Art. 1784.

A partnership begins from the moment of the execution of the contract, unless it
is otherwise stipulated. (1679)

General Rule:
A partnership begins from the moment of the execution of the contract.

Example:
X and Y entered into a contract of partnership on July 2, 2016. Here, the life of their
partnership begins on July 2, 2016, when the parties executed their contract of partnership.

Exception:
The partners can agree on some other date for the start of the partnership.

Example:
X and Y entered into a contract of partnership on July 2, 2016. However, X and Y agreed
that the commencement of their contract of partnership will be on September 1, 2016. Here
the life of their partnership begins on September 1, 2016 as agreed upon und not on July 2,
2016

Note: As of July 2, 2016 the partnership to be formed by X and Y is a future partnership which
has no juridical existence yet. Consequently, there is no partnership yet from July 2, 2016 to
August 30, 2016. Therefore, there is no obligation nor right to speak of.

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

It is one where the life or period of existence of the partnership has been agreed upon by
the partners.

Partnership for a particular undertaking

It is one where it will exist until the purpose is accomplished.

Partnership at will
A partnership that does not fix its term is a partnership at will. The birth and life of a
partnership at will is predicated on the mutual desire and consent of the partners. The right
to choose with whom a person wishes to associate himself is the very foundation and essence
of that partnership.

Example of partnership for a fixed term

A and B entered into a contract of partnership for a period of 10 years. As rule, after the
expiration of 10 years the partnership of A and B will be dissolved. However, if after 10 years
and the partnership of A and B continued the operation of their partnership without any
express agreement then the rights and obligations of A and B will remain the same.
 For example, the right to participate in the management. Hence, A is the managing
partner then he will still be the managing partner despite the lapse of 10 years

Example of a partnership for a particular undertaking

A, B, and C entered into a contract of partnership for the manufacture of 1,000 tables for
a certain school. As a rule, after the 1,000 tables were manufactured, the partnership will be
dissolved. However, if after the 1,000 tables were manufactured, and the partnership of A, B,
and C continued the operations of their business without any express agreement, then the
rights and obligations of A and B will remain the same.

For example, the right to participate in the management. Hence, if A is the managing
partner then he will still be the managing partner despite the termination of the initial
particular undertaking, that is, the manufacture of 1,000 chairs.

Problem:
Sometime in March 1946, V and T together with F entered into a partnership for the
purpose of engaging in the printing business. Later, V obtained a personal loan from F in the
amount of P1, 100. Upon the request of V, T paid the said amount to F and this time V used
his share in the partnership as guarantee for T's payment. On June 3, 1946, F sold his share of
the partnership to T and who by virtue thereof became 2/3 owner of the business.
Subsequently, T asked V to settle his account, but due to his failure to do so, T assumed full
ownership of the business. T allegedly never rendered any accounting of the business
operations, or paid the share of V in the profits.
It is an incontrovertible fact that V had filed this action against T on February 10, 1961,
nearly ten years after the expiration of the contract of partnership.

T, in defense, alleged that the whole business of the partnership became his alone in 1947
after he had acquired by purchase the share of F and had taken over the share of V, since the
latter failed to pay the P1, 100 V had requested T to pay to F, as security for the payment of
which, he had pledge his said share to T. Since 1947, T had always been operating openly and
publicly the said printing business from 1947 without any intervention or participation of V
and without said V making any claim of any kind in connection therewith until the filing of the
complaint on February 10, 1961, hence, all the claims and causes of action of V had already
prescribed.

Is Article 1785 applicable in the present case?

Answer:
Under these circumstances, it would be giving premium to inaction and indifference to
still hold that V could sue T only a little short of ten years after the expiration of the stipulated
term of partnership. His claims for salaries accrued after each month they were unpaid.
Whether we assume that these claims lost basis in 1947 when T took over the businesses of
the printing press, by all standards, these claims had already prescribed when the present suit
was filed. Again, inasmuch as the longest period in the chapter on prescription of the Civil
Code is ten years, it is evident that V's action for accounting is already barred.

The provisions of Article 1785 to the effect that:

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.

and Article 1829 thus:

On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.

are clearly inapplicable here, for the simple reason that those articles are premised on a
continuation of the partnership as such, which is not our case, because here T repudiated the
partnership as early as 1947 with either actual or presumed knowledge of V. By analogy, at
least, with the rule as to a co-ownership, which a partnership essentially is, prescription does
not run in favor of any of the co-owners only as long as the co-owner claiming against the
others "expressly or impliedly recognizes the co-ownership," a circumstance irreconcilably
inconsistent with T's conduct of transferring the place of business, changing its name and not
paying V any of the salaries agreed upon in the articles of partnership.

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)

Obligation of every partner

1. The obligation to contribute what had been promised;
The mutual contribution to a common fund is the first test in order to have a contract of
partnership.

The failure to contribute is to make the partner a debtor of the partnership even if there
is no demand. This is an exception to the general rule that there is no delay when there is no
demand.

