Finals Reviewer PARTNERSHIP 1st Sem; 2003

INTRODUCTION the Roman law, the law merchant and equity, and the
common law courts.
Brief Historical Background
Governing law in our jurisdiction
Devel opm ent of partnershi – The earliest form of
p Before the new Civil Code, commercial or mercantile
conducting business was the single entrepreneur partnerships were governed by the Code of Commerce
ownership plan (one individual). Under this system, and non-commercial or civil partnerships by the old
growth of the business was limited (limitation of capital, Spanish Civil Code. The new Civil Code superseded the
skill or knowledge) and so partnership was developed. old Civil Code and expressly repealed in toto the
provisions in the Code of Commerce relating to
Ancient srcin of p artnership as a b usiness partnerships. Consequently, the new Civil Code
org anization – Development of partnership often provisions are intended to provide all the rules regarding
credited to the Romans. partnerships. There is no more distinction between
Historically, partnership was used long before the commercial and civil partnerships.
Romans. As early as 2300 B.C. the Babylonian system of The partnerships contemplated are those formed for
laws provided for regulation of partnership. Commercial private interest or purpose.
partnerships at that time were generally for single
transactions or undertakings. Sources of our law on partnership
Following the Babylonian period, there were clear-cut The Civil Code provisions on partnership were mostly
references to partnerships in Jewish law. taken from the old Civil Code and from the US’s Uniform
Partnership Act and the Uniform Limited Partnership Act.
The relative new ness of the law of p artnership – Some provisions were taken from the Code of
Despite its long history of use, there is not a Commerce as well as from the opinions of civilians. New
correspondingly long line of precedents and decisions rules were also formulated by the Code Commission.
dealing with the subject. This is because English courts
of justice scarcely dealt with the subject. Disputes
between merchants were disposed of by special courts. CHAPTER 1. GENERAL PROVISIONS
The law of m erchants – In the Middle Ages,
merchants had a special and peculiar kind of law that Art. 1767. By the contract of partnership two or
was applicable to them and their legal affairs. more persons bind themselves to contribute
During this period, the common law courts of money, property, or industry to a common fund,
England were slow and methodically exact as to form. with the intention of dividing the profits among
Merchants moved more rapidly than the law and themselves.
required speedier justice. Hence, the special courts. Two or more persons may also form a
English
courts law discontinued
were of part nership
and–the lawIn courts
time the special
took over. partnership for the exercise of a profession.
Chief Justice, Lord Mansfield sought to establish a Concept of partnership
common law for commercial matters. It was not until The above article gives the legal definition of
the latter years of the 18th century that the law of partnership (often called “co-partnership”) from the
partnership as we know it today began to assume both viewpoint of a contract.
form and substance. Partnership, however, has also been defined as:
In 1778, Lord Mansfield decided a case that dealt 1.) An association;
with the rights of partnership. In 1794, William Watson 2.) A legal relation;
wrote a text on partnership. 3.) A status;
Beginning of law of partn ership – These two 4.) An organization;
sources mark the beginning of printed precedents and 5.) An entity;
the publication of the principles of law in partnerships. 6.) A joint undertaking.
Increase in use of partnership and complexity of [See pp. 7-8 of De Leon (2002 Ed.) for full definitions. I think
business brought forth a rapid succession of decisions on OK na if we just know the codal definition anyway.]
partnerships. Partnership is a legal concept, but the determination
of the existence of a partnership may involve inferences
Am erica n Uniform Acts – Attempt made in US to drawn from the circumstances attending its creation and
secure uniformity of state laws dealing with partnership. operation.
The Uniform Partnership Act and the Uniform Limited
Partnership Act helped to achieve this uniformity. The Civil law concept and American concept of partnership
Uniform Partnership Act is similar with England’s distinguished
Partnership Act of 1890. English settlers brought the Civil Code American
partnership concept to their new country as part of the Basis of Partnership as a Partnership as a
common law. concept contract: the relation: the
Modern partnership law contains a combination of agreement itself result of the
principles and concepts developed from three sources: out of which a contract or

