Agency, Trust, and Partnership Notes KNLRosellas JD2 CKC Law

Partnership - It is the individual partners, not the

- Concept, Nature, and Essential Requisites partnership, who engage in the practice of the
- Definition of partnership; essential requisites profession and are responsible for their own
(consent, contribution, intent to divide profits, acts.
lawful object); partnership as a juridical - The law does not allow individuals to practice
person separate from partners; partnership a profession as a corporate entity.
distinguished from co-ownership, conjugal
partnership, voluntary association, and Characteristic elements of partnership:
corporation. (1) Consensual - perfected by mere consent upon
the express or implied agreement of two or
Definition of partnership: more people
- “By the contract of partnership, two or more (2) Nominate - has a special name or designation
persons bind themselves to contribute money, in our law
property or industry to a common fund, with (3) Bilateral - entered into by two or more
the intention of dividing the profits among persons and the rights and obligations arising
themselves. therefrom are always reciprocal
(4) Onerous - each of the parties aspires to
Two or more persons may also form a procure for himself a benefit through the
partnership ” giving of something
(5) Commutative - the undertaking of each of the
Other Definitions: partners is considered as the equivalent of
(1) “A contract of two or more competent that of the others
persons to place their money, effects, labor, (6) Principals - it does not depend for its
and skill, or some or all of them, in lawful existence or validity upon some other
commerce or business and to divide the contracts
profits and bear the losses in certain (7) Preparatory - entered into as a means to an
proportions.” end (i.e. to engage in a profit-making venture
(2) “An association of two or more persons to and share the profits among the parties)
carry on as co-owners of a business for
profit.” Essential features of partnership: (VPMOP)
(3) “A legal relation based upon the express or ➢ A valid contract
implied agreement of two or more competent - Partnership relation is fundamentally
persons whereby they unite their property, contractual
labor, or skill in carrying on some lawful - Not the contract itself, but the result
business as principals for their joint profit.” of the contract
(4) “A joint undertaking to share in the profit and a. Form:
loss.” ● Determined by the parties' agreement.
● Contracts may be oral or written, express
General Provisions or implied from their acts and
declarations.
Article 1767. By the contract of partnership two or more ● Subject to Arts. 1771–1773 and the
persons bind themselves to contribute money, property, Statute of Frauds.
or industry to a common fund, with the intention of ● Signing partnership articles is not
dividing the profits among themselves. essential; conduct or acceptance as a
Two or more persons may also form a partnership for partner may be sufficient.
the exercise of a profession. (1665a)
b. Articles of Partnership
2nd Par. - Partnership may be created informally, but is
- “A group of men pursuing a learned art as a usually evidenced by written Articles of
common calling in the spirit of public service – Partnership.
no less a public service because it may States:
incidentally be a means of livelihood.” ● Partnership name, purpose, and principal
- Not a business nor an enterprise of profit office
however, the law allows the joint pursuit ● Rights, duties, powers, and liabilities of
thereof by two or more persons as partners. partners
Agency, Trust, and Partnership Notes KNLRosellas JD2 CKC Law
● Contributions of each partner ● Contribution of money, property, or
● Profit and loss sharing industry to a common fund; and
● Intent to share profits.
● Dissolution procedure ● Profit sharing alone is insufficient if one
party contributes nothing.
c. Requisites - COC ● If the other party actively participates in
● Consent and capacity of the contracting the business, this serves as sufficient
parties consideration and gives them the rights
● Object of which is the subject matter of the and liabilities of a partner.
contract
● Cause which is established ➢ Object must be lawful
● A partnership must have a lawful object or
➢ Parties must have legal capacity to enter purpose.
into the contract ● If the purpose is contrary to law, morals, good
*The following (individuals) cannot give their customs, public order, or public policy, the
consent to a contract of partnership: partnership is void ab initio.
