Chapter II Section I - Obligations OF THE Partners Among Themselves PDF

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LAW ON PARTNERSHIPChapter IISection IOBLIGATIONS OF THE PARTNERSAMONG THEMSELVESCIVIL CODE OF THE PHILIPPINESArt. 1784- 1809RELATIONS CREATED BY A CONTRACT OF PARTNERSHIP Among the partners themselves The partners with the partnership The partnership with third persons The partners with third person...

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LAW ON PARTNERSHIP Chapter II Section I OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES CIVIL CODE OF THE PHILIPPINES Art. 1784-1809

RELATIONS CREATED BY A CONTRACT OF PARTNERSHIP 1. 2. 3. 4.

Among the partners themselves The partners with the partnership The partnership with third persons The partners with third persons

*The partnership relationship is essentially on of mutual trust and confidence, the law imposes upon the partners highest standards of integrity and good faith in their dealings with each other. *A partner is both principal and an agent in relation to his co−partners. In a limited partnership, it does not involve the element of trust and confidence, as in the case of general partnership Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. COMMENCEMENT AND TERM OF PARTNERSHIP − Consensual contract − Its registration in the SEC is not essential to give it juridical personality − The birth and life is predicated on the mutual desire and consent of the parties FUTURE PARTNERSHIP − Partners may stipulate some other date for the commencement of the partnership − It can be in future time or based on happening of some future contingency − It has no juridical personality at the moment AGREEMENT TO CREATE PARTNERSHIP − This is different from a partnership actually consummated − This is still inchoate Art. 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. (n)

PARTNERSHIP WITH A FIXED TERM − One which the term of its existence has been agreed upon expressly or impliedly. − The expiration of the term fixed or completion of the undertaking will automatically dissolve the partnership DISSOLUTION OF PARTNERSHIP − One of the partners may dictate a dissolution at will but he must act in good faith − A partnership with fixed term may be terminated prior to the expiration of the term

PARTNERSHIP FOR A TERM IMPLIEDLY 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 Art. 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 promised 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 4. To preserve the property with diligence of a good father of a family pending delivery 5. To indemnify the partnership for any damage caused to it by the retention of the property or by delay in its contribution EFFECT OF FAILURE TO CONTRIBUTE PROPERTY PROMISED − It will make the partner ipso jure a debtor of the partnership even in the absence of any demand − The remedy is not rescission but an action for specific performance with damages and interest from the defaulting partner LIABILITY OF PARTNER IN CASE OF EVICTION − Eviction shall takes place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee (partnership) is deprived of the whole or a part of the thing purchased − Governed by the law on sales (Art. 1547) LIABILITY OF PARTNER FOR FRUITS OF PROPERTY IN CASE OF DELAY − No demand is necessary − From the time the partner ought to deliver up to the time of actual delivery LIABILITY OF PARTNER FOR FAILURE TO PERFORM SERVICE STIPULATED − Partners are not entitled to charge each other except when there is a stipulation providing otherwise − If a partner neglects or refuses to render service without justifiable cause, which caused loss to the partnership, he may be held liable Art. 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. (n) APPRAISAL OF GOODS OR PROPERTY CONTRIBUTED − Appraisal is necessary to determine how much has been contributed by the partners

− 1. 2.

The appraisal is made by: Stipulation If there is no stipulation − experts chosen by the partners and according to current prices

Art. 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. (1682) OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF MONEY (PAR. 1) AND MONEY CONVERTED TO PERSONAL USE (PAR. 2) 1. To contribute on the date due 2. To reimburse any amount he may have taken for his own use 3. To pay the agreed or legal interest, if he fails to pay on time

LIABILITY OF GUILTY PARTNER FOR INTEREST AND DAMAGES − It will start from the time when the partner should have made the contribution or the time he converted the money to his own use and not to the time of the judicial or extra−judicial demand LIABILITY OF PARTNER FOR FAILURE TO RETURN PARTNERSHIP MONEY RECEIVED − Estafa (Art 315 of the RPC) − if he misappropriate partnership money or property received by him for a specific purpose − Mere failure to return is not an act under estafa Art. 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. (n) INDUSTRIAL PARTNER − The one who contributes his industry, labor, or services to the partnership − He becomes the debtor of the partnership for his work or services − The partnership acquires an exclusive right to avail itself of his industry − Action for specific performance is not available as a remedy because it will amount to involuntary servitude PROHIBITION AGAINST ENGAGING IN BUSINESS 1. Industrial Partner o Absolute prohibition o Applies whether he would engage in the same business or not o To prevent any conflict of interest 2. Capitalist Partner o Prohibition only extends to any operation which is of the same kind of business in which the partnership is engaged

