Partnership: General Provisions (Arts. 1767-1783)

 Chapter 1 

GENERAL PROVISIONS

ARTICLE 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. 

Characteristic elements of partnership. (CNBO-CPP)

1. Consensual
2. Nominate
3. Bilateral
4. Onerous 
5. Commutative
6. Principal
7. Preparatory

Essential features of a partnership. (VLMLP)

1. Valid contract 
2. Legal capacity 
3. Mutual contribution of money, property and industry to a common fund
4. Lawful object
5. Purpose must be to divide the profits among themselves

Contribution.

1. Money – currency which is legal tender in the Philippines
2. Property –real or personal, corporeal or incorporeal 
3. Industry – active cooperation, work (personal, manual efforts or intellectual)

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 Article 1772, first paragraph.

Partnership, a juridical person.

• Like a corporation, a partnership has a separate juridical person distinct from its partners under the law.
• The partnership may:
• enter contracts, 
• acquire and possess property,
• incur obligations, and 
• bring legal actions following relevant laws and regulations.
• In a partnership like X & Co., there are three distinct entities: 
• the partnership itself, 
• the individual partner A, and
• the individual partner B.
• The legal personality of the partnership means it can be declared insolvent even if individual partners are not.
• If a partner dies, it does not lead to the dismissal of pending suits against the partnership.
• Partners are not personally liable for partnership obligations unless the legal personality is being misused for fraudulent or illegal purposes.

Effect of failure to comply with statutory requirements.

• Under Article 1772. — Partnership still acquires juridical personality.
• Under Articles 1773 and 1775.— Partnership is void.

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. 

Rules to determine existence of partnership.

• Where terms of contract not clear
• Article 1769 shall apply
• Where existence disputed
• Factual matter to be decided on the basis of all circumstance

Persons not partners as to each other

• Intention to create partnership
• Partnership is a matter of intention.
• Each party giving his consent to become a partner.
• However, the substance and not the name of the arrangement determines legal relation Thus, the intention to form a partnership is not always required. 
• Exception: Partnership 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 co-possession) of an undivided thing or right belongs to different persons. 
• Clear intent to derive profits from operation of business
• If the parties are merely co-owners, there is no fiduciary relationship between them.
• Existence of fiduciary relationship establishes partnership. 

Sharing of gross returns.

• Not even presumptive evidence of partnership
• In a partnership, the partners share net profits after satisfying all of the partnership’s liabilities.
• Reason for the rule: When a business is carried on in behalf of a given person as partner, he is conceived as being interested in its failures as well as its successes.
• Where there is evidence of mutual management, a partnership may result.

Receipt of share in the profits.

• The sharing of profits and losses is prima facie evidence of an intention to form a partnership but not a conclusive evidence.
• When no such inference will be drawn:
• As a debt by installments or otherwise;
• As wages of an employee or rent to a landlord;
• As an annuity to a widow or representative of a deceased partner;
• As interest on a loan, though the amount of payment vary with the profits of the business;
• As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. 
• Sharing of profits as owner makes one a partner.

Burden of proof and presumption.

• The burden of proving the existence of a partnership rests on the party having the affirmative of that issue.
• The existence of a partnership must be proved and will not be presumed. 

Tests and incidents of partnership.

• Some of the typical incidents of a partnership are:
• The partners share in profits and losses.
• They have equal rights in the management and conduct of the partnership business.
• Every partner is an agent of the partnership, and entitled to bind the other partners by his acts, for the purpose of its business. He may also be liable for the entire partnership obligations.
• All partners are personally liable for the debts of the partnership with their separate property.
• A fiduciary relation exists between the partners.
• On dissolution, the partnership is not terminated, but continues until the winding up of partnership is completed. 

Partnership distinguished from a corporation.