Consequently, in case of failure to deliver the promised contribution, the remedy is

specific performance with interest and damages occasioned thereby and not rescission.

2. The obligation to deliver the fruits thereof; and

If property has been promised, the fruits thereof should also be given. The fruits referred
to are those arising from the time they should have been delivered, without the need of any
demand. If the partner is in hail faith, he is liable not only for the fruits actually produced, but
also for those that could have been produced.
If money has been promised and that partner failed to do so, he becomes a debtor for
the interest and damages from the time he should have complied with his obligation.
 3. The obligation to warrant
The warranty in case of eviction refers only to specific or determinate things which a
partner contributed to the partnership.

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)

Rationale:
In order to know the monetary value of the contribution of that partner as of the date of
contribution. This is useful in the future operation of the partnership just like in the
accounting of the share of profit or loss of every partner under the law, 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.

Manner of appraisal:
1. By stipulation; or
2. In the absence of stipulation, by experts chosen by the partners 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)

Essence of Partnership
It is a settled rule that when a partner who has undertaken to contribute a sum of money
fails to do so, he becomes a debtor of the partnership for whatever he may have promised to
contribute and for interests and damages from the time he should have complied with his
obligation. Being a contract of partnership, each partner must share in the profits and losses
of the venture. That is the essence of a partnership.

Cases covered of the liability for damages and interest

1. Money promised by a partner is not given on time; and
2. Money of the partnership is converted the amount to partners' own use.

Demand is not necessary

This case is an exception to the general principle in the law on obligation which states:
"there is no default, if there is no demand."

1. In the case of contribution, because time is of the essence, a partnership is formed

precisely to make use of the contributions, and this use should start from its
formation, unless a different period has been set; otherwise the firm is necessarily
deprived of the benefits thereof. Thus, injury is constant.
2. In the case of conversion, demand is also not necessary, even if no actual injury results,
the liability exists, because the Article is absolute.
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)

Capitalist partners
Those who contribute money or property or both money and property to the common fund.

Industrial partners
Those who contribute only their industry or labor to the common fund.

Capitalist-industrial partners
Those who contribute money or property and industry or both money, property and
industry to the common fund.
Capitalist partner vs. Industrial partner
Capitalist partner Industrial partner
Contribution
Contributes money or property Contributes his industry

Prohibition to engage in other business

General rule: cannot engage in the same General rule: cannot engage in business for
kind of business in which the partnership is himself
engaged Exception: If the partnership expressly
Exception: stipulation authorizing him permits him to do so

Profits
Shares in the profits according to Shares in the profits according to
agreement; if there is no agreement in agreement; if there is no agreement, he shall
proportion to his contribution receive such share as may be just and
equitable under the circumstances.

Losses
General rule: the agreement as to losses; in General rule: the agreement as to losses: if
any. However, if there is no agreement, then any.
the agreement as to profits Exception: in the absence of agreement, the
Exception: in the absence of agreement as industrial partner shall not be liable for
to profits and losses, in proportion to his losses
contribution.

Remedies of capitalist partners against an industrial partner who engaged in business for
himself
1. The capitalist partners may exclude the industrial partner from the partnership plus
damages; or
2. The capitalist partners may avail themselves of the benefits which the industrial
partner may have obtained plus damages.
Note:
An action for specific performance to compel the partner to perform the promised industry
is not available as a remedy because this will lead to the prohibition on involuntary servitude
under the Philippine Constitution.

Example:
A, and B formed a partnership to engage in the repair of computers. Partner A contributed
P100, 000 while B contributed his industry. Adjacent the stall of the repair shop, A opened a
coffee shop. At the other side, B opened a store for selling computer parts. May A and B
engage in separate businesses?

A, may engage in the coffee shop business as it is not of the same kind as the business of
the partnership. While B, may not engage in any kind of business, without the consent of A,
because as an industrial partner he must devote his full time to the partnership.

Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal
shares to the capital of the partnership. (n)

Example:
A and B entered into a contract of partnership having an initial capital of P300, 000. How
much is the contribution of B?
Obviously, the facts of the case did not mention the separate contribution of partners A
and B. Hence, using the disputable presumption mentioned in the above-stated article, B
contributed P150, 000 (P300, 000/2 = P150, 000).

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. (n)

Obligation of capitalist partners to contribute additional capital

General rule:
Capitalist partners are not bound to contribute additional capital.

Exceptions:
1. Stipulation
2. In case of imminent loss of the business of the partnership to save the venture. If the
capitalist partners refuse to contribute additional capital they shall be obliged to sell
their interest to the other capitalist partners who are willing to contribute additional
capital.

Note:
Contract of partnership is governed by the principle of fiduciary relationship, that is trust
and confidence, so that if a capitalist partner is not willing to make additional contribution,
then there is no more fiduciary relationship to speak of. Of course, the above-article presumes
that the capitalist partners are solvent.
 Additionally, the above-stated article is not applicable to industrial partners because they
are already giving their entire industry.

