1.

2 ELEMENTS OF A CONTRACT OF 

SEPT. ​1 , 2020 
PARTNERSHIP 
(ARTS. 1767-1771) 
A:  If  we  talk  about the contract of partnership. What is 
I. CONTRACT OF PARTNERSHIP the consent, object, or cause?

ARTICLE  1767.  By  the  contract  of  partnership  two  or  more  persons 
1.1 ELEMENTS OF A CONTRACT  bind  themselves  to  contribute  money,  property,  or  industry  to  a 
common  fund,  with  the  intention  of  dividing  the  profits  among 
A:  So  one  must  have  legal  capacity  to  enter  into  a  themselves. 
Two  or  more  persons  may  also  form  a  partnership for the 
contract.  That  involves  the  execution  of  the  contract. 
exercise of a profession. 
To  have  the  contract  itself,  what are the elements of a 
contract?
1.2.1. CONSENT (LEGAL CAPACITY TO 
Since  partnership  is  fundamentally  contractual,  all 
CONTRACT) 
the  essentials  of  a valid contract must be present, which 
are: 
A: Can you become a partner?
● CONSENT 
● OBJECT OR SUBJECT MATTER  There  is  an  express  or  implied  agreement  between 
● CAUSE OR CONSIDERATION  the parties to enter into a contract of partnership 
● the  consent  may  be  express  or  implied  through 
1.1.1. CONSENT  the actions of the parties 
Consent  is  the agreement on the subject matter, and 
1.2.1.1 Legal Capacity of Individuals 
the cause or consideration (meeting of the minds) 
● Consent must be freely given  Before an individual can enter into a valid contract of
● One  must  have  the  capacity  to give consent and  partnership, it is essential that the contracting parties
therefore  contract  —  he  must  not  suffer  from  have the necessary legal capacity to enter into the
any of the disqualifications  contract.
● GENERAL RULE: Any person may be a partner
1.1.2. OBJECT OR SUBJECT MATTER  who is capable of entering into contractual
 
relations
ART.  1770.  A  partnership  must  have  a  lawful  object or purpose, and 
● EXCEPTIONS:
must  be  established  for  the  common  benefit  or  interest  of  the  ○ Unemancipated minors
partners.  ○ Insane or demented persons
When  an  unlawful  partnership  is  dissolved  by  a  judicial  ○ Deaf-mutes who do not know how to
decree,  the  profits  shall  be  confiscated  in  favor  of  the State, without 
write
prejudice  to  the  provisions  of  the  Penal  Code  governing  the 
confiscation of the instruments and effects of a crime  ○ Persons who are suffering from civil
interdiction
Object  or  subject  matter  is  the  thing  to  be  given  or  ○ Incompetents who are under
the service to be rendered  guardianship
● a  contract must have a LAWFUL object, meaning 
the  thing  to  be  given  or  the  service  to  be  1.2.1.2. Legal Capacity of Partnerships 
rendered  must  not  be  contrary  to  laws,  public 
There is no prohibition against a partnership being a
moral,  public  policy  and  public  order,  otherwise,  partner in another partnership.
the contract is VOID  ● a partnership therefore may be a partner is
 

another partnership
1.1.3. CAUSE OR CONSIDERATION 
The  cause  or  consideration  is the purpose or reason  1.2.1.1 Legal Capacity of Corporations 
which the contracting parties entered into the contract  The doctrine adopted by our Supreme Court is that,
● the thing to be received  unless authorized by statute or by its charter, a

AGENCY, TRUST & PARTNERSHIP (MIDTERMS) | EH405 | ATTY. ESPEDIDO | 1

corporation is without capacity or power to enter into a
the obligations that the corp will enter into. Their
contract of partnership.
liability is limited to his investment. 
● this limitation is based on public policy, since in
a partnership the corporation would be bound by
the acts of persons who are not its duly 1.2.2.  OBJECT  OR  SUBJECT  MATTER 
appointed and authorized agents and officers, (CONTRIBUTION TO THE PARTNERSHIP) 
which would be entirely inconsistent with the
policy of the law that the corporation shall A: So when we say object or subject matter of the
manage its own affairs separately and partnership we are referring to the contributions
exclusively of the partner. These contributions may be in the
form of what?
A: Can a partnership become a partner in a
partnership (YES)? How about the corporation The  contribution  of  the  partners,  whether  ​MONEY or 
(NO)? PROPERTY  contributed  or  the  ​SERVICES  or  ​INDUSTRY 
rendered 
A: I think that’s the reason why corporations cannot be ● The partners must have a proprietary interest in
a partner and a partnership can be. Because every the business or undertaking, that is, they must
partner is liable even beyond their contribution. On the contribute capital which may be money or
other hand, a corporation, the stockholders are liable property, or their services, or both, to the
only up to the extent of their contribution. Therefore, in common business
a partnership, liability is not limited. While in a ● Without the element of mutual contribution to a
corporation, liability is limited. Because of that common fund there can be no partnership
difference or that distinction, it would be unable to
become a partner in a partnership. A: So when we say property, what kind of property
could this be? And how do we classify them?
A: The basic distinction between P and C is the trust
KINDS OF CONTRIBUTION TO THE PARTNERSHIP
and confidence required in a partnership. As a matter
● MONEY - ​The term is to be understood as
of fact, other than the liabilities, this is another reason
referring to currency which is legal tender in the
why a corporation cannot be a partner in a partnership
Philippines.
while a partnership can become a partner. The reason
● PROPERTY - ​The property contributed may be
is the lack of trust and confidence among
real or personal, corporeal or incorporeal
stockholders. In a corporation, there could be as many
● INDUSTRY - ​The word “industry” has been
stockholders as may be allowed. On the other hand,
interpreted to mean the active cooperation, the
partnership could be limited in numbers because it is
work of the party associated, which may be
required that before a partner can be admitted into the
either personal manual efforts or intellectual,
partnership, all the other partners must agree. And
and for which he receives a share in the profits
this is important because each partner shall be liable
(not merely salary) of the business.
for the obligations of the partnership. Each partner is
even considered an agent of the partnership. Which
1.2.1.1 Property as Contribution 
simply means every partner can bind the partnership,
and that any liability that a partner will enter into or
execute on behalf of the partnership shall be binding A: So when we say property, what kind of property
could this be? And how do we classify them?
upon the partnership. This is not so in a corporation,
because in a corporation, management is vested in a All kinds of property may be contributed, whether
board of directors and the fact that you are a ​ ERSONAL​, or ​TANGIBLE​ or ​INTANGIBLE
REAL​ or P
stockholder does not mean that you can participate in
the management of the corporation. Here, each REAL PROPERTIES
partner must enjoy the trust and confidence of all the Immovable properties that cannot be transferred or
other partners because of the potential authority that moved from one place to another
each partner receives from the other partners. OTOH a. Immovable by nature - ​Cannot be moved from
in a corporation, a stockholder simply is an investor in one place to another by reason of their own
the business of a corporation. He is not liable at all for characteristics
● Examples​: Land, trees, road

