Partnership: Obligations of the Partners with Regard to Third Persons (Arts. 1815-1827)

 CHAPTER 2

Obligations of the Partners

SECTION 3

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. 

Requirement of a firm name. 

1. Meaning of word “firm.” 
• The word “firm” is defined as the name, title, or style under which a company transacts business; 
• a partnership of two or more persons; 
• a commercial house. 
• In its common acceptation, the term implies a partnership. 
• The term is also used as synonymous with “company,” “house,” and “concern.”
2. Importance of having a firm name. 
• A partnership must have a firm name under which it will operate. 
• A firm name is necessary to distinguish the partnership which has a distinct and separate juridical personality (Art. 1768.) from the individuals composing the partnership and from other partnerships and entities. 
• Under the Business Name Law (Sec. 1, Act No. 3883, as amended.), such firm name must be registered with the Bureau of Commerce (now with the Intellectual Property Office created under R.A. No. 8293).
3. Right of partners to choose firm name.
• The partners enjoy the utmost freedom in the selection of the partnership name. 
• As a general rule, they may adopt any firm name desired. 
• The firm name of a partnership may be that of an individual partner, the surnames of all the partners, or the surname of one or more of the members with the addition of “and Company,” or it may consist of individual names wholly distinct from the names of any of the members, or it may be a name purely fanciful or fictitious. 
• But whatever the firm name may be, the signature of the firm name is, in law, the signature of the several partners’ name.
4. Use of misleading name. 
• The partners cannot use a name that is “identical or deceptively confusingly similar to that of any existing [partnership] or corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws”(Sec. 18,Corporation Code.), as to mislead the public by passing itself off as another partnership or corporation, or its goods or services as those of such other company. 
5. Use of names of deceased partners. 
• The Supreme Court has ruled that a partnership cannot continue to use in its firm name, the names of deceased partners for such use “will run counter to Article 1815. 
• It is clearly tacit in the above provision that names in a firm name of a partnership must either be those of living partners and, in the case of nonpartners, should be living persons who can be subjected to liability.
• In fact, Article 1825 prohibits a third person from including his name in the firm name under pain of assuming the liability of a partner.” (In the Matter of the Petition for authority to continue use of the firm name “SyCip, Salazar, etc.”/“Ozaeta, Romulo, etc.,” 92 SCRA1 [1979].) 
• This ruling must be considered abandoned in view of Rule 3.02 of the Code of Professional Responsibility approved and adopted by the Supreme Court on June 21, 1988 which provides: “In the choice of a firm name, no false, misleading or assumed name shall be used. The continued use of the name of a deceased partner is permissible provided that the firm indicates in all its communications that said partner is deceased.”
• CPRA, Canon II Sec. 26
• Definition of a law firm; choice of firm name. — A law firm is any private office, partnership, or association, exclusively comprised of a lawyer or lawyers engaged to practice law, and who hold themselves out as such to the public. In the choice of a firm name, no false, misleading, or assumed name shall be used. The continued use of the name of a deceased, incapacitated, or retired partner is permissible provided that the firm indicates in all its communications that said partner is deceased, incapacitated, or retired.

Liability for inclusion of name in firm name. 

• Persons who, not being partners, include their names in the firm name do not acquire the rights of a partner (see Art. 1767.) but under Article 1815, they shall be subject to the liability of a partner (Art. 1816.) insofar as third persons without notice are concerned. 
• Such persons become partners by estoppel. (Art. 1825.) 
• Article 1815 does not cover the case of a limited partner who allows his name to be included in the firm name (Art. 1846.), or of a person continuing the business of a partnership after dissolution, who uses the name of the dissolved partnership or the name of a deceased partner as part thereof. (Art. 1840, last par.)

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. 

Liability for contractual obligations of the partnership. 

1. Partnership liability. 
• Partners are principals to the other partners and agents for them and the partnership. 
• They are liable to third persons who have dealt with one of them in the same way that a principal is liable to third persons who have dealt with an agent. (see Art.1818.) 
• General Rule: A partner has the right to make all partners liable for contracts he makes for the partnership in the name and for the account of the partnership but only if the partner was authorized, i.e., he had actual (or apparent) authority. 
• The authority can be expressly granted in the partnership agreement or by the other partners subsequently. 
• A partner has implied authority to bind the partnership in transactions that are for the purpose of “carrying on in the usual way the business of the partnership.’’ (Art. 1818, par.1.) 
2. Individual liability. 
• A partner, however, may assume a separate undertaking in his name with a third party to perform a partnership contract or make himself solidarily liable on a partnership contract. 
• In such case, the partner is personally bound by his contract even if only the partnership is shown to have derived benefits from it.

Nature of individual liability of partners.

•  Article 1816 lays down the rule that the partners, including the industrial partner, are liable to creditors of the partnership for the obligations contracted by a partner in the name and for the account of the partnership. 
• The debts and obligations of the partnership are, in substance, also the debts and obligations of each individual member of the firm.
•  Their individual liability to creditors is pro rata and subsidiary.

