Chapter 2 Obligations of the

Partners
Article Outline
Chapter 2 Obligations of the Partners

 Reference
 Torres, Justo P., Jr. The Law on Business Organization, 2008 Edition. Manila,
Philippines. Rex Book Store. 2008
Chapter 2 Obligations of the Partners

 Utmost good faith required of partners

 The relation of partners to each other is one of great confidence and trust,
and the law demands from them the exercise of the highest integrity and good
faith toward each other. Each one is bound to use the partnership property
and exercise his partnership powers for the benefit of the firm and not for
himself alone. Profits made in the course of the partnership belong to the
firm, and one partner will not be permitted to make gain for himself at the
expense of the firm xxx. This duty of good faith is intensified when one
partner is conducting the business alone as managing partner.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1784. A partnership beings from the moment of the execution of the
contract, unless it is otherwise stipulated. (1679)
 Partnership begins from execution of contract. A partnership contract being
consensual, the partnership begins from the time that the partners agree to
the contract unless the partners stipulate otherwise.
 Example: A and B enter into a contract of partnership today. The partnership begins
today unless A and B expressly stipulate that it shall commence on a different date.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 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.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Continuation beyond fixed term.
 A partnership is organized for a fixed term or for a particular undertaking is
dissolved at the expiration of the term or accomplishment of the particular
undertaking unless the life of the partnership is extended expressly by agreement
of the partners or impliedly by mere continuation of the business by the partner or
partners who habitually manage the partnership.
 Partnership at will
 If no time is specified for the continuance of the partnership, and it is formed for a
particular transaction or the completion of a particular enterprise, it will be
construed to be one which is to last during the mutual consent of the partners a
partnership at will, which may be dissolved by mutual agreement of the parties or
by the act of any partner alone in accordance with his own will or pleasure.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Example
 A and B organized a partnership for a period of five years. The term has recently
ended. But A and B are still continuing the business although without any express
agreement to that effect. In this case, A and B continue to be partners, having the
same rights and duties as before the expiration of the period. But the partnership is
now a partnership at will which may continue or cease at the will of the partners of
either of them.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1786.
 Every partner is a debtor of the partnership for whatever he may have promised to
contribute thereto.
 He shall also be 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 thereof from the time they should have been
delivered, without the need of any demand.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Partner's failure to contribute
 When a partner fails to contribute the money, property or industry which he
promised to contribute to the partnership he becomes a debtor to the partnership.
 Obligations of partners to contribute
 A partner (a) shall deliver at the beginning of the partnership or, if a different date
has been agreed upon, at the stipulated time the properties he agreed to
contribute; (b) shall answer for eviction, in case the partnership is deprived of the
ownership of any specific property he contributed; (c) shall answer to the
partnership for the fruits of the properties whose delivery he delayed from the date
he should have contributed it up to his actual delivery without necessity of any
demand; (d) shall preserve said properties with the diligence of a good father of a
family pending their delivery to their partnership; and (e) shall indemnify the
partnership for any damage caused it by the retention of said properties or by the
delay in their contribution.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Obligations of partners to contribute
 A partner
a) shall deliver at the beginning of the partnership or, if a different date has been agreed
upon, at the stipulated time the properties he agreed to contribute;
b) shall answer for eviction, in case the partnership is deprived of the ownership of any
specific property he contributed;
c) shall answer to the partnership for the fruits of the properties whose delivery he
delayed from the date he should have contributed it up to his actual delivery without
necessity of any demand;
d) shall preserve said properties with the diligence of a good father of a family pending
their delivery to their partnership; and
e) shall indemnify the partnership for any damage caused it by the retention of said
properties or by the delay in their contribution.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Example
 A, B and C formed a partnership. A promised to contribute P5,000 which he failed
to pay on the date agreed upon; B contributed a parcel of land which was later on
recovered by X by virtue of a judgment of the court that said parcel of land
belonged to X; C contributed P5,000 to the partnership. In this case, what are the
remedies of the partnership? The partnership may compel A to pay his contribution
of P5,0000 plus interest; the partnership may hold B liable for damages under his
warranty against eviction from the land he contributed.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1787.