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Finals Reviewer PARTNERSHIP 1st Sem; 2003

partnership is agreement; the 3.) Bilateral: two or more parties, reciprocal rights
created. juridical relation. and obligations;
Possession “Entity theory”: “Aggregate 4.) Onerous: Each of the parties aspires to procure
of separate Partnership has a theory”: No a benefit through the giving of something;
personality juridical separate juridical 5.) Commutative: undertaking of each partner is
personality of its personality; considered the equivalent of that of the others;
own, distinct and merely an 6.) Principal: does not depend upon some other
separate from that extension of its contract for its existence/validity;
of each of the members, a 7.) Preparatory: entered into as a means to an end.
partners. conglomerate of A partnership contract, in its essence, is a contract of
individuals. agency.
Tax Partnerships, Partnership not
Consequence except general taxed. Individual Essential features of partnership
professional members 1.) There must be a valid contract;
partnerships, are severally pay 2.) Parties must have legal capacity to enter into
treated for income their income the contract;
tax purposes as taxes, partnership 3.) Mutual contribution of money, property, or
corporations and regarded merely industry to a common fund;
subject to tax as as source of 4.) Object must be lawful;
such. income. 5.) Primary purpose: to obtain profits and to divide
them among the parties.
General Professional Partnership It is also required that the articles of partnership
Par. 2 relates to the exercise of a profession. must not be kept secret among the members;
[Profession: a group of men pursuing a learned art as a otherwise, the association shall have no legal personality
common calling in the spirit of public service – no less a public and shall be governed by the provisions relating to co-
service because it may incidentally be a means of livelihood.] ownership.
The practice of a profession is not a business or an
enterprise for profit. However, the law allows the joint Existence of a valid contract
pursuit thereof by two or more persons as partners. It is Partnership rel ation fundam entally c ontr actual
the individual partners, and not the partnership, who – Partnership is a voluntary relation created by
engage in the practice of the profession and are agreement of the parties.
responsible for their own acts as such. The law does not Actually, the partnership relation is not the contract
allow the practice of a profession as a corporate entity. itself, but the result of the contract.
Personal qualifications for such practice cannot be Form – The relation is evidenced by the terms of
possessed by a corporation.
the contract
implied from which may
the acts bedeclarations
and oral or written, express
of the or
parties.
Partnership for the practice of law Art icles of par tn ership – While the partnership
A m ere ass ocia tion for non-b usiness purp ose - relation may be informally created and its existence
Right to practice law not a constitutional right but a proved by the manifestations of the parties, it is
privilege or franchise. It cannot be likened to customary to embody the terms of the association in a
partnerships formed by other professionals or for written document known as “Articles of Partnership”.
business. Requ isites – Since partnership is contractual, all
It is not formed for the purpose of carrying on trade the essentials of a valid contract must be present:
or business or of holding property. Thus, use of a nom 1.) Consent and capacity of parties;
de plume, assumed, or trade name is improper. 2.) Object;
Distinguished from business – It is intimately and 3.) Cause.
peculiarly related to the administration of justice; not a A person cannot enter into a contract of partnership
mere money-making trade. Primary characteristics solely by himself; there must be two contracting parties.
which distinguish it: For a partnership to be valid, there must be a valid
1.) Duty of public service; consideration existing as between the partners. Each
2.) Relation as an officer of court to the surrenders to the partnership some sort of contribution.
administration of justice; Partnership relation fidu cia ry in natu re –
3.) Highly fiduciary relation to clients; Partnership is a form of voluntary association entered
4.) Relation to colleagues at the bar characterized into by the associates. It is a personal relation in which
by candor, fairness, etc. the element of delectus personae exists, involving as it
does trust and confidence between the partners.
Characteristic elements of partnership Membership requires the consent of all. Its fiduciary
1.) Consensual: perfected by mere consent nature and the liability of each partner for the acts of
(express/implied); the others require that each person be granted the right
2.) Nominate: has a special name/designation in our to choose with whom he will be associated with.
law;

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Finals Reviewer PARTNERSHIP 1st Sem; 2003

