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Obligations of the Partners

with regard to Third Persons


Partnerships
Key Questions for Articles 1817-1821

 What is the effect of stipulations against the liability under Article 1816?
 How will an act of one partner bind or not bind the partnership?
 What are the acts of a partner involving real property that bind or not bind
the partnership?
 What is the effect of an admission or representation of a partner?
 How will notice or knowledge to a partner of a matter related to the
partnership affairs bind the partnership?
Article 1817

STIPULATION ELIMINATING LIABILITY

 Any stipulation against the liability laid down in the preceding article
shall be void except as among the partners. (n.)
liability laid down in Article 1816

 Contractual obligations with third persons


 In the name or account of the partnership under its signature and the person
authorized
 Includes all partners–whether they are capital or industrial, they are still
liable pro rata and subsidiary with all their personal property
 This liability takes effect after the properties of the partnership have been
exhausted
Query: Is it permissible to stipulate that a partner be
exempt from liability?

 General rule: The answer is NO.


 Reason – all partners are liable with all their property under Article 1816, in
relation to the principle of commonality of interests.

 Exception: YES. But only valid as among the partners.


Article 1818

 Acts of a partner that bind the partnership


 Acts of a partner that do not bind the partnership
Article 1818

Acts for apparently carrying on in the usual way the


business of the partnership

 Every partner is an agent of the partnership for the purpose of its


business, and the act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual
way the business of the partnership of which he is a member binds the
partnership, unless the partner so acting has in fact no authority to act for
the partnership in the particular matter, and the person with whom he is
dealing has knowledge of the fact that he has no such authority. (par.1)
GENERAL RULE: The act of every partner, including the execution in the partnership
name of any instrument, for apparently carrying on in the usual way the business of the
partnership of which he is a member BINDS THE PARTNERSHIP.

EXCEPTION: He has IN FACT no authority to act for the partnership in the particular
matter, and the person with whom he is dealing HAS KNOWLEDGE of the fact that he
has no such authority.
Article 1818, par. 1

 This should be read with Article 1803


 There is a presumption that all partners have equal rights in the
management of the partnership and its conduct
 Hence, every act of every partner which is in connection with the conduct of
business of the partnership BINDS the partnership
 There is an exception
 When partner has no authority to do so
 When the person to whom the partner mentioned above is dealing with knows
that he has no authority
Article 1818

Acts of strict dominion or ownership

 An act of a partner which is not apparently for the carrying of


business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners. (par.2)

 “Apparently carrying” means actions which are connected with or within the
scope of the usual course of business
 Example: A, B, and C are in a contract of partnership for buying and selling cars.
If C is authorized only to buy cars on CASH basis, and he buys a car from X on an
installment basis, the partnership will still be bound by the transaction because it
was still apparently connected with the course of business.
Article 1818

Acts of strict dominion or ownership

 GENERAL RULE: One or more but less than all the partners have no authority to:
 Assign the partnership property in trust for the creditors or on the assignee’s promise to pay the
debts of the partnership;
 Dispose of the goodwill of the business
 Do any other act which would make it impossible to carry on the ordinary business of a partnership
 Confess a judgment
 Enter into a compromise concerning partnership claim or liability
 Submit a partnership claim or liability to arbitration
 Renounce a claim of the partnership

 EXCEPTION: When authorized by the other partners or unless they have abandoned
the business. (par. 3)
Article 1818

Acts in contravention of a restriction on authority

 No act of a partner in contravention of a restriction on authority shall bind


the partnership to persons having knowledge of the restriction.

 REQUISITES:
1. Act of partner must be an act restricted
2. Person knows the restrictions

 This applies to all acts whether they are classified under par. 1, 2, or 3. If
the act is a restricted act, and person knows that the act is a restricted one,
it will never bind the partnership.
Article 1819

Conveyance of Real Property Belonging to the Partnership

Where title to real property is in the partnership name, any partner may
convey title to such property by a conveyance executed in partnership
name; but the partnership may recover such property unless the partner’s
act binds the partnership under the provisions of the first paragraph of
article 1818, or unless such property has been conveyed by the grantee or
a person claiming through such grantee to a holder for value without
knowledge that the partner, in making the conveyance has exceeded his
authority. (par.1)
Article 1819

Conveyance of Real Property Belonging to the Partnership

1. Title to real property must be in the partnership name


2. A partner or partners convey title to such property in the partnership name

 When this happens, partnership may still recover the property, except:
 When the act falls under Article 1818, par. 1; or
 When grantee or person claiming through such grantee conveys the property to a holder
for value in good faith. (Here, whether the act falls under Article 1818 or not, doesn’t
matter)
Article 1819

Conveyance of Real Property Belonging to the Partnership

 Where title to real property is in the name of the partnership, a


conveyance executed by a partner in his own name, passes the
equitable interest of the partnership provided the act is one within the
authority of the partner under the provisions of the first paragraph of
article 1818. (par. 2)
Article 1819

