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• True or False?
• A promissory note evidencing collectible may be contributed to a
common fund.
• Political Credit is not a valid contribution.
• A license to construct may validly part of the contribution.
• The “industry” contributed may be intellectual or physical
• A limited partner cannot contribute mere “industry.
C. The object must be a lawful one.
D. There must be an intention of dividing the profit among the
partners
(Art. 1767) since the firm is for the common benefit or interest
of the partners
• A partnership was validly created:
• where two people jointly borrowed from their father a sum of
money which,
• together with their own personal funds,
• was used by them in buying real properties
• for lease to third parties,
• such investment consisting of a series of transactions and
• the management thereof being under one person
• for more than 10 years
(Evangelista, et al. v. Coll. of Int. Rev., L-9996, Oct. 15, 1957)
• NOTE: The object must be for profit and not merely for common
enjoyment; otherwise, only a co-ownership has been formed.
ATTAINMENT OF the firm becomes a juridical person from the time the
LEGAL PERSONALITY contracts begins
• An agent never acts for himself but only for his principal; a partner is
both a principal (for his own interests) and an agent (for the firm and
the others).
Partnership’ Distinguished from a ‘Joint Adventure’ (or
JOINT ACCOUNTS)
• A joint adventure (an American concept similar to our joint accounts)
is a sort of informal partnership, with no firm name and no legal
personality. In a joint account, the participating merchants can
transact business under their own name, and can be individually
liable therefor.
• Now then, suppose this requirement has not been complied with, is
the partnership still a juridical person, assuming that all other
requisites are present?
• ANS.: Yes, in view of the express provision of Art. 1768.
• Art. 1772 “is not intended as a prerequisite for the acquisition of
juridical personality by the partnership, but merely as a condition for
the issuance of licenses to engage in business or trade.
• In this way, the tax liabilities of big partnerships cannot be evaded, and
the public can also determine more accurately their membership and
capital before dealing with them.”
Consequences of the Partnership Being a Juridical Entity
• A. Its juridical personality is SEPARATE and DISTINCT from that of each
of the partners.
• Foreign partnerships may lease lands provided the period does not
exceed 99 years, there being no prohibition regarding lease.
• (b) One who enters into contract with a “partnership” as such (as
when he borrows money therefrom) cannot, when sued later on for
recovery of the debt, allege the lack of legal personality on the part of
the firm, even if indeed it had no personality. The reason is that the
borrower is in estoppel.
Sharing of Net Profits
• Sharing of NET profits is prima facie evidence that one is a partner except
in the five instances enumerated under Art. 1769 (No. 4).
• (d) As interest on a loan, though the amount of payment vary with the
profits of the business;
• For his services, he was entitled to 35% of the net profits in the
fertilizer business. Aside from this, he sued the firm for 35% of the
value of its goodwill on the ground that he had become a partner
thereof.
• Was he a partner?
• HELD: He was not a partner, but a mere employee with no power to
vote. While the parties had used the phrase “en sociedad con,” the
truth is that this should not be interpreted to mean “in partnership
with” but only as “en reunion con” or “in association with.”
Lyons v. Rosenstock 56 Phil. 632
• FACTS: Eliser and Lyons were real estate dealers who often associated
with each other in their business deals, and who owned together a
certain parcel of land. With Lyon’s consent, Eliser mortgaged the
common land to obtain money for the development of the San Juan
Estate. Lyons however expressed a desire not to participate in the
project of development.
• The business of Eliser prospered and later on Lyons asked for a share
obtained from the mortgage of the common property, and that
therefore, he and Eliser had been partners. Was there a partnership
created?
• HELD: No partnership was created, for Lyons himself did not want to
engage in the development project, the mortgage of the common
property being immaterial.
Valderrama and Co.
• Valderrama and Co., a general merchandise partnership, has become
insolvent for maladministration of the business and entered into an
agreement with its creditors to the effect that the business should be
continued for the time being under the direction and management of
an experienced businessman appointed by the creditors, an
arrangement to be carried out until the claims of the creditors are
fully satisfied.
• Can you consider the creditors who are parties to the agreement
partners? Reasons.
• ANS.: The creditors are not partners, for their only interest in the
sharing of profits is the receipt or payment of their credits. (Art.
1769).
• Yes, so long as the illegal purpose can be separated from the legal
purposes.
Is a Judicial Decree Needed to Dissolve an Unlawful Partnership?
