Obligations of the Partners PDF

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CHAPTER 2. OBLIGATIONS OF THE PARTNERSSECTION 1.OBLIGATIONS OF THE PARTNERS AMONG THEMSELVESRelations 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; 4.) Relatio...

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THE LAW ON PARTNERSHIP 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; 4.) Relations of the partners with third persons. Rights and obligations, in general, or partners inter se

Where a partnership relation results, the law itself fixes the incidents and consequences of this relation if the parties fail to do so. This is true even if parties call their relation something different or state that they are not partners. Executory agreement of partnership The above rule on commencement of a partnership is not absolute. Future partnership The partners may stipulate some other date for the commencement of the partnership. There can be a future partnership which at the moment has no juridical existence yet. If it is not to start within a year of the making of the contract, it should be in writing in order to be enforceable (Statute of Frauds).

Partnership relationship essentially one of mutual trust and confidence Each partner is a trustee and a cestui que trust at the same time. Agreement to create partnership He is a trustee to the extent that his duties bind him, a cestui que A partnership in fact cannot be predicated on an agreement to enter trust as far as the duties that rest on his co- partners. into a co-partnership at a future day unless it is shown that such an agreement was actually consummated. So long as the agreement Fiduciary relationship remains until partnership terminated remains executory the partnership is inchoate. The relation of trust applies also to matters concerned with the The death of either party to an executory agreement prevents the formation of the partnership and when a partnership is dissolved, formation of the firm, since such agreement is based on the the assets of the partnership must still be managed in accordance continuance of the life of each. with this fiduciary principle. The fiduciary obligation of a partner remains until the relationship is terminated and the equities Failure to agree on material terms between the partners adjusted and satisfied. May prevent any rights and obligations from arising on either side for lack of complete contract. Relationship in a limited partnership The relationship between a limited partner and the other partners Art. 1785. When a partnership for a fixed term or particular in a limited partnership does not involve the element of trust and undertaking is continued after the termination of such term or confidence, as in the case of a general partnership. particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such Art. 1784. A partnership begins from the moment of the execution termination, so far as is consistent with a partnership at will. A continuation of the business by the partners or such of them as of the contract, unless it is otherwise stipulated. habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a Commencement and term of partnership continuation of the partnership. As a consensual contract, a partnership exists from the moment of the celebration of the contract. Its registration with the SEC is not Continuation of partnership beyond fixed term essential to give it juridical personality. A partnership with a fixed term is one which the term of its The birth and life of a partnership is predicated on the mutual existence has been agreed upon expressly (definite period) or desire and consent of the parties. Unlike corporations, no time impliedly (particular enterprise or transaction). The expiration of limit is prescribed by law for a partnership’s lifetime. Partners may such term or accomplishment of undertaking will cause automatic dissolution. fix in their contract any term. Rules governing partnership relation What is necessary for the existence of partnership is that the essential requisites of a contract of partnership are present even when the partners have not yet actually started business/given contributions, etc.

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Rights and duties of partners Partnership 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 remain the same.

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Atty. Maan Grace B. Elago

THE LAW ON PARTNERSHIP With such continuation, the partnership is dissolved and a new one, a partnership at will, is created by implied agreement the continued existence of which will depend upon the mutual desire and consent of the partners. Dissolution of partnership Any one of the partners may, at his sole pleasure, dictate dissolution of a partnership at will. He must, however, act in good faith or else be liable for damages. Even a partnership for a fixed term may be terminated by the express will of any partner before the time mentioned. There is no such thing as an indissoluble partnership.

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. This matter is governed by the law on sales. Liability of partner for fruits of property in case of delay No demand is necessary to put the partner at fault. The injury to the partnership is constant. Liability of partner for failure to perform service stipulated

Continuation of partnership for an indefinite term Partnership for a term impliedly fixed An agreement 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. 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 he had 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, 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 in its contribution.

Partner generally not liable Unless there is a special agreement to that effect, the partners are not entitled to charge each other, or the partnership, for their services in the firm business. Exception The general rule that partners are not entitled to compensation for their services is inapplicable where the reason of it fails. If a partner neglects or refuses, without reasonable cause, to render the service which he agreed to perform by reason of which the partnership suffered loss, he should be responsible for this breach. 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 assets – this cannot be considered compensation for services rendered. The proper measure of damages in such case is the value of services wrongfully withheld. 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 the account of the partnership. Appraisal of goods or property contributed Appraisal is necessary to determine how much has been contributed by the partners. In the absence of stipulation, the share of each partner in the profits or losses is in proportion to what he may have contributed.

Failure to contribute makes the partner ipso jure a debtor of the partnership even in the absence of any demand.

The appraisal is made: 1.) In manner prescribed by contract of partnership; 2.) If no stipulation, by experts chosen by the partners and according to current prices.

Remedy: not rescission but an action for specific performance (to collect what is owing) with damages and interest.

