In the Philippines, partnership law is governed by the Civil Code (Articles 1767 to 1867). One of the most distinct figures in this legal framework is the industrial partner—an individual who contributes their industry, labor, or technical skill to the common fund, rather than money or property.
Because an industrial partner invests their "self" rather than capital, the law provides specific, protective rules regarding how they share in the fruits of the business and, conversely, how they are shielded from its risks.
1. The Basic Rule of Distribution
Under Article 1797 of the Civil Code, the distribution of profits and losses follows a specific hierarchy. The law prioritizes the agreement between partners, but provides a "default" for industrial partners when the contract is silent.
- According to Agreement: The partners may stipulate how profits are shared.
- In the Absence of Agreement: If the partnership contract does not specify the share of the industrial partner, they shall receive a share that is just and equitable under the circumstances.
Note: What constitutes "just and equitable" often depends on the nature of the business and the importance of the services rendered. If there is also a capitalist-industrial partner (someone who contributes both money and labor), they receive a share for their capital plus a just share for their industry.
2. The Rule on Losses: An Absolute Exemption
Perhaps the most significant protection for an industrial partner is found in the second paragraph of Article 1797.
- The Exemption: An industrial partner is not liable for losses as between the partners.
- The Rationale: The law deems it unfair for a person who has already "lost" their labor and time (which cannot be recovered) to also be burdened with financial debt. Their contribution is their effort; if the business fails, they have already lost that effort.
3. Liability to Third Persons
It is critical to distinguish between internal loss sharing and external liability.
While an industrial partner is exempt from losses relative to their co-partners, Article 1816 dictates that they are still liable to third-party creditors.
- All partners, including industrial ones, are liable pro rata with all their property for partnership debts after the partnership assets have been exhausted.
- The Remedy: If an industrial partner is forced to pay a third-party creditor, they have the right to be reimbursed by the capitalist partners, unless there is an agreement to the contrary.
4. Obligations and Prohibitions
To balance the privilege of being exempt from losses, the law imposes strict loyalty requirements on industrial partners under Article 1789.
| Feature | Rule for Industrial Partners |
|---|---|
| Exclusivity | An industrial partner cannot engage in any business for themselves unless the partnership expressly permits it. |
| Reasoning | The partnership "owns" the partner’s time and skill. Any side venture is seen as a diversion of the contribution owed to the firm. |
| Penalty for Violation | If they engage in outside business without permission, the capitalist partners may: |
1. Exclude them from the firm; or
2. Avail themselves of the benefits the industrial partner obtained from the outside business. |
| Damages | In either case, the capitalist partners may also sue for damages. |
5. Summary of Profit and Loss Sharing Logic
The Civil Code ensures that the "sweat equity" of the industrial partner is recognized through a flexible profit-sharing model while providing a safety net against financial ruin.
- Profits:
- First: Follow the written agreement.
- Second: If no agreement, a "just and equitable" share.
- Losses:
- The industrial partner is strictly excluded from sharing in losses internally.
- Any stipulation requiring an industrial partner to share in losses is generally void as to them, though it does not void the entire partnership contract.
6. Capitalist-Industrial Partners
In instances where a partner contributes both money and labor, the distribution is calculated as follows:
- For the Capital: They receive a share in profits proportional to their capital contribution (the same rule as a pure capitalist partner).
- For the Industry: They receive an additional "just and equitable" share as an industrial partner.