4.

Onerous
o Each party expects to gain a benefit through
CHAPTER I giving something (may bayad or contribution).
General Provisions
5. Commutative
Article 1767: Definition of Partnership
o The undertaking of each partner is considered
By the contract of partnership, two or more persons bind the equivalent of the others’ (equivalent
themselves to contribute money, property, or industry to a common consideration — what you give should be
fund, with the intention of dividing the profits among themselves. matched by what you receive).

Two or more persons may also form a partnership for the exercise 6. Principal
of a profession. o Its existence or validity does not depend on
another contract; it can stand alone.
Other Definitions of Partnership
7. Preparatory
o Entered into as a means to an end — in this
1. A partnership is an association of two or more persons to
case, to engage in business for profit, with the
carry on as co-owners a business for profit.
view of dividing such profits among the
2. A partnership is a legal relation based upon the expressed
contributing parties.
or implied agreement of two or more competent persons
whereby they unite their property, labor, or skill in
carrying on some lawful business as principals for their Essential Features of a Partnership
joint profit.
3. A partnership is a joint undertaking to share in the profit The following are the five essential features of a partnership
and loss. contract:
4. A partnership is the status arising out of a contract
entered into by two or more persons whereby they agree
1. There must be a valid contract.
to share, as common owners, the profits of a business
2. The parties must have legal capacity to enter into the
carried on by all or any of them on behalf of all of them.
contract.
5. A partnership is an organization for the production of
3. There must be a mutual contribution of money,
income to which each partner contributes one or both of
property, or industry to a common fund.
the ingredients of income: capital or services.
4. The object must be lawful.
5. The purpose (or primary purpose) must be to obtain
Partnership for the Exercise of a Profession profits and to divide them among the parties.

A profession is a calling in the preparation for which academic Additionally, the Articles of Partnership must not be kept secret
learning is required, and which has for its primary purpose the among the members; otherwise, the association shall have no legal
rendering of public service. personality and shall be governed by the provisions of the Civil
Code relating to co-ownership. (Art. 1775)
It has been defined as:
1. Existence of a Valid Contract
"A group of men pursuing a learned art as a common calling in the
spirit of public service — no less a public service because it may  Voluntary and personal association:
incidentally be a means of livelihood." A partnership is formed voluntarily by the associates. It
is a personal relation involving the element of delectus
Paragraph 2 of Article 1762 relates to a professional partnership personae — Latin for “choice of the person.”
or a partnership for the exercise of a profession. The law does not o This means that the right to choose one’s
allow individuals to practice a profession as a corporate entity. The partners is fundamental to the partnership
reason is that personal qualifications — such as age, good moral relationship because of its fiduciary nature
character, and a college degree — for such practice cannot be (based on trust and confidence).
possessed by a corporation. o As a result, no person can become a partner
without the consent of all the other partners.
Characteristic Elements of a Partnership For example, someone who buys another’s
interest in a partnership does not automatically
become a partner unless all existing partners
The contract of partnership is: agree.

1. Consensual 2. Creation and Proof of Existence

o Perfected by mere consent of the parties.
o No need for delivery; a mere promise is
enough. Delivery, if any, is for transferring
 A partnership may be created informally and proven by
the conduct or acts of the parties.
ownership.
 However, it is customary to put the terms into a written
agreement called the Articles of Partnership.
2. Nominate  A partnership requires at least two competent parties —
o It has a special name or designation in the law: no one can enter into a partnership solely with
Partnership. themselves.

