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San Beda College of Law

2011 CENTRALIZED BAR OPERATIONS

PARTNERSHIP


By the contract of partnership two or more
persons bind themselves to contribute money,
property or industry to a common fund, with
the intention of dividing the profits among
themselves.

Two or more persons may also form a


partnership for the exercise of a profession
(Article 1767).
3

ESSENTIAL REQUISITES (C OP-G)


1. There must be a valid contract;
2. The parties must have legal capacity to
enter into the contract;
3. There must be a mutual contribution of
money, property, or industry to a common
fund;
4. The object or purpose must be lawful. (Art.
1770);
5. The primary purpose must be to obtain
profits to divide the same among the
parties; and
6. There must be at least one general
partner.
The following cannot give their consent to
a contract of partnership (U DI2P)
1. Unemancipated minors;
2. Insane or demented persons;
3. Deaf-mutes who do not know how to write;
4. Persons who are suffering from civil
interdiction; and
5. Incompetents who are under guardianship.
Note: Although a corporation cannot enter into
a partnership contract, it may however engage
in a joint venture (Aurbach v. Sanitary Wares

Manufacturing Corporation, GR No. 75875,


December 15, 1989).
COMMON FUND
A partnership may be deemed to exist among
parties who agree to borrow money to pursue
a business and to divide the profits or losses
that may arise therefrom, even if it is shown
that they have not contributed any capital of
their own to a common fund, as their
contribution to such fund could be an
intangible like credit or industry (Lim Tong Lim
v. Phil. Fishing Gear Industries, Inc., GR No.
136448, November 3, 1999).
MERCANTILE VIEW OF THE NATURE OF A
PARTNERSHIP (Art. 1768)
A partnership has a juridical personality
separate and distinct from that of each of the
partners.
Article 1768 provides that the partnership
retains its juridical personality even if it fails to
register, so long as the contract has the
essential requisites (Sunga-Chan v. Chua,
G.R. No. 143340, August 15, 2001).
RULES TO DETERMINE EXISTENCE OF A
PARTNERSHIP (Art. 1769)
General Rule: Persons who are not partners
as to each other are not partners as to third
persons.
Exception: Partnership by estoppel
Example: If Atoy and Joey are not partners as
to each other, neither will they be partners with
respect to Cath, a third person. But if Atoy,
with the consent of Joey, represents to Cath
that they are partners, then Atoy and Joey will

EXECUTIVE COMMITTEE:
EZEKIEL JOSHUA VILLENA overall chairperson, MINISTER MOISES DU chairperson for academics, DJOANIVIE JOMARE
JUNASA chairperson for hotel operations, MARIE MICAELA STA. ANA vice-chairperson for operations, MIKHAIL MAVERICK
TUMACDER vice-chairperson for secretariat, JACKIE LOU LAMUG vice-chairperson for finance, DIANA JEAN TUAZON vicechairperson for edp, JASSEN RALPH LEE vice-chairperson for logistics
SUBJECT COMMITTEE:
JESUS ERICK STA. BARBARA subject chair, APRIL ROSE JAVIER assistant subject chair, KRISYL CANCINO edp, INA
BEATRIZ DE VERA and GWYNETH ALIGA persons and family relations, HARLY JAYSON REYES property, IVA FREYRITZ
ERICA CAYABAN wills and succession, JESUS ERICK STA. BARBARA obligations and contracts, DIORY RABAJANTE sales
and lease, STEPHANIE GARAY and JESUS ERICK STA. BARBARA partnership, agency and trust, RUSKIN PRINCIPE credit
transactions, DIANA FAJARDO and GERWIN PANGHULAN torts and damages, MAY KRISTINE ARELLANO and RAMIL
AUSTRIA land titles and deeds, MA. ANGELA BONIFACIO and ANTHONY VILLAMOR conflict of laws
MEMBERS:
Veda Marie Vedan, Jecky Lamug, Angeli Adriano, Errol Albano, Princess Parreas, Katrine Paula Suyat, Venice Buagin,
Marviglyn Mindo, Mary Jane Perez, Rozzalie Gonzales, Dorothy Kate Punzalan, Ednalyn Saron, Frances Dyan Lim, Katrina
Kalaw, Maria Katrina Rivera, Aizza Gonzales, Kathlyn Jane Cainday, Art John Arongat, , Jose Angelo David, Mei Suyat, Daryl
Ann Tan, Raynan Larosa, Kamille Deanne Lagasca, Karell Marie Lascano, Frances Dyan Lim, Maris Donna Kwok, Mark
Joseph Ayo, Hansel Moraa, Paul Joseph Mercado, Ian Michel Geonanga

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
be considered partners as to Cath even if they
are not really partners (See De Leon, p. 32)
1. Co-ownership of a property does not itself
establish a partnership, even though the
co-owners share in the profits derived from
the incident of joint ownership.
Reason: The law does not imply a
partnership between co-owners or copossesors because of the fact that they
develop or operate a common property,
since they may rightfully do this by virtue
of their respective titles or common
dominion over the property. (De Leon, p.
32)
Example: Atoy and Joey inherited from
their father an apartment which is leased
to third persons. They are merely coowners and not partners.
2. Sharing of gross returns alone does not
indicate a partnership, whether or not the
persons sharing them have a joint or
common right or interest in any property
from which the returns are derived.
Reason: When a business is carried on in
behalf of a given person as a partner, he is
conceived as being interested in its
failures as well as its successes; it is the
chance of gain or loss which characterizes
a business. Take note that in a
partnership, the partners share profits
AFTER satisfying all of the partnerships
liabilities. (De Leon, p. 37-38)
Example: Atoy, owner of a passenger
jeepney, agrees with Jerick, a driver, that
the latter shall have full control and use of
the jeepney to carry passengers, pay for
gasoline and oil, and shoulder the cost of
repairs, and that the gross receipts are to
be divided between them. No partnership
is established as no sharing of profits is
contemplated.
Note: To regard the petitioners as having
formed an unregistered partnership would
result in oppressive taxation. Their original
purpose was to divide the lots for
residential purposes, but they were
compelled to resell because of the high
cost of construction. There must be an
unmistakable
intention
to
form
a
partnership or joint venture (Obillos v. CIR,
et al., 135 SCRA 436; Pascual v. CIR, 166
SCRA 560).

