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Chapter 2- OBLIGATIONS OF THE PARTNERS

Section 1-Obligations of the Partners AmongThemselves

Juridical Relations created by a COP:1. Relations among the partners themselves2. Relations of the partners with the partnership3. 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 partnersInter Se1. Partnership relationship is essentially one of mutual

trust and confidence

Each partner is a trustee and at the same time, acestui que trust. He is a trustee to the extent thatthe duties bind him with respect to his co-partnersand the partnership, and a cestui que trust as far asthe duties that rest on his co-partners.

This relationship is as much the same as the oneexisting between the principal and the agentbecause technically, the partnership is the principaland each partner is an agent of the partnership and

every other partners with respect to partnershipaffairs

2. Fiduciary relationship remains until partnership isterminated

The obligations of the partners to act with theutmost candor and good faith in their dealingsbetween themselves is not lessened by theexistence of the strained relations between them orthe existence of any condition which might in and ofitself 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 notinvolve the element of trust and confidence, as in

the case of a general partnership

#1784Commencement and term of partnership1. A partnership is a consensual contract; hence, it

exitsts from the moment of the celebration of thecontract by the partners.

Since under Article 1784, a partnership commencesfrom the time of execution of the contract if there isno contrary stipulation as to the date of effectivity ofthe same, its registration in the Securities andExchange Commission is not essential to give itjuridical 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 partnersmay fix in their contract any term and they shall bebound to remain under such a relation for theduration of the term barring the occurrence of any ofthe events causing dissolution of the partnershipbefore its expiration

Rules governing partnership relation

What is necessary for the existence of a partnershipis that the essential requisites of a COP are presenteven when the partners have not yet actually begunthe carrying on of its business or given theircontributions, or even though its conditions ordetails, such as the participation of the partners inthe profits and losses, and the nature of thepartnership, have not yet been fixed, as they pertainto the accidental and not the essential parts of thecontract.

Where a partnership relation results, the law itselffixes the incidents and consequences of this relationif the parties fail to do so. This is true although theparties thereto actually call their relation somethingother than a partnership or even go so far as to stateexpressly that they are not partners.

Executory agreement of partnership1. Future partnership

The partners may stipulate some other date for thecommencement of the partnership. But they do notbecome partners until or unless the agreed time hasarrived or the contingency has happened. As long asthe agreement for a partnership remains inchoateand unperformed, the partnership is notconsummated.

Hence, there can be a future partnership which at

the moment has no juridical existence yet. In theabsemce of express stipulation, evidence isadmissible to show the commencement date asdetermined by the words, acts or conduct of theparties

2. Agreement to create partnership

A partnership in fact cannot be created on anagreement to enter into a co-partnership at a futureday unless it be shown that such an agreement wasactually consummated, So long as the agreementremains executory, the partnership is inchoate, nothaving called into being by the concerted actionnecessary under the partnership agreement.

The death of either party to an executory agreementof partnership prevents the formation of a firm, since

such agreement is based on the continuance of thelife of each.

3. Failure to agree on material terms

May prevent any rights or obligations from arising oneither side for lack of complete contract

#1785Continuation of partnership beyond fixed term

A partnership with a fixed term is one in which theterm of its existence has been agreed uponexpressly (as when there is a definite period) orimpliedly (as when a particular enterprise ortransaction 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 thepartners by express agreement, written or oral, orimpliedly, by the mere continuation of the businessafter the termination of such term or particularundertaking without any settlement or liquidation.

In such case, the rights and duties of the partnersremain the same as they were at such determinationbut only insofar as is consistent with a partnership atwill.

With such continuation, the partnership for a fixedterm or particular undertaking is dissolved and anew one, a partnership by will is created by implied

agreement the continued existence of which willdepend on the mutual desire and consent of thepartners.

2. Dissolution of partnership

Any one of the partners may at his sole pleasure,dictate a dissolution of the partnership but that canresult in a liability for damages to the other partners.

