Silent Partnership: Rights and Duties of the Silent Partner

The joint placement of the partnership and the silent partnership in the statute and in the literature owes more to the difficulty of fitting them anywhere else in the present system of the special part of the law of obligations than to any genuine similarity between these contract types.2)

The silent partnership is governed by Part Four of Act No. 89/2012 Coll., the Civil Code (the "Civil Code"), specifically by the part regulating relative property rights. Under Section 2747(1) of the Civil Code, a silent partnership is a contractual relationship between an entrepreneur and a silent partner established by a contract of silent partnership. Under that contract, “the silent partner undertakes to make a contribution through which he will share in the results of the entrepreneur's business throughout the duration of the silent partnership, and the entrepreneur undertakes to pay the silent partner a share in the profit”3). “A silent partnership may also be agreed for the silent partner's participation in the operation of only one of the entrepreneur's business establishments.”4)

Under Section 1724, by concluding a contract the parties express their will to create an obligation between themselves and to be bound by its content. They face only slight limits in arranging their contractual relationships: under Section 1(2), unless a statute expressly prohibits it, persons may agree rights and duties departing from the statute, that is from its non-mandatory provisions; arrangements breaching good morals, public order or the law governing the status of persons, including the right to protection of personality, are prohibited. A contract is concluded once the parties have agreed its content, and under Section 1746 that content must, in the case of a contract of a type regulated by statute, include the essential elements laid down in the basic provision governing that type. For the parties' contract to be treated as a contract of silent partnership, its content must therefore meet the requirements laid down by the Civil Code.5)

The Nejvyšší soud (Supreme Court) characterised the nature of the contract of silent partnership in its judgment of 23 August 2013, file no. 23 Cdo 1733/2010, as follows: “Under this contract type the silent partner participates in the entrepreneur's business solely through his property contribution, in return for the use of which the entrepreneur undertakes to provide the silent partner with a share in the profit; the silent partner, conversely, undertakes that, besides providing the contribution, he will also share in any loss should the entrepreneur's business produce a loss rather than a profit. Unlike a credit contract, the relationship of the two parties is therefore dynamic: the silent partner has no assured return on his investment in the entrepreneur's business, and his profit or loss depends on the results of that business. The basic provision conceives the silent partner as an investor of capital, since the essence of the contract type lies in providing a contribution to the entrepreneur and participating in the business through that contribution. The statute therefore neither requires nor assumes that the silent partner will take part in the business directly; it confines his participation to providing the contribution.”

The provisions on the silent partnership follow on from Section 673 of Act No. 513/1991 Coll., the Commercial Code, and lay down the basic obligations of both parties. The silent partner, who may be any natural or legal person irrespective of whether he is an entrepreneur, must provide a contribution to the entrepreneur as the other party to the contract. The entrepreneur must in turn pay the silent partner a share in the profit.6)

Duties of the silent partner

The principal duty of the silent partner, arising from Section 2748 of the Civil Code, is to hand over the object of the contribution to the entrepreneur. That object most often consists of money, but the silent partner's contribution may equally be an immovable thing, a movable thing, a right, another item of property value that the business can use for its activity, or something else.7) It follows that the silent partner's contribution may be any property advantage capable of being valued in money. The silent partner need not be the original owner of the contribution; it suffices that a third person makes the contribution on his behalf.8)

In accordance with Section 2748(1) of the Civil Code, the silent partner must hand over the object of the contribution to the entrepreneur without undue delay after the silent partnership arises, or enable him to dispose of it. Where the object of the contribution is an immovable thing, the entrepreneur acquires the right of use and enjoyment in it for the duration of the silent partnership. Where the object of the contribution is something else, the entrepreneur is presumed to have acquired ownership of it upon the creation of the silent partnership.9)