• Manner of creation.
• Partnership — mere agreement of the parties.
• Corporation — by law or by operation of law.
• Number of incorporators.
• Partnership — may be organized by only two persons.
• Corporation —  requires at least five incorporators, except a corporation sole.
• Powers.
• Partnership — may exercise any power authorized by the partners provided it is not contrary to law, morals, good customs, public order, or public policy.
• Corporation —  can exercise only the powers expressly granted by law or implied from those granted or incident to its existence.
• Management.
• Partnership — every partner is an agent, when the management is not agreed upon.
• Corporation — the power to do business and manage its affairs is vested in the board of directors or trustees.
• Effect of mismanagement.
• Partnership — a partner as such can sue a co-partner who mismanages.
• Corporation — suit against a member of the board of directors or trustees who mismanages must be in the name of the corporation.
• Right of succession.
• Partnership — no right of succession.
• Corporation — has right of succession.
• Transferability of interest.
• Partnership — a partner cannot transfer his interest in the partnership so as to make the transferee a partner without the consent of all the other existing partners because the partnership is based on the principle of delectus personarum.
• Corporation — a stockholder has generally the right to transfer his shares without the prior consent of the other stockholders because a corporation is not based on this principle.
• Term of existence.
• Partnership — may be established for any period of time stipulated by the partner.
• Corporation — corporation may not be formed for a term in excess of 50 years extendible to not more than 50 years in any one instance.
• Firm name.
• Partnership — a limited partnership is required by the law to add the word “Ltd.” to its name.
• Corporation — may adopt any firm name provided it is not the same as or similar to any registered firm name.
• Dissolution.
• Partnership — may be dissolved at any time by the will of any or all of the partner.
• Corporation — can only be dissolved with the consent of the State.
• Governing law.
• Partnership — Civil Code.
• Corporation — Corporation Code.

Similarities between a partnership and a corporation.

1. Juridical personality separate and distinct from that of the individuals composing it;
2. Can act only through agents;
3. An organization composed of an aggregate of individuals;
4. Distributes its profits to those who contribute capital to the business;
5. Can be organized only where there is a law authorizing its organization;
6. Taxable.

 

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.

Object or purpose of partnership.

• Two essential elements of a contract of partnership: 
1. Legality of the object, and 
2. Community of benefit or interest of the partners.
• This limitation may arise from:
1. Express provisions of the law, or
2. General principles of morality and justice.
• The illegality of the object will not be presumed; it must appear to be of the essence of the relationship.

Effects of an unlawful partnership.

1. The contract is void ab initio and the partnership never existed in the eyes of the law.
2. The profits shall be confiscated in favor of the government;
3. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the government;
4. The contributions of the partners shall not be confiscated unless they fall under No. 3.

Dissolution of an unlawful partnership.

1. By operation of law.
• Upon the happening of an event which makes it unlawful.
2. By judicial decree.

Right to return of contribution where partnership is unlawful.

• Article 1770 does not state whether upon the dissolution of the unlawful partnership, the amounts contributed are to be returned to the partners.
• General Rule: The partners must be reimbursed the amount of their respective contributions.

Right to receive profits where partnership is unlawful.

• Article 1770 permits no action for the purpose of obtaining the earnings made by an unlawful partnership.
• General Rule: The courts will not aid either party to an illegal agreement.

Effect of partial illegality of partnership business.

• Where a part of the business of a partnership is legal and a part illegal, an account of that which is legal may be had. 

Effect of subsequent illegality of partnership business.

• The happening of an event subsequent to the making of a valid partnership contract which would render illegal the business of the partnership as planned, will not nullify the contract.

Salient features of an ordinary partnership.

1. Community of interest in profits and losses.
2. Community of interest in the capital employed.
3. Community of power in administration.

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.

Registration of partnership.

• Requirements of a partnership with capital of P3,000.00 or more:
1. The contract must appear in a public instrument; and
2. It must be recorded or registered with the Securities and Exchange Commission.
• Failure to comply with the above requirements does not prevent the formation of the partnership or affect its liability and that of the partners to third persons. Partners may compel each other to execute the contract in a public instrument.
• Purpose is to ensure that:
1. The tax liabilities of big partnerships cannot be evaded and 
2. The public can also determine more accurately their membership and capital before dealing with them.
• The recording of articles of partnership is not for the purpose of giving the partnership juridical personality. The only objective of the law is to make the recorded instrument open to all and to give notice thereof to interested parties. The date the partnership papers are presented to and left for record in the Commission is considered the effective date of registration of the articles of partnership.

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. 

Partnership with contribution of immovable property.

• Where immovable property, regardless of its value, is contributed, the failure to comply with the following requirements will render the partnership contract void in so far as the contracting parties are concerned:
• The contract must be in a public instrument; and
• An inventory of the property contributed must be made, signed by the parties, and attached to the public instrument.
• The absence of either formality renders the contract void.
• Article 1773 is intended primarily to protect third persons. 
• With regard to them, a de facto partnership or partnership by estoppel may exist. 

When inventory is not required.

• An inventory is required only “whenever immovable property is contributed.”
• It does not apply in the case of:
1. Immovable property which may be possessed or even owned by the partnership but not contributed by any of the partners; or
2. Personal property, aside from real property, is contributed.

