■ FAILURE to observe

SEPTEMBER 15, 2020  formality: ​The partnership is

void as to the partner who
1772-1776 LEGEND: contributed in the partnership, if
“A” in italics red: Atty. Espedido’s discussion did not comply with the
“A” in bold red and italics: Atty. Espedido’s question requirements.
“​A​” underlined: mentioned during class recitation, the remainder is the
3. Partnership Contracts falling within the
complete information on the topic concerned
TN: ​Comments and notes of the maker STATUTE OF FRAUDS​.
S in blue italics: Student’s answer ○ FAILURE to observe formality: t​ he
contract is valid between the parties but
will be unenforceable
I. Formalities in partnership 

Article 1771.​ A partnership may constitute in any form, except II. CLASSIFICATION OF PARTNERSHIP 
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary.
A: How do we classify contracts of partnership?
Article 1772. Every contract of partnership having a capital of three
thousand pesos or more, in money or property, shall appear in a
public instrument which must be recorded in the Office of the 2.1 AS TO THE EXTENT OF ITS SUBJECT MATTER  
Securities and Exchange Commission.

A. UNIVERSAL partnership — one which refers to

all the present property or to all profits. (Art.
A: When would a contract of partnership begin? 1777);
● Universal partnership of all PRESENT
GENERAL RULE: A contract of partnership begins the PROPERTY — property which belongs
moment it perfected, that is when there is meeting to each of the partners at the time of the
of the minds between the parties constitution of the partnership, becomes
the common property of all the partners,
EXCEPTIONS: ​When Formalities are Required as well as all the profits which they may
1. CAPITAL WORTH ₱3,000 OR MORE - Where acquire there-with.​ ; or
the contract of partnership has a capital of ● Universal partnership of PROFITS —
P3,000 or more, in money or property, it shall comprise the properties of the partners
appear in a public instrument and must be acquired through work or industry and
recorded in the Office of the Securities and the usufruct of properties (Art. 1780)
Exchange Commission. B. PARTICULAR partnership — f​or its object
○ FAILURE to observe formality: ​the determinate things, their use or fruits, or a
partnership will still have a juridical specific undertaking, or the exercise of a
personality. profession or vocation. (Art. 1783);
2. CONTRIBUTION OF IMMOVABLES OR REAL
RIGHTS - ​in this case the contract of partnership 2.2 ACCORDING TO THE LIABILITY OF THE 
must:
PARTNERS:  
a. be in ​WRITING be in a ​PUBLIC
instrument;
b. have an inventory of the property A. GENERAL partnership ​— one consisting of
contributed attached to it (meaning general partners who are liable pro rata and
attached to the public instrument); subsidiarily (Art. 1816.) and sometimes solidarily
c. be recorded with the Register of Deeds (Arts. 1822-1824.) with their separate property
where the immovable is located to bind for partnership debts; or
third persons; B. LIMITED partnership — one formed by two or
more persons having as members one or more

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

 general partners and one or more limited
partners, the latter not being personally liable for 2.6 ACCORDING TO PUBLICITY 
the obligations of the partnership.
A. SECRET partnership ​— one wherein the
2.3 ACCORDING TO ITS DURATION:   existence of certain persons as partners is not
avowed or made known to the public by any of
the partners;
A. Partnership AT WILL ​— no time is specified
B. OPEN or notorious partnership — one whose
and is not formed for a particular undertaking or
existence is avowed or made known to the
venture; may be terminated at anytime by
public by the members of the firm
mutual agreement of the partners, or by the will
of any one partner alone (Art. 1785) ; there are 2
Types of Partnership at will: 2.7 ACCORDING TO PURPOSE 
● Partnership which, from the very start
did not have a fixed period
A. COMMERCIAL or trading partnership — one
● Partnership was for a fixed period, but
formed for the transaction of business 27 (Art.
partners ​decided to continue with the
1767.)
business AFTER the expiration of the
B. PROFESSIONAL or non-trading partnership
agreed period,
— one formed for the exercise of a profession.
B. Partnership with a fixed term ​— term is fixed
or agreed upon or one formed for a particular A: Parents of A B and C. The Parents died of
undertaking. Covid. Leaving behind A B and C. At the time
Parents died they had 3 units of Apartment. Who’s
2.4 ACCORDING TO THE LEGALITY OF ITS  the owner of the apartments? (​ ***repeated from last
meeting)
EXISTENCE 
Answer: A B and C are co-owners of the apartments.
They will bear the expenses equally and they will
A. DE JURE partnership — one which has equally divide the profit.
complied with all the legal requirements for its
establishment
B. DE FACTO partnership — one which has failed III. PARTNERSHIP v. CO - OWNERSHIP 
to comply with all the legal requirements for its
establishment
PARTNERSHIP CO-OWNERSHIP

