Partnership:

Characteristic elements of partnership:

1. Consensual, because it is perfected by mere consent, that is, upon

the express or implied agreement of two (2) or more persons;
2. Nominate, because it has special name or designation in our law;
3. Bilateral, because it is entered into by two (2) or more persons
and the rights and obligations arising therefrom are always
reciprocal;
4. Onerous; because each of the parties aspires to procure for himself
a benefit through the giving of something;
5. Commutative, because the undertaking of each of the partner is
considered as the equivalent of that of the others;
6. Principal, because it does not depend for its existence or validity
upon some other contract;
7. Preparatory, because it is entered into as a means to an end, i.e.,
to engage in business for the realization of profits with the view
of dividing them among the contracting profits.

A partnership contract, in its essence, is a contract of agency.

Partnership relation fiduciary in nature. It is a personal relation in

which the element of delectus personae exists, involving as it does trust
and confidence between the partners.

1. Right to choose co-partners – UNLESS OTHERWISE PROVIDED IN THE

PARTNERSHIP AGREEMENT, no one can become a member of the
partnership association without the consent of all the other
associates.
The fiduciary nature of the partnership relation and the liability
of each partner for the acts of the others within the scope of the
partnership business require that each person be granted the right
to choose with whom he will be associated in the firm.
2. Power to dissolve partnership - Neither would the presence of
period for its specific duration or the statement of a particular
purpose for its creation prevent the dissolution of a partnership
by an act or will of a partner.
Among partners, mutual agency arises and the doctrine of delectus
personae allows them to have the power, although not necessarily
the right, to dissolve the partnership. VERILY, ANY ONE OF THE
PARTNERS MAY, AT HIS SOLE PLEASURE, DICTATE A DISSOLUTION OF THE
PARTNERSHIP AT WILL.
He must however act in good faith. The attendance of bad faith
cannot prevent the dissolution of the partnership but it can result
in a liability for damages.
 Essential features of partnership

Below are the five (5) essential features of a partnership

contract:
A. There must be a valid contract
B. The parties must have legal capacity to
C. There must be a mutual contribution of money, property or
industry to a common fund
D. The object must be lawful
E. The purpose or primary purpose must be to obtain profits and to
divide the same among the parties.

1. There must be a valid contract.

A. A form of voluntary and personal association – partnership is

a form of voluntary association entered into by the
associates.
B. Creation and proof of existence – It may be informally created
and its existence proved by the conduct or acts of the
parties.

It is customary (commonly practiced), however, to embody the

terms of the association in a written document known as
Articles of Partnership.

Requisites of a Valid Contract:

A. Consent/Capacity of the contractual parties

B. Object which is the subject matter of the contract
C. Cause which is established

Other forms of association excluded: Partnership, therefore, exclude

from its concept all other associations which do no have their origin
in a contract, express or implied.

Religious societies, conjugal or community partnerships, and other

similar nature are not, therefore, included as they are not created by
the express or implied contract of the parties.

2. LEGAL CAPACITY OF PARTIES TO ENTER INTO THE CONTRACT

GR: Before there can be a valid contract of partnership, it is essential

that the contracting parties have the necessary legal capacity to enter
into the contract. A as general rule, any person may be a partner who
is capable under the law of entering into contractual relations.
Consequently, any person who cannot legally give consent to a contract
cannot be a partner.

Hence, the following cannot give their consent to a contract of

partnership:

A. Unemancipated minors
B. Insane or demented persons
C. Deaf-mutes who do not know how to write;
D. Persons who are suffering from CIVIL INTERDICTION
(Civil interdiction is a legal restriction that prevents someone
from managing their own property or engaging in other legal
activities. It can be imposed on someone who is considered
incapable of managing their affairs, such as those with mental
disabilities or insanity/ penalty for certain crimes.)

E. Incompetents who are under guardianship

Exceptions: Under article 1782, persons who are prohibited from giving
each other any donation or advantage cannot enter into a universal
partnership. A married woman may enter into a contract of partnership
even without her husband’s consent, but the latter may object under
certain conditions.

MUTUAL CONTRIBUTION TO A COMMON FUND.

1. Proprietary or financial interest. The partners must have a

proprietary or financial interest in the business. The very
definition of partnership provides for this element. Without the
element of mutual contribution to a common fund, there can be no
partnership.
2. For of contribution:

Money – referring to currency that is legal tender in the

Philippines. It must be pointed out that checks, bank drafts,
promissory notes payable to order, and other mercantile documents
are not money but only representatives of money. Consequently,
there is no contribution of money until they have been cashed.

Property – The property contributed may be real or personal

property, tangible or intangible. Hence, credit such as promissory
note or other evidence of obligation or even mere goodwill may be
contributed as it is considered property.

Industry – the law permits the contribution of industry. “Industry”

means the work or services of the party associated, which may be
 either personal manual efforts or intellectual, and for which he
receives a share in the profits (not merely salary) of the business.

A limited partner in a limited partnership, however, cannot contribute

mere industry or service.