Importance of making inventory of real property in a partnership.

• To show how much is due from each partner to complete his share in the common fund;
• To show much is due to each of them in case of liquidation;
• The execution of a public instrument of partnership would be useless if there is no inventory of immovable property contributed because without its description and designation, the instrument cannot be subject to inscription in the Registry of Property, and the contribution cannot prejudice third persons.
• This will result in fraud to those who contract with the partnership in the belief of the efficacy of the guaranty in which the immovables may consist.

ART. 1774. 

Any immovable property or an interest therein 

may be acquired in the partnership name. 

Title so acquired can be conveyed only in the partnership name.

Acquisition or conveyance of property by partnership.

• Since a partnership has juridical personality separate from and independent of that of the persons or members composing it, it is but logical and natural that immovable property may be acquired in the partnership name. 
• Title so acquired can, therefore, be conveyed only in the partnership name.
• The legal effects of conveyance of property standing in the name of the partnership executed by a partner in the partnership name or in his own name are governed by Article 1819(1)&(2).
• Article 1819. Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner's act binds the partnership under the provisions of 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.
• The right of a partnership to deal in real and personal property is subject to limitations and restrictions prescribed by the Constitution and special laws.

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.

Secret partnerships without juridical personality.

• The partnership relation is created only by the voluntary agreement of the partners.
• It is essential that the partners are fully informed not only of the agreement but of all matters affecting the partnership. 
• Likewise, a partner is considered the agent of his co-partners and of the partnership in respect of all partnership transactions. 
• Every partnership must have a firm name under which it shall conduct its business and to distinguish it from the partners and other partnerships.
• The partners have equal rights and interests in the partnership which must be established for the common benefit or interest of the partners.

Importance of giving publicity to articles of partnership.

• It is essential that the articles of partnership be given publicity for the protection not only of the members themselves but also third persons from fraud and deceit to which otherwise they would be easy victims.
• A member who transacts business for the secret partnership in his own name becomes personally bound to third persons unaware of the existence of such association, in the same way and for the same reason that an agent who acts in his own name when dealing with third persons is directly bound in favor of such persons who may only sue or be sued by the agent and not his principal. 
• But a person may be held liable as a partner or partnership liability may result in favor of third persons by reason of estoppel. 

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.

Classifications of partnership.

• Subject Matter
• Universal partnership
  
• Universal partnership of all present property
• Universal partnership of profits
• Particular partnership

• Liability
• General partnership
• Limited partnership

• Duration
• Partnership at will
• Partnership with a fixed term

• Legality
• De jure partnership
• De facto partnership

• Representation
• Ordinary or real partnership
• Ostensible partnership or partnership by estoppel

• Publicity
• Secret partnership
• Open or notorious partnership

• Purpose
•  Commercial or trading partnership
•  Professional or non-trading partnership 

Kinds of partners.

• Under the Civil Code
• Capitalist partner
• Industrial partner
• General partner
• Limited partner
• Managing partner
• Liquidating partner
• Partner by estoppel
• Continuing partner
• Surviving partner
• Subpartner

• Others
• Ostensible partner
• Secret partner
• Silent partner
• Dormant partner
• Original partner
• Incoming partner
• Retiring partner

ART. 1777. 

A universal partnership 

may refer to all the present property 

or to all the profits.

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 all the profits they may acquire therewith. 

ART. 1779. 

In a universal partnership of all present property, 

the property which belongs to each of the partners

at the time of the constitution of the partnership, 

becomes the common property of all 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 partners

 may acquire subsequently by inheritance, legacy or donation 

cannot be included in such stipulation, 

except the fruits thereof.

Universal partnership of all present property explained. 

• The following become the common property of all the partners:
1. Property which belonged to each of them at the time of the constitution of the partnership; and 
2. Profits which they may acquire from the property contributed. 

Contribution of future property.

General Rule: Future properties cannot be contributed. 

•  The very essence of the contract of partnership that the properties contributed be included in the partnership requires the contribution of things determinate. 
• The position of a partner is like that of a donor, and donations cannot comprehend future property.
• Property subsequently acquired by:
1. Inheritance,
2. Legacy, or 
3. Donation 
• cannot be included by stipulation except the fruits thereof. 
• Any stipulation including property so acquired is void.
• Profits from other sources, not from the properties contributed, will become common property only if there is a stipulation.

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. 

Universal partnership of profits explained.

• A universal partnership of profits is one which comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property which each of the partners may possess at the time of the celebration of the contract.

Ownership of present and future property. 