After the goods have been contributed, the partnership bears the risk or gets the benefits of subsequent changes of value.

Effect of failure to contribute property promised

1st Semester, SY 2021- 2022

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Atty. Maan Grace B. Elago

THE LAW ON PARTNERSHIP In the case of immovable property, the appraisal is made in the inventory of said property; otherwise it may be made as provided in art. 1787.

may have obtained in violation of this provision, with a right to damages in either case. Obligations of industrial partner

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.

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 Obligations with respect to contribution of money and money exclusive right to avail itself of his industry. Consequently, if he engages in business for himself, such act is considered prejudicial to converted to personal use the interest of the other partners. 1.) To contribute on the date due the amount he has undertaken Action for specific performance not available against him – to contribute; 2.) To reimburse any amount he may have taken from the involuntary servitude. partnership coffers and converted to his own use; 3.) To pay the agreed or legal interest, if he fails to pay his Prohibition against engaging in business contribution on time or in case he takes any amount from the As regards an industrial partner common fund and converts it to his own use; 4.) To indemnify the partnership for the damages caused to it by Absolute prohibition: any kind of business. the delay in the contribution or for the conversion of any sum As regards capitalist partners for his personal benefit. Prohibition extends only to any operation which is of the same kind of business in which the partnership is engaged. Liability of guilty partner for interest and damages The guilty partner is liable for interest and damages not from the time judicial or extra judicial 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. Unless otherwise stipulated, obligation to contribute arises from the commencement of the partnership (perfection of the contract). Liability of partner for failure to return partnership money received

Remedies where industrial partner engages in business The capitalist partners have the right either to: 1.) Exclude him from the firm; or 2.) Avail themselves of the benefits which he may have obtained. In either case, they have a right to damages. Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. Extent of contribution to partnership capital

Where fraudulent misappropriation committed Partner is guilty of estafa if he misappropriates partnership money or property received by him for a specific purpose of the partnership. Where there is mere failure to return No estafa. Remedy: civil action for liquidation of the partnership and a levy of its assets. 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

1st Semester, SY 2021- 2022

Partners can stipulate contribution of unequal funds to the common fund, but in the absence of such stipulation, the presumption is that their contribution shall be in equal shares. Obviously, this does not apply to an industrial partner unless he also contributes capital.

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 be obliged to sell his interest to the other partners.

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Atty. Maan Grace B. Elago

THE LAW ON PARTNERSHIP Obligation of capitalist partner to contribute additional capital General rule: Capitalist partner not bound to contribute more than what he agreed to.

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.

Except: In case of 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.

Art. 1793. A partner who has received, in whole or in part, his share of a partnership, 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.

Requisites for application of rule 1.) Imminent loss of the business of the partnership; 2.) Majority of capitalist partners are of the opinion that an additional contribution to the common fund would save the business; 3.) Capitalist partner refuses deliberately (not coz he ain’t got no money) 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.

Obligation of partner who receives share of partnership credit

The industrial partner is exempt. Having contributed his entire industry, he can do nothing further. Reason for the sanction Refusal of partner to contribute additional share reflects lack of interest in the continuance of the partnership. 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 debtor by article 1252, but only if the personal credit of the partner should be more onerous to him.

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; 3.) The partnership debtor has become insolvent. Reason for imposing obligation to return The debt becomes a bad debt. It would be unjust for that one partner not to share in the loss. Provision is based on community of interest among the partners. 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. Obligation of partner for damages to partnership This article follows the general rule in contracts that any person guilty of negligence or fault in the fulfillment of his obligation shall be liable for damages. The partner’s fault, however, must be in accordance with the nature of the obligation and the circumstances of the person, time and place.

Obligation of managing partner who collects debt

Compensation of damages with profits earned for partnership by guilty partner

Requisites for application of rule 1.) There exists at least two debts, one where the collecting partner is creditor, and the other, where the partnership is creditor; 2.) Both debts are demandable; 3.) The partner who collects is authorized to manage and actually manages the partnership.

Damages not generally subject to set-off GR: 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. EXC: 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.

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Atty. Maan Grace B. Elago

THE LAW ON PARTNERSHIP 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 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 risks 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. Risk of loss of things contributed 1.) Specific and determinate things which are not fungible where only the use is contributed - Risk of loss 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 - Risk of loss for the account of partnership as owner. 3.) Fungible things or things which cannot be kept without deteriorating even if they are contributed only for the use of the partnership - Risk of loss borne by partnership. Ownership was being transferred since use is impossible without the things being consumed or impaired. 4.) Things contributed to be sold - Partnership bears risk of loss. Partnership intended to be owner or it could not effect the sale. 5.) Things brought and appraised in the inventory - Partnership bears risk of loss because intention of 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. Art. 1796. The partnership shall be responsible to every partner for the amounts he may have disbursed...