MODULE 20 – OBLIGATIONS OF THE PARTNERS WITH REGARD TO

THIRD PERSONS

This module aims to teach students about the obligations of the partners with
regard to third persons. Discussed in this module are liabilities and losses of the
partnership including the effects of a stipulation exempting liability to third persons. Also
presented in this module is a discussion when can the act or acts of partner bind or not
bind the partnership. Examples or situation are given to explain the articles under this
section of the law.
Course Learning Outcomes
At the end of the Module, the students should be able to:
1. Identify the obligations of the partners with regard to third persons.
2. Discuss the liabilities and losses of the partnership and the effects of a
stipulation exempting liability to third persons.
3. Discuss when can the act or acts of a partner bind or not bind the partnership.

Lesson 1 – Obligations of the Partners with Regard to Third Persons

Article 1815. Every partnership shall operate under a firm name, which may or may not
include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in the firm
name, shall be subject to the liability of a partner. (n)

Note: the firm name is the name of the juridical entity. The firm
name may or may not include the name of one or more of the
partners.

Strangers (those not members of the partnership) who include

their names in the firm are liable as partners because of estoppel
(Art. 1815, par. 2) but do not have the rights of partners for after
all, they had not entered into any partnership contract. The
purpose of the law is to protect customers from being misled as to
whom they are dealing with. (Paras citing Sagal v. Fylar, 89 Conn.
293).

If a person misrepresents himself as a partner, and as a

consequence thereof, a stranger is misled, the deceiver is liable as
a partner (without the rights of a partner) and this is true, even if
he did not include his name in the firm name) Under 1846, if a
limited partner includes his name in the firm name, he has
 obligations, but not the rights of, a general partner. (Paras: Civil
Code of the Philippines Vol. V)

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)

Note: While an industrial partner is exempted by law from losses,

(as between the partners), he is not exempted from liability
(insofar as third persons are concerned). This means that the
third person can sue the firm and the partners, including the
industrial partner. Of course, the partners will be personally liable
(jointly or pro rata) only after the assets of the partnership have
been exhausted. Even the industrial partner would have to pay,
but of course he can recover later on what he has paid, from the
capitalist partners, unless there is contrary agreement. (Paras
citing De los Reyes v. Lukban and Borja, 35 Phil. 757; Compania
Maritima v. Munoz, et al., 9 Phil 326).

Example: A, B and C, capitalist partners, each contributed P100K;

and D, the industrial partner contributed his services. Suppose X,
customer, is the creditor of the firm to the amount of P900K, What
should X do?

X must sue the firm and all the partners, including D. After getting
the P300K (capital assets of the firm) he can still recover P600K
from the 4 partners jointly or pro rata (not solidarily). Hence, he
can recover P150K from D. D, can later on recover P150K from A,
B, and C at the rate of P50K each, for after all, he is exempted by
the law from losses, as distinguished from liabilities. Note: the
liability of the partners is subsidiary and joint, not principal and
solidary. (Paras: Civil Code of the Philippines Vol. V)

A partner who withdraws is not liable for liabilities contracted after

he has withdrawn, for then he is no longer a partner. If his interest
has not yet been paid him, his right to the same is that of a mere
creditor. (Paras citing Robles v. Pardo y Robles Hermanos, 59 Phil
482).

Note also that a stipulation exempting that all the industrial

partners and some of the capitalist partners would be exempted
 from liability would be null and void. (Paras citing Compania
Maritima v. Munoz, et al., 9 Phil. 326)

Article 1817. Any stipulation against the liability laid down in the preceding article shall
be void, except as among the partners. (n)

Example: A, B, and C, capitalist partners, each contributed

P100K. The firm’s indebtedness amounts to P900K. It was
stipulated that A would be exempted from liability. Assuming that
the capital of P300K , is still in the firm, what would be the rights of
the firm’s creditors?

Answer: To get the P300K and to get still P200K each from the 3
partners ( a total of P900K). A will thus be liable to the third
persons for P200K. How much, if any, can A recover from B and
C? It is submitted that he can recover P200K from B and C
(P100K each for as to liability as among them, he is exempted
(Art. 1817) but he cannot recover his original capital Of P100K.
(Art. 1799) (Paras: Civil Code of the Philippines Vol. V)

Article 1818. 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.

An act of a partner which is not apparently for the carrying on of business of the
partnership in the usual way does not bind the partnership unless authorized by the
other partners.

