EH 402 | July 10, 2015 WWW Partnership, Agency and Trust 1

START

Q; May a capitalist partner engage in business?

A: A capitalist partner may engage in a business
only when the business is not of the same kind as
or not in competition with the business he is
engaged in.
Q: Otherwise?
A: Otherwise he will be liable to partnership and
may be compelled to bring in the benefits he reaped
from the competing business to the common fund
of the partnership and to pay damages for the loss.
Q: Can he not therefore be liable in the same
manner that an industrial partner is liable?
A: There should be a distinction. For an industrial
partner there is a total prohibition. An industrial
partner cannot engage in any sort of business by the
reason that he is supposed to contribute his entire
industry to the partnership. But with regard to the
capitalist partner, it is only as to the business
which is in competition with that of the
partnership and the liability therein is different
because the law provides that the profits
derived from the competing business be
brought into the common fund of the
partnership.
Q: Unless of course?
A: Business not competitive, not of the same kind.
Q: Or? (Asking for another exception)
A: Unless there is a contrary stipulation. Unless the
parties stipulate.
Q: So, again?
A: Generally a capitalist partner can engage into
another kind of business which is not in
competition with the partnership and when there is
no stipulation to the contrary.

and profits, it would be the basis thereof. The

sharing would be in proportion to their
contributions.
Q: Can they be compelled to make additional
contributions?
A: Yes, only in some instances. For one, in case
there is a danger of imminent loss, capitalist
partners can be compelled to contribute additional
contributions to save the venture.
Q: (Situation) Partnership engaged in car
dealership. Partners A and B agreed 25M each
contribution. And with the 50M they were able to
put up the service area, the display room, and 25
units of cars. So with the 25 units, they were able to
start with the business, and like selling hotcakes, the
cars were almost sold out. Prompting them to put
up additional 25M contribution, just the same the
queues for customers were even getting longer.
And customers were knocking at their door, saying
we want to buy. Until the point came where they
could no longer sell because they have no more
units and they cannot also put up new cars because
the supplier is insisting now that the cars are sold
cash and carry basis. So they cannot buy new cars.
All their cars are out, but all their cash as well are
out. They cannot acquire anew because they ran out
of cash because all the cars have been sold, and
although sold they were unable to collect. They
were on credit. More customers insisted, sorry we
could no longer sell because we ran out of cars. So,
where do you think the customers will go?
A: Since the partnership have no more money they
will go to other dealers or another brand.
Q: And when customers who have not been paying
would observe that this dealer is almost closing its
business, now, they would think: why should I
pay? Manira naman nahapit, di nalang ko mobayad
pud. So if this time, you were one of the partners,
what will you do?
A: Collect the debts.

Q: We have discussed that appraisal is important,

why?

Q: Well, youre lucky if you are able to collect. But,

if youre unable to collect?

A: Appraisal is important because it is the method

by which the contributions of the partners are
determined; hence, absent any stipulation or
agreement to the contrary on the sharing of losses

A; If the partnership wont be able to collect, then

the partnership is at a loss and it would result to

EH 402 | July 10, 2015 WWW Partnership, Agency and Trust 2

dissolution or they could demand funds from the
other partners.

A: So, he cannot be compelled to sell his interest to

the other partners.

Q; Alright. To save the ventures what becomes

necessary?

Q: Kick out. Abi pobre man ko wa nako

ikahatag, imo nako i.kick out. He has no more
financial capability. Because in the first place, why
can he not be compelled? When we entered into
this partnership? Why cant he be compelled?