AGENCY, TRUST & PARTNERSHIP (MIDTERMS) | EH405 | ATTY. ESPEDIDO | 2

 b. Immovable by incorporation - ​Those that are
attached to an immovable in a fixed manner to Ii. PARTNERSHIP: A JURIDICAL PERSON
be an integral part thereof
● Examples​: Buildings, wall, fences, trees ART. 1768. The partnership has a juridical personality separate and
distinct from that of each of the partners even in case of failure to
c. Immovable by analogy - ​So classified by an
comply with the requirements of Article 1772, first paragraph.
express provision of law because it is regarded
as united to the immovable JURIDICAL PERSON
● Examples​: Contracts for public works, A juridical person is a distinct person created by
and servitudes and other real rights over fiction of law
immovable
d. Immovable by destination - ​Placed in an NATURAL PERSON
immovable for the utility it gives to the activity Human beings created by God with the intervention
carried thereon of the parents
● Examples​: machinery installed in a
building to meet the needs of an PARTNERSHIP AS A JURIDICAL PERSON
industry in the building, and docks on a The partnership has a juridical personality separate
river and distinct from that of each of the partners
e. Immovable by agreement: ​Those that are by ● thus, in the partnership X & Co., in which A and
their nature capable of being moved but treated B are the partners, there are three distinct
as an immovable by the agreement of the persons, namely, the partnership X & Co., A,
parties and B.
● Example​: A whiteboard, a painting
A: So here when a partnership is organized, a new
PERSONAL PROPERTIES personality is created by law. A personality separate
Movable properties that can be transferred from one and distinct from the personality of the individual
place to another partners. So once you become a partner, you become
a. Tangible - ​Has physical properties liable for the obligations of the partnership itself. And
● Example​: car, table, furnitures once a partnership is organized, that partnership
b. Intangible - ​Has no physical properties becomes itself a juridical person. A juridical person as
● Example​: Shares of stocks, credit, rights distinguished from a natural person is a creation of the
c. Consumable - ​Cannot be enjoyed without law. No juridical person exists except when the law
being consumed allows a partnership to exist or when a corporation is
● Example​: Food created.
d. Non-consumable - ​Can be enjoyed even
without being consumed TN: ​Discussed also under this topic was whether or not a
partnership or a corporation can be a partner in another partnership.
● Example​: table, laptop Please see notes on “Legal Capacity to Contract” for discussion.
e. Fungible - ​it can be substituted by another thing
of the same kind, quantity and quality,
● Example​:Money, rice, corn Iii. FORMS OF BUSINESS ORGANIZATIONS
f. Non-fungible - ​Not replaceable in such
equivalents 3.1 SOLE PROPRIETORSHIP 
● Example​: Specific car
A: (Atty’s Segway/Jokes) So anything that you enjoy but you don’t
An individual personally owns the business; has no
consume is a non-consumable property. Table for example, chairs, separate legal personality from its owner and the latter is
furnitures, cars. They are non-consumable. You don’t eat the table, you personally liable for all its debts and obligations
eat ON the table. Unless you are consuming your table. ● registration of sole proprietorships is with the
DEPARTMENT OF TRADE AND INDUSTRY
1.2.3. CAUSE OR CONSIDERATION 
The  case  or  consideration  in  a  contract  of  3.2 PARTNERSHIP 
partnership is the division of profits among the members  Formed when two or more persons bind themselves
of the partnership  to contribute money, property or industry to a common
fund with the intention of dividing the profits and
ownership among themselves
AGENCY, TRUST & PARTNERSHIP (MIDTERMS) | EH405 | ATTY. ESPEDIDO | 3
 ● while the partnership is a separate legal entity the New
from its partners, the latter are personally Corporation Code (One
Person Corporation)
responsible for the debts and obligations of the
partnership Commencem From the moment of From the date of
● registration of partnerships is with the ent of the execution of the issuance of the
Juridical contract of certificate of
SECURITIES AND EXCHANGE COMMISSION Personality partnership incorporation by the
Securities and
3.3 CORPORATION  Exchange Commission

Group of people authorized to act as a single entity Powers May exercise any Can exercise only the
power authorized by powers expressly
and recognized by law the partners provided it granted
● it is owned by several people, called is not by law or implied
contrary to law, from those granted
shareholders, and has a personality separate morals, good customs, or incident to its
and distinct from them public order, or public existence
● shareholders are responsible for the debts of the policy

corporation only up to the extent of their capital Management When the Power to do
contribution management is business and
not agreed upon, manage its affairs
● corporations can either be stock or non-stock every partner is is vested in the
and are controlled by the Board of Directors or an agent of the board of directors
Trustees partnership or trustees

● Registration of corporations is with the SEC Effect of Partner as such Suit against a
A: (Atty’s Segway/Jokes) The Story of Genesis management can sue a copartner member of the
Adam- Sole Proprietorship who board of directors
Adam and Eve- Partnership (Contribution of industry by tilling the soil) mismanages or trustees who
Adam and Eve and Children- Corporation mismanages must
be in the name of
the corporation
Iv. distinction of partnerships and other business 
Right of No right of Has right of succession
organizations succession succession