1. Pro rata. 
• As used in the law, the term must be understood to mean equally or jointly, and not proportionately which is its literal meaning, because the pro-rating is based on the number of partners and not on the amount of their contributions to the common fund, subject to adjustment among the partners. (see Art. 1839[4].) 
• The fact that a partner has left the country and the payment of his share of the liability cannot be enforced; or his liability is condoned by the creditor cannot increase the liability of the otherpartners.
• Article 1816 refers to the extent of the share of the partners in the partnership liability for its contractual debts. It should be read together with Article 1824 where a third person can hold the partners solidarily liable for the whole obligation if his case falls under Article 1822 orArticle 1823. 
• Under Article 127 of the Code of Commerce, all members of a general partnership “are liable personally and in solidum with all their property.” 
• The basic rule (Art. 1698.) in the old Civil Code on the personal but subsidiary liability of the partners pro rata for the obligations of the partnership has been retained. (now Arts. 1816 and 1817.) 
• “The Commission considers the solidary liability laid down in the Code of Commerce as inadvisable, such liability being one of the causes of the reluctance and fear with which the formation of business partnerships has been regarded by all.” (Report of the Code Commission, pp. 148-149.)
2. Subsidiary or secondary.
• It is subsidiary or secondary because the partners become personally liable only after all the partnership assets have been exhausted. 
• Thus, the partners are liable as guarantors in favor of partnership creditors to the extent that the assets of the firm are not sufficient to meet its obligations. They may be joined as party defendants in the same action against the partnership subject to their right to prior exhaustion of partnership property. 
3. Liability of industrial partner. 
• Even the industrial partner who, ordinarily, is not liable for losses (Art. 1797.) would have to pay but, of course, he can recover the amount he has paid from the capitalist partners unless there is an agreement to the contrary. 
• Neither on principle nor on authority can the industrial partner be relieved from liability to third persons for the debts of the partnership. 

Distinction between a liability and a loss. 

There is a marked distinction between a liability and a loss.

1. The inability of a partnership to pay debt to a third party at a particular time does not necessarily mean that the partnership business, as a whole, has been operated at a loss. 
• The partnership may have outstanding credits which for the moment may be unavailable for the payment of debts, but which eventually may be realized upon and yield profits more than sufficient to cover all losses. 
2. The exemption of the industrial partner to pay losses relates exclusively to the settlement of the partnership affairs among the partners themselves and has nothing to do with the liabilities of the partners to third persons. 
• An industrial partner is not exempted from liability to third persons for the debts of the partnership. 
  • Article 1816 refers to “liabilities”
  • Article 1797 speaks of “losses.” 
• There is, therefore, no conflict between the two articles. 

No distinction between obligations and losses.

• During the existence of a partnership, the gains or the losses are set off, the one against the other, and the difference is either in favor of or against the concern. 
• As to the industrial partner, it is not a matter of striking a balance from time to time, but one of the final adjustment of assets and liabilities. 
• As long as there is property belonging to the partnership, obligations in favor of third persons are covered by the primary and direct responsibility of the partnership. 
• The question arises when the assets of the partnership are exhausted and it becomes necessary to enforce the subsidiary liability of the private property of the partners. 
• In this case, such obligations constitute the extreme losses in the liquidation of the partnership.

Article 1817. 

Any stipulation against the liability 

laid down in the preceding article 

shall be void, 

except as among the partners. 

Stipulation against liability.

• A stipulation among the partners contrary to the pro rata and subsidiary liability expressly imposed by Article 1816 is void and of no effect insofar as it affects the rights of third persons.
• It is valid and enforceable only as among the partners.

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.

Power of partner as agent of partnership. 

• In the absence of an agreement to the contrary, all partners have equal rights in the management and conduct of the partnership business. (Art.1803.)

1. As among themselves. 
• When a partner performs an act within the scope of his actual, implied, or apparent authority, he is not only a principal as to himself, but is also for all purposes, an agent as to his co-partners or to the partnership, considered as a group. 
• Thus, his act concerning partnership business and every contract signed in the partnership name bind the firm. 
• The general rules of law applicable to agents likewise apply to partners. 
• Each partner is a fiduciary of the other partners. As a matter of fact, the law of partnership is a branch of the law of agency.
• Accordingly, the liability of one partner for the acts of his co-partners is founded on the principle of mutual agency. 
2. As to third persons. 
• Limitations upon the authority of any one of the partners are not binding upon innocent third persons dealing with the partnership (Art. 1818, par. 4.), who have the right to assume that every general partner has power to bind the partnership especially those partners acting with ostensible authority, by whatever is proper for the transaction in the ordinary and usual manner of the business of the partnership.

