Law on Agency, trust, and Partnership Lecture Notes

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1. PARTNERSHIP

2. ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP

3. ART. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. 3

4. ART. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph. 4 “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.”

5. Under the Law on Partnerships of New Civil Code, every partnership that comes to existence is endowed with the following essential attributes: Informal/Consensual Juridical Personality; Mutual Agency; Delectus Personae; Partners Burdened With Unlimited Liability (except for Limited Partners in a Limited Partnership). 5

6. NON-SOLEMN / INFORMAL / CONSENSUAL JURIDICAL PERSONALITY 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. 6

7. 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 a continuation of the partnership. (n) 7

8. In contrast to the corporate juridical personality which can only arise and be terminated by complying with the formal processes and procedures mandated by the State, the juridical personality accorded to every partnership under Article 1768 of New Civil Code is best described to be "informal," or better yet merely "consensual“. 8

9. It is very well implied from the substance and sequence of Articles 1767 and 1768 of New Civil Code that the existence of a separate juridical personality for a partnership is conditioned on the perfection and validity of a contract of partnership; and that the separate juridical personality arises ipso jure upon the perfection of a contract of partnership. 9

10. So informal or casual is the attitude of the law on the partnership's juridical personality that under Article 1785, such juridical personality can be extended beyond the original fixed term or particular undertaking by the mere "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." 10

11. Exceptions to Informal or Consensual Nature of Partnership Juridical Personality 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 person. 11

12. 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. 1843. A limited partnership is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. 12

13. Under the New Civil Code, the contract of partnership must assume a solemn or formal characteristic only in three instances: Under Article 1772, that every contract of partnership having a capital of ₱ 3,000.00 or more shall appear in a public instrument, which must be recorded with the Securities and Exchange Commission (SEC); 13

14. (b) Under Articles 1771 and 1773, where immovable property or real rights are contributed: i . in which case a public instrument shall be necessary; ii. the contract of partnership is void, if an inventory of said property is not made, signed by the parties and attached to the public instrument; (c) Under Articles 1843 and 1844, which require particular provisions describing limited partners in the articles of limited partnership, and which must be formally registered with the SEC. 14

15. Article 1772 of the New Civil Code does not state what happens to the legal status of the contract of partnership when the capital contributions not involving real property are in excess of ₱ 3,000.00 and there is failure to comply with the requirement for public instrument and recording with the SEC. Instead, Article 1772 provides that "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." 15

16. On the other hand, the law is clear that when what is contributed to the partnership is immovable (real) property , and there is failure to provide for an inventory thereof to be attached to the public instrument to be registered with the SEC, the resulting partnership is void. 16

17. The only other exception to the informal or consensual nature of the partnership juridical personality would be the mandatory registration requirements for the constitution of the limited partnerships. Again, this is in line with the principle that limited liability to the owners of a business enterprise is unusual, and if it is to exist to bind the public, it must be pursued and reflected in a formal manner. 17

18. 2. Weak Juridical Personality The juridical personality of the partnership is "weak" because it be put asunder without need of formal dissolution process, and under the will of any of the partners or all of them, or even by chance. To illustrate, under Article 1830 of New Civil Code, the partnership may be dissolved by: Express will of any partner, either acting in good faith or even when not in good faith and in contravention of the agreement; Express will of all the partners; Expulsion of any partner; 18

19. (d) Any event which makes the partnership business unlawful; (e) Loss before delivery of the property promised to be contributed by the partner; (f) Death, insolvency, or civil interdiction of any partner; (g) By court decree, when a partner has been declared insane or incapacitated, or guilty of conduct prejudicial to the partnership business or in breach of the agreement, or when the partnership business can only be carried at a loss. 19

20. MUTUAL AGENCY The default rule under Article 1803(1) of New Civil Code is that each of the partners is an agent of the partnership and of all of the other partners in the pursuit of partnership affairs, thus: "When the manner of management has not been agreed upon… All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership." 20

21. Article 1818 in turn provides that "Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership." 21

22. A partnership is simply a conglomeration of two or more sole proprietorships, where the original sole proprietors continue to manage their business and the businesses of the other proprietors in the association. 22

