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LAW ON PARTNERSHIP
Summer 2015

NATURE OF PARTNERSHIP
WHAT IS PARTNERSHIP?
1. It is a CONTRACT whereby two or more persons
(a) bind themselves to CONTRIBUTE money, property, or industry to a COMMON FUND
(b) with the intention of dividing the PROFITS among themselves or in order to EXERCISE a PROFESSION
2. It is also a STATUS and a FIDUCIARY RELATION subsisting between persons carrying on a business in common
with a view on profit.
Fiduciary relation is defined as where one person places complete confidence in another in regard to a particular
transaction or ones general affairs or business. It encompasses the idea of faith and confidence and is generally
established only when the confidence given by one person is actually accepted by the other person. Mere respect
for another individuals judgment or general trust in his or her character is ordinarily insufficient for the creation of a
fiduciary relationship.

CHARACTERISTIC ELEMENTS OF THE CONTRACT OF PARTNERSHIP


1. Consensual because it is perfected by mere consent, that is, upon the express or implied agreement of two or
more persons.
2. Nominate because it has a special name or designation in our law.
3. Bilateral because it is entered into by two or more persons and the rights and obligations arising therefrom are
always reciprocal (meaning owed to each other).
4. Onerous because each of the parties aspires to procure for himself a benefit through the giving of something.
5. Commutative because the undertaking of each of the partner is considered as the equivalent of that of the others.
6. Principal because it does not depend for its existence or validity upon some other contract.
7. Preparatory because it is entered into as a means to an end, i.e. to engage in business for the realization of profits
with the view of dividing them among the contracting parties.

ESSENTIAL FEATURES OF PARTNERSHIP CONTRACT


1. There must be a valid contract
2. The parties must have the legal capacity to enter into the contract.
Before there can be a valid contract of partnership, it is essential that the contracting parties have the necessary
legal capacity to enter into the contract. As a general rule, any person may be a partner who is capable under the
law of entering into contractual relations. Consequently, any person who cannot legally give consent to a contract
cannot be partner. Hence, the following cannot give their consent to a contract of partnership:
2.1 Unemancipated minors

LAW ON PARTNERSHIP
Summer 2015
The age of majority commences upon the attainment of the age of 18 years (R.A. 6809); a person below such
age is a minor, and has a limited capacity to act. The unemancipated minor cannot enter into contracts (article
1327, par. 1, Civil Code); but he may be estopped from disavowing his contract if he has misled the other party
as to his age.
2.2 Insane or demented persons
Insanity includes the various forms of mental disease, either inherited or acquired, in which there is a
perversion of the mentality, as when the person is suffering from illusions, hallucinations, or delusions,
unnatural exaltation or depression, or insane ideas of persecution or power. Various phases of insanity are
known as dementia praecox, paranoia, schizophrenia, mania, melancholia, etc. It is a manifestation, in
language or conduct, of disease or defect of the brain, or a more or less permanently diseased or disordered
condition of the mentality, functional or organic, characterized by perversion, inhibition, or disordered function
of the sensory or of the intellective faculties, or by impaired or disordered volition (Sec. 1089, Revised
Administrative Code).
2.3 Deaf-mute who do not know how to write
2.4 Persons who suffering from civil interdiction
Civil interdiction is an accessory penalty imposed upon persons who are sentenced to a principal penalty not
lower than reclusion temporal (article 41, Revised Penal Code), which is a penalty ranging from twelve years
and one day to twenty years.
Article 34 of the Revised Penal Code provides: Civil interdiction shall deprive the offender during the time of
his sentence of the rights of parental authority, or guardianship, either as to the person or property of any ward,
of marital authority, of the right to manage his property, and of the right to dispose of such property by any act
or any conveyance inter vivos.
2.5 Incompetents who are under guardianship.
The Rules of Court defines incompetent as including
a) persons suffering from the penalty of civil interdiction
b) hospitalized lepers,
c) prodigals or spendthrift
A spendthrift or prodigal is a person who, by excessive drinking, gambling, idleness or debauchery of any
kind shall so spend, waste or lessen his estate as to expose himself or his family to want or suffering.
d) deaf and dumb who are unable to read and write,
e) those who are of unsound mind, even though they have lucid intervals, and
f) persons not being of unsound mind, but by reason of age, disease, weak mind, and other similar causes,
cannot, without outside aid, take care of themselves and manage their property, becoming thereby an easy
prey for deceit and exploitation.
3. There must be contribution of money, property or industry to a common fund.
3.1 Money The term is to be understood as referring to currency which is legal tender in the Philippines. It must
be pointed out that checks, drafts, promissory notes payable to order, and other mercantile documents are
not money but only representatives of money. Consequently, there is no contribution of money until they
have been cashed.