3. Receipt of share in the profits is a strong


presumptive evidence of partnership.
Sharing in the NET profits presupposes
sharing in the losses.
HOWEVER, NO such inference will be drawn
if such profits were received in payment:
(DWAIC)
1. As a debt by installments or otherwise;
2. As wages of an employee or rent to a
landlord;
3. As an annuity to a widow or representative
of a deceased partner;
4. As interest on a loan, though the amount
of payment vary with the profits of the
business; and
5. As the consideration for the sale of a
goodwill of a business or other property by
installments or otherwise.
TEST OF PARTNERSHIP EXISTENCE
1. Whether or not there is an agreement to
contribute money, property, or industry to
a common fund; and
2. Whether or not there is an intent of the
contracting parties to divide the profits
among themselves.
INCIDENTS OF A PARTNERSHIP
1. The partners share in profits and losses;
2. They have equal rights in the management
and conduct of the partnership business;
3. Every partner is an agent of the
partnership, and entitled to bind the other
partners by his acts, for the purpose of its
business;
4. All partners are personally liable for the
debts of the partnership with their separate
property EXCEPT that limited partners are
not bound beyond the amount of their
investment;
5. A fiduciary relation exists between the
partners; and
6. On dissolution, the partnership is not
terminated, but continues until the winding
up of partnership is completed.
These may be modified by stipulation of the
partners.
EFFECTS OF UNLAWFUL PARTNERSHIP
1. The contract is void ab initio
2. The PROFITS shall be confiscated in favor
of the government
3. The instruments or tools and proceeds of
the CRIME shall be forfeited in favor of the
government; and
4. The contributions of the partners shall not
be confiscated unless they fall under No.
3.
Note:

278

San Beda College of Law


2011 CENTRALIZED BAR OPERATIONS

A partnership is dissolved by operation of


law upon the happening of an event which
makes it unlawful for the business of the
partnership to be carried on, or for the
members to carry it on in partnership.
A judicial decree is not necessary to
dissolve
an
unlawful
partnership.
However, it may sometimes be advisable
that a judicial decree of dissolution be
secured for the convenience of the parties.
Where a part of the business of a
partnership is legal and part illegal, an
account of that which is legal may be had.

B. Purpose of registration: To set a condition


for the issuance of licenses to engage in
business or trade and to give notice to
third parties. It can be assumed that the
members themselves knew of the contents
of their contract. (5 Tolentino, p.326)

FORM OF PARTNERSHIP CONTRACT


As a rule under Art.1771, a partnership may
be constituted in any form (for VALIDITY and
ENFORCEABILITY of the contract among the
parties, regardless of the value of the
contribution) Take note that a partnership
begins from the moment of the execution of
the contract, unless it is otherwise stipulated
(Art. 1784)
Problem:
Today, Atoy and Joey orally agreed to form a
partnership one and one half years from today,
each one to contribute P1K. If at the arrival of
the period, Joey refuses to go ahead with the
agreement, can Atoy enforce the agreement?
No. Since the agreement is to be enforced
after one year from the making thereof, the
same should be in writing under the Statute of
Frauds.(5 Paras 564)
A limited partnership, however, cannot be
constituted orally. The requirements of the
statute must be followed; otherwise, the
liability of the limited partners becomes the
same as that of general partners (De Leon,
p.303)
A. Personal Property
If Capital is Less than P3,000 No special
form is required for its validity or existence
(Art. 1772).
Where the contract of partnership has a
capital of 3,000 pesos or more, in money
or property - it shall appear in a public
instrument and must be recorded in the
Office of the Securities and Exchange
Commission. HOWEVER, a partnership
has a juridical personality and is valid even
in case of failure to comply with this
requirement (Article 1772, 1768).

279

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
B. Real Property
Where immovable property or real rights
are contributed, regardless of the value
thereof:
a. The CONTRACT ITSELF must be in
writing in a public instrument
b. An
inventory
of
the
property
contributed, signed by the parties is
attached to the public instrument
(Article 1773). Otherwise, if there is no
inventory contract of partnership is
void and no juridical personality.
Moreover, to be effective against third
parties, the partnership must also be
registered in the Registry of Property
of the province where the real property
contributed is found.
Reason: The execution of a public
instrument would be useless if there is
no
inventory
of
the
property
contributed, because without its
designation and description, they
cannot be subject to inscription in the
Registry of property. This will result in
fraud to those who contract with the
partnership in the belief of the efficacy
of the guaranty in which the
immovables may consist. (5 Tolentino,
p. 326)
Note:
The
more
important
consideration is that the real property
was contributed, in which case an
inventory of the contributed property
duly signed by the parties should be
attached to the public instrument, or
else there is legally no partnership to
speak of (Litonjua, Jr. v. Litonjua, Sr.,
et al., G.R. Nos. 166299-300,
December 13, 2005). Art. 1773
applies also if aside from real
property, cash or personal property is
contributed. The inventory, however,
need not include the personalty. (5
Paras 566)
c.

Must be recorded with the Register of


Deeds where the immovable is
located to bind third persons.
d. Where the contract falls within the
statute of frauds.

280

Partnership
and
Co-ownership
Distinguished (CJP3-D2AFT)
Partnership

Co-Ownership
Creation

Always created by a
contract, either express
or implied

Generally created by law,


but may exist even
without a contract

Juridical personality
Has a juridical
personality separate and Has no juridical
distinct from that of each personality
partner
Purpose
Common enjoyment of a
thing or right;

Realization of profits

Power to act with third persons


A co-owner cannot
In general a partner may
represent the cobind the partnership
ownership
Profits

May be stipulated upon

Must always depend


upon proportionate
shares and any
stipulation to the contrary
is VOID

Duration
An agreement to keep
the thing undivided for
more than 10 years is not
allowed

No limitation upon the


duration is set by law

Dissolution
Death or incapacity of a
partner dissolves the
partnership

Death or incapacity of a
co-owner does not
necessarily dissolve the
co-ownership

Agency or Representation
As a rule, there is mutual As a rule, there is no
agency
mutual representation
Form
In general there is no
required form (See
exceptions)

No public instrument is
needed even if real
property is the object of
the co-ownership

Transfer of interests
A partner may not
dispose of his individual
interest in the partnership A co-owner can dispose
so as to make the
of his share without the
assignee a partner
consent of the others
without unanimous
consent

San Beda College of Law


2011 CENTRALIZED BAR OPERATIONS
Partnership and Corporation Distinguished
(CNJPMERET2FDG)
Partnership

Corporation
Creation

Created
agreement

by

mere Created by law or by


operation of law

Number of incorporators
Requires at least five
incorporators (except a
corporation sole)

At least two persons

Commencement of Juridical Personality


From the date of
From the moment of
issuance of the certificate
execution of the contract
of incorporation by the
of partnership
SEC

Partnership
Partnership may be
established for any
period of time stipulated
by the partners

Management
When management is
not agreed upon, every Vested in the board of
partner is an agent of the directors or trustees
partnership
Effect of mismanagement
A partner as such can
sue a co-partner who
mismanages

The suit against a


member of the board of
directors or trustees who
mismanages must be in
the name of the
corporation

Right of succession
No such right

Has such right

Extent of liability to third persons


Partners are generally
liable for partnership
debts to third persons

Stockholders are liable


only to the extent of the
shares subscribed by
them

Transferability of interest
Partner cannot transfer
his interest in the
partnership so as to
make the transferee a
partner without the
unanimous consent of all
the existing partners

Stockholder has
generally the right to
transfer his shares
without prior consent of
the other stockholders

Term of existence

Corporation may not be


formed for a term in
excess of 50 years
extendible to not more
than 50 years in any one
instance

Firm name
Corporation may adopt
Limited partnership is
any name provided it is
required by law to add
not the same as or
the word Ltd. to its
similar to any registered
name
firm name
Dissolution
May be dissolved at any Can only be dissolved
time by any or all of the with the consent of the
partners
State
Governing Law

Powers
Can exercise only the
May exercise any power
powers expressly
authorized by the
granted by law or implied
partners
from those granted or
incident to its existence