Except when authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:

(1) Assign the partnership property in trust for creditors or on the assignee's
promise to pay the debts of the partnership;

(2) Dispose of the good-will of the business;

(3) Do any other act which would make it impossible to carry on the ordinary
business of a partnership;

(4) Confess a judgment;

 (5) Enter into a compromise concerning a partnership claim or liability;

(6) Submit a partnership claim or liability to arbitration;

(7) Renounce a claim of the partnership.

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

partnership to persons having knowledge of the restriction. (n)

Note: when can a partner bind the partnership? Ex: A and B

are partners in buying and selling automobiles. A, by the
partner’s agreement, was authorized to buy automobiles on a
cash basis, never on the installment plan. One day A bought on
credit or on the installment plan a car from X, a client. X did not
know of A’s lack of authority. A’s purchase was made on behalf
and in the name of the partnership. Is the partnership bound?
Ans: Yes, the partnership is bound because although A was
not really authorized, still for apparently carrying on in the usual
way the business of the partnership A is implicitly authorized
and X was in good faith. Had X known of A’s actual lack of
authority, the answer would be different, that is, the partnership
would not be bound. (Paras citing Smith, Bell and Co. vs.
Aznar, C. A., 40 OG 1882, citing 20 RCL, pp. 894-895)

When will the act of the partner not bind the partnership? When
although for apparently carrying on in the usual way the business
of the partnership, still the partners has in fact no authority, and
the 3rd party knows that the partner has no authority and when the
act is not for apparently carrying on in the usual way of the
partnership and the partner has no authority. (Paras: Civil Code of
the Philippines Vol. V)

(5) Reasons Why the 7 Acts of Ownership are “Unusual”

(a) “assign the partnership property” – the firm will virtually be

dissolved

(b) “dispose of the goodwill” – goodwill is valuable property

(c) “do any other act which would make it impossible to carry
on” – this is evidently prejudicial

(d) “confess a judgement” – if done before the case is filed, this

is null and void; if done later, the firm would be jeopardized
 (e) ”compromise” – this is an act of ownership and may be said
to be equivalent to alienation (which may not be justified)

(f) ”arbitration” – this is also an act of ownership which may not

be justified

(g) ”renounce a claim” – why would a partner renounce a claim

that does not belong to him but to the partnership? (Paras: Civil
Code of the Philippines Vol. V)

Article 1819. Where title to real property is in the partnership name, any partner may
convey title to such property by a conveyance executed in the 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.

Example of Par. No. 1

A, B, C, and D are partners of the firm “Edimus.” A parcel of land

registered under the name “Edimus” was sold by A on behalf and
in the name of the firm “Edimus,” but without express authority.
The purchaser X. Does X become the owner?

ANS.: Ordinarily YES, but the firm may get back the land unless:

(a) The firm is engaged in the buying and selling of land

(consequently, the act of A is “unusual”);

X had in turn sold the name land to Y for value and Y did not know
of A’s actual lack of authority. (This is the case even when the
selling of the land was not apparently carrying on the business in
the usual ways.) Thus, in the case presented, the firm cannot get
back the land. Reason: Because the property has in turn been
“conveyed by the guarantee (X) to a holder for a value (Y) without
knowledge that the partner, in making the conveyance, has
exceeded his authority.” (Art. 1819, 1st par.) (Paras: Civil Code of
the Philippines Vol. V)

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.

Example of Par. No. 2

 A, B, C, and D are partners of the firm “Edimus” engaged in the
buying and selling of land. A parcel of land registered in the name
“Edimus” was sold by A in his own name. Does the buyer become
the owner of the land? If not, what right does the buyer have?

ANS.: The buyer does not become the owner of the land.
However, he gets the “equitable interest” if the firm insofar as the
land is concerned, because after all the selling of the land was in
the “usual” course of the business. Of course, the buyer may later
on ask for the reformation of the contract, so that now, the seller’s
name would appear to be that of Edimus, provided of course that
the other partners would not object. (They would object of course,
if indeed A did not have actual authority to sell, unless the buyer
did not know of such lack of authority.) If the contract be thus
reformed, it is clear that the buyer has also been given TITLE.
(Paras: Civil Code of the Philippines Vol. V)

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 or his assignee, is a holder for
value, without knowledge.

Example of Par. No. 3

A, B, C, and D were partners in the real estate firm of “Edimus.”

Although a certain parcel of land really belonged to the firm, it was
registered in the name of A and B. A and B sold, in their own
name, the land to X. May the firm get back the land?

