OBLIGATIONS OF THE PARTNERS

 4 distinct juridical relations in a partnership:

 (1 ) Among the partners themselves;

 (2) Between partners and the partnership;
 (3) Between the partnership and third persons it
contracted; and
 (4) Between partners and that third persons.
 EXAMPLE:

 If A and B formed a partnership called X & Co.,

and it transacts business with Y, a third person.
 What are the 4 juridical relationships?
 1. relations between A and B;
 2. relations between A and B, on the one hand,
and X & Co., on the other;
 3. relations between X & Co. and Y; and
 4. relations between A and B, on the one hand,
and Y, on the other.
 Art. 1784. A Partnership begins from the
moment of the execution of the contract,
unless it is otherwise stipulated. (1679)
 This provision talks about birth of the partnership
– that is, as a general rule, upon the execution
of contract (Articles of Partnership, or
Partnership Agreement);

 But why is birth or commencement of a

partnership (or of any thing, for that matter)
important?
 It gives rise to rights (on one hand) and
obligations (on the other);
 General rule: Partnership exists from the moment of
the partners signed contract;
 But provided that all the essential requisites of a
contract of partnership are present;

 The birth of the partnership is not affected by:

 1. Partners have not given yet their contributions;
 2. Partners have not fixed yet the conditions or
details of their participation as to profits and losses;
 3. The nature of the partnership have not yet been
fixed;
 Reason: These are not essential parts of a partnership
contract.
Exception to the Rule that Partnership starts at the execution of
the contract of partnership:
 1. Future partnership – partners may stipulate
some other date for the commencement of the
partnership;
 Example:
 > stipulation that persons to become partners at:
 (a) some future time; or
 (b) happening or fulfillment of some condition;
 (c) happening of future contingency.

 Become partners only if the agreed time has

arrived or the condition has happened.
 Future partnership – at present it has no juridical
existence yet.
• 2. Agreement to create partnership –
• This is only an agreement to enter into a
contract of partnership at a future time.
• Thus, there is no partnership yet;

• By analogy, this is similar to a “contract to sell”

as distinguished from a “contract of sale”.
3. Failure to agree on material terms –

 Indication that parties intended to be bound

only in the future;
 Effect – No rights or obligations will arise;

 By analogy – “not-serious” buyer in a sale;

 Art. 1785. When a partnership for a fixed term or
particular undertaking is continued after
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 a 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)
 The provision talks of a partnership with a fixed
term;

 A partnership with a fixed term is one in which

the term of the existence has been agreed
upon expressly (as when there is a definite
period) or impliedly (as when a particular
enterprise or transaction is undertaken).

 Dissolution of this kind of partnership is (a) upon

the expiration of the term fixed, or (b) the
accomplishment of the particular undertaking.
 Can a partnership with a fixed term (whose
term has expired or the undertaking has been
accomplished) continue?
 Or can partners continue their partnership with
a fixed term despite the expiration of the term
or the accomplishment of an undertaking?
 Yes, by express agreement (written or oral), or
impliedly (just continue the business of the
partnership without settlement or liquidation).
 By analogy – contract of lease for one (1) year;
What is the rule?
 a. Partnership with a fixed term is dissolved;

 b. It becomes a partnership at will;

 > at will – means a partner may terminate a
partnership as he wishes;
 > reason – partnership is PERSONAL; no one can
be forced to continue as a partner;

 c. Any partner can, as a matter of right, end the

partnership;
 > No need to justify the reason for termination;
 > But he must be in good faith, otherwise, he will
be liable for damages to other partners;
 > Termination be at a proper and reasonable
time.
EXAMPLE:

 A partnership with a fixed term was continued by

partners A, B, and C without express agreement.

 If their original stipulation is that the net profits shall

be divided equally and that C shall be the
managing partner, the same profit ratio shall still
govern and C shall continue as managing partner.

 The partnership having become a partnership at

will, can lawfully be terminated at any time by the
express will of all the partners or any of them.
 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)
 Remember – the 4 relationships in a partnership;

 This talks about 2 relationships:

 (a) partners among themselves; and
 (b) partners to the partnership;

 It deals with an obligation of a partner – to deliver

what he promised to contribute to the partnership;
 When will he deliver?
 (a) at the beginning of the partnership;
 (b) at the stipulated time.
 Since he promised, he becomes a debtor of the
partnership;

 As debtor, his relationship to the partnership is akin

to that of vendor-vendee, with these obligations:
 To deliver what he has promised to contribute;
 To warrant that what he will contribute
(determinate thing) is free from defects and
against eviction;
 To deliver the fruits of the thing he promised to
contribute without need of demand;
 What is the significance of a “demand”?
 Generally, there is no “default” if there is no
demand.

 Delay vs. Default

 Art. 1169 talks about DELAY;
 1. Ordinary delay – mere failure to perform an
obligation on time;
 2. Legal delay (default or mora ) – failure to
perform an obligation on time which failure
constitutes a breach of the obligation;
 Demand (not mere reminder or notice);

 Demand may either:

 1. judicial (complaint is filed in court); or

 2. extra-judicial (made outside of court)

orally or in writing;
Summary of Obligations – Re: Contribution of Property

 1. To deliver at his designated time the thing he

promised to contribute;
 2. To answer for eviction;
 3. To deliver the fruits of the thing he promised,
and be liable for the delay;
 4. To preserve said property with the diligence of a
good father of a family pending delivery to the
partnership; and
 5. To be liable for damages as a result of his
withholding of or delay in its contribution.
 What happened to the money or property
contributed by a partner to the partnership?
 It becomes the property of the partnership.

 Therefore, it cannot be withdrawn or disposed by

the contributing partner without the consent or
approval of the partnership or of other partners.
Effect of failure to contribute property promised:

 1. Liability as debtor to partnership;

 > failure to contribute makes the partner
automatically a debtor of the partnership without
need of a demand;

 2. Remedy of other partner;

 > Not rescission or cancellation of the contract of
partnership but action for specific performance;
 > To collect with damages and interest from the
time he should have complied with his obligation.
 But can a partner rescind or annul a partnership
contract?
 Yes, but not on the ground of failure to deliver
what was promised as contribution to the
partnership.

 The proper ground is fraud or misrepresentation

by one of the parties - under Article 1838 of the
Civil Code;
 > When is there eviction?
 > Under the law on sales, eviction takes place
when by a final judgment based on a right prior
to the sale or an act imputable to the vendor,
the vendee is deprived of the whole or a part of
the thing purchased. (Art. 548);
 > Example

 > As to fruits –
 > no demand is necessary to put the partner in
default;
 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
partnership, and in absence of stipulation, it
shall be made by experts chosen by the
partners, and according to current prices, the
subsequent changes thereof being for the
account of the partnership. (n)
Appraisal of goods or property contributed

 Why appraisal is necessary?