2.5 ACCORDING TO REPRESENTATION TO  Creation By contract Created by law

OTHERS 
Juridical Has juridical No juridical
Personality personality personality
A. ORDINARY or REAL partnership — one which
actually exists among the partners and also as Purpose To obtain Profits Common
to third persons. enjoyment of a
thing
B. OSTENSIBLE partnership or partnership by
ESTOPPEL — one which in reality is not a Duration No limit Maximum of 10
partnership, but is considered a partnership only years
in relation to those who, by their conduct or
admission, are precluded to deny or disprove its Disposal of Interest Partner cannot May dispose his
dispose of his interest even
existence. (Art. 1825.) interest without the without the
consent of other consent of others
partners.

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

IV. RIGHTS OF THE OWNER  A: Being partners now, how many people are we
talking about?
S: There are now four people involved.
Article 428.​ The owner has the right to enjoy and dispose of a (3) Natural persons - children
thing, without other limitations than those established by law.
(1) Juridical person - partnership

Article 441.​ To the owner belongs:

(1) The natural fruits;
(2) The industrial fruits;
(3) The civil fruits;
V.  partnership  and  the  partners,  separate  and 
distinct 
Article 442. Natural fruits are the spontaneous products of the soil,
and the young and other products of animals.
Industrial Fruits are those produced by lands of any kind through Art 1768. The partnership has a juridical personality separate and
cultivation or labor. distinct from that of each of the partners, even in case of failure to
Civil Fruits are the rents of buildings, the price of leases of lands comply with the requirements of Art 1772, first paragraph.
and other property and the amount of perpetual or life annuities or
other similar income.
5.1 NATURAL VS. JURIDICAL PERSONS 
A: if you own a property, what rights do you have? NATURAL PERSONS are created by God, has physical
existence, a product of procreation.
1. Right to possess (jus possidendi)
2. Right to use (jus utendi)
JURIDICAL PERSONS ​are created by law, product of
3. Right to dispose (just disponendi)
legal fiction.
4. Right to the fruits (jus fruendi)

A: What can a partner contribute? Both Natural and Juridical Persons enjoy rights
A: H ​ e has the right to choose which rights to under the law, such as:
contribute. He may contribute the right to possess, ● right to own properties
use or fruits to the partnership. He may contribute all ● right to equal protection
his rights or any of his rights, if he is capable to do so.
● right to due process
● right against self-incrimination
A: Once he contributes all of his rights, what does
he contribute? ● right against unreasonable searches and
S: In effect, he contributes ownership. seizures
○ TN​: ​Juridical persons DO NOT have P ​ OLITICAL
A: Once he contributes ownership, who is the rights such as the right to vote or to be voted upon.
owner of the property?
S: The partnership becomes the new owner. VI. TESTS AND INCIDENTS OF PARTNERSHIP
A: Going back to our illustration where the parents
Art 1769. In determining whether a partnership exists, these rules
died from COVID, are the children co-owners or shall apply:
partners? (1) Except as provided by Art 1825, persons who are not partners
S: They were merely co-owners. as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a
A: Could they become partners if they want? And partnership, whether such-co-owners or co-possessors do or do not
what should they do if they want to create a share any profits made by the use of the property;
partnership?
(3) The sharing of gross returns does not of itself establish a
S: Yes. They can become partners. But they must
partnership, whether or not the persons sharing them have a joint or
comply with the formalities because this involves an
common right or interest in any property from which the returns are
apartment which is real property. It is not a mere derived;
consensual contract.
(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
A: If expenses are incurred?
such inference shall be drawn if such profits were received in
S: The partners would share it equally or up to the payment:
extent of their contribution.​ a. As a debt by installments or otherwise;