The silent partner is further obliged to share in both the profit and the loss of the business. The proportion in which he shares may be fixed by agreement of the parties, by reference to the contribution, by established practice between the parties or by usage. Section 2751(1) of the Civil Code provides mandatorily that an arrangement giving the silent partner a share only in the profit and not in the loss is disregarded.10) Section 2751(1) of the Civil Code further provides that the silent partner bears the loss only up to the amount of his contribution. His contribution is reduced by the loss and he need not make up the difference. If the silent partner has been paid a share in the profit and the entrepreneur suffers a loss in a subsequent period, the silent partner need not return the profit already paid or use it to make up the difference between the contribution before and after the loss is set off.11) Because the parties enjoy contractual freedom, they may agree otherwise within this provision. The contract may bind the silent partner to make up the original contribution by the amount of the loss incurred or, for instance, to top the contribution up to an agreed figure. By topping up the contribution the silent partner can avert the dissolution of the silent partnership under Section 2754(2)(a) of the Civil Code, under which the silent partnership is dissolved once the silent partner's share in the loss reaches the amount of his contribution. A silent partner wishing to avoid that outcome must pay his share in the loss or top up the contribution.12)

The silent partner must also stand surety for the entrepreneur's debts in the two cases defined in Section 2750 of the Civil Code. In those two cases his liability may exceed the amount of his contribution.

The first case, in which the silent partner stands surety for the entrepreneur's debts without limitation, arises where the silent partner's name is contained in the entrepreneur's name or business name. Here the amount of the contribution plays no role as regards the share in the loss, because the silent partner stands surety for the entrepreneur's debts without limitation, that is with all his assets.13) A similar provision appears in the rules on the limited partnership, where the limited partner's suretyship for the partnership's debts is limited, but only where his name does not appear in the business name.14)

The second case in which the silent partner stands surety for the entrepreneur's debts arises where he declares to a person with whom the entrepreneur is negotiating a contract that the two of them carry on business together. The silent partner then stands surety not for all the entrepreneur's debts without limitation, but only for the debts arising from the contract under negotiation. This follows from Section 2750(3) of the Civil Code.15) The declaration must be made before the contract is concluded, and a mere declaration does not suffice: the silent partner must create in the third party the impression that he and the entrepreneur carry on business together.16)

In performing the partnership contract the partners must act in the interest of the partnership and towards achieving its aims, having regard to the legitimate interests and rights of the other partners. This duty of loyalty derives from the general rules on the conduct of partners under the Civil Code; Section 2726 of the Civil Code, for instance, prohibits a partner from acts harmful to the partnership. Section 2727(1) of the Civil Code lays down a prohibition of competition, under which a partner may not, without the consent of the other partners, act on his own or another's account in a competing interest. Where the contract of silent partnership imposes no duty of confidentiality, the general principles prohibiting abuse of rights protect the entrepreneur. Even though the silent partner does not participate directly in the business, it runs counter to the nature of the silent partnership for him to deal freely with internal information.

Rights of the silent partner

Alongside the share in the loss, the share in the profit is a defining feature of the contract of silent partnership. The size of the share in the profit or loss is not a mandatory element of the contract; it is most often expressed as a percentage or a fraction. For the silent partner the share in the profit is calculated from the net profit, that is the profit after tax, and the financial statements are decisive for determining it. Where the entrepreneur makes a profit in the business in which the silent partner participates through his contribution, the entrepreneur must pay the silent partner his share in the profit within thirty days of the financial statements being drawn up.17) Once the share in the profit has been paid, the silent partner need not return it if a loss arises later.18)

The silent partner should have no ability to interfere in the entrepreneur's business unless the contract of silent partnership provides otherwise. To supervise his investment, however, the statute grants him rights of control.

