PARTNERSHIP

GENERAL PARTNERSHIP

DEFINITION

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.

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.

NOTE: A contract of partnership may be entered orally and the 3 rd person may establish a prima facie
case of partnership by showing that the parties share in the net profits.

EXCEPT: (Art. 1769 par. 4) …payment of xxx

Art. 1769. In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons;

(2) 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;

(3) 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;

(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.

PRINCIPLE OF DELECTUS PERSONAE

Art. 1804. Every partner may associate another person with him in his share, but the associate shall not
be admitted into the partnership without the consent of all the other partners, even if the partner having an
associate should be a manager.

Art. 1813. A conveyance by a partner of his whole interest in the partnership does not of itself dissolve
the partnership, or, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the
partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of
but it merely entitles the assignee to receive in accordance
partnership transactions, or to inspect the partnership books;
with his contract the profits to which the assigning partner would otherwise be entitled. However, in case of
fraud in the management of the partnership, the assignee may avail himself of the usual remedies.

In case of a dissolution of the partnership, the assignee is entitled to receive his assignor's interest and may require an account from the date
only of the last account agreed to by all the partners.

Arts. 1830-1831. The assignee could petition the court for dissolution of the partnership only upon
termination of the period or particular undertaking for which the partnership was formed.

MANAGEMENT OF PARTNERSHIP

Art. 1818. 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, unless the partner so acting has in fact no authority to
act for the partnership in the particular matter, and the person with whom he is dealing has knowledge
of the fact that he has no such authority.

Art. 1800. The partner who has been appointed manager in the articles of partnership may execute all
acts of administration despite the opposition of his partners, unless he should act in bad faith ; and his
power is irrevocable without just or lawful cause. The vote of the partners representing the controlling interest shall be necessary for such
revocation of power.

A power granted after the partnership has been constituted may be revoked at any time.

NOTE:
If less than all of the partners were entrusted with the management
= each one of the managing partners may execute all acts of administration.

If any one of the managing partners should oppose the acts of the others
= decision of the majority will prevail.

If there is a tie
= all other partners shall participate in the voting; and
= the partner holding the controlling interest will decide.
DISSOLUTION OF PARTNERSHIP

CAUSES:

Art. 1830. Dissolution is caused:

(1) Without violation of the agreement between the partners:

a) By the termination of the definite term or particular undertaking specified in the agreement;
b) By the express will of any partner, who must act in good faith, when no definite term or particular is
specified;
c) By the express will of all the partners who have not assigned their interests or suffered them to be
charged for their separate debts, either before or after the termination of any specified term or particular
undertaking;
d) By the expulsion of any partner from the business bona fide in accordance with such a power conferred
by the agreement between the partners;

(2) In contravention of the agreement between the partners, where the circumstances do not permit a dissolution
under any other provision of this article, by the express will of any partner at any time;

(3) By any 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;

(4) When a specific thing which a partner had promised to contribute to the partnership, perishes before the
delivery; in any case by the loss of the thing, when the partner who contributed it having reserved the ownership
thereof, has only transferred to the partnership the use or enjoyment of the same; but the partnership shall not be
dissolved by the loss of the thing when it occurs after the partnership has acquired the ownership thereof;

(5) By the death of any partner;

(6) By the insolvency of any partner or of the partnership;

(7) By the civil interdiction of any partner;

(8) By decree of court under the following article.

Art. 1831. On application by or for a partner the court shall decree a dissolution whenever:
(1) A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
(2) A partner becomes in any other way incapable of performing his part of the partnership contract;
(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
(4) A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership business that it is not reasonably practicable to
carry on the business in partnership with him;
(5) The business of the partnership can only be carried on at a loss;
(6) Other circumstances render a dissolution equitable.

On the application of the purchaser of a partner's interest under Article 1813 or 1814:
(1) After the termination of the specified term or particular undertaking;
(2) At any time if the partnership was a partnership at will when the interest was assigned or when the
charging order was issued. (n)

NOTE:
A partner may withdraw from the partnership at any time, but he may be liable for damages if his
withdrawal is wrongful. His withdrawal will cause the dissolution of the partnership which will continue
only for the purpose of winding up the business.

ART. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business.

EFFECTS OF CHANGE IN MEMBERSHIP OF A PARTNERSHIP

1. Dissolution of existing partnership and formation of a new one.
- Any change in the membership of a partnership, either by the retirement or death of partner, or by the
admission of new members into the partnership, produces, technically, an immediate dissolution of
the existing partnership relation, and the formation of a new one

2. Continuance by remaining partners of partnership as before.

- The change in the relation of the partners will dissolve the partnership but will not disturb the continuance
by the remaining partners or by the existing and new partners of the business as before.
THREE SEPARATE STAGES
1. Dissolution
- is the change in the relation of the partners caused by any partner ceasing to be associated
in the carrying on of the business. (Art. 1828.)
- it is that point in time when the partners cease to carry on the business together. It represents the
demise of a partnership. Thus, any time a partner leaves the business, the partnership is dissolved.