LAW ON PARTNERSHIP
Summer 2015
3.2

Property The property contributed may be real or personal, tangible or intangible. Hence, credit such as
promissory note or other evidence of obligation or even a mere goodwill may be contributed as it is
considered property.

3.3

Industry In the absence of money or property, or in concurrence with these two, the law permits the
contribution of industry. The word industry means the work or service of the party associated, which may
be either personal manual efforts or intellectual, and for which he receives a share in the profits (not merely
salary) of the business.

4. The object or purpose must be a lawful one. In other words, it should not be contrary to law, morals, good customs,
public order or public policy. It must be within the commerce of man.
Instances when partnership is unlawful:
a) A partnership formed to furnish apartment houses which would be used for prostitution.
b) A partnership formed to create illegal monopolies.
c) A partnership for gambling purposes or distribution of illegal drugs.
IF a partnership has SEVERAL PURPOSES, one of which is UNLAWFUL, the partnership can still validly exist so
long as the illegal purpose can be separated from the legal purposes
One of the causes for the dissolution of a partnership is any event which makes it unlawful for the business of the
partnership to be carried on
When an UNLAWFUL PARTNERSHIP is dissolved by a judicial decree, the PROFITS shall be CONFISCATED in
FAVOR of the STATE
5. There must be an intention of dividing the profit among the partners.
6. There must be the affectio societatis. This is desire to formulate an ACTIVE UNION, with people among whom
there exist a mutual CONFIDENCE and TRUSTS.
It is a very important constitutive element of partnership: more or less capturing the fact that partners enter into a
partnership in good faith with a will to associate and a commitment that is consequential.
7. A new personality that of the firm must arise, distinct from the separate personality of each of the members.
Thus being the case the PARTNERSHIP BEING A JURIDICAL ENTITY; in the partnership Aquino and Abunda
there are three persons:
a) Aquino,
b) Abunda,
c) and the firm Aquino and Abunda
Art. 37. (first sentence, Juridical capacity, definition, nature, how lost)Juridical capacity, which is the fitness to
be the subject of legal relations,

LAW ON PARTNERSHIP
Summer 2015
Juridical capacity is synonymous to legal capacity and to personality. These terms are, therefore, used
interchangeably in the law. They all refer to the aptitude for the holding and enjoyment of rights. On the other hand,
capacity to act refers to the aptitude for the exercise of rights, and is often referred to merely as capacity. In this
sense, it is broadly defined as the ability, power, qualification, or competency of persons, natural or artificial, for
the performance of civil acts depending on their state or condition (status) as defined or fixed by law (1 Tolentino
156, citing 1 Bouviers Law Dictionary 416). In the words of the Code, while juridical capacity is the fitness of man
to be the subject of legal relations, capacity to act is the power to do acts with legal effect.

RULES ON CAPACITY TO BECOME A PARTNER


1. In general, a person capacitated to enter into contractual relations may become a partner.
2. UNEMANCIPATED MINOR CANNOT become a partner UNLESS his parent or guardian consents. Without such
consent, the partnership contract is voidable.
3. MARRIED WOMAN, cannot contribute conjugal funds as her contribution to the partnership
3.1 UNLESS she is permitted to do so by her husband, or
3.2 UNLESS she is the administrator of the conjugal partnership, in which the COURT must give its consent
authority.
4. A partnership being a juridical person by itself can form another partnership either
4.1 with private individuals, or
4.2 with other partnerships there being no prohibition on this matter under Philippine law.
5. A corporation cannot become a partner on grounds of public policy

CONSEQUENCES OF THE PARTNERSHIP BEING A JURIDICAL ENTITY


1. Its juridical personality is SEPARATE and DISTINCT from that of each partner
2. The partnership CAN in GENERAL:
2.1 Acquire and possess property of all kinds
2.2 Incur obligations
2.3 Bring civil and criminal actions
2.4 Can be adjudged insolvent* even if the individual members be each financially solvent
*Unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of
inability to pay debts as they mature.
3. Unless he is personally sued, a partner has no right to make a separate appearance in court, if the partnership
being sued is already represented