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 b. As wages of an employee or rent to a landlord; partners as to C even if they are not really partners.
c. As an annuity to a widow or representative of a deceased
Co-ownership or co-possession.
partner;
d. As interest on a loan, though the amount of payment vary There is co-ownership (or co-possession)
with the profits of the business; whenever the ownership (or co-possession) of an
e. As the consideration for the sale of a goodwill of a undivided thing or right belongs to different persons.
business or other property by installments or otherwise.
(Art. 484.)

​ here are situations wherein we would not be able

A: T
to determine whether they are co-owners, 6.2 CO-OWNERSHIP OR CO-POSSESSION PER 
co-possessors, or they are partners. The law however
SE IS NOT A PARTNERSHIP 
provides for indicators that indeed these parties are
partners.
There is co-ownership (or co-possession) whenever
RULES TO DETERMINE THE EXISTENCE OF the ownership (or co-possession) of an undivided thing
PARTNERSHIP
or right belongs to different persons. (art. 484, Civil
(1) Persons not partners to each other are not
Code)
partners as to third persons
(2) Co-ownership or co-possession does not of itself Co-[ownership of property does not of itself establish
establish a partnership the existence of a partnership, although “co-ownership”
(3) sharing of gross returns does not of itself is an essential element of partnership. (see Art. 1811.)
establish a partnership To transform a co-ownership into a partnership, two
(4) receipt of share in profits is prima facie evidence things must exist:
of one’s partnership in the business
● clear ​INTENT TO DERIVE PROFITS from
***TN: Items 1 to 3 was not discussed only item 4 was discussed.
However, for future reference, we included it here. operation of business
● a ​FIDUCIARY RELATIONSHIP
6.1 PERSONS NOT PARTNERS TO EACH OTHER 
ARE NOT PARTNERS AS TO THIRD PERSONS  6.2.1. INTENT TO PROFIT FROM OPERATION OF 
BUSINESS 
GENERAL RULE: ​A partnership can never exist as to
third persons if no contract of partnership, express or 6.2.1.1 Profit Must be Derived From Business  
implied, has been entered into between the parties
themselves. Two or more persons may become co-owners
without a contract (e.g., by inheritance or by law) but
EXCEPTION:​ ​Partnership by ESTOPPEL. they cannot be partners in the absence of contract.
● THUS, where persons by their acts, consent, or ● TN: ​the existence of the contract here manifests
representations have misled third persons or the intent of the parties to derive profits from the
parties into believing that the former are partners operation of a business or undertaking
in a non-existing partnership, such persons
become subject to liabilities of partners to all This is true even though the co-owners share in the
who, in good faith, deal with them in their profits derived incident to the joint ownership
apparent relations. This liability is predicated on ● THEREFORE, the profits must be derived from
the doctrine of estoppel provided for in Art. the operation of the business or undertaking by
1825. the members of the association and not merely
Illustrative example (from De Leon): from property ownership.
If A and B are not partners as to each other, neither ○ A partner may transfer to the
will they be partners with respect to C, a third person. partnership, as his contribution, merely
But if A, with the consent of B, represents to C that the use or enjoyment of a specific thing,
they are partners, then A and B will be considered retaining the ownership thereof. (Art.
1830[4].)

