Partnership: Obligations of the Partners Among Themselves (Arts. 1784-1809)

        

 CHAPTER 2

Obligations of the Partners

SECTION 1

Obligations of the Partners Among Themselves

Relations created by a contract of partnership.

1. Relations among the partners themselves; 
2. Relations of the partners with the partnership; 
3. Relations of the partnership with third persons with whom it contracts; and
4. Relations of the partners with such third persons.

Rights and obligations, in general, of partners inter se.

• Partnership relationship essentially one of mutual trust and confidence.
• Each partner is, in one sense, a trustee and at the same time, a cestui que trust. 
• He is a trustee to the extent that his duties bind him with respect to his co-partners and the partnership, and a cestui que trust as far as the duties that rest on his co-partners.
• Fiduciary relationship remains until partnership terminated.
• The rights and obligations of the partners as to each other are provided on the theory that a partner is both a principal and an agent in relation to his co-partners. But the relationship between a limited partner and the other partners in a limited partnership does not involve the element of trust and confidence, as in the case of a general partnership.

Article 1784. 

A partnership begins 

from the moment of the execution of the contract, 

unless it is otherwise stipulated.

Commencement and term of partnership.

• A partnership is a consensual contract; hence, it exists from the moment of the celebration of the contract by the partners.
• Its registration in the Securities and Exchange Commission is not essential to give it juridical personality.
• Unlike a corporation, no time limit is prescribed by law for the life of partnership

Rules governing partnership relation.

• What is necessary for the existence of a partnership is that the essential requisites of a contract of partnership are present even when the partners have not yet actually begun the carrying on of its business or given their contributions, or even though its conditions or details, such as the participation of the partners in the profits and losses and the nature of the partnership, have not yet been fixed, as they pertain to the accidental and not to the essential parts of the contract.
• Where a partnership relation results, the law itself fixes the incidents and consequences of this relation (supra.) if the parties fail to do so. 

Executory agreement of partnership.

The above rule on the commencement of a partnership is not absolute.

1. Future partnership
• Persons who have entered into a contract to become partners at some future time or on the happening of some future contingency do not become partners until or unless the agreed time has arrived or the contingency has happened. As long as the agreement for a partnership remains inchoate or unperformed, the partnership is not consummated.
• There can be a future partnership which at the moment has no juridical existence yet.
• In the absence of express stipulation, evidence is admissible to show the commencement date as determined by the words, acts or conduct of the parties. 
• The Statute of Frauds provides that an agreement that by its terms is not to be performed within a year from the making thereof, must be in writing and signed by the party charged in order to be enforceable.
2. Agreement to create partnership.  
• A partnership in fact cannot be predicated on an agreement to enter into a co-partnership at a future day unless it is shown that such an agreement was actually consummated. 
• So long as the agreement remains executory the partnership is inchoate, not having called into being by the concerted action necessary under the partnership agreement.
• The death of either party to an executory agreement of partnership prevents the formation of a firm, since such agreement is based on the continuance of the life of each.
3. Failure to agree on material terms. 
• A failure of the parties to agree on material terms may not merely be evidence of the intent of the parties to be bound only in the future, but may prevent any rights or obligations from arising on either side for lack of complete contract.

Article 1785. When a partnership for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will.

A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. 

Continuation of partnership beyond fixed term. 

• A partnership with a fixed term is one in which the term of its existence has been agreed upon expressly (as when there is a definite period) or impliedly (as when a particular enterprise or transaction is undertaken). The expiration of the term thus fixed or the accomplishment of the particular undertaking specified (or the demonstration of the impossibility of its accomplishment) will cause the automatic dissolution of the partnership.
• The partnership, however, may be extended or renewed by the partners by express agreement, written or oral, or impliedly, by the mere continuation of the business after the termination of such term or particular undertaking without any settlement or liquidation. In such case, the rights and duties of the partners remain the same as they were at such termination but only insofar as is consistent with a partnership at will.
• Any one of the partners may, at his sole pleasure, dictate a dissolution of a partnership at will. He must, however, act in good faith not that the attendance of bad faith can prevent the dissolution of the partnership but that can result in a liability for damages to the other partners.
• Implicit in good faith is the requirement that the dissolution must not be made at an improper or unreasonable time.
• There is no such thing as an indissoluble partnership.

Continuation of partnership for an indefinite term.

• Although the term of a partnership is not expressly fixed, an agreement of the parties may evidence an understanding that the relation should continue until the accomplishment of a particular undertaking or certain things have been done or have taken place.
• The implied agreement must be proved.
• The mere expectation that the business would be successful and that the partners would be able to recoup their investment is not sufficient to create a partnership for a term.

Article 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.

He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a)

Obligations with respect to contribution of property.

