and
misapplies it; and (2) Where the partnership in the course of its
business receives money or property of a third person and the
money or property so received is misapplied by any partner
while it is in the custody of the partnership. (n)

Art. 1824. All partners are liable solidarily with the partnership
for everything chargeable to the partnership under Articles 1822
and 1823. (n)
1. Solidary liability of partnership and all the partners for torts

The partnership shall be solidarily liable with all the partners in the following cases:

a. For loss or injury caused to a third person or any penalty is incurred by reason of the
wrongful act or omission of any partner acting in the ordinary course of the business of
the partnership or with the authority of his co-partners. (Art. 1822)

Example: A, B and C are partners in the firm ABC Company. A was driving the firm's delivery
truck beyond the speed limit when the truck hit P, a pedestrian. A was on his way to deliver to a
customer of the firm. Here, ABC Company and the three partners are solidarily liable to P for
damages by reason of A's negligence.

b. When one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it. [Art. 1823 (1)]

Example: A, B and C are partners in Wash-Well Laundry Shop with A as the manager. One day,
while B was at the counter of the shop, T brought his coat for dry-cleaning. B accepted the coat
as A was not around. B used the coat while attending a party where a lighted cigarette caused a
hole on the coat. A, B and C and Wash-Well Laundry Shop can be held solidarily liable by T for
the damage on the coat. This rule holds true although no material damage was caused on the
coat because it is the misapplication itself that renders. the partnership and the partners
solidarily liable for damages.
 c. Where the partnership in the course of the business receives money or property of a
third person and such money or property is misapplied by any partner while it is in the
custody of the partnership. [Art. 1823 (2)]

Example: Refer to the preceding example. Supposing that after the coat was dry-cleaned, C,
another partner used it while attending a party where the coat was damaged. Here, the
partnership and the three partners are likewise solidarily liable to T.

2. Right of the partnership and the partners not at fault

If the partnership and/or any of the partners other than the partner at fault are made to pay the
damages, the former can recover from the partner at fault the damages they paid to the third
person. Hence, the partner at fault is ultimately liable.

Art. 1825. When a person, by words spoken or written or by

conduct, represents himself, or consents to another representing
him to anyone, as a partner in an existing partnership or with one
or more partners not actual partners, he is liable to any such person
to whom such representation has been made, who has, on the faith
of such representation, given credit to the actual or apparent
partnership, and if he has made such representation or consented
to its being made in a public manner, he is liable to such person,
whether the representation has or has not been made or
communicated to such person so giving credit by or with the
knowledge of the apparent partner making the representation or
consenting to its being made:

(1) When a partnership liability results, he is liable as though he

were an actual member of the partnership;

(2) When no partnership liability results, he is liable pro rata with

the other persons, if any, so consenting to the contract or
representation as to incur liability, otherwise separately.

When a person has been thus represented to be a partner in an

existing partnership, or with one or more persons not actual
partners, he is an agent of the persons consenting to such
representation to bind them to the same extent and in the same
manner as though he were a partner in fact, with respect to the
persons who rely upon the representation. When all the members of
the existing partnership consent to the representation, a
partnership act or obligation results; but in all other cases it is the
joint act or obligation of the persons acting and the persons
consenting to the representation. (n)
1. Partnership by estoppel, concept
A partnership by estoppel occurs when an individual's statement, conduct or silence leads a
third person to the reasonable belief that a partnership exists. It is not a true partnership; rather,
it is a doctrine applied by the courts to prevent injustice to innocent third persons who are misled
into believing that a partnership exists.

2. Kinds of partnership by estoppel

a. When a person represents himself, or consents to another representing him to anyone,

as a partner in an existing partnership.
1. If all the partners consented to such misrepresentation, a partnership by estoppel
is created between the actual partners and the person who made, or consented
to, the misrepresentation. Here, a partnership liability results. Thus, the assets of
the partnership shall be used to pay the liability, and after their exhaustion, both
the actual partners and the person who made or consented to the
misrepresentation shall be liable with their separate properties.

2. If not all the partners consented to the misrepresentation, no partnership liability results.
A partnership by estoppel is created among the actual partners who consented to the
misrepresentation and the person who made or consented to the misrepresentation,
each of whom shall be liable jointly with their separate properties.

Example: JIG'S DINERS, a partnership composed of James, lan and George, needed funds for
expansion. The three of them asked Steve to help them obtain financing from Lawrence, a
money lender. Steve agreed and pretended to be a partner with the consent of the three. Since
Lawrence knew Steve personally and that the latter had a good credit background, he extended
a loan to JIG'S. If JIG'S is unable to pay the loan, Lawrence can go after the assets of JIG'S
since a partnership liability arose when the three partners consented to the misrepresentation. If
the assets of JIG'S are not enough, Lawrence can go after the separate assets of the three
partners and Steve who are liable jointly. Here, partnership by estoppel arose among the three
actual partners and Steve.

If only James and Jan consented misrepresentation, no partnership liability arose. partnership
by estoppel was created among James, lan and Steve who will be liable jointly for the loan.
Here, the will not be made to answer partnership assets to answer for the loan.

b. When a person represents himself as a partner in a non existing partnership.

Here, no partnership liability arises as the partnership is non-existent. The person who
made the misrepresentation and all the persons who consented to it are liable jointly or pro
rata to the person who suffers damage on account of such misrepresentation.

Example: A and B are not partners but they represent themselves to X as partners. A and B
are partners by estoppel. They shall be liable jointly or pro rata to X for any liability incurred
on account of the misrepresentation.
Art. 1826. A person admitted as a partner into an existing
partnership is liable for all the obligations of the partnership arising
before his admission as though he had been a partner when such
obligations were incurred, except that his liability shall be satisfied
only out of partnership property, unless there is a stipulation to the
contrary. (n)
1. Liability of newly-admitted partner

THEY CAN ACCEPT ADDITIONAL PARTNERS IN THE PARTNERSHIP, HOWEVER, THEY HAVE TO GIVE CONSENT
TO ALL OF THE EXISTING PARTNERS SINCE IT IS BASED ON THE PRINCIPLE OF DELECTOUS PERSONAE

a. Obligations existing at the time of his admission (HE IS LIABLE LIMITED ONLY UPTO HIS SHARE
OR CONTRIBUTION, UNLESS THERE IS STIPULATION TO THE CONTRARY)

A person who joins an existing partnership is liable for partnership obligations which were
contracted prior to his admission as if he had been a partner at the time (the obligations/ liability) they
were incurred. This is so because such incoming partner stands to benefit from an already
established business with all the rights of a partner. His liability, however, is limited to his
contribution, unless there is a stipulation that his liability extends to his separate property.

b. Obligations incurred subsequent to his admission FOR PARTNERSHIP OBLIGATIONS

CONTRACTED AFTER HIS ADMISSION, THE INCOMING PARTNER IS LIABLE PRO
RATA WITH THE OTHER PARTNERS FOR THEIR SEPERATE ASSETS IF THE
ASSETS HAVE BEEN EXHASUTED (HE IS LIABLE UP TO THE SEPARATE HIS PROPERTY/ ASSETS)

2. Example: Alcaraz, Bernarte, Cortez and Delantar were partners in Summit Enterprises,
each one contributing equally to the capital of the partnership. Espanto was admitted as
a partner contributing P15,000.00 at a time when Summit Enterprises had liabilities of
P140,000.00. Later, the partnership failed to pay such liabilities with its assets
amounting only to P100,000.00 including the contribution of Espanto. Here, the liabilities
shall be paid out of the partnership assets with the balance of P40,000.00 to be
shouldered equally by Alcaraz, Bernarte, Cortez and Delantar. Espanto shall not be
liable beyond his contribution of P15,000.00 unless there was a stipulation to the
contrary.