Implicit in good faith is the requirement that thedissolution must not be made at an improper orunreasonable time.

Even a partnership for a fixed term may likewise beterminated by the express will of any partner beforethe time mentioned. There is no such thing as anindissoluble partnership.

Continuation of partnership for an indefinite term1. Partnership for a term impliedly fixed

Although the term of a partnership is not expresslyfixed, an agreement of the parties may evidence anunderstanding that the relation should continue untilthe accomplishment of a particular undertaking orcertain things have been done or have taken place

The partners may impliedly agree to continue inbusiness until a certain sum of money is earned, orone or more partners recoup their investment, oruntil certain debts are paid, or until certain propertycould be disposed of on favorable terms.

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2. Partnership with mere expectation that business willbe profitable

The mere expectation that the business would besuccessful and that the partners would be able torecoup their investment is not sufficient to create apartnership for a term

#1786Obligations with respect to Contribution ofProperty

1. To contribute at the beginning of the partnership orat the stipulated time and money, property orindustry which he may have promise to contribute;

2. To answer for eviction in case the partnership isdeprived of the determinate property contributed;

3. To answer to the partnership for the fruits of theproperty the contribution of which he delayed, fromthe date they should have been contributed up tothe time of actual delivery

4. To preserve said property with the diligence of agood father of a family pending delivery to thepartnership;

5. To indemnify the partnership for any damage causedto 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. Itnecessarily follows that the same cannot bewithdrawn or disposed of by the contributing partnerwithout the consent or approval of the partnership orof the other partners.

Effect of failure to Contribute Property Promised

The failure to contribute is to make the partner ipsojure a debtor of the partnership even in the absenceof any demand.

The remedy of the other partner or the partnership isnot recission but an action for specific performance(to collect what is owing) with damages and interest

from the defaulting partner from the time he shouldhave complied with his obligation.

Article 1191, which refers to resolution of reciprocalobligations in general is not applicable.

Article 1838, however allows rescission or annulmentof a partnership contract on the ground of fraud ormisrepresentation committed by one of the partiesthereto.

Liability of partner in Case of Eviction

The partner is bound in the same cases and in themanner as vendor is bound with respect to thevendee with regard to specific and determinatethings 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 priorto the sale or an act imputable to the vendor, thevendee is deprived of the whole or part of the thingpurchased.

This obligation of warranty in case of eviction is inconsequence of the character of the contract ofpartnership which is an onerous contract.

Liability of partner for Fruits of Property In Caseof Delay

No demand is necessary to put the partner indefault.

From the mere fact that the property which apartner ought to deliver does not pass to thecommon fund on time, the partnership fails toreceive the fruits or benefits which the saidcontribution produced as well as those it ought toproduce, thus prejudicing the common prupose ofobtaining form them the greatest possible profitsthrough some means of speculation or investment.The injury, therefore, to the partnership is constant.

Liability of partner for Failure to Perform ServiceStipulated1. Partner generally not liable

Unless there is a special agreement to that effect,the patrners are not entitled to charge each other, orthe partnership of which they are members, for theirservices in the firm business.

The doctrine seems to be that every partner isbound to work to the extent of his ability for thebenefit of the whole, without regard to the service ofhis co-partners, however unequal in value oramount, and to require a partner to account for thevalue of his services would be in effect, allowing

compensation to the other members of thepartnership for the services they rendered.2. Exception

The general rule that partners are not entitled tocompensation for their services is inapplicable wherethe reason of it fails.

If a partner neglects or refuses, without reasonablecause, to render the service which he agreed toperform by reason of which the partnership sufferedloss.

If the partner is compelled to make good the loss,each member of the firm, including himself, willreceive his proportion of the amount in thedistribution of the partnership assets, and in no justsense can this be regarded as compensation for theservices individually rendered,

If under the circumstances of the case the propermeasure of the damages or loss (which may includeunrealized profits) is the value of the serviceswrongfully witheld, then the defendant should becharged this value.

