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.
Partnership is a/an:
1) ASSOCIATION of two or more persons to carry on as co-owners of a
business for profit
2) LEGAL RELATION based upon the expressed or implied agreement of
two or more persons
3) JOINT UNDERTAKING to share in the profit or loss
4) STATUS arising out of a contract into by two or more persons whereby
they agree to share as common owners the profits of a business
5) ORGANIZATION for production of income to which each partner
contributes one or both of the ingredients of income, which are capital
and service
6) ENTITY distinct and apart from the members composing it
Characteristics of a partnership:
1) CONSENSUAL (perfected by mere consent)
2) NOMINATE (special name or designation in our law)
3) BILATERAL (entered into by two or more persons and obligations
arising are reciprocal)
4) ONEROUS (each of the parties aspires to procure for himself a benefit
by giving up something)
5) COMMUTATIVE (undertaking of each of the partners is considered as
equivalent of others)
6) PRINCIPAL (does not depend for its existence or validity upon some
other contract)
7) PREPARATORY (it is entered into as a means to an end i.e., profit)
Essential features of a partnership:
1) There must be a valid contract
2) The parties must have legal capacity to enter into the contract
3) There must be a mutual contribution of money, property or industry
4) The object must be lawful
5) Primary purpose must be to obtain profits
Existence of a valid contract
 1) A form of voluntary and personal association: No one can become a
member of the partnership without the consent of all the other
associates
2) Creation and proof of existence: May be informally created but it is
customary to embody the terms in the Articles of Partnership
3) Other forms of associations excluded: Religious societies and
community partnerships
Legal capacity of parties to enter into contract:
1) General Rule: unemancipated minors, insane or demented persons,
deaf-mutes who do not know how to write, persons who are suffering
from civil interdiction and incompetents who are under guardianship
are not allowed to enter in a contract of partnership
2) Exceptions: persons prohibited from giving each other any donation or
advantage cannot enter into a universal partnership
3) Capacity of partnership/corporation to be a partner: partnerships can
be a partner but corporations cannot be
Mutual contribution to a common fund:
1) Propriety/Financial interest
2) Money (legal tender and must be in cash; promissory notes, checks are
not cash)
3) Property (may be real or personal, tangible or intangible)
4) Industry (service or work)
Article 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.
Article 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 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 debts 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, through the amounts 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
Partnerships distinguished from voluntary associations:
Juridical Personality, Purpose (to make profit), Contribution (money, property
or industry), Liability.
Article 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.
Effects of an unlawful partnership:
1) The contract is void 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
Article 1771: A partnership may be constituted in any form, except where
immovable property or real rights are contributed thereto, in which case a
public instrument shall be necessary.
*The transfer of real property to the partnership must be duly registered in
the Registry of Property of the province or city where the property
contributed is located.
Article 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.
Two requirements where the capital is P3,000 or more:
 1) The contract must appear in a public instrument
2) It must be recorded or registered with the Securities and Exchange
Commission
Registration of partnership:
Registration is necessary as “a condition for the issuance of licenses to
engage in business or trade”.
1) Tax liabilities cannot be evaded
2) Public can determine more accurately their membership and capital
before dealing with them
Article 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.
Requirements so that the partnership would not be void:
1) The contract must be in a public instrument
2) An inventory of the property contributed must be made, signed by the
parties, and attached to the public instrument.
Article 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.
Article 1775: Associations and societies, whose articles are kept secret
among the members, and wherein anyone 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.
 It is essential that the partners are fully informed not only of the
agreement but of all matters affecting the 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.
Article 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.
General Partnership: one consisting of general partners who are liable
beyond their contribution in the partnership
Limited Partnership: one formed by two or more persons having as
members one or more general partners and one or more limited partners.
Partnership at will: no time specified and is not formed for a particular
undertaking
Partnership with a fixed term: one which the term for which the
partnership is to exist is fixed or agreed upon for a particular undertaking
De jure partnership: complied with legal requirements
De facto partnership: failed to comply with legal requirements
Ordinary/real partnership: partnership that actually exists
Ostensible/partnership by estoppel: in reality is not a partnership
Secret partnership: not known to the public
Open/notorious partnership: one whose existence is made known to the
public
Commercial partnership: for business
Professional partnership: for the exercise of a profession
Capitalist Partner: one who contributes money or property to the common
fund
Industrial partner: one who contributes only his service
Managing partner: one who manages the affairs of the partnership
Liquidating partner: one who takes charge of the winding up of a
partnership

Article 1777: A universal partnership may refer to all the present property
or to all the profits.