Extent of Partners (except Stockholders are

A: How do we distinguish one from the other? liability to 3rd limited p.) are liable only to the
persons liable personally extent of the
and subsidiarily shares subscribed
4.1 PARTNERSHIP VS.  for partnership
debts to third
by them

SOLE PROPRIETORSHIP  persons

Transferabilit Cannot transfer Stockholder

PARTNERSHIP S.P. y of interest his interest in the generally has the
partnership so as right to transfer his
As to number 2 or more Only 1 to make the shares
of owners transferee a without the prior
partner without consent of the
Juridical Has JP No JP the consent of all other stockholders
personality the other existing
partners because
the partnership is
As to Liability goes beyond Liability is not limited to
based on trust
liabilities the capital of the the contribution. Also
owner and may extend liable for their personal and confidence
to his personal assets assets
Term of May be May be established
existence established for for any period of
any period of time stipulated by
4.2. PARTNERSHIP VS. CORPORATION  time stipulated by the partners as
the partners according to the
PARTNERSHIP CORPORATION New Corporation
Code
Manner of Created by Generally created
creation contract (express by law Firm name Limited May adopt any firm
or implied) partnership name provided it is
should have the not the same as or
word “Ltd.” to its similar to any
Number of May be organized by Can now be made of name registered firm
incorporators at least two persons one incorporator under name

AGENCY, TRUST & PARTNERSHIP (MIDTERMS) | EH405 | ATTY. ESPEDIDO | 4

 Dissolution Any time by the With the consent of ● they are similar in a way that an executor or
will of any or all the State administrator acts on behalf of the estate of the
of the partners
except when it is
deceased just like a partner acts on behalf of the
a partnership partnership as agents
with a fixed term

Governing Civil Code Corporation Code

4.1 PARTNERSHIP VS. CO-OWNERSHIP 
Law
PARTNERSHIP CO-OWNERSHIP

Iv. distinction of partnerships and other  Creation Created by contract Generally created by
(express or implied) law
RELATIONSHIPS
Juridical Has JP No JP
Personality
A: How do we distinguish partnership from other
types of relationship? Purpose Realization of profits Common enjoyment
and subsequent of a thing or right,
division thereof which does not
necessarily involve
4.1 PARTNERSHIP VS. GUARDIANSHIP  the sharing of profits

Duration No limitation Agreement to keep

A: Is a guardian a partner? (NO.) the thing undivided
for more than ten
GUARDIANSHIP years is not allowed
Refers to the relationship existing between guardian
and ward Disposal of May not dispose of May freely do so
interests his individual interest
in the partnership
GUARDIAN without the consent
of the other partners
One who has or is entitled or legally appointed to the
care and management of the person or estate of a minor Power to act A partner’s act may A co-owner cannot
or incompetent with 3rd bind the partnership represent the co-
persons ownership
● a guardian is ​NOT A PARTNER and a partner is
not a guardian Effect of Results to the Does not necessarily
● a guardian does not contribute money property death dissolution of the dissolve the co-
partnership ownership
or industry to a common fund for the purpose of
division of profits
● they are similar in a way that a guardian acts on v. CLASSIFICATIONS OF A CONTRACT
behalf of the ward just like a partner acts on
behalf of the partnership as agents A: How do we classify contracts?
4.2 PARTNERSHIP VS. EXECUTOR VS. 
ADMINISTRATOR  5.1. ACCORDING TO PERFECTION 
a. CONSENSUAL - ​Perfected by mere consent
A: What about an executor and administrator? b. REAL - ​Perfected by delivery
c. FORMAL OR SOLEMN - ​Those where special
EXECUTOR formalities are essential before the contract may
An Executor is nominated within the Will of a be perfected
deceased person
5.2. ACCORDING TO CAUSE 
ADMINISTRATOR
a. ONEROUS - ​Where there is an interchange of
If there is no Will, an Administrator is appointed by a
Court to manage or administer a decedent’s estate. equivalent valuable consideration
A partner is NOT an executor or administrator b. GRATUITOUS - ​One party received no
equivalent prestation except a feeling that one
neither is an executor or administrator a partner
● there is no agreement to contribute money, has been generous or liberal
property, or industry to a common fund for the c. REMUNERATIVE - ​One where one prestation is
purpose of division of profits given for a benefit or service that has been
rendered previously
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 ● EXCEPTIONS: a partnership contracts needs to
5.3. ACCORDING TO DEPENDENCE ON  observe legal formalities for its perfection when
ANOTHER CONTRACT  it:
○ involves ​REAL PROPERTY ​— it must:
a. PRINCIPAL - ​The contract may stand alone by
■ be executed in a public
itself
instrument
b. ACCESSORY - ​This depends for its existence
■ have an inventory of property
upon another contract
contributed attached to the
c. PREPARATORY - ​Parties do not consider the
public document
contract as an end by itself, but as a means thru
■ be recorded with the Register of
which future transaction or contract may be
Deeds
made
○ has a capital of ₱​3,000 OR MORE ​— it
shall it shall appear in a public
5.4. ACCORDING TO PARTIES OBLIGATED 
instrument and must be recorded in the
a. UNILATERAL - ​Only one of the parties has an Office of SEC
obligation ■ HOWEVER: a partnership has a
b. BILATERAL - ​Both parties are required to juridical personality even in
render reciprocal prestations case of failure to comply with
this requirement
5.5. ACCORDING TO NAME OR DESIGNATION  ○ falls within the ​STATUTE OF FRAUDS
2. NOMINATE - ​it has a special name or designation
a. NOMINATE - ​Contracts given a particular or
under the law, that is, contract of partnership
special name under the law
b. INNOMINATE - ​Those with special name 3. BILATERAL - it is entered into by two or more
persons and the rights and obligations arising therefrom
5.6. ACCORDING TO RISK OR FULFILLMENT  are always reciprocal
4. ONEROUS - ​each of the parties aspires to procure for
a. COMMUTATIVE - ​Parties contemplate a real himself a benefit through the giving of something
fulfillment and therefore equivalent value are 5. COMMUTATIVE - ​the undertaking of each of the
given partners is considered as the equivalent of that of the
b. ALEATORY - ​Fulfillment is dependent upon others
chance and this values vary because of the risk 6. PRINCIPAL - ​it does not depend for its existence or
of chance validity upon some other contracts
7. PREPARATORY - it is entered into as a means to an
5.7. ACCORDING TO TIME OF PERFORMANCE 
end, i.e., to engage in business or specific venture for
OR FULFILLMENT  the realization of profits with the view of dividing them
a. EXECUTED - ​One completed at the time the among the contracting parties.
contract is entered into, that is, the obligations
are compile with at this time v. principles on the law of obligations and 
b. EXECUTORY - ​One where prestations are to be contracts
complied with at some future time

