REPORT ON PARTNERSHIP ARTICLES 1784 1784 to 1789 1789 OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. Commencement of partnership. A partnership is a consensual contract; hence, it exists from the moment of the celebration of the contract by the partners. What is necessary is that the essential requisites of a contract of partnership are present even the partners have not yet actually given their contributions, or even though its conditions or details, such as participation of the partners in the profits and losses and the nature of the partnership have not yet been fixed, as they pertain to the accidental a ccidental and not to the essential parts of the contract. Essential elements of contract: a. Consent – refers to the meeting of the minds between the contracting parties or their conformity to all the terms and conditions of the contract which is freely given. b. Object – refers to the subject of the contract. It must be definite and certain, otherwise, the meeting of the minds of the contracting cont racting parties is not possible. c. Cause – refers to the compelling reason why a party assumes an obligation. Where a partnership relation results, the law itself fixes the incidents of their relation if the parties fail to do so. Executory agreement of partnership. But the above rule is not absolute. 1. Future partnership – the partners may stipulate some other date for the commencement of the partnership a. Persons who have entered into a contract to become partners at some future time; or b. On the happening of some condition or future contingency do not become partners until or unless the agreed time has arrived or the condition has happened. Hence, there can be a future partnership which at the moment has no juridical existence yet.
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2. Agreement to create partnership – distinction must be made between a partnership actually consummated and an agreement to enter into a contract of partnership at a future time. So long as the agreement remains executor, no partnership can be said to exist. Article 1784 must be read in relation to Articles 1771 and 1773, which read: Art. 1771. A partnership may be constituted in any form except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument.
ART. 1785. When a partnership for a fixed term or particular undertaking is continued after the 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 the 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 continuation of the partnership. Partnership as to Duration 1. Partnership at will a. 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 of partner alone; or b. one of a fixed term or particular undertaking which is continued by the partners after the termination of such term or particular undertaking without express agreement. 2. Partnership with a fixed term a. One in which the term of its existence has been agreed upon expressly, as when there is a definite period; or b. Impliedly, as when a particular enterprise or transaction is undertaken. The expiration of the term thus fixed or the accomplishment of the particular undertaking specified will cause the automatic dissolution of the partnership. The partnership, however, may be extended or renewed by the partners by: a. Express Agreement – written or oral Page 2 of 7
b. Implied – by the mere continuation of the business after the termination of such term or particular undertaking without any settlement or liquidation Effect of the continuation of partnership beyond fixed term The rights and duties of the partners remain the same as they were at such termination but only insofar as is consistent with a partnership at will. In other words, with such continuation, the partnership for a fixed term or particular undertaking is dissolved and a new one, a partnership at will, is created the continued existence of which will depend upon the will of the partners.
ART. 1786. Every partner is debtor of the partnership for whatever he may have promised to contribute thereto. He shall also 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 from the time they should have been delivered without the need of any demand. Obligations with respect to contribution of property Art. 1786 deals with the obligations of the partners among themselves and to the partnership with respect to contribution of property. They are as follows: 1. To contribute from the very beginning of the partnership or at the stipulated time the money, property or industry which he may have promised to contribute; 2. To answer for eviction in case the partnership is deprived of the determinate property contributed; and 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. In addition, the partner has the obligation: 4. To preserve said property with the diligence of a good father of family pending delivery to the partnership (Art. 1163); and 5. To indemnify the partnership for any damage caused to it by retention of the same or delay in its contribution (Arts. 1788, 1170). Effect of failure to contribute property promised. Mutual contribution to a common fund is of the essence of the contract of partnership (Art. 1767), for without the contributions the partnership is useless. It is but Page 3 of 7