Corporation

Governed by the contract Governed


by
and the Civil Code
Corporation Code

the

JOINT VENTURE
An association of persons or companies jointly
undertaking some commercial enterprise;
generally all contribute assets and share risks
(Kilosbayan, Incorporated v. Guingona, Jr.
GR. No. 118910 November 16, 1995).
Requisites:
1. A community of interest in the
performance of the subject matter;
2. A right to direct and govern the policy in
connection therewith;
3. Duty to share profits and losses.
Note:
Under the Civil Code, a partnership may
be particular or universal, and a particular
partnership may have for its object a
specific undertaking.
Hence, a joint
venture may be treated like any other
contract, innominate in nature to be
regulated and governed primarily by the
stipulations of the parties thereto and
suppletorily by the general provisions of
the Civil Code on obligations and
contracts, by rules governing the most
analogous contracts and by the customs
of the place.
The main distinction in common law
jurisdiction
is
that
partnership
contemplates a general business with
some degree of continuity, while joint
venture is formed for the execution of a
single transaction and is thus of temporary
nature

281

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
CLASSIFICATIONS OF PARTNERSHIP:
2
(OLDER-P )
1. As to Object:
a. Universal partnership
i. Of all present property
ii. Of profits
b. Particular partnership
2. As to Liability of partners:
a. General partnership
b. Limited partnership
3. As to Duration:
a. Partnership at will
Note: A partnership that does not fix
its term is a partnership at will. The
birth and life of a partnership at will is
predicated on the mutual desire and
consent of the partners. Verily, any
one of the partners may, at his sole
pleasure, dictate the dissolution of the
partnership at will. He must, however,
act in good faith, not that the
attendance of bad faith can prevent
the dissolution of the partnership but
that it can result in a liability for
damages (Ortega, et al. v. CA, et al.,
SCRA 529).
b. Partnership with a fixed period
4. As to legality of Existence:
a. De jure partnership
b. De facto partnership
5. As to Representation to others:
a. Ordinary or real partnership
b. Ostensible or partnership by estoppel
6. As to Publicity:
a. Secret partnership
b. Notorious or open partnership
7. As to Purpose:
a. Commercial or trading
b. Professional or non-trading
PROFESSIONAL PARTNERSHIP
Under Art. 1767, two or more persons may
also form a partnership for the exercise of A
PROFESSION. A profession has been
defined as a group of men pursuing a learned
art as a common calling in the spirit of public
service. (De Leon, p. 10)
A partnership that has for its object the
exercise of A PROFESSION is a particular
partnership (Art. 1783). This is one case
where a partnership is composed entirely of
industrial partners, (See 4 Tolentino, p. 329)

282

UNIVERSAL PARTNERSHIP
A. Universal Partnership of All Present
Property One wherein the partners
contribute all the property which actually
belong to them to a common fund, with the
intention of dividing the same among
themselves, as well as all the profits which
they may acquire therewith (Art. 1778).
The property which belongs to each of
the partners at the time of the
constitution
of
the
partnership,
becomes the common property of all
the partners, as well as the profits
which they may acquire therewith.
As a rule, aside from the contributed
properties only the PROFITS of the
contributed COMMON PROPERTY
(not other profits) are included. Thus,
should a partner SUBSEQUENTLY
acquire a property as remuneration for
his work, such property and its fruits
are not to be enjoyed by the universal
partnership
of
all
PRESENT
property.(5 Paras, p. 573)
However, profits from other sources
may become COMMON, only if there
is a stipulation to such effect. (5
Paras, p. 573)
Unless otherwise stipulated in the
articles of universal partnership it will
be presumed to be a partnership of
profits.
Future
properties
cannot
be
contributed.
Thus,
property
subsequently
acquired
by
(1)
inheritance, (2) legacy or (3) donation
cannot be included by stipulation
except the fruits thereof.
B. Universal Partnership of Profits One
which comprises all that the partners may
acquire by their industry or work during the
existence of the partnership and the
usufruct of movable or immovable property
which each of the partners may posses at
the time of the celebration of the contract
(Art. 1780).

Articles of Universal Partnership


entered into without specification of its
nature, only constitute a Universal
Partnership of Profits (Art. 1781).
Reason: A universal partnership of
profits imposes less obligations on the
partners, since they preserve the
ownership of their separate property.

Persons who are prohibited from


giving each other any donation or

San Beda College of Law


2011 CENTRALIZED BAR OPERATIONS
advantage cannot enter into a
UNIVERSAL partnership (Art. 739,
Art. 87, Family Code) (Article 1782).
Reason: To allow them will be like
permitting them to do indirectly what
the law expressly prohibits.
While the spouses cannot enter into a
universal partnership, they can enter
into a PARTICULAR partnership or be
members thereof.

Profits acquired by their partners


through chance (i.e. lottery) without
employment of any physical or
intellectual efforts are not included.

PARTICULAR PARTNERSHIP (D-FUSE)


One which has for its object determinate
things, their use or fruits, or a specific
undertaking, or the exercise of a profession or
vocation (Art. 1783).
In a universal partnership, the object is vague
and indefinite, contemplating a general
business with some degree of continuity. In
particular partnership, the object is well
defined and limited, being confined to an
undertaking of a single, temporary or ad hoc
nature. (De Leon, p.87)
Kinds of Partners
1. As to the NATURE of contribution:
a. Capitalist partner contributes money
or property.
b. Industrial partner contributes only
his industry or personal service.
2. As to LIABILITY:
a. General partner liability to third
persons extends to his separate
property.
b. Limited partner liability to third
persons is limited to his capital
contribution.
3. As to MANAGEMENT:
a. Managing partner manages the
business or affairs of the partnership;
b. Silent partner does not take any
active part in the business although he
may be known to be a partner.
c. Liquidating partner takes charge of
the winding up of the partnership
affairs upon dissolution.
4. As to EXPOSURE to public perception:
a. Ostensible partner one who takes
active part and known to the public as

a partner in the business, whether or


not he has actual interest in the firm.
b. Secret partner takes active part in
the business but is not known to be a
partner by outside parties nor held out
as a partner by the other partners.
c. Dormant partner does not take
active part in the business and is not
known or held out as partner.
5. As to MEMBERSHIP:
a. Real partner one who is really a
contributing member of an existing
legal partnership.
b. Partner by Estoppel or quasipartner. One who is not really a
partner but represents himself as one.
6. As to CONTINUATION of the business
affairs after dissolution:
a. Continuing partner one who
continues the partnership business
after the dissolution of the partnership
due to the reasons stated in Article
1840.
b. Discontinuing partner one who does
not participate in the partnership
business after its dissolution.
7. As to the VALUE of contribution:
a. Majority partner one whose
contribution represents the majority or
controlling interest;
b. Nominal partner one whose
contribution represents only a minority
interest.
8. As to the NATURE OF MEMBERSHIP:
a. Original partner one who is a
member of the partnership from the
time of its commencement as a
juridical person.
b. Incoming partner one who becomes
a member subsequent to the
establishment of the firm or one who is
about to be admitted by the consent of
all the members.
9. As to the state of SURVIVORSHIP:
a. Surviving partner one who remains
alive while one of the partners dies or
one who continues to be in the
partnership after its dissolution by
reason of the death of a partner.
b. Deceased partner one who died
while being a member of the
partnership.
10. As to the effect of EXPULSION:

283

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
a. Expelled partner one who is
expelled from the partnership by the
other partner/s for a valid cause.
b. Expelling partner partner who
caused the expulsion of a partner for a
valid cause.

