How Can Two Managing Partners Resolve Operational Deadlocks?
Introduction
Operational disagreements between two managing partners can disrupt business decisions, delay transactions, and place partnership assets at risk. Philippine law provides a specific rule for resolving disagreements when two or more partners are entrusted with management but their respective duties are not separately defined.
Under Article 1801 of the Civil Code of the Philippines, each managing partner may perform acts of administration separately. If one managing partner opposes the act of another, the decision of the majority prevails. When there is a tie, the matter is decided by the partners holding the controlling interest.
What Rule Applies to Managing Partners?
Article 1801 of the Civil Code governs a partnership in which two or more partners have been entrusted with management, but the partnership agreement does not specify their respective functions or require joint action.
The provision states that each managing partner may separately perform acts of administration. However, if one managing partner objects to the act of another, the decision of the majority prevails. In the event of a tie, the partners owning the controlling interest decide the matter.
The rule is distinct from the general rule under Article 1803 of the Civil Code. Where the manner of management has not been agreed upon at all, all partners are considered agents of the partnership, subject to the limitations concerning important alterations to partnership immovable property.
When Does the Majority Rule Apply?
The majority rule applies when the following conditions are present:
- At least two partners are entrusted with management.
- The partnership agreement does not assign separate duties to the managing partners.
- The agreement does not require all managing partners to consent before any managing partner may act.
- One managing partner objects to an administrative act proposed or undertaken by another.
In this setting, management authority is shared. Each managing partner may initially act for the partnership, but an objection activates the decision-making process under Article 1801.
How Is a Majority Determined?
A majority generally requires more than half of the persons entitled to vote on the management issue. The result depends on the number of managing partners and the partnership agreement.
| Number of Managing Partners | Effect of an Objection |
|---|---|
| Three managing partners | The position supported by at least two managing partners generally prevails. |
| Four managing partners | At least three votes are ordinarily required to constitute a majority. |
| Two managing partners | An equal division creates a tie; the controlling-interest rule must then be examined. |
For a partnership with only two managing partners, one partner cannot ordinarily claim that his or her position is the “majority” when the other partner objects. The dispute becomes a tie unless the partnership agreement or the partners’ ownership interests gives one side controlling interest.
What Happens When Two Managing Partners Are Divided?
Where two managing partners have equal voting power or equal partnership interests, Article 1801 does not automatically authorize one partner to prevail over the other. The matter must be resolved by reference to the partners owning the controlling interest.
If the two managing partners are also the only partners and hold equal interests, there may be no internal majority capable of resolving the dispute. The partnership agreement should then be examined for provisions on deadlock resolution, appointment of a temporary manager, buyout, dissolution, or court intervention.
A partner should not treat the absence of an internal majority as permission to disregard the partnership agreement or to appropriate partnership property. Continued unilateral management may expose the responsible partner to an accounting claim, damages, or an action for winding up partnership affairs.
How Does the Partnership Agreement Affect the Dispute?
The partnership agreement is the first document that should be reviewed. It may alter the default rules by assigning exclusive functions, requiring joint consent, granting a casting vote, establishing voting thresholds, or identifying the partner with controlling interest.
Article 1800 of the Civil Code applies when a partner is appointed manager in the articles of partnership. That manager may perform acts of administration despite opposition from the other partners, unless the manager acts in bad faith. The manager’s power is generally irrevocable without just or lawful cause, and revocation requires the vote of partners representing the controlling interest.
By contrast, a management authority granted after the partnership has been constituted may be revoked at any time, subject to the agreement and the circumstances of the revocation.
When Is Unanimous Consent Required?
Unanimous consent is required when the partners stipulated that none of the managing partners may act without the consent of the others. Article 1802 of the Civil Code recognizes this arrangement.
The absence or disability of one managing partner generally cannot be used to avoid the unanimity requirement. An exception exists when there is imminent danger of grave or irreparable injury to the partnership.
Accordingly, a managing partner who acts alone despite an express unanimity clause may have acted beyond the authority granted by the partnership agreement. The legal consequences depend on the nature of the act, the knowledge of the third party, the partnership’s ratification, and the resulting injury.
What Acts Are Covered by the Majority Rule?
Article 1801 concerns acts of administration. These ordinarily include routine acts necessary to operate the partnership business, such as dealing with customers, paying ordinary expenses, supervising employees, collecting receivables, and entering transactions within the usual scope of the enterprise.
Acts that fundamentally alter the partnership, dispose of substantial assets, change the nature of the business, or materially prejudice the partnership may require a different analysis. The partnership agreement, the partners’ authority, the nature of the property, and the circumstances of the transaction must be considered.