#1787Appraisal of Goods of Property Contributed

It is necessary to determine how much has beencontributed by the partners. In the absence of astipulation, the share of each partner in the profitsand losses is in proportion to what he may havecontributed.

The appraisal is made (1) In the manner prescribedby the contract of partnership; (2) In the absence ofstipulation, by the experts chosen by the partnersand according to current prices.

After the goods have been contributed, thepartnership bears the risk or gets the benefit ofsubsequent changes in their value.

In the case of immovable property, the appraisal ismade in the inventory of said property; otherwise, itmay be made as provided in Article 1787

#1788Obligation with Respect to Contribution of MoneyAnd Money Converted to Personal Use.

Two distinct cases refers(1) To money promised butnot given on time and; (2) To partnership moneyconverted to the personal use of the partner

1. To contribute on date due the amount he hasundertaken to contribute to the partnership;

2. To reimburse any amount he may have taken fromthe partnership coffers and converted to his ownuse;

3. To pay the agreed or legal interest, if he fails to payhis contribution on time or in case he takes anyamount from the common fund and converts it to hisown use;

4. To indemnify the partnership for the damages causeto it by the delay in the contribution or the

conversion of any sum for his personal benefit.

Liability of Guilty Partner for Interest andDamages

Not from the time judicial or extrajudicial demand ismade but from the time he should have compliedwith his obligation or from the time he converted theamount 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 promisedcontribution arises from the commencement of thepartnership, that is upon perfection of the contract.

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This double responsibility of the partner is anexception to the general rule in damages that inobligations consisting in the payment of a sum ofmoney, the indemnity for damages shall be only thepayment of interest agreed upon, or in the absenceof stipulation, the legal interest.

Liability of Partner for Failure to ReturnPartnership Money Received1. Where fraudulent misappropriation committed

A partner is guilty of estafa if he misappropriatespartnership money or property received by him for aspecific purpose of the partnership

2. Where there was mere failure to return

This is not act constituting the crime of estafa. Themoney having been received by the partnership, thebusiness commenced and profits accrued, the actionthat lies with the partner who furnished capital forthe recovery of his money is a civil one arising fromthe partnership contract for a liquidation of thepartnership and a levy on its assets if there shouldbe any.

#1789Obligations of Industrial Partner

An industrial partner is one who contributes hisindustry, labor or services to the partnership. He isconsidered the owner of his serives, which is hiscontribution to the common fund.

Unless the contrary is stipulated, he becomes adebtor of the partnership for his work or servicesfrom the moment the partnership relation begins.

In effect, the partnership acquires an exclusive rightto avail itself of his industry. Consequently, if heengages in business for himself, such act isconsidered prejudicial to the interest of the otherpartners.

An action for specific performance to compel thepartner to perform the promised work or service is

not available as a remedy because this will amountto involuntary servitude which as a rule, is prohibitedby the Constitution.

Prohibition against Engaging in Business

1. As regards an industrial partner

The prohibition is absolute and applies whether theindustrial partner is to engage in the business inwhich the partnership is engaged or in any kind ofbusiness.

This is to prevent any conflict of interest betweenthe industrial partner and the partnership and toinsure faithful compliance by said partner with hisprestation.

2. As regards capitalist partners

The prohibition extends onlyto any operation whichis of the same kind of business in which thepartnership is engaged unless there is a stipulationto the contrary.

Remedies Where Industrial Partner Engages inBusiness

The capitalist partners have the right either toexclude him from the firm or to avail themselves ofthe benefits which he may have obtained.

In either case, the capitalist partners have a right todamages. Note that the permisson given must beexpress; hence mere toleration by the partnershipwill not exempt the industrial partner from liability.

Although the law mentions only the capitalistpartners, it is believed that industrial partners arealso entitled to the remedy