Capitalist
and
Industrial
2
Distinguished (CP L)
Capitalist Partner

Partner

Industrial Partner

Contribution
Contributes money or
property

Contributes his industry

Prohibition to engage in other business


Cannot generally
engage in the same or
similar enterprise as
that of his firm

partnership is a consensual contract (5


Paras, p. 580)
When a partnership FOR A FIXED TERM OR
PARTICULAR UNDERTAKING is continued
after the termination of such term or particular
undertaking
WITHOUT
any
express
agreement, the rights and duties of the
partners REMAIN THE SAME as they were at
such termination, so far as is consistent with a
PARTNERSHIP AT WILL.
A continuation of the business by the partners
or such of them as habitually acted therein
during the term, WITHOUT any settlement or
liquidation of the partnership affairs, is prima
facie evidence of a continuation of the
partnership (Art. 1785).

Cannot engage in any


business for himself

Profits
Shares in the profits
according to agreement Receives a just and
thereon; if none, pro
equitable share
rata to his contribution
Losses

1.

First, the stipulation


as to losses;
If none, the
agreement as to
profits;
If none, pro rata to
contribution

2.
3.

Exempted as to losses
as between partners;
but is liable to third
persons, without
prejudice to
reimbursement from the
capitalist partners
Note: Only in the
difference representing
the net profits does the
industrial partner share.
But if, on the contrary,
the losses exceeded the
income, the industrial
partner does not share
in the losses (Santos v.
Sps. Reyes, G.R. No.
135813, October 25,
2001).

OBLIGATIONS OF PARTNERS


PARTNERSHIP TERM
A partnership begins from the moment of the
execution of the contract, unless it is otherwise
stipulated (Art. 1784).

As a rule, even if contributions have not


been made, the form already exists, for

284

In a sense, a partnership is unlimited to its


duration as no time limit is fixed by law.
The term may be agreed upon expressly,
as when there is a definite period, or
impliedly, as when a particular enterprise
is undertaken- it being understood that the
firm ends as soon as its purpose is
achieved.(5 Paras, p.580)

Kinds of Partnership at Will


1. When at the onset, there is no term
express or implied
2. When it is continued by the habitual
managers- although the period has ended
or the purpose has been accomplished
(This is prima facie evidence of the firms
continuation)

It is called at will because its continued


existence really depends upon the will of
the partners, or even on the will of any of
them.

RELATIONS CREATED BY A CONTRACT


OF PARTNERSHIP
1. Relations among the partners themselves;
2. Relations of the partners with the
partnership;
3. Relations of the partnership with third
persons with whom it contracts; and
4. Relations of the partners with such third
persons.
OBLIGATIONS OF PARTNERS AMONG
THEMSELVES
1. Obligation with respect to contribution
of property
a. To contribute what had been promised
(Art. 1786)
b. To warrant property contributed in
case of eviction (Art. 1786)

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2011 CENTRALIZED BAR OPERATIONS
c.

To deliver the fruits of the property


from the time they should have been
delivered, without the need of any
demand (Art. 1786)
Reason: Without the contributions,
the partnership is useless (time is of
the essence); failure to contribute
makes the partner ipso jure a debtor
of the partnership even in the
absence of demand (De Leon, p. 99)

The warranty referred to includes


that of against hidden defects; the
contribution to the partnership is
an onerous contract of alienation,
and the provisions of the law on
sales, so far as pertinent, should
be applied (5 Tolentino, p.331)

d. When contribution is in goods, the


amount thereof must be determined
by proper appraisal of the value
thereof at the time of contribution (Art.
1787)
Reason for appraisal: To determine
how much has been contributed (5
Paras, p.583)
e. To preserve the property with the
diligence of a good father of a family
pending delivery to the partnership
(Art. 1163)
f. To indemnify for any damages caused
by the retention of the property or by
delay in its contribution. (Art. 1788 &
1170)
Even if no actual injury results, the
liability exists because Art. 1788 is
absolute (5 Paras 585)
2. Obligations with respect to contribution
of money and money converted to
personal use
a. To contribute on the date due the
amount promised to be given (Art.
1788)
b. To reimburse any amount he may
have taken from the partnership
coffers and converted to his own
personal use (Art. 1788)
c. To pay the agreed or legal interest, if
he fails to pay (a & b) in due time (Art.
1788)
d. To indemnify the partnership for the
damages caused to it by the delay in
the contribution (a, b & c)

3. Obligation Not to Engage in Other


Business for Himself
a. Industrial partner cannot engage in
any business for himself unless the
partnership expressly permits him to
do so. The other partners have the
remedy of either excluding the erring
partner from the firm or of availing
themselves of the benefits which he
may have obtained (Art. 1789).
Although Art. 1789 mentions only the
capitalist partners, the industrial
partners are also entitled to the
remedy since they are equally
prejudiced by the act of their copartner engaging in business for
himself. (De Leon, p.107)
Reason: Partnership is considered
owner of his services (5 Tolentino,
p.333)
b. Capitalist partner the prohibition
extends only to any operation which is
of the same or similar kind of business
in which the partnership is engaged
unless there is a stipulation to the
contrary. The test is the possibility of
unfair competition (Art. 1808)
A partner occupies a fiduciary position
with respect to his co-partners
imposing duties of utmost good faith
and he may not carry on any other
business in rivalry with the business of
the partnership whether in his own
name or for the account of another at
the expense of the partnership. (De
Leon, p.153)
The violator can be ousted from the
firm on the ground of loss of trust and
confidence. This would of course
result in the dissolution of the firm (5
Paras, p. 615)
4. Obligation to Contribute Additional
Capital In case of an imminent loss of
the business, and there is no agreement to
the contrary, CAPITALIST partners are
under obligation to contribute an additional
share to save the venture. If he refuses to
contribute, he shall be obliged to sell his
interest in the partnership to other partners
(Art. 1791).

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CIVIL LAW
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Note that the industrial partners are
exempted as he is already giving his entire
industry.