LAW ON PARTNERSHIP
Summer 2015

LIMITATIONS ON ALIEN PARTNERSHIP


1) If 60% capital is not owned by Filipinos
the firm cannot acquire by purchase or otherwise AGRICULTURAL Philippine lands
2) Foreign partnership may lease lands provided the period does not exceed 99 years
3) Foreign partnership may be MORTGAGEES of land
period of 5 years, renewable for another 5 years
they cannot purchase it in a foreclosure sale

REQUISITES FOR EXISTENCE OF PARTNERSHIP


1. INTENTION to create a partnership
2. COMMON FUND obtained from contributions
3. JOINT INTERESTS in the PROFITS

RULES TO DETERMINE THE EXISTENCE OF A PARTNERSHIP


1.

Persons who are not partners to each other are not partners as to third persons
EXCEPTION:
PARTNERSHIP BY ESTOPPEL

2.

CO-OWNERSHIP of a property does not itself establish a partnership, even though the co-owners share in the
profits derived from the incident of joint ownership

3.

SHARING OF GROSS RETURNS ALONE does not indicate a partnership whether or not the persons sharing
them have a joint or common right or interest in any property from which the returns are derived

4.

The receipt of the share in the profits is a strong presumptive evidence of partnership HOWEVER, no such
inference will be drawn if such profits were received in payment A)
B)
C)
D)
E)
F)

as a DEBT by installments or otherwise


as WAGES of an employee
as RENT to a landlord
as an ANNUITY to a widow or representative of a deceased partner
as INTEREST on a LOAN, though the amount of payment vary with the profits of the business
as the CONSIDERATION for the sale of a GOOD WILL of a business or other property or otherwise

Creditors are not partners, for their only interest in the sharing of profits is the receipt or payment of their
credits. In a partnership, the partners are supposed to trust and have confidence in all the partners

RULES IN THE FORMATION OF A PARTNERSHIP


A partnership may be constituted in any form.
EXCEPTION: PUBLIC INSTRUMENT is required if 1. IMMOVABLE PROPERTY is contributed and a necessity for inventory of the immovable.

LAW ON PARTNERSHIP
Summer 2015
For EFFECTIVITY of the partnership contract insofar as innocent third persons are concerned the same must be
REGISTERED if REAL PROPERTIES are INVOLVED.

IF REAL PROPERTIES have been contributed, REGARDLESS of the VALUE, a public instrument is needed for
the attainment of legal personality

2. REAL RIGHTS are contributed


When there are conditions to be fulfilled or when a certain period is to lapse, the partnership is not created till after
the fulfillment of the conditions or the arrival of the term and this is true even if one of the parties has already
advanced his agreed share of the capital.

REQUIREMENTS IF CAPITAL IS P3,000 OR MORE


1. PUBLIC INSTRUMENT
2. RECORDED AT THE SECURITIES AND EXCHANGE COMMISSION
FAILURE TO COMPLY shall not affect the liability of the partnership and its members to third persons

RULES IF ARTICLES ARE KEPT SECRET AMONG THE MEMBERS


1.
2.

It may be sued by third person under the common name it uses


3.

4.
5.

NOT a partnership NOT a LEGAL PERSON

It cannot sue as such and cannot be ordinarily be a party to a civil action


Any one of the members may contract in his own name with third persons

EFFECT OF CERTAIN TRANSACTIONS


1. Contracts entered into by a partner in his own name may be sued upon still by him in his individual capacity,
notwithstanding the absence of a partnership.
2. When two or more individuals, having a common interests in a business bring a court action, it should be
presumed that they prosecute the same in their individual capacity as co-owners and not in behalf of a partnership
which does not exist in legal contemplation

LAW ON PARTNERSHIP
Summer 2015

CLASSIFICATION OF PARTNERSHIPS
A. ACCORDING TO MANNER OF CREATION
1. Orally constituted
2. Constituted in a private instrument
3. Constituted in a public instrument
4. Registered in the Office of the Securities and Exchange Commission
B. ACCORDING TO OBJECT
1. Universal
1.1 With all present property
The contribution of the partners consists of:
a) All the properties actually belonging to the parties.
b) The profits acquired with said properties.
1.2 With all profits (the individual properties here continue to be owned by the partners, but
the usufruct* thereof passes to the firm.)
*The right to use and derive profit from a piece of property belonging to
another, provided the property itself remains undiminished and uninjured in
any way.
a) Only the usufruct of the properties of the partners becomes COMMON PROPERTY
(owned by them and the partnership). The individual properties here continue to be
owned by the partners.
b) All profits acquired by the industry or work of the partners become common
property (regardless of whether or not said profits were obtained through the usufruct
contributed.)