1. To contribute at the beginning of the partnership or at the stipulated time the money, property, or industry which he may have promised to contribute;
2. To answer for eviction in case the partnership is deprived of the determinate property contributed; and
3. To answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they should have been contributed up to the time of actual delivery.
4. To preserve said property with the diligence of a good father of a family pending delivery to the partnership; and
5. To indemnify the partnership for any damage caused to it by the retention of the same or by the delay in its contribution. 

• The money or property contributed by a partner becomes the property of the partnership.
• It necessarily follows that the same cannot be withdrawn or disposed of by the contributing partner without the consent or approval of the partnership or of the other partners.

Effect of failure to contribute property promised.

• The mutual contribution to a common fund being of the essence of the contract of partnership , for without the contributions the partnership is useless, it is but logical that the failure to contribute is to make the partner ipso jure a debtor of the partnership even in the absence of any demand
• Remedy: Not rescission but an action for specific performance with damages and interest from the defaulting partner from the time he should have complied with his obligation.
• Article 1838 allows rescission or annulment of a partnership contract on the ground of fraud or misrepresentation committed by one of the parties thereto. 

Liability of partner in case of eviction.

• The partner is bound in the same cases and in the same manner as the vendor is bound with respect to the vendee with regard to specific and determinate things which he may have contributed to the partnership. This matter is, therefore, governed by the law on sales. 
• Under the law on sales, eviction shall take place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or a part of the thing purchased.
• This obligation of warranty in case of eviction is in consequence of the character of the contract of partnership which is an onerous contract. 

Liability of partner for fruits of property in case of delay.

• No demand is necessary to put the partner in default.
• From the mere fact that the property which a partner ought to deliver does not pass to the common fund on time, the partnership fails to receive the fruits or benefits which the said contribution produced as well as those it ought to produce, thus prejudicing the common purpose of obtaining from them the greatest possible profits through some means of speculation or investment. The injury, therefore, to the partnership is constant. 

Liability of partner for failure to perform service stipulated. 

Q: Is a partner who fails to perform the personal services which he has stipulated to render to the partnership, liable to the other partners for the value of the services?

General rule: Partner generally not liable. 

Reason: Every partner is bound to work to the extent of his ability for the benefit of the whole, without regard to the services of his co-partners, however unequal in value or amount.

Exceptions: 

1. Partner neglects or refuses, without reasonable cause, to render the service which he agreed to perform by reason of which the partnership suffered loss;
2. If the partner is compelled to make good the loss, each member of the firm, including himself, will receive his proportion of the amount in the distribution of the partner- ship assets, and in no just sense can this be regarded as compensation for the services individually rendered;
3. If under the circumstances of the case the proper measure of the damages or loss (which may include unrealized profits) is the value of the services wrongfully withheld, then the defendant should be charged this value. If the defendant had made profit by engaging in other business in violation of the contract, he is liable to account for the same. 

Article 1787. When the capital or a part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for account of the partnership. 

Appraisal of goods or property contributed.

• The appraisal of the value of the goods contributed is necessary to determine how much has been contributed by the partners.
• In the absence of an stipulation, the share of each partner in the profits and losses is in proportion to what he may have contributed.
• The appraisal is made:
1. In the manner prescribed by the contract of partnership; 
2. In the absence of stipulation, by experts chosen by the partners and according to current prices.
• After the goods have been contributed, the partnership bears the risk or gets the benefi tof subsequent changes in their value.
• In the case of immovable property, the appraisal is made in the inventory of said property; otherwise it may be made as provided in Article 1787. There is no reason why the rule in Article 1787 should not also apply with respect to other kinds of property.

Article 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation.

The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use. 

Obligations with respect to contribution of money and money converted to personal use.

First paragraph: Money promised but not given on time.

Second paragraph: Money converted to the personal use of the partner.

Obligations of the partners with respect to the partnership capital:

1. To contribute on the date due the amount he has undertaken to contribute to the partnership;
2. To reimburse any amount he may have taken from the partnership coffers and converted to his own use;
3. To pay the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from the common fund and converts it to his own use; and
4. To indemnify the partnership for the damages caused to it by the delay in the contribution or the conversion of any sum for his personal benefit. 

Liability of guilty partner for interest and damages.

• The guilty partner is liable for interest and damages not from the time judicial or extrajudicial demand is made but from the time he should have complied with his obligation or from the time he converted the amount to his own use, as the case may be. 
• Unless there is a stipulation fixing a different time, this obligation of a partner to give his promised contribution arises from the commencement of the partnership, that is, upon perfection of the contract.
• This double responsibility of the partner is an exception to the general rule in damages that in obligations consisting in the payment of a sum of money, the indemnity for damages shall be only the payment of interest agreed upon or, in the absence of stipulation, the legal interest.
• It is in harmony with the principle laid down in Article 1794 that every partner is responsible to the partnership for damages suffered by it through his fault and is justified by the nature of the contract of partnership.