Ans.: Since the firm is engaged in the real estate business, the act
of selling the land was for carrying on in the usual way the firm’s
business. So, the firm cannot get back the land, for title thereto
has been conveyed to X. (Paras: Civil Code of the Philippines Vol.
V)

Where the title to real property is in the name of one or more or all the 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.

Example of Par. No. 4

 A, B, C, and D were partners in the real estate firm of “Edimus.” A
certain parcel of land was in the name of “A, in trust for the firm
Edimus.”

(a) If A sells the land to X in the name of Edimus, will X become be

owner?

ANS.: No. What X gets will only be the equitable interest of the
firm.

(b) If A sells the land to X in his (A’s) own name, will X become the
owner?

ANS.: No. What X gets will also be only the equitable interest of
the firm.

Reason: It is clear in both instances that under the registry records

A is only the trustee. (Paras: Civil Code of the Philippines Vol. V)

Where the title to real property is in the name of all the partners a conveyance executed
by all the partners passes all their rights in such property. (n)

Example of Par. No. 5

A, B, C, and D were partners in the real estate firm of “Edimus.” A

certain parcel of land was registered, not in the name of the firm,
but in the name of A, B, C, and D. If A, B, C, and D will sell the
land to X, will X become the owner, or will he have only the
equitable interest?

ANS.: X will get the title. Consequently, he becomes the owner, for
the law says that “where the title to real property is in the names of
all the partners, a conveyance executed by all the partners, a
conveyance executed by all the partners passes all their rights in
such property.” (Art. 1819, par. 5). The phrase “all their rights”
includes “ownership” because under Art. 1811 – “A partner is co-
owner with is partners of specific partnership property.” (Paras:
Civil Code of the Philippines Vol. V)

Article 1820. 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. (n)

Restrictions on the Rule

 (a) Admissions made BEFORE dissolution are binding only when
the partner has authority to act on the particular matter.

(b) Admissions made AFTER dissolution are binding only if the

admissions were necessary to WIND UP the business.

Reason: If the admission is not the “act of the partnership (thru the
partner), it should NOT be evidence against it.” The words “within
the scope of his authority” produce the result. (See
Commissioner’s Note, 7 ULA, Sec. 11, p. 20).

[NOTE: Needless to say, an admission by a former partner, made

AFTER he has retired from the partnership, is NOT evidence
against the firm. (Paras citing Ormachea Tin Congco v. Trillana,
13 Phil. 194).]

Article 1821. 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 fraud on the partnership, committed by or with the
consent of that partner. (n)

Effect of Notice to a Partner

(a) In general, notice to a partner is notice to the partnership, that is, a

partnership cannot claim ignorance if a partner knew. BUT this
rule has restrictions and qualifications.
(b) Notice to a partner, given while ALREADY a partner, is a notice to
the partnership, provided it relates to partnership affairs.

Effect of Knowledge Although No Notice Was Given

It may be that no notice has been given, but knowledge has been
somehow required. (Thus, while nobody made any notification, still
the partnership perhaps because of analysis or deduction came to
know of something.) Is this knowledge of the partner also to be
considered knowledge of the partnership?

ANS.: knowledge of the partner is also knowledge of the firm

provided:

The knowledge was acquired by a partner who is acting in the

particular matter involved. (Paras: Civil Code of the Philippines
Vol. V)
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 omitting to act. (n)

Example:

A, B, and C were partners. While acting within the scope of the

firm’s business, A committed a tort against X, a third person. Is the
firm liable?

ANS.: Yes. (Art. 1822). Moreover A, B, and C, as well as the firm

itself, are liable in solidum. (Art. 1824). Note that even the innocent
partners are civilly personally liable (Baxter v. Wunder, 1927, 89
Pa. Super. Ct. 585), without prejudice of their course to their right
to recover from the guilty partner. (See Art. 1217). (Paras citing
Fairman v. Darney, 1919, 73 Pa. Super. Ct. 238, where the court
held that a wrongful refusal to return to a customer’s machine
rendered ALL the partners personally liable.)

(1) When the Firm and the Other Partners are NOT Liable

(a) If the wrongful act or omission was not done within the scope of
the partnership business and for its benefit (Paras citing Schols v.
Silverman, 172 Md. 632) or with the authority of the co-partners.
(Art. 1822).
(b) If the act or omission was NOT wrongful. (See Art. 1822 which
uses the term “wrongful”.)
(c) If the act or omission, although wrongful, did not make the partner
concerned liable himself. (Paras citing Caplan v. Caplan, 268 N.Y.
455).
(d) If the wrongful act or omission was committed after the firm have
been dissolved (stopped its business) the same was in not
connection with the process of winding up. (Paras citing Halton v.
American Pastry Products Corp., 274 Mass. 268).