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. (1684)

Rationale:
To prevent furtherance of the partner's personal interest to the detriment of the
partnership. The above-stated article is not applicable to a partner who is not a managing
partner because there is no basis for the suspicion that the partner is in bad faith.

Example:
A and B entered into a contract of partnership. Who is the manager? Clearly, the facts of
the case did not state who is the manager so that the law provides that if there is no partner
designated as a manager in a contract of partnership, then all (A and B) the partners are
managers.

Obligation of a managing partner who collects debt

Requisites:
1. The existence of at least 2 debts (one where the managing partner is the creditor and
the other where the partnership is the creditor); and
2. Both sums are demandable.

Example:
A, and B formed AB partnership. They agreed that partner A will be the manager.
Subsequently, in a contract, partner A had a receivable against X in the amount of P100, 000
due on August 1, 2016. In another transaction. AB partnership had a receivable against X in
the amount of P300, 000 due also on August 1, 2016. On September 1, 2016 X paid A the
amount of P80, 000. Should A collect the entire amount? It depends.
a. If A issued a receipt for his own credit, then the P80, 000 should be applied
proportionately, that is, P 20, 000 (100, 000/400, 000 x P80, 000) will be applied to his
own credit and the balance of P60, 000 (300,000/400,000 x P80, 000) will be applied
to the credit of the partnership.
b. If A issued a receipt for the credit of the partnership, then the entire P80, 000 will be
applied to the credit of the partnership.

What if in the above problem, the debt of X to A has an interest or that X delivered a car
as a security in the form of pledge or chattel mortgage? In this case, the law allows X to apply
the entire payment of P80, 000 to his credit with partner A.
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)

Rationale:
Equity demands proportionate share in the benefits and losses.

Article 1792 vs. Article 1793

Article 1792 Article 1793
As to the number of credits
There are two distinct credits, that is, one in There is only one credit, that is, in favor of
favor of the partnership and another in favor the partnership
of the managing partner
As to applicability
Applies only if the partner is a managing Applies to any partner
partner
As to debtor's insolvency
The debtor is not insolvent The debtor has become insolvent

Example:
A and B entered into a contract of partnership. Subsequently, X owed the partnership the
amount of P500, 000. Thereafter, partner A collected P200, 000 from X. Later, X turned
insolvent so that B could not collect from X.
In this case, the law provides that partner A should give the share of B in the amount of
P100, 000.

Note:
The above-stated article applies whether the partner has received his share in whole or in
part.

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)

Rule:
Damages suffered by the partnership through the fault or negligence of a partner are not
generally subject to set-off with the profits and benefits which that partner may have earned
for the partnership by his industry.

Rationale:
It is the obligation of a partner to earn benefits and profits for the partnership and it is also
his obligation not to cause damages through negligence for the partnership. These are two
distinct obligations that cannot be set-off. Moreover, in the law on obligation, only a right and
an obligation are required to be compensated or set-off.
Mitigation of liability by the courts
In case of a partner's extraordinary efforts in other activities of the partnership, unusual
profits have been realized. This principle rests on equity.

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 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)

Risk of loss
1. Specific and determinate things which are not fungible
What was contributed here is only the use of the object. For example, a partner
contributes only the use of his delivery truck. Hence, it is the partner who bears the risk
of loss because the partner did not transfer the ownership to the partnership.
2. Fungible things
It is the partnership who bears the risk of loss as there was transfer of ownership.
3. Things contributed to be sold
It is the partnership who bears the risk of loss as there was transfer of ownership;
4. Things brought and appraised in the inventory
It is the partnership who bears the risk of loss as there was transfer of ownership,

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 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. (1688a)

Obligation of the partnership to every partner

1. To refund the amounts a partner may have disbursed on behalf of the partnership plus
the interest from the time the expenses were made.
Example:
A and B formed AB partnership. Subsequently B purchased office supplies in the amount
of P20,000 out of his own money with the consent of A on August 1, 2016.

In this case, AB partnership must reimburse the amount of P20,000.

What if AB partnership reimbursed B only on October 1, 2016? In this case, AB partnership

must also be liable for legal interest for two months (from August 1, 2016 to October 1, 2016).

2. To answer to each partner for obligations, he may have contracted into in good faith
in the interest of the partnership, and for the risks in consequence of its management.
Example:
A, and B formed AB partnership to engage in car repair shop. Subsequently B purchased
on credit car accessories from X Corp. in the amount of P400,000. In this case AB partnership
is answerable to X Corp. for the payable of P400, 000.
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)

Rules for distribution of profits and losses of a partnership

1. Distribution of profits
a. According to agreement
The profits shall be distributed in conformity with the agreement.
b. If there is no agreement
1. Capitalist partners - in proportion to what he may have contributed to the
common fund
2. Industrial partners - that which is just and equitable under the circumstances

Example:
A, B, C and D entered into a contract of partnership. A contributed P5, 000,000 in cash
while B contributed his only car with a market value of P1, 000,000. C also contributed his only
parcel of land with a market value of P2, 000,000 while D his industry as a managing partner.
They agreed to share in the profit as follows: A = 40%; B = 10%; C=30%; and D 20%. After their
first year of operation, the partnership realized a net profit of P200, 000. How much is the
share of every partner in the profit?