A: In the law of obligations and contracts, we learn

v. CLASSIFICATION OF A CONTRACT of partnership
certain principles, could you recall what these
are?
A: How do we classify a contract of partnership?
A. MUTUALITY
ART. 1771. A partnership may be constituted in any form, except Contract must bind both contracting parties; its
where immovable property or real rights are contributed thereto, in validity or compliance cannot be left to the will of one of
which case a public instrument shall be necessary.
them (Art.1308).
1. CONSENSUAL - it is perfected by mere consent, that
is, upon the express or implied agreement of two or
more persons B. LIBERALITY

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 The contracting parties may establish such
behind three minor children ages 10, 12 and 15. At
stipulations, clauses, terms and conditions as they may
the same time, leaving the apartment units to their
deem convenient
children. Are the children partners?
● PROVIDED they are ​NOT contrary to law,
S: NO. They are merely co-owners absent an
morals, good customs, public order, or public
agreement or intent to share in the profits or engage in
policy
trade or business.

C. PRIVITY (subject to exception of stipulations pour

Illustrative example (from De Leon):
autrui)
A and B inherited from their father an apartment which
Contracts take effect only between parties, their
is leased to third persons. Are they partners? No, they
assigns and heirs
are merely co-owners of the property, whether or not
● UNLESS​, obligations arising from the contract
they share in the profits made by the lease of the
are not transmissible:
property, and not of the lease of, and not of the lease
○ by their ​NATURE​,
business itself.
○ by ​STIPULATION​ or
○ by ​PROVISION OF LAW​.
■ The heir is not liable beyond the value of
CASE;
the property he received from the Ona vs. CIR, 45 SCRA 74 [1972].
decedent. FACTS:
A and B are co-owners of inherited properties.
D. CONSENSUALITY They agreed to use the said common properties and
Contracts are perfected by mere consent and from the income derived therefrom as a common fund with
that moment, the parties are bound not only to the the intention to produce profits for them in proportion
fulfillment of what has been expressly stipulated but to their respective shares in the inheritance as
also to all consequences which, according to their determined in a project of partition.
nature, may be in keeping with good faith, usage and
law, (Art.1315) ​EXCEPT​ real and formal contracts ISSUE: What is the effect of such agreement on the
existing co-ownership?
E. OBLIGATORY FORCE
The contract has the force of law between the HELD:
parties The co-ownership is automatically converted into a
partnership. From the moment of partition, A and B, as
VI. RULES TO DETERMINE EXISTENCE OF PARTNERSHIP heirs, are entitled already to their respective definite
shares of the estate and the income thereof, for each
ART. 1769. In determining whether a partnership exists, these of them to manage and dispose of as exclusively his
rules shall apply: own without the intervention of the other heirs, and,
(1) Except as provided by article 1825, persons who are not
partners as to each other are not partners as to third persons; accordingly, he becomes liable individually for all
(2) Co-ownership or co-possession does not of itself establish a taxes in connection therewith.
partnership, whether such co-owners or copossessors do or do not
share any profits made by the use of the property; If, after such partition, an heir allows his shares to
(3) The sharing of gross returns does not of itself establish a be held in common with his co-heirs under a single
partnership, whether or not the persons sharing them have a joint or
management to be used with the intent of making
common right or interest in any property from which the returns are
derived; profit thereby in proportion to his share, there can be
(4) The receipt by a person of a share of the profits of a business no doubt that, even if no document or instrument were
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 executed for the purpose, for tax purposes, at least,
payment: an unregistered partnership is formed.
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord; ***​TN​: In order to convert a co-ownership into a partnership an
(c) As an annuity to a widow or representative agreement to use the property to engage in trade or business is
of a deceased partner; necessary. Without such agreement, the parties remain to be
(d) As interest on a loan, though the amount of payment vary with co-owners.
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. (n)
A: If apartment A needed repairs, who will pay for
the repairs? (same facts as the previous question)
A: A couple owned three apartment units and
because of COVID both of them died, leaving

