CHRIST THE KING COLLEGE

College of Accountancy
Calbayog City, Western Samar

PARTNERSHIP

Chapter 2
Section 3

Obligations of the Partners with regard to Third Persons

LEARNING OUTCOMES
Upon finishing this session, the learner is expected to:
1. Know the rules for selection and election of firm name.
2. Discuss the partner’s subsidiary or secondary liability with the partnership.
3. Correlate “agency rule” in the partner’s representation for the partnership.
4. Explain the effects of conveyance of real property utilizing by the partnership.
5. Explain the effects of admission and notice of matters for partnership of one
partners.
6. Understand the concept of partnership estoppel.
LEARNING CONTENTS
Every partnership shall operate under a firm name, which may or may not include
the name of one or more of the partners (Article 1815). The importance of a having a
firm name is to distinguish the partnership which has a distinct and separate juridical
personality from the individuals composing the partnership and from other partnerships.
It is the right of partners to choose a firm name provided it is not misleading,
identical with or deceptively similar to a name which was previously adopted by any
other entity, interfere with the rights of others or is contrary to law.
The continued use of the name of a deceased partner is permissible provided
that the firm indicates in all its communications that the said partner is deceased (Rule
302, Code of Professional Responsibilities).
A person, not being a partner, included his name in the firm name does not
acquired the rights of a partner however he shall be subject to the liability of a partner
insofar as third persons without notice are concerned. (ibid.)
Liability for contractual obligations of the partnership (Article 1816)
For 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,
one who is bound and liable is the partnership itself, its assets or property.
However, when after all the partnership assets have been exhausted, the
individual member or partners becomes subsidiary or secondary liable. They shall be
liable pro-rata, meaning equally or jointly and not proportionately. The fact that a partner
has left the country and the payment of his share of the liability cannot enforced or his
liability is condoned by the creditor cannot increase the liability of the other partners.
An industrial partner although not liable to partnership losses but when it comes
to partnership debts, he is liable however he can recover the amount he has paid from
the capitalist partners unless there is an agreement to the contrary.
Any partner may enter a separate undertaking in his name with a third party to
perform a partnership contract or make himself solidarily liable on a partnership contract
and in such case, the partner is personally bound by his contract even if only the
partnership is shown to have derived benefits from it.
Partners may agree that the pro-rata liability shall not be imposed between and
among themselves however such agreement or that stipulation will not affect the rights
of a third person such as he cannot collect from one partner to his prejudice, that is void
and of no effects (Article 1817).
Partner as agent of the partnership (Article 1818)
Every partner are considered an agent of the partnership. The power of every
partner being the agent of the partnership, he can perform all acts or to do all things
necessary to carry out the ordinary business of the partnerships. Being an agent of the
partnership, he can bound the latter to the third persons who in turn is not bound or
affected when the partnership assert that such partner has no authority to perform or to
do an act, especially an innocent third persons who have the right to assume that every
partner has the power to bind the partnership for any transaction in the ordinary and
usual manner of the business of the partnership.
The third person has:
a) No duty to make inquiries as to acting partner’s authority.
b) Presumption that acting partner has authority to bind partnership.
c) No right to assume that acting partner has unlimited authority.
In these cases, all action of a partner to a third person, the partnership is bound
and liable. However, exception to these agency rule that the partnership is not bound
and liable, two (2) requisites must be concurred:
1. The partner so acting has, in fact, no authority; and
2. The third person knows that the acting partner has no authority.
Partnership is liable for all acts of partners for apparently carrying on the usual or
in line with the normal business of the partnership. For acts which are not apparently for
carrying on the usual business, the partnership is not bound, it is the individual partner
who contracted shall be liable. Exception, unless authorized by all the other partners or
unless they have abandoned the business.
Partnership is not liable for acts of partners if such:
1. Acts of strict dominion or ownership (selling partnership property not held for
sale).
2. Acts in contravention of a restriction on authority. – 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.
Legal effects of conveyance of real property belonging to partnership (Article
1819)
1. Title in partnership name, conveyance in partnership name.
Any partner may convey and pass the title to the buyers on the premise that
every partner is an agent of the partnership intended 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.
However, exception that partnership may recover such property notwithstanding
of the above if:
a) The conveyance was not in the usual way of business, or
b) Third person had knowledge of the fact that the said partner had no authority
even though the conveyance was made in the usual way of business.
2. Title in partnership name, conveyance in partner’s name.
The buyer or third person does not become the owner of the land, he gets only
the equitable interest of the partnership. Equitable interest or title is one not duly
recognized by law but in equity alone; it is a right or interest in property which is
imperfect and unenforceable at law but which under well-recognized equitable principles
should and is convertible into a legal right or title.
However, buyer or third person is not entitled even to the equitable interest if:
a) Partnership is not engaged in the buying and selling of lands.
b) Had knowledge of partner’s lack of authority although the sale was made in
the usual course of business.
3. Title in name of one or more of partners, conveyance in name of partner(s) in whose
name title stands.
Title and ownership passes although the land belongs to the partnership for the
reason that it is registered in the name of one or more partners and the record does not
disclose the right of the partnership.
4. Title in name of one or more or all partners or a third person in trust for partnership,
conveyance executed in partnership name or in name of partner.
The conveyance will only pass the equitable interest of the partnership for the
reason that partner(s) is/are being a mere trustee of the partnership. However, buyer or
third person is not entitled even to the equitable interest for the same reason in par. 2.
5. Title in name of all partners, conveyance in name of all partners.
Conveyance passes all their rights in such property, the same effect occur even
though the sale was not in the usual course of business of the partnership.