• No duty to make inquiries as to acting partner’s authority. 
• Third persons are not bound, in entering into a contract with any of the partners, to ascertain whether or not the partner with whom the transaction is made has the consent of the other partners. The public should not make inquiries as to the agreements had between the partners. 
• The regular course of a business procedure does not require that each time a third person contracts with one of the managing partners, he should inquire as to the latter’s authority to do so, or that he should first ascertain whether or not the other partners had given their consent thereto. 
• His knowledge is enough that he is contracting with a partner. 
• Presumption that acting partner has authority to bind partnership. 
• There is a general presumption that each individual partner is an agent of the firm and that he has authority to bind the firm in carrying on the partnership transactions. 
• The presumption is sufficient to permit third persons to hold the firm liable on transactions entered into by any one of the members of the firm acting apparently in its behalf and within the scope of his authority.
• No right to assume that acting partner has unlimited authority. 
• The apparent scope of the partner’s authority is the whole scope of the partnership’s customary business. However, third parties should not assume that a partner has unlimited authority. 
• Generally, a partner has no authority to do the acts enumerated in the third paragraph of Article 1818. 
• When a third party deals with a partner who has no express, implied, or apparent authority, the partnership is not liable for his acts unless the other partners ratify his acts or are estopped from asserting the partner’s lack of authority.

Liability of partnership for acts of partners. 

The acts of a partner mentioned in Article 1818 may be grouped into three. 

1. Acts for apparently carrying on in the usual way the business of the partnership (par. 1.). 
• Every partner is an agent and may execute such acts with binding effect on the partnership even if he has in fact no authority unless the third person has knowledge of such lack of authority. 
• In other words, there are two requisites in order that the partnership will not be liable:
1. The partner so acting has in fact no authority; and
2. The third person knows that the acting partner has no authority. 
• Usual way may be interpreted as meaning usual for the particular partnership or usual for similar partnerships. 
• Actually, the acts mentioned in No. (1) refer only to acts of administration (see Art. 1800.)  as distinguished from acts of strict dominion or ownership.
2. Acts of strict dominion or ownership (pars. 2 and 3.).
• For acts which are not apparently for carrying on in the usual way the business of the partnership, the partnership is not bound, unless authorized by all the other partners or unless they have abandoned the business. 
• The general rule is that powers not specifically delegated in a partnership agreement are presumed to be withheld.
• The instances of acts which are generally outside the implied power of a partner are enumerated in the third paragraph. They constitute limitations to the authority granted to the partners to bind the partnership. 
• Whatever acts are done by any partner in regard to partnership property or contracts beyond the scope and objects of the partnership, must, in general, to bind the partnership, be derived from such further authority, express or implied, conferred upon such partner, beyond that resulting from his character as partner. 
• This principle is incorporated in the second paragraph of Article 1818. In the application of this principle, it is held that where a partnership is limited to a particular trade or business, one partner cannot bind his co-partner by any contract not relating to such trade or business, or by any contract made after such business is concluded.
• Similarly, if the purposes of a partnership are limited or special, third persons cannot obtain credit on the faith of the firm in relation to a matter foreign to its objects, although if the objects of the partnership are general, the power to bind may be equally general. 
3. Acts in contravention of a restriction on authority (par. 4.). — 
• The partnership is not liable to third persons having actual or presumptive knowledge of the restrictions, whether or not the acts are for apparently carrying on in the usual way the business of the partnership. 
• For example, when a partnership is formed for a special purpose and is limited, and a partner gives promissory notes in the name of the firm for his individual obligation, the other partner is not liable, if the notes are issued without the latter’s knowledge or consent, and the person receiving them is aware that they are not issued for a firm debt. 
• On the other hand, persons not having such notice have a right to assume that the authority of a partner is co-extensive with the business transacted by his firm. 
• Thus, it is always presumed, when there is no evidence to the contrary, that when a member of a firm borrows money or gives a note in the name of the firm, the transaction is for a partnership purpose, and the burden of proof is on the firm to show the contrary, and a contract made by a partner in the name of the firm is prima facie binding on the firm unless it is made outside the firm’s business.

Liability of partner acting without authority. 

• As a general rule, the particular partner who undertakes to bind his co-partners by a contract without authority is himself personally liable on such contract. 
• Such partner binds himself no matter in what name he contracts. 
• The fact that he attempts to bind his co-partners and does not succeed does not avoid his own act. 
• He cannot be admitted to say that he was not authorized to make a contract, as he is estopped to deny its effect or validity. 

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.

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.

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.

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.

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.

Conveyance of real property belonging to the partnership. 

1. Prima facie ownership of real property.
• The ownership of real estate is prima facie that indicated by the muniment of title. 
• Ordinarily, title to real property or interest therein belonging to the partnership is registered in the partnership name. 
• However, for one reason or another, the title to the property is not held by the partnership, although as between the partners there is no question that it is a partnership property.
• The presumption is that, property purchased with partnership funds belongs to the partnership unless a contrary intent is shown. 
2. Legal effects of conveyance.
• Article 1819 gives the legal effects of the conveyance of real property belonging to the partnership depending in whose name it is registered and in whose name it is conveyed. Under the article, the real property may be registered or owned in the name of: 
1. The partnership (pars. 1, 2.);
2. One or more but not all the partners (par. 3.);
3. One or more or all the partners, or in a third person in trust for the partnership (par. 4.); or 
4. All the partners. (par.5.)
3. Scope of term “conveyance.’’
• Paragraphs 1, 3, and 5 — title or ownership
• Paragraphs 2 and 4 — equitable interest. 
• The term “conveyance” used in the last paragraph, which is taken from Section 10 of the American Uniform Partnership Act, has been interpreted to include a mortgage.
• Thus, the right to mortgage is included in the right to convey. 
• This is different from the rule in agency (Art. 1879.) that a special power to sell excludes the power to mortgage.