A: To demand additional contribution. Fresh

capital.
Q: Your partner however was not interested to
contribute. What can you do now?
A: If the partner purposely refused to contribute
money, then he could be kicked out of the
partnership. So in that case, if there are only two
partners, and the other is kicked out, the
partnership would be dissolved.
Q: So, when you say kicked out?
A: Expelled from the partnership sir.
Q: Solon, kick out? Ayaw pamatid solon oy.
A: It depends on the partner, if he has the financial
ability to contribute to the fund and he deliberately
refuses, he could be compelled to sell his interest to
the other partners. So, the partner would not be
kicked out but rather he would be compelled to
transfer his interest.
S: Kung wa na kay gana, bayran nalang tika. Ihatag
nalang nako imong share. Because?
A: Under the law when there is imminent loss,
and the partner deliberately refuses to
contribute additional fund, then he shall be
compelled to sell his interest to the other
partners.
Q: Alright, thats the magic word! Deliberately,
which means?
A: Deliberately which means that the partner
has the financial capability to contribute but
refuses maybe because he lacked interest.
Q: On the other hand, therefore?
A: On the other hand, when the other partner has
no financial capability to contribute, then he is not
deliberately refusing to contribute to the funds.
Q: So?

A: I think sir because he was not proven that he

lacked interest sir in the partnership. So maybe he
is still interested in the partnership.
Q: Yeah, Im interested, thats why. How will you
argue now? Bayran nalang tika oy pobre ka man.
Would the law allow that? Why not?
A: Because he contributed to the partnership sir.
And so, his intention is clear sir, in that sense. He
did not want to dissolve the partnership. He agreed
that he wanted to be a partner to the partnership.
So, just because of this inability to contribute, then
their agreement will not be dissolved by compelling
him to contribute in the partnership.
Q: Because in this first place when we entered into
this partnership?
A: They agreed sir.
Q: What was their agreement? Among others?
A: To contribute funds.
Q: This is our contribution. We never agreed that
we will contribute more than this. So, you cannot
just kick me out. Thats our agreement, noh? It is
important to agree on the contribution. The
agreement was to contribute a particular some of
money, from the very start. The system may be
abused, as when the other partner may demand
indiscriminately for additional contributions even
though it was not necessary. That is why the law
says that you can only compel the other partner to
sell his interest if, among others?
A: The other partner can only compel the other
to sell his interest if (1) there is imminent loss
to the business, (2) the other partner, despite
his ability to contribute, deliberately refuses to
make additional contributions to save the
partnership.

EH 402 | July 10, 2015 WWW Partnership, Agency and Trust 3

Q: So that, it is important therefore to know how
much each partner has contributed. But since the
partners in our case are suffering from their senior
moments, they forgot to agree on the amount of
their contribution. What should be done?
Q: In case where there is absence of stipulation, Sir,
the partners are presumed to contribute in equal
shares. So, in case of imminent loss to the business
of the partnership, the share of the additional
contributions should be equal.
Q: Otherwise, if the partner is not willing to
contribute?
A: The partner from whom the additional
contribution is demanded cannot anymore say,
No, I will not contribute, because that is not what
we agreed! In fact, there was no agreement. This
is true, unless the partner does not have the
financial capability to contribute.
Q: Otherwise, if one is willing, but the other is not,
despite his financial capability, the refusal would
be?
Q: The refusal would be taken to mean that the
partner is lacks interest in the continuance of
the partnership. The law presumes that he is no
longer interested in the partnership. That is why,
the other partners can now buy out the share of
the refusing partner.
Q: Buy out, not kick out. So, that how do we
distinguish a partnership from a corporation with
regard to management?
A: Sir, in a partnership, the partners are all regarded
as agents and managers of the partnership in the
absence of a stipulation in the contract of
partnership designating one or more persons as
managers; whereas in a corporation, management
functions are exercised by the Board of Directors.
Q: So, going back to the car dealership situation,
because the first batch of cars was sold out,
additional cars were acquired which were almost
sold. Only two were left. But because you were a
very industrious partner, and a very good salesman,
you managed to convince, say, PNP Gen. Alan
Purissima to purchase cars from you 50 cars!
for several police stations nationwide. Purchase
Orders (P.O.s) were signed. But when you went to

your partner, he said that only two cars were left.

