XBUSLAW - Prelims

PARTNERSHIP

A contract whereby 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, or in order to exercise a profession.

CHARACTERISTICS of a Partnership

1. Consensual - perfected by mere consent of the parties, 2. Bilateral or Multilateral - entered into between two or more persons, 3. Nominate - designated by a specific name and has specific rules applicable only to it, 4. Principal - its existence does not depend on the existence of another contract, 5. Onerous - certain contributions have to be made to become a partner, 6. Preparatory - other contracts essential to its purposes can be entered into after it is formed.

Affectio Societatis

The desire to formulate an ACTIVE union with people among whom there exists mutual confidence and trust.

Delectus Personae (Personal Choices)

A principle meaning a partner has a right to choose those whom he wants to be associated with the partnership because it is based on trust and confidence. Admission of a third person as a partner requires unanimous consent of all the partners.

PURPOSE of a Partnership

Can either be for the intention of dividing the Profits themselves, or in order to exercise a profession. Must have a LAWFUL object or purpose, otherwise, it will be dissolved by judicial decree and profits confiscated by the state (Art. 1770).

PARTNERSHIP vs. CORPORATION (Creation)

Partnership is created by Voluntary agreement of parties, Corporation is Created by the state in the form of a special charter or by a general enabling law (The Corporate Code).

PARTNERSHIP vs. CORPORATION (Number of Organizers)

Partnership: Two or more, Corporation: Not more than 15.

PARTNERSHIP vs. CORPORATION (Existence)

Partnership: Generally, no time limit except will of the parties, Corporation: Not more than 50 years from with perpetual existence under the Revised Corporation Code.

PARTNERSHIP vs. CORPORATION (Liability of owners)

Partnership: May extend to private property, Corporation: Liable only up to their capital contributions.

PARTNERSHIP vs. CORPORATION (Transferability of interest)

Partnership: All partners need to consent to the transfer of interest to another, Corporation: Does not need the consent of the other stockholders.

PARTNERSHIP vs. CORPORATION (Ability of owners to bind the firm)

Partnership: Generally, partners acting on behalf of the partnership are agents thereof, Corporation: Generally, stockholders cannot bind corporations since the official acts are through a Board of Directors.

PARTNERSHIP vs. CORPORATION (Remedies in case of mismanagement)

Partnership: A partner can sue another partner who mismanages, Corporation: A stockholder cannot sue a director who mismanages, it must be in the name of the corporation, through a derivative suit.

PARTNERSHIP vs. CORPORATION (Separate Juridical Personality)

Partnership: None. Death, retirement, insolvency, civil interdiction, or insanity of a partner dissolves the partnership, Corporation: Yes. Such causes do not dissolve a corporation.

Separate Juridical Personality of a Partnership

The partnership has a judicial personality generally separate and distinct from that of each of the partners, allowing it to: 1. Acquire and possess property of all kinds, 2. Incur obligations, 3. Bring civil or criminal actions, 4. Be Adjudged insolvent even if individual members are financially solvent.

Rules Determining Existence of Partnership (No Partnership)

1. Between persons who are not partners as to each other (except partnership by estoppel), 2. Co-ownership or co-possession of itself, whether or not they share profits from the use of the Property, 3. The sharing of gross returns, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.

Rules Determining Existence of Partnership (Presumption)

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 is drawn if such profits were received in payment: a. As a debt by installments or otherwise, b. As wages of an employee, c. As rent to a landlord, d. As an annuity to a widow or representative of a deceased person, e. As interest on a loan, though the amount of payment varies with profits of the business, f. As the consideration for the sale of a goodwill of a business or property by installments or otherwise.

Formal Requirements of Partnership (General Rule)

A partnership may be constituted in any form.

Formal Requirements of Partnership (Exception 1 - Immovable Property)

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.

Formal Requirements of Partnership (Exception 2 - Capital of P3,000 or more)

The contract of partnership must appear in a public instrument, which must be recorded in the SEC (intended only to affect third persons, does not invalidate the partnership).