 > to determine how much a partner has
contributed;

 How appraisal is made?

 1. Per agreement (as to the manner);
 2. In the absence of agreement, by experts
chosen by the partners and according to
current prices;
 3. The share of each partner in the profits and
losses is in proportion to what he may have
contributed (Art. 1797);
 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)
 This article talks about the obligations of a
partner who used the partnership’s money.

 Two (2) situations:

 1. Money promised but was not given on time;
 2. Partnership’s money used by a partner for his
personal ends.
Obligations of partners under Article 1788:

 1. To contribute on the date due the money

promised as contribution;
 2. If able to use partnership’s money for personal
ends, to reimburse said amount;
 3. To pay the agreed or legal interest for delay on
giving contribution, or for use of partnership’s
funds for personal ends; and
 4. To pay the partnership damages for the delay in
contribution or personal use of partnership’s funds.
When is the guilty partner liable for interest and damages?
What is the reckoning period?
 From the time the money should have been
contributed and/or the time he used the funds of the
partnership for personal ends;
 NOT from the extra-judicial demand (sending of a
demand letter) or judicial demand (filing of
complaint in court).
 Why is there damages?
 > Ordinarily – in obligations to pay money, the award
for damages is only for the payment of interest;
 > But in partnership – Exception;
 > Article 1794 that every partner is responsible to the
partnership for damages suffered by it through his
fault xxx.
 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)
This deals on – partners prohibited from engaging in
business:
• 1. Industrial partner – prohibition is absolute;
• > applies regardless the business of industrial partner is
the same of that of the partnership or not;
• > to prevent conflict of interest;
• > can’t serve to masters at the same time;

• 2. Capitalist partners – prohibition is not absolute;

• > applies only to the business of capitalist partner
which is the same of that of the partnership;

• But partners may agree to allow industrialist and

capitalist partners to engage in business.
Remedies available in case of violation:

• 1. Capitalist partners can exclude erring

industrialist partner from the firm; or

• 2. Avail themselves of the benefits which he may

have obtained;

• 3. Right to damages;

These remedies are also available to industrial

partners against erring capitalist partners.
 Art. 1790. Unless there is a stipulation to the
contrary, the partners shall contribute equal
shares to the capital of then partnership.
Rule on contribution to partnership capital

 General rule – equal contribution;

 But partners may agree on the contribution of
unequal shares to the common fund;
 Legal basis –
 > xxx Rule that partners are deemed to have
equal rights and obligations (Art. 1770).

 Note – Equal or unequal contribution does not

apply to industrialist partner;
 Except if, in addition to his services, he has
contributed capital pursuant based on partnership
agreement.
 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 partner. (n)
Imminent loss of partnership’s business

 Imminent – forthcoming; impending;

 > General rule – capitalist partner not bound to

contribute beyond what he agreed or promised;
 > If there is imminent loss of business and majority
of the capitalist partners decide to save the
partnership:
 - Check if the terms of the partnership agreement;
 - If none, capitalist partner has obligation to
contribute additional capital;
 - In case of refusal (deliberate), his interest shall be
sold to the other partners.
• Reason for the sanction:

• > Refusal of the partner to contribute his

additional share reflects his lack of interest in the
continuance of the partnership.

• > It would be unjust for him to remain and reap

the benefits of the efforts of the others while he
himself refuses to help.
 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)
 The provision applies only when:

 1. At least two (2) debts – one is due to the

partner; the other due to the partnership;

 2. Both debts are demandable; and

 3. Partner who collects has the authority to

manage the partnership.
 Managing partner who collects debt:
 > Sum received shall be applied to the two (2)
credits in proportion to their amounts;
 > Exception: If the sum received is for the account
of the partnership.

 Not apply when the partner who collects for his

own credit only is not authorized to manage.
 What is the reason for applying payment to
partnership credit?
 Give example
 Note – The debtor is given the right where to apply
his payment.

 But the condition is - The credit of the partner is

more onerous;

 EXAMPLE:

 If the obligation in favor of A bears 15% interest per

annum while that in favor of the partnership is 14%
interest per annum, the credit of A being more
onerous or burdensome, the law allows C to prefer
the payment of A’s credit in case he so desires.
 Art. 1793. A partner who has received, in
whole or in part, his share to 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)
Partner’s obligation who receives share of
partnership credit

 This provision talks of only one (1) credit – in favor

of the partnership;

 Different from Art. 1792 – deals with two (2) distinct

credits:
 (1) in favor of the partnership; and
 (2) in favor of the managing partner.

 Also, Art. 1793 applies whether or not the partner

(who receives his share of the partnership credit) is
authorized to manage the partnership.
Requisites for Art. 1793 to apply:

 1. A partner has received, in whole or in part, his

share of the partnership credit;

 2. Other partners have not collected their shares;

 3. Debtor of partnership has become insolvent.

EXAMPLE:

 D owes partnership X and Co. (A, B and C) P4,500.

 A received a share of P1,500 ahead of B and C.
When B and C were collecting from D, the latter was
already insolvent.
 In this case, even if A had given a receipt for his
share only, he can be required to share the P1,500
with his partners B and C.
 Note: Not to pay the balance of P3,500, but only to
share the P1,500 A has received from D.
 Why share? Because the debt of D becomes a bad
debt; fairness in line with the principle of “community
of interest” of partners.
 Art. 1794. Every partner is responsible to the
partnership for damages suffered by it through his
fault, and he cannot compensate them with the
profits and benefits which he may have earned for
the partnership by his industry. However, the courts
may equitably lessen this responsibility if through
the partner’s extraordinary efforts in other activities
of the partnership, unusual profits have been
realized. (1686a)
 Damage suffered by the partnership through the
fault of a partner:

 Rules:
 1. Erring/responsible partner is liable;
 2. He/She cannot compensate (set-off) his/her
liability with the profits and benefits which he may
have earned for the partnership by his industry;
 3. But courts may equitably lessen this liability/
responsibility if through his/her extraordinary
efforts in other activities of the partnership, the
partnership earned unusual profits.
 Legal basis:

 Any person guilty of negligence or fault in the

fulfillment of his obligation, shall be liable for
damages. (Art. 1170)
 Art. 1795. The risk of specific and determinate
things, which are not fungible, contributed to the
partnership so that only their use and fruits maybe
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 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)
5 Cases on “risk of loss” of things contributed

 1. Specific and determinate things which are not

fungible where only the use is contributed;

 Fungible - a good one part or quantity of which can be

substituted or replaced for another of equal value in
satisfying an obligation.
 Fungible things - are things or goods of which any unit is,
from its nature or by mercantile usage, treated as the
equivalent of any other unit, such as oil, wine, rice, etc.;

 > The risk is borne by the partner because he remains

the owner of the things (like car);
 2. Specific and determinate things the ownership of
which is transferred to the partnership;
 > The risk is for the account of the partnership, being
the owner;

 3. Fungible things or things which cannot be kept

without deteriorating even if they are contributed
only for the use of the partnership;
 > The risk of loss is borne by the partnership for
evidently the ownership was being transferred since
use is impossible without the things being consumed
or impaired.
 4. Things contributed to be sold;
 > The risk is for the account of the partnership for
there cannot be any doubt that the partnership was
intended to be the owner; otherwise, the partnership
could not effect the sale; and

 5. Things brought and appraised in the inventory;

 > The partnership bears the risk of loss because the
intention of the parties was to contribute to the
partnership the price of the things contributed with
an appraisal in the inventory. There is, thus, an
implied sale making the partnership owner of the
said things.
 Note:

 In this provision, it is required that the things

contributed have been delivered actually or
constructively to the partnership.

 Before delivery, the risk of loss is borne by the partner.

 If the loss is due to the fault of any of the partners, he

shall be liable for damages to the partnership.
 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 expense
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)
3 Obligations of the partnership to each partner:

 1. To refund amounts disbursed by him in behalf of the

partnership plus the corresponding interest from the time
expenses are made (not from date of demand);
 Ex. loans or advances made by a partner to the
partnership other than capital contributed by him;

 2. To answer for the obligation he may have contracted

in good faith in the interest of the partnership business;
 Ex. purchase price of supplies needed by the
partnership)

 3. To answer for risks as a result of its management.

 Ex. loss of his property, accidents
 EXAMPLE:
 The articles of partnership of Partnership X
composed of A, B, and C provides that any
purchase in excess of P50,000 must first be
approved by all the partners.

 C made a purchase of goods out of his personal

funds for P60,000 without the knowledge and
approval of A and B. Partnership incurred a loss.

 Here, C is not entitled to be reimbursed for the

purchased.
 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)
Note:
 This article gives - rules for distribution of profits and losses;
 Does not deal with the liability of the partners to third persons
(which is governed by Article 1816);
A. Distribution of profits:
1. According to their agreement subject;
 The agreement must be contrary to Art. 1799;
 Art. 1799 – A stipulation which excludes one or more partners
from any share in the profits or losses is void. (1691)
2. If no agreement:
a. Share of each capitalist partner - in proportion to his capital
contribution;
b. Share of industrial partner must be given and satisfied first before
the capitalist partners shall divide the profits;
 Share of an industrial partner in the profits is not fixed since it is
very difficult to ascertain the value of the services of a person.
EXAMPLE:

 A, B, and C formed a partnership, where each of

them contributed P30,000. They agreed that should
the partnership realize/earn profits, the same shall
be distributed in the following proportions:
 A, as a manager partner - 40%
 B - 30%
 C - 30%

 Here partners shall share the profits in conformity

with their agreement. If there is no agreement with
respect to the share of each partner, then they
shall share the profits equally.
 Suppose, the contribution of the partners are as
follows:
 A - P30,000
 B - 20,000
 C - 10,000
 Total - P60,000

 If no stipulation, the share of each of the partners

shall be in proportion to his contribution, that is:

 A - 3/6
 B - 2/6
 C - 1/6
Case:

 Angela, Boni and Christine formed ABC

Partnership contributing the following:
 (a) Angela = P50,000;
 (b) Boni = P20,000; and
 (c) Christine = P10,000.

 ACB Partnership is indebted to the following:

 (a) Xeres = P60,000;
 (b) Yangco = P20,000; and
 (c) Christine (partner) = P10,0000.

 The gross capital upon dissolution is P250,00.

 In case of liquidation:

 A. How much should Christine (Partner) recover?

 B. Explain in detail the order of liquidation.

 Legal opinion:
 Gross Capital P250,000
 Those owing to creditors
 Xeres P60,000
 Yangco P20,000 P 80,000
 P170,000
 Those owing to partners
 Other than capital and profit
 Christine P10,000 P 10,000
 P160,000
 P160,000
 Those owing to partners with
 Respect to their capital
 Angela P50,000
 Boni P20,000
 Christine P10,000 P 80,000
 P 80,000
 Those owing to the partners
 with respect to profits
 Angela – 5/8 of P80,000 = P 50,000
 Boni – 2/8 of P80,000 = P 20,000
 Christine – 1/8 of P80,000 = P 10,000
 P 80,000
 xxx
 Thus:

 Xeres may recover a total amount of P60,000;

 Yangco may recover a total amount of P20,000;

 Christine may recover a total amount of P30,000.

If D is an industrial partner, he shall receive such share
- just and equitable under the circumstances.

Assuming that the partnership makes a profit of

P17,000, the partners may determine that D, as
industrial partner, is entitled to P2,000. The balance of
P15,000 will be divided among A, B, and C in
proportion to their respective capital contributions.

If aside from his services, D contributed P4,000, then

he will also share in the balance of P15,000 in
proportion to his contribution which is 1/16
(P4,000/P64,000) or P937.50. A, B and C will share
P7,031.25, P4,687.50, and P2,343.75, respectively.
 Distribution of losses

 a. Losses shall be distributed according to partners’

agreement subject to Article 1799;

 b. If NO agreement, but contract provides for the

share of the partners in the profits, the share of
each in the losses shall be in accordance with the
profit-sharing ratio, but the industrial partner shall
not be liable for the losses.

 In determining profits or losses of the partnership,

the results of all transactions shall be considered.
 c. If NO profit-sharing agreed upon, losses shall be
borne by partners in proportion to their capital
contributions, but purely industrial partner shall not be
liable for the losses.

 EXAMPLE:
 In the same example, the partners will share in the
losses in conformity with their agreement. If they
failed to agree as to the sharing of losses, the share of
each partner in the losses shall be in the same
proportion stipulated with regard to the share of each
in the profits, to wit:
 A - 40%

 B - 30%

 C - 30%
 If NO profit-sharing ratio stipulated, then losses shall
be divided in proportion to capital contributions.

