ARTICLE 1797.

(Division of Profit and Loss)

The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been
agreed upon, the share of each in the losses shall be in the same
proportion. In the absence of stipulation, the share of each partner
in the profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his services he has contributed capital, he shall also receive
a share in the profits in proportion to his capital. (1689a)
Rules For Distribution of Profits and Losses.

This article and the two succeeding ones regulate the distribution of profits
and losses among the partners.

They do not refer to the liability of the partners to third persons which is
governed by Article 1816.

(1) Distribution of profits:

a. The partners share the profits according to their agreement subject to
Article 1799.
b. If there is no such agreement:
i. The share of each capitalist partner shall be in proportion to his
capital contribution. This rule is based on the presumed will of
the partners.
ii. The industrial partner shall receive such share, which must be
satisfied first before the capitalist partners shall divide the
profits, as may be just and equitable under the circumstances.
The share of an industrial partner in the profi ts is not fi xed, as in the case of
the capitalist partners, as it is very diffi cult to ascertain the value of the
services of a person. Under the Code of Commerce, the industrial partner
was “placed in the distribution in the same position as the capitalist partner
having the smallest interest.”

In a case, where two brothers engaged in a business venture, with one

furnishing the capital and the other contributing his industry, the Supreme
Court ruled that “Justice and equity dictate that the two share equally the
fruit of their joint investment and efforts,” because it was through the
“industry and geniuses” of the industrial partner that the property of the
venture was developed and improved into a valuable asset worth more than
P22 million.
A partner is entitled to receive only his share of the profi ts actually realized
by the venture. Even when an assurance was made by a partner that they
would earn a huge amount of profi ts, in the absence of fraud, the other
partner cannot claim a right to recover the profi ts promised where the
business was highly speculative and turned out to be a failure. Hidden risks
in any business venture have to be considered.

(2) Distribution of losses:

a. The losses shall be distributed according to their agreement subject to
Article 1799.
b. If there is no such agreement, but the contract provides for the share
of the partners in the profi ts, the share of each in the losses shall be in
accordance with the profi t-sharing ratio, but the industrial partner
shall not be liable for losses. The profi ts or losses of the partnership
cannot be determined by taking into account the result of one
particular transaction but of all the transactions had.
c. If there is also no profi t-sharing stipulated in the contract, then losses
shall be borne by the partners in proportion to their capital
contributions, but the purely industrial partner shall not be liable for
the losses.
__
Rules in PROFIT SHARING:
1. The partners share the profits in accordance with the ratio established
by their contract.
2. If only the share on the profits is agreed upon, the share of each
partner for the losses will follow that agreement.
3. If there is no such stipulation in the partnership contract, then:
a. If all are capitalist partners, they have the profits in proportion to
their capital contributions (capital share or interest)
b. If there are capitalist as well as industrial partners, the industrial
partner get a share each that is just and equitable while the capitalist
partners divide the remainder in proportion to their capital
contributions.
c. If there is a capitalist-industrial partner, he gets a share in the
profits as an industrial partner and an additional share in proportion to
his capital contribution to be determined as in (b), above.

Rules in LOSS SHARING:

1. The stipulation in the partnership agreement regarding loss sharing must
be followed. 2. If there is no such agreement, but the contract provides for a
profit-sharing ration, the profitsharing ratio shall also be the loss sharing
ration.
3. In the absence of loss sharing and profit-sharing stipulations in the
contract, then the loss shall be borne by the partners in proportion to their
capital contributions; but a purely industrial partner is exempted from
participation in the loss
NOTE: Any exception which excludes one or more partner from any sharing
or losses is void – Art. 1799 except one which exempts an industrial partner
from losses (by law as he shall not be liable) – art. 1797.

As for the losses, the industrial partner is not liable. However, under Art.
1816, if the partnership has a contractual debt and it cannot pay, the
industrial partner equally with the capitalist partners, can be compelled by
the creditor to pay his pro rata share out of his own property or assets.

ARTICLE 1799. A stipulation which excludes one or more partners

from any share in the profits or losses is void. (1691)
Stipulation Excluding A Partner From Any Share In Profits Or Losses.

(1) Stipulation generally void, but partnership subsists. — The law does not,
as a general rule, allow a stipulation excluding one or more partners from
any share in the profits and losses.