Since there is an agreement, their profit sharing will be as follows:

1. A will receive P80,000 (P200,000 x 40%);
2. B will receive P20,000 (P200,000 x 10%);
3. C will receive P60,000 (P200,000 x 30%); and
4. D will receive P40,000 (P200,000 x 20%).

What if there is no agreement? The sharing of the profit will be based on capital
contribution. However, in the present case, there is an industrial partner so that his just and
equitable share must first be given. For example, if it was agreed upon by all of the partners
that the just and equitable share of D, the industrial partner, is P20,000 then the capitalist
partners will share in the remaining P180,000 (P200,000 - P20,000).

Their profit sharing will be as follows:

1. A will receive P112, 500 (P5,000,000/P8,000,000 x P180,000);
2. B will receive P22, 500 (P1,000,000/P8,000,000 x P180,000);
3. C will receive P45, 000 (P2,000,000/PB,000,000 x P180,000); and
4. D, will receive P20,000 (agreed upon by the partners as his just and equitable share)

What if aside from the fact that D is an industrial partner, he also contributed cash in
the amount of P2,000,000? This is a case where D is a capitalist-industrial partner. Based on
the same assumption that the just and equitable share of D as an industrial partner is P20,000.
Their profit sharing will be as follows:
1. A will receive P90, 000 (PS,000,000/P10,000,000 x P180,000);
2. B will receive P18, 000 (P1,000,000/P10,000,000 x P180,000):
3. C will receive P36, 000 (P2,000,000/P10,000,000 x P180,000); and
4. D, will receive P 36,000 (P2,000,000/P10,000,000 x P180,000) plus
P20,000 (agreed upon by the partners as his just and equitable share)

2. Distribution of losses
a. According to agreement
The losses shall be distributed in conformity with the agreement. If the only
agreement pertains to the share of each partner in the profits, the share of each in the losses
shall be in the same proportion. However, the industrial partner shall not be liable for the
losses.
b. If there is no agreement:
3. Capitalist partners - in proportion to what they may have contributed to the common fund.
4. Industrial partners - not liable for losses.
Example:
A, B, C and D entered into a contract of partnership. A contributed P5,000,000 in cash
while B contributed his only car with a market value of P1,000,000. C also contributed his only
parcel of land with a market value of P2,000,000 while D his industry as a managing partner.
They agreed to share in the profit as well as losses as follows: A = 40%; B = 10 %; C = 30%; and
D 20%. After their first year of operation, the partnership incurred a net loss of P100,000. How
much is the share of every partner in the loss?
Since there is an agreement, their loss sharing will be as follows:
1. A will share P40,000 (P100,000 x 40%);
2. B will share P10,000 (P100,000 x 10%);
3. C will share P30,000 (P100,000 x 30%); and
4. D will share P20,000 (P100,000 x 20%),

Note:
As a rule, an industrial partner is not liable for losses, however in the instant case D agreed
to shoulder 20% in case of loss. Such kind of agreement is valid. It is a waiver of right on the
part of partner D.

What if there is no agreement? The sharing of the losses will based on capital contribution. In
the present case, there is an industrial partner so that as a rule an industrial is not liable for
losses

Their loss sharing will be as follows

1. A will share P62, 500 (P5,000,000/P8,000,000 x P100,000)
2. B will share P12, 500 (P1,000,000/P8,000,000 x P100.000)
3. C will share P25, 000 (P2,000,000/P8,000,000 x P100,000), and
4. D, an industrial partner, is not liable.

What if aside from the fact that D is an industrial partner, he also contributed cash in the
amount of P2,000,000? This is a case where D is a capitalist-industrial partner. Their profit
sharing will be as follows:
1. A will share P50,000 (P5,000,000/P10,000,000 x P100,000).
2. B will share P10,000 (P1,000,000/P10,000,000 x P100,000).
3. C will share P20,000 (P2,000,000/P10,000,000 x P100,000); and
4. D. will share P20,000 (P2,000,000/P10,000,000 x P100,000)

Note:
The above-stated article excludes an industrial partner from losses but he is not exempted
from liability insofar as third persons are concerned. He may, however, recover what he has
given to third persons from the other partners because as to him and his partners, that will
now be treated as a loss.
Consequently, liability refers to the obligation towards third person and losses refers to
obligation as among the partners.

Problem:
M, Inc. and G, Inc. entered into a Joint Venture Agreement (VA for the construction and
development of an office building on a land owned by M, Inc. in Makati City.
The joint venture engaged the services of X, Inc. to provide subsurface soil exploration,
laboratory testing, seismic study and geotechnical engineering for the project.
X Inc. then billed the joint venture for P284, 553 representing the cost of partial
subsurface soil exploration, and for P250, 000 representing the cost of the completed seismic
study.
Despite repeated demands from X, Inc. the joint venture failed to pay its obligations.
Meanwhile, due to unfavorable economic conditions at the time, the joint venture was
cut short and the planned building project was eventually abandoned.
X, Inc. subsequently filed a complaint for collection of sum of money against M, Inc. and
G, Inc.