 When the capital or part thereof which a partner is bound to contribute consists of
good, their appraisal must be made in the manner prescribed in the contract of
partnership, and in the absence of stipulation, it shall be made by experts chosen
by the partners, and according to current prices, the subsequent changes thereof
being for the account of the partnership.
 Goods as contribution
 A partner may contribute goods but an appraisal must be made according to the
terms of the contract of partnership and in the absence of an agreement to this
effect, the appraisal shall be made by experts chosen by the partners who shall
base their appraisal on current prices.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 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 converter the amount to his
own use.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Example
 A, B and C are partners. In their contract, they agreed to deliver their contributions
last October 31, 1964. Notwithstanding that A and B gave their contributions on
time, C failed to deliver and has not yet delivered on his contribution in the sum of
P2,000. On the other hand, A, who was designated managing partner, took on
January 5, 1965, P3,000 from the partnership coffers for his personal use. Under
the circumstances, C is a debtor of the partnership for delayed contribution of
P2,000 plus interest and damages from October 31, 1964, the date when he should
have paid the amount. On the other hand, A shall be liable for P3,000, the amount
he took from the partnership coffers, plus interest and damages from January 5,
1965, the date he converted said amount for his own use.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Liability of partner for estafa.
 If aside from the failure to return the money taken, there is the element of
fraudulent appropriation of the money delivered to a partner with specific
instructions for the use of the partnership, then estafa is committed under the
Revised Penal Code. (People v. dela Cruz, GR No. 21732)
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 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 hiim from the firm or avail themselves of the benefits which he may
have obtained in violation of this provision, with a right to damages in either case.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Concept of industrial partner
 An industrial partner is one who contributes his industry or labor in the
partnership.
 Industrial partner barred from engaging in business
 The industrial partner himself cannot exploit his own services for his own profit
without the express permission of the owner, the partnership. The prohibition
seeks to prevent any conflict of interest between the industrial partner and the
partnership, and to insure faithful compliance by said partner with his prestation.
(Limuco vs. Calinao, GR No. 10099-R, September 30, 1953)
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1790
 Unless there is a stipulation to the contrary, the partners shall contribute equal
shares to the capital of the partnership.
 Example
 A and B enter into a contract of partnership. They do not agree as to the amount of
contribution to be given by each one of them. But they stipulate that the common
fund is P3,000. In such case, it is presumed that each one of them shall contribute
equally. This must be so for the reason that partners are deemed to have equal
rights and obligations.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1791
 If there is no agreement to the contrary, in case of an imminent loss of the business
of the partnership, any partner who refuses to contribute an additional share to the
capital, except an industrial partner, to save the venture, shall be obliged to sell his
interest to the other partners.
 Example
 A, B, C and D are partners in a partnership of which A, B and C are capitalist
partners while D is an industrial partner. Due to business reverses, A and B have
decided to contribute additional shares to the capital to save the partnership from
imminent collapse. C, however, refuses to give additional contribution. If the
partnership agreement does not provide that no partner can be compelled to make
additional contributions, C may be compelled by A and B to sell his interest to them
because C's refusal reflects his lack of interest in the business. D cannot be
compelled to sell his interest for the reason that being an industrial partner he has
given all his industry to the firm.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1792.
 If a partner authorized to manage collects a demandable sum, which was owed to
him in his own name, from a person who owed the partnership another sum also
demandable, the sum thus collected shall be applied to the two credits in
proportion to their amounts, even though he may have given a receipt for his own
credit only; but should he have given a receipt for the account of the partnership
credit, the amount shall be fully applied to the latter.
 The provisions of this article are understood to be without prejudice to the right
granted to the debtor by Article 1252, but only if the personal credit of the partner
should be more onerous to him.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Partner authorized to manage
 This provision applies only to the partner who has been authorized to manage the
partnership and who actually undertakes its management. It does not apply to the
other partners who are not authorized to manage it, for there can be no ground for
suspicion or apprehension in the collection of credits that they may act in bad faith.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Example
 A and B are partners, with B as the managing partner. X owes the partnership and B
the amount of P5,000 each; both debts are due and demandable. X pays B the sum
of P5,000 and B issues a receipt:
 “Received from X P5,000 in payment of his debt to me. (Sgd) B.”