2. Winding up
- is the actual process of settling the business or partnership affairs after dissolution, involving the
collection and distribution of partnership assets, payment of debts, and determination of the value
of each partner’s interest in the partnership.
- it is the final step after dissolution in the termination of the partnership.

3. Termination
- is that point in time when all partnership affairs are completely wound up and finally settled.
- it signifies the end of the partnership life. It takes place after both dissolution and winding up have
occurred.

NOTICES

A. TO THE OTHER PARTNERS

Art. 1833. Where the dissolution is caused by the act, death or insolvency of a partner, each partner
is liable to his co-partners for his share of any liability created by any partner acting for the
partnership as if the partnership had not been dissolved unless:

(1) The dissolution being by act of any partner, the partner acting for the partnership had
knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the partner acting for the
partnership had knowledge or notice of the death or insolvency.

B. TO THIRD PERSONS
(1) 3rd persons who extended credit to the partnership prior to its dissolution must have knowledge
or notice of the dissolution

(2) To other 3rd person who have transacted business with the partnership prior to its dissolution,
NOTICE BY PUBLICATION IS SUFFICIENT.
- Lack of notice required to be given to 3 rd persons would render the partnership LIABLE as if
dissolution had not taken place
-If the partnership become PARTNERSHIP BY ESTOPPEL, SILENT PARTNERS CANNOT BE LIABLE
BEYOND THE INTEREST OF PARTNERSHIP
 (3) NO NOTICE IS REQUIRED IF DISSOLUTION OF THE PARTNERSHIP IS DUE TO THE BUSINESS
BECOMING UNLAWFUL or where the PARTNER acting for the partnership IS JUDICIALLY
DECALRED INSOLVENT

WINDING UP

Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.

Art. 1832. Except so far as may be necessary to wind up partnership affairs or to complete transactions
begun but not then finished, dissolution terminates all authority of any partner to act for the
partnershipxxx

Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or
the legal representative of the last surviving partner, not insolvent, has the right to wind up the
partnership affairs, provided, however, that any partner, his legal representative or his assignee, upon
cause shown, may obtain winding up by the court.

Art. 1834. xxx

The partnership is in no case bound by any act of a partner after dissolution:

(3) Where the partner has no authority to wind up partnership affairs; except by a transaction with one
who:
a) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of
his want of authority; or
b) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or
notice of his want of authority, the fact of his want of authority has not been advertised in the
manner provided (IN A NEWS PAPER OF GENERAL CIRCULATION)…

OBLIGATION OF PARTNERS TO 3RD PERSONS

Partnership does not have a juridical personality apart from its members, so all partners must be sued
jointly and each is liable for the entire obligation

For tort or breach of trust committed by a partner

- all partners are solidarily liable (anyone of them can be sued alone)

For anomalous situation

- a partner is solidarily liable with the partnership for tort or breach of trust committed by a partner in
the course of its business

For contractual obligations of the partnership

- all partners including the industrial ones, shall be liable pro rata (in proportionate to their contribution)
with all their property and after all the assets of the partnership have been exhausted

LIMITED PARTNERSHIP
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.

Art. 1844. Two or more persons desiring to form a limited partnership shall:

(1) Sign and swear to a certificate, which shall state –

 a. The name of the partnership, adding thereto the word "Limited";
b. The character of the business;
c. The location of the principal place of business;
d. The name and place of residence of each member, general and limited partners being
respectively designated;
e. The term for which the partnership is to exist;
f. The amount of cash and a description of and the agreed value of the other property contributed
by each limited partner;
g. The additional contributions, if any, to be made by each limited partner and the times at which
or events on the happening of which they shall be made;
h. The time, if agreed upon, when the contribution of each limited partner is to be returned;
i. The share of the profits or the other compensation by way of income which each limited partner
shall receive by reason of his contribution;
j. The right, if given, of a limited partner to substitute an assignee as contributor in his place, and
the terms and conditions of the substitution;
k. The right, if given, of the partners to admit additional limited partners;
l. The right, if given, of one or more of the limited partners to priority over other limited partners,
as to contributions or as to compensation by way of income, and the nature of such priority;
m. The right, if given, of the remaining general partner or partners to continue the business on the
death, retirement, civil interdiction, insanity or insolvency of a general partner; and
n. The right, if given, of a limited partner to demand and receive property other than cash in return
for his contribution.