● Unemancipated minors ● A partnership cannot engage in businesses
● Insane or demented persons reserved by law for a specific business form
● Deaf-mutes who do not know how to write (e.g., banking, which only stock corporations
● Persons who are suffering from civil may undertake).
interdiction; and Examples of unlawful purposes:
● Incompetents who are under guardianship ➢ Illegal monopolies/restraint of trade
➢ Gambling
➢ Partnerships ➢ Smuggling
● A partnership may be a partner in another ➢ Leasing apartments for prostitution
partnership. ➢ Bid-rigging in government contracts
● If partnerships combine to form a new ➢ Price-fixing/cartels
partnership, all individual partners of the
constituent partnerships are personally ➢ Primary purpose must be to obtain profits
liable to the creditors of the new and to divide the same among the parties
partnership.
- Must not be kept secret among members,
➢ Corporations otherwise the association will have no legal
● General rule: A corporation cannot enter personality and shall be governed by co-
into a partnership. ownership
● Exception: If authorized by law or its
charter. Article 1768. The partnership has a juridical personality
separate and distinct from that of each of the partners,
➢ Mutual contribution of money, property, or
even in case of failure to comply with the requirements of
industry to a common fund
article 1772, first paragraph. (n)
➢ Existence of proprietary interest
➢ A partnership is also called a firm or company.
Partners must have a proprietary interest by
➢ These terms imply a separate entity from its
contributing:
individual partners.
● Money
➢ A partnership has a personality separate and
● Property
distinct from its partners.
● Industry (services)
It may:
● Or a combination of these
● Own property
- Contribution to a common fund is essential for
● Enter into contracts
a partnership.
● Sue and be sued in its firm name
- However, contribution alone does not
● Be declared insolvent independently
conclusively prove a partnership exists.
of the partners
➢ A partner cannot sue on a partnership cause
➢ Proof of contribution
of action in their own name.
A partnership requires:
Agency, Trust, and Partnership Notes KNLRosellas JD2 CKC Law
➢ The death of a partner does not automatically partner in the business, but no such inference shall be
dismiss a pending case against the drawn if such profits were received in payment:
partnership. (a) As a debt by installments or otherwise;
➢ Partners are generally not personally liable (b) As wages of an employee or rent to a landlord;
for partnership obligations, except (c) As an annuity to a widow or representative of
➢ As provided by law (e.g., Art. 1816); or a deceased partner;
➢ When the partnership's separate personality
(d) As interest on a loan, though the amount of
is used for fraud, unfairness, or illegality.
payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill
Effect of failure to comply with statutory
of a business or other property by installments or
requirements:
otherwise. (n)
(1) Art. 1772:
➢ A partnership still acquires juridical
(1) Persons not partners as to each other
personality even if it fails to:
➢ General Rule: If persons are not partners
● Execute a public instrument; or
among themselves, they are not partners as
● Register with the SEC (when required).
to third persons
➢ The rule recognizes that many partnerships
➢ Partnership requires intent – parties must
are small businesses with minimal capital,
consent to form a partnership.
making strict compliance impractical.
➢ The label given to the relationship is not
(2) Art. 1773 and 1775:
controlling; what matters is the actual facts.
➢ No juridical personality if:
➢ If the parties expressly agree they are not
● The partnership is void under Art. 1773;
partners, this is generally binding between
or
them.
● It is a secret association or society under
➢ Exception: Partnership by Estoppel (Art.
Art. 1775.
1825)
● Even without a valid partnership agreement,
Organization of Partnerships:
persons may be liable as partners if:
● Forming a partnership is a privilege, not an
○ They represent themselves as
absolute right.
partners (by words, acts, or consent);
● The State may regulate or restrict who may
and
organize and operate partnerships.
○ A third person, in good faith, relies on
● Partnerships must comply with laws
that representation and transacts with
governing their business.
them.
● Example: Under the former Retail Trade
● Effect: They are liable to the third person as if
Nationalization Law (R.A. No. 1180), only
they were partners, although no actual
Filipinos could engage in the retail business,
partnership exists.
affecting even existing partnerships.
