CHAPTER 2

SECTION 1 - OBLIGATIONS OF THE PARTNERS

4 Distinct Juridical Relations Created by a Partnership:

1. between the partners themselves
2. between the partners and the partnership
3. between partnership and 3rd persons
4. between partners and 3rd persons

Art 1784 - A partnership begins from the moment of the execution of the contract, unless it is otherwise
stipulated.
 even though the contributions are not yet given, what matters is the 3 essential requisites that must be
present
 executory agreement: partners may stipulate some other date for the commencement of the partnership
o hence, there can be a future partnership wc at the moment it has no juridical existence yet
o but as long as the agreement remains executory, no partnership is said to exist

Art 1785 - Partnership At Will

 Definition: is one in which the term of its existence has been agreed upon expressly or impliedly
o Its expiration is fixed
o no term of existence has been fixed and which may be terminated at the will of any partners
o it can be terminated by the express will of any partner provided he acted in good faith, but it can
result to damages to the other partners
 However, the partnership may be extended through the mere continuation of the business even after the
termination of the term by means of the partners having an express or implied continuation
 But with such continuation, the partnership for a fixed term is dissolved, and a new one (a partnership at
will) is created
 The continuation is prima facie

Art 1786 - Every partner is a debtor of the partnership to whatever he promise to contribute
 It means that the partnership is entitled to receive what the partner had promised
 Obligations of partners to contribute:
1. Shall deliver at the beginning of the partnership or, if a different date has been agreed upon, at the
stipulated time the properties he agreed to contribute;
2. Shall answer for eviction, in case the partnership is deprived of the ownership of any specific
property he contributed;
3. Shall answer to the partnership for the fruits of the properties whose delivery he delayed from the
date he should have contributed it up to actual delivery without necessity of any demand;
4. Shall preserve said properties with the diligence of a good father of a family pending their
delivery to the partnership;
5. And shall indemnify the partnership for any damage caused it by the retention of said properties
or by the delay in their contribution.

Art 1787 - The Need for Appraisal in Contributions

 The contributions (capital) must be appraised in (1) the manner prescribed in the contract, or shall be (2)
made by experts in accordance to current prices

Art 1788 - Liability of Partner for (1)Failure to Contribute Money and for (2) Estafa
 First case - he becomes a debtor for the interest and damages from the time he should have complied with
his obligation
 Second case - same liability as first case
o Estafa - an act obtaining money through fraud
 Obligations with respect to contribution of money and money converted to personal use
 1. to contribute on the date due
2. to reimburse any amount he may have taken
3. to pay the agreed legal interest
4. to indemnify partnership for damages
 Liability of guilty partner
0. guilty partner is liable for both interest and damages from the time he should have complied the
obligation and not from the time demand is made

Art 1789 - Industrial Partner Is Restricted From Engaging in Business

 Industrial Partner - one who contributes his industry or labor in the partnership
 He cannot engage in any business for himself unless the partnership expressly permits him to do so.
o This is done to prevent any conflict of interest between the indsutrial and the partnership, and to
ensure faithful compliance by the said partner with his prestation
 And if he is given the permit, the capitalist partners may either exclude him from the firm or avail the
benefits which the industrial partner may have obtained in violation of this provision
 Remedies if industrial partner engaged in business WITHOUT express permission:
1. capitalist partners have right to damages
2. co-industrial partners can also claim damages

Art 1790 - Partners Shall Contribute Equal Shares to the Capital Unless Stipulated Otherwise
 In the absence of stipulation, the presumption is that their contribution shall be in equal shares
 This rule is not applicable to industrial partners

Art 1791 - In Case of Imminent Loss of the Business of the Partnership

1. Any partner (except an industrial partner) shall contribute an additional share to the capital to
save the venture.
2. If he refuses to do #1, he is obliged to sell his interest to the other partners
1. note: an industrial partner is exempted from this requirement
 Requisites:
1. there is an imminent loss of the business
2. the majority of the capitalist partners are of the opinion that an additional information to the
common fund would save the business
3. the capitalist partner refuses deliberately to contribute
4. there is no agreement that even in case of an imminent loss, the partners are not obliged to
contribute

Art 1792 - Obligation of Managing Partner Who Collects Debt

 A person may be separately indebted to the partnership and to the managing partner at the same time
 Any sum received by the managing partner shall be applied to the 2 credits in proportion to their amounts
 Exception: the managing partner received the sum for the account of the partnership, in which case, the
whole sum shall be applied to the partnership credit only
 Requisites:
1. Two existing debts
2. Both debts must be demandable
3. The one who collected the debt is a partner who is authorized to manage and is actually managing
the partnership
 Reason for applying payment to partnership credit
o to protect the interest of the partnership from being prejudiced by the interest of the managing
partner
o good faith from the managing partner demands that he should have more interest in the business
rather than his personal credit
 note: if there is no managing partner agreed upon, then every partner shall be considered a managing
partner for the purpose of this article
Art 1793 - Obligation of Partner Who Received Shares of Partnership Credit
 difference to 1792: the previous article contemplates 2 distinct credits, one in favor of partnership and one
in favor of the managing partner
o in this article, there is only 1 credit, one in favor of the partnership
 (requisites) A partner should bring to the partnership capital the share that he had received when (1) the
other partners had not collected theirs and (2) the debtor thereafter becomes (3) insolvent.