Liability of partner for failure to return partnership money received. 

• Where fraudulent misappropriation committed.
• Estafa (Art. 315, RPC)
• Where there was mere failure to return.
• Civil action.

Article 1789. An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case. 

Obligations of industrial partner.

• An industrial partner is one who contributes his industry, labor, or services to the partnership. He is considered the owner of his services, which is his contribution to the common fund.
• Unless the contrary is stipulated, he becomes a debtor of the partnership for his work or services from the moment the partnership relation begins. 
• In effect, the partnership acquires an exclusive right to avail itself of his industry.
• Consequently, if he engages in business for himself, such act is considered prejudicial to the interest of the other partners.
• An action for specific performance to compel the partner to perform the promised work or service is not available as remedy because this will amount to involuntary servitude which, as a rule, is prohibited by the Constitution.

Prohibition against engaging in business.

• Industrial partner.
• Absolute.
• Applies whether the industrial partner is to engage in the same business in which the partnership is engaged or in any kind of business.
• Reason: To prevent any conflict of interest between the industrial partner and the partnership and to insure faithful compliance by said partner with his prestation. 
• Capitalist partner.
• Relative.
• Extends only to any operation which is of the same kind of business in which the partnership is engaged unless there is a stipulation to the contrary.

Remedies where industrial partner engages in business.

1. Either to exclude him from the firm, or
2. Avail themselves of the benefits which he may have obtained.

• In either case, the capitalist partners have a right to damages.
• The permission given must be express; hence, mere toleration by the partnership will not exempt the industrial partner from liability.
• Although the law mentions only the capitalist partners, it is believed that industrial partners are also entitled to the remedy granted since they are equally prejudiced by the act of their co-partner engaging in business for himself.

Article 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 he obliged to sell his interest to the other partners. 

General rule: A capitalist partner is not bound to contribute to the partnership more than what he agreed to contribute.

Exception: But in case of an imminent loss of the business, and there is no agreement to the contrary, he is under obligation to contribute an additional share to save the venture. If he refuses to contribute, he shall be obliged to sell his interest to the other partners.

Requisites for application of rule.

1. There is an imminent loss of the business of the partnership;
2. The majority of the capitalist partners are of the opinion that an additional contribution to the common fund would save the business;
3. The capitalist partner refuses deliberately (not because of his financial inability to do so), to contribute an additional share to the capital; and
4. There is no agreement that even in case of an imminent loss of the business the partners are not obliged to contribute.

Note: The industrial partner is exempted from the requirement to contribute an additional share. Having contributed his entire industry, he can do nothing further.

Reason for the sanction.

• The refusal of the partner to contribute his additional share reflects his lack of interest in the continuance of the partnership. 

Article 1792. If a partner authorized to manage collects a demandable sum which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter.

The provisions of this article are understood to be without prejudice to the right granted to the other debtor by article 1252, but only if the personal credit of the partner should be more onerous to him. 

Obligation of managing partner who collects debt.

General rule: Where a person is separately indebted to the partnership and to the managing partner at the same time, any sum received by the managing partner shall be applied to the two credits in proportion to their amounts.

Exception: Where he received it for the account of the partnership, in which case the whole sum shall be applied to the partnership credit only.

Requisites for application of rule.

1. There exist at least two debts, one where the collecting partner is creditor, and the other, where the partnership is the creditor;
2. Both debts are demandable; an
3.  The partner who collects is authorized to manage and actually manages the partnership.

Reason for applying payment to partnership credit. 

• The law safeguards the interests of the partnership by preventing the possibility of their being subordinated by the managing partner to his own interest to the prejudice of the other partners.
• The article does not apply where the partner who collects for his own credit only is not authorized to manage, for there can be no ground for suspicion that he may have acted improperly to create an undue advantage to himself.

Right of debtor to application of payment.

• Under the second paragraph, the debtor is given the right to prefer payment of the credit of the partner if it should be more onerous to him in accordance with his right to application of payment. 

Article 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. 

Obligation of partner who receives share of partnership credit.

• The case contemplated under this article is different from that referred to in Article 1792, which treats of two distinct credits, one in favor of the partnership and another in favor of the managing partner.
• In the present article:
1. There is only one credit — credit in favor of the partnership. 
2. The present article applies whether the partner who receives his share of the partnership credit is authorized to manage or not.

Requisites for application of rule. —

1. A partner has received, in whole or in part, his share of the partnership credit;
2. The other partners have not collected their shares; and
3. The partnership debtor has become insolvent.

Example:

D owes partnership X and Co. P4,500.00. 

A, a partner, received a share of P1,500.00 ahead of B and C, the two other partners. 