Which between joint ventures M, Inc. and G, Inc. bears the liability to pay X, Inc. its unpaid
claims.
Answer:
M. Inc. and G, Inc. are jointly liable to X, Inc. A joint venture being a form of partnership,
is to be governed by the laws on partnership. Article 1797 of the Civil Code provides:
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 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.

In the JVA, M., Inc. and G, Inc. agreed on a 50-50 ratio on the proceeds of the project.
They did not provide for the splitting of losses, however. Applying the above-quoted provision
of Article 1797 then, the same ratio applies in splitting the P535,353 obligation-loss of the
joint venture.

M, Inc. and G, Inc. being jointly liable, there is no need for G, Inc. to reimburse M, Inc. for
"50% of the aggregate sum due” to X, Inc.
Allowing M, Inc. to recover from G, Inc. what it paid to X. Inc. would not only be contrary
to the law on partnership on division of losses but would partake of a clear case of unjust
enrichment at G. Inc.'s expense.
Art. 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 manifestly 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. (1690)
Third person designating the share of partners in the profits and losses

General rule:
It is valid.

Exception:
It is not valid and it may be questioned if it is manifestly inequitable unless:
1. A partner began to execute the decision of the third person; or
2. A partner has not questioned the said decision of the third person within a period of 3
months from the time he had knowledge thereof.

Art. 1799. A stipulation which excludes one or more partners from any share in the profits
or losses is void. (1691)

General rule:
A stipulation excluding one or more partners from any share in the profits and losses is
void. Take note that what is void is the stipulation only and not the contract of partnership.
Hence, the profits and losses shall be distributed as if there was no agreement as discussed
in the preceding article
Also, let it be noted that one of the tests in order to have a partnership is the intent of
the contracting parties to divide the profits among themselves

Exception:
An industrial partner is not liable for losses unless he waived this right.
Rationale: Why an industrial partner is not liable for losses?
While capitalist partners can withdraw their capital, the industrial partner cannot
withdraw any labor or industry he had already exerted. Moreover, in a certain sense, he
already has shared in the losses in that, if the partnership shows no profit this means that he
has labored in vain.

Art. 1800. The partner who has been appointed manager in the articles of partnership may
execute all acts of administration despite the opposition of his partners, unless he should
act in bad faith; and his power is irrevocable without just or lawful cause. The vote of the
partners representing the controlling interest shall be necessary for such revocation of
power.
A power granted after the partnership has been constituted may be revoked at any
time. (1692a)

Example of an act of administration

A managing partner of a partnership may execute all acts of administration including the
right to sue debtors of the partnership in case of their failure to pay their obligations when it
became due and demandable.
Who shall manage the partnership?
Either one, some or all of the partners designated as managing partner either in the
articles of partnership or after the contract of partnership had already been constituted. If
there is no agreement management is vested in all of the partners.

Two modes of appointment

1. Appointment as manager in the articles of partnership, or
2. Appointment as manager made in an instrument the articles of partnership.

I. Appointment as manager in the articles of partnership

General Rule:
Power is irrevocable without just or lawful cause.
Exception:
1. To remove him for just cause, vote of partners having controlling interest is necessary;
2. To remove him without just cause, there must be unanimity including his own vote.
Reason: This represents a change in the will of the parties; a change in the terms of the
contract; a novation; so to speak, requiring unanimity.
Extent of power:
1. If he acts in good faith, he may do all acts of administration despite the opposition of his
partners.
2. If he acts in bad faith, he cannot do any act of administration. It must be noted that the
presumption in law is in favor of good faith.

II. Appointment as manager made in an instrument other than the articles of partnership
Rule:
The power to act may be revoked at any time, with or without just cause by the partners
owning the controlling interest.
Reason: Such appointment is a mere delegation of power revocable at any time.
Extent of power:
The manager can do all acts of administration.

Art. 1801. If two or more partners have been intrusted with the management of the
partnership without specification of their respective duties, or without a stipulation that
one of them shall not act without the consent of all the others, each one may separately
execute all acts of administration, but if any of them should oppose the acts of the others,
the decision of the majority shall prevail. In case of a tie, the matter shall be decided by the
partners owning the controlling interest. (1693a)

When 2 or more managing partners have been entrusted with the management.

Requisites:
1. Two or more partners are managers;
2. There is no specification of respective duties;
3. There is no stipulation requiring unanimity, that is, that one of them shall not act without
the consent of all the others.

General rule:
Each one may separately execute all acts of administration.
Exceptions: If any of the managers should oppose:
1. The decision of the majority (per head) of the managing partners shall prevail.
2. In case of a tie, the decision of the managing partners owning the controlling interest
(more than 50%) shall prevail.