Then you proposed that the partnership acquire
some more, but then your partner said the
partnership does not have money anymore. Then
you demanded that he contribute, can you do that?
Consider that the transaction is so big that it means
big profits. If he deliberately refuses to contribute,
can you buy his share out?
A: In this case, Sir, there can be no valid buy out,
because the partnership does not incur a loss
Q: Does not incur a loss? 50 sold units, and its not
loss? Atong sales tibuok tuig, covered na. Suroy
suroy nalang tag Europe, di nata maninda.
A: In that case sir, they may incur loss but not really
imminent loss in a sense that they cannot anymore
perform their business.
Q: Not imminent? Naa na ang PO. Sos! If di jud ni
nato madeliver, loss jud ni.
A: Sir, I believe sir that still in this case, cannot be
considered imminent loss since the PO is still
unrealized. Therefore, I think, what is
contemplated in law is a loss that is threatening, the
threat of loss. The law provides the requirements
that there is an imminent loss and the partners
agree that there is a need for additional
contribution to save the venture, absent any
agreement to the contrary.
Q: What do you think, Herrera?
A: I think there is no imminent loss to speak of
because the law contemplates here an excess of
revenue but in this case there was still no cause
incurred yet and the non-delivery of the car to the
customer can just be seen as an opportunity for
profit that would not really tantamount to loss.
Q: Not a loss. If in the computation they have a
500K per car for 50 cars. If they could only deliver,
they will realize 500K x 50 = 25M PROFIT! Just by
delivery, its ready. PO has been signed. Its a matter
of getting that unit from the supplier and delivering
it to PNP. 25M. Not imminent?
A: Let me just clarify sir. If they will not be able to
deliver, will the partnership close? Or, in short, will
the existence of the partnership depend from this
order? If so, in that case, the partner can be made
to contribute additional capital. Whereas, if the

EH 402 | July 10, 2015 WWW Partnership, Agency and Trust 4

non-delivery of the purchase order to the PNP will
not constitute the liquidation of the partnership,
then theres no need to contribute.
Q: Talking to me? Are you asking me?
A: I was just clarifying the situation sir.
Q: Vallena, Would you clarify please?
A: She just wants to clarify whether or not the nondelivery the ordered car will be the proximate cause
of the dissolution or liquidation of the partnership
then that is tantamount to an imminent loss of the
partnership. On the other hand, if the failure to
deliver will not endanger the partnership, then it
will not be tantamount to imminent loss of the
partnership. Thats what she wants to clarify.
Q: And would you want to clarify it to her?
A: Sir, we also share the same point of clarification.
But I think that the failure of the partnership to
deliver the cars to the PNP, and that since the PO
has been signed by the PNP, I think that would
amount to imminent loss to the partnership, sir.
Hence, the partners may be compelled to put up
additional funds to save the partnership.
Q: Herrera, would you still want to clarify?
A: Well, in that case sir, taking the non-delivery of
the 50 cars to the PNP will constitute the
discontinuance of the partnership business, then it
is what is contemplated in law warranting the
additional contributions of the partners to save the
business.
Q: Laurente, what do you think?
A: I think sir the partner, knowing that they only
have 2 units left, the partner is liable to the
partnership sir for damages because it is through
his own fault that they had that obligation. And it
cannot be said that it was not done in good faith
because he was aware that they only had two trucks
left.
Sir: Ikaw pataka kag pamaligya. Kibaw kag duha
nalang na. Nisugot pajud ka mu baligya ug 50.
Paninguha ra ko ug naay tay halin. Naka baligya
unta ko nay willing mu palit unya ako pag sad-an
karon. Na convince na unta tos Purisima to buy 50
cars! Nya, sad-an pa gyud?

