Chapter 2- OBLIGATIONS OF THE PARTNERS

Section 1-Obligations of the Partners Among Themselves

Juridical Relations created by a COP: 1. Relations among the partners themselves 2. Relations of the partners with the partnership 3. Relations of the partnership with third persons with whom it contracts 4. Relations of the partners with such third persons Rights and Obligations, in general, of partners Inter Se 1. Partnership relationship is essentially one of mutual trust and confidence Each partner is a trustee and at the same time, a cestui que trust. He is a trustee to the extent that the duties bind him with respect to his co-partners and the partnership, and a cestui que trust as far as the duties that rest on his co-partners. This relationship is as much the same as the one existing between the principal and the agent because technically, the partnership is the principal and each partner is an agent of the partnership and every other partners with respect to partnership affairs 2. Fiduciary relationship remains until partnership is terminated The obligations of the partners to act with the utmost candor and good faith in their dealings between themselves is not lessened by the existence of the strained relations between them or the existence of any condition which might in and of itself justify the firms dissolution. 3. Relationship in a limited partnership But the relationship between a limited partner and other parties in a limited partnership does not involve the element of trust and confidence, as in the case of a general partnership

Executory agreement of partnership 1. Future partnership The partners may stipulate some other date for the commencement of the partnership. But they do not become partners until or unless the agreed time has arrived or the contingency has happened. As long as the agreement for a partnership remains inchoate and unperformed, the partnership is not consummated. Hence, there can be a future partnership which at the moment has no juridical existence yet. In the absemce of express stipulation, evidence is admissible to show the commencement date as determined by the words, acts or conduct of the parties 2. Agreement to create partnership A partnership in fact cannot be created on an agreement to enter into a co-partnership at a future day unless it be shown that such an agreement was actually consummated, So long as the agreement remains executory, the partnership is inchoate, not having called into being by the concerted action necessary under the partnership agreement. The death of either party to an executory agreement of partnership prevents the formation of a firm, since such agreement is based on the continuance of the life of each. 3. Failure to agree on material terms May prevent any rights or obligations from arising on either side for lack of complete contract

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Continuation of partnership beyond fixed term A partnership with a fixed term is one in which the term of its existence has been agreed upon expressly (as when there is a definite period) or impliedly (as when a particular enterprise or transaction is undertaken). The expiration of the term thus fixed will cause the automatic dissolution of the partnership. 1. Rights and duties of partner The partnership may be extended or renewed by the partners by express agreement, written or oral, or impliedly, by the mere continuation of the business after the termination of such term or particular undertaking without any settlement or liquidation. In such case, the rights and duties of the partners remain the same as they were at such determination but only insofar as is consistent with a partnership at will. With such continuation, the partnership for a fixed term or particular undertaking is dissolved and a new one, a partnership by will is created by implied agreement the continued existence of which will depend on the mutual desire and consent of the partners. 2. Dissolution of partnership Any one of the partners may at his sole pleasure, dictate a dissolution of the partnership but that can result in a liability for damages to the other partners. Implicit in good faith is the requirement that the dissolution must not be made at an improper or unreasonable time. Even a partnership for a fixed term may likewise be terminated by the express will of any partner before the time mentioned. There is no such thing as an indissoluble partnership. Continuation of partnership for an indefinite term 1. Partnership for a term impliedly fixed Although the term of a partnership is not expressly fixed, an agreement of the parties may evidence an understanding that the relation should continue until the accomplishment of a particular undertaking or certain things have been done or have taken place The partners may impliedly agree to continue in business until a certain sum of money is earned, or one or more partners recoup their investment, or until certain debts are paid, or until certain property could be disposed of on favorable terms.

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Commencement and term of partnership 1. A partnership is a consensual contract; hence, it exitsts from the moment of the celebration of the contract by the partners. Since under Article 1784, a partnership commences from the time of execution of the contract if there is no contrary stipulation as to the date of effectivity of the same, its registration in the Securities and Exchange Commission is not essential to give it juridical personality. 2. The birth and life of a partnership is predicated on the mutual desire of the parties Unlike a corporation, no time limit is prescribed by law for the life of a partnership. Hence, the partners may fix in their contract any term and they shall be bound to remain under such a relation for the duration of the term barring the occurrence of any of the events causing dissolution of the partnership before its expiration Rules governing partnership relation What is necessary for the existence of a partnership is that the essential requisites of a COP are present even when the partners have not yet actually begun the carrying on of its business or given their contributions, or even though its conditions or details, such as the participation of the partners in the profits and losses, and the nature of the partnership, have not yet been fixed, as they pertain to the accidental and not the essential parts of the contract. Where a partnership relation results, the law itself fixes the incidents and consequences of this relation if the parties fail to do so. This is true although the parties thereto actually call their relation something other than a partnership or even go so far as to state expressly that they are not partners.

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Partnership with mere expectation that business will be profitable The mere expectation that the business would be successful and that the partners would be able to recoup their investment is not sufficient to create a partnership for a term