Universal Partnership (According to Object)

A kind of partnership that is either ALL PROFITS or ALL PRESENT PROPERTY.

Universal Partnership of ALL PROFITS

Only the USUFRUCT of the properties of the partners become common property (NAKED OWNERSHIP is retained), ALL PROFITS acquired by industry or work of the partners become common, Profits from other sources may become partnership property if there is a stipulation to such effect, Properties subsequently acquired by inheritance, legacy, or donation cannot be included in the stipulation, BUT the fruits thereof can be included.

Universal Partnership of ALL PRESENT PROPERTY

ALL the property actually belonging to partners are contributed (both usufruct and naked ownership), Only the PROFITS OF THE CONTRIBUTED PROPERTY are included as a rule (aside from the contributed properties).

Universal Partnership (Rule in case of ambiguity)

If the Articles of Universal Partnership do not specify the nature, it is deemed to be a universal partnership of profits.

Persons not allowed to form a universal partnership

Those who cannot donate to each other, namely: a. Husband and Wife (Art. 87, Family Code), b. Those guilty of adultery and concubinage (Art. 739, NCC), c. Those guilty of the same criminal offense, if the partnership was entered into in consideration of the same (Art. 739, NCC).

Particular Partnership

A kind of partnership where the object is: a. Determinate things, their use or fruits, b. A specific undertaking, or c. The exercise of a profession or occupation.

General Partnership (According to Liability)

All the partners are general partners whose liability extends to their individual properties, after the assets of the partnership have been exhausted.

Limited Partnership (According to Liability)

At least one of the partners is a limited partner, liable only up to the extent of his contribution.

Partnership with a fixed term or particular undertaking (According to Term)

A partnership for a fixed term or for the fulfilment of a particular undertaking, if continued after the fixed term or fulfillment, it constitutes a partnership at will.

Partnership at will

A partnership that has no fixed term or undertaking.

Ordinary partnership

A partnership which actually exists as to partners as well as to third persons.

Partnership by estoppel or nominal partnership

A partnership that in reality is not a partnership but is considered as one with respect to third persons who, by reason of their conduct or admission, are precluded in denying its existence.

Partnership by prescription

A partnership which is established by a lapsing of time (not fully covered in the text).

De jure partnership

A partnership that exists both in fact and in law.

De facto partnership

A partnership that exists in fact but not in law.

Commercial Partnership or Business Partnership

A partnership formed by two or more persons who bind themselves to common money, property, or industry to a common fund, with the intention of dividing the profits among themselves. It is a taxable corporation for Income Tax purposes.

General Professional Partnership

A partnership formed for the exercise of a common profession. It is a tax-exempt entity for Income Tax purposes because the practitioner partners are liable to pay income tax on their share in net income in their separate returns.

Capitalist Partners

Partners who contribute capital.

Industrial Partners

Partners who furnish industry or labor.

Capitalist-Industrial Partners

Partners who furnish both capital and industry.

Liability of a Partner to Contribute

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 (no demand is necessary).

Liabilities of a Partner Similar to a Vendor

i. Bound to deliver the fruits of the thing from the time it should have been delivered, without need of demand, ii. Must exercise due diligence in preserving the promised thing, otherwise, liable for loss and deterioration, iii. Must Warrant the thing delivered against eviction.

Risk of Loss Borne by the Partner

When the thing contributed is a specific and determinate which is NOT fungible and only its use and fruits are for the common benefit, OR when there is a stipulation that he shall bear the loss of the thing brought as appraised in the inventory.

Risk of Loss Borne by the Partnership

When the things contributed are: i. fungible, ii. cannot be kept without deteriorating, or iii. they were contributed to be sold, OR when there was appraisal in the inventory and no stipulation that the partner will bear the loss.

Obligation to give additional contribution in case of imminent losses

Any partner who refuses to contribute an additional share to the capital to save the business from imminent loss shall be obliged to sell his interest to the other partners. Exceptions: Industrial partners (unless stipulated otherwise) and if there is a stipulation to the contrary.