Art. 1827. The creditors of the partnership shall be preferred to

those of each partner as regards the partnership property. Without
prejudice to this right, the private creditors of each partner may ask
the attachment and public sale of the share of the latter in the
partnership assets. (n)
1. Preference of partnership creditors in partnership assets over the private creditor of a
partner
In the payment of liabilities of the partnership and the private debts of a partner, preference shall
be as follows:
a. Partnership creditors shall be paid first out of the partnership assets. (Art. 1827)
b. Thereafter, a partner's separate creditor shall be paid out of the share of the partner
owing him if there is an excess, i.e.. partnership assets are more than the partnership
liabilities. The separate creditor of a partner may in fact ask for the attachment and
public sale of the share of a partner in partnership assets for his claim, but without
prejudice to the preferential rights of partnership creditors over the proceeds. (Art. 1827)
c. If the share of the debtor partner in the remaining assets of the partnership is not
enough to settle his private debts, his private creditor can go after the partner's
separate assets over which he (private creditor) enjoys preference. (See Art. 1839.)

2. Example: A, B and C are partners in ABC Enterprises. They share in the profits and
losses in the ratio of 5:3:2. The firm has assets of P120,000.00 and liabilities of
P110,000.00. A personally owes X P9,000.00. Should the firm's creditors and X demand
payment of their respective claims, the firm's creditors shall be paid first out of its assets of
P120,000.00. The balance in the assets amounting to P10,000.00 shall be shared by the
partners as follows: A. P5,000.00; B, 3,000.00; and C, P2,000.00. X can go after the share
of A in the partnership assets amounting to P5,000.00 for the partial payment of his claim of
P9,000.00. X can collect the balance of P4,000.00 from A's separate assets, if there are
any.

CHAPTER 3
DISSOLUTION AND WINDING UP
Art. 1828. The dissolution of a partnership is the change in the
relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up
or the business. (n)

Art. 1829. On dissolution the partnership is not terminated. but

continues until the winding up of partnership affairs is completed.
(n)
1. Dissolution, winding up and termination, concept
Dissolution is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business. (Art. 1829)
 DISSOLUTION OF A PARTNERSHIP GENERALLY OCCURS WHEN ONE OF THE
PARTNERS CEASES TO BE A PARTNER IN THE FIRM
→ IT IS IN ESSENCE, A CHANGE IN THE RELATIONSHIP BETWEEN THE
PARTNERS

Winding up is the process of settling partnership affairs after dissolution. It involves the sale of
partnership assets, the settlement of liabilities, and the distribution of the remaining cash and
other assets to the partners.
 REFERS TO THE PROCEDURE FOLLOWED FOR DISTRIBUTING OR LIQUIDATING
ANY PARTNERSHIP ASSETS AFTER DISSOLUTION
→ ALSO PROVIDES A PRIORITY BASED METHOD FOR DISCHARGING THE
OBLIGATION OF THE PARTNERSHIP, SUCH AS PAYMENTS TO NON PARTNER
CREDITORS OR TO REMAINING PARTNERS

Termination refers to the point when all the business or affairs of the partnership are completely
wound up.
 REFERS WHEN ONCE THE WIND UP IS COMPLETE, THE PARTNERSHIP IS
TERMINATED.
HERE THE BUSINESS PARTNERSHIP OPERATIONS ARE TOTALLY
CLOSED & ENSURES THAT PARTNERS CAN NO LONGER BE HELD
RESPONSIBLE FOR OTHER PARTNER'S DEBTS, AND PARTNERS CAN NO
LONGER OBLIGATE THE PARTNERSHIP IN ANY WAY.

Art. 1830. Dissolution is caused:

(1) Without violation of the agreement between the partners:

(a) By the termination of the definite term or particular

undertaking specified in the agreement;

(b) By the express will of any partner, who must act in good
faith, when no definite term or particular undertaking is
specified;

(c) By the express will of all the partners who have not
assigned their interests or suffered them to be charged for
their separate debts, either before or after the termination of
any specified term or particular undertaking;
 (d) By the expulsion of any partner from the business bona
fide in accordance with such a power conferred by the
agreement between the partners;

(2) In contravention of the agreement between the partners, where

the circumstances do not permit a dissolution under any other
provision of this article, by the express will of any partner at
anytime;

(3) By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on in
partnership;

(4) When a specific thing, which a partner had promised to

contribute to the partnership, perishes before the delivery; in any
case by the loss of the thing, when the partner who contributed it.
having reserved the ownership thereof, has only transferred to the
partnership the use or enjoyment of the same; but the partnership
shall not be dissolved by the loss of the thing when it occurs after
the partnership has acquired the ownership thereof;

(5) By the death of any partner;

(6) By the insolvency of any partner or of the partnership;

(7) By the civil interdiction of any partner;

(8) By decree of court under the following article. (1700 and 1701a)

Art. 1831. On application by or for a partner the court shall decree

dissolution whenever:

(1) A partner has been declared insane in any judicialproceeding or

is shown to be of unsound mind;

(2) A partner becomes in any other way incapable of performing his

part of the partnership contract;

(3) A partner has been guilty of such conduct as tends to affect

prejudicially the carrying on of the business;
(4) A partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that it is not reasonably
practicable to carry on the business of the partnership with him;

(5) The business of the partnership can only be carried on at a loss;

(6) Other circumstances render a dissolution equitable.