3. Bilateral
o Entered into by two or more persons; rights
and obligations are reciprocal.
3. Other Forms of Association Excluded 2. Property – Real or personal, tangible or intangible; may
include credits, promissory notes, or goodwill.
 A partnership must arise from an express or implied 3. Industry – Personal services, whether manual or
contract. intellectual, for which the partner gets a share in profits
 There is no such thing as a partnership created purely by (not just a salary).
law or by operation of law. o A limited partner cannot contribute industry
 Associations not based on such contracts — such as alone (Art. 1845).
religious societies or conjugal/community
partnerships — are excluded from the concept of Legality of Object
partnership.
 A limited partnership (as distinct from a general  The object is unlawful if contrary to law, morals, good
partnership) cannot be created by mere voluntary customs, public order, or public policy (Art. 1306).
agreement alone; specific statutory requirements must be  If unlawful, the partnership is void from the beginning
complied with. (See Art. 1844) (Art. 1409[1]; Art. 1770).
 Partnerships cannot engage in businesses requiring a
Legal Capacity of Parties to Enter into the Contract specific legal form (e.g., banking, which only stock
corporations can do under R.A. 8791, Sec. 8).
1. General Rule
Intention to Realize and Divide Profits
Before there can be a valid contract of partnership, the contracting
parties must have the legal capacity to enter into the contract.
 The main reason for a partnership is to obtain pecuniary
gain (Fernandez v. De la Rosa, 6 Phil. 671).
 Rule: Any person who can legally enter into contractual  Profit need not be the exclusive aim, but it must be the
relations may be a partner. principal purpose (11 Manresa 264).
 Consequence: Anyone who cannot legally give consent  Even an unprofitable business can still be a partnership if
to a contract cannot be a partner. the goal is to earn profits.

Persons who cannot give valid consent (see Arts. 1327, 1329; Sharing of Profits
Art. 34, Revised Penal Code; Rules 93, 94, Rules of Court):
1. Essential Requirement – There must be intent to divide
1. Unemancipated minors profits among the partners (Art. 1770). Shares need not
2. Insane or demented persons be equal, but there must be a joint interest in profits.
3. Deaf-mutes who do not know how to write 2. Not Conclusive Evidence – Sharing profits is
4. Persons suffering from civil interdiction presumptive, not conclusive proof of partnership (Art.
5. Incompetents under guardianship 1769).
o If profit-sharing is just a method to determine
2. Exceptions & Special Rules compensation, the recipient is not a partner.

 Article 1782: Persons prohibited from making donations Sharing of Losses

or giving advantages to each other cannot enter into a
universal partnership. 1. Necessary Corollary of Sharing in Profits
 Married women: May enter into a partnership even
without their husband’s consent, but the husband may  Article 1767 mentions only profits, not losses, because
object on valid, serious, or moral grounds (Art. 73, the primary object of a partnership is profit-making.
Family Code).  However, the right to share in profits carries with it
the obligation to share in losses, if any (Art. 1797).
3. Capacity of Partnerships & Corporations to be Partners  Loss-sharing is considered a possible consequence of
profit-sharing (11 Manresa 263).
 Partnerships are typically composed of individuals.
 A partnership can be a partner in another partnership. 2. Agreement Not Necessary
 Corporations cannot enter into a partnership unless
expressly authorized by law.  It is not necessary for the parties to expressly agree on
o Reason: In a partnership, the entity is bound by how losses will be shared; the essence of partnership
the acts of partners, some of whom may not be implies that both profits and losses are shared.
its duly authorized officers, conflicting with  If a valid partnership exists, a later agreement excluding
corporate policy that a corporation manages its a partner from profits or losses is void (Art. 1799) —
own affairs. but this does not affect the partnership’s existence.

Mutual Contribution to a Common Fund Article 1768: Partnership as a Juridical Person

Requirement: Partners must have a proprietary or financial Rule: A partnership has a juridical personality separate and
interest in the business (Art. 1767). Without mutual contribution, distinct from that of each partner, even if it fails to comply with
there is no partnership (Art. 1784). Article 1772 (public instrument & SEC registration for capital over
₱3,000).
Forms of Contribution:
1. Nature as a Juridical Person
1. Money – Legal tender in the Philippines; checks, drafts,
or notes are not money until cashed (Art. 1249).  Like a corporation, a duly formed partnership can:
o Acquire and own property
 o Incur obligations Rule 2 — Co-ownership or co-possession does not of itself
o Bring civil or criminal actions establish a partnership
 Legal basis: Art. 44(3) and Art. 46 of the Civil Code.
 Co-ownership: Ownership of an undivided property or
Example: right by two or more persons (Art. 484).
In the partnership X & Co., with A and B as partners:  Even if co-owners share profits from the property, this
alone does not make them partners.
 For a partnership to exist, the profits must come from the
 There are three legal persons: X & Co., A, and B.
operation of a business, not merely from property
 X & Co. may be declared bankrupt even if A and B are
ownership.
solvent.
 X & Co. can enter into contracts, sue, and be sued.
 Death of A or B does not automatically dismiss a pending Examples:
case against X & Co.
 A or B cannot sue for a cause of action belonging to the 1. No Partnership — A and B inherit an apartment and
partnership in their own name. lease it, dividing the rent. They are only co-owners.
 A and B are liable for X & Co.’s obligations only as 2. Partnership Exists — A and B contribute money to buy
provided in Art. 1816. sweepstakes tickets and agree to share the prize.

