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Lawful vs. Unlawful Partnerships

1. A partnership must have a lawful object or purpose for the common benefit of the partners. An unlawful partnership is void and profits will be confiscated by the state. 2. If a partnership becomes unlawful, it is dissolved by operation of law without needing a judicial decree, though getting one is advisable. Partners can recover contributions but not profits. 3. If only part of a partnership's business is unlawful, an accounting can be made for the legal parts. Innocent partners can recover profits from guilty partners if the firm's profits were increased by wrongful acts without their knowledge.

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Ken Darryl Tagolgol
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286 views2 pages

Lawful vs. Unlawful Partnerships

1. A partnership must have a lawful object or purpose for the common benefit of the partners. An unlawful partnership is void and profits will be confiscated by the state. 2. If a partnership becomes unlawful, it is dissolved by operation of law without needing a judicial decree, though getting one is advisable. Partners can recover contributions but not profits. 3. If only part of a partnership's business is unlawful, an accounting can be made for the legal parts. Innocent partners can recover profits from guilty partners if the firm's profits were increased by wrongful acts without their knowledge.

Uploaded by

Ken Darryl Tagolgol
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
  • Partnerships: Lawful and Unlawful

Art. 1770.

A partnership must have a lawful object or purpose, and must be established for the
common benefit or interest of the partners. When an unlawful partnership is dissolved by a
judicial decree, the profits shall be confiscated in favor of the State, without prejudice to
the provisions of the Penal Code governing the confiscation of the instruments and effects
of a crime. Object or purpose of partnership

The provision of the 1st paragraph reiterates 2 essential elements of a contract of partnership:
1. Legality of the object; and
2. Community of benefit or interest of the partners. The parties possess absolute freedom to
choose the transaction or transactions they must engage in. The only limitation is that
the object must be lawful and for the common benefit of the members. The illegality of
the object will not be presumed; it must appear to be of the essence of the relationship.

Effects of an unlawful partnership


1. The contract is void and the partnership never existed in the eyes of the law;
2. The profits shall be confiscated in favor of the government;
3. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the
government;
4. The contributions of the partners shall not be confiscated unless they fall under #3.

A partnership is dissolved by operation of law upon the happening of an event which


makes it unlawful. A judicial decree is not necessary to dissolve an unlawful partnership.
However, advisable that judicial decree be secured. 3rd persons who deal w/ partnership w/o
knowledge of illegal purpose are protected.
Right to return of contribution where partnership is unlawful
Partners must be reimbursed the amount of their respective contributions. The partner
who limits himself to demanding only the amount contributed by him need not resort
to the partnership contract on which to base his claim or action. Since the purpose for
which the contribution was made has not come into existence, the manager or
administrator must return it, and he who has paid his share is entitled to recover it.

Right to receive profits where partnership is unlawful


Law does not permit action for obtaining earnings from an unlawful partnership
because for that purpose, the partner will have to base his action upon the
partnership contract, which is null and without legal existence by reason of its
unlawful object; and it is self-evident that what does not exist cannot be a cause of
action. Profits earned do not constitute or represent the partner’s contribution. He
must base his claim on the contract which is void. It would be immoral and unjust for
the law to permit a profit from an industry prohibited by it. T he courts will refuse to
recognize its existence, and will not lend their aid to assist either of the parties thereto
in an action against each other. Therefore, there cannot be no accounting demanded
of a partner for the profits which may be in his hands, nor can recovery be had.

Effect of partial illegality of partnership business


Where a part of the business is legal and part illegal, a n account of that which is
legal may be had. Where, w/o the knowledge or participation of the partners, the
firm’s profits in a lawful business has been increased by wrongful acts, the innocent
partners are not precluded as against the guilty partners from recovering their share
of the profits.

Effect of subsequent illegality of partnership business


Contract will not be nullified. Where the business for which the partnership is formed
is legal when the partnership is entered into, but afterward becomes illegal, an
accounting may be had as to the business transacted prior to such time.

Common questions

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A lawful partnership requires that its object or purpose must be legal, and it must benefit or be in the interest of all partners. The legality is crucial as it enables the partnership to exist before the law. If the object is illegal, the partnership is considered void and non-existent legally, leading to the confiscation of profits by the state as per Article 1770 .

If a partnership that was initially lawful later becomes illegal, the contract stays valid for transactions conducted before the change. Partners can still demand accounting for business transacted while it remained legal, protecting their interests in originally lawful activities .

The legal stance permits accounting and profit recovery for lawful business activities, separating them from illegal ones. Innocent partners can still recover profits from legal activities, ensuring they aren't penalized for parts of the business they didn't illegally influence .

The rationale for not confiscating partners' contributions is based on fairness when the contributions are not associated with illegal activities. The contributions should be returned because the partnership for which they were made never legally existed, and no immoral benefit should be accrued .

Courts refuse to recognize an unlawful partnership as it conflicts with legal principles that prevent the enforcement of illegal contracts. This results in no legal assistance being available for disputes among partners, effectively barring any legal claims for division of profits or claims based on a void contract .

Partners cannot demand an accounting of profits in an unlawful partnership because the partnership contract is void due to its illegal object. The law does not permit an action based on a non-existent contract, hence making it impossible to account for profits derived from illegality .

Disallowing profit claims ensures no benefit from illegal activities, maintaining public policy against illegality. However, returning contributions respects property rights when the contributions aren't tied to illegal acts. This strikes a balance between deterring illegality and preserving fairness where possible .

In cases where part of the partnership's business is legal and another part is illegal, innocent partners who did not participate in or know about the increased profits from wrongful acts can still claim their share for the lawful part of the business .

An unlawful partnership is dissolved either by a judicial decree or by the operation of law. Consequences include the partnership being void, profits confiscated by the government, and the instruments and effects of the crime seized. The partners' contributions are returned unless associated with the crime .

The law provides protection to third parties who engaged with the partnership without knowledge of its illegal purpose. Their transactions are considered valid as long as they acted in good faith and were unaware of the partnership's illegality, thereby safeguarding innocent parties from unjust loss .

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