Notes Partnership (1770 – 1772)

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

“A partnership must have a lawful object or purpose, and must be established for the common benefit
or interest of the partners.”
Reiterates the 2 essential elements of Partnership
1. legality of the object
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.
 This limitation arises not only from the express provisions of the law, but from the general
principles of morality and justice.

Effects of an unlawful partnership.

(1) The contract is void ab initio and the partnership never existed in the eyes of the law (Art. 1409[1].);
(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
(Art. 45, RPC); and

(4) The contributions of the partners shall not be confiscated unless they fall under No. 3.

 A partnership is dissolved by operation of law upon the happening of an event which makes it
unlawful for the business of the partnership to be carried on, or for the members to carry it on in
partnership.
 A judicial decree is not necessary to dissolve an unlawful partnership.
 it may sometimes be advisable that a judicial decree of dissolution be secured for the
convenience and peace of mind of the parties. Third persons who deal with the partnership
without being aware of its illegal purpose or character are protected unless such knowledge can
be presumed as where the transaction is plainly unlawful.

Right to return of contribution where partnership is unlawful

(1) Article 1770 does not state whether upon the dissolution of the unlawful partnership, the
amounts contributed are to be returned to the partners, because it only deals with the
disposition of profi ts. The fact, however, that said contributions are not included in the disposal
prescribed for said profi ts, shows that in consequence of said exclusion, the general rules of law
must be followed, and hence, the partners must be reimbursed the amount of their respective
contributions.
 (2) 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 of
the partnership holding said contribution retains what belongs to others, without any
consideration, for which reason he is bound to return it, and he who has paid in his share is
entitled to recover it.
(3) Any other solution would be immoral, and the law will not consent to the contribution remaining
in the possession of the manager or administrator who has refused to return them by denying to
the partners the action to demand them. (Arbes vs. Polistico, 53 Phil. 489 [1929].

Right to receive profits where partnership is unlawful.

(1) Article 1770 permits no action for the purpose of obtaining the earnings made by an unlawful
partnership, during its existence as a result of the business in which it was engaged, 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.
(2) The profits earned in the course of the partnership do not constitute or represent the partner’s
contribution but are the result of the industry, business, or speculation which is the object of the
partnership; and again, in order to demand the proportional part of said profi ts, the partner
would have to base his action on the contract, which is null and void since the partition or
distribution of profits is one of the juridical effects thereof
(3) It would be immoral and unjust for the law to permit a profi t from an industry prohibited by it
(4) Under the general rule that the courts will not aid either party to an illegal agreement (see Art.
1411.), where a partnership is formed for the prosecution of an illegal business or for the
conduct of a lawful business in an illegal manner, the 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 can be no accounting demanded of a partner for the profi ts which may be in
his hands, nor can a recovery be had.

Effect of partial illegality of partnership business

(1) Where a part of the business of a partnership is legal and a part illegal, an account of that which
is legal may be had.
(2) Where, without the knowledge or participation of the partners, the firm’s profits in a lawful
business have 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.

The happening of an event subsequent to the making of a valid partnership contract which would render
illegal the business of the partnership as planned, will not nullify the contract. 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.

Community of interest between the partners for business purposes.

  Although every partnership appears to be founded on a community of interest, every
community of interest does not necessarily constitute a partnership. For example, tenants in
common of land are not partners.
 Property used in the business may belong to one or more partners, so that there is no joint
property, other than joint earnings. Partners may agree upon concentration of management,
leaving some of their members entirely inactive or dormant.
 In every partnership, profits are to be divided among the partners. But the mere sharing of
profits of itself does not of necessity constitute a partnership or the members partners inter se.
(Art. 1769 [4])

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.

Form of partnership contract.

General Rule: No special form (express or implied) is required for the validity or existence of the contract
of partnership.

Exceptions

1. Where immovable property or real rights are contributed - a public instrument shall be
necessary
2. When partnership agreement covered by Statute of Frauds (An agreement to enter in a
partnership at a future time, not to be performed within a year) - agreement is unenforceable
unless the same be in writing or at least evidenced by some note or memorandum thereof
subscribed by the parties (Art. 1403)

Partnership implied from conduct

 Binding effect - A partnership may exist and often exists in the absence of express agreement,
written or verbal, between the parties. Its existence may be implied from the acts or conduct of
the parties, as well as from other declarations, and such implied contract would be as binding as
a written and express contract. Thus, where A and B, house painters, oblige themselves to paint
the house of C for a certain sum, undertaking to furnish both labor and material, and they divide
the sum received after payment of expenses, a partnership is created notwithstanding that they
did not expressly agree to establish a partnership, a partnership is created notwithstanding that
they did not expressly agree to establish a partnership.
 Ascertainment of intention of parties - In determining whether or not a particular transaction
constitutes a partnership, as between the parties, the intention as disclosed by the entire
transaction, and as gathered from the facts and from the language employed by the parties as
well as their conduct, should be ascertained. A partnership may even be created without any
definite intention; the intention of the parties being inferred from their conduct and dealings
with each other. (Kiel vs. Estate of Sabert, 46 Phil. 198 [1924])
 Conflict between intention and terms of contract - Also, if the parties intend a general
partnership, they are general partners although their purpose is to avoid the creation of such a
relation. Thus, in a case, the Supreme Court declared an association as a general partnership it
 appearing that the inclusion of “Ltd.” (limited) in the firm name was only a subterfuge resorted
to by the partners in order to evade liability for possible losses, while assuming their enjoyment
of the advantages to be derived from the relation. (Jo Chung Cang vs. Pacific Commercial Co., 45
Phil. 142 [1923].)

ART. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money
or property, shall appear in a public instrument, which must be recorded in the Office of the Securities
and Exchange Commission.

Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons.

(1) Partnership with capital of P3,000.00 or more. Two requirements:

(a) The contract must appear in a public instrument; and
(b) It must be recorded or registered with the Securities and Exchange Commission.

Failure to comply with the above requirements does not prevent the formation of the
partnership or affect its liability and that of the partners to third persons.

(2) Purpose of registration. — The requirement of public instrument is imposed as a prerequisite to

registration, and registration is necessary as “a condition for the issuance of licenses to engage in
business or trade.
(3) When partnership considered registered - The date the partnership papers are presented to and
left for record in the Commission is considered the effective date of registration of the articles of
partnership.