2. Effect of Failure to Comply with Statutory Requirements Rule 3 — Sharing of gross returns does not of itself establish a
a. Under Article 1772 partnership

 Even without executing a public instrument or  In a true partnership, profits are shared after paying
registering with the SEC (for capital over ₱3,000), a expenses and liabilities.
partnership still acquires juridical personality.  Sharing only gross returns suggests a compensation or
 Rationale: Many Philippine partnerships are small-scale joint-venture arrangement, not a partnership.
and it would be impractical to require formalities for all.  Decisive Test: Does the person receiving profits have a
proprietary interest and equal voice in management?
b. Under Articles 1773 and 1775
Example:
A owns a jeepney, B drives it, they split gross receipts. No
 Article 1773: If the partnership contract is void (e.g., partnership exists — B’s share is compensation for services, not
object is unlawful or certain legal defects exist), no co-ownership of business profits.
juridical personality is acquired.
 Article 1775: Secret associations or societies also do not
acquire juridical personality. Rule 4 — Receipt of share in profits is prima facie evidence of
partnership
Article 1769 — Rules to Determine the Existence of a
Partnership  General Rule: Receiving a share of the profits is prima
facie evidence that the recipient is a partner.
 Exceptions: No inference of partnership if profits were
When it is unclear whether an association is a partnership, the received as:
following rules apply: 1. Payment of a debt
2. Wages of an employee or rent to a landlord
Rule 1 — Persons not partners as to each other are not 3. Annuity to a widow/heir of a deceased partner
partners as to third persons 4. Interest on a loan, even if payment varies with
profits
 Partnership is a matter of intention; each party must 5. Installment payments for sale of goodwill or
consent to be a partner. property
 If parties expressly declare they are not partners, this
generally settles the question between themselves. Practical Application of Article 1769
 However, parties who are in fact partners cannot avoid
partnership liabilities by simply denying the relationship.  This provision is designed to exclude certain
arrangements from being classified as partnerships
Exception — Partnership by Estoppel (Art. 1825) when the essential elements are missing.
 The court will look at all facts and circumstances to
 Even if no partnership exists between the parties, they determine whether the parties actually intended to create
may be liable as partners to third persons if: a partnership and conducted themselves as such.
o They represent themselves (or allow
themselves to be represented) as partners, and Test vs. Incidents of Partnership
o Third persons, in good faith, rely on such
representation. When determining if a partnership exists, it’s important to
distinguish between:
Example:
A and B are not partners, but A tells C they are partners and B 1. Tests (or indicia) — Factors or contractual terms used to
consents. Even without a real partnership, A and B are liable to C determine if a partnership was actually formed.
as if they were partners. o Only the agreed terms between the parties
may be used as a test.
o Example: An agreement to share profits and
losses can be a strong indicator.
 2. Incidents — Legal consequences that automatically Aspect Partnership Co-ownership
follow once a partnership exists, even if the parties
never discussed them. (2) Juridical Has separate juridical No separate juridical
o These arise by operation of law (see 40 Am. Personality personality – Art. 1768 personality
Jur. 146–147).
Common enjoyment
Realization of profits – Art.
Typical Incidents of a Partnership (3) Purpose of a thing or right –
1767
Art. 486
Once a partnership is established, the following are generally true:
Cannot agree to keep
No legal limit (Arts. 1767,
(4) Duration property undivided >
(a) Sharing in profits and losses 1785)
10 years – Art. 494

 Arts. 1767, 1797, 1798 Partner cannot transfer his

Co-owner may freely
 Even if not expressly agreed upon, the right to profits (5) Disposal interest so as to make
implies liability for losses. dispose of his share
of Interest transferee a partner without
– Art. 495
consent – Arts. 1812, 1814
(b) Equal rights in management
Co-owner cannot
 Art. 1803 (6) Power to Partner may bind the bind others without
 Each partner has an equal say unless otherwise agreed. Bind partnership (Art. 1803) authority (Arts. 491–
492)
(c) Mutual agency Death of co-owner
(7) Effect of Death of partner dissolves
does not dissolve co-
 Art. 1818 Death partnership – Art. 1830(5)
ownership
 Every partner is an agent of the partnership and can bind
the others in business transactions.