 D, however, being an industrial partner, shall not be

liable for losses but the same shall be borne by A, B,
and C, the capitalist partners. However, if D is also a
capitalist partner, then he shall share in the losses in
proportion to his contribution.
 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)
 Rule in intrusting of share in profits and losses:

 > Yes to a third person – but by common consent;

 > No to a partner – Reason: to guarantee the outmost

impartiality in the distribution of shares in the profits
and losses.
 Designation to a third person:
 Generally, binding;
 Exception: if manifestly inequitable.
 > Here, the designation must be questioned/
impugned within three (3) months from the time
aggrieved partner had knowledge;

 > Otherwise, he can no longer complain;

 > Why can’t complain?
 - Deemed guilty of estoppel, or to have given his
consent, or ratification to the designation;
 > Why only 3 months?
 - To restore whatever business interruptions.
 Estoppel

 > principle precluding a person from asserting

something contrary to what is implied by his/her
previous action or statement, or by a previous
pertinent judicial determination;

 > a legal principle that prevents someone from

arguing something or asserting a right that
contradicts to what he/she has previously said
or agreed upon.
 Art. 1789. A stipulation which excludes one or
more partners from any share in the profits or losses is
void. (1691)
 Rules if one or more partners has NO share in the profits
or losses:
 1. Agreement/stipulation generally void, but partnership
subsists/exists;
 Reasons:
 > The law prohibits such agreement of stipulation;
 > Thus, such agreement/stipulation shall be disregarded;
 > Profits or losses – to be distributed as if there was no
stipulation – based on partners’ capital contributions;
 But the partnership must exists;
 An agreement/stipulation that one or more partners has
no share in the profits or losses is an indication that there
is no partnership.
 Agreement where industrial partner is excluded
from losses:
 > Valid – the law excludes industrial partner;

 Agreement for unequal shares on profits or losses:

 > Valid – even if there contributions are equal;
 > Exception – the inequality is so gross resulting to
an attempt to exclude a partner from any share in
the profits or losses.
 Why industrial partner exempted from losses?
 > Because he cannot withdraw the work or labor
already done by him, unlike the capitalist partners
who can withdraw their capital;

 > Also, if the partnership fails to earn any profits, his

“labor” becomes useless; thus, in effect, he has
already deemed contributed his share in the loss.
 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)
Management of Partnership’s Business

 Talks about appointment of a managing partner;

 Who is a partner (not a stranger/third person);
 General rule on COMPENSATION:
 > Partner is not entitled to compensation for his
services other than his share of the profits;
 > Exception: If there is a partners’ agreement.

 General rule on MANAGEMENT OF PARTNERSHIP:

 > Each partner has equal voice, regardless of amount
of capital contribution or services (unlike in
corporation);
 Exception – If there is an agreement - where partners
select a managing partner, or allocate different
functions among them;
 Art. 1800 deals with 2 distinct cases of appointments:

 1. Appointment as manager in the articles of

partnership;
 > Powers: may execute all acts of administration
despite opposition of the other partners unless he
acted in bad faith;
 > This power is revocable only:
 (1) upon just and lawful cause; and
 (2) upon the vote of the partners representing the
controlling interest.
 Reason of the 2 requirements for revocation:

 > Revocation means a change in the terms of

contract;

 > Since appointment was by virtue of the

agreement (consent) of the partners, then, it
logically follows (similarly) the revocation must be
with the consent of all the partners including the
partner thus appointed;

 > No party to a contract can violate the law of the

contract without the consent of the others;
 2. Appointment as manager after constitution of the
partnership;
 > Here, appointment is after the partnership was formed
– thus, it is independent of the articles of partnership;
 > Consequently, the appointment may be revoked at
any time for any cause;
 > Reason – the revocation is not founded on a change
of will on the part of the partners since the appointment
is not a condition of the contract of partnership;
 > It is simply a contract of agency – which may be
revoked at any time;
 > Vote for revocation must also represent the controlling
interest.
Scope of power of a managing partner

 General rule: has all the necessary and

incidental powers, which includes:

 a. power to issue receipt;

 b. power to purchase on credit (even without

approval of other partners) - if partnership is
engaged in buying and selling;

 c. power to dismiss an employee when there is

a justifiable cause for dismissal;
 Exceptions: when powers of the manager are
specifically restricted or expressly withheld;
 > cannot exercise powers which are NOT necessary
OR incidental to carry out the object of partnership;
 Example:
 > “selling fish” and “purchase of supplies” – do NOT
include the power to buy a “barge, a truck and an
adding machine”;
 > “operating a tailoring shop” – NO Power to sell or
convey the tailoring shop without the consent of all
the partners:
 > “any partnership business” – NO Power to
mortgage on the firm’s property to secure the debt
of a third person;
Are partners entitled to compensation for services
they rendered?
 If no agreement, NOT entitle to compensation;
 > Reason: in doing added service to partnership, a
partner is practically taking care of his own business;
 Exception:
 > Implied from the circumstances that a partner be
given additional compensation, like when his work
was beyond normal partnership functions:
 > Example:
 – saving partnership property from a flood where a
partner spent much time and effort and incurred
expenses;
 – performing clerical services of resigned employee).
 Art. 1801. If two or more partners have been
intrusted with the management of the partnership
without specification of their respective duties, or
without 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 tie, the matter shall be decided by the
partners owning Powers of two (2) or more
managing partners.
 Art. 1801 applies only if:

 1. Two (2) or more partners have been appointed

as managers;

 2. There is no specification of their respective

duties; and

 3. There is no stipulation that one (1) of them shall

not act without the consent of all the others.
 A. Respective duties are unspecified:
 Rule – each one may separately perform acts of
administration;
 What if there is an opposition?
 > The opposition must come from those entrusted
with the management of partnership (managing
partner) and not just by any partner;
 > The decision of the majority (per head) of the
managing partners shall prevail;
 > Tie – decided by the vote of the partners owning
the controlling interest, that is more than 50% of
the capital investment.
 B. Respective duties are specified:

 Rule - Decision of partner concerned shall

prevail subject only to the limitation that he
should act in good faith;
Example
 The respective interests of the partners in a
partnership are as follows:
 I. A - 5%; II. B - 10%;
 III. C - 15%; IV. D - 15%;
 V. E - 20%; VI. F - 35%.