On the application of the purchaser of a partner's interest under

Article 1813 or 1814:

(1) After the termination of the specified term or particular

undertaking;

(2) At anytime if the partnership was a partnership at will when the

interest was assigned or when the charging order was issued. (n)
1. Causes of automatic dissolution (Art. 1830)

a. Without violation of the partnership agreement

1. By the termination of the definite term specified in the agreement

Thus, if the partners stated in their agreement that the partnership shall exist for a term of 10
years, the partnership shall be automatically dissolved upon the termination of such term.
However, the partners may agree to continue the partnership, in which case, the partnership
becomes a partnership at will. (Art. 1785)

2. By termination of the particular undertaking specified in the agreement

Thus, if the partnership was organized for the purpose of constructing 10 residential houses as
stated in the agreement, the partnership shall be automatically dissolved when such objective is
accomplished. As in the case of the termination of the definite term specified in the agreement,
the partners may agree to continue the partnership after the undertaking is terminated, in which
case, the partnership also becomes a partnership at will. (Art. 1785)

3. By the express will of any partner when no definite term or particular undertaking is
specified

The partnership here refers to a partnership at will. The partner causing the dissolution must
act in good faith. Thus, a partner may ask for dissolution of the partnership if he can no longer
participate in the activities of the partnership because of failing health or he and his family are
migrating to another country.

4. By the express will of all the partners either before or after the termination of any
specified term or particular undertaking

This right is available to all the partners who have not assigned or suffered charging orders
against their interest in the partnership for their separate debts. Such partners must agree
unanimously to effect the dissolution.

Thus, A, B, C, D and E are partners, A assigned his interest in the partnership to T, a third
person, on account of his debt to the latter. B, C, D and E who did not make any assignment of
their interest, may vote for the dissolution of the partnership.

5. By the expulsion of any partner

The expelled partner ceases to be associated in the carrying on of the business; hence, the
dissolution of the partnership. The expulsion, however, must be made in good faith; otherwise,
the dissolution is wrongful and the expelled partner may recover damages. Thus, a partner may
be expelled for "theft of partnership property" or "conviction of any crime" if the partnership
agreement allows expulsion on either of such grounds by a majority vote of the partners.

b. In violation of the partnership agreement

The law recognizes the power of a partner to dissolve the partnership by expressly
withdrawing therefrom even before the end of the term or the accomplishment of its
objective as stated in the agreement. The dissolution, however, contravenes the partnership
agreement and subjects the withdrawing partner to the payment damages to the other partners.
of

Thus, if a partner withdraws before the end of the ten-year term of the partnership or before the
partnership has attained its undertaking of selling all the lots in a certain subdivision, the
dissolution is wrongful. The withdrawing partner can be held liable for damages by the other
partners.

c. Partnership business becomes unlawful

The partnership is automatically dissolved when any event makes it unlawful for the business to
be carried on or for the members to carry it on in partnership.

Examples:

1. The disbarment of a partner in law firm will cause the dissolution of the partnership
because it is now unlawful for the disbarred partner to practice law. Thus, he ceases to
be associated with the other partners in the carrying on of the partnership business.
 2. M, a man, and W, a woman, entered into a universal partnership of all present
property. Shortly after the formation of the partnership, M and W got married. The
marriage of M and W resulted in the dissolution of the partnership because a husband
and wife cannot enter into a universal partnership since they are prohibited to make
donations to each other. Thus, the marriage of the partners in such a case is an "event
that makes it unlawful for the business to be carried on or for the members to carry it on
in partnership". (See Art. 789, 1782; Commissioner of Internal Revenue vs. Suter, G. R.
No. L-25532, February 28, 1969.)

d. In the following cases of loss:

1. Loss before or after the delivery of property to the partnership where the partner
contributed only its use or enjoyment, he having reserved the ownership thereof.

Here, the partner bears the loss as he is the owner of the property. With such loss, the
partnership is dissolved since the partner is considered not to have made any
contribution at all.
2. Loss before the delivery to the partnership of a specific property which a partner has
promised to contribute to the partnership.

Where a partner has promised to contribute a specific property to the partnership and
not merely its use or enjoyment, its loss before delivery causes the automatic dissolution
of the partnership. Being still the owner, the partner bears the loss and is considered
in default as regards his contribution to the partnership.

If the loss occurs after the delivery of the property to the partnership, the partnership is
not dissolved. The partnership, having acquired ownership upon delivery, bears the
loss.

e. Death of a partner

The death of a partner automatically dissolves the partnership because he ceases to be

associated in the carrying on of the partnership business.

f. Insolvency of any partner or of the partnership

1) If a partner is insolvent, his personal creditors will not only be after his separate properties
but also that of his interest in the partnership. The insolvent partner may also be unable to
undertake his share of partnership losses.

2) If the partnership is the one insolvent, it cannot be expected to pursue its business in the
ordinary course since its properties will be subject to the claims of its creditors.

g. Civil interdiction of a partner

The partnership is automatically dissolved when a partner is civilly interdicted because he is
deprived during the term of his sentence of his right to manage his property. and to dispose
such property by any act or conveyance inter vivos. (Art. 34, Revised Penal Code)
 2. Dissolution by decree of court

a. On the application by or for a partner

A partner (or his legal representative) may seek judicial dissolution of the partnership on any of
the following grounds:

1. Insanity of a partner
The partner must have been declared insane in any judicial proceeding or must be shown to be
of unsound mind. An insane person is incapable of entering into any contract (Art. 1327)
because he is not possessed of mind and reason equal to a full and clear understanding of his
act. (De Borja vs. Ongsingco, 24322-R, October 1, 1962)

2. Incapacity of a partner to perform his part of the partnership contract

The incapacity must appear to be permanent such that it will substantially affect the partner's
ability to discharge his duties to the firm.

Example: A and B formed a partnership to engage in the car repair business, with Partner A
being in charge of electrical work, and Partner B, the automotive part. Partner A is paralyzed by
a stroke making him unable to perform his part of the partnership contract. Such inability
constitutes a ground for the dissolution of the partnership.

3. Partner's conduct affecting prejudicially the carrying on of the business.

Thus, if a partner has been continually rude in dealing with customers thereby causing the
loss of business to competitors, or he has been habitually drunk when he reports for work, the
other partners may seek the judicial dissolution of the partnership.

4. Willful or persistent breach of the partnership agreement by a partner

Thus, the persistent and substantial use of partnership property by a partner for personal
purposes may serve as a ground for the judicial dissolution of the partnership as it may no
longer be reasonably practicable to carry on the partnership business with him.

5. The partnership business cannot be carried on except at a loss

This recognizes the objective of a partnership as a profit-making enterprise; hence, if it becomes
apparent that this objective can no longer be attained, the partners or any of them may seek
dissolution by the court on such ground.

6. Other circumstances rendering a dissolution equitable

Some circumstances that will render include unjustified refusal by a partner to render an
accounting of partnership affairs or to allow another partner to inspect the partnership
books which are under the former's custody.

b. On the application of purchaser of a partner's interest

The purchaser or the assignee of a partner's interest may seek dissolution by judicial decree
after the termination of the term or undertaking, or at any time when the partnership was a
partnership at will when the interest was assigned or the charging order was issued.