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 GENERAL RULE: A contract of partnership begins the
The three co-owners are all equally liable for the
moment it perfected, that is when there is meeting
expense for the repairs. If one of the three co-owners
of the minds between the parties
advances the expense for the repairs, he may seek
reimbursement from his fellow co-owners. (Art. 488,
EXCEPTIONS: ​When Formalities are Required
Civil Code.)
1. CAPITAL WORTH ₱3,000 OR MORE - Where
the contract of partnership has a capital of
A: The tenant of Apartment C failed to pay for 3
P3,000 or more, in money or property, it shall
months. It becomes necessary for the co-owners
appear in a public instrument and must be
to file a collection case for the rentals. Who could
recorded in the Office of the Securities and
file the case? (same facts as the previous
Exchange Commission.
question)
○ FAILURE to observe formality: ​the
S: Either one of the co-owners may file the collection
partnership will still have a juridical
case since it is for the benefit of the co-ownership.
(​TN: ART. 487 provides that “Anyone of the co-owners may bring personality.
an action in ejectment.” We are not sure if the same rule applies if 2. CONTRIBUTION OF IMMOVABLES OR REAL
the action is merely for the collection of sum of money (i.e. rentals) RIGHTS - ​in this case the contract of partnership
and not yet ejectment. If you have a different answer, or another
must:
legal basis, please feel free to share so we can add it to the notes.
Thank you.) a. be in ​WRITING be in a ​PUBLIC
instrument;
b. have an inventory of the property
A: What is the difference between co-possession
contributed attached to it (meaning
or co-ownership?
attached to the public instrument);
Answer: When we talk about the right of ownership,
c. be recorded with the Register of Deeds
we have the absolute right to do whatever we want to
where the immovable is located to bind
do insofar as the thing is concerned. (Right to use, the
third persons;
fruits, to possess and the right to dispose). Right to
■ FAILURE to observe
possession is just one of the rights of the owner.
formality: T​ he partnership is
void as to the partner who
Atty: May the owner be deprived of the right to
contributed in the partnership, if
possession?
did not comply with the
S: Yes, if he leases the property to somebody else or
requirements.
he gives the right to usufruct to someone else.
3. Partnership Contracts falling within the
STATUTE OF FRAUDS​.
SEPTEMBER 15, 2020  ○ FAILURE to observe formality: ​the
contract is valid between the parties but
will be unenforceable
1772-1776 LEGEND:
“A” in italics red: Atty. Espedido’s discussion
“A” in bold red and italics: Atty. Espedido’s question
“​A​” underlined: mentioned during class recitation, the remainder is the II. CLASSIFICATION OF PARTNERSHIP 
complete information on the topic concerned
TN: ​Comments and notes of the maker
S in blue italics: Student’s answer A: How do we classify contracts of partnership?

I. Formalities in partnership  2.1 AS TO THE EXTENT OF ITS SUBJECT MATTER  

Article 1771.​ A partnership may constitute in any form, except A. UNIVERSAL partnership — one which refers to
where immovable property or real rights are contributed thereto, in all the present property or to all profits. (Art.
which case a public instrument shall be necessary. 1777);
Article 1772. Every contract of partnership having a capital of three
● Universal partnership of all PRESENT
thousand pesos or more, in money or property, shall appear in a PROPERTY — property which belongs
public instrument which must be recorded in the Office of the to each of the partners at the time of the
Securities and Exchange Commission.
constitution of the partnership, becomes
the common property of all the partners,
A: When would a contract of partnership begin?

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 as well as all the profits which they may
acquire there-with.​ ; or 2.5 ACCORDING TO REPRESENTATION TO 
● Universal partnership of PROFITS — OTHERS 
comprise the properties of the partners
acquired through work or industry and A. ORDINARY or REAL partnership — one which
the usufruct of properties (Art. 1780) actually exists among the partners and also as
B. PARTICULAR partnership — f​or its object to third persons.
determinate things, their use or fruits, or a B. OSTENSIBLE partnership or partnership by
specific undertaking, or the exercise of a ESTOPPEL — one which in reality is not a
profession or vocation. (Art. 1783); partnership, but is considered a partnership only
in relation to those who, by their conduct or
2.2 ACCORDING TO THE LIABILITY OF THE  admission, are precluded to deny or disprove its
PARTNERS:   existence. (Art. 1825.)

2.6 ACCORDING TO PUBLICITY 

A. GENERAL partnership ​— one consisting of
general partners who are liable pro rata and
subsidiarily (Art. 1816.) and sometimes solidarily A. SECRET partnership ​— one wherein the
(Arts. 1822-1824.) with their separate property existence of certain persons as partners is not
for partnership debts; or avowed or made known to the public by any of
B. LIMITED partnership — one formed by two or the partners;
B. OPEN or notorious partnership — one whose
more persons having as members one or more
existence is avowed or made known to the
general partners and one or more limited
public by the members of the firm
partners, the latter not being personally liable for
the obligations of the partnership.
2.7 ACCORDING TO PURPOSE 
2.3 ACCORDING TO ITS DURATION:  
A. COMMERCIAL or trading partnership — one
A. Partnership AT WILL ​— no time is specified formed for the transaction of business 27 (Art.
and is not formed for a particular undertaking or 1767.)
venture; may be terminated at anytime by B. PROFESSIONAL or non-trading partnership
mutual agreement of the partners, or by the will — one formed for the exercise of a profession.
of any one partner alone (Art. 1785) ; there are 2
Types of Partnership at will: A: Parents of A B and C. The Parents died of
● Partnership which, from the very start Covid. Leaving behind A B and C. At the time
Parents died they had 3 units of Apartment. Who’s
did not have a fixed period
the owner of the apartments? ​(***repeated from last
● Partnership was for a fixed period, but meeting)
partners ​decided to continue with the Answer: A B and C are co-owners of the apartments.
business AFTER the expiration of the They will bear the expenses equally and they will
agreed period, equally divide the profit.
B. Partnership with a fixed term ​— term is fixed
or agreed upon or one formed for a particular
undertaking. III. PARTNERSHIP v. CO - OWNERSHIP 
2.4 ACCORDING TO THE LEGALITY OF ITS  PARTNERSHIP CO-OWNERSHIP
EXISTENCE 
Creation By contract Created by law

A. DE JURE partnership — one which has Juridical Has juridical No juridical

complied with all the legal requirements for its Personality personality personality
establishment
B. DE FACTO partnership — one which has failed Purpose To obtain Profits Common
enjoyment of a
to comply with all the legal requirements for its
thing
establishment
AGENCY, TRUST & PARTNERSHIP (MIDTERMS) | EH405 | ATTY. ESPEDIDO | 9
Duration No limit Maximum of 10 consensual contract.
years
A: If expenses are incurred?
Disposal of Interest Partner cannot May dispose his
S: The partners would share it equally or up to the
dispose of his interest even
extent of their contribution​.
interest without the without the
consent of other consent of others
partners. A: Being partners now, how many people are we
talking about?
S: There are now four people involved.
(3) Natural persons - children
IV. RIGHTS OF THE OWNER  (1) Juridical person - partnership

Article 428.​ The owner has the right to enjoy and dispose of a
thing, without other limitations than those established by law.
V.  partnership  and  the  partners,  separate  and 
Article 441.​ To the owner belongs: distinct 
(1) The natural fruits;
(2) The industrial fruits;
(3) The civil fruits; Art 1768. The partnership has a juridical personality separate and
distinct from that of each of the partners, even in case of failure to
Article 442. Natural fruits are the spontaneous products of the soil, comply with the requirements of Art 1772, first paragraph.
and the young and other products of animals.
Industrial Fruits are those produced by lands of any kind through
cultivation or labor. 5.1 NATURAL VS. JURIDICAL PERSONS 
Civil Fruits are the rents of buildings, the price of leases of lands
and other property and the amount of perpetual or life annuities or NATURAL PERSONS are created by God, has physical
other similar income. existence, a product of procreation.