LAW ON PARTNERSHIP
Summer 2015

2. Particular
Here the object is determinate things, their use or fruits; a specific undertaking, or the
exercise of a profession or occupation.
Examples: To construct a building; to buy and sell real estate; to practice the law
profession. Here in a sense, it is as if all the members are industrial partners.
C. ACCORDING TO LIABILITY
1. Limited Partnership that where at least one partner is a general partner, and the rest are
limited partners. A limited partner is one whose liability is limited only up to the extent of his
contribution.
2. General Partnership is one where all the partners are general partners; that is, they are
liable even with respect to their individual properties, after the assets of the partnership
have been exhausted.
D. ACCORDING TO LEGALITY OF EXISTENCE
1. De jure partnership one which has complied with all the legal requirements for its
establishment.
2. De facto partnership one which has failed to comply with all the legal requirements for its
establishment.
E. ACCORDING TO DURATION
1. Partnership with a fixed term or one in which the term for which the partnership is to exist
is fixed or agreed upon or one formed for a particular undertaking; and upon the expiration
of the term or completion of the particular enterprise, the partnership is dissolved, unless
continued by the partners.
2. Partnership at Will
2.1 One in which no time is specified and is not formed for a particular undertaking or
venture and which may be terminated anytime by mutual agreement of the partners, or by
the will of any one partner alone.
2.2 One for a fixed term or particular undertaking which is continued by the partners after
the termination of such term or particular undertaking without express agreement.
F. ACCORDING TO REPRESENTATION TO OTHERS

LAW ON PARTNERSHIP
Summer 2015

1. Ordinary or real partnership one which actually exists among the partners and also as to
third persons.
2. Partnership by estoppel - one which in reality is not a partnership, but is considered a
partnership only in relation to those who, by their conduct or admission, are precluded to
deny or disprove its existence.
Example:
Suppose A, B, and C are not really partners, but A told X that he (A), B, and C are partners.
X believing the representation made by A and consented to by B, extend credit to A.
As against A and B, a partnership by estoppel has been constituted. But as against C, there
is no partnership and X cannot hold him liable as a partner.
When the debt matures, X is entitled to collect only from A and B who are liable as partners
although not actually partners.
G. ACCORDING TO PUBLICITY
1. Secret partnership one wherein the existence of certain persons as partners is not
avowed or made known to the public by any of the partners.
2. Open or notorious partnership one whose existence is avowed or made known to the
public by the members of the firm.
H. ACCORDING TO PURPOSE
1. Commercial or trading partnership one formed for the transaction of business.
2. Professional or non-trading partnership one formed for the exercise of a profession.

LAW ON PARTNERSHIP
Summer 2015

OBLIGATIONS OF PARTNERS
A. OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES
1. OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF PROPERTY:
1.1. To contribute at the beginning of the partnership or at the stipulated time the money, property or industry
which he may have promised to contribute.
1.2. To answer for eviction in case the partnership is deprived of the determinate property contributed.
1.3. To answer to the partnership for the fruits of the property the contribution of which he delayed, from the
date they should have been contributed up to the time of actual delivery.
1.4. To preserve said property with the diligence of a good father of a family pending delivery to partnership.
1.5. To indemnify partnership for any damage caused to it by the retention of the same or by the delay in its
contribution.
2. OBLIGATIONS WITH RESPECT TO CONTRIBUTION OF MONEY AND MONEY CONVERTED TO
PERSONAL USE
2.1. To contribute on the date fixed the amount he has undertaken to contribute to the partnership.
2.2. To reimburse any amount he may have taken from the partnership coffers and converted to his own use.
2.3. To pay for the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any
amount from the common fund and converts it to his own use.
2.4. To indemnify the partnership for the damages caused to it by delay in the contribution or conversion of any
sum for his personal benefits
3. OBLIGATIONS WITH RESPECT TO CONTRIBUTION TO PARTNERSHIP CAPITAL
3.1. Partners must contribute equal shares to the capital of the partnership unless there is stipulation to
contrary.
3.2. Partners (capitalist) must contribute additional capital In case of imminent loss to the business of the
partnership and there is no stipulation otherwise; refusal to do so shall create an obligation on his part to sell
his interest to the other partners