23. DELECTUS PERSONAE Prof. Bautista referred to delectus personae as follows: "For, in accordance with the principle of delectus personae (selection of persons), one selects his partners on the basis of their personal qualifications and qualities, such as solvency, ability, honesty, and trustworthiness, among others. It is for this reason that there is mutual representation among the partners so that the act of one is considered the act and responsibility of the others as well." 23

24. The best way to define the concept of delectus personae is that the contract of partnership creates the most personal relationship between and among the partners which when broken, also breaks the bond of the partnership. 24

25. PARTNERS BOUND TO UNLIMITED LIABILITY ART. 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. ART. 1817. Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners. 25

26. Why does the law make partners personally liable for partnership debts contracted as a separate juridical person? Would such unlimited liability apply without express provision of law? Even without any express provision of law and despite the separate juridical personality of the partnership, unlimited liability would be the rule for partners in a partnership setting for the basic reason that partners essentially occupy the position of sole proprietors, albeit associated with other sole proprietors. 26

27. The basic rule is that sole proprietors are always unlimitedly liable for business debts and obligations even as to their properties not used nor devoted for the business enterprise. A sole proprietor controls the business enterprise, and all profits go to him which he can funnel into nonbusiness matters; consequently, he must also absorb the losses from the business enterprise. 27

28. Distinguished from corporation The most important distinction between the corporation and the partnership are their legal capacities. With the right of succession, a corporation has a stronger legal personality, enabling it to continue despite the death, incapacity, withdrawal, or insolvency of any of its stockholders or members. In a partnership, the withdrawal, death, incapacity, or insolvency of any partner ipso jure dissolves the partnership. 28

29. Limited liability is a main feature of the corporate medium, whereas partners are liable personally for partnership debts not only to what they have invested in the partnership but even as to their other properties. Generally, every partner is an agent of the partnership, and by his sole act, he can bind the partnership; whereas in a corporation, only the Board of Directors or its duly authorized agents can bind the corporation. 29

30. THE CONTRACT OF PARTNERSHIP

31. ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP ART. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. 31

32. 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. 32

33. 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. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. 33

34. As in any other contract, the essential elements of the contract of partnership are as follows: CONSENT : The meeting of minds between two or more persons to form a partnership, i.e., to pursue jointly a business enterprise, or to jointly exercise a profession; SUBJECT MATTER : The "creation of a common fund" or more specifically, to undertake a business venture with the "intention of dividing the profits among themselves," or in the case of a professional partnership, to exercise together a common profession; CONSIDERATION : The contribution of cash, property or service to the business venture, "with intention to derive profits." 34

35. Element of "CONSENT“ ART. 1769. In determining whether a partnership exists, these rules shall apply: Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons; Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived; 35

36. (4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: a. As a debt by installments or otherwise; b. As wages of an employee or rent to a landlord; c. As an annuity to a widow or representative of a deceased partner; d. As interest on a loan, though the amount of payment vary with the profits of the business; e. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. 36

37. Consent to Pursue a Business Jointly Is the Nexus of the Partnership Relationship The agreement of two or more persons to "bind themselves" to jointly pursue a business venture constitutes the very nexus by which the contract of partnership arises under Article 1767 of the New Civil Code. Under Article 1769, "in determining whether a partnership exists," the first and foremost rule is that "persons who are not partners as to each other are not partners as to third persons." In other words, no person can find himself a partner in a partnership unless he previously consented to be in such contractual relationship. 37

38. b. Legal Capacity to Contract Parties to a contract of partnership must have legal capacity to contract. Under Article 1782 of the New Civil Code, persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. On the other hand, under Article 87 of the Family Code, a married woman may enter into a contract of partnership even without her husband's consent, but the latter may object under certain conditions. 38

39. c. Admission of New Partner into an Existing Partnership Since consent is the nexus of all partnership relationships, the principle is exemplified under Article 1804 of New Civil Code which provides that even in an already existing partnership, no person shall be admitted into a partnership, or become a party to the partnership arrangement, without the consent of all the partners. 39

40. 2. SUBJECT MATTER Essentially, the consent or meeting of the minds of the parties in a contract of partnership must be upon a particular type of "subject matter," which is "the joint pursuit of a business enterprise." This is embodied in the elements provided in Article 1767 of the New Civil Code as it defines a partnership as: (a) an agreement to contribute to a common fund; and (b) with joint interest in the profits and losses thereof. 40