Take note that liquidation of the business


must first be effected to know the extent of
the damage (5 Tolentino, p.335)

5. Obligation of Managing Partner who


Collects Debt Where a person is
separately indebted to the partnership and
to the MANAGING partner at the same
time, any sum received shall be applied to
the two credits in proportion to their
amounts, except where he received it
entirely for the account of the partnership,
in which case the whole sum shall be
applied to the partnership credit only (Art.
1792). The debtor is given the right to
prefer payment of the credit of the partner
if it should be more onerous to him (De
Leon, p. 110)
Art. 1792 does not apply if the collecting
partner is not a managing partner. There is
no basis for the suspicion that the partner
is in bad faith ( 5 Paras, p. 591)

8. Duty to Render Information Partners


shall render on demand true and full
information of all things affecting the
partnership to any partner or the legal
representative of any deceased partner of
any partner under legal disability. (Art.
1806)

6. Obligation of Partner Who Receives


Share in Partnership Credit Such
partner is obliged, if the debtor should
become insolvent, to bring to the
partnership capital what he received even
though he may have given receipt for his
share only (Art. 1793).
Reason: When a debtor becomes
insolvent, the debt in favor of the
partnership becomes a bad debt and is a
loss which must be borne by all the
partners. (5 Tolentino, p.335)
Credit Collected After Dissolution
The collecting partner need not bring the
same to the PARTNERSHIP CAPITAL.
Art. 1793 presupposes that there exists a
partnership capital. Upon dissolution of the
partnership and the return to each
principal of what he contributed, the
community of interest between them
disappears altogether. (De Leon, p.113)
7. Obligation of Partner for Damages to
Partnership

Every
partner
is
responsible to the partnership for
damages suffered by it through his fault.
He cannot compensate them with the
profits and benefits which he may have
earned for the partnership by his industry.
HOWEVER, the courts may equitably
lessen this responsibility if through the
partners EXTRAORDINARY efforts in
other activities of the partnership,
UNUSUAL profits have been realized (Art.
1794).

286

Even without demand, honesty demands


the giving of vital information; the
refraining from all kinds of concealment (5
Paras, p.608)
9. Obligation to account for any benefit
and hold as trustee unauthorized
personal profits Every partner must
account to the partnership for any benefit,
and hold as TRUSTEE for it any profits
derived by him without the consent of the
other partners from any transaction
connected
with
the
FORMATION,
CONDUCT,
LIQUIDATION
of
the
partnership or form any use by him of its
property (Art. 1807).
The words and hold as trustee in Art.
1787 indicate that the partnership can
claim as its own any property or money
that can be traced. Thus, should the
partner be insolvent, the partnership claim
against him is a claim to specific property.
In this case, the partnership is not
regarded as an ordinary creditor.
RISK OF LOSS OF THINGS CONTRIBUTED
1. Specific and determinate things which are
not fungible- The risk of loss is borne by
the partner because he remains the owner
of the things;
2. Specific and determinate things the
ownership of which is transferred to the
partnership- The risk of loss is for the
account of the partnership, being the
owner;
3. Fungible things- The risk of loss is borne
by the partnership since use is impossible
without the things being consumed or
impaired;
4. Things contributed to be sold- The
partnership bears risk of loss for there
cannot be any doubt that the partnership
was intended to be the owner; and
5. Things brought and appraised in the
inventory- The partnership bears the risk
of loss because the intention of the parties
was to contribute to the partnership the
price of the things contributed with an

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appraisal in the inventory. There is thus an
implied sale.
RULES FOR DISTRIBUTION OF PROFITS
AND LOSSES
1. Distribution of profits
a. According to their agreement (but not
iniquitously to defeat Art. 1797)
b. If none,
i. Share of capitalist partner shall be
in proportion to his capital
contribution
ii. Industrial partner shall receive
such share, which must be
satisfied first before the capitalist
partners shall divide the profits, as
may be just and equitable
2. Distribution of losses
a. Same as 1.a
b. If none, according to their agreement
as to profits
c. No profit agreement, in proportion to
his capital contribution.
General Rule: A stipulation excluding a
partner from any share in the profits or losses
is VOID (Art. 1799)
Exception: Art. 1797(2) excludes an industrial
partner from losses, but he is NOT exempted
from liability insofar as third persons are
concerned. He may, however, recover what he
has given to third persons from the other
partners, for he is exempted by law from
losses.
Note: In general, LIABILITY refers to
responsibility towards third persons, and
LOSSES refers to responsibility as among
partners.
Problem: Atoy and Joey are partners, the
former being an industrial partner. During the
first year of operation the firm made a profit of
P20K. In the second year of operation, a loss
of P10K was sustained. Should the agreement
state that Atoy would get 0f the profits, how
much is he entitled to receive?
5K. Take note that the net profit for the two
years is only 10K. While it is true that an
industrial partner does not share in the losses,
this only means that he will not share in the
NET LOSSES. It is understood that he shares
in the losses insofar as these can be
accommodated in the profits. (5 Paras, p. 598)
MANAGEMENT OF PARTNERSHIP

A. When the manner of management has


been provided for in the partnership
agreement
1. When a managing partner has been
appointed
a. Appointment as manager IN THE
ARTICLES OF PARTNERSHIP
(Art. 1800)
i. Power is irrevocable without
just or lawful cause
1) To remove him for JUST
cause, vote of partners
having controlling interest
is necessary
2) To remove him without
just cause or for UNJUST
cause, there must be
UNANIMITY INCLUDING
HIS OWN VOTE
Reason for (2): This represents
a change in the will of the
parties, requiring unanimity
ii. Extent of power
1) If he acts in good faith, he
may perform all acts of
ADMINISTRATION,
despite opposition of his
partners
2) If in bad faith, he cannot.
b. Appointment as manager AFTER
the constitution of the partnership
i. Power to act may be revoked
at any time, with or without
just cause
Reason: Such appointment is
a mere delegation of power,
revocable
at
any
time.
Removal, however, should
also
be
done
by
the
controlling interest.
ii. Extent of power: as long as
he remains manager, he can
perform
all
acts
of
administration, but if others
oppose and he persists, he
can be removed
2. When two or more managing partners
have been entrusted with the
management (Art. 1801)
a. Without specification of their
respective duties and without
stipulation that one of them shall
not act without the consent of all
the others

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CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
General Rule: Each one may
execute all acts of administration
Exceptions: If any such partner
should oppose,
i. Decision of the MAJORITY of
the managing partners shall
prevail
ii. In case of a tie, decision of the
partners
having
the
CONTROLLING INTEREST
shall prevail, provided that
they are also managers (5
Paras, p.601)
The right to oppose is not given
to non-managers because in
appointing their other partners
as
managers,
they
have
stripped themselves of all
participation
in
the
administration.
In case of an irreconcilable
deadlock, those who vote
against the contract shall
prevail, the same having been
entered into without authority.
b. With STIPULATION requiring
unanimity of action (Art. 1802)
General rule: Unanimous consent
of ALL the managing partners
(even if one of the managers is
absent or incapacitated) shall be
necessary for the validity of the
acts and absence or disability of
any managing partner cannot be
alleged
Exception: When there is an
imminent danger of grave or
irreparable
injury
to
the
partnership
The requirement of previous
approval applies only to execution
of formal contracts in writing and
not to routine transactions, such
as ordinary purchases and sales
for a firm engaged in the buying
and selling merchandise of all
kinds, which naturally come within
the scope of the general authority
of the manager of a business (5
Tolentino, p.342)
B. When manner of management has not
been agreed upon (Art. 1803)

288

1. All partners shall be considered


managers and agents
2. UNANIMOUS consent required for
any
important
alteration
of
IMMOVABLE property
Reason: In comparison with personalty,
immovable property is of greater
importance. In a proper case, immovables
should be returned to partners in the same
condition as when they are delivered to
the partnership (5 Paras, p.605). Any
important alteration in the immovable
property of the partnership is an act of
strict dominion.

Alteration
contemplates
useful
expenses, not necessary ones.
In case of conflict, the rules provided
by Art. 1801 shall govern

CONTRACT OF SUB-PARTNERSHIP (Art.