• ANS.: No, for the contract is void from the very beginning, and
therefore never existed from the viewpoint of the law.
• This is particularly true when the object was lawful at the beginning
but has later on become unlawful.
Instances When a Partnership Is Unlawful
• Issue: Can the partners get back their capital? their profits?
• HELD: Capital- YES, Profit- No
• The partners can get back their capital, for the law speaks only of the
confiscation of profits which certainly should not be returned, first
because of the express provision of the law on profits, and second,
because to legally get profits, the action must be based on a lawful
contract or transaction, not an illegal one like this.
• Recovery of the capital indeed may be had, except if the same can
come under the category of “instruments and effects of the crime.”
Formalities Needed
• (a) For VALIDITY of the contract (among the parties) as well as for
ENFORCEABILITY, NO FORM is required as a general rule, regardless
of the value of the contributions.
• HELD: No, because the oral partnership is valid, real properties not
having been contributed.
Agad v. Mabato L-24193, Jun. 28, 1968
• [NOTE: In one case our Supreme Court ruled that even if there was a
prior agreement to form in the future a partnership, still if one of
those who had so agreed refuses to carry the agreement and to
execute the necessary partnership papers, he cannot be obliged to do
so. For here, his obligation is one to DO, not to GIVE.
• 1) universal
• a) with all present property
• b) with all profits (the individual properties here continue to be
owned by the partners, but the usufruct thereof passes to the firm)
• 1) ordinary partnership
• 2) partnership by estoppel
Classification Into General and Limited
Only the USUFRUCT of the properties of All the property actually belonging to the
the partners becomes COMMON partners are CONTRIBUTED — and said
PROPERTY (owned by them and the properties become COMMON PROPERTY
partnership); NAKED OWNERSHIP is (owned by all the partners and by the
retained by each of the partners. partnership).
ALL PROFITS acquired by the INDUSTRY As a rule, aside from the contributed
or WORK of the partners become properties, only the PROFITS of said
COMMON PROPERTY (regardless of contributed COMMON PROPERTY (not
whether or not said profits were other profits).
obtained through the usufruct
contributed).
NOTE: All Present Property
Profits from other sources may become COMMON, but only if there is
a stipulation to such effect.)
• Question: Are the two parcels of land and their fruits to be enjoyed by
the partnership?
• ANS.: The land acquired as salary as well as its fruits will belong to the
firm; but the land acquired later by inheritance will NOT belong to the
partnership since this cannot be stipulated upon. (Art. 1780).
• The fruits of the inherited land will go to the firm because said fruits
may be considered as properties subsequently acquired, and there is
no prohibition to stipulate on fruits, even if the fruits be those of
properties acquired later on by inheritance, legacy, or donation.
on Profits
• In a universal partnership of profits, A contributed the use of his car.
At the end of the partnership, should the car be returned to him?
• ANS.: Yes, because the naked ownership had al- ways been with him,
and upon the end of the usufruct, full ownership reverts to him.
Remember that only its use had been previously contributed.
• A and B entered into a universal partnership of profits. Subsequently, A
won 1st prize in the sweepstakes. Will the money belong to the
partnership?
• ANS.: Yes, even though no stipulation was made on this point because
after all the salary was acquired by A’s “industry or work during the
existence of the partnership.” (Art. 1780, par. 1).
• Such “profit” belongs therefore to the firm as a matter of RIGHT.
• ANS.: As a rule, NO, because the usufruct (use and fruits) granted to
the firm under Art. 1780, par. 2 refers only to that of the property
possessed by the partner at the time of the celebration of the contract.
• (c) Those guilty of the same criminal offense, if the partnership was
entered into in consideration of the same. (Art. 739, Civil Code).
Reason for the Article
• Generally, even if contributions have not yet been made, the firm
already exists, for partnership is a consensual contract (of course all
the requisite formalities for such consent must be present).
Duration of a Partnership
• If money has been promised, “interest and damages from the time he
should have complied with his obligation” should be given. (Art.
1788). Here again, no demand is needed to put the partner in default.
• Query: Who owns the property before it is delivered?
• ANS.: As a general rule, NO. The reason is, rescission is not the proper
remedy; the remedy should be to collect what is owing, as well as
damages. The general rule in obligations cannot apply in the case of
partnership. (Sancho v. Lizarraga, 55 Phil. 601). However, if the
defaulting partner is already dead, rescission may prosper
When Contribution Consists of Goods
• Risk of Loss
• After goods have been contributed, the partnership bears the risks of
subsequent changes in their value.