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 ■ In such case, the partners
There is co-ownership (or co-possession)
become co-owners, not of the
whenever the ownership (or co-possession) of an
property, but of the right to use
undivided thing or right belongs to different persons.
such property.
(Art. 484.)
6.2.1.2  Joint  Development  or  Operation  of  a 
(2) TLDR: Children sold lots given by their father and
Common  Property  Does  Not  Equate  to  a 
divided the proceeds.
Partnership 
-The law does not imply a partnership between FACTS:
co-owners or co-possessors because of the fact that O, after completing payment to S on two lots,
they develop or operate a common property, since they transferred his rights to his four children, C, etc. to
may rightfully do this by virtue of their respective titles. enable them to build their residences. S sold the two
(Crondale vs. Van Boynburgk, 195 Pa. 377, cited in lots for P178,708.12 to C, etc. who resold them more
Teller, p. 14.) than a year later to T for P313,050, treating the profit
● Thus, in a case, it was held that two isolated of P134,341.88 as capital gains and paying an income
transactions whereby two persons purchased tax on one-half of their respective shares (or P33,584)
two (2) parcels of land and then another three of the profit.
(3) parcels of land and sold the same a few
years thereafter, did not thereby make them ISSUE: Did C, etc. form a partnership under Article
partners. 1767?
○ There must be a ​CLEAR INTENT to
form a partnership. (Pascual vs. HELD:
Commission of Internal Revenue, 166 No. (1) Division of profits was merely incidental.
SCRA 560 [1988].) They were co-owners pure and simple. To consider
them as partners would obliterate the distinction
6.2.1.  EXISTENCE  OF  A  FIDUCIARY  between a co-ownership and a partnership. C, etc.
RELATIONSHIP  were not engaged in any joint venture by reason of
that isolated transaction.
If the parties are partners in the business
The original purpose was to divide the lots for
undertaking, there is a well-defined fiduciary relationship
residential purposes. If later on they found it not
between them as partners. On the other hand, if the
feasible to do so because of the high cost of
parties are merely co-owners, there is no fiduciary
construction, then they had no choice but to resell the
relationship between them.
same to dissolve the co-ownership. The division of the
profits was merely incidental to the dissolution of the
If the parties are partners, the remedy for a dispute
co-ownership which was, in the nature of things, a
or difference between them would be an action for
temporary state. It has to be terminated sooner or
dissolution, termination, and accounting. Where the
later.
relationship is that of co-owner, the remedy would be an
action, as for instance, for non-performance of a
CASES:
contract. (Barrett & Seago, op. cit., p. 21.)
Gatchalian vs. CIR, 67 Phil. 666 [1939].
Illustrative examples (from De Leon): SUMMARY​: Two persons contributed money to buy a
(1) ​If A and B are not partners as to each other, sweepstakes ticket with the intention to divide the
neither will they be partners with respect to C, a third prize which they may win.
person. But if A, with the consent of B, represents to C
that they are partners, then A and B will be considered
partners as to C even if they are not really partners.
Co-ownership or co-possession. FACTS​:

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 may result, even though the agreement calls for a
A, B, etc. put up money to buy a sweepstakes
portion of “gross returns”
ticket for the sole purpose of dividing equally the prize
which they may win as they did in fact the amount of
6.4 RECEIPTS OF SHARE IN PROFITS — PRIMA 
P50,000.00. If a partnership had been formed by A, B,
etc. then it was liable for income tax pursuant to law FACIE EVIDENCE OF BEING A PARTNER 
then in force; if merely a community of property, then GENERAL RULE: A receipt in the share of profits of a
such co-ownership was not liable, not having a legal ​ vidence/presumption that one is
business is ​prima facie e
personality of its own. a partner
● A: Prima facie presumption = can be rebutted by
ISSUE: Did A, B, etc. form a partnership or merely a counter-evidence, in the absence of such, the
community of property? presumption stands that the partnership exists

EXCEPTIONS: ​If profits were received in payment as

HELD: (a) Debt by installments
A, B, etc. formed a partnership. The partnership (b) Wages or rent
was not only formed, but upon the organization (c) Annuity of a widow or representative of a
thereof and the winning of the prize, it appeared that B deceased partner
personally appeared in the office of the Philippine (d) Interest on a loan
Charity Sweepstakes, in his capacity as co-partner, (e) As consideration for the sale of a goodwill of
a business
and as such collected the prize. All these
circumstances repel the idea that A, B, etc. organized A: Illustrate Article 1769 4(a) as a debt by
and formed a community of property only. installments or otherwise;
B, creditor of partnership X, is entrusted by the
partners to manage the business, and B shall receive,
6.3 SHARE OF GROSS RETURNS PRE SE DOES  in addition to his compensation, a share in the net
NOT ESTABLISH PARTNERSHIP  profits of the business in settlement of his credit.