 > A, B, and E were appointed as managing partners

without specification of their respective duties;
 > Contract was entered into by A which was
objected by E, but approved by B;
 > Is the contract valid?
 > YES.
 I. A - 5%; II. B - 10%;
 III. C - 15%; IV. D - 15%;
 V. E - 20%; VI. F - 35%.

 > If the managing partners are A, B, C, and E,

and C sided with E so that there was a tie and
when the matter was put to a vote of all the
partners, A, B and D were in favor, with C, E, and
F against;
 Is the contract is valid:
 NO.
 I. A - 5%; II. B - 10%;
 III. C - 15%; IV. D - 15%;
 V. E - 20%; VI. F - 35%.

 If A and E were the ones who originally vote in

favor of the contract and later, F sided with
them, the transaction is deemed ratified by the
controlling interest in the partnership.
 I. A - 5%; II. B - 10%;
 III. C - 15%; IV. D - 15%;
 V. E - 20%; VI. F - 35%.
 > Suppose after a tie, the voting is as follows:
 > A, B, and F – in favor; and
 > C, D, and E – against;

 > Both sides representing 50% of the interest, with

neither side willing to give way to the other;

 > What shall be the rule?

 > The law is silent on this point. It is believed that
contract should be considered as having been
entered into without authority. When the partners are
equally divided, those who vote against the contract
or who resist change must prevail.
 Best solution – partners to dissolve the partnership.
“A” shall be responsible for damages if it is found
that he was at fault.

 If the contract is merely proposed, it may or may

not be entered into depending upon the decision
of the majority of the managing partners or of the
controlling interest, as the case may be.
 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)
 More than 1 managing partners;
 Concurrence necessary for validity of acts:
 > Unanimous consent of all managing partners
shall be necessary;

 > This consent is so indispensable that neither the

absence nor disability of any one of them may be
alleged as an excuse or justification to dispense
with requirement.
 Exception (on absence nor disability of any
partner):
 > 1. When there is an imminent danger of grave or
irreparable injury to the partnership – partner may
act alone without the consent of the partner who
is absent or under disability without prejudice to
the former’s liability for damages under Art. 1794;

 > 2. Routine transactions;

 - purchase in the regular course of business by a
managing partner of a partnership engaged in
buying and selling merchandise or goods regularly
purchased by the partnership.
 A sold to B (one of the managing partners of
Partnership X, the other is C) a certain number of
mining claims without the consent of C.
 In an action by A to recover the unpaid balance
of the purchase price against Partnership X, C
claims that the contract is not binding upon the
partnership for the reason that under the articles
of partnership, there is a stipulation that one of the
partners cannot bind the firm by a written
contract without the consent of the others.
 Is the transaction made by B binding upon the
partnership?
 Yes.
 The stipulation creates an obligation between the two (2)
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 a partnership.

 A third person may and has a right to presume that the

managing partner with whom he contracts has, in the
ordinary and usual course of business, the consent of his
co-partner for otherwise he would not enter into contract.
The reason or purpose is no other than to protect a third
person who contracts with one of the managing partners
from fraud or deceit to which he can be an easy victim.
(Litton & Careon. 67 Phil.509 [1939].)
 Art. 1803. When the manner of management has
been not agreed upon, the following rules shall be
observed:
(1) All of 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. (1695a)
Rules if NO agreement on the manner of
management:
 1. All partners are considered managers – If
partners fail to designate who among them shall
acts as manager;
 > Then, whatever any one of them may do alone
shall bind the partnership:
 - Except, if there is a timely opposition of any
partner:
 - Where the matter shall first be decided by the
majority vote (person);

 2. If there’s a tie, it shall be decided by the vote of

the partners representing the controlling interest.
 I. A - 5%; II. B - 10%;
 III. C - 15%; IV. D - 15%;
 V. E - 20%; VI. F - 35%.

 EXAMPLE:

 If A, B, C and D are in favor of a particular

transaction, their decision shall prevail even if they
do not represent the controlling interest.

 In case of a tie, the controlling interest rule shall

govern.
 2. Unanimous consent needed on important
alteration on immovable property of partnership;

 > Consent need not be express; it may be implied,

that is - presumed from the fact of knowledge of
the alteration without making any objection;
 > Applies only to immovable property due to its
greater importance than movable property;
 > Any important alteration in the immovable
property of the partnership is an act of strict
dominion. As such, even the managing partner
cannot make such alteration without the consent
of all the partners.
Exceptions (Unanimous consent needed):

 1. If the refusal to give consent by other partners is

manifestly prejudicial to the interest of the
partnership;
 > Here, partner concerned can ask the court for
an authority to make the necessary alteration;

 2. If the alteration of the immovable property is

necessary for its preservation, not merely useful to
the partnership;
 “A”, “B” and “C” organized a partnership purposely
to engage in transportation business. Without a prior
express authority, “A” contracted an indebtedness
for automobile supplies and accessories.
 Are the partnership and the partners liable for said
indebtedness?
 Yes. There being no agreement with regard to the
manner of management, all the partners are
considered agents of the partnership.
 “A” must be deemed to have authority to contract
the indebtedness in question since it was incurred in
the prosecution of the partnership business.
 (Bachrach vs. La Protectora, 37 Phil. 441 [1918].
 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)
Contract of sub-partnership

 Sub-partnership – partnership formed between a

member of a partnership and a third person for a
division of the profits coming to him from the
partnership enterprise;
 > A sub-partnership is a partnership within a
partnership but is separate and distinct from the
latter;

 > Is sub-partnership allowed?

 - Yes. A partner may associate another person
(sub-partner) with him in his share without the
consent of the other partners.
 Is the division of profit of a sub-partnership
important to the partnership?
 > NO.
 > Division of profits between members of a sub-
partnership is immaterial;

 Can a partner designate his entire profits from the

partnership to a sub-partner?
 > YES. The mere fact that the one who is not a
partner of the original partnership is to receive the
entire profits of the business will not prevent the
formation of a subpartnership. (40 Am. Jur.135-136)
 Do sub-partnership agreements affect the
partnership? Why or Why not?
 NO.
 Sub-partnership agreements do not affect the
composition, existence, or operations of the firm.

 Sub-partner does not become a member of the

partnership – even though the sub-partnership
agreement is known to the other members of the
firm;
 Not being a member of the partnership, he does
not acquire the rights of a partner nor is he liable
for its debts.
EXAMPLE:
 A, B and C are partners. A may contract with D,
whereby D will participate in his (A’s) share in the
profits of the partnership.
 A can do this independently of the partnership
based on the principle of freedom to contract.
 The original contract of partnership between A, B
and C is not in any manner altered.

