Law on Partnership

Law on Partnership (Article 1767 – 1867)

 Chapter 1 – General Provisions (1767 – 1783)

 Chapter 2 – Obligations of the Partners (1784 – 1927)
o Section 1 – Obligation of the Partners Among Themselves
o Section 2 – Property Rights of a Partner
o Section 3 - Obligation of the Partners with Regard to Third Persons
 Chapter 3 – Dissolution and Winding Up (1828 – 1842)
 Chapter 4 – Limited Partnership (1843 – 1867)

CHAPTER 1: GENERAL PROVISIONS

 Partnership
It is a contract whereby two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves (NCC, Art.
1767).
 Characteristics of Partnership
1. Consensual
2. Nominate
3. Bilateral
4. Onerous
5. Commutative
6. Principal
7. Preparatory

 Essential Features
1. Valid contract
2. Legal capacity of the parties
3. Mutual contribution of money, property, or industry to a common fund;
4. Legality of the object
5. Purpose to obtain profits
6. Partnership a juridical personality

1. There must be a valid contract.

A. Form – No special form is required for its validity or existence. (Art. 1771) The contract
may be made orally or in writing regardless of the value of the contributions.
Exceptions:
(1) Personal property
a. Less than P3,000 – may be oral
b. P 3,000 or more – must be:
- In a public instrument;
- Registered with Securities and Exchange Commission (Art. 1772).
(2) Real property or real rights – must be:

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a. In a public instrument
b. With an inventory of said property
- Signed by the parties
- Attached to the public instrument
- Registered in the Registry of Property of the province, where the real property
is found to bind third persons
(3) Limited Partnership
Must be registered as such with the SEC, otherwise, it is not valid as a limited
partnership but may still be considered a general partnership with juridical
personality

***** The failure to register the contract of partnership does not invalidate the
same as among the partners, so long as the contract has the essential requisites,
because the main purpose of registration is to give notice to third parties, and it can
be assumed that the members themselves knew of the contents of their contract.
Noncompliance with this directory provision of the law will not invalidate the
partnership.

B. Requisites
(1) Consent
(2) Object -
(3) Cause/Consideration

2. The parties must have legal capacity to enter into the contract.
General Rule: Any person capacitated to contract may enter into a contract of partnership.

Exception: Persons who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership (NCC, Art. 1782) (1994 Bar);
As such, the following persons cannot enter into a contract of partnership:
(1) Those suffering from civil interdiction;
(2) Minors;
(3) Insane or demented persons;
(4) Deaf-mutes who do not know how to write;
(5) Incompetents who are under guardianship.

3. There must be a mutual contribution of money, property, or industry to a common

fund.
A. Forms of Contribution
(1) Money – refers to a currency, which is the legal tender of the Philippines.
(2) Property – it may be real or personal, corporeal or incorporeal, even a goodwill may
be contributed.
(3) Industry – mean an active cooperation, the work of the party associated, which may
be either personal manual efforts or intellectual and for which he receives share in
the profits.

4. The object must be lawful.

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A. Effect of Unlawful Object

(1) The contract is void ab initio.
(2) Once dissolved by judicial decree:
(a) The profits shall be confiscated by favor of the State;
(b) The instruments or tools and proceeds of the crime shall also be forfeited in favor
of the State [Art. 1770]
(3) The contributions of partners shall not be confiscated unless they are instruments or
tools of the crime [De Leon (2010)].

5. The primary purpose must be to obtain profits and to divide the same among the
parties.
- This is the very reason for existence of partnership. It provides the goal to generate profits
and to return these profits to the partners as owners of the business.
- The division of profits is not necessarily in equal shares.
- The sharing in profits is merely presumptive and not conclusive evidence of partnership.
- The definition of partnership under Art. 1767 refers to “profits” only and is silent as to
“losses.” The reason is that the object of partnership is primarily the sharing of profits,
while the distribution of losses is but a “consequence of the same.” The right to share in
the profits carries with it the duty to contribute to the losses, of any.

6. The partnership has a juridical personality separate from individual partners.

- As an independent juridical person, a partnership may enter into contracts, acquire and
possess property of all kinds in its name, as well as incur obligations and bring civil or
criminal actions in conformity with the laws and regulations of its organizations.

 Rules To Determine Existence

When the intent of the parties is clear, such intent shall govern. When it does not clearly
appear, the following rules apply:
1. Persons who are not partners to each other are not partners as to third persons, subject to
the provisions on partnership by estoppel.
2. Co-ownership or co-possession does not of itself establish a partnership, even when there is
sharing of profits in the use of the property.
3. Sharing of gross returns does not of itself establish a partnership, even when the parties have
joint or common interest in any property from which the returns are derived.
4. The receipt by a person of a share in the profits of a business is prima facie evidence that he
is a partner.
As to the fourth, no such inference is drawn if the profits are received in payment:
A. As a debt by installments or otherwise;
B. As wages of an employee of rent to a landlord;
C. As an annuity to a widow or representative of a deceased partner;
D. As interest on a loan, though the amount of payment vary with the profits of the business;
E. As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise [Art. 1769].

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 Burden Of Proving the Existence of a Partnership

It rests on the party having the affirmative of that issue. The existence of a partnership must
be proved and will not be presumed.