 In such a case, even if B has issued a receipt for his own credit only, the payment
made by X will be divided between B and the partnership proportionately P2,500
will go to B and the other P2,500 will go to the partnership. If B, on the other hand,
gives a receipt for the account of the partnership credit, the whole amount of
P5,000 shall be applied to the partnership credit. The reason for Article 1792 is that
good faith cannot permit a managing partner to subordinate the interest of the
partnership to that of his own.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1793
 A partner who has received, in whole or in part, his share of a partnership credit,
when the other partners have not collected theirs, shall be obliged, if the debtor
should thereafter become insolvent, to bring to the partnership capital what he
received even though he may have given receipt for his share only.
 Example
 A and B are partners in a duly organized partnership. X owes the partnership the
sum of P1,000. A and B agree to divide the credit with each undertaking to collect
his own share. A collects the sum of P500 from X, giving a receipt for his share only.
Later on, B demands payment from X, but the latter turns out to be insolvent. In
this case, A will be required to bring to the partnership capital the P500 he has
received, the reason being that in case the partnership debtor (X) becomes
insolvent, his debt becomes a bad debt and it will be unfair for A not to share in the
loss with his co-partners B.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1794
 Every partner is responsible to the partnership for damages suffered by it through
his fault, and he cannot compensate them with the profits and benefits which he
may have earned for the partnership by his industry. However, the courts may
equitably lessen this responsibility if through the partner's extraordinary efforts in
other activities of the partnership, unusual profits have been realized.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Partner liable for damages caused the partnership
 This article follows the general rule of contracts that where a person is at fault in
the fulfillment of his obligations he shall be liable for the payment of damages. The
partner's fault, however, must be determined in accordance with the circumstances
of person, time and place.
 Example
 A, B and C are partners. Through the fault of A, the partnership sustained damages
in the amount of P5,000. Under the law, A shall be responsible for such damages.
However, if A, through extraordinary efforts like overtime work, excellent
salesmanship and public relations, was able to bring enormous profits to the
partnership, the court may mitigate or lessen A's responsibility for damages.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Liquidation necessary to ascertain damages.
 It has been held that for purpose of adjudicating to plaintiff damages which he
alleges to have suffered as a partner by reason for the supposed fraudulent
management of the partnership referred to, it is first necessary that a liquidation of
the business thereof be made to the end that the profits and losses may be known
and the causes of the latter and the responsibility of the defendant as well as the
damages which each partner may have suffered, may be determined.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1795
 The risk of specific and determinate things, which are not fungible, contributed to
the partnership so that only their use and fruits may be for the common benefit,
shall be borne by the partner who owns them.
 If the things contributed are fungible, or cannot be kept without deteriorating, or if
they were contributed to be sold, the risk shall be borne by the partnership. In the
absence of stipulation, the risk of things brought and appraised in the inventory,
shall also be borne by the partnership, and in such case the claim shall be limited to
the value at which they were appraised.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Risk of specific and determinate things
 The risk of specific and determinate things which are not fungible, (like a boat) only
the use of which is contributed, shall be borne by the partner as the ownership
thereof is not transferred to the partnership. This follows the general rule that the
thing perishes with the owner.
 Things fungible or perishable
 But if the things are contributed are fungible or cannot be kept without
deteriorating (perishable) like wine, oil, etc., even if they are contributed only for
the use of the partnership, the risk of loss shall be for the account of the
partnership for the latter cannot make use of them without their getting consumed
or impaired.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Things contributed to be sold
 If the things contributed are to be sold, the partnership bears the risk of loss, for
obviously the partnership is the intended owner; otherwise, the firm cannot make
the sale.
 Things brought and appraised in inventory
 The partnership bears the risk of loss of things brought and appraised in the
inventory as this has the effect of an implied sale thus making the partnership the
owner of said things.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1796
 The partnership shall be responsible to every partner for the amounts he may have
disbursed on behalf of the partnership and for the corresponding interest, from the
time the expenses are made; it shall also answer to each partner for the obligations
he may have contracted in good faith in the interest of the partnership business,
and for risks in consequences of its management.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Responsibility of the partnership to a partner
 If a partner has advanced funds for the partnership, he is entitled to recover the
amounts advanced by him with interest. This must be so for the reason that a
partner is a mere agent of the partnership and under the rules of agency, an agent
who advances funds for his principal may recover the same with interest.