Prohibition to engage in other businesses (Industrial Partners)

Cannot engage in business for himself except when the capitalist partners permit him to do so. Non-compliance consequence: Capitalist partners may either i. Exclude him from the firm or ii. Avail themselves of the benefits which he may have obtained.

Prohibition to engage in other businesses (Capitalist Partners)

Prohibition is limited to businesses in the same industry as that of the partnership which may result in competition. Exceptions: i. Express stipulation allowing it, ii. Other partners allow him, iii. During liquidation/winding up, iv. When the general-capitalist partner becomes a limited partner in a competitive enterprise. Non-compliance consequence: i. He shall bring to the partnership all the profits illegally obtained, ii. He is liable, personally, for all the losses, iii. He may be ousted for loss of trust and confidence.

Rule when Managing Partner Collects from a Common Debtor (Receipt in partnership name)

If the managing partner issued a receipt in the name of the partnership, the payment shall be applied to the partnership credit.

Rule when Managing Partner Collects from a Common Debtor (Receipt in partner's name)

If the managing partner issued a receipt in his name, the payment shall be applied proportionate to the amounts of the two debts. Exception: When the debt owed by the debtor to the managing partner is more onerous, the debtor may choose to apply the payment exclusively to such.

Firm Name

Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.

Liability of Limited Partner if name included in Firm Name (Art. 1846)

If a limited partner included his name in the firm name, he shall be liable as a general partner.

Liability after Exhaustion of Partnership Assets

All partners, including industrial ones, shall be liable pro rata with all their property (personal assets) after all the partnership assets have been exhausted, for partnership contracts. Any stipulation to the contrary shall be void, except as to the partners.

Other obligations of partners to the partnership

a. Not to convert partnership funds/property for his own use, b. To account for and hold as trustee, unauthorized (or secret) personal profits, c. Pay for damages caused by his fault, d. Share with other partners the share of the partnership credit which he has received from an insolvent firm debtor, e. Keep the partnership books in the principal office and allow other partners to have access, inspect and copy, f. Reimburse the partnership of damages suffered by it through his fault (liability is not compensable with profits, but may be decreased by courts if extraordinary efforts earned unused profits), g. To inform the other partners on all matters affecting the partnership, h. To observe the diligence of a good father of a family, i. To adhere to the partnership agreement and decisions of approved managing partner(s).

Authority of a Partner to Act on Behalf of the Partnership

Every partner is an agent of the partnership. Authority can be: a. Express (expressly granted), b. Implied (implied from the express authority), c. Apparent (when he apparently carries on the usual business and the person dealing has no knowledge of lack of authority).

Acts requiring Consent of ALL Partners (Unless authorized or abandoned business)

a. Assign the partnership property in trust for creditors or an assignee’s promise to pay the debts of the partnership, b. Dispose of the good-will of the business, c. Do any other act which would make it impossible to carry on the ordinary business, d. Confess a judgment, e. Enter into a compromise concerning a partnership claim or liability, f. Submit a partnership claim or liability to arbitration, g. Renounce a claim of the partnership.

Admission of Partners (as evidence)

An admission made by one partner within the scope of his authority is evidence against the partnership.

Notice to a Partner

Operates as notice to the partnership, except in case of fraud committed by such partner.

Sundry Liability for Torts/Quasi-Delict

The partnership is liable for loss, injury, or penalty caused by any wrongful act or omission of any partner acting in the ordinary course of business or with co-partners' authority, to the same extent as the partner so acting. All partners are solidarity liable.

Sundry Liability for Misappropriation (Partner as receiver)

The partnership is bound to make good the loss where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it. All partners are solidarity liable.

Sundry Liability for Misappropriation (Partnership as receiver)

The partnership is bound to make good the loss where the partnership in the course of its business receives money or property of a third person and it is misapplied by any partner while it is in the custody of the partnership. All partners are solidarity liable.

Partner by Estoppel (With consent of existing partnership)

A person represents himself as a partner of an existing partner with the consent of the partnership. A partnership by estoppel is created between the original members and the deceiver, and partnership liability results.