Note: The rights to oppose is not given to non-managers because in appointing their other
partners as managers, they have stripped themselves of all participation in the administration.

Example:
A (15 %), B (10 %), C (35%), D (20%), E (10%), and F (10%) are partners in AF partnership.
It was agreed upon that the managers are A, B, C and D. Afterwards, an issue arose on whether
or not to enter into a contract of lease with X Corp. Managers A, B, and C agreed to enter into
a contract with X Corp but D opposed the offer. In this case majority (per head) prevails, that
is, AF partnership will enter into a contract with X Corp.

What if A and B want to enter into a contract with X Corp but C and D do not want to
enter into a contract? Since we have a tie per head count, the next rule is to go to their
controlling interest so that A and B have a total of 25% (15% + 10% ) interest while C and D
have a total of 55% (35% + 20%) interest, the latter shall prevail, that is AF partnership will
enter into a contract with X Corp.

Take note that partners E and F do not participate in management being non-managers;
thus, as a rule, they have no power or authority in all acts of administration.

Problem:
X is the proprietor of X Construction and Trading (XCT). On May 24, 1999, X executed a
special power of attorney (SPA) authorizing Y to participate in the bidding of a National
Irrigation Administration (NIA) project.

On September 29, 1999, Y, participated in the bidding of a project and was awarded the
construction of a road system with a project cost of P5, 613,591.

When W learned that Y is in need of heavy equipment for use in the NIA project, he met
up with Y, in an apartment where the latter was holding office under an XCT signboard. A
series of meetings followed in said XCT office among W, X and Y.
On December 2 and 20, 1999, W and Y signed two Agreements for the lease of W's dump
trucks to XCT.
On April 27, 2000, X revoked the SPA he previously issued in favor of Y consequently, NIA
refused to make payment to Y on her billings. W, therefore, could not be paid for the rent of
the equipment.

In a letter dated April 5, 2000, W demanded from Y and/or XCT payment of the
outstanding rentals which amounted to P726, 000.00 as of March 31, 2000.
Is there a partnership? If yes, can X or Y separately execute at acts of administration?

Answer:
 X (or, more appropriately, XCT) and Y had entered into partnership in regard to the NIA
project. X's contribution thereto is his contractor's license and expertise, while Y would
provide and secure the needed funds for labor, materials and services and deal with the
suppliers and sub-contractors. For this, X would receive as his share 3% of the project cost
while the rest of the profits shall go to Y. X admitted this arrangement.

Evidence shows that when Y and W met and discussed (at the XCT office) the lease of the
latter's heavy equipment for use in the project X was present and interposed no objection to
Y's actuations. Quite the contrary, Y's actions were in accord with what she and X originally
agreed upon, as to division of labor and delineation of functions within their partnership.

Under the Civil Code, every partner is an agent of the partnership for the purpose of its
business; each one may separately execute all acts of administration, unless a specification
of their respective duties has been agreed upon, or else it is stipulated that any one of them
shall not act without the consent of all the others. At any rate, X does not have any valid
cause for opposition because his only role in the partnership is to provide his contractor's
license and expertise, while the sourcing of funds, materials, labor and equipment has been
relegated to Y.

X should be made civilly liable for abandoning the partnership, leaving Y to fend for her
own, and for unduly revoking her authority to collect payments from NIA, payments which
were necessary for the settlement of obligations contracted for and already owing to laborers
and suppliers of materials and equipment like W, not to mention the agreed profits to be
derived from the venture that are owing to Y by reason of their partnership agreement.

Art. 1802. In case it should have been stipulated that none of the managing partners shall
act without the consent of the others, the concurrence of all shall be necessary for the
validity of the acts, and the absence or disability of any one of them cannot be alleged,
unless there is imminent danger of grave or irreparable injury to the partnership. (1694)

Stipulation requiring unanimity of action

General Rule:
Unanimous consent of all the managing partners (even if one of the managers is absent
or incapacitated) shall be necessary for the validity of the acts and absence or disability of any
managing partner cannot be alleged.

Exception:
When there is an imminent danger of grave or irreparable injury to the partnership.

Art. 1802 NOT applicable to third person

The stipulation in the articles of partnership that any of the two managing partners may
contract and sign in the name of the partnership with the consent of the other, undoubtedly
creates an obligation between the two partners, which consists in asking the other's consent
before contracting for the partnership. This obligation of course is not imposed upon a third
person who contracts with the partnership. Neither it is necessary for the third person to
ascertain if the managing partner with whom he contracts has previously obtained the
consent of the other. A third person may and has a right to presume that the partner with
whom he contracts has, in the ordinary and natural course of business, the consent of his
copartner, for otherwise he would not enter into the contract. The third person would
naturally not presume that the partner with whom he enters into the transaction is violating
the articles of partnership, but on the contrary is acting in accordance therewith. And this
finds support in the legal presumption that the ordinary course of business has been followed,
and that the law has been obeyed. This last presumption is equally applicable to contracts
which have the force of law between the parties."