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LAW ON PARTNERSHIP
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4. OBLIGATION OF MANAGING PARTNERS WHO COLLECTS DEBT FROM PERSON WHO ALSO OWED
THE PARTNERSHIP
4.1. Apply sum collected to 2 credits in proportion to their amounts
4.2. If he received it for the account of partnership, the whole sum shall be applied to partnership
credit.
5. OBLIGATION OF PARTNER WHO RECEIVES SHARE OF PARTNERSHIP CREDIT
5.1. Obliged to bring to the partnership capital what he has received even though he may have given receipt
for his share only
6. OTHER RIGHTS AND OBLIGATIONS OF PARTNERS:
6.1. Right to associate another person with him in his share without consent of other partners
partnership)

(sub-

6.2. Right to inspect and copy partnership books at any reasonable hour
6.3. Right to a formal account as to partnership affairs (even during existence of partnership):
a. If he is wrongfully excluded from partnership business or possession of its property by his co-partners
b. If right exists under the terms of any agreement
c. As provided by art 1807
d. Whenever other circumstances render it just and reasonable
6.4. Duty to render on demand true and full information affecting partnership to any partner or legal
representative of any deceased partner or of any partner under legal disability
6.5. Duty to account to the partnership as fiduciary

B. PROPERTY RIGHTS OF A PARTNER


1. His rights in specific partnership property
2. His interest in the partnership
3. His right to participate in the management
Nature of partner's right in specific partnership property
1. Equal right to possession
2. Right not assignable
3. Right limited to share of what remains after partnership debts have been paid
Nature of partner's right in the partnership
1. Share of profits and surplus

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LAW ON PARTNERSHIP
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C. OBLIGATIONS OF PARTNERS WITH REGARD TO 3RD PERSONS


1. Every partnership shall operate under a firm name. Persons who include their names in the partnership name
even if they are not members shall be liable as a partner
2. All partners shall be liable for contractual obligations of the partnership with their property, after all partnership
assets have been exhausted
2.1. Pro rata
2.2. Subsidiary
3. Admission or representation made by any partner concerning partnership affairs within scope of his authority is
evidence against the partnership
4. Notice to partner of any matter relating to partnership affairs operates as notice to partnership except in case of
fraud:
4.1. Knowledge of partner acting in the particular matter acquired while a partner
4.2. Knowledge of the partner acting in the particular matter then present to his mind
4.3. Knowledge of any other partner who reasonably could and should have communicated it to
the acting partner
5. Partners and the partnership are solidary liable to 3rd persons for the partner's tort or breach of trust
6. Liability of incoming partner is limited to:
6.1. His share in the partnership property for existing obligations
6.2. His separate property for subsequent obligations
7. Creditors of partnership preferred in partnership property & may attach partner's share in partnership assets
8. Every partner is an agent of the partnership

D. RESPONSIBILITY OF PARTNERSHIP TO PARTNERS


1. To refund the amounts disbursed by partner in behalf of the partnership + corresponding interest from the time
the expenses are made (loans and advances made by a partner to the partnership aside from capital contribution)
2. To answer for obligations partner may have contracted in good faith in the interest of the partnership business
3. To answer for risks in consequence of its management

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LAW ON PARTNERSHIP
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KINDS OF PARTNERS
CLASSIFICATION
A. FROM THE VIEWPOINT OF CONTRIBUTION
1. Capitalist
2. Industrial
B. FROM THE VIEWPOINT OF LIABILITY
1. General
2. Limited
C. FROM THE VIEWPOINT OF MANAGEMENT
1. Managing
2. Silent
3. Liquidating
D. MISCELLANEOUS CLASSIFICATION
1.
2.
3.
4.

Ostensible
Secret
Dormant
Nominal

DEFINITION
1. 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.)
2. 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:
2.1 he can be EXCLUDED from the firm (PLUS DAMAGES);
2.2 OR the benefits he obtains from the other businesses can be availed of by the other partners (PLUS
DAMAGES).
NOTE: The rule remains true whether or not there is COMPETITION.

