c. Obligations of Partners Among Themselves

What May Be Contributed

Contribution must be in equal shares unless otherwise stipulated. (Art. 1790)¹

Consent/Ratification of All Limited Partners Needed

• Any act in contravention of the certificate
• Any act which would make it impossible to carry on the ordinary business of the partnership
• Confess judgment against partnership
• Possess partnership property/assign rights in specific partnership property other than for partnership purposes
• Admit person as general partner
• Admit person as limited partner - unless authorized in certificate
• Continue business with partnership property on death, retirement, civil interdiction, insanity, or insolvency of a general partner unless authorized in certificate (Art. 1850)²

(a) Money

Failure to contribute promised money makes the promissory-partner liable for the amount promised including the interest due and damages arising from the time he should have complied with his or her undertaking. (Arts. 1786, par. 1, and 1788³)

If there is fraud or misrepresentation, action for rescission may be filed, and the party entitled to rescind, without prejudice to any other right, has the right to:

• Lien on, or right of retention over, the surplus of partnership property after satisfying partnership liabilities to third persons (for any sum paid by the injured partner for the purchase of an interest in the partnership and for any capital or advances contributed by the latter)
• Stand in place of creditors of the partnership for any payments made by the injured partner in respect of partnership liabilities, after all liabilities to third persons have been satisfied
• Indemnity by the guilty partner against all partnership debts and liabilities (Art. 1838⁴); relate to Art. 1831⁵: with or without fraud or misrepresentation, injured partner may seek judicial dissolution

(b) Property

May include intangible or incorporeal (e.g. credit). (Lim v. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, 3 November 1999)⁶

Liable for fruits from the time property should have been delivered without need of demand; also include obligation to preserve the promised property with the diligence of a good father of a family pending delivery. (Art. 1786⁷ [1] and [2])

Requisites for Return of Contribution of Limited Partner

• All partnership liabilities, except liabilities to general partners and limited partners on account of their contributions, have been paid or sufficient partnership property remains to pay them
• Consent of all members has been obtained, unless the return of the contribution may be rightfully demanded under Article 1857
• Certificate is cancelled/amended as to set forth withdrawal /reduction of contribution (Art. 1857)⁸

(c) Industry

May concur with any or both of the first two or in the absence of any one or both of them; manual and/or intellectual in consideration of share in the profits; hence, as generally, partners are not entitled to charge each other. (Marsh’s Appeal, G.R. No. 69 Pa. St. 30)⁹

Every partner is bound to work to the extent of his ability for the benefit of the whole, without regard to the services of his co-partners, and without comparison of value; for services to the firm cannot, from their very nature, be estimated and equalized by compensation of differences. (Beatty v. Wray, G.R. No. 7 Harris 519)¹⁰

But: A partner who has agreed to render special service to the partnership, for the performance of which he is qualified, and which is one of the inducements for the other members to enter the partnership, was found liable civilly to account for the value of such service upon a finding that he wrongfully refused to perform such service.

But then again: Specific performance not available due to constitutional prohibition against involuntary servitude.

A limited partner’s contribution may be cash or property, but not services (Art. 1845)¹¹. An attempted contribution of services does not, by itself, establish general-partner status or personal liability.

Liabilities of A Limited Partner

• To the Partnership
• For the difference between his contribution as actually made and that stated in the certificate as having been made, and
• For any unpaid contribution which he agreed in the certificate to make in the future time (Art. 1858)¹²
• As a Trustee for the Partnership
• For the specific property stated in the certificate as contributed by him but which he had not contributed;
• For the specific property of the partnership which had been wrongfully returned to him; and
• Money or other property wrongfully paid or conveyed to him on account of his contribution. (Art. 1858)

Consequence of Failure to Contribute

Each partner has the obligation:

• To contribute at the beginning of the partnership or at the stipulated time the money, property or industry which he may have promised to contribute. (Art. 1786)¹³
• To answer for eviction in case the partnership is deprived of the determinate property contributed (Art. 1786)
• To answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they should have been contributed up to the time of actual delivery (Art. 1786)
• To preserve said property with the diligence of a good father of a family pending delivery to partnership (Art. 1163)¹⁴
• To indemnify partnership for any damage caused to it by the retention of the same or by the delay in its contribution (Arts. 1788¹⁵, 1170)