When B and C were collecting from D, the latter was already insolvent. 

In this case, even if A had given a receipt for his share only, he can be required to share the P1,500.00 with B and C. 

Reason for imposing obligation to return. — 

• The debt of D becomes a bad debt. It would be unjust or unfair for A not to share in the loss with B and C or for him to obtain more and B and C, less. 
• This is based on the community of interest among the partners, which is one of the underlying principles of the contract of partnership.

Credit collected after dissolution of the partnership.

Q: Does the obligation of the partner to bring to the partnership capital what he has collected refer only to that collected during the existence of the partnership, or does it also refer to that collected after the dissolution of the same?
Two schools of thought.

1. Obligation to bring amount collected to the partnership fund.
• Based in the community and equality which ought to exist among all the partners.
2. Contrary view.
• It would not be just that he who has been diligent and collected his quota should suffer the consequence of the negligence of his associates, thus making him responsible for the default of the latter.
• Upon the dissolution of the partnership, the tie that unites the partnership ceases. This being the case, the reason forthe obligation disappears.

Article 1794. 

Every partner is responsible to the partnership

for damages suffered by it through his fault,

and he cannot compensate them with the profits and benefits

which he may have earned for the partnership by his industry.

However, the courts may equitably lessen this responsibility

if through the partner's extraordinary efforts

in other activities of the partnership,

unusual profits have been realized.

Obligation of partner for damages to partnership. 

• This article follows the general rule applicable to all contracts that any person guilty of negligence or fault in the fulfillment of his obligation shall be liable for damages. (Art. 1170.) The partner’s fault, however, must be determined in accordance with the nature of the obligation and the circumstances of the person, the time, and the place. (Art.1173.)

Compensation of damages with profits earned for partnership by guilty partner.

General Rule: The damages caused by a partner to the partnership cannot be offset by the profits or benefits which he may have earned for the partnership by his industry.

• The partner has the obligation to secure benefits for the partnership. Hence, the profits which he may have earned pertain as a matter of law or right, to the partnership.
• He has also the obligation to exercise diligence in the performance of his obligation as a partner.

Exception: If unusual profits are realized through the extraordinary efforts of the partner at fault, the courts may equitably mitigate or lessen his liability for damages.

• This rule rests on equity. 
• Even in this case, the partner at fault is not allowed to compensate such damages with the profits earned. 
• The law does not specify as to when profits may be considered “unusual.”
• The question depends upon the circumstances of the particular case.

Article 1795.

The risk of specific and determinate things, 

which are not fungible,

contributed to the partnership

so that only their use and fruits

may be for the common benefit,

shall be borne by the partner who owns them.

If the things contributed are fungible,

or cannot be kept without deteriorating,

or if they were contributed to be sold,

the risk shall be borne by the partnership.

In the absence of stipulation,

the risk of the things brought and appraised in the inventory,

shall also be borne by the partnership,

and in such case the claim shall be limited

to the value at which they were appraised. 

Risk of loss of things contributed.

1. Specific and determinate things which are not fungible where only the use is contributed.
• The risk of loss is borne by the partner because he remains the owner of the things (like car); 
2. Specific and determinate things the ownership of which is transferred to the partnership.
• The risk of loss is for the account of the partnership, being the owner;
3. Fungible things or things which cannot be kept without deteriorating even if they are contributed only for the use of the partnership.
• The risk of loss is borne by the partnership for evidently the ownership was being transferred since use is impossible without the things (e.g., oil, wine) being consumed or impaired;
4. Things contributed to be sold.
• The partnership bears risk of loss for there cannot be any doubt that the partnership was intended to be the owner; otherwise, the partnership could not effect the sale; and
5. Things brought and appraised in the inventory. 
• The partnership bears the risk of loss because the intention of the parties was to contribute to the  partnership the price of the things contributed with an appraisal in the inventory. There is thus an implied sale making the partnership owner of the said things, the price being represented by their appraised value.

• The above presuppose that the things contributed have been delivered actually or constructively to the partnership. 
• Before delivery, the risk of loss is borne by the partner since he remains their owner. He is a debtor of the partnership for whatever he may have promised to contribute. (Art.1786; see Arts.712, 1164, 1262, 1263.)
• If the loss is due to the fault of any of the partners, he shall be liable for damages to the partnership in accordance with the provision of the preceding article.

Article 1796.

The partnership shall be responsible to every partner

for the amounts he may have disbursed

on behalf of the partnership

and for the corresponding interest,

from the time the expense are made;

it shall also answer to each partner

for the obligations he may have contracted

in good faith in the interest of the partnership business,

and for risks in consequence of its management.

Responsibility of the partnership to the partners.