Why No Demand Is Needed to Put Partner in Default
• In the case of the 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, the injury is constant.
• (NOTE: After all, there may really have been a business loss.
Moreover, what should be brought is a civil case.)
Classification of Partners
• Capitalist partner — one who furnishes capital. (He is not exempted
from losses; he can engage in other business provided there is NO
COMPETITION between the partner and his business.)
• Industrial partner — one who furnishes industry or labor. [He is
exempted from losses as between the partner; he cannot engage in
any other business without the express consent of the other partners;
otherwise:
• 1) he can be EXCLUDED from the firm (PLUS DAMAGES);
• 2) OR the benefits he obtains from the other businesses can be
availed of by the other partners (PLUS DAMAGES). (Art. 1789)
• E.) Limited partner — one who is liable only to the extent of his
contribution.
• Ostensible partner — one whose connection with the firm is public and
open (that is, not hidden). (Usually his name is included in the firm
name.)
• Secret partner — one whose connection with the firm is concealed or
kept a secret.
• Dormant partner — one who is both a secret (hidden) and silent (not
managing) partner.
• Nominal partner — one who is not really a partner but who may
become liable as such insofar as third persons are concerned.
(Example: a partner by estoppel.)
Distinctions Between a ‘Capitalist’ and an ‘Industrial Partner’
• (a) As to contribution:
• 1) capitalist
• a) first, the stipulation as to losses
• b) if none, the agreement as to profits
• c) if none, pro rata to contribution
• To Whom Applicable
• The rule applies to capitalist partners apparently; however, the share of
the industrial partner is undoubtedly also available, for his industry may
be worth even more than the entire capital contributed.
When a Capitalist Partner Is Obliged to Sell His Interest to the Other
Partners
• (a) If there is imminent loss of the business of the partnership;
• (a) The existence of at least 2 debts (one where the firm is the
creditor; the other, where the partner is the creditor).
• (a) If P gives a receipt for the firm, it is the firm’s credit that has been
collected.
• (b) If P gives a receipt for his own credit only, P500,000 will be given to
him; the other P500,000, to the firm. (Note the use of the word
“proportion.”)
• ANS.: Yes, even if P had given a receipt for his share only.
• Reason for the law: Equity demands proportionate share in the
benefits and losses.
Who bears the Risk
• (a) Specific and determinate things (NOT fungible) — whose usufruct is
enjoyed by a firm — like a car — partner who owns it bears loss for
ownership was never transferred to the firm.
• (c) Things Contributed to be Sold — Firm bears loss for evidently, firm was
intended to be the owner; otherwise, a sale could not be made.
• (d) Contributed under Appraisal — Firm bears loss because this has the
effect of an implied sale.
Responsibility of Firm
• (a) To refund amounts disbursed on behalf of firm plus interest (legal)
from the time expenses were made (and not from demand, since after
all, a partner is an agent, and the rule on agency applies to him).
• (b) One exception is in the case of the industrial partner whom the
law itself excludes from losses. (Art. 1797, par. 2).
If the law itself does this, a stipulation exempting the industrial partner
from losses is naturally valid.
Reason Why Industrial Partner Is Generally Exempted from
Losses
• While capitalist partners can withdraw their capital, the industrial
partner cannot withdraw any labor or industry he had already
exerted.
• 2) A will get only 1/3 of P1.5 million, the net profit and not 1/3 of P3
million.
While it is true that he does not share in the losses, this only means that
he will not share in the net losses. It is understood that he share in the
losses insofar as these can be accommodated in the profits. It is but fair
to compute all the various transactions in determining the net profits or
losses
Appointment of Manager
THEREFORE:
• 1) to remove him for JUST cause, the controlling partners (controlling
financial interest) should vote to OUST HIM. (See Art. 1800, par. 1)
• ANS.: Before the acts produce legal effects insofar as third persons are
concerned.