In the event that there is a failure to contribute property promised:

• Partners become ipso jure a debtor of the partnership even in the absence of any demand (Art. 1169[1])¹⁶
• The partnership may demand performance and applicable damages from the defaulting partner (Arts. 1786, 1170)¹⁷

In the event that there is a failure to contribute money promised:

• To contribute on the date fixed the amount he has undertaken to contribute to the partnership
• To reimburse any amount he may have taken from the partnership coffers and converted to his own use
• To pay for the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from the common fund and converts it to his own use
• To indemnify the partnership for the damages caused to it by delay in the contribution or conversion of any sum for his personal benefit (Art. 1788)

A partner who promises to contribute to partnership becomes a promissory debtor of the partnership, including liability for interests and damages caused for failure to pay, and which amounts may be deducted upon dissolution of the partnership from his share in the profits and net assets. (Rojas v. Maglana, G.R. No. 30616)¹⁸

Obligations with respect to Contribution to Partnership Capital

Partners must contribute equal shares to the capital of the partnership unless there is stipulation to contrary. (Art. 1790)¹⁹

If a majority of the capitalist partners considers an additional contribution necessary to save the business from imminent loss, a capitalist partner who refuses to contribute must sell his interest to the other partners, unless there is an agreement to the contrary. (Art. 1791)

Requisites:

• There is an imminent loss of the business of the partnership
• The majority of the capitalist partners are of the opinion that an additional contribution to the common fund would save the business
• There is no agreement to the contrary

Fiduciary Duty

A partnership is a fiduciary relation—one entered into and to be maintained on the basis of trust and confidence. With that, a partner must observe the utmost good faith, fairness, and integrity in his dealings with the others:

• He cannot directly or indirectly use partnership assets for his own benefit;
• He cannot carry on a business of the partnership for his private advantage;
• He cannot, in conducting the business of the partnership, take any profit clandestinely;
• He cannot obtain for himself that which he should have obtained for the partnership (e.g. business opportunity)
• A capitalist partner cannot engage for his own account in an operation of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary; an industrial partner cannot engage in business for himself unless the partnership expressly permits it (Civil Code, Arts. 1789 and 1808); and
• He cannot avail himself of knowledge or information, which may be properly regarded as the property of the partnership.

Prohibition to Engage in Competitive Business

If an industrial partner engages in any business

• He can be excluded from the partnership; or
• The capitalist partners can avail of the benefit he obtained from the business; or
• The capitalist partners have the right to file an action for damages against the industrial partner, in either case. (Art. 1789)²⁰

If the capitalist partner engages in a business (which competes with the business of the partnership)

• He must bring to the common funds the profits accruing from the prohibited transactions and personally bear all their losses. (Art. 1808)²¹

As a rule, an industrial partner may not engage in any business during the existence of the partnership, unless the capitalist partners expressly permit him to do so (Art. 1789). The reason is that his industry must be given only to the partnership. This is true even if the business is not competitive. (Albano Civil Law Reviewer, p. 822, 2008 ed.)

When a partner engages in a separate business enterprise that is competitive with that of the partnership, the other partner’s withdrawal becomes thereby justified and for which the latter cannot be held for damages. (Rojas v. Maglana, G.R. No. 30616)²²

Managing Partner who Collects Debt from Third Party

Obligation of a managing partner who collects debt from person who also owed the partnership (Art. 1792²³):

• Apply sum collected to 2 credits in proportion to their amounts.
• If he received it for the account of partnership, the whole sum shall be applied to partnership credit.

Requisites:

• There exist at least two debts, one where the collecting partner is creditor and the other, where the partnership is the creditor
• Both debts are demandable
• The partner who collects is authorized to manage and actually manages the partnership

Partner who Receives Share of Partnership Credit

Obligation of partner who receives share of partnership credit:

Obliged to bring to the partnership capital what he has received even though he may have given receipt for his share only (Art. 1793)²⁴

Requisites:

• A partner has received in whole or in part, his share of the partnership credit
• The other partners have not collected their shares
• The partnership debtor has become insolvent

Rules for Distribution of Profits and Losses (Art. 1797)

NOTE: A stipulation which excludes one or more partners from any share in the profits or losses is void. (Art. 1799)²⁶

Management