Under Section 2749(1) of the Civil Code, the silent partner may inspect the entrepreneur's business records and accounting documents. An arrangement limiting or excluding this right is disregarded where the silent partner shows reasonable grounds to believe that the business records and accounting documents are not kept correctly or honestly.19)

The entrepreneur must provide the silent partner with a counterpart of the financial statements without undue delay after they have been drawn up and, where required, approved; any arrangement to the contrary is disregarded.20)

Where the silent partner's share in the loss reaches the amount of his contribution, the silent partnership is dissolved; if, however, the silent partner pays his share in the loss or tops up the contribution, no dissolution occurs. The silent partner therefore has the right to prevent the silent partnership from coming to an end by paying the loss or topping up the contribution, and the entrepreneur cannot refuse this. The silent partner must, however, act without undue delay once he learns of the loss from the financial statements.

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1. JOSKOVÁ, Lucie. Tichá společnost – zvláštní druh společnosti občanského práva. Právní rozhledy, 2018, No. 17, pp. 581-584
2. Kožiak, J. in Bejček, J., Šilhán, J. et al. Obchodní smlouvy. Závazky v podnikání. Prague: C. H. Beck, 2015, p. 481
3. Section 2747(1) of Act No. 89/2012 Coll., the Civil Code
4. Section 2747(2) of Act No. 89/2012 Coll., the Civil Code
5. MACEK, Jiří. Section 2747 [Basic provision]. In: HULMÁK, Milan et al. Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). 1st ed. Prague: C. H. Beck, 2014, p. 1272, marg. no. 6
6. Section 673(1) of Act No. 513/1991 Coll., the Commercial Code - under a contract of silent partnership the silent partner undertakes to provide the entrepreneur with a specified contribution and to participate through it in the entrepreneur's business, and the entrepreneur undertakes to pay a part of the net profit, after deduction of any mandatory allocation to the reserve fund where the entrepreneur must create one, corresponding to the silent partner's share in the results of the business. The contract of silent partnership must provide for the same extent of the silent partner's participation in profit and in loss.
7. KADLEC, Ing. Michal. Tichý společník s. r. o. [online]. Prague, 2020, 2 January 2020 [cited 9 April 2022]. Available at: https://portal.pohoda.cz/dane-ucetnictvi-mzdy/ucetnictvi/tichy-spolecnik-s-r-o/
8. MACEK, Jiří. Section 2748 [Object of the contribution]. In: HULMÁK, Milan et al. Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). 1st ed. Prague: C. H. Beck, 2014, p. 1277
9. Section 2748(2) of Act No. 89/2012 Coll., the Civil Code
10. Section 2751(1) of Act No. 89/2012 Coll., the Civil Code
11. Section 2751(1) of Act No. 89/2012 Coll., the Civil Code
12. NOSKOVÁ, Tereza. Tichá společnost – práva a povinnosti smluvních stran: diploma thesis [online]. Prague, 2019, 7 March 2019 [cited 9 April 2022]. Available at: https://dspace.cuni.cz/bitstream/handle/20.500.11956/108721/120324915.pdf?sequence=1&isAllowed=y
13. NOSKOVÁ, Tereza. Tichá společnost – práva a povinnosti smluvních stran: diploma thesis [online]. Prague, 2019, 7 March 2019 [cited 9 April 2022]. Available at: https://dspace.cuni.cz/bitstream/handle/20.500.11956/108721/120324915.pdf?sequence=1&isAllowed=y
14. Section 118(2) of Act No. 90/2012 Coll., on Business Corporations
15. Section 2750(3) of Act No. 89/2012 Coll., the Civil Code
16. NOSKOVÁ, Tereza. Tichá společnost – práva a povinnosti smluvních stran: diploma thesis [online]. Prague, 2019, 7 March 2019 [cited 9 April 2022]. Available at: https://dspace.cuni.cz/bitstream/handle/20.500.11956/108721/120324915.pdf?sequence=1&isAllowed=y
17. Section 2752 of Act No. 89/2012 Coll., the Civil Code
18. Section 2753(2) of Act No. 89/2012 Coll., the Civil Code
19. Section 2749(1) of Act No. 89/2012 Coll., the Civil Code
20. Section 2749(2) of Act No. 89/2012 Coll., the Civil Code