1. Refund amounts disbursed by the partner in behalf of the partnership plus the corresponding interest from the time the expenses are made (not from the date of demand). Here, the law refers to loans or advances made by a partner to the partnership other than capital contributed by him.
2. Answer for the obligations the partner may have contracted in good faith in the interest of the partnership business; and
3.  Answer for risks in consequence of its management.

• In the absence of any stipulation to the contrary, every partner is an agent of the partnership for the purpose of its business.
• Being a mere agent, the partner is not personally liable, provided, however, that he is free from all fault and he acted within the scope of his authority.
• But unlike an ordinary agent, he is not given the right of retention if he is not reimbursed or indemnified. 
• In the absence of an agreement to the contrary, no partner is entitled to compensation for his services to the partnership without the consent of all the partners unless it can be implied from the circumstances that the parties intended a partner to receive additional compensation where the partner’s work was beyond normal partnership functions.

Article 1797. 

The losses and profits shall be distributed in conformity with the agreement. 

If only the share of each partner in the profits has been agreed upon, 

the share of each in the losses shall be in the same proportion.
In the absence of stipulation, 

the share of each partner in the profits and losses shall be 

in proportion to what he may have contributed, 

but the industrial partner shall not be liable for the losses. 

As for the profits, the industrial partner shall receive such share 

as may be just and equitable under the circumstances. 

If besides his services he has contributed capital, 

he shall also receive a share in the profits in proportion to his capital. 

Rules for distribution of profits and losses.

• This article and the two succeeding ones regulate the distribution of profits and losses among the partners. 
• They do not refer to the liability of the partners to third persons which is governed by Article 1816.

Distribution of Profits

1. The partners share the profits according to their agreement subject to Article 1799.
2.  If there is no such agreement:
• The share of each capitalist partner shall be in proportion to his capital contribution. 
• This rule is based on the presumed will of the partners.
• The industrial partner shall receive such share, which must be satisfied first before the capitalist partners shall divide the profits, as may be just and equitable under the circumstances. 
• The share of an industrial partner in the profits is not fixed, as in the case of the capitalist partners, as it is very difficult to ascertain the value of the services of a person. 
• Under the Code of Commerce (Art. 140 thereof.), the industrial partner was “placed in the distribution in the same position as the capitalist partner having the smallest interest.”

• A partner is entitled to receive only his share of the profits actually realized by the venture. 
• Even when an assurance was made by a partner that they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a right to recover the profits promised where the business was highly speculative and turned out to be a failure. Hidden risks in any business venture have to be considered. 

Distribution of Losses

1. The losses shall be distributed according to their agreement subject to Article 1799.
2.  If there is no such agreement, but the contract provides for the share of the partners in the profits, the share of each in the losses shall be in accordance with the profit-sharing ratio, 
• The industrial partner shall not be liable for losses.
• The profits or losses of the partnership cannot be determined by taking into account the result of one particular transaction but of all the transactions had.
3. If there is also no profit-sharing stipulated in the contract, then losses shall be borne by the partners in proportion to their capital contributions, 
• The purely industrial partner shall not be liable for the losses.

Case: Ramnani vs. Court of Appeals

Two brothers engaged in a business venture, with one furnishing the capital and the other contributing his industry, the Supreme Court ruled that  “Justice and equity dictate that the two share equally the 

fruit of their joint investment and efforts,” because it was through the “industry and geniuses” of the industrial partner that the property of the venture was developed and improved into a valuable asset worth more than P22 million.

Article 1798. 

If the partners have agreed to intrust 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 intrusted to one of the partners. 

Designation by a third person of share in profits and losses.

Delegation to a third person.

• The designation of the share in the profits and losses may be delegated to a third person by common consent. 
• This article speaks of a third person, not a partner, following the general rule in contracts that the fulfillment of a contract cannot be left to the will of one of the contracting parties alone. 
• The prohibition in the second paragraph is necessary to guarantee the utmost impartiality in the distribution of shares in the profits and losses. 

Binding force of designation by third person. 

• The designation by the third person would generally be binding unless manifestly inequitable. 
• Even then, a partner who has begun to execute the decision of the third person or who fails to impugn the same within three months from the time he had knowledge of it can no longer complain. 
• In such case, the partner is guilty of estoppel or is deemed to have given his consent or ratification to the designation.
• The reason behind the comparatively short period of three months within which to impugn the designation is to forestall any paralyzation in the operations of the partnership. 

Article 1799. 
A stipulation which excludes one or more partners 

from any share in the profits or losses is void. 

Stipulation excluding a partner from any share in profits or losses.

• Stipulation generally void, but partnership subsists.
• Such an agreement would contravene the very purpose of a partnership contract, that is, profit-sharing among the partners.
• Although the stipulation is void, the partnership, if otherwise valid, subsists and the profits or losses shall be apportioned as if there were no stipulation on the same.
• Stipulation, a factor to show no partnership exists.
• Where person excluded not intended by parties to become a partner.
  