41. Co-ownership or Co-possession Does Not Necessarily Constitute a Partnership A group of individuals do not become partners to one another, nor is a partnership constituted, by the mere fact that they are associated together in situation where there is co-ownership, or that profits are earned from a co-ownership arrangement. Thus, under Article 1769(2) of the New Civil Code, "Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property." 41

42. Navarro v. Court of Appeals , held that mere co-ownership of property does not necessarily constitute the co-owners or co- possessors partners, regardless of whether or not they share any profits derived from the use of the property, when no indication is shown that the parties had intended to enter into a partnership. 42

43. b. Receipt by a Person of a Share of the Net Profit Under Article 1769(4), the receipt by a person of a share of the net profits of a business is prima facie evidence that he is a partner in the business. However, in the following cases, where there is legal and contractual basis for the receipt of the profits other than as equity holder, there is no partnership constituted, thus: As installment payments of a debt and/or interests thereof; As wages of an employee; As rentals paid to a landlord; As annuity to a widow or representative of a deceased partner; As consideration of sale of goodwill or other property. 43

44. c. When Subject Matter (the Business Venture) Is Unlawful or Against Public Policy When the subject matter of a contract of partnership is unlawful, Article 1770 of New Civil Code provides that the contract is void; and being void the purported partners have no right to participate in any profits that may have been earned by the partnership enterprise, and "the profits shall be confiscated in favor of the State." 44

45. In Arbes v. Polistico , a partnership organized to engage in illegal gambling was declared void by judicial order, and pursuant to the provisions of Article 1770, all the profits earned were deemed confiscated in favor of the state. However, it decreed that the partners had a right to recover their contributions. 45

46. 3. CAUSE or CONSIDERATION In a contract of partnership, it is held that the cause or consideration for each partner is the undertaking of the others to contribute money, property or industry to a common fund (i.e., to the business venture). 46

47. ESSENTIAL CHARACTERISTICS OF THE PARTNERSHIP CONTRACT Nominate and Principal The contract of partnership is nominate because it has been given a specific name under the New Civil Code. It is also a principal contract which can exist on its own upon the essential elements coming together at perfection. 47

48. 2. Consensual A contract of partnership is consensual in character that is perfected upon meeting of the minds of the parties of the subject matter to undertake a business venture, and the consideration, which is the obligation to contribute of money, property or service to a common fund. 48

49. 3. Onerous and Bilateral Under Article 1786 of the New Civil Code, every partner becomes by its very constitution, "a debtor of the partnership for whatever he may have promised to contribute thereto." All partners are bound to contribute to the common fund, or to the partnership, including even the industrial partner who is bound to contribute his service. 49

50. 4. Preparatory and Progressive A contract of partnership is entered into not merely for the sake of creating a contractual relationship between and among the partners, but primarily to pursue a business enterprise. 50

51. FORMAL REQUIREMENTS FOR PARTNERSHIPS

52. 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. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. 52

53. Since the contract of partnership is consensual in character, there is generally no form required, much less a need for the delivery of the promised contributions, to perfect it and thereby lead to the arising of a separate juridical personality. However, Article 1771 of the New Civil Code provides that "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." 53

54. In addition, Article 1772 of the New Civil Code provides that "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 Exchange Commission." 54

55. REQUIREMENTS TIED TO CAPITAL CONTRIBUTIONS When Capital Contributions Total P3,000.00 or More 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. 55

56. In any event, since Articles 1771 and 1772 of the New Civil Code do not expressly declare any deleterious consequence, the general rule is that such failure to comply with the formality mandated does not render the contract void, but only affects the manner of its registration and affords to the parties affected the remedy of demanding that it be executed in a public instrument. Basis: Article 1357.  If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.  56

57. 2. When Immovable Property Contributed 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. (1668a) 57

58. REQUIREMENTS TIED TO PARTNERSHIP NAME ART. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners. Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner. 58

59. The mere inclusion by a non-partner's name in the partnership name would make him liable to partnership debts, even when under the terms of the articles of partnership he is not listed formally as one of the partners of the partnership. 59

60. Under SEC Memorandum Circular No. 13-2019, the partnership name shall bear the word "Company" or "Co." and if it is a limited partnership, the word "Limited" or "Ltd.“. For professional partnerships, the name name may bear the word "Company," "Associates," or "Partners," or other similar descriptions. 60