(1) Co-ownership or Co-possession
Article 1769. In determining whether a partnership
➢ General Rule: Co-ownership or co-possession
exists, these rules shall apply:
alone does NOT create a partnership, even if
(1) Except as provided by article 1825, persons profits are shared.
who are not partners as to each other are not partners as to ➢ Reason: Co-owners may acquire property
third persons; without a contract (e.g., inheritance or by law),
(2) Co-ownership or co-possession does not of while a partnership requires an agreement.
itself establish a partnership, whether such-co-owners or ● Profits from ownership ≠
co-possessors do or do not share any profits made by the partnership.
use of the property; ● Profits from operating a business + intent to
(3) The sharing of gross returns does not of itself carry on business = may indicate partnership.
establish a partnership, whether or not the persons sharing ● Co-owners may jointly manage or develop
them have a joint or common right or interest in any property without becoming partners.
property from which the returns are derived; ● A partner may contribute only the use or
(4) The receipt by a person of a share of the enjoyment of property while retaining
profits of a business is prima facie evidence that he is a ownership.
Agency, Trust, and Partnership Notes KNLRosellas JD2 CKC Law
(2) Sharing of gross returns In these cases, the recipient receives profits
➢ General Rule: Sharing gross returns alone not as a partner, but for another purpose.
does NOT establish a partnership.
➢ It is not even prima facie (presumptive) Tests and incidents of partnership
evidence of a partnership. Once a partnership exists, these legal consequences
automatically follow:
➢ In a partnership, partners share net profits 1. Share in profits and losses.
(after payment of liabilities), not merely gross 2. Equal right to manage the business (unless
returns. agreed otherwise).
Reason 3. Each partner is an agent of the partnership
● Sharing gross returns is commonly payment and can bind the partnership in business
for: transactions.
○ Commission 4. Partners are personally liable for partnership
○ Wages debts (except limited partners).
○ Rent 5. Partners owe fiduciary duties (utmost good
○ Interest on a loan faith, loyalty, honesty) to one another.
● It does not necessarily mean the parties share 6. Dissolution does not immediately end the
in the risks and losses of a business. partnership—it continues until all affairs are
wound up.
Exception
● A partnership may exist if there is additional
evidence of:
○ Mutual management and control of Article 1770. A partnership must have a lawful object or
the business; and purpose, and must be established for the common benefit
○ Intent to carry on a business as co- or interest of the partners.
owners. When an unlawful partnership is dissolved by a
judicial decree, the profits shall be confiscated in favor of
Key Distinction the State, without prejudice to the provisions of the Penal
● Gross returns → Not evidence of Code governing the confiscation of the instruments and
partnership. effects of a crime. (1666a)
● Net profits + co-ownership + mutual
management + intent → May indicate a ➢ A partnership requires:
partnership. ● Lawful object; and
● Common benefit or interest of the partners.
(3) Receipt of Share in the Profits ➢ Partners are free to choose any business as long
➢ General Rule: as it is lawful and benefits all partners.
● Sharing in net profits is prima facie - Illegality is never presumed; it must be
(presumptive) evidence of a partnership. inherent in the partnership's purpose.
● An agreement to share profits and losses - Some businesses (e.g., banking) may only be
strongly indicates a partnership. conducted by corporations.
● However, it is not conclusive—the
presumption may be rebutted by other facts. Effects of an unlawful partnership:
➢ When Profit-Sharing Does NOT Indicate a (1) Void ab initio (never legally existed).
Partnership (2) Profits are confiscated in favor of the
➢ No presumption of partnership if profits are government.
received as: (3) Instruments, tools, and proceeds of the crime
● Payment of a debt (creditor) are forfeited to the government.
● Wages (employee) (4) Partners' contributions are not confiscated
● Rent (landlord) unless they are instruments, tools, or
● Annuity to a deceased partner's proceeds of the crime.
widow/heirs
● Interest on a loan ➢ The partnership is automatically dissolved
● Consideration for the sale of property once its business becomes unlawful.
➢ No judicial decree is required for dissolution,
though one may be obtained for convenience.