Student: Sir in my opinion in the matter is that in

article 1791, there is an intervening clause that to
save the business therefore sir my analysis is this
is that we have to distinguish whether in the
contract that has already been perfected
Sir: its just a purchase order. . theres no
commitment on the part of the seller but theres a
commitment to buy.
Student: With that in mind sir, this does not meet
the requirement of 1791, because if a partner is
compelled to sell his share in the partnership, the
law provides this as a punishment for him for not
being interested in the profits and in the
continuance in the business. Therefore to deny the
partner that part his share would mean that the
other partners would be relieved in carrying in him
in the business and at the same time profiting
without him. Therefore sir, the conditions is that
the activity must be in order to save the
business. and in this case if the business would still
continue in fact, then the venture is not really lost.
Sir: So there is no loss?
Student: there is a loss
Sir: what loss is this?
Student: the probability of not getting the 25m.
Sir: Loss of the transaction! Is this a ground to
buy out?
Student: No sir.
Sir: What the law contemplates is loss of?
Student: The loss of venture.
Sir: Loss of the venture itself. In other words, if we
cannot proceed with this transaction, do we have
to close?
A: No sir.
Sir: In this case, there is a mere loss of transaction,
which the law does not contemplate. Pugson jud ni
nato? Since, our business does not close, we have
to continue our business. So this does not apply. It
only applies when?
Student: It applies when there is an imminent loss
of venture and not just a particular transaction.

EH 402 | July 10, 2015 WWW Partnership, Agency and Trust 5

Sir: Going back to management, how is partnership
managed?
Student: a partnership is managed pursuant to the
law when there is no agreement to the contrary,
every partner is an agent and at the same time a
manager of the partnership. Therefore his acts
provided they are not in bad faith will bind the
partnership.
Sir: So here are the partners A, B and C was
engaged in another business. The partnership
business was car dealership that c engaged in the
lending business. Do you think C can engage in the
lending business?
Student: Sir Id like to qualify. In this particular case
since there is no stipulation to the contrary, we can
presume that they are general partners and we can
likewise presume that if they are capitalist partners
since this is a car dealership business C being
engaged in the lending business, since this is not in
direct competition in the partnership business is
allowed. However if C was exclusively an industrial
partner, and by contemplation of law, the industrial
partners must contribute his entire service to the
partnership, regardless of whether this is in
competition in the car business, C is now allowed
to engage in another business.
Sir: So that if C were a capitalist partner, may C
engage in the lending business?
Student: He can engage in the lending business as
there is no competition with the business.
Sir: and here is costumer x. he bought a unit form
the partnership and paid 50% down but needed the
balance to pay the balance in instalments. And so
he went to partner c. C I still owe the partnership
the balance. Can I borrow from you being a
lender? Can c lend money to the customer of the
partnership?
Student: C can lend as C having a different business
can lend to customer x. my reason for this is that in
the contemplation of law is that there must not be
a competition between the other business of the
capitalist partner and that business which he
engaged in the partnership. In this particular case,
they are not in competition but are complementing
each other.

Sir: Exactly! It does not compete it even

complements and so C extended the loan for
Customer x to pay the balance. However, after
extending the loan, x now demanded payment.
Although x said patay, 10,000. So partner C
accepted the balance. Any obligation on the part of
partner c?
Student: Yes sir there is an obligation on the part
of partner c. however, my answer would have to be
distinguished sir. First is that, we have to look into
the kind of __ that partner c does in the business.
If he is the managing partner, then the obligation
of partner c, when he released the credit to x as his
own credit in the lending company, once he
receives it, he has to distribute the credit that
customer x gave him even when such credit is
received by the lending business. Therefore, this
particular payment by x would have to be
distributed proportionately to the credit in the
lending and to that of the partnership provided that
partner c is that managing partner. Not just the
managing partner but manages the business.
Sir: Anything else?
Student: This rule however does not apply strictly
if one is not a managing partner.
Sir: Only? When do we apply the rule?
Student: So when a managing partner receives
credit, sir
Sir: A managing partner receives credit? *Calls
another student* Does managing partner ever
receive credit?
Student: No sir.
Sir: No. a managing partner doesn't receive credit.
He receives?
Student: he receives payment.
Sir: Somebody extends credit does not receive
credit. The managing partner here under the
situation receives
Student: The rule provides that if ever the amount
the managing partner collects from the customer,
even if he should receive in his own name, he has
the duty to remit or to give the partnership in