Here, the purchaser or assignee, upon dissolution, can seek a winding up of the partnership
affairs and allow him to recover his claim against the debtor partner.

Art. 1832. Except so far as may be necessary to wind up partnership

affairs or to complete transactions begun but not then finished,
dissolution terminates all authority of any partner to act for the
partnership:

1. With respect to the partners,

(a) When the dissolution is not by the act, insolvency or death of a

partner; or

(b) When the dissolution is by such act, insolvency or death of a

partner, in cases, where Article 1833 so requires;

2. With respect to persons not partners, as declared in

Article 1834. (n)

Art. 1833. Where the dissolution is caused by the act, death or

insolvency of a partner, each partner is liable to his co-partners for
his share of any liability created by any partner acting for the
partnership as if the partnership had not been dissolved unless:

1. The dissolution being by the act of any partner, the

partner acting for the partnership had knowledge of the
dissolution; or
2. The dissolution being by the death or insolvency of a
partner, the partner acting for the partnership had knowledge
or notice of the death or insolvency.
Art. 1834. After dissolution, a partner can bind partnership, except
as provided in the third paragraph of this article: By any act
appropriate for winding up partnership the

1. affairs or completing transactions unfinished at

dissolution;
2. By any transaction which would bind the partnership it
dissolution had not taken place, provided the other party to
the transaction:

(a) Had extended credit to the partnership prior to dissolution and

had no knowledge or notice of the dissolution: or

(b) Though he had not so extended credit, had nevertheless known

of the partnership prior to dissolution, and having no knowledge or
notice of the dissolution, the fact of dissolution had not been
advertised in a newspaper of general circulation in the place (or in
each place if more than one) at which the partnership business was
regularly carried on.

The liability of a partner under the first paragraph, No. 2, shall be

satisfied out of partnership assets alone when such partner had
been prior to dissolution:

1. Unknown as contract is made; and a partner to the

person with whom the
2. So far unknown and inactive in partnership affairs that
the business reputation of the partnership could not be said to
have been in any degree due to his connection with it.

The partnership is in no case bound by any act of a partner after

dissolution:

1. Where the partnership is dissolved because it is

unlawful. to carry on the business, unless the act is
appropriate for winding up partnership affairs; or
2. Where the partner has become insolvent; or
3. Where the partner has no authority to wind up
partnership affairs, except by a transaction with one who -
 (a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of his want of authority; or

(b) Had not extended credit to the partnership prior to

dissolution, and, having no knowledge or notice of his want of
authority, the fact of his want of authority has not been
advertised in the manner provided for advertising the fact of
dissolution in the first paragraph No. 2 (b).

Nothing in this article shall affect the liability under Article CAN
1825 of any person who after dissolution represents himself or
consents to another representing him as a partner in a partnership
engaged in carrying on business. (n)
1. Effect of dissolution on authority of a partner

Dissolution terminates all authority of any partner to act for the partnership, except with respect
to the following:
a. Acts to wind up partnership affairs.
b. Acts to complete transactions begun before dissolution.

This applies to wholly or partly executory contracts.

Example: A, B, C, D and E are partners with A as the manager. A purchased goods on

credit from T. The goods are to be delivered in four installments with the equivalent
payment to be made for each delivery. After two deliveries and payment, E dies causing
the dissolution of the partnership. Here, A must make payment for each of the next two
deliveries of the goods to be made by T after the firm's dissolution. Other than for the
completion of this transaction, A's authority is deemed terminated.

In the above cases, the act of the partner binds the partnership. If the assets of the
partnership are not sufficient to pay the liabilities, the partners can be held liable
to the extent of their separate properties. (Arts. 1832, 1833, 1834 and 1839)

2. When authority of a partner to enter into new transactions terminated among the partners
(Arts. 1832, 1833, 1834)
a. If the cause of dissolution is not by the act, insolvency or death of a partner (such as by
the expiration of the term for which the partnership was constituted or by decree of
court)

Notice or knowledge of the acting partner of the cause of dissolution is immaterial.

Example: A, B, C, D and E are partners. A is the managing partner. The term of the partnership
expired on December 31, 2020. Here, the authority of A to act for the partnership is deemed
terminated among the partners as of such date even if A was not aware of the firm's dissolution.
 b. If the cause of dissolution is the act of a partner and the partner who entered into the
new transaction had knowledge of the dissolution

Example: A, B, C, D and E are partners. A is the managing partner. E withdraws from the firm
thereby causing the dissolution of the partnership. A knows of the dissolution of the partnership
by reason of E's withdrawal. Here, the authority of A to act for the partnership is deemed
terminated among the partners.

c. If the cause of dissolution is the insolvency or death of a partner and the partner who
entered into the new transaction had notice or knowledge of such insolvency or death *

Example: A, B, C, D and E are partners. A is the managing partner. E dies thereby causing the
dissolution of the partnership. A knows of the dissolution of the partnership by reason of E's
death. Here, the authority of A to act for the partnership is deemed terminated among the
partners.

3. When authority of a partner to enter into new transaction is not terminated among the
partners (Art. 1832)
a. If the cause of dissolution is the act of a partner and the acting partner had no
knowledge of the dissolution.

Example: A, B, C, D and E are partners. A is the managing partner. E withdraws from the firm
thereby causing the dissolution of the partnership. A has no knowledge of the dissolution of the
partnership by reason of E's withdrawal. Here, the authority of A to act for the partnership is not
deemed terminated among the partners until he obtains knowledge of E's withdrawal.

b. If the cause of dissolution is the insolvency or death of a partner and the acting partner
had no notice or knowledge of such insolvency or death. *

Example: A, B, C, D and E are partners. A is the managing partner. E becomes insolvent

thereby causing the dissolution of the partnership. A has no notice or knowledge of the
dissolution of the firm by reason of E's insolvency. Here, the authority of A to act for the
partnership is not deemed terminated among the partners.

4. When the act of a partner after dissolution binds the partnership (Art. 1834)
a. When the act is necessary for winding up of partnership affairs.
b. When the act is necessary to complete transactions begun before dissolution.
c. In case of a new transaction or business in the following cases:

1. If the other party to the transaction had extended credit to the partnership before
dissolution (i.e., a previous creditor) and he had no knowledge or notice of the
dissolution.

A previous creditor is entitled to a special attention; hence, he must be specially

notified of the dissolution. Mere publication of the dissolution is not notice to him.
However, he will be bound by the dissolution if he had read the publication if there was
 one or had obtained knowledge of the dissolution in some other manner. Without such
notice or knowledge, the partnership will be bound by the transaction.

2. If the other party to the transaction had not so extended credit before dissolution (i.e., a
new creditor) but had nevertheless known of the partnership before dissolution, and the
fact of dissolution had not been advertised in a newspaper of general circulation in the
place (or in each place if more than one) at which the business is regularly carried on.

