a. General Rule on Partnership Management
Article 1818 of the Civil Code provides that “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.” This principle is supported by Article 1803 which provides “When the manner of management has not been agreed upon . . . All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership.” Article 1818 goes on to provide that “An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.”
Embodied clearly with the language of Article 1818 is the “doctrine of apparent authority” which allows a third party dealing with a juridical entity to rely upon the validity and enforceable of contracts entered into with an officer or representative who has been by practice endowed with apparent authority to act for the juridical person. In every partnership, there is a presumption of apparent authority for every partner to act for and thereby bind the partnership in all that is “apparently for the carrying on of the business of the partnership in the usual way.” Thus, the Court held in Munasque v. Court of Appeals, 139 SCRA 533 (1985), that a presumption exists that each partner is an authorized agent for the firm and that he has authority to bind it in carrying on the partnership transaction.
We should therefore consider the old ruling in Council of Red Men v. Veterans Army, 7 Phil. 685 (1907), where the Court interpreted the original provision of Article 1803 of the Civil Code (then Article 1695 of the old Civil Code), that allowed one partner to act to bind the partnership, to apply only when there has been no provision at all in the articles of partnership on the exercise of power or management, thus:
One partner, therefore, is empowered to contract in the name of the partnership only when the articles of partnership make no provision for the management of the partnership business. In the case at bar we think that the articles of the Veteran Army of the Philippines do so provide. It is true that an express disposition to that effect is not found therein, but we think one may be
fairly deduced from the contents of those articles. They declare what the duties of the several officers are. In these various provisions there is nothing said about the power of making contracts, and that faculty is not expressly given to any officer. We think that it was, therefore, reserved to the department as a whole; that is, that in any case not covered expressly by the rules prescribing the duties of the officers, the department were present. It is hardly conceivable that the members who formed this organization should have had the intention of giving to any one of the sixteen or more persons who composed the department the power to make any contract relating to the society which that particular officer saw fit to make, or that a contract when so made without consultation with, or knowledge of the other members of the department should bind it. We therefore, hold that no contract, such as the one in question, is binding on the Veteran Army of the Philippines unless it was authorized at a meeting of the department. No evidence was offered to show that the department had never taken any such action. In fact, the proof shows that the transaction in question was entirely between Apache Tribe, No. 1, and the Lawton Post, and there is nothing to show that any member of the department ever knew anything about it, or had anything to do with it. The liability of the Lawton Post is not presented in this appeal. (7 Phil. 685, at pp. 688-689).
We are of the strong position that the doctrine in Council of Red Men,rendered at a time when our legal jurisdiction was still deciding the proper formulation of the doctrines in Philippine Partnership Law, no longer applies.
Firstly, the prevailing doctrine now embodied in Articles 1803[1] and 1818 of the Civil Code is that every partner has the apparent authority to act for and in behalf of the partnership in carrying on the ordinary or usual business of the partnership.
Secondly, the ruling in Council of Red Men was based on the principal that the special rules of management of partnership affairs provided for in the articles of partnership is binding on the public, or at least on every person dealing with the partnership. This is not the rule under Philippine Partnership Law which characterizes the contract of partnership and the arising of the partnership juridical person, as being merely consensual with no specific formalities being required in general. Thus, even when the articles of partnership has been formally executed and registered with the SEC, the same is not considered to be a public document binding on the public. Therefore, notwithstanding what specific provisions may be found in the articles of partnership on the management of the partnership business, the same is binding inter se among the partners, but does not prejudice the rights of a third party who deals in good faith with the partners without actual knowledge of the content of the articles of partnership.
Although special management arrangements may be made among partners, and even when so formalized within the terms of the articles of partnership, generally such special arrangements do not bind or prejudice third parties who deal with the
partnership business without knowledge of such special arrangement, and who are not mandated to seek formal authority and that in fact are deemed to have a right to expect, unless otherwise indicated, that their dealings with the managing partner should bind the partnership.