Among partners, mutual agency arises and the Proof of c ontr ibution – Proof is necessary that
doctrine of delectus personae allows them to have the there be contribution of money, property, or industry to
power to dissolve the partnership. Any partner may, at a common fund with the intention of dividing the income
his sole pleasure, dictate dissolution at will. He must, or profits obtained therefrom. If only one partner gives,
however, act in good faith or he’ll be liable for damages. no enforceable contract exists.
Application of prin ciples of estop pel –
Partnership liability may be imposed when one holds Legality of the object
himself out, or permits himself to be held out, as a The object is unlawful when it is contrary to law,
partner. There is no actual or legal partnership relation morals, good customs, public order, or public policy. If
but merely a partnership liability imposed by law in purpose unlawful, no partnership can arise as the
favor of third persons. contract is inexistent and void ab initio.

Legal capacity of the parties to enter into the Purpose to obtain profits
contract The very reason fo r existence of part nership –
I nd ividuals – General rule: any person who is The idea of obtaining pecuniary profit or gain is the very
capable of entering into contractual relations may be a reason for the existence of a partnership.
partner. The following cannot: Need only be th e principal, not exclusi ve aim –
1.) Minors; pecuniary profit need not be the exclusive aim. It is
2.) Insane or demented persons; sufficient that it is the principal purpose even if there
3.) Deaf-mutes who do not know how to write; are, incidentally, other ends.
4.) Persons who are suffering from civil interdiction;
5.) Incompetents who are under guardianship. Sharing of profits
Persons who are prohibited from giving each other Not necessarily in equ al shares – There must be
any donation cannot enter into a universal partnership. intention to divide the profits but not necessarily in
Partn erships – There is no prohibition against a equal shares. There must be a joint interest in the
partnership being a partner in another partnership. All profits.
the members of the constituent partnerships will be held A stipulation which excludes a partner from any
liable to the creditors of the combined partnership. participation in the profits is void.
Corp orat ions – Unless authorized by statute or by Not concl usive evidence of p artnership – The
its charter, a corporation is without capacity or power to sharing of profits is merely presumptive and not
enter into a contract of partnership. This is based on conclusive evidence of partnership.
public policy, since in a partnership the corporation
would be bound by the acts of persons who are not its Sharing of losses
duly appointed and authorized agents and officers, Necessary corollary of sh aring in p rofit s– The

which would be shall

the corporation entirely inconsistent
manage its ownwith theseparately
affairs policy that right to share
contribute in the
to the profits
losses, carries
if any. with it the in
A community duty to is
losses
and exclusively. a necessary corollary of a participation in profits.
Exceptions: Agreem ent n ot n eces sary – It is not necessary for
1.) Joint ventures where the nature of the venture is the parties to agree on a system of sharing losses, for
in line with the business authorized by its the obligation is implied from the partnership relation. If
charter. only the share of each partner in the profits has been
2.) Partnership agreement provides that the two agreed upon, the share of each in the losses shall be in
partners will manage the partnership so that the the same proportion.
management of corporate interest is not Generally, a stipulation which excludes one or more
surrendered. partners from any share in the profits or losses is void.
3.) Entry of foreign corp as a limited partner in a
limited partnership merely for investment Art. 1768. The partnership has a juridical
purposes. personality separate and distinct from that of each
of the partners even in case of failure to comply
Contribution of money, property, or industry to a with the requirements of art. 1772, 1st paragraph.
common fund
Existen ce of pro priet ary int erest – The partners Partnership, a juridical person
must have a proprietary interest in the business or As an independent juridical person, a partnership
undertaking, that is, they must contribute capital which may enter into contracts, acquire and possess property
may be money, or property, or their services, or both, to of all kinds in its name, as well as incur obligations and
the common business. bring civil or criminal actions.
Mon ey – Legal tender in the Phils. Thus, a partnership may be declared insolvent even if
Proper ty – Real or personal, corporeal or incorporeal. the partners are not. It may enter into contracts and
I ndustr y – Active cooperation, the work of the party may sue and be sued in its firm name or by its duly
associated.
authorized representative. It is sufficient that service of
summons be served on any partner.

