Short answer. Three things. Under Article 1838, on rescinding a partnership contract for fraud, you are entitled to a lien on the surplus partnership property for what you paid and contributed; to stand in the place of the firm's creditors for payments you made on its liabilities; and to be indemnified by the guilty party against the partnership's debts.
What the law says
To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons
Civil Code, Article 1838 — Rescission for Fraud in Formation. Read the full provision →
Rescission for fraud, and what it protects
A partnership contract, like any contract, can be rescinded where a party was induced into it by fraud or misrepresentation. Article 1838 addresses what the defrauded partner can recover, and it opens by preserving his position: the party entitled to rescind is protected without prejudice to any other right. So the three specific entitlements the article lists are additional to, not a substitute for, whatever other remedies the law gives a defrauded party.
A lien on the surplus
The first entitlement secures the money the defrauded partner sank into the venture. He has a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him. So what he paid to buy in, and the capital and advances he put up, are charged against the surplus — the partnership property left after the firm's outside creditors are paid.
Subrogation and indemnity
The other two entitlements deal with debts and with the wrongdoer. First, subrogation: after all liabilities to third persons have been satisfied, the defrauded partner may stand... in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities. So if he paid the firm's debts out of his own pocket, he steps into those creditors' shoes and can recover as they could have. Second, indemnity: he is entitled to be indemnified by the person guilty of the fraud... against all debts and liabilities of the partnership. This puts the ultimate burden where it belongs — on the person who committed the fraud, who must hold the defrauded partner harmless from the firm's debts.
If you were defrauded into a partnership
If you were induced to join a partnership by fraud or misrepresentation, this article maps what rescission gets you, and it is more than simply undoing the contract. Assemble the record of everything you put in — what you paid for your interest, the capital and advances you contributed, and any of the firm's debts you paid — because each of these grounds a specific entitlement: a lien on the surplus, subrogation to creditors you paid, and indemnity from the person who deceived you. And remember these rights are without prejudice to any other remedy you may have. The proof of what you paid, and of the fraud, is what turns the entitlements into a recovery.
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.
- Primelink Properties & Devt. Corp., et al. vs. Ma. Clarita T. Lazatin-Magat, et al, G.R. No. 167379, June 27, 2006 — read the decision on LawPhil →