Innocent purchasers without notice.

Regardless of the fact that one partner cannot convey partnership realty without the concurrence of his co-partners, it is fundamental that innocent purchasers without notice may be protected. 

1. Where the legal title is in the partner making the conveyance, although the equitable title is in the firm, a purchaser without notice may acquire a valid title, since he has the right to presume that possession or interest of the partnership is subordinate to and not inconsistent with the record title. 
2. Under Article 1819, a conveyance by a partner of partnership property in the partnership name even though without authority, cannot be recovered by the partnership where it has been conveyed by the grantee to a holder for value and without notice or knowledge that the partner, in making the conveyance, had exceeded his authority. (par.1.)
3. The purchaser need not have either actual or constructive notice of any trust or other condition limiting the authority of the partner making the conveyance. Notice of a partnership interest in real property is not created by mere knowledge of the fact that the holder of the legal title is a member of a partnership which is using the property for partnership purposes. The title of such purchaser will be protected.

Authorization or ratification of conveyance. 

A conveyance of partnership realty by one partner may be authorized by his co-partners, or when made without authority, may be ratified by them. Such authority or ratification must affirmatively appear, for the authority of one partner to makea nd acknowledge a deed for the partnership will not be presumed. 

1. After the lapse of many years from the time of execution of a conveyance by a partner purporting to act for the partnership, authority or ratification will be presumed.
2. It has sometimes been said that the authority to execute a deed in behalf of a firm should be conferred in writing and not by parol (see Art. 1874.), although the decisions on the point are not wholly uniform, partners having been held bound because of previous parol authority. 
3. It has also been held that one partner, in the presence of his co-partners, may, by parol authority, execute a deed for them which will amount to an execution of the deed of all the partners.
4. The authority may also be implied from the nature of the partnership business, and where a firm is engaged in the business of buying and selling real estate, a contract of sale executed by one of the partners in the firm name is valid. 
5. When a deed is executed on behalf of a firm by one partner, the other partner will also be bound if there is subsequent adoption of the act. (6) A ratification may be inferred from the presence of the other partners at the execution and delivery, or from their acting under it or knowingly taking the benefits arising therefrom.

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. 

Admission by a partner.

General Rule: A person is not bound by the act, admission, statement, or agreement of another of which he has no knowledge or to which he has not given his consent.

Exception: By virtue of a particular relation between them. 

1. Admissions by a party as testified to by a third person are admissible in evidence against him in litigation. 
2. Admissions by another are received against a party if the former is acting in the capacity of agent of the latter. 
• Thus, under Article 1820, the admission of a partner made during the existence of the partnership are binding against the partnership (and co-partners) when such admissions refer to a matter concerning partnership affairs and made within the scope of his authority.
3. When a partner makes admissions for himself only without purporting to act for the partnership, he alone shall be chargeable with his admissions.
4. After dissolution, admission made by a partner will bind the co-partners if connected with the winding up of partnership affairs. (see Art.1834.)

Examples:

1. A borrowed P1,000 from B in whose favor he executed a promissory note. A made the statement that he was acting for C and that the money was intended for C. C never authorized A to borrow money from B. The declaration of A that he was acting for C and that the money was intended for C is not admissible against C as to make him liable to B.
2. Suppose C said on one occasion in the presence of D that he received the money or that the contract was entered into by A with his (C’s) consent, this statement can be testified to by D in a litigation by B against C.
3. If A was really an agent of C in the transaction, then, whatever is said or done by A while acting within the scope of his authority is admissible against C, his principal, the same as if C personally entered into the contract with B.
4. Assuming that A is a partner and C is the partnership, it is clear, on the same legal principle, that the statement of A while transacting the business of the partnership within the scope of his authority is evidence against the partnership.
5. Where, however, A acted in his own name and B extended the loan on the personal credit of A, any admission made by A is not binding on C, the partnership.

Existence of partnership must be proved. 

• Before the partnership can be charged with the admission of a partner under Article 1820, the partnership relation must be shown and proof of that fact must be made by evidence other than the admission itself. (Sec. 29, Rule 130, Rules of Court.) 
• Hence, if in the example given (No. 4.), the existence of the partnership is denied, B must first prove the same by evidence other than the statement of A before such statement can be used as evidence against the partnership. 
• Once the existence of the partnership relation has been proven by other independent evidence, statements or admissions, made by any partner speaking for the partnership concerning partnership affairs while acting within the scope of his authority are admissible as evidence against the partnership.
• Admissions or declarations made in the presence of the person to be charged as a partner are admissible to prove the existence of the partnership. 
• Thus, where A states in the presence of C that A is a partner in partnership X composed of A and C, and C remains silent, the statement may be offered in evidence to show that A and C are partners.
• It has been held that an admission made by a partner who was no longer a partner at the time of the declaration is not admissible in evidence against the partnership.

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.