REMEDIES WHERE INDUSTRIAL PARTNER ENGAGES IN BUSINESS − Exclude him from the firm or avail themselves of the benefits which he may obtained − Right to damages − Mere toleration by the partnership will not exempt the industrial partner from liability Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. (n) EXTENT OF CONTRIBUTION TO PARTNERSHIP CAPITAL − Partner can stipulate the contribution of unequal shares to the common fund − Absence of stipulation, there is a presumption that the contribution is in equal shares Art. 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. (n) OBLIGATION OF CAPITALIST PARTNER TO CONTRIBUTE ADDITIONAL CAPITAL GR: capitalist partner is not bound to contribute more than what he agreed to contribute EXPN: imminent loss of the business − He is under obligation to contribute an additional share to save the venture − If he refuses, he shall be obliged to sell his interest to the other partners Requisites for application of rule 1. Imminent loss of the business 2. Majority of the capitalist partners are of the opinion that an additional contribution to the common fund would save the business 4. There is no agreement *Industrial partner is exempted Art. 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. (1684) OBLIGATION OF MANAGING PARTNER WHO COLLECTS DEBT GR: If there is debt to the partnership and to the managing partner, payment shall be applied to both credits proportionately EXPN: it was received for the account of the partnership only REQUISITE FOR THE APPLICATION OF THE RULE 1. There are at least 2 debts; one from the partners and the other to the partnership 2. Both debts are demandable 3. The partner who collects is authorized to manage and actually manages the partnership

Art. 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. (1685a) OBLIGATIONS OF PARTNER WHO RECEIVES SHARE OF PARTNERSHIP CREDIT − There is only one credit, the credit in favor of the partnership REQUISITES FOR APPLICATION OF THE RULE 1. A partner has received, whole or in part, his share of the partnership cred 2. The other partners have not collected their shares 3. The partnership debtor has become insolvent CREDIT COLLECTED AFTER THE DISSOLUTION OF THE PARTNERSHIP Q: would the obligation under art. 1793 for the partner who has collected his share in the partnership credit to share it with the others who have not collected theirs when the debtor becomes insolvent apply after the dissolution of the partnership? There are commentators who said YES because of the COMMUNITY OF INTEREST AND EQUALITY among partners But Manresa and Ricci held otherwise. e.g. After the dissolution of the partnership, the partnership credit will be divided among partners who assume the obligation to COLLECT THEIR RESPECTIVE SHARES 1. It would be unfair and unjust for the MORE DILIGENT partner who has already collected his credit to bear the NEGLIGENCE of the other partners who were unable to collect. It would be unfair for his to suffer their DEFAULT 2. When the partnership is DISSOLVED, the tie that unites the partnership ceases, hence, the obligation under Art. 1793 has no foundation anymore. Art. 1793 presupposes the existence of a PARTNERSHIP CAPITAL. After dissolution, the shares of each principal partners are returned and hence, there is no more common property or partnership capital. If at all there remains a COMMON CREDIT among them (credit owned in common) but NOT a partnership capital Art. 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. (1686a) OBLIGATION OF PARTNER FOR DAMAGES TO PARTNERSHIP GR: Every partner is responsible to the partnership for damages suffered by it thru his FAULT and he cannot compensate it with the PROFITS AND BENEFITS which he may have earned for the partnership by his industry REMEDY OF THE PARTNER HELD LIABLE − The courts may EQUITABLY LESSEN THIS RESPONSIBILITY if thru the EXTRAORDINARY EFFORTS of the partner in OTHER ACTIVITIES of the partnership, UNUSUAL PROFITS may have been realized

COMPENSATION OF DAMAGES WITH PROFITS EARNED FOR PARTNERSHIP BY GUILTY PARTNER GR: There shall be no compensation Reason: There are 2 reasons given: 1. The partner is responsible to SECURE BENEFITS for the partnership. Hence, all the profits earned shall pertain as a matter of law or right to the partnership 2. Compensation takes place when the negligent partner is both a creditor and debtor of the partnership. A partner however is a DEBTOR of the partnership for his industry and he shall be liable for the injury suffered by it caused by his fault. Hence, there cannot be any compensation EXPN: When UNUSUAL PROFITS may have been realized by the partnership thru the extraordinary efforts of the partner, the courts may MITIGATE OR LESSEN the liability for damages Art. 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 contribute 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. (1687) GR: the risk of SPECIFIC AND DETERMINATE THINGS, which are NOT FUNGIBLE, contributed to the partnership so that only their USE AND FRUITS are for the common benefit shall be borne by the PARTNER who owns it GR: The following shall be borne by the partnership: 1. When the thing contributed is FUNGIBLE 2. Thing which cannot be kept without deteriorating 3. Contributed to be sold EXPN: 1. When the thing promised has NOT YET BEEN DELIVERED to the partnership 2. When the loss is due to the fault of any of the partners, in which case, the said partner shall be liable for damages to the partnership in accordance with Art. 1794 GR: When the thing brought is appraised in the inventory, the STIPULATION of the parties will govern EXPN: When there is no stipulation, then the risk shall be borne by the PARTNERSHIP and in which case, the value appraised shall be the limit of the claim