 D is merely a creditor of A who associated him in his

share. Thus:
 - D is a stranger to the partnership;
 - D has no right to intervene in the partnership;
 - D cannot require information or account, or inspect
partnership books;
 A remains a partner as through no contract has
been made by him with D;
 A continues to enjoy the rights of and subject to
the liabilities of a partner;

 D does not become a partner;

 D is not liable for the partnership debts even if the
agreement between A and D is with the
knowledge of other partners;
 D is regarded as an investor.
 In the example, D does not become a partner.
Why?
 > To become a partner, all the other partners must
consent even if the partner who associated the
sub-partner should be the manager;

 > Reasons:
 1. Delictus personae;
 2. Partnership is based on mutual trust and
confidence among the partners;
 3. Inclusion of sub-partner as a new partner will, in
effect, modify the original “partnership contract”
which requires unanimous consent of all partners.
 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)
 Partnership books;
 Duty to keep true and correct partnership books –
showing partnership’s accounts;

 Who will keep partnership books?

 a. Managing or active partner;
 b. Partner being assigned to keep records;

 > Open at all times to inspection of all partners;

 > Presumption: Partners have knowledge of the
contents of the partnership books and that said
books state accurately the state of accounts.
 Rules on Partnership books:
 1. be kept at the principal place of the business;
 > Unless there is a different agreement;

 2. Each partner has a right: (a) to free access to

them; and (b) to inspect or copy any of them;
 > Condition: at any reasonable time even after
dissolution;

 Reason for Right – to enable partners to have true

and full information of all things affecting the
partnership.
Any reasonable hour to inspect

 What is “any reasonable hour”?

 > interpreted to mean reasonable hours on
business days throughout the year and not merely
during some arbitrary period of a few days chosen
by the managing partners; (Pardo vs. Lumber Co.
et. al., 47 Phil. 964);

 Is the partner’s inspection right absolute?

 NO. He can be restrained from using information
gathered for other than partnership purpose.
 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 any
partner under legal disability. (n)
 Partner’s duty – to give true and full disclosure of
information;
 Note: Upon REQUEST or DEMAND;
 > No concealment of all matters affecting the
partnership;
 > Based on the principle of mutual trust and
confidence among partners;

 But the information given must be used only for

a partnership purpose.
EXAMPLES:

 A and B are partners engaged in the real estate

business. A learned that C (3rd person) was
interested in buying a certain parcel of land
owned by the partnership, even for a high price.
 Without informing B, A was able to make B sell to
him (A) his (B’s) share in the partnership. Then, A
sold the land at a big profit.

 In this case, A is liable to B for the latter’s share in

the profits.
 When A bought B’s interest, A was under the duty
to make disclosure of facts - value of such interests
which were not known to B.
 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)
 Partner’s Fiduciary relationship
 > Partner’s relationship - essentially fiduciary - trust
and confidence;

 Partner’s Accountabilities/Duties:

 1. To act for common benefit;

 > Partner is obliged to act for the common benefit
of all partners in all transactions relating to the
partnership business or affairs;
 > Individual benefit vs. Partnership benefit
 2. To account for secret and similar profits;
 – made secret profit out of the operation of
partnership;
 – accepted a secret commission from 3rd person
dealing with the partnership;
 > To account such profit or commission with co-
partners.

 3. To account earnings accruing even after

termination of partnership;
 – earnings accruing after the termination of the
partnership;
 > Rule:

 “When a partner wrongfully snatches a seed of

opportunity from the granary of his firm, he
cannot thereafter excuse himself from sharing
with his co-partners the fruits of its planting, even
though the harvest occur after they have
terminated the association.”
 4. To make full disclosure of information affecting
partnership;

 – duty similar to a trustee;

 – To act for the common benefit in all transactions
relating to the partnership business or affairs;
 – He cannot apply exclusively to his own benefit
the results of knowledge and information gained
in the character of partner.
 A and B are partners engaged in the real estate
business. A bought a parcel of land with
partnership funds in his own name and thereafter
sold the same at a profit.

 B has a right to share in the profit and A holds as

trustee the profit derived by him from the
transaction.
 A and B were partners in the operation of a
cinema business. The theatre was mortgaged to C
who foreclosed the mortgaged debt.

 A, in his own behalf, redeemed the property with

his own private funds. Subsequently, A filed a
petition for the cancellation of the old title of the
partnership and the issuance of another title in his
name alone.

 Issue:
 Did A become absolute owner of the property?
 Held:

 No.

 When A redeemed the said property, he became

a trustee for the benefit of his co-partner, B,
subject to his right to demand from the latter his
contribution to the price of redemption plus legal
interest. (Catalan vs. Gatchalian, 105 Phil. 1270 [1959])
 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 fund any profits
accruing to him from his transactions, and shall
personally bear all the losses. (n)
Prohibition on capitalist partner to engage in business

 Prohibition vs. capitalist partner is not absolute;

 Why?

 Absolute prohibition would prevent a member of

partnership from investing his private funds.

 Partners may agree/allow capitalist partner to

engage in the same kind of business;

 Industrial partner is absolutely prohibited from

engaging in any business for himself.
 1. Prohibition – only from engaging any operation
which is the same as or similar to the business of
the partnership;
 > To avoid competition;

 2. Prohibition – only during the period that he is a

member of a firm (partner);

 Sanctions: Erring capitalist partner:

 > Obliged to bring to the common fund any profits
derived by him from his transactions;
 > In case of losses on his business, he shall bear
them alone.
 3. But can a capitalist partner engage in the same
line of business for the account of another?

 > The law is silent, but it is believed that the

prohibition also applies;
 > Reason:
 > Partnership is a fiduciary relation involving trust
and confidence;
 > Each partner owes his co-partners outmost good
faith, loyalty and integrity xxx;
 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)
 Right of partner to formal account;
 General rule:
 > During the existence of partnership, a partner is
not entitled to a formal account of partnership
affairs;

 > Reason: Rights of partner to know partnership

affairs are amply protected in Articles 1805 and
1806;
 > Also, if a partner constantly demand or ask for a
formal accounting, it will cause or result to much
inconvenience and unnecessary waste of time.
 Exceptions: - The enumerations under Article 1809;
 > Example (When circumstances render it just and
reasonable):
 - Where a partner has been assigned abroad for a
long time in connection with partnership business
and the partnership books during such period
being in the possession of the other partners;
 - Here, partner’s right to demand an accounting
without bringing about a dissolution is necessary
relative to his right to share in the profits.