A new creditor is not entitled to a special attention; hence, mere publication of the
dissolution is constructive notice to him although he had not read it. So if there was no
publication and he had not come to learn of the dissolution in some other manner, he will
not be bound by the dissolution. The partnership will thus be liable to him.

In the above cases, a partner is not liable with his separate property after the exhaustion
of partnership assets:

1. If he is unknown as a partner to the person with whom the contract is made, and
2. So far unknown and inactive in partnership affairs that the business reputation of
the partnership could not be said to have been in any degree due to his
connection with it.

d. Where although the partner has no authority to wind up partnership affairs, the other
party to the transaction is:

1. One who had extended credit to the partnership before dissolution (i.e., previous
creditor), and he had no notice or knowledge of the partner's lack of authority.

2. One who had not extended credit before SO dissolution (i.e., new creditor) and having
no notice or knowledge of the partner's lack of authority, the fact of want of authority has
not been advertised in a newspaper of general circulation in the place (or in each place if
more than one) at which the business is conducted.

Except for the subject matter of the notice or knowledge which is the lack of authority of
the partner to wind up, the explanation for No. 4 (d)(1) and (2) is similar to No. 4(c)(!)
and (2), respectively.

5. When the act of a partner after dissolution does not bind the partnership (Art. 1834)
a. Where the partnership is dissolved because it is unlawful to carry on the business,
unless the act is appropriate for winding up partnership affairs.
b. Where the acting partner is insolvent.
c. Where the partner had no authority to wind up partnership affairs, except with innocent
third person. [Please refer to No. 4(d)(1) and (2).]
d. Where a partner's authority is already terminated among the partners and the third
person had actual or constructive knowledge, as the case may be, of the dissolution of
the firm.
6. Summary of rules on liability of partners and the partnership for acts of a partner after
dissolution.

a. If a partner's authority is terminated among the partners (or such partner has no
authority to act) but the partnership is bound by the transaction. (an acting partner is liable and
other partners have to recover including partnership for what they have paid due to the cause of the acting partner; when
he has the knowledge of the dissolution and still entered into new transactions that of third person has no knowledge of
the dissolution)
1. The third person can go after the assets of the partnership.
2. If the assets of the partnership are not sufficient, the person can go after the
separate assets of each partner.
3. Thereafter, the other partners can go after the acting partner to recover the
amount they paid out of their separate assets and to demand the return of the
amount paid out of the partnership assets. This is so because in so far as the
partners are concerned, the authority of the acting partner was already
terminated.

Examples:

1. A, B, C, D and E are partners in a construction company. A is the

managing partner. E dies thereby causing the dissolution of the
partnership. A knows of the dissolution of the partnership by reason of E's
death. Nonetheless, A still purchased construction supplies on credit from
PC, a previous creditor who had no knowledge or notice of the
dissolution. Here, the partnership is bound by the new transaction. PC
can go after the assets of the partnership. If such assets are not
sufficient, he can go after the separate assets of all the partners including
E. Thereafter, B, C, D and the legal representative of E can demand
payment from A, both for the amount they and the partnership paid to PC.
This is so because A's authority was already terminated among the
partners.

In the above case, if D is unknown as a partner to PC and so far unknown

and inactive in partnership affairs that the business reputation of the
partnership could not be said to have been in any degree due to his
connection with it, D shall not be liable with his separate property after the
exhaustion of partnership assets.
2. A, B, C and D are partners. The partnership is dissolved by reason of the withdrawal of
B. A was given the authority to wind up. However, D, who had no authority to wind
up, transacted with NC, a new creditor who had no knowledge of D's want of authority.
The fact of D's want of authority was not published in the newspapers. The partnership
here is bound and NC can go after its assets. If such assets are not sufficient, he can go
after the separate assets of all the partners. Thereafter, A, B and C can demand
payment from D, both for the amount they and the partnership paid to NC. This is so
because D had no authority to wind up partnership affairs.

b. If a partner's authority is not terminated among the partners and the partnership is
bound by the transaction. (both partners and partnership are liable; when he has given the authority however still
enters into new transactions or had no knowledge of the dissolution and entered into a transaction that the third person has
also no knowledge of the dissolution))
 1. If a partner's authority is not terminated among the partners and the
partnership is bound by the transaction.
2. If the assets of the partnership are not sufficient, the third person can go
after the separate assets of each partner.
3. Thereafter, the other partners cannot go after the acting partner for
recovery because after all the authority of the latter was not terminated
among all the partners. Here, the partnership and the partners are liable
as if there had been no dissolution of the firm.
Examples:
1. A, B, C and D are partners. In the partnership agreement, A was given
the authority to wind up in the event of dissolution. D dies thereby
causing the dissolution of the partnership. Any transaction entered into by
A to wind up partnership affairs will be binding on both the partnership and
the partners who can be held liable up to the extent of their separate
assets with no right to reimbursement.

2. A, B, C, D and E are partners in a construction company. A is the managing partner. E

dies thereby causing the dissolution of the partnership. A had no notice or knowledge
of the dissolution of the firm by reason of E's death. Thereafter, A purchased
construction supplies on credit from PC, a previous creditor who had no knowledge or
notice of the dissolution. Here, the partnership is bound by the new transaction. PC can
go after the assets of the partnership. If such assets are not sufficient, he can go after
the separate assets of all the partners including those of E. B, C, D and the legal
representative of E cannot demand payment from A, both for the amount they and the
partnership paid to PC.

c. If a partner's authority is terminated among the partners (or has no authority to act for the
partnership) and the partnership is not bound by the transaction. (when he has no authority to act or
has knowledge of the cause of the dissolution and still insists to enter into new transactions and also the third person also
hasthe knowledge of the dissolution)

1) The partnership assets cannot be held to answer for the liability to the third person.
2) The acting partner alone is liable to the third person with whom he contracted, and he
cannot call on the other partners to share in the payment.

Examples:
1. A, B, C and D are partners with A as the manager. A becomes insolvent
thereby causing the dissolution of the firm. Nonetheless, A still transacted
with T, a third person. Here, the partnership is not bound. A, being insolvent, has
no authority to act for, and. cannot bind, the partnership. He alone will be liable to
T.
2. A, B, C, D and E are partners in a construction company. A is the managing
partner. E dies thereby causing the dissolution of the partnership. A knows
of the dissolution of the partnership by reason of E's death. Nonetheless, A
still purchased construction supplies on credit from PC, a previous creditor who
had knowledge of the dissolution. Here, the partnership is not bound by the new
transaction. PC cannot go after the assets of the partnership. A alone shall be
liable to PC and he cannot call on B, C, D. and the legal representative of E to
contribute.
d. If a partner's authority is not terminated among the partner but the partnership is not
bound by the transaction. (when acting partner has no knowledge of the dissolution and still enters into new transactions
(in good faith). However, the third person has the knowledge of the dissolution)

This may occur for instance, when a dissolved by reason of the death of a partner and the
acting partner has no knowledge of such death. Then, such partner enters into a new
transaction with a previous creditor who had notice or knowledge of the dissolution of the
partnership by reason of such death. partnership acting

This situation seems not to be covered by the provisions of partnership. However, the author
respectfully submits that the transaction does not bind either the partnership or the acting
partner by reason of the bad fais of the third person in view of Art. 1931 on Agency which
provides that, "(A)nything done by the agent, with knowledge of the death of the principal or of
any other cause which extinguishes the agency, is valid and shall be fully effective with respect
to third persons who may hav contracted with him in good faith." Thus, if the third person had
knowledge of the dissolution of the partnership (which is the principal), then he is considered in
bad faith and will not be protected by the law. (See Buason vs. Panuyat, 105 Phil 795.)

