Can one partner sign a contract that legally binds the whole partnership?

Each partner carries the firm's authority by default

Article 1818 opens with the proposition that every partner is an agent of the partnership for the purpose of its business, and binds the firm by acts, including signing in the partnership name, that are apparently for carrying on its business in the usual way. This is not a loophole; it is what makes a partnership workable, since a supplier cannot be expected to verify internal permissions before every order. The consequence for partners is uncomfortable but unavoidable: you are exposed to your co-partners' ordinary dealings, and the protection lies in choosing them carefully rather than in disowning what they sign.

The two limits on that authority

The first is knowledge. The firm is not bound where the partner in fact had no authority in the particular matter and the person dealing with him knew that. Both halves are required — a private restriction the counterparty never heard of does not help. The second limit is the nature of the act itself: 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. Anything outside the ordinary course of what this firm does needs actual authority, and the counterparty relies on appearances at his own risk.

The acts one partner can never do alone

The article then lists seven things that one or more partners, but less than all, have no authority to do unless the others authorised it or abandoned the business. They include assigning partnership property in trust for creditors, disposing of the goodwill of the business, doing any act that would make it impossible to carry on the ordinary business, confessing a judgment, entering into a compromise of a partnership claim or liability, submitting such a claim to arbitration, and renouncing a claim of the partnership. What unites them is that each disposes of the firm's future or its claims rather than conducting its trade.

What this means when you are drafting or dealing

The article closes by providing that no act in contravention of a restriction on authority binds the partnership as to persons having knowledge of the restriction — which tells you what to do with internal limits. A limit that lives only in the partnership agreement protects you against nobody; a limit communicated in writing to the banks, suppliers and counterparties who matter does. If you are on the other side of a significant or unusual transaction, ask for written authority from all the partners rather than assuming the signatory speaks for the firm, and keep it with the contract.

Cases citing this provision

These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.

• Villamor & Victolero Construction Company, et al. vs. Sogo Realty and Development Corporation/Sogo Realty, G.R. No. 218771 / G.R. No. 220689, June 3, 2019 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 1818 — Partner as Agent of the Partnership