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

• Like the law of agency, the law of partnership imputes notice to, or knowledge of, any partner of any matter relating to partnership affairs to the partnership except in case of fraud. 
• The reason is that members of a partnership stand in a fiduciary relationship to one another, and it is presumed that the partners disclose to one another all relevant information concerning partnership business.
• A third person desiring to give notice to a partnership of some matter pertaining to the partnership business need not communicate with all the partners. 
• If notice is delivered to a partner, that is an effective communication to the partnership notwithstanding the failure of the partner to communicate such notice or knowledge to his co-partners.

Cases of knowledge of a partner. 

Article 1821 speaks of three cases of knowledge, namely: 

1. Knowledge of the partner acting in the particular matter acquired while a partner; 
2. Knowledge of the partner acting in the particular matter then present to his mind; and 
3. Knowledge of any other partner who reasonably could and should have communicated it to the acting partner.

Examples:

1. A, B, and C are partners in partnership X and Co. D filed an action against X and Co. on a contract. The service of notice of the complaint made on A only, operates as service to the partnership or to all the partners.
2. A, acting for the partnership, bought a parcel of land from D. Before the sale, A acquired some knowledge that the land is involved in litigation in which E claims to be the owner. Nevertheless, A did not convey the information to the partnership. Later on, E was able to recover the land. In this case, A’s knowledge is knowledge of the partnership. The knowledge by A may have been acquired before he became a partner provided the same was then present to his mind. This proviso involves a question of fact and it may be difficult to prove that such knowledge was present to A’s mind. It is believed, however, that once prior knowledge by the acting partner is shown, such knowledge must be presumed to be “then present to his mind,” unless the partnership proves otherwise. 
3. If B (he is not the acting partner) had received the information and it is reasonable to believe that he could and should have communicated it to A (the acting partner), B’s knowledge also operates as knowledge of the partnership. However, if B acquired knowledge or notice before he became a partner, then, there is neither notice to nor knowledge of the partnership.
4. If A, in the second example, deliberately did not inform the partnership regarding the claim of E for a consideration paid or promised by D, the notice to or knowledge of A cannot be imputed to the partnership, because the law says “except in the case of a fraud on the partnership committed by or with the consent of that partner.”

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.

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 articles 1822 and 1823.

Liability arising from partner’s wrongful act or omission or breach of trust.

• Solidary liability. —
• The above three articles provide for the solidary liability of the partners and also the partnership to third persons (Art. 1824.)for the wrongful act or omission (Art. 1822.) or breach of trust (Art.1823.) of a partner acting within the scope of the firm’s business or with the authority of his co-partners. 
• This is true even though the other partners did not participate in, or ratify, or had no knowledge of the act or omission, without prejudice to their right to recover from the guilty partner. 
• It has been held that in workmen’s compensation cases, the liability of business partners arising from compensable injury or death of an employee should be solidary.
• Different from liability under Article 1816.— 
• This liability of the partners under the above articles is different from their liability for contractual obligations as defined in Article 1816. 
• Art. 1816:
• Joint and subsidiary
• Partnership obligations
• Arts. 1822-1824:
• Solidary
• Liability of the partnership arising from the wrongful acts or omissions of any partner
•  The act or omission is called “quasi-delict’’ or “tort’’ when it does not constitute a crime or felony punishable by law.
• Reason for imposition of wider liability. — 
• The reason for the law’s imposition of wider liability on the partnership with respect to torts and breach of trust is based on public policy. 
• The rule of respondeat superior (also called the rule of vicarious liability) applies to the law of partnership in the same manner as other rules governing the agency relationship. 
• Respondeat superior ("let the master answer") is a legal doctrine that holds the principal vicariously liable for the torts (civil wrongs) committed by their agents while acting within the scope of their authority.
• The obligation is solidary because the law protects him who, in good faith, relied upon the authority of a partner, whether such authority is real or apparent. This is the reason why under Article 1824 all partners, whether innocent or guilty, as well as the legal entity which is the partnership, are solidarily liable. 
• Injured party may proceed against partnership or any partner. — 
• Since the partners are liable solidarily, the party aggrieved has his election to sue the firm or to sue one or more of its members. 
• He may even single out for suit a partner who, personally, was in no wise involved in the commission of the tort or breach of trust.
• Requisites for liability. — 
• The following are the requisites for liability under Article 1822:
1. The partner must be guilty of a wrongful act or omission; and
2. 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.
• So, the partners are liable for the negligent operation of a vehicle by a partner, acting in the course of the business which results in a traffic accident.
• But if he is driving a partnership-owned vehicle for purposes of his own, although with the permission of the other partners, the acting partner alone is liable. 
• The partnership is not liable if the partner acted on his own and not for the benefit of the partnership in the course of some transaction not connected with the partnership business, even though he was in a position to commit the act (e.g., fraud) only because of his being a partner in the business.
• Neither is the partnership liable if the wrongful act or omission was committed after its dissolution and the same was not connected with the winding up of partnership affairs.
• Criminal liability for criminal acts.—
• A non-acting partner in a partnership engaged in a lawful business is not criminally liable for the criminal acts of another partner but he is criminally liable if the partnership is involved in an unlawful enterprise with his knowledge or consent. 
• Partnership liability under Article 1822 does not extend to criminal liability, such as embezzlement, where the wrongdoing is regarded as individual in character. 
• So, it has been held that one member of a law partnership is not subject to disbarment or discipline for the misconduct of his partner where he had no knowledge of the misconduct, nor consented to it nor participated in it.
• But where the crime is statutory, especially where it involves a fine rather than imprisonment, even criminal liability may be imposed. 
• Thus, in a case, a partnership fine was imposed for a partner’s illegal blasting.
• Article 1822 speaks of “any penalty x x x incurred.”