Illustrative Case:
(d) Personal liability

 Art. 1813 Gallemet v. Tabilaran (20 Phil. 241, 1911)

 All partners are personally liable for partnership debts
with their separate property, except limited partners (who  Facts: A and B each contributed ₱1,000 to buy land, with
are only liable up to their investment). an agreement to later divide it equally.
 Ruling: No partnership was formed—purpose was not
(e) Fiduciary relationship business/profit but division of property. They were co-
owners, not partners.

 Art. 1807
 Partners owe each other utmost good faith and loyalty. Partnership vs. Conjugal Partnership of Gains
Business Conjugal Partnership of
Aspect
(f) Continuation after dissolution Partnership Gains

Created by voluntary Arises from marriage of

 Art. 1828
agreement of two or a man and woman who
 Partnership is not automatically terminated at
dissolution; it continues until winding up is completed. (1) Parties more persons of agree that it shall govern
either sex (Art. 1767, property relations (Art.
CC) 105, FC)
Modifications by Agreement
Governed primarily
 The partners may change some of these incidents (2) Governing by stipulations of Governed by law (Arts.
through a stipulation, but cannot prejudice the rights of Law the parties (Arts. 105–133, FC)
third persons who deal with the partnership in good 1159, 1308, CC)
faith.
Has separate
Partnership vs. Co-ownership (3) Juridical juridical No separate juridical
Personality personality from personality
Definition of Co-ownership: partners
Ownership of an undivided thing or right by two or more persons
(Art. 484). Begins upon
Begins on date of
execution of the
(4) marriage; any contrary
contract, unless
Key Distinctions: Commencement stipulation is void (Arts.
stipulated otherwise
88, 107, FC)
(Art. 1784, CC)
Aspect Partnership Co-ownership
To regulate property
Generally by law; To obtain profits
Always by contract (express (5) Purpose relations during marriage
(1) Creation may exist without a (Art. 1767, CC)
or implied) – Art. 1767 (Art. 74, FC)
contract
(6) Distribution According to Equal sharing between
 Business Conjugal Partnership of 4. Contributions are not confiscated unless they fall under
Aspect No. 3.
Partnership Gains

agreement or Examples of Unlawful Purpose

proportion to capital
of Profits spouses (Art. 106, FC)
contributions (Art.
 Illegal monopolies or restraint of trade (Art. 185, RPC)
1797, CC)  Gambling operations (Art. 195, RPC)
 Smuggling
Joint administration, but
Shared equally  Leasing to prostitutes
husband’s decision  Preventing competition in bidding for government
unless a manager is
(7) Management prevails in case of contracts
designated (Arts.
disagreement (Art. 124,
1801–1803, CC)
FC)
Note:
Spouse’s share cannot be
Partner may dispose disposed of during  Judicial decree not required for dissolution but may be
(8) Disposition of obtained for legal certainty.
of whole interest marriage, even with
Shares
(Art. 1813, CC) other’s consent (Arts. 89,
107, 121, 127, FC)

Article 1771 – Form of Partnership Contract

Partnership vs. Voluntary Association (Social Purposes) General Rule

Aspect Partnership Voluntary Association
 No special form required – can be oral or written (Art.
Has a separate 1356 CC).
(1) Juridical Has no juridical
juridical personality
Personality personality
(Art. 1768, CC)

Organized mainly for ART. 1772 – Partnership with Capital of ₱3,000 or More
Always for pecuniary social, charitable,
(2) Purpose
profit fraternal, or other non- Requirements (if capital ≥ ₱3,000 in money/property):
profit purposes

Members contribute Members may pay fees 1. Public instrument (notarized)

(3) 2. Registration with SEC
capital (money, or dues, but no capital
Contributions of
property, or services) contribution for profit-
Members Notes:
to a common fund making