A: if you own a property, what rights do you have? JURIDICAL PERSONS ​are created by law, product of
legal fiction.
1. Right to possess (jus possidendi)
2. Right to use (jus utendi)
Both Natural and Juridical Persons enjoy rights
3. Right to dispose (just disponendi)
under the law, such as:
4. Right to the fruits (jus fruendi)
● right to own properties
A: What can a partner contribute? ● right to equal protection
A: ​He has the right to choose which rights to ● right to due process
contribute. He may contribute the right to possess, ● right against self-incrimination
use or fruits to the partnership. He may contribute all ● right against unreasonable searches and
his rights or any of his rights, if he is capable to do so. seizures
○ TN​: ​Juridical persons DO NOT have P ​ OLITICAL
A: Once he contributes all of his rights, what does rights such as the right to vote or to be voted upon.
he contribute?
S: In effect, he contributes ownership.
VI. TESTS AND INCIDENTS OF PARTNERSHIP
A: Once he contributes ownership, who is the
owner of the property? Art 1769. In determining whether a partnership exists, these rules
S: The partnership becomes the new owner. shall apply:
(1) Except as provided by Art 1825, persons who are not partners
A: Going back to our illustration where the parents as to each other are not partners as to third persons;
died from COVID, are the children co-owners or (2) Co-ownership or co-possession does not of itself establish a
partners? partnership, whether such-co-owners or co-possessors do or do not
S: They were merely co-owners. share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a
A: Could they become partners if they want? And partnership, whether or not the persons sharing them have a joint or
what should they do if they want to create a common right or interest in any property from which the returns are
partnership? derived;
S: Yes. They can become partners. But they must (4) The receipt by a person of a share of the profits of a business is
comply with the formalities because this involves an prima facie evidence that he is a partner in the business, but no
apartment which is real property. It is not a mere

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 such inference shall be drawn if such profits were received in There is co-ownership (or co-possession)
payment:
whenever the ownership (or co-possession) of an
a. As a debt by installments or otherwise;
b. As wages of an employee or rent to a landlord; undivided thing or right belongs to different persons.
c. As an annuity to a widow or representative of a deceased (Art. 484.)
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 6.2 CO-OWNERSHIP OR CO-POSSESSION PER 
business or other property by installments or otherwise. SE IS NOT A PARTNERSHIP 

A: ​There are situations wherein we would not be able

There is co-ownership (or co-possession) whenever
to determine whether they are co-owners,
the ownership (or co-possession) of an undivided thing
co-possessors, or they are partners. The law however
or right belongs to different persons. (art. 484, Civil
provides for indicators that indeed these parties are
Code)
partners.
Co-[ownership of property does not of itself establish
RULES TO DETERMINE THE EXISTENCE OF the existence of a partnership, although “co-ownership”
PARTNERSHIP is an essential element of partnership. (see Art. 1811.)
(1) Persons not partners to each other are not To transform a co-ownership into a partnership, two
partners as to third persons things must exist:
(2) Co-ownership or co-possession does not of itself ● clear ​INTENT TO DERIVE PROFITS from
establish a partnership
(3) sharing of gross returns does not of itself operation of business
establish a partnership ● a ​FIDUCIARY RELATIONSHIP
(4) receipt of share in profits is prima facie evidence
of one’s partnership in the business 6.2.1. INTENT TO PROFIT FROM OPERATION OF 
***TN: Items 1 to 3 was not discussed only item 4 was discussed. BUSINESS 
However, for future reference, we included it here.

6.1 PERSONS NOT PARTNERS TO EACH OTHER  6.2.1.1 Profit Must be Derived From Business  
ARE NOT PARTNERS AS TO THIRD PERSONS 
Two or more persons may become co-owners
GENERAL RULE: ​A partnership can never exist as to without a contract (e.g., by inheritance or by law) but
third persons if no contract of partnership, express or they cannot be partners in the absence of contract.
implied, has been entered into between the parties ● TN: ​the existence of the contract here manifests
themselves. the intent of the parties to derive profits from the
operation of a business or undertaking
EXCEPTION:​ ​Partnership by ESTOPPEL.
● THUS, where persons by their acts, consent, or This is true even though the co-owners share in the
representations have misled third persons or profits derived incident to the joint ownership
parties into believing that the former are partners ● THEREFORE, the profits must be derived from
in a non-existing partnership, such persons the operation of the business or undertaking by
become subject to liabilities of partners to all the members of the association and not merely
who, in good faith, deal with them in their from property ownership.
apparent relations. This liability is predicated on ○ A partner may transfer to the
the doctrine of estoppel provided for in Art. partnership, as his contribution, merely
1825. the use or enjoyment of a specific thing,
retaining the ownership thereof. (Art.
Illustrative example (from De Leon): 1830[4].)
If A and B are not partners as to each other, neither ■ In such case, the partners
will they be partners with respect to C, a third person. become co-owners, not of the
But if A, with the consent of B, represents to C that property, but of the right to use
they are partners, then A and B will be considered such property.
partners as to C even if they are not really partners.
Co-ownership or co-possession. 6.2.1.2  Joint  Development  or  Operation  of  a 