Conveyance of Real Property Belonging to the Partnership

1. Title to real property must be in the partnership name


2. A partner conveys the property in his own name
3. Conveyance falls under Article 1818, par. 1

 When this happens, only the equitable interest of the partnership is transferred to the third
person, and no transfer takes place:
 When it does not fall under Article 1818, par. 1
 When third person knows that the partner has no authority to do the act (even if it falls under Article
1818)
Article 1819

Conveyance of Real Property Belonging to the Partnership

 Where title to real property is in the name of one or more but not all the
partners, and the record does not disclose the right of the partnership,
the partners in whose name the title stands may convey title to such
property, but the partnership may recover such property if the partners’
act does not bind the partnership under the provisions of the first
paragraph of article 1818, unless the purchaser of his assignee, is a
holder for value, without knowledge. (par. 3)
Article 1819

Conveyance of Real Property Belonging to the Partnership

1. Title to real property is in the name of one or more but not all of the partners
2. The record does not disclose the right of the partnership
3. A partner or partners convey the title of the property to a third person

 When this happens, the partnership cannot recover the title to the property, except:
 When it does not fall under Article 1818, par. 1
 When third person knows that the partner has no authority to do the act (even if it falls under
Article 1818)
Article 1819

Conveyance of Real Property Belonging to the Partnership

 Where the title to real property is in the name of one or more or all partners,
or in a third person in trust for the partnership, a conveyance executed by a
partner in the partnership name, or in his own name, passes the equitable
interest of the partnership, provided the act is one within the authority of
the partner under the provisions of the first paragraph of article 1818. (par.
4)
Article 1819

Conveyance of Real Property Belonging to the Partnership

1. Title to real property is in the name of one or more but not all of the partners, or in a third
person in trust for the partnership
2. A partner or partners or the trustee conveys the title of the property to a third person,
either in the partnership name or in their own name

 When this happens, the partnership cannot recover the equitable interest to the property, except:
 When it does not fall under Article 1818, par. 1
 When third person knows that the partner has no authority to do the act (even if it falls under Article 1818)
Article 1819

Conveyance of Real Property Belonging to the Partnership

 Where the title to real property is in the names of all the partners a
conveyance is executed by all the partners passes all their rights in such
property. (par. 5)
Article 1819

Conveyance of Real Property Belonging to the Partnership

1. Title to real property is in the name of all the partners


2. All the partners executed a conveyance of the title to the real property
 When this happens, all their rights in such property are also conveyed or
transferred
Article 1820

Admissions or representations made by a partner

 An admission or representation made by any partner concerning


partnership affairs within the scope of his authority in accordance with
this Title is evidence against the partnership.
Article 1820

Admissions or representations made by a partner

 Elements:
1. A partner makes an admission or representation
2. The admission or representation is related to the partnership affairs
3. Admission or representation is within the scope of his authority

 If these concur, the admission or representation is evidence against the


partnership
Article 1820

Admissions or representations made by a partner

 General rule: A person is not bound by the act or admission of another of


which he has no knowledge or has not given his consent

 Exception: When a particular relation (like a contract) exists between


them (Samilliano v. Samilliano)
Article 1820

Admissions or representations made by a partner

Ormachea Tin Congco v. Trillana (13 Phil 194)


 An admission made after a partner had ceased to be a partner to a
partnership business cannot be used as evidence.
Article 1821

Notice to or knowledge of a partner of matter affecting partnership affairs

 Notice to any partner of any matter relating to partnership affairs, and


the knowledge of the partner acting in the particular matter, acquired
while a partner or then present to his mind, and the knowledge of any
other partner who reasonably could and should have communicated it to
the acting partner, operate as notice to or knowledge of the partnership,
except in the case of a fraud on the partnership, committed by or with
the consent of that partner.
Article 1821

Notice to or knowledge of a partner of matter affecting partnership affairs

 “Notice” to a partner on any matter relating to partnership affairs

 “Knowledge” of a partner acting in the particular matter acquired while a


partner or then present to his mind

 “Knowledge” of a partner who reasonably could and should have


communicated it to the acting partner
Article 1821

Notice to or knowledge of a partner of matter affecting partnership affairs

 All three instances presume that the partner acquired the notice or
knowledge WHEN HE IS ALREADY A PARTNER to bind the partnership.

 But with respect to knowledge, it must be acquired by a partner acting in


a particular matter in order to bind the partnership.

 If it is acquired by a partner not acting in a particular matter,


communication to the acting partner is necessary to bind the partnership.
Article 1821

Notice to or knowledge of a partner of matter affecting partnership affairs

 Exception:

 When there is FRAUD on the partnership committed by a partner or with the


consent of that partner.
 Shenapotchie naaaaaa
Article 1822

 Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of his co-
partners, loss or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is liable therefor to
the same extent as the partner so acting or committing the act.
Article 1823

The partnership is bound to make good the loss:

1. Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it; and
2. Where the partnership in the course of its business receives money or
property of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership
Article 1824

 All partners are liable solidarily with the partnership for everything
chargeable to the partnership under 1822 and 1823
Solidary liability