Art 1794 - Partner Liable for Damages Caused the Partnership

 Every partner is liable to the partnership for damages he casued
 He cannot compensate it with the profits and benefits he is entitled to
o This follows the general rule that a person at fault cannot claim compensation and that the
appropriate remedy is damages
 But the courts may equitably lessen the damage if this partner is evidenced to have been caused bigger
profits to the partnership
 It is first necessary to liquidate the business for the purpose of knowing the profits and losses in order to
determine the responsibility of the defendant and the damages suffered by the other partners

Art 1795 - Risk for Fungible or Not Fungible Things (determinate or specific)
 Risk of Loss Contributed:
1. Specific, not fungible - risk borne by partner who owns them
2. Specific, ownership is transferred to the partnership -risk borne by partnership
3. Fungible (perishable), cannot be kept without deteriorating - borne by partnership
4. Things contributed to be sold - borne by partnership
5. Things brought and appraised in the inventory - borne by partnership

Art 1796 - Responsibility of Partnership To Partners

 Every partner is an agent of the partnership. Hence, the obligations of the partnership are:
1. Reimbursement plus interest from time the partner had made advances (concept of drawing in
accounting) (expenses made by partner in behalf of the firm other than the capital contributed by
him
2. To answer for the obligation the partner may have been contracted in good faith
3. To answer for the risks in consequence of its management
 Being a mere agent, the partner is not personally liable provided he is free from all fault
 important: all partners must agree with the expense first, if a partner made one without the knowledge, it
is treated as a loss and he is not entitled to reimbursement

Art 1797 - Rules for distribution of profits and losses

 Distribution of Profit
1. (as stipulated) partners share the profits in accordance with the ratio established by their contract
2. When there is no stipulation
1. If all are capitalist partners -profits in proportion to their capital contributions;
2. If there are capitalist and industrial partners - the industrial partner gets a equitable share
first, then the capitalist partners divide the remainder in proportion to their capital
contributions; and
3. If there is a capitalist-industrial partner - he gets a share in the profits as an industrial
partner and an additional share in proportion to his capital contribution to be determined
as in (b), above.
 Distribution of Losses
1. The stipulation in the partnership agreement regarding loss sharing must be followed.
2. If there is no such agreement, but the contract provides for a profit sharing ration, the profit
sharing ratio shall also be the loss sharing ration.
3. In the absence of loss sharing and profit sharing stipulations in the contract, then the loss shall be
borne by the partners in proportion to their capital contributions; but a purely industrial partner is
exempted from participation in the loss.
Art 1798 - Designation of Losses and Profits Cannot Be Intrusted To One of the Partners
 follows the general rule that a contract cannot be left to the sole will of one of the contracting person
 the prohibition is necessary to guarantee the outmost impartiality in the distribution of shares in the
profits and losses
 therefore, the designation may be delegated to a 3rd person by common consent and it would be binding
unless the distribution made is unequitable
o If a partner began to (1) execute the decision of the 3rd person or (2) failed to impugn the
decision within 3 months from the time he had knowledge, they can no longer complaign
o In such case, the partner is deemed guilty of estoppel or to have ratified the designation

Art 1799 - A Stipulation Excluding Partner From Any Share in Profits or Losses is VOID
 only the stipulation is void, but the partnership subsists
 a stipulation excluding an industrial partner from losses is valid as long as there are no 3rd persons
prejudiced
 parties can stipulate distribution of unequal shares as long as the inequality is not so gross that it is
unequitable for one partner

Art 1800 - Rights and Obligations With Respect To Management

 Unless there is a managing partner provided, each partner in a general partnership has an equal voice in
the management of the firm
 Managing partner appointed at the constitution of the partnership:
o he may execute all acts of administration despite the opposition of his partners, unless there is bad
faith
o his power is irrevocable upon lawful cause
 Managing partner appointed after the constitution
o same power above but his power may be revoked for any cause whatsover
o because the appointment is independent of the articles of partnership and therefore constitutes a
different contract of agency
 Scope of the power of the managing partner
o General rule: partner appointed as manager has all the powers of a general agent as well as all the
incidental powers necessary to carry out the object of the partnership in the transaction of its
business.
o Exception: When powers of manager is specifically restricted. A managing partner may not bind
the partnership by contract foreign to its business.
 Compensation for Services Rendered
o General Rule: parnters are generally not entitled to compensation. The share in profits is their
only compensation
o Exception: a partner can receive additional compensation if his work went beyond normal
functions, or in a capacity other than that of a partner