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 Common  Property  Does  Not  Equate  to  a  O, after completing payment to S on two lots,
Partnership  transferred his rights to his four children, C, etc. to
enable them to build their residences. S sold the two
The law does not imply a partnership between
lots for P178,708.12 to C, etc. who resold them more
co-owners or co-possessors because of the fact that
than a year later to T for P313,050, treating the profit
they develop or operate a common property, since they
of P134,341.88 as capital gains and paying an income
may rightfully do this by virtue of their respective titles. tax on one-half of their respective shares (or P33,584)
(Crondale vs. Van Boynburgk, 195 Pa. 377, cited in
of the profit.
Teller, p. 14.)
● Thus, in a case, it was held that two isolated ISSUE: Did C, etc. form a partnership under Article
transactions whereby two persons purchased
1767?
two (2) parcels of land and then another three
(3) parcels of land and sold the same a few
HELD:
years thereafter, did not thereby make them
No. (1) Division of profits was merely incidental.
partners. They were co-owners pure and simple. To consider
○ There must be a ​CLEAR INTENT to
them as partners would obliterate the distinction
form a partnership. (Pascual vs.
between a co-ownership and a partnership. C, etc.
Commission of Internal Revenue, 166 were not engaged in any joint venture by reason of
SCRA 560 [1988].)
that isolated transaction.
The original purpose was to divide the lots for
6.2.1.  EXISTENCE  OF  A  FIDUCIARY 
residential purposes. If later on they found it not
RELATIONSHIP  feasible to do so because of the high cost of
If the parties are partners in the business construction, then they had no choice but to resell the
undertaking, there is a well-defined fiduciary relationship same to dissolve the co-ownership. The division of the
between them as partners. On the other hand, if the profits was merely incidental to the dissolution of the
parties are merely co-owners, there is no fiduciary co-ownership which was, in the nature of things, a
relationship between them. temporary state. It has to be terminated sooner or
later.
If the parties are partners, the remedy for a dispute
or difference between them would be an action for CASES:
dissolution, termination, and accounting. Where the Gatchalian vs. CIR, 67 Phil. 666 [1939].
relationship is that of co-owner, the remedy would be an SUMMARY​: Two persons contributed money to buy a
action, as for instance, for non-performance of a sweepstakes ticket with the intention to divide the
contract. (Barrett & Seago, op. cit., p. 21.) prize which they may win.

Illustrative examples (from De Leon): FACTS​:

(1) ​If A and B are not partners as to each other, A, B, etc. put up money to buy a sweepstakes
neither will they be partners with respect to C, a third ticket for the sole purpose of dividing equally the prize
person. But if A, with the consent of B, represents to C which they may win as they did in fact the amount of
that they are partners, then A and B will be considered P50,000.00. If a partnership had been formed by A, B,
partners as to C even if they are not really partners. etc. then it was liable for income tax pursuant to law
Co-ownership or co-possession. then in force; if merely a community of property, then
There is co-ownership (or co-possession) such co-ownership was not liable, not having a legal
whenever the ownership (or co-possession) of an personality of its own.
undivided thing or right belongs to different persons.
(Art. 484.) ISSUE: Did A, B, etc. form a partnership or merely a
community of property?
(2) TLDR: Children sold lots given by their father and
divided the proceeds. HELD:
A, B, etc. formed a partnership. The partnership
was not only formed, but upon the organization
FACTS: thereof and the winning of the prize, it appeared that B

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 personally appeared in the office of the Philippine A: Illustrate Article 1769 4(a) as a debt by
Charity Sweepstakes, in his capacity as co-partner, installments or otherwise;
and as such collected the prize. All these B, creditor of partnership X, is entrusted by the
circumstances repel the idea that A, B, etc. organized partners to manage the business, and B shall receive,
and formed a community of property only. in addition to his compensation, a share in the net
profits of the business in settlement of his credit.
A: In other words, the party receiving a share in the
6.3 SHARE OF GROSS RETURNS PRE SE DOES 
profits is not a partner. But the share of profit that he is
NOT ESTABLISH PARTNERSHIP  receiving, is a payment of the obligation incurred by
the partnership.
GENERAL RULE: ​The mere sharing of gross returns
alone does not indicate a partnership, since in a
A: Because there’s a presumption that he is a
partnership, the partners share net profits after
partner, what do we do to rebut this?
satisfying all of the partnership’s liabilities.
S: All we have to do to rebut such presumption is to
● TN: ​There is a difference between gross return
present a copy of the promissory note.
and profits. Gross returns are the receipts
without deducting expenses. Profits are the
A: Illustrate Article 1769 4(b) As wages of an
receipts after deducting expenses. What the
employee or rent to a landlord;
partnership shares in is profits and not gross
Y, an employee of partnership X, shall receive instead
returns.
a fixed salary, or being the owner of a building rented
EXAMPLE (from De Leon): by the partnership, Y shall receive as rent a certain
A, owner of a passenger jeepney, agrees with B, a percentage of the monthly net profits of the business.
driver, that B shall have full control and use of the To rebut the prima facie evidence, you will have to
jeepney to carry passengers, pay for gasoline and oil, present the lease agreement.
and shoulder the cost of repairs, and that the gross
receipts are to be divided between them. A: Illustrate Article 1769 4(c) As an annuity to a
In this case, no partnership is established between widow or representative of a deceased partner;
A and B as no sharing of profits is contemplated. Y, the widow of a deceased partner in partnership X,
in consideration of the continuation of the business
EXCEPTION: Where, however, there is further evidence without liquidation and satisfaction of the deceased’s
of mutual management and control, a partnership interest, shall receive an annuity for a period of 5
may result, even though the agreement calls for a years based on a certain percentage of the net profits.
portion of “gross returns”
A: Illustrate Article 1769 4(d) As interest on a loan,
6.4 RECEIPTS OF SHARE IN PROFITS — PRIMA  though the amount of payment vary with the
FACIE EVIDENCE OF BEING A PARTNER  profits of the business;

GENERAL RULE: A receipt in the share of profits of a Y, creditor of partnership X, agreed that the payment
​ vidence/presumption that one is
business is ​prima facie e of interest shall be taken from the net profits to be
a partner realized by the partnership.
● A: Prima facie presumption = can be rebutted by
A: Again, there’s a loan agreement. There’s a
counter-evidence, in the absence of such, the
debtor-creditor relationship. But instead of paying the
presumption stands that the partnership exists
creditor cash for interest, the partnership might not
EXCEPTIONS: ​If profits were received in payment as have enough funds for that, they can just agree that
(a) Debt by installments the interest shall be paid out of the profits. And that’s
(b) Wages or rent not your share as a partner but that would be your
(c) Annuity of a widow or representative of a share as payment of the interest.
deceased partner
(d) Interest on a loan
A: Illustrate Article 1769 4(e) As the consideration
(e) As consideration for the sale of a goodwill of
a business for the sale of a goodwill of a business or other
property by installments or otherwise.