EH 402 | July 10, 2015 WWW Partnership, Agency and Trust 6

proportion to the amount in which the partnership
is entitle to receive sir.
Sir: is that it? The rules give me the rules
Student: When the managing partner receives
payment in his own name and another person is
indebted to the partnership, he has the duty to
distribute the money the received as payment in
proportion to the amount of the credit in which the
partnership is entitled to. However, if the payment
is made in name of partnership, then that amount
must be fully credited to the partnership alone.
Sir: is that it? Give us the rules
Student: The rules in this specific provision sir is
that there must be 2 debts - one owing to the
managing partner and the other to the partnership.
Both debts must be due and demandable. The
partner receiving the payment should be the
managing partner. If the payment is given in the
name of the managing partner, the amount should
be applied in proportion to the credits of the
partnership and the managing partner. However, if
the payment is given in the name of the
partnership, it should be applied to the credit to
the partnership alone.
Sir: Is that it?

each, enough to celebrate Christmas. one note was

signed by x, y and z. P100,000 each. So A,B, and C,
partners, decided Lets distribute, the note of X
goes to A, Y to B, and Z to C. C and B were already
able to collect. A, knowing that he had the money,
did not collect yet.
A, wala pa lage ka nikubra? Kamu kay mga
pobre man mo.
Until Christmas day came and A did not yet collect.
New Year, still did not collect because he still had
the money. Until Valentines Day, A needed the
money to buy flowers to 10 girls, only to find out
that he did not have cash anymore, so he needed to
collect, he was looking now for the promissory
note and went to Z. Z was there feeding his dog,
He noticed that the sleepers of Z were no longer
matched, one was pink and the other was blue.
Moreover, both were left.
What did it show?
Ligan: C was insolvent.
Sir: So, if you were A, what will you have to tell?
Ligan: I will tell B and C that they would need to
give back to the partnership what they have
collected from the debtors.

Student: If the debt of the debtor is onerous, then

he has the right to choose to which the payment
may be applied.

Sir. What do you think B and C tell A.

Sir: One more time baby!

Sir. Whay would they refuse?

Student: Repeats.

Ligan: Because thats there share sir.

Sir: Give an example

Sir: nahurot na namug panghatag, daghan mi

kinugus...in other words B and C will no longer be
willing to bring back the money to the partnership.
If you were A, what would you do?

Student: For example sir, the partnership imposes

an interest rate greater than that imposed by the
managing partner. then the debtor would naturally
choose to pay that which will impose the lower rate.
Sir: you know its Christmas time and the partners
wanted to celebrate and they agreed to themselves
that we should give yourself Christmas gifts. They
went over the books and they have profits but they
did not have cash. So profit is good but so they
went over the books only to find out that there
were 3 promissory notes already due.. as a matter
of fact overdue. These notes were P100,000

Ligan: They would refuse to.

Ligan: I would have to compel B and C to give back

the money they collected.
Sir. DO you think B and C would return to the
partnership funds?
Ligan: No.
Sir. Why not?

EH 402 | July 10, 2015 WWW Partnership, Agency and Trust 7

Ligan. Because they have already used the money,
but under the law, they are required to give back.
Sir: They are, otherwise?
Ligan: They will be considered debtors to the
partnership.
Sir: If you were B, will you return?
Ligan: I would not return, but since there is a law
that requires me to give back what i have collected,
i should return it.
Sir: ...What is the law? Will you return?
Ligan: Yes.
Sir: Is there any reason for you not to return?
Ligan: Under the law sir, there is no exemption.
Sir: There is no exemption. The law is the law. Dura
lex sed lex. The law is hard but its nicer when its
hard. Will you return Valendez?
Valendez: NO.
Sir: Why not?
Valendez: Because i have already spent it sir.
Sir: Nahurot na, and the law says , if you already
spent everything, you dont need to return anything.
Is that what the law say?
Val: No sir. I think the reason behind the law is that
each partner who collects something from the
creditor, must exercise his right with prudence and
diligence, but with C, he waited for Valentines Day
is very unlikely. There is imprudence
Sir: So what would you tell A, why would you not
return?
Val: I will tell A that we should not return the
money beacuse it was the fault of C not having
exercised his right with prudence, and that it his
loss was incurred through his own delay.
Sir: I have a function to attend. Sayang akoang
kurbata og amerikana!

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