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. (n)
Article 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under articles 1822 and 1823. (n)

Example

A and B are partners. A misappropriates a sum of money

belonging to a customer X but which was already in the custody of
the partnership. Whom can X hold liable?

ANS.: X can hold liable either the firm of A or B, and the liability is
for the whole amount because it is solidary. However, if be is
made to pay the full amount, he can recover the full amount, plus
interest from A later on instead of only A’s share, for the simple
reason that is only A who is guilty. (Paras: Civil Code of the
Philippines Vol. V)

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 the 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:

(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 an existing partnership, or

with one or 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 consent to the
representation, a 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.
(n)

How the Problem May Arise

A person may:
 (a) Represent himself as a partner of an existing partnership, with or
without the consent of the partnership.

(NOTE: If a third person is misled and acts because of such

misrepresentation, the deceiver is partner by estoppel. If the
partnership consented to the misrepresentation, a partnership
liability results. We have here a case of “partnership by estoppel”
with the original members and the deceiver is considered still as a
“partner by estoppel,” with all the obligation but not the rights of
the partner.)

Represent himself as a partner of a non-existent partnership.

(Here, clearly no partnership liability results, but the deceiver and
all persons who may have aided him in the misrepresentation is
still liable.) (Paras: Civil Code of the Philippines Vol. V)

When Estoppel Does Not Apply

When although there is misrepresentation, the third party is not

deceived, the doctrine of the estoppel does not apply. Note that
the law says “liable to any such persons to whom such
representation has been made, who has, on the faith of such
representation, given credit as to the actual or apparent
partnership.” (Art. 1825). (Paras citing also re Ganaposki D. C.
Pa., 1939, 27 F. Supp. 41).

Examples of a “Partner by Estoppel”

(a) To obtain better credit facilities for a partnership of which he was

not a member, X represented himself as having a half-interest
therein. If the misrepresentation is believed and acted upon by
innocent strangers, X should be considered as a partner by
estoppel (Paras citing Mever v. Newmann, 1922, 222 Ill. App.
191).
(b) A rich man, wanted to give better financial credit to a partnership,
so he signed the partnership agreement as partner when in fact,
he was not really one. People rely on the misrepresentation can
consider him a partner by estoppel. (Paras citing Hobbin v.
Virginia Nat. Bank, 1926, 147 V. 892).

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 this liability shall be satisfied
only out of partnership property, unless there is a stipulation to the contrary. (n)

Entry of a New Partner Into an Existing Partnership

 Example: A, B, and C are partners. D is admitted as a new
partner. Will D be liable for partnership obligations contracted
PRIOR to his admission to the partnership?

ANS.: Yes, but his liability will extend only to his share in the
partnership property, not to his own individual properties. (Art.
1826). (Paras: Civil Code of the Philippines Vol. V)

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. (n)

(1) Reason for the Preference of Partnership Creditors

After all, the partnership is a juridical person with whom the

creditors have contracted. Moreover, the assets of the partnership
must first be exhausted.

(2) Reason Why Individual Creditors May Still Attach the Partner’s
Share

After all. The remainder (after paying partnership obligations)

really belongs to the partners.

(NOTE: The purchaser at the public sale does not necessarily

become a partner.)

(3) Sale by a Partner of His Share to a Third Party

If a partner sells his share to a third party, but the firm itself still
remains solvent, creditors of the partnership cannot assail the
validity of the sale by alleging that is made in fraud of them, since
they have not really been prejudiced. (Paras citing Walch v. Lim,
Chay Seng, 58 Phil. 13).

Assessment:

Direction: Answer the following question/s:

1. Distinguish liability from losses?

2. Cite instances when the firm and the other partners are not liable.
3. How may a partner and partnership by estoppel arise?
References:
Civil Code of the Philippines. 2005 Edition. Rex Bookstore, Inc., Manila.
Paras Edgardo L. Civil Code of the Philippines: Annotated. XIV Edition, Vol. V. Rex
Bookstore, Inc., Manila.
Paras Edgardo L. Pre-week Handbook in Civil Law. VI Edition, 2012. Rex Bookstore,
Inc. Manila.