Misapplication of money or property of a third person.

• Under Article 1823, the partnership is liable for any losses suffered by a third person whose money or property is misappropriated by a partner who received it within the scope of his authority or by any other partner after it was received by the partnership in the ordinary course of business while in its custody.

Examples:

1. A, B, and C are partners in partnership X & Co. engaged in a pawnshop business. A received from D a diamond ring as security for a loan D obtained from the partnership. 
• In case of the conversion of the ring by A, who received the same or by B, all of the partners are solidarily liable for the loss with X & Co. to D. Even the innocent partners are personally liable without prejudice, of course, to their right to recover from the guilty partner
2. A, B, and C are partners in X & Co., an investment firm. C fraudulently obtained D’s money in the ordinary course of the firm’s business and used the money for personal expenses rather than investing it.Aand C did not consent to or participate in the breach of trust.As a matter of fact, they came to know of the breach only some years after it had occurred. 
• All partners are solidarily liable to D. 

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. 

Partner by estoppel; partnership by estoppel.

• A partnership is ordinarily created by contract among the parties. 
• Article 1825 recognizes another form of partnership — partnership by estoppel. 
• It is, however, strictly speaking not a partnership.

Meaning and effect of estoppel.

• Estoppel is a 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. 
• Through estoppel, an admission or representation is rendered conclusive upon the person making it and cannot be denied or disapproved as against the person relying thereon. (Art. 1431.) 

When person a partner by estoppel.

• General Rule: Persons who are not partners as to each other are not partners as to third persons. (Art. 1709[1].) No one can be held liable nor claim rights as a partner unless he has given his consent to become such. 
• Exception: Article 1825. 
• Due to the doctrine of estoppel, one may become liable as a partner even though he is not a partner in fact.
• A person not a partner may become a partner by estoppel and thus be held liable to third persons as if he were a partner, when by words or by conduct he:
1. Directly represents himself to anyone as a partner in an existing partnership or in a non-existing partnership (with one or more persons not actual partners); or
2. Indirectly represents himself by consenting to another representing him as a partner in an existing partnership or in a non-existing partnership.
• In other words, the holding out as a partner may be done by the person himself, or by his consent or with his knowledge. 
• To hold the party liable, the third person must prove such misrepresentation by the purported partner and that a bona fide or justifiable reliance by him upon it caused him injury.

Liability as partners may arise contrary to their intentions.

• The liability as a partner of a person who holds himself out as a partner, or permits another to do so, is predicated on the doctrine of estoppel and on the policy of the law seeking to prevent frauds upon those who lend their money on the apparent credit of those who are held out as partners. 
• This liability as partners may arise contrary to their own intentions. 
• Thus, one who has received profits from an apparent partnership transaction is estopped from denying the relationship on the ground that the partnership agreement was void. 
• The question of liability is not what the parties intended by their contract but whether third persons had a right to rely on their joint credit.
• It is important to understand that one who is deemed to be liable as a partner by reason of estoppel does not thereby obtain full rights as a partner.

Examples:

1. A, B, and C are partners in X & Co. D represented himself as a partner in X & Co. to E who, on the faith of such representation, extended credit to X &Co. 
• D is a partner by estoppel. He is liable to E as though he is an actual member of X &Co. 
• If all the partners A, B, and C consented to the representation, then a partnership liability results. This is a case of partnership by estoppel. All the partners and D are liable. (par. 1[1].) Note that in this case there is an existing partnership and all the partners consented to the representation.
2. If only A and B consented to the representation, there is no partnership liability. Only A, B, and D are partners by estoppel. They are liable pro rata to E. (par. 1[2].)
3. But if D acted alone without the consent of A, B, and C, then he alone is liable to E. He is liable separately. 
4. Suppose A, B, and C are not really partners, and D represented himself as a partner of A, B, and C to E. 
• If the representation was made without the consent of A, B, and C, D alone shall be liable separately to E. If it was made with the consent of A, B, and C, then all of them (A, B, C, and D) shall be liable pro rata to E. They are partners by estoppel.
• If only A consented to the representation, separate liability is created only against A and D. Of course, if D is represented as a partner in an existing or non-existing partnership without his consent, he is not liable to E. 
• In all the cases when there is no existing partnership (Example No. 4), or there is no consent by all the members of an existing partnership (Example No. 2), it is the joint act or obligation of the person acting and the persons consenting to the representation. (par. 2.) 
5. A is held out with his consent as a partner of B who is in business by himself. E relied on the representation of B. 
1. Has E a priority on the property in the business of B over F, a creditor of B, who trusted only B and not the supposed partnership of A and B? 
2. No. Aand B would be liable jointly, but, as there was, in fact, no partnership fund, E, who thought there was a partnership of A and B, would have no priority on the assets which B had in his business as distinguished from his other assets.