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LAW ON PARTNERSHIP
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REASON: All his industry is supposed to be given only to the partnership.
3. Capitalist-Industrial Partner one who contributes both capital and industry.
4. General Partner one who is liable beyond the extent of his contribution.
5. Limited Partner one who is liable only to the extent of his contribution.
NOTE: An industrial partner can only be a general partner, never a limited partner.
6. Managing Partner one who manages actively the firms affairs.
7. Silent Partner one who does not participate in the management (though he shares in the profits or losses).
8. Liquidating Partner one who liquidates or winds up the affairs of the firm after it has been dissolved.
9. 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.
10. Secret Partner one whose connection with the firm is concealed or kept a secret.
11. Dormant Partner one who is both a secret (hidden) and silent (not managing) partner.
12. 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).

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LAW ON PARTNERSHIP
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DISTINCTION BETWEEN A CAPITALIST AND INDUSTRIAL PARTNER


A. AS TO CONTRIBUTION
1. The capitalist partner contributes money or property.
2. The industrial partner contributes his industry (mental or physical)
B. AS TO PROHIBITION TO ENGAGE IN OTHER BUSINESS
1. The capitalist partner cannot generally engage in the same or similar enterprise as that of
his firm (the test is the possibility of unfair competition).
2. The industrial partner cannot engage in any business for himself
Reason: all his industry is supposed to be contributed to the firm
C. AS TO PROFITS
1. The capitalist partner shares in the profits according to the agreement thereon; if none, pro
rata to his contribution.
2. The industrial partner receives a just and equitable share.
D. AS TO LOSSES
1. Capitalist
1.1 first, the stipulation as to losses
1.2 if none, the agreement as to profits
1.3 if none, pro rata to contribution

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LAW ON PARTNERSHIP
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2. The industrial partner is exempted as to losses (as between the partners). But is limited to
strangers, without prejudice to reimbursement from the capitalist partners.

DISSOLUTION AND WINDING UP


DISSOLUTION, WINDING UP and TERMINATION DEFINED
DISSOLUTION change in the relation of the partners caused by any partner ceasing to be associated in the carrying
on of the business; partnership is not terminated but continues until the winding up of partnership affairs is completed.
WINDING UP process of settling the business or partnership affairs after dissolution.
TERMINATION that point when all partnership affairs are completely wound up and finally settled. It signifies the end
of the partnership life

EIGHT (8) CAUSES OF DISSOLUTION:


1. Without violation of the agreement between the partners
a. By termination of the definite term/ particular undertaking specified in the agreement.
b. By the express will of any partner, who must act in good faith, when no definite term or particular undertaking is
specified.
c. By the express will of all the partners who have not assigned their interest/ charged them for their separate
debts, either before or after the termination of any specified term or particular undertaking.
d. By the bona fide expulsion of any partner from the business in accordance with power conferred by the
agreement.
2. In contravention of the agreement between the partners, where the circumstances do not permit a dissolution
under any other provision of this article, by the express will of any partner at any time
3. By any event which makes it unlawful for business to be carried on/for the members to carry it on for the
partnership
The object of partnership must be a lawful one. In other words, it should not be contrary to law, morals, good
customs, public order or public policy.
Instances when partnership is unlawful:
(A) A partnership formed to furnish apartment houses which would be used for prostitution.
(B) A partnership formed to create illegal monopolies.
(C) A partnership for gambling purposes or distribution of illegal drugs.

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LAW ON PARTNERSHIP
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4. Loss of specific thing promised by partner before its delivery
5. Death of any partner
6. Insolvency of a partner/partnership
*Unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to
pay debts as they mature.
7. Civil interdiction of any partner
Civil interdiction is an accessory penalty imposed upon persons who are sentenced to a principal penalty not lower
than reclusion temporal (article 41, Revised Penal Code), which is a penalty ranging from twelve years and one
day to twenty years.
Article 34 of the Revised Penal Code provides: Civil interdiction shall deprive the offender during the time of his
sentence of the rights of parental authority, or guardianship, either as to the person or property of any ward, of
marital authority, of the right to manage his property, and of the right to dispose of such property by any act or any
conveyance inter vivos.
8. Decree of court under Article 1831 of the Law on Partnership

