Commercial and Taxation Laws › Business Organizations › Partnerships › Rights and Obligations

d. Obligations of Partners to Third Persons

Rights and obligations of the partnership

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. (Art. 1816)1

Note: Except limited liability partners.

Any stipulation against personal liability of partners for partnership debts is void, except as among them. (Art. 1817)2

Partners are liable solidarily with the partnership for everything chargeable to the partnership when caused by the wrongful act or omission of any partner acting in the ordinary course of business of the partnership or with authority from the other partners and for partner's act or misapplication of properties. (Art. 1824)3

A newly admitted 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. (Art. 1826)4

Partnership creditors are preferred to those of each of the partners as regards the partnership property. (Art. 1827)5

Upon dissolution of the partnership, the partners shall contribute the amounts necessary to satisfy the partnership liabilities. (Art. 1839(4), (7))6

A partner’s obligation for partnership liabilities is subsidiary in nature - they shall only be liable with their property after all partnership properties have been exhausted. (Nicolas Co-Pitco v. Yulo, G.R. No. L-3146, 14 September 1907)7

Obligations of partners to third persons

All partners shall be liable for contractual obligations of the partnership with their property, after all partnership assets have been exhausted:

  • Pro rata
  • Subsidiary (Art. 1816)8.

Admission or representation made by any partner concerning partnership affairs within scope of his authority is evidence against the partnership. (Art. 1820)9

General rule: Notice to partner of any matter relating to partnership affairs operate as notice to partnership.

Exception: Notice or knowledge is not imputed in the case of fraud on the partnership committed by or with the consent of that partner.

  • Knowledge of partner acting in the particular matter, acquired while a partner
  • Knowledge of the partner acting in the particular matter then present to his mind
  • Knowledge of any other partner who reasonably could and should have communicated it to the acting partner (Art.1821)10

Partners and the partnership are solidarily liable to third persons for the partner's tort or breach of trust. (Art. 1824)11

Liability of incoming partner is limited to:

  • For obligations arising before admission, liability is satisfied only out of partnership property, unless there is a stipulation to the contrary
  • His separate property for subsequent obligations (Art. 1826)12

Creditors of partnership preferred in partnership property. Subject to that preference, a partner's private creditors may seek attachment and public sale of the partner's share in partnership assets. (Art. 1827)13

Power of Partner as an Agent of the Partnership (Art. 1818)14

ACTS EFFECT
Acts for carrying on in the usual way the business of the partnership A partner's apparently usual-course act binds the partnership unless the partner in fact lacks authority in the particular matter and the third person knows of that lack of authority
Act which is not apparently for the carrying of business in the usual way.

Acts of strict dominion or ownership:
• Assign partnership property in trust for creditors
• Dispose of goodwill of business
• Do an act which would make it impossible to carry on ordinary business of partnership
• Confess a judgment
• Enter into compromise concerning a partnership claim or liability
• Submit partnership claim or liability to arbitration
• Renounce claim of partnership		 Does not bind partnership unless authorized by other partners
Acts in contravention of a restriction on authority Partnership is not liable to 3rd persons having actual or presumptive knowledge of the restrictions

Effects of Conveyance of Real Property Belonging to Partnership (Art. 1819)15

TITLE EFFECT
Title in partnership name, Conveyance in partnership name Conveyance passes title, but the partnership may recover unless the partner's act binds it under the first paragraph of Art. 1818 or the property has been conveyed to a subsequent holder for value without knowledge that the partner exceeded his authority
Title in partnership name, Conveyance in partner's name Conveyance passes the partnership's equitable interest if the act is within the partner's authority under the first paragraph of Art. 1818; this provision does not pass legal title
Title in name of 1 or more but not all partners, where the record does not disclose the partnership's right; conveyance by the partners in whose names title stands Conveyance passes title, but the partnership may recover if the partners' act does not bind it under the first paragraph of Art. 1818, unless the property reaches a subsequent holder for value without knowledge that the partners exceeded their authority
Title in name of 1/more/all partners or 3rd person in trust for partnership, Conveyance executed in partnership name if in name of partners Conveyance passes the partnership's equitable interest, provided the act is within the partner's authority under the first paragraph of Art. 1818
Title in name of all partners, Conveyance in name of all partners A conveyance executed by all partners passes all their rights in the property, provided their act binds the partnership under the first paragraph of Art. 1818

Liability of a Limited Partner Whose Surname Appears in the Partnership Name

General Rule: A limited partner whose surname appears in the partnership name is liable as a general partner to the partnership creditors who extended credit without actual knowledge that he is not a general partner.

Exceptions:

  • If the surname is also the surname of a general partner; or
  • If prior to the time the partner became a limited partner, the business has been carried under such name.

Authorities

  • Civil Code, Sec. 1816
  • Civil Code, Sec. 1817
  • Civil Code, Sec. 1818
  • Civil Code, Sec. 1819
  • Civil Code, Sec. 1820
  • Civil Code, Sec. 1821
  • Civil Code, Sec. 1824
  • Civil Code, Sec. 1826
  • Civil Code, Sec. 1827
  • Civil Code, Sec. 1839
  • Nicolas Co-Pitco v. Yulo, G.R. No. L-3146, 14 September 1907