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Finals Reviewer PARTNERSHIP 1st Sem; 2003

Partners cannot be held liable for the obligations of 1769 shall apply. This article seeks to exclude from the
the partnership unless it is shown that the legal fiction of category of partnership certain features enumerated
a different juridical personality is being used for a therein which, by themselves, are not indicative of the
fraudulent, unfair or illegal purpose. existence of a partnership.

Effect of failure to comply with statutory Persons not partners as to each other
requirements Persons who are partners as between themselves are
Under art . 1772 – Partnership still acquires partners as to third persons. Generally, the converse is
personality despite failure to comply with the true: if they are not partners between themselves, they
requirements of execution of public instrument and cannot be partners as to third persons.
registration of name in SEC. Partnership is a matter of intention, each partner
Under arts. 1773 and 17 75 – Partnership with giving his consent to become a partner. However,
immovable property contributed, if without requisite whether a partnership exists between the parties is a
inventory, signed and attached to public instrument, factual matter. Where parties declare they are not
shall not acquire any juridical personality because the partners, this, as a rule, settles the question between
contract itself is void. This is also true for secret themselves. But where a person misleads third persons
associations or societies. into believing that they are partners in a non-existent
partnership, they become subject to liabilities of
To organize a partnership not an absolute right partners (doctrine of estoppel).
It is but a privilege which may be enjoyed only under Whether or not the parties call their relationship or
such terms as the State may deem necessary to impose. believe it to be a partnership is immaterial. Thus, with
the exception of partnership by estoppel, a partnership
Art. 1769. In determining whether a cannot exist as to third persons if no contract of
partnership exists, these rules shall apply: partnership has been entered into between the parties
1.) Except as provided by art. 1825, persons themselves.
who are not partners as to each other are
not partners as to 3rd persons; Co-ownership or co-possession
2.) Co-ownership or co-possession does not of There is co-ownership whenever the ownership of an
itself establish a partnership, whether such undivided thing or right belongs to different persons.
co-ownership or co-possessors do or do not Clear i ntent to derive profits from operation of
share any profits made by the use of the bu siness – Co-ownership does not of itself establish the
property; existence of a partnership, although it is one of its
3.) The sharing of gross returns does not of essential elements. This is true even if profits are
itself establish a partnership, whether or derived from the joint ownership. The profits must be

not the persons

or common rightsharing them
or interest inhave a joint
any property derived from the operation
of the association of business
and not merely from by the members
property
from which the returns are derived; ownership.
4.) The receipt by a person of a share of the The law does not imply a partnership between co-
profits of a business is prim a faci e evidence owners because of the fact that they develop or operate
that he is a partner in the business, but no a common property, since they may rightfully do this by
such inference shall be drawn if such virtue of their respective titles. There must be a clear
profits were received in payment: intent to form a partnership.
a.) As a debt by installments or Existence of fiduciary r elation ship – Partners
otherwise; have a well-defined fiduciary relationship between them.
b.) As wages of an employee or rent to Co-owners do not. Should there be dispute, the remedy
a landlord; of partners is an action for dissolution, termination and
c.) As an annuity to a widow or accounting. For co-owners it would be one, for instance,
representative of a deceased for non-performance of contract.
partner; People can become co-owners without a contract but
d.) As interest on a loan, though the they cannot become partners without one.
amount of payment vary with the Pers ons li ving togeth er w ithout ben efit of
profits of the business; m arriag e – Property acquired governed by rules on co-
e.) As the consideration for the sale of a ownership.
goodwill of a business or other
property by installments or Sharing of gross returns
otherwise. Not even presum ptive evidence of partnership –
The mere sharing of gross returns alone does not even
Rules to determine existence of partnership constitute prima facie evidence of partnership, since in a
In general, to establish the existence of a partnership, the partners share profits after satisfying all
partnership, all of its essential features or characteristics of the partnership’s liabilities.
must be shown as being present. In case of doubt, art.

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