2 GROUNDS FOR DISSOLUTION BY DECREE OF COURT (Art. 1831, LAW ON PARTNERSHIP)


1. On application by or for a partner, the court shall decree a dissolution whenever:
1.1. Partner declared insane in any judicial proceeding or shown to be of unsound mind
Insanity includes the various forms of mental disease, either inherited or acquired, in which there is a
perversion of the mentality, as when the person is suffering from illusions, hallucinations, or delusions,
unnatural exaltation or depression, or insane ideas of persecution or power. Various phases of insanity are
known as dementia praecox, paranoia, schizophrenia, mania, melancholia, etc. It is a manifestation, in
language or conduct, of disease or defect of the brain, or a more or less permanently diseased or disordered
condition of the mentality, functional or organic, characterized by perversion, inhibition, or disordered function
of the sensory or of the intellective faculties, or by impaired or disordered volition (Sec. 1089, Revised
Administrative Code).
1.2 Incapacity of partner to perform his part of the partnership contract
ESSENTIAL FEATURES OF PARTNERSHIP CONTRACT
a. There must be a valid contract
b. The parties must have the legal capacity to enter into the contract.
Before there can be a valid contract of partnership, it is essential that the contracting parties have the
necessary legal capacity to enter into the contract. As a general rule, any person may be a partner who is
capable under the law of entering into contractual relations. Consequently, any person who cannot legally
give consent to a contract cannot be partner. Hence, the following cannot give their consent to a contract of
partnership:

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b.1 Unemancipated minors
The age of majority commences upon the attainment of the age of 18 years (R.A. 6809); a person
below such age is a minor, and has a limited capacity to act. The unemancipated minor cannot enter
into contracts (article 1327, par. 1, Civil Code); but he may be estopped from disavowing his contract if
he has misled the other party as to his age.
b.2 Insane or demented persons
Insanity includes the various forms of mental disease, either inherited or acquired, in which there is a
perversion of the mentality, as when the person is suffering from illusions, hallucinations, or delusions,
unnatural exaltation or depression, or insane ideas of persecution or power. Various phases of insanity
are known as dementia praecox, paranoia, schizophrenia, mania, melancholia, etc. It is a
manifestation, in language or conduct, of disease or defect of the brain, or a more or less permanently
diseased or disordered condition of the mentality, functional or organic, characterized by perversion,
inhibition, or disordered function of the sensory or of the intellective faculties, or by impaired or
disordered volition (Sec. 1089, Revised Administrative Code).
b.3 Deaf-mute who do not know how to write
b.4 Persons who suffering from civil interdiction
Civil interdiction is an accessory penalty imposed upon persons who are sentenced to a principal
penalty not lower than reclusion temporal (article 41, Revised Penal Code), which is a penalty ranging
from twelve years and one day to twenty years.
Article 34 of the Revised Penal Code provides: Civil interdiction shall deprive the offender during the
time of his sentence of the rights of parental authority, or guardianship, either as to the person or
property of any ward, of marital authority, of the right to manage his property, and of the right to
dispose of such property by any act or any conveyance inter vivos.
b.5 Incompetents who are under guardianship.
The Rules of Court defines incompetent as including
a) persons suffering from the penalty of civil interdiction
b) hospitalized lepers,
c) prodigals or spendthrift
A spendthrift or prodigal is a person who, by excessive drinking, gambling, idleness or debauchery
of any kind shall so spend, waste or lessen his estate as to expose himself or his family to want or
suffering.
d) deaf and dumb who are unable to read and write,
e) those who are of unsound mind, even though they have lucid intervals, and
f) persons not being of unsound mind, but by reason of age, disease, weak mind, and other similar
causes, cannot, without outside aid, take care of themselves and manage their property, becoming
thereby an easy prey for deceit and exploitation.
1.3 Partner guilty of conduct prejudicial to business of partnership

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LAW ON PARTNERSHIP
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1.4 Wilfull or persistent breach of partnership agreement or conduct which makes it reasonably impracticable to
carry on partnership with him
1.5 Business can only be carried on at a loss
1.6 Other circumstances which render dissolution equitable
2. On application by purchaser of partner's interest:
2.1 After termination of specified term/particular undertaking
2.2 Anytime if partnership at will when interest was assigned/charging order issued