 Art. 1822- for the wrongful act or omission


 Art. 1823- breach of trust
Art. 1822-1824 vs Art. 1816

Art.1822-1824 Art. 1816


• Solidary • Joint and
subsidiary
• Liability arising • Refers to
from acts or partnership
omissions of any obligations
partner
Requisites for liability under Art. 1822

 The partner must be guilty of a wrongful act or omission; and


 He must be acting in the ordinary course of business, or with the authority
of his co-partners even if the act is unconnected with the business.
Art 1823

 Misapplication of money or property of a third person


Article 1825

When a person, by words spoken or written or by conduct, represents himself,


or consents to another representing him to anyone, as a partner in an existing
partnership or with one or more persons not actual partners, he is liable to any
such persons to whom such representation has been made, who has, on the
faith of such representation given credit to an actual or apparent partnership,
and if he has made such representation or consented to its being made in a
public manner he is liable to such person, whether the representation has or
has not been made or communicated to such person so giving credit by or with
the knowledge of the apparent partner making the representation or
consenting to its being made:
…next
1. When a partnership liability results, he is liable as though he were an actual
member of the partnership
2. When no partnership liability results, he is liable pro rata with the other
persons, if any, so consenting to the contract or representation as to incur
liability otherwise separately
When a person has been thus represented to be a partner in existing
partnership, or with one more persons not actual partners, he is an agent of
the persons consenting to such representation to bind them to the same extent
and in the same manner as though he were a partner in fact, with respect to
persons who rely upon the representation. When all the members of the
existing partnership act or obligation results; but in all other cases it is the joint
act or obligation of the person acting and the persons consenting to the
representation.
Article 1825

Partner by Estoppel;
Partnership by Estoppel
ESTOPPEL

 Bar which precludes a person from denying or


asserting anything contrary to that which has been
established as the truth by his own deed or
representation, either express or implied
PARTNER BY ESTOPPEL

When by words or by conduct he:


a. Directly represents himself to anyone as a partner in an existing partnership
or in a non-existing partnership

b. Indirectly represents himself by consenting to another representing him as


partner in an existing partnership or in a non-existing partnership
PARTNERSHIP BY ESTOPPEL

 If all the actual partnership consented to the representation


When liability pro rata When liability separate
• When there is no existing • When there is no existing
partnership and ALL those partnership and NOT ALL of the
represented as partners partners of an existing
consented to the representation partnership consented to the
representation
• Or NOT ALL the partners of an
existing partnership consented • Or NONE of the partners in an
to the representation existing partnership consented
to such representation
Who are liable
• person who represented himself • person who represented himself
to be a partner, or to be a partner, or
• Person who consented to his • Person who consented to his
being represented as partner; being represented as partner;
and and
• All those who made and • All those who made and
consented to such consented to such
representation representation, or
• That only of the person who
Elements to establish liability as a partner on ground
of estoppel
1. Proof by plaintiff that he was individually aware of the defendant’s
representations were made by others and not denied or refuted by the
defendant

2. Reliance on such representations by the plaintiff;

3. Lack of any denial or refutation of the statements by the defendant


Liability as general partners of persons who assume to
act as a corporation

The Corporation Code:


“Sec. 21. Corporation by estoppel.−All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality. x x x .”
Article 1826

 A person admitted as a partner into an existing partnership is liable for all


the obligations of the partnership arising before his admission as though he
had been a partner when such obligations were incurred, except that his
liability shall be satisfied only out of partnership property unless there is a
stipulation to the contrary.
Article 1826

Liability of incoming partner for partnership obligations

 Limited to his share in partnership property for existing obligations


 Extends to his separate property for subsequent obligations
Rights of existing and subsequent
creditors

 Existing and subsequent creditors have equal rights as against partnership


property and separate property of the previous existing member
 Subsequent creditors have rights against the separate estate of the newly
admitted partner
Liability of Outgoing Partner

 He is freed from any liability on contracts entered into after notice of his
retirement or withdrawal from the partnership
 Liability on existing incomplete contracts continues
Liability of Incoming Partner

 Not personally liable for the existing partnership obligations unless there is a
stipulation to the contrary
 Liable for the performance of an obligation made before his admission
Article 1827

 The creditors of the partnership shall be preferred to those of each partner


as regards the partnership property. Without prejudice to this right, the
private creditors of each partner may ask the attachment and public sale of
the share of the latter in the partnership assets.
Preference of partnership creditors
in partnership property
Remedy of private creditors of a
partner

 Attachment and public sale of the share of the partner in the partnership
Article 1828
 The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business.
Effects of change in membership of a partnership

1. Dissolution of Existing partnership and formation of a new one


2. Transformation of all partners into upcoming partners
3. Continuance by remaining partners of partnership as before
3 stages in ENDING a partnership
 Dissolution
change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on the business
 Winding up
actual process of settling the business or partnership affairs after
dissolution
 Termination
point in time when all partnership affairs are completely wound up
Article 1829

 On the dissolution the partnership is not terminated, but continues until the
winding up of partnership affairs is completed.
Effects of Dissolution

 Partnership is not terminated


 Partnership continues for a limited purpose
 Transaction of new business prohibited