LEGALITY OF OBJECT:

1. Effect of ILLEGALITY: The object is unlawful when it is contrary

to LAW, MORALS, GOOD CUSTOMS, PUBLIC ORDER, OR PUBLIC POLICY. As
in other kinds of contract, the purpose of partnership must be
lawful; otherwise, no partnership can arise as the contract is void
ab initio, i.e., void or without force and effect from the
beginning.
2. Business partnership is not permitted to engage in – Subject to
this general limitation on contracts, a partnership may be
organized for any purpose except that it may not engage in an
enterprise for which the law requires specific form of business
organization, such as banking, which, under the General Banking
Law of 2000, only stock corporations may undertake.

Intention to realize and divide profits.

(1) Very reason for existence of partnership – the idea of obtaining

pecuniary profit or gain directly as a result of the business
to be carried on is the very reason for the existence of a
business partnership. As a matter of fact, this element is what
distinguishes the contract of partnership from voluntary
religious or social organizations. Even unprofitable business
can be a partnership provided its goal is to obtain profits.
(2) Sufficient of obtaining profit principal purpose – the
realization of pecuniary profit, however, need not be the
exclusive aim of the partnership. It is sufficient that it is
the principal purpose even if there are, incidentally, moral,
social, or spiritual ends.

Sharing of profits

A partnership is essentially a business enterprise established for

profit.

(1) NOT NECESSARILY IN EQUAL SHARES – Since the partnership is for

the common benefit or interest of the partners, it is necessary
to divide the profits among the members, although not
necessarily in equal shares. In other words of the “Supreme
Court” there must be a joint interest in the profits. WITHOUT
THIS SHARING OF PROFITS, IT CANNOT BE SAID THAT AN AGREEMENT OF
 HAS BEEN ENTERED INTO AND THAT IT EXISTS. One without any right
to participate in the profits, cannot be deemed as a partner.
(2) NOT CONCLUSIVE EVIDENCE OF PARTNERSHIP - The sharing of profits
is merely presumptive and not conclusive, even if the cogent,
evidence of partnership. There are numerous instances of parties
who have a common interest in the profits and losses of an
enterprise but who are not partners. Thus, if the division of
profits is merely used as a guide to determine the compensation
due to one of the parties, such one is not a partner.

Sharing of losses – the right to share in the profits (or losses)

carries with it the obligation to share also in the losses.

Agreement not necessary – it is not necessary for the parties to agree

upon a system of sharing. The essence of a partnership is to be shared
between or among the partners. However, where a partnership has been
validly created, a subsequent stipulation which excludes one or more
partners from any share in profits (or losses) will not affect its
existence. Only the stipulation is VOID.

Partnership, a juridical person.

As a juridical person, a partnership may acquire and possess property

of all kinds, as well as incur obligations and bring civil or criminal
actions in conformity with the laws and regulations of its
organization.

Partnership X & Co., in which A and B are the partners, there are
three distinct persons, namely, the partnership, A, and B.

Consequently, the partnership may be declared as bankrupt even if A

and B are not; it may enter into contracts and may sue and be sued;
and the death of either A or B ground for the dismissal of a pending
suit against the partnership.

Article 1769. In determining whether a partnership exist, these rules

shall apply:

(1) Except as provided by Article 1825, persons who are not partners
as to each other are not partners as third persons;
(2) Co-ownership or co-possession does not of itself establish a
partnership, whether such co-owners or co-possessors do or 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 the 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 installment or otherwise;
B. As wages of an employee or rent to a landlord;
C. As annuity to widow or presentative of a deceased partner;
D. As interest on a loan, though the amounts of payment vary
with the profits of the business;
E. As the consideration for the sale of goodwill of a business
or other property by installment or otherwise.

Persons not partners as to each other

(1) Partnership, a matter of intention – partnership is a matter of

intention, each party giving his consent to become a partner.
Where the parties expressly declare they are not partners, this,
as a rule, settles the question as between themselves. Where,
however, a partnership exists, it is immaterial whether or not
the parties call or believes their relationship a partnership.
Persons who are partners in fact may not avoid the consequences
of the relation by merely denying that they are partners.
(2) Partners by estoppel – where persons by their acts, consent, or
representations have MISLED third persons or parties into
believing that the former are partners in a non-existing
partnership, such persons become subject to liabilities of
partners to all who, in good faith, deal with them in their
apparent relations.

CO-OWNERSHIP OR CO-POSSESSION

There is co-ownership (or co-possession) whenever the ownership (or

possession) of an UNDIVIDED THING or RIGHT belongs to different persons.

In partnership, the profits must be derived from the operation of the

business or undertaking by the members of the ASSOCIATION and not merely
from property ownership.

A and B inherited from their father an apartment which is leased to third

persons.

Are they partners? NO, they are merely co-owners whether or not they
share in the profits made by the lease of the property. They cannot be
partners in the ABSTRACT OF CONTRACT.

A and B put up money to buy sweepstakes tickets for the sole purpose of
dividing equally the prize money which they may win. The parties in this
case formed a partnership.
Share of GROSS RETURNS (not profit)

The mere sharing of gross returns alone does not indicate a partnership,
since in a partnership, the partners share profits after satisfying all
the partnership’s liabilities.

THE DECISIVE TEST: Does the recipient of a share of the profits have an
equal voice as a PROPRIETOR in the conduct and control of the business?
Does he own a share of the profits as a proprietor of the business
producing them? Thus, if one takes a share of the profits as payment of
a debt, he is not a partner.