Application of estoppel as between partners.

• The doctrine of estoppel has no application as between actual partners. 
• Partners become such by agreement and not by estoppel. (No. 6.) 
• It is true that a single partner or one or more partners in a partnership may become liable to third persons beyond the limits fixed by the partnership agreement by holding out as partners to an extent greater than that specified in the partnership agreement. 
• As between the partners, such an action might be the basis for a dissolution of the partnership but it would apply primarily to third persons who had acted on the representations to their detriment. 

Application of estoppel as to third parties.

• It is in this area that the doctrine of estoppel has been applied. (No. 6.) 
• A person or persons is or are held to be liable as partners because of their representing themselves to be such, or by allowing others with their consent and knowledge, to so hold them out to be partners. 
• The law will not permit a denial of such representation where third parties have in the exercise of reasonable diligence relied thereon to their detriment. 
• There is a dictum to the effect that the holding out as a partner may have been so public and open that the presumption is thus created that the third person did, in fact, rely upon it. 
• As to whether or not a person has held himself out to be a partner or has permitted another to so hold him out is a question of fact (Ibid., pp. 47-48.) to be determined by evidence; so each case rests upon its own merits.
• It is obvious, however, that no one can be charged as a partner where the acts relied on for that purpose are neither his own acts, nor acts of others authorized by or known to him. 
• Even though it were generally, supposed, believed, and understood that a person is a “partner” in a concern, this would be insufficient evidence to prove that he was a partner. 
• The cases arising under Article 1825 must be distinguished from the situation covered by the last paragraph of Article 1834  which is not, properly speaking, a situation where partnership by estoppel results. It is rather a partnership liability which continues for lack of proper termination.

Applicability of general provisions on partnership. 

• If the law recognizes a defectively organized partnership as de facto as far as third persons are concerned, for purposes of its de facto existence, it should have such attribute of a partnership as domicile. 
• Although it has no legal standing or juridical personality, it is a partnership de facto and the general provisions of the Civil Code applicable to all partnerships apply to it. The domicile of such a partnership is at the place where it conducts its business so that registration of a chattel mortgage therein is valid in accordance with Section 4 of the Chattel Mortgage Law. 

Elements to establish liability as a partner on ground of estoppel. 

The basic elements in connection with establishment of liability as a partner if based on the doctrine of estoppel must encompass: 

1. Proof by plaintiff that he was individually aware of the defendant’s representations as to his being a partner or that such representations were made by others and not denied or refuted by the defendant; 
2. Reliance on such representations by the plaintiff; and 
3. Lack of any denial or refutation of the statements by the defendant; such denial need not precede plaintiff’s acting thereon if the denial was forthcoming promptly upon hearing of the representations, and if, by prudence and diligence the plaintiff might have learned of the truth or untruth of the representations. 

• Defendant need not be proved to be a man of financial ability. Sole reliance is not a requisite with respect to dealings involving the one representing or represented to be a partner.

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

• The Revised Corporation Code of the Philippines (R.A. 11232) provides: 

“Sec. 20. Corporation by estoppel. — All persons who assume to act as a corporation knowing it to be without the 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 its as a corporation or on any tort committed by it as such, it shall not be allowed to use on any its lack of corporate personality as a defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation.” 

• The law makes liable as general partners “all persons who assume to act as a corporation” and may include persons who attempt, but fail to form a corporation and who carry on business under the corporate name.
•  A de facto partnership among them is created. 
• Only the active members of the unsuccessfully attempted corporation should be liable as general partners. 
• Subscribers to stocks who take no part in the supposed corporation are not personally liable.

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 

be satisfied only out of partnership property, 

unless there is a stipulation to the contrary.

Liability of incoming partner for partnership obligations. 

• Limited to his share in partnership property for existing obligations. — 
• When a person is admitted as a partner into an existing partnership, he is liable for all obligations existing at the time of his admission as though he was already a partner when such obligations were incurred. 
• For such obligations, his liability is limited to his share in the partnership property, unless there is a stipulation to the contrary. 
• It has been said that the credit of a new member of a partnership does not enter into the consideration of the creditors of the old partnership, and it would be manifestly unjust to hold the new partner liable unless he, by an express or implied agreement, assumed the debts of the old firm. 
• Extends to his separate property for subsequent obligations.— 
• Those who were already partners at the time when the obligations were incurred are liable with their separate property. (Art. 1816.) 
•  For all the obligations accruing subsequent to the admission of the new partner, all the partners are liable with their separate properties.
• Such obligations may have been incurred by virtue of a contract made before his admission.

Rights of existing and subsequent creditors.