 Example
 A and B are partners in a poultry business. At one time when A was on a vacation, B
advanced the sum of P300 for the purchase of feeds. May B demand
reimbursement from the partnership of the sum advanced by him? Yes. B may
demand payment of the amount advanced with interest from the time when the
expenses were made.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Article 1797
 The losses and profits shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
 In the absence of stipulation, the share of each partner in the profits and losses,
shall be in proportion to what he may have contributed, but the industrial partner
shall not be liable for the losses. As for the profits, the industrial partner shall
receive such share as may be just and equitable under the circumstances. If besides
his services he has contributed capital, he shall also receive a share in the profits in
proportion to his capital.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Sharing of profits and losses
 The profit and loss of the partnership must be divided in the manner stipulated,
and if the agreement should only refer to the participation of each partner in the
profits then their corresponding share in the losses shall be in the same ratio. In the
absence of an agreement the share of each partner in the profits and losses shall
be in proportion to what he may have contributed. (Chaves vs. Linan, 2 Phil 12)
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Rules in profit-sharing
1. The partners share the profits in accordance with the ratio established by their
contract.
2. If there is no such stipulation in the partnership contract, then:
a) If all are capitalist partners they have the profits in proportion to their capital
contributions;
b) If there are capitalist as well as industrial partners, the industrial partners get a share
each that is just and equitable while the capitalist partners divide the remainder in
proportion to their capital contributions; and
c) If there is a capitalist-industrial partner, he gets a share in the profits as an industrial
partner and an additional share in proportion to his capital contribution to be
determined as in (b) above.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Rules in loss-sharing
1. The stipulation in the partnership agreement regarding loss-sharing must be
followed.
2. If there is no such agreement, but the contract provides for a profit-sharing ratio,
the profit-sharing ratio shall also be the loss-sharing ratio.
3. In the absence of loss-sharing and profit-sharing stipulations in the contract, then
the loss shall be borne by the partners in proportion to their capital contributions;
but a purely industrial partner is exempted from participation in the loss.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Share of industrial partner in profits and losses
 Unless agreed upon, the industrial partner shall receive such share in the profits as
may be just and equitable under the circumstances. As for the losses, the industrial
partners is not liable. However, under Article 1816, if the partnership has a
contractual debt and it cannot pay, the industrial partner equally with the capitalist
partners, can be compelled by the creditor to pay his pro rata share out of his own
property or assets.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Example
 Stipulation as to profits.
 A, B and C formed a partnership contributing P3,000 each to the common fund. They
agreed that should the partnership realize profits the same shall be distributed as
follows: A will get 50%; B will get 25%, while C will get the other 25%. In the event the
partnership realizes profits, then the partners will share the same in conformity with
their agreement. If the only stipulation on profits and losses is that indicated above, then
since A, B and C failed to agree as to the sharing of losses, in the event of a loss they shall
share such loss as they would share in the profits. Their profit sharing ratio shall also be
their loss sharing ratio
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Example
 Absence of stipulation
 A, B and C formed a partnership contributing P2,000 each to the common fund. They did
not agree as to the division of profits and losses. Under the law, profits and losses shall
be divided between the partners in the proportion of their contribution. Hence, A, B and
C will share equally the profits and losses as they also contributed equally.
Chapter 2 Obligations of the Partners

 Section 1 Obligations of the Partners Among Themselves

 Example
 Share of industrial partner in profits and losses
 A and B are the capitalist partners in a partnership, contributing P5,000 each
while C is the industrial partner. In due course of the business, the partnership
makes a profit of P6,000. How much should be the share of C? The share of C
must be that which is just and equitable under the circumstances to be
determined by the partners. If the partners decide that P2,000 is just and
equitable after considering the circumstances, then such amount must be
given to C. Assuming that the partnership sustains a loss of P6,000 instead of
profits? Then in such case, C shall not be liable for such loss but the same shall
be borne by A and B, capitalist partners.
 The exemption of an industrial partner to pay for losses “relates exclusively to
the settlement of the partnership affairs among the partners themselves, and
has nothing to do with the liabilities of the partners to third person.
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