GENERAL RULE: ​The mere sharing of gross returns A: In other words, the party receiving a share in the
alone does not indicate a partnership, since in a profits is not a partner. But the share of profit that he is
partnership, the partners share net profits after receiving, is a payment of the obligation incurred by
satisfying all of the partnership’s liabilities. the partnership.
● TN: ​There is a difference between gross return
and profits. Gross returns are the receipts A: Because there’s a presumption that he is a
partner, what do we do to rebut this?
without deducting expenses. Profits are the
receipts after deducting expenses. What the S: All we have to do to rebut such presumption is to
partnership shares in is profits and not gross present a copy of the promissory note.
returns.
A: Illustrate Article 1769 4(b) As wages of an
EXAMPLE (from De Leon): employee or rent to a landlord;
A, owner of a passenger jeepney, agrees with B, a Y, an employee of partnership X, shall receive instead
driver, that B shall have full control and use of the a fixed salary, or being the owner of a building rented
jeepney to carry passengers, pay for gasoline and oil, by the partnership, Y shall receive as rent a certain
and shoulder the cost of repairs, and that the gross percentage of the monthly net profits of the business.
receipts are to be divided between them. To rebut the prima facie evidence, you will have to
In this case, no partnership is established between present the lease agreement.
A and B as no sharing of profits is contemplated.
A: Illustrate Article 1769 4(c) As an annuity to a
EXCEPTION: Where, however, there is further evidence
widow or representative of a deceased partner;
of mutual management and control, a partnership

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Y, the widow of a deceased partner in partnership X, S: NO. Your interest in the partnership is that of an
in consideration of the continuation of the business employee. So what exists between you and the
without liquidation and satisfaction of the deceased’s partnership is an employee-employer relationship. For
interest, shall receive an annuity for a period of 5 you to be a partner, you have to have a proprietary
years based on a certain percentage of the net profits. interest in the partnership.

A: Illustrate Article 1769 4(d) As interest on a loan, ATTY: So what’s the difference between a salary
though the amount of payment vary with the and a share in the profits?
profits of the business; A: The fact that the amount you received as your
Y, creditor of partnership X, agreed that the payment salary represents a certain percentage of the profits, it
of interest shall be taken from the net profits to be doesn’t necessarily mean that you’re already a
realized by the partnership. partner. Whether you received a fixed amount or you
received a percentage, it all depends on your
A: Again, there’s a loan agreement. There’s a
relationship with the partnership. Were you receiving
debtor-creditor relationship. But instead of paying the
payment as an employee for the compensation of
creditor cash for interest, the partnership might not
services rendered? Or were you receiving it as a
have enough funds for that, they can just agree that
return of your contribution which is your industry? That
the interest shall be paid out of the profits. And that’s
should be distinguished.
not your share as a partner but that would be your
share as payment of the interest.
ATTY: So if you’re invited to be a partner in a
partnership, for the purpose of engaging in a
A: Illustrate Article 1769 4(e) As the consideration
shabu business. You agreed to contribute
for the sale of a goodwill of a business or other
PHP5,000,000 for the business. Is there a
property by installments or otherwise.
partnership?
Y sold property to partnership X, and he agreed that
S: NO. The object of the partnership is to sell
the purchase price shall be paid out of the net profits
drugs/shabu, That’s against the law. If the object is
of the business.
unlawful, then the partnership can’t be considered
A: What is goodwill? existing.
A: It refers to the good name of a business
Illustrative examples (from De Leon):
establishment. For example, Jollibee or McDonalds.
FACTS​:
When you sell these businesses, the businesses carry
Dr. S, a physician, withdrew from the Overland
with them the value of the goodwill. So you don’t only
Medical Center(OMC), claiming that the medical
sell based on the value of the properties but also
center was a professional partnership, that he was a
include the value of your name and that’s part of the
partner therein prior to his withdrawal, and that he was
capital.
entitled to receive his share of the partnership, OMC
So if you're given a part of the share of the profits argued that S was not entitled to any share of the
because there’s a sale of goodwill, then that doesn’t business enterprise because what was agreed upon
necessarily mean that you’re a partner. You could just was an expense-sharing operation rather than a
be sharing the profits out of the sale of the goodwill. In partnership, so that S was not a partner. Under the
the absence however of a proof that the share you agreement, each physician at the center was paid
received was part of the sale of the goodwill then the based on the doctor’s billings for the services
presumption applies. rendered less a percentage of those billing applied to
the expenses of the center.
A: So if you’re an employee and you’re receiving
5% of the net profits as your salary, are you a ISSUE: ​Was there a partnership agreement involved
partner? in the operation of OMC?