RISK OF LOSS OF THINGS CONTRIBUTED 1. Risk of SPECIFIC AND DETERMINATE THINGS which are NOT FUNGIBLE where THE USE is the only thing contributed − Risk of loss: The OWNER of the thing because he remains to be the owner 2. Risk of SPECIFIC AND DETERMINATE THINGS which are NOT FUNGIBLE where THERE IS A TRANSFER OF OWNERSHIP − Risk of loss: shall be borne by the PARTNERSHIP − Reason: because the ownership is transferred to the partnership (res perit domino) 3. FUNGIBLE THINGS (right term should be consumable) or THINGS WHICH CANNOT BE KEPT WITHOUT DETERIORATING even if ONLY THE USE is contributed

− Risk of loss: PARTNERSHIP − Reason: because the ownership is intended to be transferred because USE IS IMPOSSIBLE without such transfer because the thing is CONSUMMED OR IMPAIRED − E.G. Oil, rice, wine 4. − −

WHERE THE THING CONTRIBUTED IS TO BE SOLD Risk of loss: Partnership Reason: because the partnership cannot sell it without it being the owner

5. THINGS BROUGHT AND APPRAISED IN THE INVENTORY − Risk of loss: Partnership − Reason: because it is to be presumed that the parties intended the PRICE to be contributed to the partnership for the thing appraised. Hence, the PRICE is deemed as the appraised value There is in effect an IMPLIED SALE − The parties contributed the PRICE to buy the land (appraised) belonging to the partner *this article presupposes actual or constructive delivery Art. 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. (1688a) GR: Every partner is AN AGENT of the partnership for purposes of its business EXPN: when there is a stipulation to the contrary RESPONSIBILITY OF HE PARTNERSHIP TO THE PARTNERS 1. Obligation to REFUND THE AMOUNT disbursed by the partner in behalf of the partnership PLUS interest from the time the expenses WERE CONTRACTED (and not from the time of DEMAND) o Here, the law contemplates A LOAN OR ADVANCES MADE by partner AND not the capital contributed by him 2. To answer for the OBLIGATIONS contracted by the partner in GOOD FAITH in the interest of the partnership business 3. Answer for the risks in consequence of its management Art. 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. (1689a) GR: The profits and losses shall be distributed in conformity with the agreement (PROFITS AND LOSSES AGREED UPON) EXPN:

1. If only the share in the profits are agreed upon, the share in the losses shall also be in the same proportion 2. If there is no agreement as to the share in the losses and profits, then, each partner shall have a share in the same in proportion to what he may have contributed BUT: Exception to the exception: 1. The INDUSTRIAL PARTNER shall not be liable for the losses 2. The industrial partner shall be entitled to a share in the profits as may be JUST AND EQUITABLE under the circumstances 3. If the industrial partner, ASIDE FROM HIS SERVICES, contributed capital, he shall also receive a share in the profits in proportion to his capital THE RULES IN DISTRIBUTION OF PROFITS a. If there is an agreement − The share of the partners in the profits shall be in accordance with their agreement − So if they agreed that it shall be 50−50, so be it − Subject to Art. 1799 which provides that a STIPULATION which excludes any partner from the share in the profits and losses shall be void b.

If there is no agreement

o

CAPITALIST PARTNERS

− The share of the capitalist partners shall be in proportion to their CAPITAL CONTRIBUTION − So it depends on HOW MUCH they have given in the partnership (if A contributed P3000 and B contributed only P1000, then, A should receive twice as much) − BASIS: Presumed WILL of the parties 2.

INDUSTRIAL PARTNERS

− Their share must be that which is JUST AND EQUITABLE under the circumstances − Their share must be satisfied first before the CAPITALIST PARTNERS divide the profits − Their share, LIKE THAT PERTAINING TO THE CAPITALIST PARTNERS, is not fixe...