 > Formal account is a necessary incident to the

dissolution of a partnership.
Section 2 – Property Rights of a Partner

Art. 1810. The property rights of a partner are:

(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management.
(n)
Extent of property rights of a partner

 1. Principal rights – Those mentioned in Art. 1810;

 2. Related rights:

 a. Right to reimbursement for amounts advanced

to the partnership and to indemnification for risks
in consequence of management (Art.1796.);

 b. Right of access and inspection of partnership

books (Art. 1805.);
 c. Right to true and full information of all things
affecting the partnership (Art. 1806);

 d. Right to a formal account of partnership affairs

under certain circumstances (Art. 1809); and

 e. Right to have the partnership dissolved also

under certain conditions. (Arts. 1830-1831.)
Partnership property vs. partnership capital

1. Changes in value;

> Partnership property is variable – its value may vary

from day to day with changes in the market value of
the partnership assets;

> Partnership capital is constant – it remains

unchanged as the amount fixed by agreement of
partners, and is not affected by fluctuations in the
value of partnership property;
2. Assets included;
> Partnership property includes not only the partners’
original capital contributions, but all property
subsequently acquired on account of the partnership
or with partnership funds;
– These include partnership name, goodwill of the
partnership;

> Partnership capital represents the aggregate of the

individual contributions made by the partners;
– Cash or in property or services the value of which
has been fixed in the partnership agreements.
Other matters:

1. Property used by the partnership;

 Ownership remains with the partner who allows the
use of his property by the partnership;

2. Property acquired by a partner with partnership

funds;
 Presumption – Partnership property;
 Property acquired after dissolution but before the
winding up of the partnership affairs – separate
property but he would be liable to account to the
partnership for the funds used in acquisition.
3. Property carried in partnership books as partnership
asset;
 Partnership property;

4. Other factors to indicate property ownership;

 Income generated by the property is received by
the partnership;
 Partnership pays the taxes on the property;
 But if partnership funds were used to repair or
maintain property purchased with funds of an
individual partner – NOT enough basis to show that
the property belongs to the partnership.
 Art. 1811. A partner is co-owner with his
partners of specific partnership property.
The incidents of this co-ownership are such
that:
(1) A partner, subject to the provisions of this
title and to any agreement between the partners,
has equal right with his partners to possess
specific partnership property for partnership
purposes; but he has no right to possess such
property for any other purpose without the
consent of his partners;
 (2) A partner’s right in specific partnership
property is not assignable except in connection with
the assignment of rights of all the partners in the
same property;
(3) A partner’s right in specific partnership
property is not subject to attachment or execution
except on a claim against the partnership. When
partnership property is attached for a partnership
debt, the partners, or any of them, or the
representatives of a deceased partner, cannot claim
any right under the homestead or exemption laws;
(4) A partner’s right in specific partnership
property is not subject to legal support under Article
291.(n)
Partner is a co-owner on specific partnership property

 But RULES on co-ownership do not necessarily

apply;

 Legal incidents of this common right:

 (1) Equal right of possession of the property for
partnership purposes;

 Example:
 If the partnership of A, B, and C owns a specific
parcel of land, none of them can possess and use
the land other than for “partnership purposes.”
 (a) Should any of them use the land for his own
profit, he must account to the others for the profits
derived therefrom (Art. 1807);

 (b) Any partner shall have the right to formal

account of partnership affairs if he is wrong fully
excluded from the possession of its property by his
co-partners (Art. 1809);
 (c) The wrongful exclusive possession of
partnership property by one or more partners may
be a ground for dissolution (Art. 1831 [3,4,6]);

 (d) By agreement, the right to possess specific

partnership property may be surrendered, and this
is especially true of a partnership with large
membership, where the management and
possession are concentrated in the managing
partners.
 (2) Assignment of right to the property;
 Note – Not an assignment of share;
 Partner A, B, or C cannot assign his right to the
land but all of them can assign their right in the
same property.

 (a) Partner’s right in specific partnership property is

not assignable since it is impossible to determine
the extent of his beneficial interest in the property
until after the liquidation of the partnership affairs.

 Partnership’s property cannot be disposed of or

mortgaged even by the partner who contributed
it without the consent or approval of partnership
or of the other partners.
(b) Primary reasons for the non-assignability of a
partner’s right in specific partnership property:

 prevents interference by outsiders in partnership

affairs;
 protects the right of other partners and partnership
creditors to have partnership assets applied to firm
debts; and
 It is often impossible to measure or value a
partner’s beneficial interest in a particular
partnership asset. (In re Decker. 295 F. Supp. 501 [1909]
 (c) The law allows a retiring partner to assign his
rights in partnership property to the partner or
partners continuing to business. (Art. 1840 [1,2])

 (3) Attachment or execution;

 > In the example, the land is not a separate or
individual property of A, B and C, but of the
partnership;
 > Hence, the land is not subject to attachment or
execution (against A or B or C) except on a claim
against the partnership.
 > Since the land belongs to the partnership, A, B,
and C cannot claim any right under the
homestead or exemption laws when it is attached
for partnership debts;

 > A partner’s interest in the partnership itself may

be levied upon by a judgment creditor because it
is actually his property. (Art. 1814, last par.)
(4) Legal Support;
 The right of A, B and C to the land is not subject to
legal support under Art. 1952 of the Family Code;
 Reason: The land belongs to the partnership;

(5) Partner’s interest not a debt due from partnership;

 Creditors cannot go after any specific partnership
property;
 Reason:
 A partner is not a creditor of the partnership for the
amount of his share. His interest in the partnership is
not a debt of the partnership to him.
 Art. 1812. A partner’s interest in the
partnership is his share of the profits and
surplus. (n)
Partner’s interest in the partnership
 (1) Share of the profits and surplus;
 PROFIT?
 > means the excess of returns over expenditure in
a transaction or series of transactions; or the net
income of the partnership for a given period of
time. (see Webster 3rd Int. Dict.,p.1811)
 SURPLUS?
 > refers to the assets of the partnership after
partnership debts and liabilities are paid and
settled and the rights of the partners among
themselves are adjusted;
 > excess of assets over liabilities; if liabilities are
more than the assets, the difference represents
the extent of the loss.
 RULE:

 > On Profits - During the life of the partnership;

 > On surplus - After its dissolution;

 > Can a partner assigned his said share?