• The stipulation is valid.
• Where person excluded from losses is industrial partner.
• The stipulation is valid as an exception to the general rule.
• This is without prejudice, however, to the rights of third persons.
• Where stipulation provides for unequal shares.
• The stipulation is valid unless the inequality is so gross that it is, in effect, a simulated form or attempt to exclude a partner from any share in the profits or losses.

Stipulation exempting a partner from losses should be allowed.

• In order to induce a person to become a member of the firm, it becomes necessary to guaranty him against his suffering any financial losses thereby, without which guaranty such person may not be willing to become a member of the partnership and yet his connection thereto is considered as absolutely necessary by the other partners willing to guaranty him against losses.
• If a person can make a gift to another, there is no sound reason why a person cannot also agree to bear all the losses that a partnership may suffer, in order to exempt his co-partners from sharing in the said losses.
• As far as third persons are concerned, any agreement which tends to excuse or exclude one or more partners from satisfying the partnership liability caused through partnership losses may be properly declared void.

Article 1800.

The partner who has been appointed manager 

in the articles of partnership 

may execute all acts of administration 

despite the opposition of his partners, 

unless he should act in bad faith; 

and his power is irrevocable without just 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.

Rights and obligations with respect to management.

• Appointment as manager in the articles of partnership.
• The partner appointed by common agreement in the articles of partnership may execute all acts of administration notwithstanding the opposition of the other partners, unless he should act in bad faith. His power is revocable only upon just and lawful cause and upon the vote of the partners representing the controlling interest. 
• The reason for this principle is that the revocation represents a change in the terms of the contract. The law presumes that the appointment thus constituted is, in effect, one of the conditions of the contract and it is only logical that such appointment should not be revoked without the consent of all the partners, including the partner thus appointed. It is an elementary rule that no party to a contract can violate the law of the contract without the consent of the others.
• In case of mismanagement, the other partners may avail of the usual remedies allowed by law, including an application for dissolution of the partnership by a judicial decree.
• Appointment as manager after the constitution of the partnership.
• Management granted by the partners after the partnership has been constituted independently of the articles of partnership may be revoked at any time for any cause whatsoever.
• The reason for this provision is that in such case, the revocation is not founded on a change of will on the part of the partners, the appointment not being a condition of the contract. It is merely a simple contract of agency, which may be revoked at any time. It is believed that the vote for revocation must also represent the controlling interest.
• It should be noted that Article 1800 refers to a partner, not a stranger, who has been appointed manager. As a rule, a partner is not entitled to compensation for his services other than his share of the profits.

Q: Is the appointment of managing partner required by law? NO.

Scope of power of a managing partner.

General Rule: A partner appointed as manager has all the powers of a general agent as well as all the incidental powers necessary to carry out the object of the partnership in the transaction of its business.

1. Issue receipts
2. Purchase on credit
3. Secure loans
4. Dismiss an employee
5. Employ a person

Exception: When the powers of the manager are specifically restricted or expressly withheld. The managing partner cannot also exercise powers which are neither necessary or incidental to carry out the object of the partnership.

Compensation for services rendered.

General Rule: Partner generally not entitled to compensation.

Exception: When the law imply a contract for compensation:

1. Services in capacity other than a partner
2. Extraordinary neglect
3. Employing a co-worker
4. Exempted from terms of partnership
5. Extraordinary services

Article 1801.

If two or more partners have been intrusted 

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. 

Where respective duties of two or more managing partners not specified.

• Each one may separately perform acts of administration.
• If one or more of the managing partners shall oppose the acts of the others, then the decision of the majority (per head) of the managing partners shall prevail. 
• Right to oppose can only be exercised by those entrusted with the management of the partnership and not by any partner. 
• In case of tie, the matter shall have to be decided by the vote of the partners owning the controlling interest, that is, more than 50% of the capital investment.
• Requisites for application of rule:
• Two or more partners have been appointed as managers;
• There is no specification of their respective duties;
• There is no stipulation that one of them shall not act without the consent of all the others.

Article 1802.
In case it should have been stipulated

that none of the managing partners shall act 

without the consent of the others, 

the concurrence of all shall be necessary 

for the validity of the acts, 

and the absence or disability of any one of them 

cannot be alleged, 

unless there is imminent danger of grave or irreparable injury to the partnership. 

Where unanimity of action stipulated.

General Rule: Concurrence necessary for validity of acts. Consent is so indispensable that neither the absence nor disability of any one of them may be alleged as excuse or justification to dispense with this requirement.

Exception: When there is an imminent danger of grave or irreparable injury to the partnership,

Rule where there is opposition by a managing partner.