Article 1778: A partnership of all present property is that in which the
partners contribute all the property which actually belongs to them to a
common fund with the intention of dividing the same among themselves, as
well as the profits they may acquire therewith
Article 1779: In a universal partnership of all present property, the property
which belonged 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 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 stipulations, except the fruits thereof.
Article 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.
 Ownership of present and future property: The partners retain
their ownership over their present and future property.
 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 the property
do not belong to the partnership.
Article 1781: Articles of universal partnership, entered into without
specification of its nature, only constitute a universal partnership of profits.
Article 1782: Persons who are prohibited from giving each other any
donation or advantage cannot enter into a universal partnership.
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 offer or his wife, descendants and ascendants
by reason of his office
4) Married couple
Article 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
Reasons for forming particular partnerships:
1) Acquisition of an immovable property
2) Established for the purpose of carrying out a specific enterprise such
as the construction of a building
3) Practice of a profession or vocation
Chapter 2: Obligations of the Partners
SECTION 1. – Obligations of the Partners among Themselves
Article 1784: A partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated.
 A partnership exists from the moment of the celebration of the
contract by the partners
  Future partnership: Partners may stipulate some other date for the
commencement of the partnership.
 Agreement to create partnership: A distinction must be made between
a partnership actually consummated and an agreement to enter into a
contract of partnership at a future time.
Article 1785: When a partnership for a fix 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.
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.
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
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
5) To indemnify the partnership for any damage caused to it by the
retention of the same or by the delay of its contribution
Effect of failure to contribute property
1) Liability as debtor to partnership: No contribution means that the
partner is automatically in debt.
2) Remedy of other partners: Action for specific performance with
damages and interest
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 the account of the
partnership.
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.
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 damage in either case.
Article 1790: Unless there is a stipulation to the contrary, the partners shall
contribute equal shares to the capital of the partnership
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 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 majority of the capitalist partner refuses (deliberately not because
of his financial inability to do so) to contribute an additional share to
the capital
4) There is no agreement that even in case of an imminent loss of the
business the partners are not obliged to contribute
***Industrial partner is exempted from the requirement to contribute an
additional share***
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 debtor by Article 1252, but only if the
personal credit of the partner should be more onerous to him.
Requisites for application of the rule:
1) There exists 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
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.
 Good faith demands that the partner vested with the management of
the partnership attend more to the interest of the partnership than to
his own and he should not intentionally fail to effect the collection of
the credit of the partnership in order to effect the collection of his own.
Right of debtor to application of payment:
 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.
**One credit: in favor of the partnership**
Requisites for application of the 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
3) The partnership debtor has become insolvent
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.
General rule:
Damages caused by a partner to the partnership cannot be compensated or
offset by the profits or benefits which he may have earned for the
partnership by his industry
1) 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.
2) He has also the obligation to exercise diligence in the performance of
his obligation as a partner. Consequently, inasmuch as a partner is a
debtor to the partnership for his industry, and at the same time is
obliged to repair the injury which he might have occasioned through
his fault, there cannot be any compensation.
Exception:
If unusual profits are realized through the extraordinary efforts of the partner
at fault.
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 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.
Five cases for determination of the risk of things:
1) Specific and determinate things which are not fungible where only the
use is contributed
 The risk is borne by the partner because he remains the owner of the
things
2) Specific and determinate things the ownership of which is transferred
to the partnership
 The risk is for the account of the partnership, being the owner
3) Fungible things/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 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
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
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 expenses 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 partnership to partners:
1) To refund amounts disbursed by him in behalf of the partnership plus
the corresponding interest from the time the expenses are made.
2) To answer for the obligation he may have contracted in good faith in
the interest of the partnership business
3) To answer for risks in consequence of his management
Article 1797: The losses and profits shall be distributed in conformity with
the agreement. If only the share of each partner in 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 service he has contributed capital, he shall also
receive a share in the profits in proportion to his capital.

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 manifested 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.
Article 1799: A stipulation which excludes one or more partners from any
share in the profits or losses is void.