• Reason — For them to delay or for them to protest after third parties
are affected would be unfair to said third parties. Moreover, the acts
of the firm would be unstable
Duty of Third Persons
• The rule that third persons are not required to inquire as to whether
or not a partner with whom he transacts has the consent of all the
managers, for the presumption is that he acts with due authority and
can bind the partnership applies only when they innocently deal with
a partner apparently carrying on in the usual way the partnership
business (See Art. 1818)
• (b) Although each is an agent, still if the acts of one are opposed by
the rest, the majority should prevail (Art. 1801) for the presumed
intent is for all the partners to manage, as in Art. 1801.
• What is this?
• Our Supreme Court has held that the reasonable hour should be on
business days throughout the year, and not merely during some
capricious or arbitrary period selected by the managers.
Value of Partnership Books of Account as Evidence
• The only way out is to prove that the entries had been placed therein
as a result of fraud or mistake, which of course must be proved
Duty of Partners to Give Information
• Reason for the law — There must be no concealment between
partners in all matters affecting the firm’s interest.
• This is required by good faith. Thus, this duty to give on demand “true
and full information.”
• (b) The trust relations exist only during the life of the partnership, not
before, nor after. Hence, fiduciary relations do not exist between the
persons still negotiating for the formation of partnership The trust
relations end with the death of the partnership unless the foundation
for the breach of trust took place even during the existence of the
firm.
Some Illustrations:
• ANS.: The partnership owns the house. The buying partner should
only be considered a trustee. (See Art. 1807).
• A partner in the real estate business, without the knowledge of the
other partners, bought a parcel of land in his daughter’s name and
subsequently sold the same at a profit. Should the other partners
share in the profits?
• ANS.: The words “and hold as trustee for the partnership any profits”
indicate clearly that the partnership can claim as their own (hence,
specific property) any property or money that can be traced.
Business Prohibition on Capitalist Partners
• Note that while the industrial partner is prohibited from engaging “in
business for himself” (any business),
• the capitalist partner is prohibited from engaging for his own account
in any operation “which is of the kind of business in which the
partnership is engaged” (same or similar business that may result in
competition).
• (a) the violator shall bring to the partnership all the profits illegally
obtained
• ANS.: Strictly construed, he must bring P10 million, and suffer the P2
million loss all by himself; however this would be unduly harsh, and
the proper interpretation, it is submitted, is for him to give only P8
million. In other words, losses can be deducted from profits.
• (a) In general, he has an equal right with his partners to possess the
car but only for partnership purposes (not for other purposes, except
if the others expressly or impliedly give their consent).
• (b) He cannot assign his right in the car (except if all the other
partners assign their rights in the same property).
• [NOTE: If this rule is violated, the assignment is VOID where the other
partners were able to recover what had been sold or assigned).
• The same rule applies if the right is mortgaged.
• (c) His right in the car is not subject to the attachment or execution
(except on a claim against the partnership).
• D. His right in the car is NOT subject to legal support under Art. 291 (said
Article enumerates the people who are obliged to support each other).
Kimbal v. Hamilton F. Ins. Co.
• FACTS: A and B were partners. Without A’s consent B assigned all the
specific partnership properties to X.
• HELD: Yes, for the assignment is void and is clearly against the law.
McGrath v. Cowen
• This means that the third person can sue the firm and the partners,
including the industrial partner. Of course, the partners will be
personally liable (jointly or pro rata) only after the assets of the
partnership have been exhausted.
• Even the industrial partner would have to pay, but of course he can
recover later on what he has paid, from the capitalist partners, unless
there is contrary agreement.
Liability of a Partner Who Has Withdrawn
• ANS.: Proportionate for the law says “pro rata” (proportionate). (See
Art. 1815).
• X, Y, and Z organized and registered a commercial regular general co-
partnership with a capital of P10 million, X contributing 50% of the
capital, Y 30% and Z 20%. A certain creditor who has a claim of P2
million against the co-partnership desired to file suit to collect his
claim.
• (b) Whose assets are liable for the satisfaction of the creditor’s
judgment? Explain the extent of liability of the defendant or
defendants.
Answer:
• (a) The defendants should be the firm itself and the three partners.
(Art. 1816). (NOTE — Since there are no more commercial partnerships
today, the new Civil Code provisions should be applied).
• (b) First, the assets of the firm (P10 million) must be exhausted, then X,
Y and Z will be liable pro rata in the proportion of 50-30-20 for the
remaining P10 million. (Art. 1860). Hence, X will pay from his individual
as- sets P5 million; P3 million; and Z, P2 million.
• ANS.: The answer is YES, under Art. 1817. And yet under Art. 1799, a
stipulation which excludes one or more partners (capitalist) from any
share in the profits or losses is VOID.