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 HELD: A: Going back to the previous illustration, the
Yes, OMC was a partnership and S was a partner. apartments which the children said they will form
The sharing of profits operates as prima facie a partnership, what kind of partnership did they
evidence of the existence of the partnership. In this enter into?
case, the doctors were sharing “profits” albeit in a
strange manner. Here, the share of each doctor Answer: To determine the kind of partnership agreement
allocated to expenses was in no way related to the entered into:
expenses that doctor had actually incurred. Thus, ● first identify if the parties expressly agree upon
anyone doctor’s contribution toward expenses could the specific kind of partnership.
actually help to defray the expenses of another of the ● HOWEVER, if there is difficulty in determining
doctors. In this manner, there was a sharing of profits. their intention and in the absence of any express
In the absence of evidence of OMC to rebut this agreement, the law presumes that they have
presumption, OMC is deemed to be a partnership. entered into a universal partnership of all profits
Consequently, S is entitled to a share of the assets of (UPAP). ​(​TN:​ ​This is based sa ELA notes)
the business. (Stewart v Overland Medical Center,
510 SW 2d [Mo. 1978]) A: I thought the law says except property acquired
by inheritance? In the given example where the
properties contributed were inherited property,
VII. TYPES OF UNIVERSAL PARTNERSHIP 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
A: How many types of universal partnership do we
any of the partners as it pertains to a future property,
have?
which, as a rule, cannot be contributed. However, in
this case, the property has already been acquired by
7.1 UNIVERSAL PARTNERSHIP OF ALL PRESENT  the partners given that their parents already died, so
PROPERTIES  that by virtue of their right to succession, the said
properties are already the partners’ present
UNIVERSAL PARTNERSHIP OF ALL PRESENT properties.
PROPERTY
That in which the partners contribute all the ***​TN​: While the answer is correct, you might want to know that for
property which actually belongs to them to a common purposes of the discussion, Atty. is referring to art. 1779(2) which
states that “A stipulation for the common enjoyment of any other
fund, with the intention of dividing the same among
profits may also be made; but the property which the partners may
themselves, as well as all the profits they may acquire acquire subsequently by inheritance, legacy, or donation cannot be
therewith ​(Article 1778 of the Civil Code) included in such stipulation, except the fruits thereof.”

A: In a universal partnership of all properties, Under said provision, the rule is that subsequent profits, which is a
future property, can be contributed to the partnership but
again what are included? subsequent inheritance cannot be contributed even though it is also
a future property. (JIC Atty. might ask a student to differentiate the
As provided in Article 1778, universal partnership of all two types of future properties in the recap)
present property consists of:
● all the present properties that actually belong to
the partners
● as well as the profits they may acquire therewith.
READ UP TO ARTICLE 1787

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)

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