Art. 1835. The dissolution of the partnership does not of itself

discharge the existing liabilities of any partner.

A partner is discharged from any existing liability upon dissolution

of the partnership by an agreement to that effect between himself,
the partnership creditor and the person or partnership continuing
the business; and such agreement may be inferred from the course
of dealing between the creditor having knowledge of the dissolution
and the person or partnership continuing the business. The
individual property of a deceased partner shall be liable for all
obligations of the partnership incurred while he was a partner, but
subject to the prior payment of his separate debts. (n)
1. Effect of dissolution on existing liabilities of partners

The 'dissolution of the partnership does not of itself discharge the existing liabilities of
any partner. A partner is discharged from liability only upon agreement of the following:
a. The partner himself liable;
b. The partnership creditor, and
c. The person or partnership continuing the business.
The agreement may be inferred from the course of dealing between the creditor having
knowledge of the dissolution and the person or partnership continuing the business.

2. Separate property of deceased partner

The separate property of a deceased partner shall be liable for partnership obligations
incurred while he was a partner. However, preference shall be given to the payment of his
separate debts.
Art. 1836. Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal representative of
the last surviving partner, not insolvent, has the right to wind up
the partnership affairs, provided, however, that any partner, his
legal representative or his assignee, upon cause shown, may obtain
winding up by the court. (n)
1. Who may wind up partnership affairs

a. Extra-judicially
1. By the partner or partners designated in agreement.
2. If none was designated:

a. By the partner or partners who have not wrongfully dissolved the partnership
b. If all the partners are dead, the legal representative of the last surviving partner who was
not insolvent.
b. Judicially
Under the direction and control of the court, upot proper cause shown by any partner, his
legal representative or assignee.

The appointee of the court should be a surviving partner, not the legal representative of
the deceased partner who was not insolvent, except when he was the last surviving
partner.

Art. 1837. When dissolution is caused in any way, except in

contravention of the partnership agreement, each partner, as
against his co-partners and all persons claiming through them in
respect of their interests in the partnership, unless otherwise
agreed, may have partnership property applied to discharge its
liabilities, and the surplus applied to pay in cash the net amount
owing to the respective partners. But if dissolution is caused by
expulsion of a partner, bona fide under the partnership agreement
and if the expelled partner is discharged from all partnership
liabilities, either by payment or agreement under the second
paragraph of Article 1835, he shall receive in cash only the net
amount due him from the partnership.

When dissolution is caused in contravention of the partnership

agreement the rights of the partners shall be as follows:

(1) Each partner who has not caused dissolution wrongfully shall
have:

a. All the rights in the first paragraph of this article; and

 b. The right, as against each partner who has caused the
dissolution wrongfully, to damages for breach of the
agreement.

(2) The partners who have not caused the dissolution wrongfully, if
they all desire to continue the business in the same name either by
themselves or jointly with others, may do so, during the agreed
term for the partnership and for that purpose may possess the
partnership property, provided they secure the payment by bond
approved by the court, or pay to any partner who has caused the
dissolution wrongfully, the value of his interest in the partnership
at the dissolution, less any damages recoverable under the second
paragraph, No. 1 (b) of this article, and in like manner indemnify
him against all present or future partnership liabilities.

(3) A partner who has caused the dissolution wrongfully shall have:

(a) If the business is not continued under the provisions of the

second paragraph, No. 2, all the rights of a partner under the first
paragraph, subject to liability for damages in the second paragraph,
No. 1 (b), of this article.

(b) If the business is continued under the second paragraph, No. 2,

of this article, the right as against his co partners and all claiming
through them in respect of their interests in the partnership to have
the value of his interest in the partnership, less any damage caused
to his co-partners by the dissolution, ascertained and paid to him in
cash, or the payment secured by a bond approved by the court, and
to be released from all existing liabilities of the partnership; but in
ascertaining the value of the partner's interest the value of the
goodwill of the business shall not be considered. (n)
1. Power and right to dissolve; wrongful and non-wrongful dissolution

A partner has the power to dissolve a partnership at any time. However, he may not have
always the right. Thus, a partner has the power to withdraw from the partnership before the end
of the term specified in the agreement, but he does not have the right because his withdrawal is
in breach of his agreement to be with the partnership up to the end of its specified term. In such
a case, his dissolution of the partnership is wrongful.

If a partner has the power and the right to dissolve the partnership at any time, such as when he
withdraws from the partnership in good faith when no term is specified in the agreement, such
dissolution is non-wrongful.
2. Dissolution without contravention of the partnership agreement.
If the partnership is dissolved without violating the partnership agreement, each partner shall
have the following rights:
 a. To have the partnership property applied to discharge the liabilities of the
partnership.
b. To have the surplus, if any, applied to pay in cash the net amount owing to the
respective partners.
However, if the cause of dissolution is the bona fide expulsion of a partner and the expelled
partner is discharged from all partnership liabilities, either by payment or the agreement of the
expelled partner, the partnership creditors and the partners continuing the business, he shall
receive in cash only the net amount (i.e., his interest less damages) due him from the
partnership.

3. Dissolution in contravention of the partnership agreement Rights of partners who have

not caused the wrongful

a. dissolution of the partnership

1) To have the partnership property applied to discharge the liabilities of the

partnership.
2) To have the surplus, if any, applied to pay in cash the net amount owing to the
respective partners.
3) To be indemnified for damages from the partner who has caused the wrongful
dissolution of the partnership.
4) To continue the business of the partnership in same name, either by themselves
or jointly with others, and for that purpose possess partnership property provided
that:

a. They pay the partner who has caused the wrongful dissolution of the partnership the
value of his interest in the partnership less damages; or

b. They secure its payment by a bond approved by the court.