• Assuming that the capital of P3 million is still in the firm, what would
be the rights of the firms creditors?
• ANS.: To get the P3 million and to get still P2 million each from the 3
partners (a total of P9 million). A will thus be liable to the third persons
for P2 million. How much, if any, can A recover from B and C? It is
submitted that he can recover P2 million from B and C (P1 million
each) for as to liability as among them, he is exempted (Art. 1817) but
he cannot recover his original capital of P1 million
In the articles of a general co-ownership, one of the partners is
expressly exempted from personal liability for the losses of the
partnership. Is this agreement valid? Explain.
• Answer:
• (a) If the exempted partner is an industrial one — the agreement is
valid as among themselves, but not insofar as creditors are
concerned.
• (b) If the exempted partner is a capitalist one — the agreement is
void as against creditors of the firm. As among themselves, it is valid
— regarding contributions in excess of the capital (Art. 1817); but
void, regarding the original contribution. (Art. 1799).
When Will the Act of the Partner Not Bind the Partnership
• (a) When, although for “apparently carrying on in the usual way the
business of the partnership,” still the partner has in fact NO
AUTHORITY, and the 3rd party knows that the partner has no
authority. (This is to penalize customer or client in bad faith.)
• (b) When the act is NOT for “apparently carrying on in the usual way”
of the partnership and the partner has NO AUTHORITY.
• Here, whether or not the 3rd party knows of the LACK of AUTHORITY
is NOT IMPORTANT. As long as there was really no authority, the firm
is not bound.
• [The 7 kinds of acts enumerated in Art. 1818 are instances of acts
which are NOT for “apparently carrying on in the usual way the
business of the partnership.”
(c) “do any other act which would make it impossible to carry on” —
this is evidently prejudicial
• 4) one, some, or not all the partners in TRUST for the partnership;
• ANS.: Ordinarily YES, but the firm may get back the land unless:
• (a) the firm is engaged in the buying and selling of land (consequently,
the act of A is “usual”);
Example of Par. No. 2
• A, B, C, and D are partners of the firm “Edimus” engaged in the
buying and selling of land. A parcel of land registered in the name
“Edimus” was sold by A in his own name. Does the buyer become
the owner of the land? If not, what right does the buyer have?
• ANS.: The buyer does not become the owner of the land. However,
he gets the “equitable interest” of the firm insofar as the land is
concerned, because after all the selling of land was in the “usual”
course of business.
• Of course, the buyer may later on ask for the reformation of the
contract, so that now, the seller’s name would appear to be that of
Edimus, provided of course that the other partners would not object.
• (NOTE: If the partnership had not been engaged in the purchase and
sale of land, the buyer would not even be entitled to the “equitable
interest.”)
Example of Par. No. 3
• A, B, C and D were partners in the real estate firm of “Edimus.”
Although a certain parcel of land really belonged to the firm, it was
registered in the name of A and B. A and B sold, in their own name,
the land to X. May the firm get back the land?
• ANS.: Since the firm is engaged in the real estate business, the act of
selling the land was for carrying on in the usual way the firm’s
business. So, the firm cannot get back the land, for title thereto has
been conveyed to X.
• Question: Suppose in the preceding problem A and B had not been
expressly disauthorized by the firm to sell land, would your answers
remain the same?
• ANS.: It depends:
• (a) If X had been in good faith, that is, he had no knowledge of the
lack of authority, the answer would be the same. (1st par., Art. 1818).
• (b) If X had been in BAD FAITH, the firm can get back the land unless
X in turn had sold the property to Y who is in GOOD faith. (Here the
assignee Y of the purchaser X is a “holder for value without
knowledge.”)
Example of Par. No. 4
• A, B, C, and D were partners in the real estate firm of “Edimus.” A
certain parcel of land was in the name of “A, in trust for the firm
Edimus.”
• (a) If A sells the land to X in the name of Edimus, will X become the
owner?
• ANS.: No. What X gets will only be the equitable interest of the firm.
• (b) If A sells the land to X in his (A’s) own name, will X become the
owner?
• ANS.: No. What X gets will also be only the equitable interest of the
firm.
• ANS.: X will get the title. Consequently, he becomes the owner, for the
law says that “where the title to real property is in the names of all the
partners, a conveyance executed by all the partners passes all their
rights in such property.” (Art. 1819, par. 5).