• The rule which authorizes any of the managing partners to proceed alone without the consent of the other in case of “imminent danger of grave or irreparable injury to the partnership” is not applicable when one of the managers, in the exercise of his right to oppose, objects to the proposed act. 
• The reason is that one of the essential conditions of the authority conferred on the managing partner is that the management should be with the consent of all the partners, and inasmuch as in this case such unanimous consent is manifestly wanting, there is no doubt that the proposed act is outside the scope of his authority. 
• The stipulation undoubtedly creates an obligation between the two partners, which consists in asking the other’s consent before contracting for the partnership. This obligation, of course, is not imposed upon a third person who contracts with a partnership

Consent of managing partners not necessary in routine transactions.

• It has been held that where the business of the partnership is to buy and sell merchandise of all kinds, an industrial partner who is authorized can purchase “on credit” in the name of the firm certain goods, regularly purchased by the company without first securing the approval of the capitalist partners since it is usual or customary to buy and sell on credit. 
• Moreover, the authority to purchase carries with it the implied authority to purchase on credit
• The requirement of written authority refers evidently to formal and unusual written contracts.

Article 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. 

Rules when manner of management has not been agreed upon.

• All partners considered managers and agents.
• All partners shall have equal rights in the management and conduct of partnership affairs,  regardless of the amount of their capital contributions or extent of their services to the partnership.
• Subject, to the provision of Article 1801 that in case of timely opposition of any partner, the matter shall first be decided by the majority vote, for the presumed intent is for all the partners to manage regardless of the amount of capital they contributed. In case of a tie, then the matter shall be decided by the vote of the partners representing the controlling interest.
• Unanimous consent required for alteration of immovable property.
• The consent need not be express. 
• It may be presumed from the fact of knowledge of the alteration without interposing any objection.
• The prohibition applies only to immovable property because of the greater importance of this kind of property as compared to movable property and the alteration thereof must be important.
• If the refusal to give consent by the other partners is manifestly prejudicial to the interest of the partnership, the intervention by the court may be sought for authority to make the necessary alteration.
• If the alteration is necessary for the preservation of the property, it would seem that the consent of the other partners is not required.

Article 1804.
Every partner may associate another person 

with him in his share, 

but the associate shall not be admitted into the partnership 

without the consent of all the other partners, 

even if the partner having an associate should be a manager. 

Contract of subpartnership.

• A partner may associate another person with him in his share without the consent of the other partners. 
• Such associate is sometimes referred to as a subpartner.
• The partnership formed between a member of a partnership and a third person for a division of the profits coming to him from the partnership enterprise is termed subpartnership. 
• In effect, a subpartnership is a partnership within a partnership and is distinct and separate from the main or principal partnership.
• In the absence of the mutual assent of all the parties, a subpartner does not become a member of the partnership, even though the agreement is known to the other members of the firm.
• Not being a member of the partnership, he does not acquire the rights of a partner nor is he liable for its debts.
• Reason for the rule: Mutual trust and confidence.

Article 1805. 
The partnership books shall be kept, 

subject to any agreement between the partners, 

at the principal place of business of the partnership, 

and every partner shall at any reasonable hour 

have access to and may inspect and copy any of them. 

Keeping of partnership books

• The duty to keep true and correct books showing the firm’s accounts, such books being at all times open to inspection of all members of the firm, primarily rests on:
• managing or active partner
• particular partner given record-keeping duties
• It is presumed that the partners have knowledge of the contents of the partnership books and that said books state accurately the state of accounts, but errors can be corrected.
• Subject to any agreement to the contrary, the partnership books should be kept at the principal place of business as each partner has a right to free access to them and to inspect or copy any of them at any reasonable time, even after dissolution. 
• This right is granted to enable the partners to have true and full information of all things affecting the partnership.
• A partner is a co-owner of the partnership properties, which include the books of the partnership.
• The partners inspection rights are not absolute. He can be restrained from using the information gathered for other than partnership purpose.
• The rights of the partners with respect to partnership books can be exercised at “any reasonable hour,” or reasonable hours on business days throughout the year and not merely during some arbitrary period of a few days chosen by the managing partners.

Article 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 partner or 

of any partner under legal disability. 

Duty to render information.

• Good faith not only requires that a partner should not make any false statement but also he should abstain from concealment.

Duty upon request or demand.

• Under the same principle of mutual trust and confidence among partners, there must be no concealment between them in all matters affecting the partnership. The duty to render true and full information of all things affecting the same upon request or demand.
• The information, to be sure, must be used only for a partnership purpose.

Duty of voluntary disclosure.

• The use of the words “on demand’’ does not mean that a partner is under no obligation to make a voluntary disclosure of information affecting the partnership.
• Not only is a partner bound to give information on demand but in certain circumstances, he is under the duty of voluntary disclosure of material facts within his knowledge relating to or affecting partnership affairs.
• The duty to render information does not arise with respect to matters appearing in the partnership books since each partner has the right to inspect the books.