Article 1803 also prohibits a partner from making an important alteration in partnership immovable property without the consent of the other partners, even if the alteration may be useful to the partnership. If the refusal of consent is manifestly prejudicial to the partnership, court intervention may be sought.
Can the Court Intervene?
Judicial intervention may be appropriate when the partnership has no functioning decision-making process, when a partner is acting in bad faith, or when partnership assets are at risk of dissipation. The available remedy may include an action for accounting, winding up, recovery of partnership property, damages, or dissolution, depending on the facts.
In Sy, et al. v. Court of Appeals, et al., G.R. No. 94285, 1999, the Supreme Court recognized that dissolution does not immediately terminate the partnership’s juridical personality. The partnership continues for the purpose of winding up its affairs and distributing its assets, and the appointment of a receiver during liquidation may be used to preserve partnership property.
Dissolution may occur by the express will of a partner in circumstances recognized by Article 1830 of the Civil Code, including situations where no definite term or particular undertaking has been specified. Dissolution does not, however, mean that a partner may immediately divide or personally use partnership assets.
What Are the Risks of Unilateral Management?
A managing partner who continues operating the business against the valid decision of the partnership may create liability for the resulting losses. The problem is particularly serious when the partner controls bank accounts, signs contracts, transfers property, or excludes the other managing partner from business records.
In Local Water Utilities Administration v. R.D. Policarpio & Co., Inc., G.R. No. 210970, 2024, the Supreme Court discussed the nature of obligations arising from the continued management of a partnership business against a partner’s will. It cited the rule that obligations involving the continuation and management of partnership affairs may be treated as solidary when the acts complained of are not severable and the respective liabilities cannot be separated.
This principle underscores the importance of promptly documenting objections and seeking an accounting or other appropriate relief when a partner continues business operations without proper authority.
Why Must the Partnership Be Joined in Litigation?
A partnership has a juridical personality separate and distinct from that of its partners. It may own property, incur obligations, enter contracts, and sue or be sued in its own name.
In Saludo, Jr. v. Philippine National Bank, G.R. No. 193138, 2018, the Supreme Court held that a partnership formed under the Civil Code acquires juridical personality by operation of law. The partnership itself is generally the real party in interest in litigation involving contracts entered into in its name and should be joined in proceedings concerning its rights or obligations.
Thus, a dispute between managing partners does not automatically become a personal dispute only between the individuals. If the controversy concerns partnership contracts, assets, accounts, or obligations, the partnership is ordinarily an indispensable or necessary party, depending on the relief sought.
Illustrative Examples
Example 1: Three managing partners. Three partners jointly manage a trading business. Two approve the purchase of inventory and one objects. If the transaction is an ordinary administrative act and no contrary agreement exists, the decision supported by two managing partners generally prevails.
Example 2: Two equal managing partners. Two partners each own 50 percent of the partnership and jointly manage the enterprise. One wants to borrow money and the other objects. There is no majority. The partner seeking the loan cannot rely on Article 1801 to override the objection unless the partnership agreement provides another method of resolving the tie or gives one partner controlling interest.
Example 3: Express unanimity clause. The partnership agreement states that neither managing partner may sell partnership property without the other’s written consent. One partner alone signs a deed of sale. The transaction must be assessed under the agreement, the rules on authority, the buyer’s knowledge, and any subsequent ratification by the partnership.
Recommended Steps for Resolving a Deadlock
- Review the governing documents. Examine the articles of partnership, partnership agreement, amendments, minutes, and written management appointments.
- Classify the disputed act. Determine whether it is an ordinary administrative act, an important alteration, or an act requiring special authority.
- Document the objection. Put the objection, reasons, and proposed alternative in writing, preferably before the transaction is completed.
- Preserve partnership records and assets. Secure books, bank statements, contracts, inventories, titles, permits, and electronic business records without unlawfully withholding access.
- Use an agreed dispute process. Consider mediation, a neutral business adviser, a casting-vote mechanism, a buyout, or a negotiated restructuring.
- Seek legal relief when necessary. Depending on the circumstances, the appropriate action may involve accounting, injunction, receivership, winding up, dissolution, or damages.
Final Observations
Article 1801 of the Civil Code allows the majority of managing partners to prevail when management duties are not separately defined and one managing partner objects to another’s administrative act. The rule promotes continuity of business operations, but it does not permit a partner to disregard an express unanimity clause, exceed delegated authority, or act in bad faith.
For two managing partners, an equal division ordinarily produces a tie rather than a majority. The partnership agreement, controlling-interest provisions, the nature of the act, and the protection of partnership assets should therefore guide the parties’ next steps. Early documentation, accurate accounting, and a carefully drafted deadlock provision can prevent an operational disagreement from becoming a dissolution or litigation dispute.
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