logical that the failure to contribute is to make the partner automatically a debtor of the partnership even in the absence of any demand. Under this article, the remedy of the other partners or the partnership is not rescission or cancellation of the contract of partnership but an action for specific performance (to collect what is owing) with damages from the defaulting partner who is made a debtor for what he has promised to contribute to the partnership. (Sancho vs. Lizarga, 55 Phil. 60) Liability of Partner in case of Eviction Under the Law on Sales, eviction shall take place whenever by final judgement based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or part of the thing purchased (Art. 1548). The partner is bound in the same cases and in the same manner as the vendor is bound with respect to the vendee. This obligation of warranty in case of eviction is in consequence of the character of the contract of partnership which is onerous contract. (Art. 1767) Onerous contract because each of the parties aspires to procure for himself a benefit through the giving of something. Liability of partner for fruits of property in case of delay. From the mere fact that the contribution which a partner ought to deliver does not pass to the common fund on time, the partnership fails to receive the benefits which the said contribution ought to produce thus prejudicing the common purpose of obtaining from them the greatest possible profits through some means of speculation or investment. The injury, therefore, to the partnership is constant. (11 Manresa 332-335). Here, again, 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 a manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by the experts chosen by the partners, and according to current prices, the subsequent change thereof being for the account of the partnership. The appraisal of the value of the goods contributed is necessary to determine how much has been contributed by the partners. In the absence of stipulation, the share of each partner in the profits and losses is in proportion to what he may have contributed. How the appraisal is made? 1. In the manner prescribed in the contract of partnership; Page 4 of 7
2. In the absence of stipulation, by experts chosen by the partners and according to current prices. After the goods have been contributed, the partnership bears the risk or gets the benefit of subsequent changes in their value.
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. Obligations of a partner with respect to contribution of money and money converted for personal use. This article contemplates two distinct cases. The first paragraph refers to money promised but not given on time and the second, to partnership money converted to the personal use of the partner. The following are the obligations of the partners with respect to the partnership capital under Article 1788: 1. To contribute on the date fixed the amount he has undertaken to contribute to the partnership; 2. To reimburse any amount he may have taken from the partnership coffers and converted to his own use; 3. To pay 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; and 4. To indemnify the partnership for the damages caused to it by the delay in the contribution or the conversion of any sum for his personal benefits. Liability of guilty partner for interest and damages The guilty partner is liable for both interest and damages not from the time judicial (i.e., filing of action or complaint in court) or extrajudicial demand is made but from the time he should have complied with his obligation or from the time he converted the amount to his own use, as the case may be. This double responsibility of the partner is an exception to the general rule in damages that in obligations consisting in the payment of sum of money, the indemnity for damages shall only the payment of interest agreed upon or, in the absence of stipulation, the legal interest. It is in harmony with the principle laid down in Article 1794 that every Page 5 of 7
partner is responsible to the partnership for damages suffered through his fault and is justified by the nature of the contract of partnership.
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 may he may have obtained in violation of this provision, with a right to damages in either case. Definition of Industrial Partner and Capitalist Partner An industrial partner is one who contributes his industry or labor to the partnership. He is considered the owner of his services, which is his contribution to the common fund. (Limuco vs. Calina, [CA] No. 10099-R, Sept. 9, 1953). Unless the contrary is stipulated, he becomes a debtor of the partnership for his work or services from the moment of the commencement of the partnership. In effect, the partnership acquires an exclusive right to avail itself of his industry. Consequently, if he engages in business for himself, such act is considered prejudicial to the interest of the other partners. A capitalist partner is one who contributes money or property to the common fund. Prohibition against engaging in business 1. As regards an industrial partner – The prohibition is absolute and applies whether the industrial partner is to engage in the same business in which the partnership is engaged or in any kind of business. It is clear that the reason for the prohibition exists in both cases, which is to prevent any conflict of interest between the industrial partner and the partnership and to insure faithful compliance by said partner with his prestation. (Evangelista & Co. vs. Abad Santos, 51 SCRA 416). 2. As regards to capitalist partners – The prohibition extends only to any operation which is of the same kind of business in which the partnership is engage unless there is stipulation to the contrary. (Article 1808.) Remedies where industrial partner engages in business If the industrial partner engages in business for himself, without the express permission of the partnership, the capitalist partners have the following remedies coupled with right to damages: a. To exclude the industrial partner from the firm; or b. To avail themselves of the benefits which the industrial partner may have obtained. Page 6 of 7
Although the law mentions only the capitalist partners, it is believed that industrial partners are also entitled to the remedy granted since they are equally prejudiced by the act of their co-partner engaging in business for himself.
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