This situation is best exemplified in the decision in Litton v. Hill & Ceron, 67 Phil. 509 (1935), where an obligation in a sum of money was sought to be recovered from the partnership Hill & Ceron in whose name it was entered into by one of the managing partners, when in fact the articles of partnership provided expressly that: “Sixth. That the management of the business affairs of the copartnership shall be entrusted to both copartners who shall jointly administer the business affairs, transactions and activities of the copartnership.” In ruling that the act of just one of the managing partners should properly make the partnership liable for the payment of the debt, the Court held –
It follows from the sixth paragraph of the articles partnership of Hill & Ceron above quoted that the management of the business of the partnership has been entrusted to both partners thereof, but we dissent from the view of the Court of Appeals that for one of the partners to bind the partnership the consent of the other is necessary. Third persons, like the plaintiff, are not bound in entering into a contract with any of the two partners, to ascertain whether or not this partner with whom the transaction is made has the consent of the other partner. The public need not make inquiries as to the agreements had between the partners. Its knowledge is enough that it is contracting with the partnership which is represented by one of the managing partners. (Ibid, at p. 513).
Litton held that there is a general presumption that each individual partner is an authorized agent for the firm and that he has authority to bind the firm in carrying on the partnership transaction, and that the presumption is sufficient to permit third persons to hold the firm liable on transactions entered into by one of the members of the firm acting apparently in its behalf and within the scope of his authority. This was especially true under the circumstances in Litton where the transaction which gave rise to the partnership obligation was in the ordinary course of the partnership’s business.
Litton also supports the legal position that even with the registrations of the article of partnership with the SEC, the same does not constitute a public document that binds those who deal with the partnership enterprise. In other words, even a registered articles of partnership constitutes first and foremost a intra-partnership document that is binding upon the partners, and a third party acting in good faith without actual knowledge of the contents thereof is not bound by the terms of the articles of partnerships.
In Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941), the Court held that in a transaction covering the purchase and delivery of merchandise within the ordinary course of the partnership business effected by the industrial partner without the consent of the capitalist partner, the provisions in the articles of partnership that the industrial partner “shall manage, operate and direct the affairs, businesses and activities of the partnership,” constitute sufficient authority to make such transaction binding against the partnership, as against another provision of the articles by which the industrial partner is authorized “To make, sign, seal, execute and deliver contracts . . upon terms and conditions acceptable to him duly approved in writing by the capitalist partner,” which must cover only the execution of formal contracts in writing and not necessarily to routine transactions such as ordinary purchases and sale of merchandise.
In addition, Aznar applied the “doctrine of apparent authority” and the “estoppel doctrine” when it held that “The evidence also shows that previous purchases made by [the industrial partner] in the name of the Aznar & Company from the same plaintiff were honored and paid for by the said firm, and we may well also assume that the goods herein in question which were delivered to defendant firm were made use of by the latter. It is, therefore, but just that the firm answer for their value.” (at p. *).
In Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court even took into consideration the provisions of Article 129 of the Code of Commerce to the effect that “If the management of the general partnership has not been limited by special agreement to any of the members, all shall have the power to take part in the direction and management of the common business, and the members present shall come to an agreement for all contracts or obligations which may concern the association.” It laid down the rule that is relevant under the current provisions of the Civil Code that defines the necessity of concurrence of partners’ vote on any partnership act or contract, thus:
but this obligation is one imposed by law on the partners among themselves, that does not necessarily affect the validity of the acts of a partner, while acting within the scope of the ordinary course of business of the partnership, as regards third persons without notice. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his co- partners. The regular course of 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. In fact, Article 130 of the same Code of Commerce provides that even if a new obligation was contracted against the express will of one of the managing partners, “it shall not be annulled for such reason, and it shall produce its effects without prejudice to the responsibility of the member or members who contracted it, for the damages they may have caused to the common fund.” (Ibid, at p. 957)
The right of a partner to manage the affairs of the partnership or to act as an agent of the partnership is expressly affirmed by the following statutory provisions:
(a) Article 1820, which provides that an admission or representation made by any partner concerning partnership affairs within the scope of his authority is evidence against the partnership;
(b) Article 1821, which provides that notice to any partner of any matter relating to partnership affairs, and the knowledge of 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 or knowledge of the partnership (except in case of a fraud on the partnership);
(c) Article 1822, which provides that any loss or injury caused to any third person or any penalty incurred by reason of any wrongful act or omission of a partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, shall make the partnership liable therefore; and
(d) Article 1823, which provides that the partnership is bound to make good the loss caused by the misapplication by a partner acting within the scope of his apparent authority of money or property belonging to, or received by the partnership from, a third person.
