Internal Partnership Relation
A partnership creates a fiduciary relation among the partners because each partner entrusts property, effort, authority, and business opportunities to the common enterprise. The obligations among partners are governed first by their lawful agreement, and, in the absence of a controlling stipulation, by the Civil Code rules on contribution, management, accounting, profits, losses, and loyalty.
The internal rights of partners are distinct from the rights of third persons. As among themselves, partners may allocate management powers, profit shares, loss shares, reimbursement rights, and restrictions on competition; as to third persons, the partnership relation may still produce external liability under agency and partnership principles.
Good faith is the controlling standard in internal partnership dealings. A partner may not use partnership property, credit, information, name, business chances, or management authority to obtain a private benefit at the expense of the common undertaking.
Contribution to the Common Fund
Every partner must contribute what he or she promised to bring into the partnership. The contribution may consist of money, property, credit, industry, or a combination of these, depending on the partnership agreement.
- Money. A partner who promised money must deliver the amount when due. Delay makes the partner liable for interest and damages from the time performance should have been made.
- Property. A partner who promised property must deliver it, preserve it until delivery, and answer for the obligations attached to the nature of the contribution, including warranty when ownership is transferred.
- Industry. An industrial partner contributes labor, skill, service, or professional activity. The contribution is personal and continuing, so the partner must devote the promised industry to the common business.
- Credit or receivables. A partner who contributes a credit must answer according to the undertaking assumed and must not impair collection by private dealing inconsistent with the partnership interest.
Unless the partners have fixed different capital shares, they are bound to contribute equally to the capital needed for the agreed undertaking. Equality in contribution, however, does not automatically mean equality in profits if the partners validly agreed on another distribution.
If the contribution consists of goods or property to be valued, the value fixed in the partnership agreement controls. If no value is fixed, valuation should be made in the manner agreed by the partners or, in default of agreement, by a fair appraisal based on the nature and condition of the property at the relevant time.
Delay, Fruits, and Misuse of Funds
A partner who delays the delivery of a promised contribution does not merely owe the thing or amount promised; the partner also answers for the loss caused by the delay. This rule protects the partnership from capital shortages, missed opportunities, and increased financing costs caused by non-performance.
If a partner promised to contribute a specific thing, the fruits of that thing belong to the partnership from the time delivery should have been made. Demand is not required when the due date for delivery is fixed or determinable from the agreement or the nature of the undertaking.
A partner who takes money or property from partnership funds for personal use is liable from the time of conversion. The liability includes restoration, interest when money is involved, and damages caused by the unauthorized taking.
The duty to contribute is not extinguished by the fact that the other partners continued the business despite the default. Continued operations may affect the measure of damages, but they do not waive the partnership's claim unless waiver is clearly shown.
Risk of Loss of Contributed Property
The risk of loss depends on whether the partner contributed ownership, use, or a class of property whose nature makes preservation or return in specie impracticable. The controlling question is whether the thing remains the property of the contributing partner or becomes partnership property.
| Contribution | Risk of Loss | Internal Effect |
|---|---|---|
| Specific and determinate thing contributed only for use | Contributing partner | The partner remains owner, so loss not caused by partnership fault generally falls on that partner. |
| Specific thing whose ownership is transferred to the partnership | Partnership | The thing becomes partnership property, and subsequent loss is borne by the common fund. |
| Fungible things, consumables, things contributed for sale, or things that cannot be kept without deterioration | Partnership | The partnership is treated as assuming the economic risk because return of the identical thing is not expected. |
| Property contributed under an appraisal accepted by the partners | Partnership | The appraised value fixes the contribution, and later changes in value are for the partnership account. |
If loss is caused by the fault or bad faith of a partner, the ordinary risk rule yields to liability for damages. A partner cannot invoke fortuitous loss when the loss was produced or aggravated by breach of duty.
Additional Contributions in Case of Imminent Loss
When the business faces imminent loss and additional capital is necessary to save the undertaking, a capitalist partner may be required to contribute an additional share if there is no agreement to the contrary. The rule rests on the mutual duty to preserve the common enterprise when preservation requires proportionate support.
A capitalist partner who refuses the required additional contribution may be compelled to sell his or her interest to the other partners, unless the partnership agreement validly provides otherwise. An industrial partner is not subject to this capital call because the industrial partner's contribution is service rather than capital.