(2) File for record the certificate in the Office of the Securities and Exchange Commission.

A limited partnership is formed if there has been substantial compliance in good faith with the foregoing
requirements.

Art. 1845. The contributions of a limited partner may be cash or property, but not services.

Art. 1846. The surname of a limited partner shall not appear in the partnership name unless:
1. It is also the surname of a general partner, or
2. Prior to the time when the limited partner became such, the business has been carried on under
a name in which his surname appeared.
A limited partner whose surname appears in a partnership name contrary to the provisions of the first
paragraph is liable as a general partner to partnership creditors who extend credit to the partnership
without actual knowledge that he is not a general partner.

Art. 1852. Without prejudice to the provisions of Article 1848, a person who has contributed to the
capital of a business conducted by a person or partnership erroneously believing that he has become a
limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner,
a general partner with the person or in the partnership carrying on the business, or bound by the
obligations of such person or partnership, provided that on ascertaining the mistake he promptly
renounces his interest in the profits of the business, or other compensation by way of income.
 AGENCY

Article 1868. By the contract of agency, a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.

Article 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without
authority.

Agency may be oral, unless the law requires a specific form.

Article 1883. If an agent acts in his own name, the principal has no right of action against the persons with
whom the agent has contracted; neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the person with whom he has contracted, as if the
transaction were his own, except when the contract involves things belonging to the principal.
The provisions of this article shall be understood to be without prejudice to the actions between the principal
and agent.

AGENCY COUPLED WITH INTEREST

Article 1927. An agency cannot be revoked if a bilateral contract depends upon it, or if it is the means of
fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the
contract of partnership and his removal from the management is unjustifiable.
Article 1930. The agency shall remain in full force and effect even after the death of the principal, if it has
been constituted in the common interest of the latter and of the agent, or in the interest of a third person
who has accepted the stipulation in his favor.

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

GUARANTY

BENEFIT OF EXCUSSION:

Article 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is called a suretyship.

Article 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.

Article 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor and has resorted to all the legal remedies against the debtor.

BENEFIT OF DIVISION:

Article 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to
answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares
which they are respectively bound to pay, unless solidarity has been expressly stipulated.

The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the
benefit of excussion against the principal debtor.

Privileges of the guarantor

a. Benefit of exhaustion or
excussion
b. Benefit of division
Privileges of the guarantor
a. Benefit of exhaustion or
excussion
b. Benefit of division
Benefit of Exhaustion
- It is the right available to the
guarantor to demand that the
creditor first exhaust the
properties of the debtor, which
are
within the Philippines and which
are not exempt from
execution. And if still, the creditor
cannot collect, that’s the
time that the guarantor is liable.
Hence, the creditor should:
a. First exhaust the properties of
the debtor
b. Resort to all legal remedies
against the debtor
c. Notify the guarantor of the
debtor’s inability to pay.
Benefit of Division
- When there are several
guarantors for one and the same
debtor and debt, the obligation to
answer for the same is
divided among all of them. The
creditor may only claim
from each debtor his
corresponding share, unless
solidarity
has been expressly stipulated.
Requisites:
a. There are several guarantors
b. They guaranteed only one
debtor
c. There is only one debt
PRIVILEGES OF THE GUARANTOR
a. Benefit of exhaustion or excussion
b. Benefit of division
BENEFIT OF EXHAUSTION:
It is the right available to the guarantor to demand that the creditor first exhaust the properties of the
debtor, which are within the Philippines, and which are not exempt from execution. And if still, the
creditor cannot collect, that’s the time that the guarantor is liable.

Hence, the creditor should

a. First exhaust the properties of the debtor
b. Resort to all legal remedies against the debtor
c. Notify the guarantor of the debtor’s inability to pay

Benefit of Division
- When there are several guarantors for one and the same
debtor and debt, the obligation to answer for the same is
divided among all of them. The creditor may only claim
from each debtor his corresponding share, unless solidarity
has been expressly stipulated.
Requisites:
a. There are several guarantors
b. They guaranteed only one debtor
c. There is only one debt
When is division not available?
a. If it is waived by the guarantor
b. If the guarantor solidarily binds himself to the debtor
because his obligation is direct and primary
c. If the debtor is insolvent, there is no need for
declaration of insolvency
d. When the debtor cannot be sued because he has
absconded
e. When it may be presumed that execution will not
result in the satisfaction of the judgment credit
BENEFIT OF DIVISION
When there are several guarantors for one and the same debtor and debt, the obligation to answer for
the same is divided among all of them. The creditor may only claim from each debtor his corresponding
share, unless solidarity has been expressly stipulated.