1804)
One formed between a member of a
partnership and a third person for a
division of profits owing to him from the
partnership enterprise.
It is a partnership within a partnership
distinct and separate from the main or
principal partnership.
3

RIGHTS OF A PARTNER (PRA ID)


1. Property rights of a partner (Art. 1810)
(SIM)
a. Specific partnership property
Example: Atoy and Joey each
contributed a car to the partnership.
The two cars are specific partnership
property.
b. Interest in the partnership
Example: The partners share of the
profits and losses (without mentioning
any specific property)
c.

Management participation

2. Right to Reimbursement for amounts


advanced to the partnership and to
indemnification for risks in consequence of
management (Art. 1796)
3. Right to Associate with another person in
his share (Art. 1804)
4. Right of Access and inspection
partnership books (Art. 1805)

of

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5. Right to true and full Information of all
things affecting the partnership (Art. 1806)
6. Right to a formal account of partnership
affairs under certain circumstances (Art.
1809) (WAPO)
a. If he is wrongfully excluded from the
partnership business or possession of
its property by his co-partners;
b. If the right exists under the terms of
any agreement;
c. If a partner has derived profits from
any transaction connected with the
formation, conduct, or liquidation of
the partnership or from any use by him
of its property; or
d. Whenever other circumstances render
it just and reasonable.
Note: As long as the partnership exists,
any of the partners may demand an
accounting of the partnership business.
Prescription of the said right starts to run
only upon the dissolution of the
partnership when the final accounting is
done (Emilio Emnace v. Court of Appeals.
G.R. No. 126334, November 23, 2001).
7. Right to have partnership Dissolved under
certain conditions.
PROPERTY RIGHTS OF A PARTNER
1. Right to specific property (Art. 1811)
Contemplates tangible property
The specific partnership property
belongs to the partnership. The
partners have no actual interest in it
until after dissolution.
Incidents of this co-ownership: (RAEL)
a. Equal right with other partners to
possess specific partnership property
for partnership purposes
b. Not assignable, except in connection
with the assignment of rights of all
partners in the same property
c. Not subject to attachment or
execution, except on a claim against
the partnership
d. Not subject to legal support
Reason: The property belongs to the
partnership and not to the partners.
His interest in the partnership,
however, is subject to legal support.
Note: Any immovable property or an
interest therein may be acquired in the
partnership name. The title so acquired

may be conveyed only in the partnership


name subject to the provisions of Article
1819 of the Civil Code.
2. Interest in the partnership (Art. 1812)
Share in the profits (excess of returns
over expenditures in a transaction or
series of transactions) and surplus
(assets of the partnership after
partnership liabilities are paid and the
rights of the partners among
themselves are adjusted)
A partners interest is not a debt due
from partnership.
Effects of assignment of partners whole
interest in the partnership (Art. 1813)
Partnership may either remain or be
dissolved
Assignee does not necessarily become a
partner. He cannot:
a. Interfere in the management or
administration
b. Demand information, accounting and
inspection of the partnership books
But the assignee is entitled to the following
rights:
a. To receive in ACCORDANCE WITH
HIS CONTRACT the profits which the
assigning partner would otherwise be
entitled.
b. To avail himself of the usual remedies
provided by law in event of fraud in
management
c. To receive the assignors interest in
case of dissolution
d. To require an account of partnership
affairs but ONLY in case the
partnership is dissolved, and such
account shall cover the period from
the date only of the last account
agreed to by all the partners
Remedies of separate judgment creditor of
a partner (Art. 1814)
Application for a charging order after
securing judgment on his credit to subject
the interest of the debtor partner with
payment of unsatisfied amount of the
judgment debt
Example: Joe and Gil are partners. Joe
personally owes Flor a sum of money. Flor
sues Joe and obtains a final judgment in
his favor. However, Joe has no money.
Flor may go to the same court (or any

289

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
other court possessed of jurisdiction) and
ask that Joes interest the partnership be
charged for the payment to her of
whatever has not been paid by him with
interest thereon (5 Paras, p.624).

the profits or losses is void.


Whereas, under Article 1817 the
partners, may stipulate among
themselves that a partner may be
exempted from liability.

Take note, however, that partnership


creditors are entitled to priority over
partnership assets.

Reconciliation: Justice Paras opined


that insofar as capitalist partners are
concerned, it is permissible to
stipulate among them that a capitalist
partner will be exempted from liability
IN EXCESS of the original capital
contributed; but will not be exempted
insofar as his capital is concerned.

Redemption of interest charged (Art. 1814)


a. General partnership
i. With separate property of a
partner; or
ii. With partnership property, with the
consent of all the partners whose
interests are not so charged or
sold
b. Limited partnership (limited partner)
With separate property of any
general partner but NOT with
partnership property

2. Liability of partnership for acts of


partners (Art. 1818)
a. Acts for apparently carrying on in
the usual way the business of the
partnership
General Rule:
partnership.

Act

binds

the

3. Right to participate in the management


FIRM NAME (Art 1815)
Persons who, not being partners, include their
names in the firm name do not acquire the
rights of a partner, but under Art. 1815, they
shall be subject to the liability of a partner
insofar as third persons without notice are
concerned. Such persons become partners by
estoppel (De Leon, p.181)

Exception: Partnership is not


bound if:
i. Acting partner has in fact no
authority and
ii. The third person knows that
the acting partner has no
authority
b. Acts of Strict
Ownership

Dominion

or

OBLIGATIONS OF PARTNERS TO THIRD


PERSONS

General Rule: Act does not bind


the partnership.

A. Liability for contractual obligations


(Arts. 1816)
1. All partners, including industrial
partners, are personally liable with all
their property. Their individual liability
is pro rata and subsidiary, unless
otherwise stipulated

Exception: Partnership is bound if:


i. The act is authorized by all the
partners; or
ii. They have abandoned the
business

After all partnership assets have been


exhausted, pro-rating is based on the
number of partners and not on the
amount of their contributions to the
common fund, subject to adjustment
among the partners. (De Leon, p. 183)
Note:
Stipulation against liability shall be
VOID except as among the
partners (Art. 1817)
Article
1799
provides
A
stipulation which excludes one or
more partners from any share in

290

One or more but less than all


partners have no authority to:
(AGO-CESR)
i. Assign
the
partnership
property in trust for creditors
or on the assignees promise
to pay the debts of the
partnership
Reason: the firm will be
virtually dissolved.
ii. Dispose of the Goodwill of the
business
Reason:
Goodwill
is
a
valuable property.
iii. Do any other act which would
make it impossible to carry on

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iv.

v.

the Ordinary business of a


partnership
Reason: This is evidently
prejudicial.
Confess a judgment
Reason: If done before a case
is filed, null and void; if done
later, the firm will be
jeopardized.
Enter into a compromise
concerning
a
partnership
claim or liability
Reason: This is an act of
ownership and may be
equivalent to alienation.

vi.

Submit a partnership claim or


liability to arbitration
Reason: This is also an act of
ownership.

vii.

c.

Renounce a claim of the


partnership
Reason: How can a partner
renounce a claim that does
not belong to him.