Admission by partners (Article 1820)
As a 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 except by virtue of a particular relation between them. Admission by a party as
testified to by a third person are admissible in evidence against him in litigation.
 In partnership, admissions of a partner does not bind against the partnership and
to his co-partners. It is only binding if such admissions refer to a matter concerning
partnership affairs and made within the scope of his authority.
An admission made by a partner who was no longer a partner at the time of the
declaration are not admissible in evidence against the partnership for he has no
personal knowledge on the matter.
Notice to, or knowledge of, a partner of matter affecting partnership affairs
(Article 1821)
Notice to or knowledge of any partner of any matter relating to partnership affairs
operates as a notice to or knowledge of the partnership except in case of fraud. A third
person desiring to give notice to a partnership need not communicate with all the
partners, notice to a partner is an effective communication to the partnership
notwithstanding the failure of the partner to communicate such notice or knowledge to
his co-partners.
Ex: Alan, Beth and Carla are partners in partnership Xander & Co. Donna filed an
action against Xander and Co. on a contract. The service of notice of the complaint
made on Alan only, operates as service to the partnership or to all the partners.
Three cases of knowledge of a partner:
1. Knowledge of the partner acting in the particular matter acquired while a
partner.
Ex: Alan, acting for the partnership, bought a parcel of land from Damian. Before
the sale, Alan acquired some knowledge that the land is involved in a litigation in which
Elena claims to be the owner. Nevertheless, Alan did not convey the information to the
partnership. Later on, Elena was able to recover the land. In this case, Alan’s
knowledge is knowledge of the partnership. Hence, Damian is not liable.
If Alan deliberately did not inform the partnership regarding the claim of Elena for
a consideration paid or promised by Damian, the notice to or knowledge of Alan 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”.
2. Knowledge of the partner acting in the particular matter then present to his
mind.
Ex: Same in the above, if Alan, before he become a partner obtained a
knowledge that the said land is involved in litigation, the partnership is presumed to
have knowledge for the said matter was then present to the mind of Alan. This proviso
involves a question of fact and it may be difficult to prove that such knowledge was then
present in Alan’s mind. It is believed, however, that once 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. Knowledge of any other partner who reasonably could and should have
communicated it to the acting partner.
Ex: If Beth (she is not the acting partner) had received the information and it is
reasonable to believe that he could and should have communicated it to Alan (the
acting partner), Beth’s knowledge also operates as knowledge of the partnership.
However, if Beth acquired knowledge or notice before she became a partner, then,
there is neither notice or nor knowledge of the partnership.
Partnership liability arising from partner’s wrongful act or omission (Article 1822)
 The partnership is liable for any partner’s wrongful act or omission provided two
(2) requisites concurred:
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-partner even if the act is not connected with the business.
Partnership liability arising from partner’s breach of trust (Article 1823)
The partnership is liable for any losses suffered by a third person (a) whose
money or property is misappropriated by a partner who received it within the scope of
his authority or by (b) any other partner after it was received by the partnership in the
ordinary course of business while it is in its custody.
All partners are liable solidarily with the partnership for everything chargeable to
the partnership under Articles 1822 and 1823. This is true even though the other partner
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. In other words, whether
innocent or guilty, all the partners are solidarily liable with the partnership itself (Article
1824).
Partner by estoppel; partnership by estoppel. (Article 1825)
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.
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 written or by conduct
he:
a) 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
b) Indirectly represents himself by consenting to another representing him as
partner in an existing partnership or in a non-existing partnership.
Partnership may be considered “partnership by estoppel” if the actual partners
consented to the representation of the third person who represented himself to be a
partner for the reason that he becomes an agent of the partnership.
Liability by the representation of a third person (separate or pro-rata
liability)
Adan, Ben and Carl are partners in X & Co. Dom represented himself as a
partner in X & Co. to Ed who, on the faith of such representation, extended credit
to X & Co.
What is the legal effect of this?
a) Dom is a partner by estoppel. He is liable to Ed just like an actual
member of X & Co.
b) If all the partners Adan, Ben and Carl consented to the representation,
then partnership liability results. This is a case of partnership by estoppel. All the
partners and Dom are liable to Ed.
If only Adan and Ben consented to the representation, there is no
partnership liability. Only Adan, Ben and Dom are partners by estoppel. They are
liable pro-rata to Ed.
 But if Dom acted alone without the consent of Adan, Ben and Carl, then
he alone is liable to Ed. He is liable separately.
Estoppel does not create partnership between the partners and third person. The
law considers them as partners and the association as a partnership only in so far it is
favourable to third persons by reason of equitable principle of estoppel. Liability is
created only in favour of persons who, on the faith of the said representation, gave
credit to the actual or apparent partnership.

Liability of incoming partner for existing obligations (Article 1826)

When a person is admitted as a partner into an existing partnership, he is liable
for all obligations previously and existing at the time of his admission as though he was
already a partner when such obligations were incurred.
The extent of his liability is limited to his share in partnership property for existing
obligations, unless there is a stipulation to the contrary and extends to his separate
property for subsequent obligations.
This rule cannot be considered harsh for the new partners because he partakes
of the benefits of the partnership property and an established business. Also, he has
every means of obtaining full knowledge of and protecting himself because he may
insist on the liquidation or settlement of existing partnership debts.
Preference in partnership property (Article 1827)
The creditors of the partnership shall be preferred to those of each partner as
regards the partnership property. Insofar to the creditors of each partner, they may ask
for the attachment and public sale of the share of the latter in the partnership assets for
such share really belongs to the partner.
The purchaser at the public sale does not become a partner.