The partnership must exist for the common benefit and interest of the
partners. Hence, such an agreement would contravene the very purpose of a
partnership contract, that is, profit-sharing among the partners. However,
although the stipulation is void, the partnership, if otherwise valid, subsists
and the profits or losses shall be apportioned as if there were no stipulation
on the same.

(2) Stipulation, a factor to show no partnership exists. — Where the parties

expressly stipulate that there shall be no liability for losses, or where from
the nature of the contract, it is clear that a party did not intend to share in
the losses, such fact may be a factor in determining that no partnership
exists.

Thus, in a case, it was held that where one party sells personalty to another
for use in a business, and agrees in payment to take one-half of the profi ts
that might be made, he does not thereby agree to share in the losses.

(3) Where person excluded not intended by parties to become a partner. —

Where the one excluded from any share in the profi ts or losses is not
intended by the parties to become a partner, the stipulation is, of course,
valid. Thus, where one of several persons engaged in an enterprise agreed to
assist by advancing money, and to share in the losses, if any, but not to
receive any part of the profits, which are to be divided among the others
exclusively, such one is not to be deemed a partner as between the others
and himself.
However, if he holds himself out, or allows himself to be held, as a partner to
a third person who, under the belief that he is such, enters into a contract
with them, he is liable on such contract.

(4) Where person excluded from losses is industrial partner. — With

reference to the industrial partner, since the law itself excludes him from
losses, a stipulation exempting him from the losses is naturally valid as an
exception to the general rule in Article 1799. This is without prejudice,
however, to the rights of third persons.

The industrial partner is not liable for losses because he cannot withdraw the
work or labor already done by him, unlike the capitalist partners who can
withdraw their capital.

Furthermore, if the partnership fails to realize any profi ts, then he has
labored in vain and in a real sense, he has already contributed his share in
the loss.

(5) Where stipulation provides for unequal shares. — The limitation does not
mean that the partners cannot stipulate for unequal shares in the profi ts or
losses even if their respective contributions are equal, unless the inequality
is so gross that it is, in effect, a simulated form or attempt to exclude a
partner from any share in the profi ts or losses.

Stipulation Exempting A Partner From Losses Should Be Allowed.

“The provision of Article 1799 which declares void an agreement excluding

one or more partners from sharing in the losses of the partnership is diffi cult
to explain. x x x. To declare also void an agreement which merely exempts or
tends to exempt one or more partners from sharing or contributing in the
partnership losses as far as it affects the partners alone, is without any
foundation either on reason or justice; because if, in order to induce a person
to become a member of the firm, it becomes necessary to guaranty him
against his suffering any financial losses thereby, without which guaranty
such person may not be willing to become a member of the partnership and
yet his connection thereto is considered as absolutely necessary by the other
partners willing to guaranty him against losses, such partnership may never
materialize on account of the provision of said Article 1799.
It seems, therefore, that if a person can make a gift to another, there is no
sound reason why a person cannot also agree to bear all the losses that a
partnership may suffer, in order to exempt his co-partners from sharing in
the said losses.

Of course, as far as third persons are concerned, any agreement which tends
to excuse or exclude one or more partners from satisfying the partnership
liability caused through partnership losses may be properly declared void.”
Stipulation to exclude a partner from profits and losses is VOID.
– (stipulation generally void, but partnership subsist)
- The law does not allow a provision in the contract of partnership excluding
one or more partners from sharing in the profits and losses.
- The reason is that a partnership is organized for the common benefit or
interest of the partners (art 1770).
- Although the stipulation is void, the partnership subsists (exists), and the
P/L shall be apportioned (distributed) as if there were no stipulation (art 1797
par 2)

Reason for exclusion of industrial partner

- An industrial partner is not liable for losses because if the partnership fails
to realize any profits, the industrial partner would have contributed his labor
in vain (in real sense he already contributed to the loss).
- Furthermore, the industrial partner cannot withdraw the work already done
by him for the partnership unlike capitalist partners who can withdraw their
capital. - A stipulation exempting from losses is naturally valid (without
prejudice to the rights of third persons art 1817)

ARTICLE 1816. All partners, including industrial ones, shall be liable

pro rata with all their property and after all the partnership assets
have been exhausted, for the contracts which may be entered into
in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership.
However, any partner may enter into a separate obligation to
perform a partnership contract. (n)
Wether you are a capitalist or industrial, you are liable for partnership debts
to third persons

Partners are only liable for partnership debts only after partnership
assets have been exhausted.