The additional contribution must be reasonably connected with saving the partnership business. A demand for additional capital cannot be used as a disguised expulsion, oppression of a minority partner, or unilateral alteration of the partnership agreement.
Management Rights and Duties
Management powers among partners depend on the partnership agreement. A partner entrusted with management in the partnership agreement has stronger authority than a partner appointed manager only after the partnership has already been constituted.
A managing partner appointed in the partnership agreement may perform acts of administration despite the opposition of the other partners, unless the manager acts in bad faith. The authority is part of the contract itself and cannot be revoked without a lawful cause and the vote required by the partnership agreement or by the controlling interest rule.
A manager appointed after the partnership has been constituted holds authority by a separate act of agency. That authority may be revoked more freely because it is not an essential term of the original partnership contract.
If two or more partners are entrusted with management and their duties are not divided, each may separately perform acts of administration. If a managing partner seasonably opposes an act before it produces legal effect, the matter is resolved by the majority of the managing partners; in case of tie, the partners representing the controlling interest prevail.
If the agreement states that none of the managing partners may act without the consent of the others, concurrence is required for valid action. Absence or incapacity of one manager does not excuse lack of concurrence, except when delay would expose the partnership to grave or irreparable injury.
If there is no agreement on management, all partners are considered agents of the partnership for ordinary acts of administration. Each partner may participate in management, but no partner may impose an extraordinary or prejudicial act over a valid opposition made before the act binds the partnership internally.
Alteration and Use of Partnership Property
Partnership property must be used for partnership purposes. A partner who uses partnership property for personal advantage without consent must account for the benefit obtained and indemnify the partnership for resulting loss.
An important alteration of partnership immovable property generally requires the consent of the other partners, even if the alteration appears useful. The rule protects ownership, capital, and business expectations from unilateral acts that change the substance or value of partnership assets.
If refusal to consent to an alteration is manifestly prejudicial to the partnership, judicial intervention may be sought. The remedy is exceptional because management disputes are ordinarily resolved under the agreement and the rules on partnership administration.
Reimbursement and Indemnity
The partnership must reimburse a partner who, in good faith and in the interest of the partnership, disburses personal funds for partnership affairs. The right includes interest from the time of disbursement when money has been advanced for the common business.
The partnership must also answer for obligations a partner contracts in good faith for partnership purposes and for risks that are reasonably connected with proper management. The obligation to indemnify prevents the common enterprise from shifting business burdens to the partner who happened to act for it.
A partner who pays more than his or her proper share of a partnership obligation may seek contribution through the partnership accounting. Internal reimbursement should consider capital accounts, advances, profits, losses, and any damages chargeable to the claiming partner.
Liability for Fault
A partner who causes damage to the partnership through fault, negligence, fraud, or bad faith must indemnify the partnership. The duty arises even if the partner also produced gains for the partnership in other transactions.
As a rule, a partner cannot offset damage caused by personal fault with profits earned through ordinary performance of partnership duties. The partnership is entitled both to the partner's faithful service and to indemnity for wrongful loss.
Equity may reduce the damages when the partner's extraordinary efforts in other matters produced unusual profits for the partnership. The reduction is not automatic; it depends on the connection between the partner's conduct, the benefits conferred, and the fairness of imposing the full loss.
Duty of Information and Accounting
Partners must render true and full information on all matters affecting the partnership to any partner and to the legal representative of a deceased partner or of a partner under legal disability. The duty covers material facts about assets, liabilities, contracts, opportunities, disputes, and transactions involving the partnership business.
Each partner must account to the partnership for any benefit derived without the consent of the other partners from transactions connected with the formation, conduct, or liquidation of the partnership, or from any use of partnership property. Secret profits belong to the partnership because they arise from a fiduciary position.
A formal accounting may be demanded when a partner is wrongfully excluded from the business or possession of partnership property, when the agreement grants an accounting right, when a partner has obtained unauthorized benefits, or when circumstances make an accounting just and reasonable.
Accounting is often the proper internal remedy because partnership claims are interrelated. Capital contributions, advances, drawings, profits, losses, damages, and reimbursements must be settled together to determine the net rights of each partner.
Competition and Conflicts of Interest
An industrial partner cannot engage in business for himself or herself unless the partnership expressly permits it. The prohibition is broad because the industrial partner's promised contribution is personal service, and private business may divert the very industry owed to the firm.