Art. 1803. When the manner of management has not been agreed upon, the following rules
shall be observed:
(1) All the partners shall be considered agents and whatever any one of them may do alone
shall bind the partnership, without prejudice to the provisions of Article 1801.
(2) None of the partners may, without the consent of the others, make any important
alteration in the immovable property of the partnership, even if it may be useful to the
partnership. But if the refusal of consent by the other partners is manifestly prejudicial to
the interest of the partnership, the court's intervention may be sought. (1695)

Rules when manner of management has not been agreed upon

1. All the partners shall be considered as managers. Consequently, a partners can do all acts
of administration. If the acts of a partner an opposed by the other partners, the majority (per
head) shall prevail case of tie (per head), then the vote of the partners representing the
controlling interest shall prevail.

Example:
A, B, C, and D formed ABCD partnership. In this case, it is presumed that all of the partners
are managers. Therefore, in case of opposition in decision making of the partners, we follow
the rules stated in Article 1801 that is majority wins (per head) and in case of tie, then it will
be decided by the vote of the partners representing the controlling interest.

2. For important alterations in immovable property, unanimity is required.

Note:
Paragraph 2 deals only with immovable property:
a. First, because of their comparative greater importance than personality
b. Second, because, in a proper case, they should be returned to the partners in the same
condition as when they were delivered to the partnership
Consent of the others may be expressed or implied (as when the partners had knowledge
of the alteration and no opposition was made by them)

Art. 1804. Every partner may associate another person with him in his share, but the
associate shall not be admitted into the partnership without the consent of all the other
partners, even if the partner having an associate should be a manager. (1696)

The above stated article refers to Contract of Sub-partnership. In a contract of sub-

partnership, the consent of the other partners is not required. Hence, all partners can have
an associate in his share or sub-partner.

It is a rule that no one can become a partner in a partnership without the consent of all
of the partners. Consequently, an associate or sub-partner shall not be admitted into the
partnership without the consent of all the other partners based on the following reasons:
a. Mutual trust is the basis of partnership; and
b. A change in membership is a modification or novation of the contract.

Example:
A, B, C, and D entered into a contract of partnership. By virtue of a contract of loan, D
borrowed P50,000 from X and one of their stipulations is that 50% of the share of partner D in
the partnership income will be applied or deducted from the obligation of D to X. In the first
year of operation of the partnership, it earned a net income of P100,000 and it was agreed
that the share of D will be P25,000. Therefore, in the contract of loan between D and X,
P12,500 (25,000 x 50%) will be the share of X as a sub-partner.

Art. 1805. The partnership books shall be kept subject to any agreement between the
partners, at the principal place of business of the partnership, and every partner shall at
any reasonable hour have access to and may inspect and copy any of them. (n)

A partner is given by law the right to have access to, inspect and copy the partnership books
for the purpose of enabling that partner to obtain true and full information of all things
affecting the partnership. Partnership books is an example of partnership property and every
partner is a co-owner of specific partnership property.

What is reasonable hour?

The Supreme Court held that reasonable hour should be on business days throughout the
year, and not merely during some arbitrary period of a few days chosen by the directors (or
managers as regards partnership).

Art. 1806. Partners shall render on demand true and full information of all things affecting
the partnership to any partner or the legal representative of any deceased partner or of any
partner under legal disability. (n)

Violation of the above stated article refers to concealment.

Who can demand true and full information?

1. Any partner;
2. Legal representative of any deceased partner; and
3. Legal representative of any partner under legal disability.

Art. 1807. Every partner must account to the partnership for any benefit, and hold as trustee
for it any profits derived by him without the consent of the other partners from any
transaction connected with the formation, conduct, or liquidation of the partnership or
from any use by him of its property. (n)

Rationale:
The partners are governed by fiduciary relationship, that is, mutual trust and confidence.

Note:
The above article refers only to any profits derived by a partner without the consent of the
other partners.

Problem:
 X, Y and Z were partners in a business concern known as XYZ Fishing Industry. Sometime
in January of 1986, they decided to dissolve their partnership and executed an agreement of
partition and distribution of the partnership properties among them, consequent to Z
withdrawal from the partnership. Among the assets to be distributed were 5 fishing boats, 6
vehicles, 2 parcels of land, and cash deposits in a local bank.
Throughout the existence of the partnership, and even after Y's untimely demise in 1994,
X failed to submit to Y's heirs any statement of assets and liabilities of the partnership, and to
render an accounting of the partnerships finances. X also reneged on his promise to turn over
to Y's heirs the decease's 1/3 share in the total assets of the partnership, amounting to
P30,000,000, or the sum of P10,000,000, despite formal demand for payment thereof.
Consequently, Y's heirs, filed against X an action for accounting payment of shares,
division of assets and damages.
Did the heirs cause of action prescribed 4 years after it accrued in 1986?
Answer:
The three (3) final stages of a partnership are: (1) dissolution: (2) winding-up; and (3)
termination. The partnership, although dissolved, continues to exist and its legal personality
is retained, at which time it completes the winding up of its affairs, including the partitioning
and distribution of the net partnership assets to the partners. For as long as the partnership
exists, any of the partners may demand an accounting of the partnerships business.
Prescription of the said right starts to run only upon the dissolution of the partnership when
the final accounting is done.