Is there a conflict between Art1797 and Art1816?

No! because art1797 talks about the losses, while 1816 is all about the
partnership
liability with respect to the 3rd person.
While the industrial partner may be made liable to third persons, he can get
reimbursement from the capitalist partners the amount he has paid to third
person.

Pro Rata – we do not look into the capital

contribution, but it is based on the number of
partners in the partnership

Liability for contractual obligations of the partnership.

(1) Partnership liability . general
rule – partners are liable for contracts
he make for the partnership but only if
the partner was authorized.
(2) Individual liability. make himself
solidarily liable on a partnership
contract.
Nature of individual liability of
partners.
(1) Pro rata . mean equally or jointly,
because the pro-rating is based on the
number of partners and not on the
amount of their contributions to the
common fund
cannot increase the liability of the
other partners.
(2) Subsidiary or secondary.
partners become personally liable only
after all the partnership assets have
been exhausted.
(3) Liability of industrial partner.
Even the industrial partner is not liable
for losses he can recover the amount
he has paid from the capitalist
partners unless there is an agreement
to the contrary.
Distinction between a liability
and a loss.
(1) The inability of a partnership to
pay debt to a third party at a
particular time does not necessarily
mean that the partnership business,
as a whole, has been operated at a
loss.
(2) The exemption of the industrial
partner to pay losses.
An industrial partner is not exempted
from liability to third persons for the
debts of the partnership.
No distinction between
obligations
and losses.
when the assets of the partnership are
exhausted and it becomes necessary
to enforce the subsidiary liability of
the private property of the partners. In
this case, such obligations constitute
the extreme losses in the liquidation of
the partnership.

ARTICLE 1817. Any stipulation against the liability laid down in the
preceding article shall be void, except as among the partners. (n)
Example:
AB Partnership, stipulated that A’s liability shall not exceed P5,000 So
kung may utang ang AB Partnership kay C amounting to P30k, and AB
Partnership asset
has been exhausted amounting to P10k, so therefore may tira pang
20k na liability kay C. So ang kailangan bayaran ni A at B kay C ay tig 10k
each pa. Pero ang sabi eh hindi dapat mag exceed sa P5k ang kay
A, pwede ba nya itong gamitin itong agreement na ito? NO! even if
there is a stipulation na hindi dapat lalagpas ng 5k, dahil hindi nya ito
pwedeng gamitin sa third person kay C, pero pwede nyang singilin si B sa
labis na P5k na naibayad nya kay C.

Note:
Always remember that any stipulation of the partners is only valid in their
partnerships
and not against the third person.

Stipulation against liability.

stipulation among the partners contrary to the pro rata and subsidiary
liability expressly imposed by Article 1816 is void. Valid and enforceable only
as among the partners.
Article 1816 distinguished from article 1787
Article 1816 applies in cases where third party creditors are concerned as it
falls under the heading of section 3. “Obligations of the Partners with Regard
to Third Persons.” Article 1797 applies only where the issue is among the
partners as it falls under the heading of Section 1, Chapter 2, which states:
“Obligations of the Partners Among Themselves.” The pro rata liability of
partners to third persons under Article 1816 being a clear mandate of the
law, any stipulation changing or modifying such liability is void except as
among the partners.
Refers to partnership obligations
Article 1816 which refers to the payment of partnership obligations arising
from contracts clearly imposes subsidiary and joint (pro rata) liability for
contractual debts owing to third persons upon all the partners, including
industrial partners who ordinarily are not liable for losses. The liability is
subsidiary because the partners cannot be made answerable with their
separate property unless the partnership property has first been exhausted.
Pro rata liability – Literally, pro rata liability means proportionate distribution
of liability. In the law of obligations, the concurrence of two or more debtors
in one and the same obligation makes it prima facie a joint (pro rata)
obligation, and the debts is presumed divided into as many equal shares as
there are debtors and each one of them is bound to pay only his share.
\

Industrial partner cannot exempt himself from liability to third persons

Each one of the industrial partners is liable to third persons for the debts of
the firm and if he has paid such debts out of his private property during the
life of the partnership, when its affairs are settled, he is entitled to credit for
the amount so paid, and if its results that there is not enough property in the
partnership to pay him, then the capitalist partners must pay him. Our
conclusion is that neither on principle nor on authority can the industrial
partner be relieved from liability to third persons for the debts of the
partnership.