If an industrial partner violates the prohibition, the capitalist partners may either exclude the industrial partner from the firm or appropriate for the partnership the benefits obtained from the unauthorized business. In either case, the industrial partner remains liable for damages.
A capitalist partner is prohibited from engaging, for personal account, in an operation of the same kind of business as that of the partnership, unless there is a stipulation allowing it. The rule prevents the partner from competing with the common business while sharing in its management, information, goodwill, or opportunities.
A capitalist partner who violates the restriction must bring to the common fund the profits from the competing operation and personally bear the losses. The partnership takes the gains because the opportunity conflicted with the common business, but it does not absorb the losses of the disloyal private venture.
A capitalist partner may generally engage in a different line of business, but the activity must still comply with good faith, the partnership agreement, and the duty not to misuse partnership property, information, credit, or opportunities.
Profits and Losses
The partners' agreement controls the distribution of profits and losses, subject to the prohibition against excluding a partner from all profits or from all losses in a manner inconsistent with partnership. A partnership is formed for common benefit, so a purely one-sided allocation destroys the mutual character of the relation.
If the partners validly entrust the fixing of profit or loss shares to a third person, the designation is generally binding unless it is manifestly inequitable. A partner who has begun to execute the designation, or who fails to object within the legally relevant period after knowledge, may lose the right to challenge it.
If only the profit share is agreed upon, the loss share follows the same proportion. This rule reflects the usual internal connection between participation in gains and participation in business risk.
If there is no agreement on distribution, capitalist partners share profits and losses in proportion to their capital contributions. The industrial partner receives a just and equitable share of the profits, but, as among the partners, does not bear losses unless there is a valid stipulation to the contrary.
| Situation | Profit Share | Loss Share |
|---|---|---|
| Agreement fixes both | Agreement controls if lawful | Agreement controls if lawful |
| Agreement fixes profits only | Agreement controls | Same proportion as profits |
| No agreement among capitalist partners | In proportion to contributions | In proportion to contributions |
| Industrial partner with no agreed share | Just and equitable share | No internal loss share by default |
A stipulation excluding a partner from any share in profits is void. Exemption of an industrial partner from losses is not the same as exclusion from partnership, because the law itself treats industry differently from capital in the internal allocation of losses.
Drawings, Advances, and Partner Accounts
Amounts withdrawn by a partner from partnership funds must be authorized by agreement, usage, or consent. Unauthorized drawings are chargeable to the partner and may be treated as advances, reductions of share, or misappropriations depending on the circumstances.
Salary or compensation for services is not presumed merely because a partner worked for the firm. A partner's services are ordinarily part of the partner's contribution or management participation, unless compensation is agreed upon or justified by a separate arrangement.
Partner accounts should distinguish capital contributions, loans or advances to the partnership, reimbursable expenses, authorized drawings, profit shares, loss shares, and damages. The classification matters because capital, debt, and profit participation have different consequences in accounting and liquidation.
Admission of Associates and Assignment of Interest
A partner may associate another person with him or her in the partner's share, but the associate does not become a partner without the consent of all the partners. The rule follows the personal and fiduciary nature of partnership.
A transfer of a partner's economic interest gives the transferee the right to receive the assigning partner's share of profits and surplus, but it does not by itself confer management rights, access to books, authority to bind the partnership, or the status of partner. The existing partners are not compelled to accept a new fiduciary relation without consent.
Because partnership is founded on mutual confidence, a partner must not use assignment, subpartnership, or nominee arrangements to evade restrictions on management, competition, confidentiality, or admission of new partners.
Internal Remedies for Breach
Breach of an internal partnership obligation may give rise to specific performance, accounting, damages, interest, restitution of secret profits, reimbursement adjustments, exclusion when allowed by law or agreement, or dissolution when the breach makes the business impracticable or inequitable to continue.
The remedy must fit the breach. Failure to contribute calls for enforcement of the promised contribution and damages; unauthorized use of funds calls for restoration, interest, and indemnity; disloyal competition calls for accounting of profits and personal assumption of losses; wrongful exclusion calls for accounting and restoration of participation rights.
Internal remedies do not erase obligations already incurred to third persons. After satisfying external liabilities, the partners may adjust the ultimate burden among themselves according to their agreement, their contributions, their loss shares, and any breach-based indemnity.