The bond is intended to answer for payment of the partner's net interest should the
persons continuing the business are unable to pay such claim.

b. Rights of partner who has caused the wrongful dissolution of the partnership
1. If the business is not continued:
a) To have the partnership property applied to discharge the liabilities of the
partnership.
b) To receive his share in the surplus, less the damages suffered by the other
partners by reason of his having caused the wrongful dissolution of the
partnership.
2. If the business is continued

a) To have the value of his interest in the partnership less damages paid to him in cash
or have its payment secured by a bond approved by the court.
In ascertaining the value of such partner's interest, the value of the goodwill shall not be
included. This is intended to penalize the partner for causing the wrongful dissolution of the
partnership.

b) To be released from all existing liabilities of the partnership.

Art. 1838. Where a partnership contract is rescinded on the ground

of the fraud or misrepresentation of the parties thereto, the party
entitled to rescind is, without prejudice to any other right, entitled:

(1) To a lien on, or right of retention of, the surplus of the

partnership property after satisfying the partnership liabilities to
third persons for any sum of money paid by him for the purchase of
an interest in the partnership and for any capital or advances
contributed by him;

(2) To stand, after all liabilities to third persons have been satisfied,
in the place of the creditors of the partnership for any payments
made by him in respect of the partnership liabilities; and

(3) To be indemnified by the person guilty of the fraud of making

the representation against all debts and liabilities of the
partnership. (n)
1. Grounds for rescission of partnership contract

a. Fraud, or
b. Misrepresentation of the parties to enter into the partnership contract.

2. Rights of partner who was induced by fraud or misrepresentation

a. Right to a lien on, or retention of, surplus profits for any sum of money paid by him for the
purchase of an interest in the partnership and for any capital or advances contributed by him,
referred to as right of retention.

b. Right to stand, after liabilities to third persons have been satisfied, in place of partnership
creditors for any payment made by him for partnership liabilities, referred to as right of
subrogation.

C. Right to be indemnified by the person guilty of fraud or misrepresentation against all debts of
the partnership, referred to as right of indemnification.
Art. 1839. In settling accounts between the partners after
dissolution, the following rules shall be observed, subject to any
agreement to the contrary:

(1) The assets of the partnership are:

a. The partnership property,

b. The contributions of the partners necessary for the
payment of all the liabilities specified in No. 2.

(2) The liabilities of the partnership shall rank in the order of

payment, as follows:

a. These owing to creditors other than partners;

b. Those owing to partners other than for capital and
profits;
c.Those owing to partners in respect of capital;
d. Those owing to partners in respect of profits.

(3) The assets shall be applied in the order of their declaration in

No. 1 of this article to the satisfaction of the liabilities,

(4) The partners shall contribute, as provided by Article 1797, the

amount necessary to satisfy the liabilities.

(5) An assignee for the benefit of creditors or any person appointed

by the court shall have the right to enforce the contributions
specified in the preceding number.

(6) Any partner or his legal representatives shall have the right to
enforce the contributions specified in No. 4, to the extent of the
amount which he has paid in excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for

the contributions specified in No. 4.

(8) When partnership property and the individual properties of the

partners are in possession of a court for distribution, partnership
creditors shall have priority on partnership property, saving the
rights of lien or secured creditors.
(9) Where a partner has become insolvent or his estate is insolvent.
the claims against his separate property shall rank in the following
order:

a. Those owing to separate creditors;

b. Those owing to partnership creditors;
c.Those owing to partners by way of contribution.

1. Liquidation of dissolved partnership

This involves the sale of the assets of the partnership, the payment of its liabilities, and the
distribution of the remaining cash or other assets to the partners.

2. Order of payment of partnership liabilities.

a. Those owing to creditors other than partners.
b. Those owing to partners other than for capital and profits.
c. Those owing to partners in respect of capital.
d. Those owing to partners in respect of profits.

Example: Ibazeta, Valencia, Angeles and Naval are partners in the firm IVAN Enterprises.
Ibazeta is an industrial partner, while the rest are capitalist partners who contributed
P60,000.00, P30,000.00 and P10,000.00 respectively. The partners share in the profits in the
ratio of 3:4:2:1. The partnership is dissolved by reason of the expiration of its term. The
partnership has assets of P220,000.00 and owes the following creditors: Castillo, P30,000.00.
The liabilities of the partnership shall be paid out of the partnership assets as follows.
P40,000.00; Deramas; P20,000.00; and Partner Valencia,

First: To Castillo, P40,000.00; and Deramas, P20,000.00, both of whom are outside creditors.
These payments will leave a balance of P160,000.00 [P220,000.00-( (P40,000.00 P20,000.00)].

Second: To Valencia, a partner who is a creditor of the firm, P30,000.00. This payment will
leave a balance of P130,000.00 ( 30.00-P30,000.00)

Third: To the capitalist partners for the return of their capital as follows: Valencia, P60,000.00;
Angeles, P20,000.00; and Naval, P10,000.00. These payments will leave a balance of
P30,000.00 (P130,000.00 P100, ). Ibazeta, being an industrial partner, is not entitled to any
return of capital.

Last: The balance of P30,000.00, representing the profits, shall be paid to the partners
according to their profit-sharing agreement. Thus, Ibazeta will receive P9,000.00(30\%)
Valencia, P12,000.00 (40%); Angeles, P6,000.00 (20%); and Naval, P3,000.00 (10%).

3. Assets of the partnership

 The following are the assets of the partnership to be applied in the order they are declared
for the payment of all the liabilities in No. 2 in the order that such liabilities are ranked:
a. The partnership property.
b. The contributions of the partners necessary for the payment of liabilities.
1. The contributions shall be made in accordance with the rules on the division of
the profits and losses.
2. The individual property of a deceased partner shall be liable for such
contributions.
3. The following may enforce payment of the contributions:
a. An assignee for the benefit of creditors:
b. Any person appointed by the court.
c. Any partner or his legal representative to the extent of the amount he paid in excess of
his share of the liabilities.

Example: X, Y and Z are partners in XYZ Company, with X contributing P50,000.00; Y,

P30,000.00; and Z, P20,000.00. The partners have no profit and loss sharing agreement. The
partnership is dissolved by reason of Z's withdrawal from the firm. After the exhaustion of
partnership assets and payment of some liabilities, the following liabilities remained: To A, an
outside creditor, P25,000.00; and to partner X, P15,000.00. The obligations of the firm are
summarized as follows:

Based on their capital contributions, X's share in the loss is P70,000.00 (50%); Y, P42,000.00
(30%); and Z, P28,000.00 (20%).
 *X, in effect, will contribute only P5,000.00 (P20,000.00 required contribution, less his
loan to the firm of P15,000.00).

Note: Under Art. 1816, all partners including industrial ones shall be liable pro rata with
their separate property after the assets of the partnership have been exhausted. Pro
rata, as understood in this provision, means joint or equal. Is there a conflict between
this provision and Art. 1839 where the partners are required contribute according to the
rules on profit and loss sharing? The answer is No, because under Art. 1816, the
partners will have to settle among themselves after paying the liabilities such that
ultimately, the sharing in the liabilities will be in accordance with the rule on profit and
loss sharing. In fact, Art. 1839 (6) provides that any partner or his legal representative
has the right to enforce the payment of the contributions if he paid in excess of his share
of the liabilities.