• It is to be noted that in this class of partnership, the partners retain their ownership over their present and future property. 
• What passes to the partnership are the profits or income and the use or usufruct of the same. 
• Consequently, upon the dissolution of the partnership, such property is returned to the partners who own it.

Profits acquired through chance.

• Profits acquired by the partners through chance, such as lottery or by lucrative title without employment of any physical or intellectual efforts, are not included. 

Fruits of property subsequently acquired.

• Fruits of property subsequently acquired by the partners do not belong to the partnership.
• Exception: Express stipulation. 
• But profits which the partners may acquire by their industry or work during the existence of the partnership as well as the usufruct of their present properties belong to the partnership as a matter of right. 
• An express stipulation is necessary to exclude any of them.

ART. 1781. 

Articles of universal partnership,

entered into without specification of its nature, 

only constitute a universal partnership of profits.

Presumption in favor of universal partnership of profits.

• Where the articles of partnership do not specify the nature of the partnership, whether it is one of “present property” or of “profits” only, it will be presumed that the parties intended merely a partnership of profits. 
• The reason for this presumption is that a universal partnership of profits imposes less obligations on the partners, since they preserve the ownership of their separate property.

ART. 1782. 

Persons who are prohibited 

from giving each other any donation or advantage 

cannot enter into a universal partnership.

Limitations upon the right to form a partnership. 

• Persons who are prohibited by law to give donations cannot enter into a universal partnership for the reason that each of the partners virtually makes a donation. 
• To allow persons who are prohibited to give each other any donation or advantage to form a universal partnership will be like permitting them to do indirectly what the law expressly prohibits.
• A partnership formed in violation of this article is null and void.
• Consequently, no legal personality is acquired. 
• A husband and his wife, however, may enter into a particular partnership or be members thereof.

Prohibited Donations

• Art. 87, Family Code.
• Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts, which the spouses may give to each other on the occasion of any family rejoicing. The prohibition shall also apply to persons living together as husband and wife without a valid marriage.
• Art. 739, Civil Code.
• The following donations shall be void: 
• (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; 
• (2) Those made between persons found guilty of the same criminal offense, in consideration thereof; 
• (3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office.
• In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donor and the donee may be proved by preponderance of evidence in the same action.
• In order that Article 739 may apply, it is not required that there be a previous conviction for adultery or concubinage. 
• This can be inferred from the clause that “the guilt of the donor and the donee may be proved by preponderance of evidence.’’

ART. 1783. 

A particular partnership 

has for its object 

determinate things, 

their use or fruits, 

or a specific undertaking, 

or the exercise of a profession or vocation. 

Particular partnership explained. 

• The fundamental difference between a universal partnership and a particular partnership lies in the scope of their subject matter or object. 
• Universal Partnership  — the object is vague and indefinite, contemplating a general business with some degree of continuity.
• Particular Partnership  — the object is limited and well-defined, being confined to an undertaking of a single, temporary, or ad hoc nature.
• Examples:
• Those formed for the acquisition of an immovable property for the purpose of reselling it at a profit or for the common enjoyment of its use and the benefits derived therefrom, or
• Those established for the purpose of carrying out a specific enterprise such as the construction of a building, or 
• Those formed for the practice of a profession or vocation. 
• Two or more persons as accountants associating themselves in the practice of accountancy or two or more lawyers in the practice of law.

Business of partnership need not be continuing in nature.

• An agreement to undertake a particular piece of work or a single transaction or a limited number of transactions and immediately divide the resulting profits would seem to fall within the meaning of the term “partnership” as used in the law.
•  Rule under American law (Uniform Partnership Act) — The word “business,” as used in the Act, clearly means business in the commercial sense only, not merely “a joint venture’’ which exists for carrying on a single act or isolated transaction or a limited number of transaction.

Joint venture.

• Sometimes called “joint adventure’’ or “joint enterprise’’ in American law, it is essentially a partnership created for a limited purpose. 
• While a joint venture is not a formal partnership in the legal or technical sense, both are governed, subject to certain qualifications, practically by the same rules or principles of partnership.
• This is logical since in a joint venture, like in a partnership, there is a community of interest in the business and a mutual right of control and an agreement to share jointly in profits and losses resulting from the enterprise.

Corporation as a partner. 

• While under the Philippine Civil Code, a joint venture is a form of partnership with a legal personality separate and distinct from the parties composing it, and should thus be governed by the law of partnership, the Supreme Court has, however, recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may, however, engage in a joint venture with others through a contract or agreement if the nature of the venture is authorized by its charter.