Partnership is Members are  Non-compliance does not:

primarily liable for individually liable for o Void the partnership
(4) Liability of
debts; partners are debts they have o Affect liability to third persons (Art. 1768)
Members
subsidiarily liable authorized, expressly or  Any partner may compel execution of a public
under Art. 1816, CC impliedly, or ratified instrument (Arts. 1357–1358), except if void under Art.
1773.
 Purpose of registration: licensing, taxation, public
notice of membership & capital.
Article 1770 – Lawful Object & Common Benefit  Registration is not for juridical personality creation (Art.
1784).
Essential Requirements

 Partnership must:
1. Have a lawful object or purpose
ART. 1773 – Partnership with Contribution of Immovable
2. Be for the common benefit or interest of all
partners Property

o (This reiterates Art. 1767 requirements) If real property is contributed → Two requirements (otherwise
void as between partners):

 Partners have freedom to choose activities, but these

must be legal and moral (Art. 1306 CC). 1. Public instrument (Art. 1771)
2. Inventory of property contributed:
o Signed by all partners
Effects of an Unlawful Partnership o Attached to the public instrument

1. Void ab initio – It is as if the partnership never existed  Applies regardless of property value
(Art. 1409[1], CC).  If only personal property is also contributed → inventory
2. Profits confiscated by the State. need not cover it.
3. Instruments, tools, and proceeds of the crime  Purpose: Protect third persons (can still have de facto
forfeited (Art. 45, RPC) unless owned by an innocent partnership or estoppel situation).
third party.
 (5) As to Representation to Others

ART. 1774 – Acquisition/Conveyance of Immovable Property  Ordinary/real – actually exists among partners and as to
by Partnership third persons
 Ostensible/by estoppel – not a real partnership but
 Partnership (as a separate juridical entity) may acquire treated as one in relation to certain third parties
real property in its name.
 Such property may only be conveyed in the partnership (6) As to Publicity
name.
 Rules on conveyance → see Art. 1819 (effect depends on
 Secret – existence of some partners not made public
whether partner acted within authority).
 Open/notorious – existence known to the public

(7) As to Purpose
ART. 1775 – Secret Associations Without Juridical Personality
 Commercial/trading – formed for business transactions
 Professional/non-trading – formed for the exercise of a
Characteristics: profession.

 Articles/agreement kept secret among members Kinds of Partners

 Any member may contract in own name with third
parties
Partners can be classified according to their interests, obligations,
or liabilities.
Consequences:

 No juridical personality → treated as co-ownership

internally
 Members are personally bound to third persons unaware 1. Under the Civil Code
of the association’s existence (Art. 1883 analogy)
 Publicity of partnership articles protects both members (a) Capitalist Partner – Contributes money or property to the
and third persons common fund.
 Partnership liability may still arise by estoppel (Art. (b) Industrial Partner – Contributes only labor or services.
1825). (c) General Partner – Liability extends to his separate property;
may be capitalist or industrial.
(d) Limited Partner (Special Partner) – Liability limited to his
capital contribution; does not take part in management.
(e) Managing Partner – Manages the business affairs; appointed
ART. 1776 – Classifications of Partnerships
in the articles or later.
(1) As to Extent of Subject Matter (f) Liquidating Partner – Handles the winding up of partnership
affairs upon dissolution.
(g) Partner by Estoppel – Not a true partner but liable as such to
 Universal partnership – covers all present property protect third parties who relied on representation.
(Art. 1778) or all profits (Art. 1780) (h) Continuing Partner – Continues the business after changes in
 Particular partnership – covers determinate things, membership.
specific undertaking, or profession (Art. 1783) (i) Surviving Partner – Remains after the death of a co-partner.
(j) Subpartner – Not a member of the firm but contracts with a
(2) As to Liability of Partners partner regarding that partner’s share.

 General partnership – all partners liable pro rata and

subsidiarily (sometimes solidarily) with separate
property 2. Other Common Classifications
 Limited partnership – has at least one general partner
(personally liable) and one limited partner (liability (a) Ostensible Partner – Active in the business and known
limited to contribution) publicly as a partner.
(b) Secret Partner – Active in business but not known to the
(3) As to Duration public as a partner.
(c) Silent Partner – Does not participate actively but may be
known as a partner.
 Partnership at will – no definite term or undertaking;
(d) Dormant (Sleeping) Partner – Neither active nor publicly
may be dissolved anytime by mutual consent or by any known as a partner.
partner (e) Original Partner – Member from the time of formation.
 Partnership with a fixed term/particular undertaking (f) Incoming Partner – Recently admitted or about to join.
– ends upon term expiration or completion of (g) Retiring Partner – Withdrawn from the partnership.
undertaking unless continued