4. Priority in the payment of liabilities if partnership property and the individual property
of the partners are in possession of the coun for distribution

Subject to the rights of lien or of secured creditors, the priority in the payment of liabilities
shall be as follows:

a. Partnership creditors for partnership property.

b. Separate creditors for individual property.

5. Priority of claims against separate property of a partner who is insolvent or whose

estate is insolvent

a. Those owing to separate creditors.

b. Those owing to partnership creditors.
c. Those owing to partners by way of contributions.
Art. 1840. In the following cases, creditors of the dissolved
partnership are also creditors of the person or partnership
continuing the business:

(1) When any new partner is admitted into an existing partnership,

or when any partner retires and assigns (or the representative of
the deceased partner assigns) his rights in partnership property to
two or more of the partners, or to one or more of the partners and
one or more third persons, if the business is continued without
liquidation of the partnership affairs:

(2) When all but one partner retire and assign (or the
representative of a deceased partner assigns) their rights in
partnership property to the remaining partner, who continues the
business without liquidation of partnership affairs, either alone or
with others;

(3) When any partner retires or dies and the business of the
dissolved partnership is continued as set forth in Nos. 1 and 2 of
this article, with the consent of the retired partners or the
representative of the deceased partner, but without any assignment
of his right in partnership property;

(4) When all the partners or their representatives assign their rights
in partnership property to one or more third persons who promise
pay the debts and who continue the business of thedissolved
partnership;

(5) When any partner wrongfully causes dissolution and the

remaining partners continue the business under the provisions of
Article 1837, second paragraph, No. 2, either alone or with others,
and without liquidation of the partnership affairs; (6) When a
partner is expelled and the remaining partners continue the
business either alone or with others without liquidation of the
partnership affairs.

The liability of a third person becoming a partner in the partnership

continuing the business, under this article, to the creditors of the
dissolved partnership shall be satisfied out of partnership property
only, unless there is a stipulation to the contrary.

When the business of a partnership after dissolution is continued

under any conditions set forth in this article the creditors of the
dissolved partnership, as against the separate creditors of the
retiring or deceased partner or the representative of the deceased
partner, have a prior right to any claim of the retired partner or the
representative of the deceased partner against the partnership
continuing the business, on account of the retired deceased
partner's interest in the dissolved partnership account of any
consideration promised for such interest or for h right in
partnership property. person or

Nothing in this article shall be held to modify any right of creditors

to set aside any assignment on the ground of fraud.

The use by the person or partnership continuing the busines of the

partnership name, or the name of a deceased partner as part
thereof, shall not of itself make the individual property of the
deceased partner liable for any debts contracted by such person
partnership. (n)

1. When creditors of the dissolved partnership are also creditors of the person or
partnership continuing the business

When the business of a dissolved partnership is continued without liquidation of partnership

affairs, the liabilities of the dissolved partnership shall also be the liabilities of the person or
partnership continuing the business who or which may be regarder as a new entity. The
dissolution of the partnership may be caused either by the admission of a new partner, or by the
retiremen death withdrawal or expulsion of a partner, or by the assignment by the partners of
their rights to one of their members, or by the assignment of all the partners of their rights in
specific partnership properties to a third person or persons. The remaining partners either by
themselves or with others, or the sole surviving a remaining partner either by himself or with
another or other persons, or even a third person, may continue the business

In the case of a newly-admitted partner, his share in the liabilities of the dissolved partnership
shall be satisfied out of partnership properties only, unless there is a stipulation making him
liable to the extent of his separate properties.
Note: Art. 1840, par. 1 provides that the admission of a new partner into an existing partnership
is also a cause of dissolution although this is not among the grounds for the dissolution of a
partnership under Art. 1830, and the admission of a new partner, going by the definition of
dissolution in Art. 1828, does not result in a partner "ceasing to be associated in the carrying on"
of the partnership business.

2. Preferential right of partnership creditors over separate creditors of a partner

When the business of a partnership after dissolution is continued, the creditors of the dissolved
partnership enjoy preferential right over the separate creditors of the retiring or deceased
partner or the representative of the deceased partner as regards their claim of the retired or
deceased partner's interest in the dissolved partnership.
 3. Use of the name of the dissolved partnership or that of a deceased partner

The use by the person or partnership continuing the business of the partnership name, or the
name of a deceased partner as part thereof, shall not of itself make the individual properties of
the deceased partner liable for any debts contracted by such person or partnership.

Art. 1841. When any partner retires or dies, and the business is
continued under any of the conditions set forth in the preceding
article, or in Article 1837, second paragraph, No. 2, without any
settlement of accounts as between him or his estate and the person
or partnership continuing the business, unless otherwise agreed, he
or his legal representative as against such person or partnership
may have the value of his interest at the date of dissolution
ascertained, and shall receive as an ordinary creditor an amount
equal to the value of his interest in the dissolved partnership with
interest, or, at his option or at the option of his legal
representative, in lieu of interest, the profits attributable to the use
of his right in the property of the dissolved partnership; provided
that the creditors of the dissolved partnership as against the
separate creditor, or the representative of the retired or deceased
partner shall have priority on any claims arising under this article,
as provided by article 1846, third paragraph. (n)
1. Right of retired partner or legal representative of deceased partner when business is
continued without liquidation

When any partner retires or dies, and the business h continu I without any settlement of
accounts as between him or his estate and the person or partnership continuing the business,
he or his legal representative shall have the following rights:

a. To have the value of the interest of the retiring or deceased partner ascertained as of the date
of dissolution of the partnership.
b. To receive as an ordinary creditor an amount equal to the value of his interest in the
dissolved partnership with interest, or, at his option or at the option of his legal representative, in
lieu of interest, the profits attributable to the use of his right in the property of the dissolved
partnership.

2. Preferential right of creditors of dissolved partnership

While the retired partner or the legal representative of deceased partner becomes an ordinary
creditor as regards his claim on the retired or deceased partner's interest, the law gives priority
to the claims of the creditors of the dissolved partnership.

Art. 1842. The right to an account of his interest shall accrut to any
partner, or his legal representative as against the winding up
partners or the surviving partners or the person or partnership
continuing the business, at the date of dissolution, in the absence
of any agreement to the contrary. (n)
1. Partner's right to an account of his interest

Any partner or the legal representative of a deceased partner has a right to an account of his
interest against the following:

a. Winding up partners.
b. Surviving partners.
c. Persons or partnership continuing the business.

2. When right to an account accrues.

The right to an account accrues at the date of dissolution, unless a different date is provided in
the agreement.

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