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Y sold property to partnership X, and he agreed that Illustrative examples (from De Leon):
the purchase price shall be paid out of the net profits FACTS​:
of the business. Dr. S, a physician, withdrew from the Overland
Medical Center(OMC), claiming that the medical
A: What is goodwill? center was a professional partnership, that he was a
A: It refers to the good name of a business partner therein prior to his withdrawal, and that he was
establishment. For example, Jollibee or McDonalds. entitled to receive his share of the partnership, OMC
When you sell these businesses, the businesses carry argued that S was not entitled to any share of the
with them the value of the goodwill. So you don’t only business enterprise because what was agreed upon
sell based on the value of the properties but also was an expense-sharing operation rather than a
include the value of your name and that’s part of the partnership, so that S was not a partner. Under the
capital. agreement, each physician at the center was paid
So if you're given a part of the share of the profits based on the doctor’s billings for the services
because there’s a sale of goodwill, then that doesn’t rendered less a percentage of those billing applied to
necessarily mean that you’re a partner. You could just the expenses of the center.
be sharing the profits out of the sale of the goodwill. In
the absence however of a proof that the share you ISSUE: ​Was there a partnership agreement involved
received was part of the sale of the goodwill then the in the operation of OMC?
presumption applies.
HELD:
Yes, OMC was a partnership and S was a partner.
A: So if you’re an employee and you’re receiving
The sharing of profits operates as prima facie
5% of the net profits as your salary, are you a
evidence of the existence of the partnership. In this
partner?
case, the doctors were sharing “profits” albeit in a
S: NO. Your interest in the partnership is that of an
strange manner. Here, the share of each doctor
employee. So what exists between you and the
allocated to expenses was in no way related to the
partnership is an employee-employer relationship. For
expenses that doctor had actually incurred. Thus,
you to be a partner, you have to have a proprietary
anyone doctor’s contribution toward expenses could
interest in the partnership.
actually help to defray the expenses of another of the
doctors. In this manner, there was a sharing of profits.
ATTY: So what’s the difference between a salary
In the absence of evidence of OMC to rebut this
and a share in the profits?
presumption, OMC is deemed to be a partnership.
A: The fact that the amount you received as your
Consequently, S is entitled to a share of the assets of
salary represents a certain percentage of the profits, it
the business. (Stewart v Overland Medical Center,
doesn’t necessarily mean that you’re already a
510 SW 2d [Mo. 1978])
partner. Whether you received a fixed amount or you
received a percentage, it all depends on your
relationship with the partnership. Were you receiving
payment as an employee for the compensation of VII. TYPES OF UNIVERSAL PARTNERSHIP
services rendered? Or were you receiving it as a
return of your contribution which is your industry? That A: How many types of universal partnership do we
should be distinguished. have?

ATTY: So if you’re invited to be a partner in a

7.1 UNIVERSAL PARTNERSHIP OF ALL PRESENT 
partnership, for the purpose of engaging in a
shabu business. You agreed to contribute PROPERTIES 
PHP5,000,000 for the business. Is there a UNIVERSAL PARTNERSHIP OF ALL PRESENT
partnership? PROPERTY
S: NO. The object of the partnership is to sell That in which the partners contribute all the
drugs/shabu, That’s against the law. If the object is property which actually belongs to them to a common
unlawful, then the partnership can’t be considered fund, with the intention of dividing the same among
existing. themselves, as well as all the profits they may acquire
therewith ​(Article 1778 of the Civil Code)

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 A: In a universal partnership of all properties, a future property. (JIC Atty. might ask a student to differentiate the
two types of future properties in the recap)
again what are included?

As provided in Article 1778, universal partnership of all

present property consists of:
● all the present properties that actually belong to READ UP TO ARTICLE 1787
the partners
● as well as the profits they may acquire therewith.

7.2 UNIVERSAL PARTNERSHIP OF ALL PROFITS 

UNIVERSAL PARTNERSHIP OF PROFITS

That which comprises all that the partners may
acquire by their industry or work during the existence of
the partnership ​(Article 1780 of the Civil Code)

A: Going back to the previous illustration, the

apartments which the children said they will form
a partnership, what kind of partnership did they
enter into?

Answer: To determine the kind of partnership agreement

entered into:
● first identify if the parties expressly agree upon
the specific kind of partnership.
● HOWEVER, if there is difficulty in determining
their intention and in the absence of any express
agreement, the law presumes that they have
entered into a universal partnership of all profits
(UPAP). ​(​TN:​ ​This is based sa ELA notes)

A: I thought the law says except property acquired

by inheritance? In the given example where the
properties contributed were inherited property,
was there valid partnership?
S: Yes, there is a valid partnership. What is prohibited
is the contribution of a property yet to be inherited by
any of the partners as it pertains to a future property,
which, as a rule, cannot be contributed. However, in
this case, the property has already been acquired by
the partners given that their parents already died, so
that by virtue of their right to succession, the said
properties are already the partners’ present
properties.

***​TN​: While the answer is correct, you might want to know that for
purposes of the discussion, Atty. is referring to art. 1779(2) which
states 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 stipulation, except the fruits thereof.”
Under said provision, the rule is that subsequent profits, which is a
future property, can be contributed to the partnership but
subsequent inheritance cannot be contributed even though it is also

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