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Obligations with respect to Contribution of Property 1. To contribute at the beginning of the partnership or at the stipulated time and money, property or industry which he may have promise to contribute; 2. To answer for eviction in case the partnership is deprived of the determinate property contributed; 3. To answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they should have been contributed up to the time of actual delivery 4. To preserve said property with the diligence of a good father of a family pending delivery to the partnership; 5. To indemnify the partnership for any damage caused to it by the retention of the same or by the delay in its contribution. The money or property contributed by partner becomes the property of the partnership. It necessarily follows that the same cannot be withdrawn or disposed of by the contributing partner without the consent or approval of the partnership or of the other partners. Effect of failure to Contribute Property Promised The failure to contribute is to make the partner ipso jure a debtor of the partnership even in the absence of any demand. The remedy of the other partner or the partnership is not recission but an action for specific performance (to collect what is owing) with damages and interest from the defaulting partner from the time he should have complied with his obligation. Article 1191, which refers to resolution of reciprocal obligations in general is not applicable. Article 1838, however allows rescission or annulment of a partnership contract on the ground of fraud or misrepresentation committed by one of the parties thereto. Liability of partner in Case of Eviction The partner is bound in the same cases and in the manner as vendor is bound with respect to the vendee with regard to specific and determinate things which he may have contributed to the partnership. Under the law on sales, eviction shall take place whenever by a final judgement based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or part of the thing purchased. This obligation of warranty in case of eviction is in consequence of the character of the contract of partnership which is an onerous contract. Liability of partner for Fruits of Property In Case of Delay No demand is necessary to put the partner in default. From the mere fact that the property which a partner ought to deliver does not pass to the common fund on time, the partnership fails to receive the fruits or benefits which the said contribution produced as well as those it ought to produce, thus prejudicing the common prupose of obtaining form them the greatest possible profits through some means of speculation or investment. The injury, therefore, to the partnership is constant. Liability of partner for Failure to Perform Service Stipulated 1. Partner generally not liable

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Unless there is a special agreement to that effect, the patrners are not entitled to charge each other, or the partnership of which they are members, for their services in the firm business. The doctrine seems to be that every partner is bound to work to the extent of his ability for the benefit of the whole, without regard to the service of his co-partners, however unequal in value or amount, and to require a partner to account for the value of his services would be in effect, allowing compensation to the other members of the partnership for the services they rendered. Exception The general rule that partners are not entitled to compensation for their services is inapplicable where the reason of it fails. If a partner neglects or refuses, without reasonable cause, to render the service which he agreed to perform by reason of which the partnership suffered loss. If the partner is compelled to make good the loss, each member of the firm, including himself, will receive his proportion of the amount in the distribution of the partnership assets, and in no just sense can this be regarded as compensation for the services individually rendered, If under the circumstances of the case the proper measure of the damages or loss (which may include unrealized profits) is the value of the services wrongfully witheld, then the defendant should be charged this value.

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Appraisal of Goods of Property Contributed It is necessary to determine how much has been contributed by the partners. In the absence of a stipulation, the share of each partner in the profits and losses is in proportion to what he may have contributed. The appraisal is made (1) In the manner prescribed by the contract of partnership; (2) In the absence of stipulation, by the experts chosen by the partners and according to current prices. After the goods have been contributed, the partnership bears the risk or gets the benefit of subsequent changes in their value. In the case of immovable property, the appraisal is made in the inventory of said property; otherwise, it may be made as provided in Article 1787

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Obligation with Respect to Contribution of Money And Money Converted to Personal Use. Two distinct cases refers(1) To money promised but not given on time and; (2) To partnership money converted to the personal use of the partner 1. To contribute on date due the amount he has undertaken to contribute to the partnership; 2. To reimburse any amount he may have taken from the partnership coffers and converted to his own use; 3. To pay the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from the common fund and converts it to his own use; 4. To indemnify the partnership for the damages cause to it by the delay in the contribution or the conversion of any sum for his personal benefit. Liability of Guilty Partner for Interest and Damages Not from the time judicial or extrajudicial demand is made but from the time he should have complied with his obligation or from the time he converted the amount to his own use, as the case may be. Unless there is a stipulation fixing a different time, this obligation of a partner to give his promised contribution arises from the commencement of the partnership, that is upon perfection of the contract.

This double responsibility of the partner is an exception to the general rule in damages that in obligations consisting in the payment of a sum of money, the indemnity for damages shall be only the payment of interest agreed upon, or in the absence of stipulation, the legal interest.

Liability of Partner for Failure to Return Partnership Money Received 1. Where fraudulent misappropriation committed A partner is guilty of estafa if he misappropriates partnership money or property received by him for a specific purpose of the partnership 2. Where there was mere failure to return This is not act constituting the crime of estafa. The money having been received by the partnership, the business commenced and profits accrued, the action that lies with the partner who furnished capital for the recovery of his money is a civil one arising from the partnership contract for a liquidation of the partnership and a levy on its assets if there should be any.

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Obligations of Industrial Partner An industrial partner is one who contributes his industry, labor or services to the partnership. He is considered the owner of his serives, which is his contribution to the common fund. Unless the contrary is stipulated, he becomes a debtor of the partnership for his work or services from the moment the partnership relation begins. In effect, the partnership acquires an exclusive right to avail itself of his industry. Consequently, if he engages in business for himself, such act is considered prejudicial to the interest of the other partners. An action for specific performance to compel the partner to perform the promised work or service is not available as a remedy because this will amount to involuntary servitude which as a rule, is prohibited by the Constitution. Prohibition against Engaging in Business 1. As regards an industrial partner

The prohibition is absolute and applies whether the industrial partner is to engage in the business in which the partnership is engaged or in any kind of business. This is to prevent any conflict of interest between the industrial partner and the partnership and to insure faithful compliance by said partner with his prestation.

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As regards capitalist partners The prohibition extends onlyto any operation which is of the same kind of business in which the partnership is engaged unless there is a stipulation to the contrary.

Remedies Where Industrial Partner Engages in Business The capitalist partners have the right either to exclude him from the firm or to avail themselves of the benefits which he may have obtained. In either case, the capitalist partners have a right to damages. Note that the permisson given must be express; hence mere toleration by the partnership will not exempt the industrial partner from liability. Although the law mentions only the capitalist partners, it is believed that industrial partners are also entitled to the remedy