Wrongful Act or Omission of a Partner
• A, B, and C were partners. While acting within the scope of the firm’s
business, A committed a tort against X, a third person. Is the firm
liable?
• ANS.: Yes. (Art. 1822). Moreover A, B, and C, as well as the firm itself,
are liable in solidum. (Art. 1824). Note that even the innocent
partners are civilly personally liable , without prejudice of course to
their right to recover from the guilty partner.
Injury to an Employee
• ANS.: It would seem that the answer is YES, for a mere employee is
not necessarily a partner. And yet in a Utah case, the court decided
otherwise apparently because the injury should have been caused a
person not connected in any way with the firm.
When the Firm and the Other Partners are NOT Liable
• (a) If the wrongful act or omission was not done within the scope of the
partnership business and for its benefit or with the authority of the co-
partners. (Art. 1822).
• (b) If the act or omission was NOT wrongful. (See Art. 1822 which uses the
term “wrongful”.)
• (c) If the act or omission, although wrongful, did not make the partner
concerned liable himself.
• (d) If the wrongful act or omission was committed after the firm had been
dissolved (stopped its business) and same was not in connection with the
process of winding up.
Solidary Liability of the Partners With the Partnership
• (a) While in torts and crimes, the liability of the partners is solidary, in
contractual obligations, it is generally merely joint. (Art. 1816).
• While Art. 1816 speaks of pro rata liability of the partners, and while
the Code Commission says that pro rata in this article means “in
proportion to their contribution” still the Supreme Court has ruled
that “pro rata” here means joint,
• (b) Note that torts and crimes result from individual acts of the
partners; while contractual liabilities arise from partnership
obligations.
• (c) Note that it is not only the partners that are liable in solidum; it is
also the partnership.
• A and B are partners. A misappropriates a sum of money belonging to
a customer X but which was already in the custody of the partnership.
Whom can X hold liable?
• ANS.: X can hold liable either the firm or A or B, and the liability is for
the whole amount because it is solidary.
• ANS.: Yes, but his liability will extend only to his share in the
partnership property, not to his own individual properties. (Art.
1826).
• ANS.: Yes, and it is precisely because of this principle that Art. 1826
has been enacted. The reason is simple: since the old firm is
dissolved, the original creditors would not be the creditors of the new
firm, but only of the original partners; hence, they may lose their
preference.
• To avoid this injustice, under the new Civil Code (together with the
new creditors of the new firm), they are also considered creditors of
the NEW firm.
DISSOLUTION AND WINDING UP
• Dissolution is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on of the business.
(Art. 1828). It is that point of time when the partners cease to carry
on the business together
• Termination is the point in time after all the partnership affairs have
been wound up.
Effect on Obligations
• (a) Arts. 1830 and 1831 give the causes for dissolution.
• (b) Note that in Art. 1830, eight causes are given, the first one of
which is subdivided into four instances.
No Violation of Agreement
• In No. 1 cause (in Art. 1830), the partnership agreement has NOT
been violated —
• Here the contract is the law between the parties, if the firm however
still continues after said period, it becomes a partnership at WILL.
• (b) express will of a partner who must act in good faith when there
is NO definite term and NO specified undertaking
• (c) express will of all partners (except those who have AS- SIGNED or
whose interests have been CHARGED)
• If one partner says he will not have any- thing more to do with the
firm, and the other does not object, there is dissolution by implied
mutual consent.
• (d) expulsion in good faith of a member
• Even if there is a specified term, one partner may cause its dissolution
by expressly withdrawing even before the expiration of the period,
with or without justifiable cause.
• If the business later on becomes unlawful, it follows that the firm will
not be allowed to carry on.
• On the other hand if the business or object had been unlawful from
the very beginning, the firm never had any juridical personality.
Cause No. 4 — LOSS
• (a) If a specific thing promised as contribution is lost BEFORE delivery.
• Reason: The firm is dissolved because the partner has NOT given his
contribution.
• If lost after delivery, the firm bears the loss, and the partner remains,
since after all, he had given his contribution.
• The rules just given do not apply to generic things, for genus does not
perish.
• (b) If only the use of a specific thing is contributed, and it is LOST
BEFORE or AFTER delivery to the firm.
• Reason: Here, the naked owner reserved the owner- ship, its loss is
borne by him, so it is as if he had not contributed anything.