Agency, Trust, and Partnership Notes KNLRosellas JD2 CKC Law
➢ Innocent third parties dealing in good faith are Community of interest in:
generally protected. ● Profits and losses
● Capital employed
Rights: ● Management/administration
➢ Right to return of the contribution where ➢ Partners are generally co-owners of the
partnership is unlawful business, but not every co-ownership creates
● Partners' contributions must be a partnership.
returned, since Art. 1770 only ➢ Business property may belong to one or more
confiscates profits, not contributions. partners; joint ownership is not always
● A partner may recover their required.
contribution even without relying on ➢ Profit sharing is essential, but profit sharing
the void partnership contract. alone does not automatically create a
● The manager/administrator cannot partnership.
retain the contributions, as doing so ➢ Courts determine the existence of a
would result in unjust enrichment. partnership by considering all elements and
➢ Right to receive profits where partnership is circumstances (Art. 1767).
unlawful
● Partners cannot recover profits from
an unlawful partnership.
● The claim for profits is based on a
void contract, which creates no Article 1771. A partnership may be constituted in any
enforceable rights. form, except where immovable property or real rights are
● Profits are confiscated by the
contributed thereto, in which case a public instrument
government.
shall be necessary. (1667a)
● Courts will not enforce or assist
Article 1772. Every contract of partnership having a
parties to an illegal partnership.
capital of three thousand pesos or more, in money or
● No accounting or recovery of profits
property, shall appear in a public instrument, which must
may be demanded between partners.
be recorded in the Office of the Securities and Exchange
Effects: Commission.
➢ Effect of partial illegality of partnership Failure to comply with the requirements of the preceding
business (exceptions) paragraph shall not affect the liability of the partnership
● If a partnership has both lawful and and the members thereof to third persons. (n)
unlawful businesses, partners may Article 1773. A contract of partnership is void,
account for and recover profits from whenever immovable property is contributed thereto, if
the lawful business. an inventory of said property is not made, signed by the
● Innocent partners may recover their parties, and attached to the public instrument. (1668a)
share of profits from the lawful Article 1774. Any immovable property or an interest
business if the unlawful acts were therein may be acquired in the partnership name. Title so
committed without their knowledge acquired can be conveyed only in the partnership name.
or participation. (n)
➢ Effect of subsequent illegality of partnership Article 1775. Associations and societies, whose articles
business (supervening illegality) are kept secret among the members, and wherein any one
● A partnership is dissolved if an event
of the members may contract in his own name with third
makes its business unlawful (Art.
persons, shall have no juridical personality, and shall be
1830[3]).
governed by the provisions relating to co-ownership.
● If the partnership was valid when
(1669)
formed but later becomes illegal:
● The contract remains valid up
Article 1776. As to its object, a partnership is either
to that point. universal or particular.
● Partners may account for As regards the liability of the partners, a partnership may
business conducted before it be general or limited. (1671a)
became illegal. Article 1777. A universal partnership may refer to all the
present property or to all the profits. (1672)
Community interest (Salient Features of Partnership):
Agency, Trust, and Partnership Notes KNLRosellas JD2 CKC Law
Article 1778. A partnership of all present property is
that in which the partners contribute all the property
which actually belongs to them to a common fund, with
the intention of dividing the same among themselves, as
well as all the profits which they may acquire therewith.
(1673)
Article 1779. In a universal partnership of all present
property, the property which belonged to each of the
partners at the time of the constitution of the partnership,
becomes the common property of all the partners, as well
as all the profits which they may acquire therewith.
A stipulation for the common enjoyment of any other
profits may also be made; but the property which the
partners may acquire subsequently by inheritance, legacy,
or donation cannot be included in such stipulation,
except the fruits thereof. (1674a)
Article 1780. A universal partnership of profits
comprises all that the partners may acquire by their
industry or work during the existence of the partnership.
Movable or immovable property which each of the
partners may possess at the time of the celebration of the
contract shall continue to pertain exclusively to each, only
the usufruct passing to the partnership. (1675)
Article 1781. Articles of universal partnership, entered
into without specification of its nature, only constitute a
universal partnership of profits. (1676)
Article 1782. Persons who are prohibited from giving
each other any donation or advantage cannot enter into
universal partnership. (1677)
Article 1783. A particular partnership has for its object
determinate things, their use or fruits, or a specific
undertaking, or the exercise of a profession or vocation.
(1678)