 – YES, if there is no agreement to the contrary,
being personal property;
 Art. 1813. A conveyance by a partner of his whole interest
in the partnership does not of itself dissolve the partnership,
or, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of
the partnership, to interfere in the management or
administration of the partnership business or affairs, or to
require any information or account or partnership
transactions, or to inspect the partnership books; but it
merely entitles the assignee to receive in accordance with
his contract the profits to which the assigning partner would
otherwise be entitle. However, in case of fraud in the
management of the partnership, the assignee may avail
himself of the usual remedies.
In case of dissolution of the partnership, the assignee is
entitled to receive his assignor’s interest and may require an
account from the date only of the last account agreed to by
all the partners. (n)
Assignment of partner’s whole interest in partnership

 Conveyance by a partner of his whole interest in the

partnership without causing dissolution is ALLOWED;
 Conveyances – sale, donation, collateral security for
loan;
 To whom?
 to any of his partners; or
 to third person without consent of the other partners,
if there is no contrary agreement;

 What is conveyed is a partner’s whole interest in the

partnership and NOT a PARTNERSHIP’S RIGHT which
is NOT assignable. (Art. 1811 [2])
 EFFECTS of said Conveyance:
 1. Assignee has:
 (a) NO right to interfere in the management;
 (b) NO right to require any information or account; or
 (c) NO right to inspect any of the partnership books.

 2. Status & rights of assignor in partnership are unaffected;

 Reasons:
– Partnership - delectus personae or mutual agency;
– No one can become a partner without the consent of
the other partners;
– Assignment does not divest the assignor of his status
and rights as partner nor operate to dissolve the partnership.
Rights of assignee of partner’s interest:

 (1) To receive the profits accruing to the assigning

partner based on their agreement;

 (2) To exercise usual remedies provided by law in

the event of fraud in the management.

 (3) To receive the assignor’s interest in case of

dissolution; and

 (4) To require an account of partnership affairs,

but only in case the partnership is dissolved;
 A (partner), mortgaged his interest in Partnership X
then worth P500,000 to B (bank) for P300,000.
 Subsequently, the partnership suffered losses,
wiping out A’s interest.

 Here, B has no legal claim against the partnership

to the extent of P300,000.
 Under Art. 1813, the mortgage merely entitles it to
receive in accordance with its contract the profits
to which A would otherwise be entitled.
 RULES:
 There must be a CLEAR INTENTION by a partner
(assignor) that he is withdrawing from the
partnership and terminating the partnership as
between the partners;
 Thus, mere assignment of a partner’s interest does
not dissolve the partnership;
 A partner’s conveyance of his interest in the
partnership operates as a dissolution of the
partnership only if there is such clear intention;
 If the assigning partner neglects his partnership
duties after assignment, the other partners may
dissolve the partnership under Article 1830;
 Art. 1814. Without prejudice to the preferred rights
of partnership creditors under Article 1827, on due
application to a competent court by any judgment
creditor of a partner, the court which entered the
judgment, or any other court, may charge the interest
of the debtor partner with payment of the unsatisfied
amount of such judgment debt with interest thereon;
and may then or later appoint a receiver of his share
of the profits, and of any other money due or to fall
due to him in respect of the partnership, and make all
others orders, directions, accounts and inquiries
which the debtor partner might have made, or which
the circumstances of the case may require.
 The interest charged may be redeemed at any
time before foreclosure, or in case of a sale being
directed by the court, may be purchased without
thereby causing a dissolution:
(1) With separate property, by any one or more of
the partners; or
(2) With partnership property, by any one or more
of the partners with the consent of all the partners
whose interests are not so charged or sold.
Nothing in this Title shall be held to deprive a
partner of his right, if any, under the exemption laws,
as regards his interest in the partnership. (n)
Remedies of separate judgment creditor of a partner
1. To apply with the court for a ”charging order” after
securing judgment of his credit;
 A separate creditor of a partner cannot attach or levy
upon specific partnership property for the satisfaction of
his credit. (Art. 1811 [3]);
 But he can secure a judgment on his credit; then apply
to the court for a charging order subjecting the interest
of debtor-partner in the partnership with the payment
of the unsatisfied judgment amount with interest;
 This “charging order” cannot prevail over “preference
of credits” – preferred rights of partnership creditors (not
just individual partner) under Article 1827;
 Thus, claims of partnership creditors must be satisfied
first before the separate creditors of the partners can
be paid out of the interest charged. (see Art. 1839 [8].)
 It appears from Art. 1814 that “charging order” is an
exclusive remedy of a separate creditor of a partner;
 This is to make sure that “writ of execution” will not
be a proper remedy;

 What is a “writ of execution”?

 If the judgment debt remains unsatisfied despite the

issuance of the charging order, Court may resort to
other courses of action such as:
 1. Appointment of receiver;
 2. Sale of the interest.
 T recovers a judgment against A (member of
Partnership X - composed of A and B) on A’s individual
liability. The partnership is very profitable and B is
solvent, but A is in deep financial trouble.
 May T attach any portion of the partnership property,
or execute against the same, or go after A’s share of
the partnership assets?
 No. T’s remedy is to apply for a charging order from a
court against the partnership. No specific property can
be attached. Partnership X continues and T’s judgment
is satisfied out of the partnership assets.
 Under the charging order, A’s share in the profits is paid
to T until the claims of T are fully paid. The partnership
need not be necessarily dissolved. B (as a partner) is
protected; only A (the debtor) suffers.
Redemption or purchase of interest charged
 What is REDEMPTION?
 Redemptioner
 The interest of the debtor-partner so charged may
be redeemed with the separate property of any one
or more of the partners, or with partnership property
but with the consent of all partners whose interest
are not so charged or sold;

 What is the Redemption price?

 Price of the thing sold represents its market or actual
value;
 Rule is different in a foreclose sale – inadequacy of
the price obtained is not material because the
mortgagor is given the right to redeem;
 Is it required that the “redeeming non-debtor
partner” has absolute ownership over the debtor-
partner’s interest?

 NO.
 Absolute ownership over the debtor-partner’s
interest is not required.
 It is enough that the “redeeming non-debtor
partner” holds the subject property in trust for him
in line with the principles of fiduciary relationship.
Application of the Rules:

 A, B and C are partners. A is personally indebted to X in

the sum of P100,000. X filed a complaint against A and
obtained from the court a final judgement in his favor.

 If A is insolvent, X can ask the same court or any

competent court that A’s interest (not a specific
property) in the partnership be attached or levied
upon for the payment of his debt.

 The other partners, B and C may redeem or purchase

the interest of A (debtor-partner) before the
foreclosure sale or before the redemption period fixed
by the court without dissolving the partnership.