61. CLASSES OF PARTNERSHIPS AND PARTNERS

62. KINDS OF PARTNERSHIPS As to the Object of the Partnership When it comes to the object or purpose, or the nature of the business enterprise to be pursued, under Article 1776 of the New Civil Code, a partnership is either: (a) Universal Partnership; or (b) Particular Partnership. 62

63. Universal partnership One where the contract of partnership encompasses either all the present properties of the partners or to all of the profits . 63

64. Universal Partnership of All Present Property One where "the partners contribute all the property which actually belong to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits they may acquire therewith”. This means that "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.“ The New Civil Code further clarifies that "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 stipulations, except the fruits thereof." 64

65. Universal Partnership of Profits All that the partners may acquire by their industry or work during the existence of the partnership," as well as the usufruct of all “movable or immovable property which each of the partner may possess at the time of the celebration of the contract" of partnership, shall all pertain to the partnership. The default rule under Article 1781 of New Civil Code is that when the "Articles of universal partnership [are] entered into without specification of its nature, [it will] only constitute a universal partnership of profits." 65

66. Particular partnership One that "has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation." There is no doubt that every professional partnership and joint venture arrangement would constitute a particular partnership. 66

67. 2. As to duration When it comes to the partnership term or life, the law distinguishes among: (a) Partnership with Fixed Term; (b) Partnership for a Particular Undertaking; and (c) Partnership at Will. 67

68. Both partnerships with fixed term and for a particular undertaking are automatically dissolved upon the expiration of the stipulated term or the achievement of the stipulated undertaking; whereas, in a partnership at will, the partnership has an indefinite term and it would be dissolved only when an act or cause of dissolution arises. Nonetheless, under Article 1785 of New Civil Code, when a partnership for a fix term or particular undertaking is continued after it has terminated without any express agreement the partnership becomes one at will and "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." 68

69. 3. As to extent of Partners’ Liabilities When it comes to the kinds of liabilities that the partners may be exposed to for partnership debts and obligations, the New Civil Code distinguishes between: General Partnership where all the partners are unlimitedly liable; and Limited Partnership where there is one or more general partner who are unlimitedly liable, with one or more limited partners, who are liable for partnership debts only to the extent of their stipulated contributions under the registered articles of partnership. 69

70. KINDS OF PARTNERS Other than the general and limited partners that have been previously discussed, there are two kinds of partners when it comes to the nature of their contributions: (a) Capitalist Partner; and (b) Industrial Partner. A capitalist partner contributes money and/or property to the partnership, while an industrial partner contributes only his industry or his service. The law does not specify the kind of industry a partner may contribute into the partnership. 70

71. The importance of such distinction is on the nature of the obligations and liabilities that they must assume, in that: The capitalist partner is liable for the losses sustained by the business and any stipulation to the contrary is void; whereas, the industrial partner is not liable for losses of the partnership venture; The capitalist partner may not engage in business or commercial undertaking which is competing with that of the partnership business; whereas, the industrial partner cannot engage in any other form of business or commercial undertaking at all during his tenure as industrial partner; and 71

72. c) Whereas a capitalist partner is bound to make additional contributions to the partnership in case of an imminent loss of the business of the partnership, the industrial partner has no such obligation. 72

73. Philippine Partnership Law also distinguishes between the liabilities assumed by an: Original Partner who is with the partnership at the time of its constitution; Subsequent or Incoming Partners, who come in during the life of a preexisting partnership. In the case of an incoming partner, his liability with respect to the partnership obligations which were incurred prior to his admission into the partnership shall be satisfied only out of partnership property, unless it is otherwise stipulated. 73

74. Partnership Law also refers to the following types of partners: Managing Partner who has been given the management of the partnership enterprise; Liquidating Partner who takes charge of the liquidation and winding up of partnership affairs; Retiring Partner who ceases to be part of the partnership which is continued after dissolution, as compared with the partners who remain with the venture as Continuing Partners; 74

75. Partner by Estoppel who is not a formal partner in an existing partnership, but his acts have led third parties dealing with the partnership to believe that he is a partner, and thereby becomes liable as a regular partner as to such relying creditors. 75