(4) As to Legality of Existence

 De jure – complies with all legal requirements

 De facto – formed without complying with all legal
requirements
Liability Note Explanation

All partners—regardless of classification—are generally liable for 1. Ownership of Present and Future Property
partnership obligations (Arts. 1816, 1822–1824, 1826, 1835, 1844, o In this type of partnership, the partners retain
1841). ownership of all present and future property.
o What passes to the partnership are:
 Profits/income from these properties
during the partnership
Universal Partnerships  The usufruct of the properties owned
at the time of the contract
o Upon dissolution, the property is returned to its
Art. 1777 – A universal partnership may refer to all present original owner.
property or all profits.

Example:
Art. 1778 – Partnership of All Present Property: Partners If A and B agree to retain ownership of their respective
contribute all property they own at the time of formation, to be properties, transfer only the usufruct to the partnership,
divided among themselves, along with profits earned from it. and divide equally the net profits earned, the partnership
is a universal partnership of profits. Upon dissolution,
Art. 1779 – In such a partnership: the properties return to their owners; any capital
contributed in cash may be treated as a loan to the
1. All property owned at the time of formation becomes partnership.
common property.
2. Profits from such property become common property. 2. Profits Acquired Through Chance
3. Any other profits can be included by stipulation. o The law refers only to profits acquired through
4. Property acquired after formation through inheritance, industry or work.
legacy, or donation cannot be included—except for the o Profits gained through chance (e.g., lottery) or
fruits (income) of such property. by lucrative title without effort are excluded,
unless expressly stipulated otherwise.

3. Fruits of Property Subsequently Acquired

Contribution of Future Property o Fruits of property acquired after the
partnership is formed do not automatically
As a general rule, future properties cannot be contributed to a belong to the partnership unless expressly
partnership. The very essence of a partnership contract is that the stipulated.
properties contributed must be determinate and included in the
partnership at the time of its constitution.

The position of a partner is similar to that of a donor, and under Article 1781 — Presumption in Favor of Universal Partnership
Article 751 of the Civil Code, donations cannot cover future of Profits
property.
If the articles of partnership do not specify whether the partnership
Thus, property subsequently acquired by: is one of “all present property” or “profits only,” it is presumed to
be a universal partnership of profits.
1. Inheritance This presumption exists because it imposes fewer obligations—
2. Legacy partners keep ownership of their separate property.
3. Donation

cannot be included by stipulation—except for the fruits thereof.

Any stipulation including property so acquired is void. Article 1782 — Prohibition on Certain Persons

Profits from other sources (not derived from contributed Persons prohibited by law from giving each other donations or
properties) become common property only if expressly stipulated. advantages cannot enter into a universal partnership.

Reason: A universal partnership involves pooling of property or

profits, which is akin to making donations to each other. This
Article 1780 — Universal Partnership of Profits would allow prohibited donations indirectly, which the law forbids.

A universal partnership of profits comprises all that the partners A partnership formed in violation of this article is null and void
may acquire by their industry or work during the existence of the and acquires no legal personality.
partnership.
However, spouses may enter into a particular partnership.
Movable or immovable property that each partner owns at the time
of the contract remains their exclusive property, but the usufruct Case Example:
(right to use and enjoy the fruits) passes to the partnership. In CIR v. Suter (27 SCRA 152, 1969), A, B, and C formed a
limited partnership. Later, A and B married. The court held that the
partnership was not dissolved by their marriage because it was a
particular partnership, not a universal one.
Related Legal Provisions

 Art. 87, Family Code — Prohibits donations between

spouses during marriage (with some exceptions).
 Art. 739, Civil Code — Lists other void donations (e.g.,
between persons guilty of adultery or concubinage).

Article 1783 — Particular Partnership

A particular partnership has for its object:

1. Determinate things (their use or fruits)

2. A specific undertaking
3. The exercise of a profession or vocation

Examples:

 Buying an immovable property for resale at a profit

 Constructing a specific building
 Practicing a profession jointly (e.g., law firm, accounting
firm)

Note: The business of a partnership need not be continuing in

nature; it may be for a single project or limited transactions.