• It, therefore, results that:
• Existing and subsequent creditors 
• have equal rights as against partnership property and separate  property of the previously existing members of the partnership 
• Subsequent creditors 
• have rights against the separate estate of the newly admitted partner. 
• Where business is continued. — 
• Section 1826 should be read in connection with Section 1840 which provides for liability of persons continuing the business in certain cases.
• Both sections are based on the principle that where there has been one continuous business the fact that a new partner has been admitted to the partnership, or a partner ceased to be connected with it, should not be allowed to cause, as before, endless confusion as to the claims of the creditors on the property employed in the business; 
• but that all creditors of the partnership, irrespective of the times when they became creditors and the exact combinations of persons owning the business should have equal rights in such property. 
• The rule has solved one of the most perplexing problems of partnership law.
• Where incoming partner has assumed obligation of retiring partner. — 
• Suppose, an incoming partner has assumed the obligation of the retiring partner as one of the terms of the contract by which he is admitted into the firm, is he liable directly to the old partnership creditors such that the latter has a right of action against the incoming partner? The answer is in the affirmative if the assumption was made primarily to benefit the firm creditors. 
• This situation is governed by Article 1311 (par.2.) of the Civil Code which states: “If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.”
• Reason for rule making the new partner liable. — 
• The rule making an incoming partner liable even for partnership obligations contracted before his admission cannot be considered harsh for the new partner because he “partakes of the benefits of the partnership property and an established business. He has every means of obtaining full knowledge of the debts of the partnership and protecting himself because he may insist on the liquidation or settlement of existing partnership debts. On the other hand, these means are not afforded the creditor.” 

Example:

• A, B, and C are partners engaged in a drug store business. Their contribution is P10,000.00 each. D is admitted as a new partner with a contribution of P4,000.00. At the time of his admission, the partnership has an outstanding obligation to E in the amount of P40,000.00. 
• In this case, D is also liable to E for this obligation of P40,000.00. Thus, if the assets of the partnership amount to P34,000.00,thesamewillbeexhaustedtherebyleavingabalance of P6,000.00 for which only A, B, and C shall be liable jointly or pro rata, out of their separate property. D is not personally liable in the absence of an agreement. 
• However, if the obligation was incurred by the partnership subsequent to the admission of D, there would be no difference between old and new partners, as all of them shall be personally liable pro rata or P1,500.00 each. (Art. 1816.) D is entitled to a proportional reimbursement from A, B, and C the amount he has paid in excess of his share of the liability as follows: 
• Shares of A, B, and C (10/34 of P6,000) = P1,764.70 each 
•  Shares of D (4/34 of P6,000) = P705.88 
• So A, B and C are liable for P264.70 each to D for the excess of P794.12, the difference between P1,500.00 and P705.88

Liability of outgoing partner/ incoming partner.

• Contract made before retirement or withdrawal.—
• Where a partner gives notice of his retirement or withdrawal from the partnership, he is freed from any liability on contracts entered into thereafter, but his liability on existing incomplete contracts continues.
• Thus, he is liable for goods sold and delivered after his retirement or withdrawal and notice thereof, if the sale was pursuant to a contract made before such retirement or withdrawal.
• Performance after admission of new partner. — 
• In the case of an incoming partner, he is not personally liable for the existing partnership obligations unless there is a stipulation to the contrary (see Art. 1840, par. 2.), but in a parallel situation above, he is liable for goods delivered to the partnership after his admission to it, where the goods so delivered are in the performance of a contract made before his admission. 
• The result is that both the retiring and the incoming persons are liable for the debt created by delivery of such goods. 
• Thus, the creditor, without further exertion, obtains two debtors where before he had only one.

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.

• With respect to partnership assets, the partnership creditors are entitled to priority of payment. (see Art. 1839[2, 3, 8].) 
• This rule is based upon the theory that the partnership, treated as a legal entity distinct and separate from the members composing it (Art. 1768.), should apply its property to the payment of its debts in preference to the claim of any partner or his creditors. 
• The rule applies only in the event of the disposition of partnership property among its creditors to pay partnership debts. 
• The partners may deal with partnership property in the usual course of business as they see fit. 
• Both the partnership and the separate partners thereof may be joined in the same action. 
• But the private property of the partners cannot be taken in payment of partnership debts until the common property of the concern is exhausted.

Remedy of private creditors of a partner. 

• Without prejudice to the right to preference of partnership creditors, the creditors of each partner may ask for the attachment and public sale of the share of the latter in the partnership assets. (Art.1814.)
• Such share really belongs to the partner. (Art.1812.) 
• The purchaser at the public sale does not become a partner. (Arts. 1767, 1813.)

Example: 

• A, B, and C are partners in a partnership known as X & Co. They contributed equally to the partnership. As they have no stipulation regarding the share of each partner in the profits, they share equally in the partnership assets, namely: 1/3.After a year of operation, the assets of the partnership amounted to P40,000.00. It is indebted to D in the amount of P28,000.00. E is a separate creditor of A for P6,000.00. 
• The different claims shall be settled as follows: 
• As partnership creditor is preferred, D shall be paid first the amount of P28,000.00, thereby leaving the partnership assets to only P12,000.00. 
• Each partner shall, therefore, get only P4,000.00 as his share in the assets. 
• Hence, E can collect only P4,000.00 from the assets of the partnership. 
• His remedy is to recover the balance of P2,000.00 from the private property of A. (see Art. 1839[9].)