(6) Cause No. 5 — DEATH of ANY Partner
• One of the partners subsequently died, and this was before the
expiration of the partnership life. The deceased partner was then
replaced by his widow.
• Issue: Does the widow or substitute become also a general partner or
only a limited partner?
• HELD: She became a mere general partner. The articles did not provide
that the heirs of the deceased would be merely limited partners; on
the contrary, they expressly stipulated that in case of death of either
partner, “the co-partnership... will have to be continued” with the
heirs or assigns.
Cause No. 6 — Insolvency of any Partner or of the Partnership
• (a) The insolvency need not be judicially declared; it is enough that
the assets be less than the liabilities.
• One of A’s rights was to demand an accounting so that his share could
be determined. This right, he could transfer to X. So X can demand
the accounting.
Dissolution by Judicial Decree
• (a) A partner for any of the 6 causes given in the first paragraph.
• If the period is not yet over, said purchaser cannot sue for dissolution
Insanity of a Partner
• (a) Even if a partner has not yet been previously declared insane by
the court, dissolution may be asked, as long as the insanity is duly
proved in court.
(b) On the other hand by other things, like TERMINATION of the period.
Dissolution Caused by A-I-D
• Art. 1833 speaks of dissolution caused by A-I-D, and the effects on the
partners as among themselves, if a partnership liability is incurred
(that is, if the firm is STILL BOUND).
• If the firm is not bound, see Art. 1834, where only the partner acting
is liable.
Effect of A-I-D
• In Art. 1833, all the partners are still bound to each other generally,
except in the 2 instances mentioned, namely:
• (a) If the partner acting had KNOWLEDGE (as distinguished from
mere NOTICE, but without actual knowledge), if dissolution is caused
by an ACT (like withdrawing, retiring).
• (Here, only the partner acting assumes liability, in that even if the firm
may be held by strangers, and even if the partners will still be
individually liable, still the other partners can always recover from the
partner acting.)
• (b) If the partner acting had KNOWLEDGE or NOTICE, if dissolution
was caused by death or insolvency.
• Here again, while the firm may be liable, in proper cases, recovery can
be had by the other partners from the partner acting.
• A, B, and C were partners. A resigned from the firm. Therefore it was
dissolved. B knew this, and yet he still deliberately entered into new
transactions with X, an innocent customer. (The meaning of “innocent
customer” will be discussed in the next article.) The transactions were
not needed for winding up. Will the firm be still liable?
• ANS.: Yes. (See Art. 1834). If the firm assets are not enough, X can still
go after the individual assets of A, B, and C.
• After all of them have paid X, can A and C still recover from B, the
partner who acted despite his knowledge of the firm’s dissolution?
• ANS.: Yes, because B should not have done what he did.
• (b) If in the preceding problem, X knew of the dissolution, the firm
cannot be held liable. Neither will A or C be liable. Only B and X are
concerned, and they will have to settle with each other, depending
on their reason why they still entered into the contract.
• (c) Note that for (a) to apply, B, must have knowledge, not merely
notice. If A had died or had become insolvent, the principles in (a)
will be followed whether B had knowledge or mere notice.
• [NOTE: Death or insolvency, being more ordinary than an “act, notice
is enough. Hence, the law provides “knowledge or notice.” However,
it is still essential that there be “knowledge or notice” of the fact of
death or insolvency to justify non-liability of the other partners to the
partner acting.
• In (a), the customer had previously extended credit, that is, was a
previous creditor. In case of dissolution he deserves to ACTUALLY
KNOW.
• ANS.: No, because after all there had been a publication of the
dissolution and it is his fault that he did not read the advertisement.
He did not deserve special attention for after all he had never been a
previous creditor of the firm.
• Had there been no notice of dissolution and X did not actually know of
the dissolution, the firm would have been liable
Liability of the Unknown or Inactive Member:
• ANS.: YES.
• Question: If the partnership assets are insufficient, can X go after the
individual properties?
• ANS.: Yes, except with reference to C, because the law says that C’s
liability “shall be satisfied out of the partnership assets alone.”
When Is the FIRM Not BOUND?
• (a) in all cases not included in our answer in COMMENT No. 2 of this
article.
Example: new business with 3rd parties who are in BAD FAITH,
as already explained.