Article 1807. 
Every partner must account to the partnership for any benefit, 

and hold as trustee for it any profits derived by him

without the consent of the other partners 

from any transaction connected 

with the formation, conduct, or liquidation of the partnership 

or from any use by him of its property. 

Partner accountable as fiduciary.

• The relation between the partners is essentially fiduciary involving trust and confidence. The duties of a partner are analogous to those of a trustee.
• Duty to act for common benefit.
• It is obligation of a partner to act for the common benefit of all in all transactions relating to the partnership business or affairs.
• Managing partners particularly owe a fiduciary duty to inactive partners.
• Duty begins during formation of partnership.
•  The principle of utmost good faith covers dealings and transactions taking place during the negotiations leading to the formation of the partnership.
• Duty continues even after dissolution of partnership.
• The duty of a partner to act with utmost good faith towards his co-partners continues throughout the entire life of the partnership even after dissolution for whatever reason or whatever means, until the relationship is terminated, i.e., the winding up of partnership affairs is completed. 
• Duty to account for earnings accruing even after termination of partnership.
• The duty of a former partner to share profits with his former associates may extend to earnings accruing after the termination of the partnership.
• Duty to make full disclosure of information belonging to partnership.
• A partner is also subject to the fiduciary duty of undivided loyalty and complete disclosure of information of all things affecting the partnership.
• By information is meant information which can be used for the purposes of the partnership.
• Duty not to acquire interest or right adverse to partnership.
• A partner may not purchase, for his own benefit, property of any kind in which the partnership is interested, or lease property when the firm is entitled to the benefit of such lease, or secure a valuable contract for himself which it is his duty to secure for the firm, or obtain secretly any right that should belong to the partnership, and put it to his own individual profit.
• The consent required to be secured from the other partners must necessarily be an “informed consent” with knowledge of the facts necessary to the giving of an intelligent consent.

Article 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 prohibition 

shall bring to the common funds any profits 

accruing to him from his transactions, 

and shall personally bear all the losses. 

Prohibition against partner engaging in business.

• The prohibition against the capitalist partner to engage in business is relative, unlike the industrial partner who is absolutely prohibited from engaging in any business for himself.
• The capitalist partner is only prohibited from engaging for his own account in any operation which is the same as or similar to the business in which the partnership is engaged and which is competitive with said business.
• Any capitalist partner violating this prohibition shall be under obligation to bring to the common fund any profits derived by him from his transactions and, in case of losses, he shall bear them alone. 
• The partners, however, by stipulation may permit the capitalist partner to engage in the same kind of business. 
• Reason for the prohibition: Since the relationship of partners is fiduciary and imposes upon them the obligation of the utmost good faith in their dealings with one another with respect to partnership affairs, one partner will not be permitted to retain for himself alone as against his co-partners benefits from the partnership relation.

Article 1809.

Any partner shall have the right to a formal account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business or possession 

of its property by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by article 1807;
(4) Whenever other circumstances render it just and reasonable.

Right of partner to a formal account.

General Rule: During the existence of the partnership, a partner is not entitled to a formal account of partnership affairs. 

• Reasons:
• The rights of the partner to know partnership affairs are amply protected in Articles 1805 and 1806.
• To entitle any partner to the right to constantly demand or ask for a formal accounting will cause much inconvenience and unnecessary waste of time.
• A suit for accounting usually is filed only when the partnership has been dissolved. A formal account is a necessary incident to the dissolution of the partnership.

Exception: In the special and unusual situations enumerated under Article 1809, the justification for a formal accounting even before dissolution of the partnership cannot be doubted. 

• An example under No. (4) of Article 1809 is where a partner has been assigned abroad for a long period of time in connection with the partnership business and the partnership books during such period being in the possession of the other partners.
• The right of a partner to demand an accounting without bringing about or seeking a dissolution is a necessary corollary to his right to share in the profits.

 Prescriptive period.

• The obligation to account is one which rests especially on the shoulders of a managing or active partner, and is one of the special tasks of a liquidating or surviving partner.
• Articles 1806, 1807, and 1809 show that the right to demand accounting exists as long as the partnership lasts. 
• Prescription begins to run only upon the dissolution of the partnership when the final accounting is done.

Nature of action for accounting.

• It is a personal action which under the Rules of Court, may be commenced and tried where the defendent resides or may be found or where the plaintiffs reside, at the election of the latter.
• The fact that the some of the assets of the partnership are real property does not materially change the nature of the action. 
• It is an action in personam because it is an action against a person for the performance of a personal duty on his part, and not an action in rem where the action is against the thing itself. 
• It is only incidental that part of the assets of the partnership subject to accounting or under liquidation happen to be real property.