Partner by Estoppel (Without consent of existing partnership)

A person represents himself as a partner of an existing partner without the consent of the partnership. The deceiver becomes a partner by estoppel, liable as a partner but does not acquire the rights thereof. No partnership liability exists, only those who consented shall be liable.

Partner by Estoppel (Of a NON-entity partnership)

A person represents himself as a partner of a NON-entity partnership. Liability of parties is pro rata, since there is no partnership liability.

Liability of New (or Incoming) Partner (Prior Debts)

Liable up to his contribution for debts incurred prior to admission (Except if there is stipulation).

Liability of New (or Incoming) Partner (After Debts)

Liable up to his personal assets for debts incurred after admission.

Distribution of Profits (With agreement)

In accordance with the agreement as to the distribution of profits.

Distribution of Profits (No agreement)

In proportion to contribution (or equally, on the presumption that partners contributed equally).

Industrial Partner's Share in Profits

Shall receive such share as may be just and equitable.

Distribution of Losses (With agreement)

In accordance with agreement as to distribution of losses.

Distribution of Losses (No agreement as to losses, but agreement as to profits)

Same proportion as to the agreement as to profits.

Distribution of Losses (No agreement as to losses and profits)

In proportion to contribution (but the industrial partner shall not be liable for losses, unless stipulated otherwise), or equally.

Stipulation excluding any partner from share in partnership profit

Void.

Stipulation excluding a capitalist partner from share in partnership loss

Void.

Stipulation excluding an industrial partner from share in partnership loss

Valid.

Property Rights of a Partner

a. His rights in specific partnership property (co-owner), b. His interest in the partnership (share of profits and surplus), c. His right to participate in the management.

Incidents of co-ownership in Specific Partnership Property

i. Equal right to possess for partnership purposes, ii. Not assigned except with rights of all partners in the same property, iii. Not subject to attachment or execution (except on a claim against the partnership), iv. Not subject to legal support.

Interest in the partnership

A partner’s share of the profits and surplus.

Charging/Attachment on Partner's Interest

Only the interest (profits and surplus) and not the share in specific properties is subject to charge or attachment. Priority is given to creditors of the partnership. May be redeemed prior to foreclosure with: 1) Separate property of any one or more partners, or 2) Partnership property with the consent of ALL the other partners.

Managing Partner in the Articles of Partnership (Power)

May execute all acts of administration, in good faith, even with opposition from the other partners.

Managing Partner in the Articles of Partnership (Revocation of Power)

Can only be revoked if (a) just or lawful cause, and (2) by a vote of the partners representing controlling interest.

Managing Partner After Partnership has been Constituted (Revocation of Power)

The power as manager may be revoked by a vote of partners representing the controlling interest EVEN WITHOUT just or lawful cause.

Multiple Managing Partners (With stipulation that no one may act without consent)

No one can perform an act of administration without the others’ consent.

Multiple Managing Partners (With Specification of Duties)

Each Managing Partner can perform an act of administration within their respective duties.

Multiple Managing Partners (No specification of duties and no stipulation on consent)

a) Each managing partner may separately execute all acts of administration, b) Should one oppose the act of another, decided by a majority of the managing partners per head count, c) Should there be a tie in votes, the controlling interest of ALL the partners shall prevail.

No Managing Partner (With stipulation that no partner can act without support of partners)

Concurrence of all is necessary for validity of acts, and absence/disability of any one cannot be alleged. Exception: if there is imminent danger of grave or irreparable injury to the partnership.

No Agreement as to Management

All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership. Exception: None of the partners may, without the consent of the others, make an important alteration in the immovable property of the partnership (even if useful). Exception to the exception: if refusal of consent is manifestly prejudicial, court intervention may be sought.

Right to associate with another person in his share (Art. 1804)

Every partner may associate another person with him in his share, but the associate cannot be admitted into the partnership without the consent of all the agents or partners.

Right to demand a formal account (Art. 1809)

In the following cases: a. A partner was wrongfully excluded, b. When there is a stipulation granting such right, c. As to information affecting partnership affairs, d. Whenever just and reasonable.