Law on Partnerships and Private Corporations
Section 3–Obligations of Partners with Regard to Third Persons
Art.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)
Requirement of firm name
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Partnership must have a name that it will be identified and distinguished from partners
composing it, third persons, and other entities. It may or may not include the name of one or
more of the partners.
Effect if a third person allows his name to be included in the firm name.
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A person not being a member of the partnership which includes his name in the firm name shall
not have the rights of partner. But instead, will be subject to the liability of a partner.
This is intended to protect third persons who transact business with the partnership believing
that he is a partner.
Art. 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)
Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void, except as
among the partners. (n)
Nature of contractual liability of partners to third persons
a. Pro rata–liability of partners after partnership assets have been exhausted is equal/joint.
Because it is meant to be imposed upon all the partners.
b. Subsidiary–each partner shall be liable with his separate property only after all partnership
assets have been exhausted.
Partners liable
All general partners whether:
a. Capitalist, or
b. Industrial Partner
Status of stipulation exempting a partner from liability to third persons
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Any stipulation exempting a partner from liability to third persons shall be void as regards such
thirds persons, but valid among partners.
If there is such stipulation and/or there is an industrial partner, liabilities shall be paid as follows:
a. Partnership assets shall first be used to pay liabilities.
b. If partnership assets are insufficient, remaining liabilities shall be paid equally from separate
assets of all partners.
c. Thereafter, partners not exempted from subsidiary liability shall reimburse to the following
partners the amount paid by them from their separate assets:
1. Industrial Partner
2. General partners exempted from liability to third persons by reason of stipulation among
partners
d. Reimbursement may be according to:
- profit and loss agreement, or
- ratio of capital contribution
Art. 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 goodwill 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 or authority shall bind the partnership to persons
having knowledge of the restriction. (n)
When partnership liable to third persons for acts of partners
1. a. partner is authorized to act
b. whether or not in the usual way of the business
2. a. partner is not authorized
b. usual way of business
c. third person is not aware of partner’s lack of authority.
NOTE: third person would not normally inquire if a partner has authority because it is in the usual way of
business. So, the third person’s assumption is, the partner has authority.
When partnership not liable to third persons for acts of partners:
1. a. partner is not authorized.
b. usual way of business
c. third person has knowledge of partner’s lack of authority.
2. a. partner is not authorized.
b. not usual way of business
NOTE: it is immaterial whether or not the third person knows of the partner’s lack of authority. It is up to
the third person to find out if the partner has authority since it is not in the usual way of business.
Acts not considered for apparently carrying on of partnership business:
1. Assignment of the partnership property in trust for creditors or on the assignee’s promise to
pay the debts of the partnership.
- possession of partnership property will be ceded to the creditors or assignee.
- partnership will be deprived of the use pf the property.
2. Disposition of goodwill of the business
- Deprives the partnership of the public patronage of its business.
3. Doing any other act which would make it impossible to carry on the ordinary business of the
partnership.
- Purpose for which the partnership was formed which is to engage in business will be defeated
4. Confession of a judgment
- Results in bargaining away of the right of the partnership to a day in court
5. Entering into a compromise concerning a partnership claim or liability
- A partner will be making concession of partnership claim or liability.
6. Submission of a partnership claim or liability to arbitration
- Results in bargaining away of the right of the partnership to a day in court
7. Renunciation of a claim of the partnership
- A partner has no right to deprive the partnership of a claim that rightfully belongs to the firm
and not him.
Art. 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