EFFECTS OF DISSOLUTION
A. AUTHORITY OF PARTNER TO BIND PARTNERSHIP
GENERAL RULE:
Authority of partners to bind partnership is terminated
Exception:
1. Wind up partnership affairs
2. Complete transactions not finished
QUALIFICATIONS:
1. With respect to partners
a. Authority of partners to bind partnership by new contract is immediately terminated when dissolution is not due
to ACT, DEATH or INSOLVENCY (ADI) of a partner (art 1833);
b. If due to ADI, partners are liable as if partnership not dissolved, when the following concur:
b.1 If cause is ACT of partner, acting partner must have knowledge of such dissolution
b.2 If cause is DEATH or INSOLVENCY, acting partner must have knowledge/ notice
.
2. With respect to persons not partners (Art.1834)
a. Partner continues to bind partnership even after dissolution in the following cases:
a.1 Transactions in connection to winding up partnership affairs/completing transactions unfinished
a.2 Transactions which would bind partnership if not dissolved, when the other party/obligee:
Situation 1
i. Had extended credit to partnership prior to dissolution &
ii. Had no knowledge/notice of dissolution, or
Situation 2
i. Did not extend credit to partnership
ii. Had known partnership prior to dissolution
iii. Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general
circulation in the place where partnership is regularly carried on
b. Partner cannot bind the partnership anymore after dissolution:
b.1 Where dissolution is due to unlawfulness to carry on with business (except: winding up of partnership affairs)
b.2 Where partner has become insolvent

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LAW ON PARTNERSHIP
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b.3 Where partner unauthorized to windup partnership affairs, except by transaction with one who:
Situation 1
i. Had extended credit to partnership prior to dissolution &
ii. Had no knowledge/notice of dissolution, or
Situation 2
i. Did not extend credit to partnership prior to dissolution
ii. Had known partnership prior to dissolution
iii. Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general
circulation in the place where partnership is regularly carried on
B. DISCHARGE OF LIABILITY
Dissolution does not discharge existing liability of partner, except by agreement between:
Partner and himself
Person/partnership continuing the business
Partnership creditors
RIGHTS OF PARTNER WHERE DISSOLUTION NOT IN CONTRAVENTION OF AGREEMENT:
1. Apply partnership property to discharge liabilities of partnership
2. Apply surplus, if any to pay in cash the net amount owed to partners
RIGHTS OF PARTNER WHERE DISSOLUTION IN CONTRAVENTION OF AGREEMENT:
1. Partner who did not cause dissolution wrongfully:
a. Apply partnership property to discharge liabilities of partnership
b. Apply surplus, if any to pay in cash the net amount owed to partners
c. Indemnity for damages caused by partner guilty of wrongful dissolution
d. Continue business in same name during agreed term
e. Posses partnership property if business is continued
2. Partner who wrongly caused dissolution:
a. If business not continued by others -apply partnership property to discharge liabilities of partnership & receive in
cash his share of surplus less damages caused by his wrongful dissolution
b. If business continued by others -have the value of his interest at time of dissolution ascertained and paid in
cash/secured by bond & be released from all existing/future partnership liabilities
RIGHTS OF INJURED PARTNER WHEREPARTNERSHIP CONTRACT IS RESCINDED ON GROUND OF FRAUD or
MISREPRESENTATION BY ONE PARTY:
1. Right to lien on surplus of partnership property after satisfying partnership liabilities
2. Right to subrogation in place of creditors after payment of partnership liabilities
3. Right of indemnification by guilty partner against all partnership debts & liabilities

C. SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS


ASSETS OF THE PARTNERSHIP:
1. Partnership property (including goodwill)

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LAW ON PARTNERSHIP
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2. Contributions of the partners
ORDER OF APPLICATION OF ASSETS (PREFERENCE OF CREDIT):
1.
2.
3.
4.

Partnership creditors
Partners as creditors
Partners as investors return of capital contribution
Partners as investors share of profits if any

D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED:


1. Creditors of old partnership are also creditors of the new partnership which continues the business of the old one
w/o liquidation of the partnership affairs
2. Creditors have an equitable lien on the consideration paid to the retiring /deceased partner by the purchaser when
retiring/deceased partner sold his interest w/o final settlement with creditors
3. Rights if retiring/estate of deceased partner:
a. To have the value of his interest ascertained as of the date of dissolution
b. To receive as ordinary creditor the value of his share in the dissolved partnership with interest or profits
attributable to use of his right, at his option
PERSONS AUTHORIZED TO WIND UP
1. Partners designated by the agreement
2. In absence of agreement, all partners who have not wrongfully dissolved the partnership
3. Legal representative of last surviving partner

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