Applied in relation to Articles 1807 and 1809, which deal with the duty to account, the
above-cited provision states that the right to demand an accounting accrues at the date of
dissolution in the absence of any agreement to the contrary. When a final accounting is
made, it is only then that prescription begins to run. In the case at bar, no final accounting
has been made, and that is precisely what Y's heirs are seeking in their action before the trial
court, since X has failed or refused to render an accounting of the partnerships business and
assets. Hence, the said action is not barred by prescription.

Art. 1808. The capitalist partners cannot engage for their own account in any operation
which is of the kind of business in which the partnership is engaged, unless there is a
stipulation to the contrary. Any capitalist partner violating this prohibition shall bring to the
common funds any profits accruing to him from his transactions, and shall personally bear
all the losses. (n)

Rationale:
The capitalist partner has already knowledge of the business secrets of the partnership;
hence, it is unfair for him to engage in a business which is of the kind of business in which the
partnership is engaged.

Effects of violation
1. The capitalist partner shall bring to the common fund any profits accruing to him; and
2. The capitalist partner shall personally bear all the losses.

Art. 1809. Any partner shall have the right to a formal account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business or possession of its property
by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by article 1807;
(4) Whenever other circumstances render it just and reasonable. (n)

General Rule:
No formal accounting is demandable until after the dissolution of the partnership.
Exceptions:
1. If a partner is wrongfully excluded from the partnership business or possession of its
property by his co-partners
2. If the right to demand for accounting exists under the terms of any agreement:
3. As provided by article 1807; and render it just and
4. Whenever other circumstances

Problem 1:
The W Panciteria, a restaurant, was established sometime in October, 1955. It was registered
as a single proprietorship and its licenses and permits were issued to and in favor of X as a
sole proprietor. Y adduced evidence during the trial of the case to show that W Panciteria was
actually a partnership and that he was one of the partners having contributed P4, 000 to its
initial establishment.
Y's evidence is summarized as follows:

About the time the W Panciteria started to become operational, Y gave P4, 000 as his
contribution to the partnership. This is evidenced by a receipt wherein X acknowledged his
acceptance of the P4, 000 by affixing his signature thereto. Y identified the signature on the
receipt as that of X because it was affixed by the latter in his presence. Witnesses B and C
corroborated Y's testimony to the effect that they were both present when the receipt was
signed by X.
Furthermore, Y received from X the amount of P12, 000 covered by the latter's Check No.
012345 from the profits of the operation of the restaurant for the year 1974.

X denied having received from Y the amount of P4, 000.00.

Is Y a partner of X in the establishment of W Panciteria? If yes, does Y have a right to ask
for an accounting of his interests in the partnership? If yes, what is the prescriptive period?
Answer:
The records sufficiently establish that there was a partnership. Y is a partner in W
Panciteria. The requisites of a partnership which are – 1) two or more persons bind
themselves to contribute money, property, or industry to a common fund; and 2) intention
on the part of the partners to divide the profits among themselves have been established.
As stated by Y, a partner shares not only in profits but also in the losses of the firm. If
excellent relations exist among the partners at the start of business and all the partners are
more interested in seeing the firm grow rather than get immediate returns, a deferment of
sharing in the profits is perfectly plausible. It would be incorrect to state that if a partner does
not assert his rights anytime within ten years from the start of operations, such rights are
irretrievably lost. Y's cause of action is premised upon the failure of X to give him the agreed
profits in the operation of W Panciteria. In effect Y was asking for an accounting of his
interests in the partnership.
Regarding the prescriptive period within which the private respondent may demand an
accounting, Articles 1806, 1807, and 1809 show that the right to demand an accounting
exists as long as the partnership exists. Prescription begins to run only upon the dissolution
of the partnership when the final accounting is done.
 ART. 1809. Any partner shall have the right to a formal account as to partnership affairs:
1) If he is wrongfully excluded from the partnership business or possession of its property by
his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by article 1807,
(4) Whenever other circumstance render it just and reasonable

Industrial Partner vs. Capitalist Partner

INDUSTRIAL PARTNER CAPITALIST PARTNER
PROHIBITION
ABSOLUTE PROHIBITION RELATIVE PROHIBITION
The industrial partner cannot engage in The capitalist partner cannot engage in the
business for himself unless the partnership same kind of business as that of the
expressly permits him to do so partnership for his own account, unless
there is a stipulation to the contrary
REMEDY
Capitalist partners may: Capitalist partner, who violated shall:
1. Exclude him from the firm plus damages; 1. Bring to the common fund any profits
and accruing to him from said transactions; and
2. Avail themselves of the benefits which he 2. Personally bears all losses
may have obtained