In the cases of items (c) and (d) above-enumerated, Article 1824 of the Civil Code provides expressly that “All partners are liable solidary with the partnership for everything chargeable to the partnership.”
b. Transactions Not in the Ordinary Course of Partnership Business
Article 1818 of the Civil Code enumerates what are certainly not“apparently for the carrying on of the business of the partnership in the usual way,” and will not therefore be valid transactions unless done by or approved by all the partners, thus:
(a) Assigning of partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership;
(b) Disposition of the goodwill of the business;
(d) Entering into a compromise concerning a partnership claim or liability;
(e) Submitting a partnership claim or liability to arbitration; or
(f) Renouncing a partnership claim.
The foregoing cases are considered to be not merely acts of administration, but rather acts of ownership which can only be effected by the concurrence of all the partners who are collectively deemed to be the “owners” of the partnership and its business enterprise.
One would consider therefore that when the transaction involves the sale, transfer or encumbrance of the entire partnership business enterprise, it would constitute an act of strict ownership or an act of alteration, which cannot be considered as within the ordinary course of business that would come within the apparent authority of one partner. And yet in the early case of Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court held that the sale of the partnership’s business enterprise can be considered to be within the power of the managing partner, thus:
Appellants also question the validity of the sale covering the entire firm realty, on the ground that it, in effect, threw the partnership into dissolution, which requires consent of all the partners. This view is untenable. That the partnership was left without the real property it originally had will not work its dissolution, since the firm was not organized to exploit these precise lots but to engage in buying and selling real estate, and “in general real estate agency and brokerage business”. Incidentally, it is to be noted that the payment of the solidary obligation of both the partnership and the late Tan Sin An, leaves open the question of accounting and contribution between the co-debtors, that should be ventilated separately. (Ibid, at p. 960).
Perhaps Goquiolay was decided at an earlier time in our jurisdiction when the concept and doctrines pertaining to “business enterprise transfers” were not yet developed, much less appreciated. On ruling on the motion for reconsideration, the resolution of Goquiolay v. Sycip, 9 SCRA 663 (1969), returned on this point and clarified the applicable doctrine as follows:
It is next urged that the widow, even as a partner, had no authority to sell the real estate of the firm. This argument is lamentably superficial because it fails to differentiate between real estate acquired and held as stock-in-trade and real estate held merely as business site (Vivante’s “taller o banco social”) for the partnership. Where the partnership business is to deal in merchandise and goods, i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of a partner, because it is not in line with the normal business of the firm. But where the express and avowed purpose of the
partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm from part of its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary powers of the partner. . . (Ibid, at pp. 671-672).
The foregoing discussions in Goquiolay certainly began to appreciate an act or transaction in the ordinary course of business, which basically may involve only a sale of assets, from an extraordinary act or contract, which either disposes of the business enterprise or has the effect of preventing the pursuit of the business enteprise.
c. Specific Modification on the Power of Management
It is a policy in Partnership Law for the partners to be allowed to expressly contract around the default principle of “mutual agency” (i.e.,that the partners are all managers of the partnership enterprise). Thus, under Article 1800 of the Civil Code it is possible to appoint only one managing partner in the articles of partnership, in which case the managing partner “may execute all acts of administration despite the opposition of his partners,” and his powers are irrevocable without just or lawful cause. The same rule would apply when a partner is designated as managing partner outside of the articles of incorporation, but in such case his designation as managing partner is essentially revocable.
Thus, the Supreme Court has held that: a manager of a partnership can execute acts of administration without need of consent of the partners, including the power to purchase goods in the ordinary course of business (Smith, Bell & Co. v. Aznar, 40 O.G. 1882 [1941]); to hire employees (Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 [1908]), as well to dismiss employees (Martinez v. Cordoba & Conde, 5 Phil. 545 [1906]); to secure a loan to finish the construction of the boat of the partnership (Agustia v. Mocencio, 9 Phil. 135 [1907]); to employ a bookkeeper by his sole authority (Fortis v. Gutierrez Hermanos, 6 Phil. 100 [1906]); and to commence a suit in the name of the partnership against partnership debtors (Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988). Curiously though, the Court has also held that the managing partner has no power to purchase “barge, a truck and an adding machine” in the name of the partnership inasmuch as none of the properties were considered to be “supplies for partnership business.” (Teague v. Martin, 53 Phil. 504 [1929]) The old ruling is contrary to the doctrine of apparent authority in the usual or normal pursuit of the business of the partnership embodied in