• (b) where the firm was dissolved because it was UNLAWFUL to carry
on the business (as when its objects were later declared by law to be
outside the commerce of man)
• ANS.: Yes, but of course his individual creditors (as distinguished from
the firm creditors) are to be preferred. (3rd par., Art. 1835).
Three Rights
• The Article speaks of 3 rights (without prejudice to his other rights
under other legal provisions):
• (a) right of LIEN or RETENTION
• (b) right of SUBROGATION
• (c) right of INDEMNIFICATION
right of LIEN or RETENTION
• To a lien on, or right of retention of, the surplus of the partnership
property after satisfying the partnership liabilities to third persons
for any sum of money paid by him for the purchase of an interest in
the partnership and for any capital or advances contributed by him;
right of SUBROGATION
• To stand, after all liabilities to third persons have been satisfied, in
the place of the creditors of the partnership for any payments made
by him in respect of the partner- ship liabilities; and
right of INDEMNIFICATION
• To be indemnified by the person guilty of the fraud or making the
representation against all debts and liabilities of the partnership.
Order of Payment of Firm’s Liabilities
• (a) First give to creditors (who are strangers), otherwise they may be
prejudiced.
• (b) Then give to partners who are also creditors (they should be placed in a
subordinate position to outside creditors for otherwise they may prefer
their own interests).
• Capital should be given ahead of profit for it is only the surplus profit over
capital that should be considered as the gain or the profit of the firm.
• An industrial partner, who has not contributed money or property at
all is, in the absence of stipulation, not entitled to participate in the
capital. He shares in the profits, however.
• (d) Lastly, the profits must be distributed.
• If, during the liquidation of a firm, the profits for a certain period of
time cannot be exactly determined because no evidence or
insufficient evidence thereof is available, the court should determine
the profit for the period by finding the average profits during the
period BEFORE and AFTER the period of time in question.
New Contributions
• If the partnership assets are insufficient, the other partners must
contribute more money or property. Who can enforce these
contributions?
• ANS.: (a) In general, any assignee for the benefit of the creditor; or
any person appointed by the court (like a receiver). . (Reason: Said
enforced contributions may be considered as partnership assets, and
should therefore be available to the creditors).
• (b) Any partner or his legal representative (to the extent of the
amount which he has paid in excess of the share of the liability). (
• A, B, and C are partners. A died. Is A’s estate still liable for the
contributions needed to pay off the partnership obligations?
• ANS.: Yes. (Generally, as long as the said obligations had been incurred
prior to his death.)
LIMITED PARTNERSHIP
• (a) The signing under oath of the required certificate (with all the
enumerated items), and
• (b) The filing for record of the certificate in the Office of the
Securities and Exchange Commission.
Non-Fulfillment of the Requisites
• If the proposed limited partnership has not conformed substantially
with the requirements of this article, as when the name of not one of
the general partners appear in the firm name, it is not considered a
limited partnership but a general partnership.
• The law says that the contribution of each limited partner must be
stated. Therefore if the aggregate sum given by two or more limited
partners is given, the law has not been complied with.
Effect of Omitting the Term “Limited” in the Firm Name
• The law requires the firm name to have the word “Limited.” If this
provision is violated, the name cannot be considered the firm name
of a limited partnership
What the Limited Partner Can Contribute
• Note that a limited partner violating this article is li- able as a general
partner to innocent third parties, without however the rights of a
general partner.
Effect of Taking Part in the Control of the Business
(a) The following acts do not constitute taking “part in the control of
the business”:
• 1) mere dealing with a customer.
• 2) mere consultation on one occasion with the general partners.
• (b) The following have been held to constitute taking “part in the
control of the business”:
• 1) selection of who will be the managing partners.
• Note that even after a limited partnership has already been formed,
the firm may still admit new limited partners, provided there is a
proper amendment to the certificate.
Effect of Failure to Amend
• ANS.: I distinguish:
• (a) X’s claim should be satisfied out of what has been returned to A.
• Reason: X’s claim arose before the return. If there is a balance, it should
be returned to A. If there is a deficit, A is not liable for this because he is
only a limited partner.
• (b) Y’s claim does not have to be satisfied from what has been returned
to A as contribution.
• Reason: His claim arose after the return. Y’s claim should be directed
against the general partners.
• A, a limited partner, assigned his interest to B. In the certificate, A was
expressly given the right to give the assignee the right to become a
substituted limited part- ner. Is B now a substituted limited partner?