Requisites:
a. There are several guarantors
b. They guaranteed only one debtor
c. There is only one debt

WHEN IS DIVISION NOT AVAILABLE?

1. If it is waived by the guarantor
2. If the guarantor solidarily binds himself to the debtor because his obligation is direct and primary
3. If the debtor is insolvent, there is no need for a declaration of insolvency
4. When the debtor cannot be sued because he has absconded
5. When it may be presumed that execution will not result in the satisfaction of the judgment credit

Article 2071. The guarantor, even before having paid, may proceed against the principal debtor:
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve him from the guaranty within a specified period, and
this period has expired;
4. When the debt has become demandable, by reason of the expiration of the period for payment;
5. After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless
it be of such nature that it cannot be extinguished except within a period longer than ten years;
6. If there are reasonable grounds to fear that the principal debtor intends to abscond;
7. If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of insolvency
of the debtor.

SURETYSHIP

CONTRACT OF SURETYSHIP
A contract of suretyship is an agreement whereby a party called the Surety guarantees the performance
by another party called the Principal or Obligor of an obligation or undertaking in favor of a third party
called the Obligee. It includes official recognizances, stipulations, bonds or undertakings issued by any
company by virtue of Act No. 536, as amended by Act No. 2206.

If a person binds himself solidarily with the principal debtor, will also be considered a suretyship.

WHAT ARE THE CHARACTERISTICS OF THE CONTRACT OF SURETYSHIP?

1. It is an accessory contract because its validity depends upon the existence of a principal
obligation guaranteed by it. It cannot exist without a valid obligation (Article 2052, New Civil
Code). It is an indispensable condition that there must be a principal contract, thus, if the
principal obligation is void, it is also void.
2. It is subsidiary and conditional because it takes effect only when the principal debtor fails in his
obligation subject to certain limitations.

WHO ARE THE PARTIES TO A CONTRACT OF SURETYSHIP?

There are three (3) parties to a contract of suretyship, to wit:
1. Principal – also known as Obligor or the policyholder. The party obligated to perform or to
refrain from performing an act.
2. Surety – also known as the insurer. The party who issues the Surety Bond on behalf of the
Principal and in favor of the Obligee. The one who guarantees the performance or compliance of
the Principal’s obligations.
3. Obligee – also known as the beneficiary. The party in whose favor the bond is issued. He is
likewise the one who obligates the Principal to perform or refrain from performing an act.

DIFFERENTIATE A CONTRACT OF SURETYSHIP AND CONTRACT OF GUARANTY?

The distinction between a Surety and a guarantor are as follows:
1. The Surety is primarily liable, whereas, the guarantor is secondarily liable;
2. The Surety is a party to the undertaking, whereas the liability of the guarantor depends upon
an independent agreement to pay if the primary debtor fails to do so;
 3. The Surety is not entitled to the benefit of exhaustion of debtor’s assets (also known as
benefit of excussion) while such right is available to the guarantor.

Note: While a Surety undertakes to pay if the Principal does not pay, the guarantor binds himself to pay
if the Principal cannot pay. (Machetti vs Hospicio de San Jose & Fidelity & Surety Co., 43 Phil. 297)

CHATTEL MORTGAGE

Article 1508 | Chattel Mortgage Law

SEC. 3. A chattel mortgage is a conditional sale of personal property as security for the payment of a
debt, or the performance of some other obligation specified therein, the condition being that the sale
shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If
the condition is performed according to its terms the mortgage and sale immediately become void, and
the mortgagee is thereby divested of his title.

SEC. 4. A chattel mortgage shall not be valid against any person except the mortgagor, his executors or
administrators, unless the possession of the property is delivered to and retained by the mortgagee or
unless the mortgage is recorded in the office of the register of deeds of the province in which the
mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the
province in which the property is situated: Provided, however, That if the property is situated in a
different province from that in which the mortgagor resides, the mortgage shall be recorded in the office
of the register of deeds of both tho province in which the mortgagor resides and that in which the
property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.

SEC. 14. The mortgagee, his executor, administrator, or assign may, after thirty days from the time of
condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a
public officer at a public place in the municipality where the mortgagor resides, or where the property is
situated, provided at least ten days' notice of the time, place, and purpose of such sale has been posted
at two or more public places in such municipality, and the mortgagee, his executor, administrator, or
assign, shall notify the mortgagor or person holding under him and the persons holding subsequent
mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if
within the municipality, or sent by mail if he does not reside in such municipality, at least ten days
previous to the sale.
Article 1484. In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendee's failure to pay cover two or more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary
shall be void.