Acts in contravention of a
restriction on authority
Partnership is not liable to
third persons having actual or
presumptive knowledge of the
restrictions

Cases of knowledge of a partner


1. Knowledge of the partner acting in the
particular matter acquired while a
partner;
2. Knowledge of the partner acting in the
particular matter then present to his
mind;
3. Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner.
B. Liability arising from partners tort or
Breach of Trust (Arts. 1822-23)
1. Where, by any wrongful act or
omission of any partner acting in the
ordinary course of business of the
partnership or with authority of his copartners, loss or injury is caused to a
non-partner.
2. Where one partner, acting within the
scope of his apparent authority,
receives money or property of a third
person and misapplies it

3. Where the partnership, in the course


of its business, receives money or
property and it is misapplied by any
partner while it is in the custody of the
former.
Note:
All partners are solidarily liable with
the partnership for any penalty or
damage arising from a partnership tort
or breach of trust (Art. 1824). This is
an exception to Art. 1816.
The rule of respondeat superior (also
called the rule of vicarious liability)
applies to the law of partnership in the
same manner as other rules governing
the agency relationship.
Note that it is not only the partners are
liable in solidum; it is also the
partnership (Art. 1824)
MUTUAL AGENCY
Partnership is a contract of mutual agency;
each partner acts as a principal on his own
behalf, and as an agent of his co-partners and
the partnership.
Principle of Delectus Personarum
A rule inherent in partnership wherein no one
can become partner without the consent of all
the partners.
Note: This is true only in case of a general
partner, but NOT as regards a limited partner.
Requisites when a Partner Binds the
Partnership
1. When he is expressly or impliedly
authorized
2. When he acts in behalf and in the name of
the partnership
PARTNERSHIP BY ESTOPPEL
Arises when a person by any means
represents himself or consents to another
representing him to anyone, as partner in an
existing partnership, or with one or more
persons not actual partners; he is liable to any
such person to whom such representation has
been made, who has, on the faith of such
representation given credit to the actual or
apparent partnership (Art 1825).
Note: Art. 1825 does not create a partnership
as between the alleged partners. The law only
considers them partners and the association
as a partnership insofar as it is favorable to
third persons. However, partnership liability is
created only in favor of persons who on the

291

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
faith of such representation given credit to the
partnership.
No preference is given to creditors who
relied on the existence of the fictitious firm.
(5 Paras, p.652)
iii.
DISSOLUTION

Change in the relation of the partners caused


by any partner ceasing to be associated in
carrying on the business (Art. 1828).
Note:
The dissolution of a partnership must not
be understood in the absolute and strict
sense so that at the termination of the
object for which it was created the
partnership is extinguished (Testate of
Mota v. Serra. G.R. No. L-22825, February
14, 1925).
Dissolution does not automatically result in
the termination of the legal personality of
the partnership, nor the relations of the
partners among themselves who remain
as co-partners until the partnership is
terminated.
The partnership, although dissolved,
continues to exist until its termination, at
which time the winding up of its affairs
should have been completed and the net
partnership assets are partitioned and
distributed to the partners (Ortega, et al. v.
CA. et al., SCRA 529).
Winding Up
Process of settling the partnership business or
affairs after dissolution.
Termination
Point in time when all partnership affairs are
wound up or completed and is the end of the
partnership life.
CAUSES OF DISSOLUTION
1. EXTRAJUDICIAL dissolution (Art. 1830) the parties may agree to expand the
grounds provided under Art 1830 but NOT
to delimit them.
Causes:
a. WITHOUT violation of the agreement
between the partners:
i. By the TERMINATION of the
definite
term
or
particular
undertaking specified in the
agreement;
ii. By the EXPRESS WILL OF ANY
PARTNER, who must act in good
faith, when no definite term or
particular undertaking is specified;

292

If the partner insists in leaving


the partnership in bad faith,
the firm is dissolved, but he
may be responsible for
damages
By the EXPRESS WILL OF ALL
the partners who have NOT
assigned their interests or suffered
them to be charged for their
separate debts, either BEFORE
OR AFTER the termination of any
specified
term
or
particular
undertaking;
By the EXPULSION OF ANY
PARTNER from the business
bona fide in accordance with such
a power conferred by the
agreement between the partners;
If a partner is expelled in bad
faith, there can also be
eventual dissolution as there
would be apparent lack of
confidence, without prejudice
to the liability for damages

iv.

b. In CONTRAVENTION OF THE
AGREEMENT between the partners,
where the circumstances do not
permit a dissolution under any other
provision of this article, by the express
will of ANY partner at any time;
c. By any event which MAKES IT
UNLAWFUL for the business of the
partnership to be carried on or for the
members to carry it on in partnership;
Take note, however, that if the
business or the object had been
unlawful from the very beginning,
the firm never had juridical
personality.
d. When a SPECIFIC thing which a
partner had promised to contribute to
the partnership, perishes BEFORE the
delivery; IN ANY CASE by the loss of
the thing, when the partner who
contributed it having reserved the
ownership
thereof,
has
only
transferred to the partnership the use
or enjoyment of the same; but the
partnership shall NOT be dissolved by
the loss of the thing when it occurs
AFTER the partnership has acquired
the ownership thereof;
Reason: The partnership is dissolved
because the partner has NOT or is
deemed to have not given his
contribution.
e. By the DEATH of any partner;

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f.

By the INSOLVENCY of any partner


or of the partnership;
g. By the CIVIL INTERDICTION of any
partner;
One who is without capacity to
manage his own property should
not be allowed to manage
partnership property
h. By DECREE OF COURT under Art.
1831 (Art.1830)
2. JUDICIAL dissolution (Art. 1831) - when
so decreed by the court, the presiding
judge may place the partnership under
receivership and direct an accounting to
be made towards winding up the
partnership affairs.
The court shall decree dissolution, on
application by or for a partner, whenever:
2
(BI LGO)
1. A partner willfully or persistently commits a
breach of the partnership agreement, or
otherwise conducts himself in matters
relating to the partnership business that it
is not reasonably practicable to carry on
the business in partnership with him;
2. A partner has been declared insane in any
judicial proceeding or is shown to be of
unsound mind;
3. A partner becomes in any other way
incapable of performing his part of the
partnership contract;
4. The business of the partnership can only
be carried on at a loss;
5. A partner has been guilty of such conduct
as tends to affect prejudicially the carrying
on of the business;
6. Other
circumstances
render
that
dissolution equitable.
Reason for necessity of court decree: In
the instances mentioned in Art. 1831, the
facts may be so far open to dispute as to
make a necessary judicial determination
as to dissolution rather than allow them to
be the occasion for automatic dissolution
by operation of law. (De Leon, p. 245)
EFFECTS OF DISSOLUTION
A. As to partners authority to act for the
partnership
General Rule: Dissolution terminates all
authority of any partner to act for the
partnership
Exceptions:

1. Acts necessary to wind up partnership


affairs
2. Acts
necessary
to
complete
transactions begun but unfinished
Qualifications to the General Rule:
1. With respect to the partners (in so far
as partners are concerned)
a. Dissolution is not by act,
insolvency or death (AID) of a
partner: General Rule applies.
Hence, dissolution terminates the
ACTUAL authority of a partner to
undertake NEW business for the
partnership (Art. 1832)
b. Dissolution is by act, insolvency or
death of a partner:
General rule: Authority of partners
inter se to act for the partnership is
NOT deemed terminated. Thus, each
partner is liable to his co-partners for
his share of any liability created by
any partner acting for the partnership
as if the partnership has not been
dissolved
Exceptions (Art. 1833):
a. The cause of dissolution is the
ACT of a partner and the acting
partner had KNOWLEDGE of
such dissolution
b. The cause of dissolution is the
DEATH or INSOLVENCY of a
partner and the acting partner had
KNOWLEDGE or NOTICE of such
dissolution
2. With respect to third persons
a. When partnership is bound to third
persons after dissolution (Art.
1834)
i. Act appropriate for winding up
partnership affairs
ii. Act for completing unfinished
transactions
iii. Completely NEW transaction
which
would
bind
the
partnership if dissolution had
not taken place provided: the
other party is in good faith,
meaning:
1) Previous creditor (had
previously
extended
credit) AND he had NO
KNOWLEDGE or NOTICE
of the dissolution, OR
2) NOT a previous creditor
AND
the
fact
of

293

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
dissolution had not been
published in a newspaper
of general circulation
b. When partnership is NOT bound
to third persons after dissolution
i. Where
partnership
was
dissolved because it was
unlawful to carry on the
business, except when the act
is for winding up
ii. Where the acting partner in
the transaction has become
insolvent
iii. Where
the
partner
is
unauthorized to wind up,
except if the transaction is
with third persons in good faith
(same
circumstances
as
defined above)
iv. Where act is NOT appropriate
for winding up or for
completing
unfinished
transactions
v. Completely NEW transaction
which
would
bind
the
partnership if dissolution had
not taken place with third
persons in bad faith

B. As to partners existing liability (Art.


1835)
General Rule: Dissolution does not
automatically discharge the existing
liability of any partner
Exception: A partner may be relieved from
all existing liabilities upon dissolution
ONLY by an agreement between:
1. Partner concerned
2. Other partners
3. Partnership creditors
Note: The consent of the creditors and
partners to the novation may be implied from
their conduct.
RIGHTS
OF
A
PARTNER
DISSOLUTION (Art. 1837)

UPON

1. Dissolution is not in contravention of


the partnership agreement
a. Have partnership property applied to
discharge partnership liabilities
b. Receive in cash his share of the
surplus
2. Dissolution is in contravention of the
partnership agreement

294

a. Rights of a partner who has not


caused the dissolution wrongfully
i. To have partnership property
applied to discharge partnership
liabilities
ii. To receive in cash his share of the
surplus
iii. To be indemnified for damages
caused by the partner guilty of the
wrongful dissolution
iv. To continue the business in the
same name during the agreed
term of the partnership, by
themselves or jointly with others
v. To possess partnership property
should they decide to continue the
business
b. Rights of a partner who has wrongfully
caused the dissolution
i. Business is not continued by the
other partners
1) To have partnership property
applied
to
discharge
partnership liabilities
2) To receive in cash his share of
the surplus less damages
caused by his wrongful
dissolution
ii. Business is continued
1) To have the value of his
interest in the partnership at
the time of the dissolution,
surplus less damages caused
by his wrongful dissolution to
his co-partners, ascertained
and paid in cash or secured
by a bond approved by the
court;
2) To be released from all
existing and future liabilities
Note: The value of the goodwill of the
business is not considered in ascertaining the
value of the interest of the guilty partners.
Rights of a partner where partnership
contract is rescinded on the ground of
fraud or misrepresentation (Art. 1838): (LIS)
1. Right of lien on, or retention of, the surplus
of partnership property after satisfying
partnership liabilities for any sum of money
paid or contributed by him
2. Right of subrogation in place of the
partnership creditors after payment of
partnership liabilities; and
3. Right of indemnification by the guilty
partner against all debts and liabilities of
the partnership

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MANNER OF WINDING UP
1. Extrajudicial by the partners themselves
without the intervention of the court
2. Judicial under the control and direction
of the court upon proper cause shown by
any partner, his legal representative or his
assignee

one or more limited partners, the latter not


being personally liable for partnership debts
(Art. 1843).
CHARACTERISTICS
OF
A
LIMITED
3
PARTNERSHIP (C RD)
1. Formed by substantial compliance in good
faith with the statutory requirements
2. One or more general partners control the
business and are personally liable to
creditors
3. One or more limited partners contribute to
the capital and share in the profits but do
not participate in the management of the
business and are not personally liable for
partnership obligations beyond the amount
of their capital contributions
4. The limited partners may ask for the return
of their capital contributions under the
conditions prescribed by law
5. The partnership debts are paid out of the
common fund and the individual properties
of the general partners.

Persons Authorized to Wind Up (Art. 1836)


1. Partners designated by the agreement
2. In the absence of such agreement, all
partners who have not wrongfully
dissolved the partnership
3. Legal representative of last surviving
partner not insolvent
Assets of the Partnership (Art. 1839 (1))
1. Partnership property
2. Contributions of the partners necessary for
the payment of al liabilities.
Order of Payment in Winding Up (Art. 1839
(2))
1. Those owing to creditors other than
partners
2. Those owing to partners other than for
capital or profits
3. Those owing to partners in respect of
capital
4. Those owing to partners in respect of
profits
Doctrine of Marshaling of Assets (Art.
1839(8))
1. Partnership creditors have preference in
partnership assets
2. Separate or individual creditors have
preference in separate or individual
properties
3. Anything left from either goes to the other
PARTNERS LIEN
Right of every partner to have the partnership
property applied to discharge partnership
liabilities AND to have the surplus assets, if
any, distributed in cash to the respective
partners, after deducting what may be due to
the partnership from them as partners.
Note: Art. 1842 speaks of accounting to be
done upon dissolution of the partnership, while
Art. 1809 refers to a demand for accounting
before dissolution by reason of the
circumstances mentioned in the article.
LIMITED PARTNERSHIP


One formed by two or more persons having as
members one or more general partners and

ESSENTIAL REQUIREMENTS FOR THE


FORMATION OF A LIMITED PARTNERSHIP
1. A certificate or articles of limited
partnership which states the matters
enumerated IN ARTICLE 1844, which
must be signed and sworn; and
2. Such certificate must be filed for record in
the Office of the Securities and Exchange
Commission.
Note:
A strict compliance with the legal
requirements is not necessary. It is
sufficient that there is substantial
compliance in good faith (Jo Chun v.
Pacific Commercial Co. GR No. 19892.
September 6, 1923).
However, a firm which fails to substantially
comply with the formal requirements of a
limited partnership is a general partnership
only as to its relations to third persons.
The firm is a limited partnership, subject to
all rules applicable to such partnership;
and as between the partners they are
bound by their agreement; and that all the
limited partners relations to his copartners and their obligations to him
growing out of the relation remain
unimpaired.
A partnership transacting business is,
prima facie, a general partnership and
those who seek to avail themselves of the
protection of laws permitting the creation
of limited partnerships must show due
compliance with such laws.

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CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST

Contributions of a limited partner: CASH or


OTHER PROPERTY, but NOT SERVICES
(Art. 1845).
A partner may be a general partner and a
limited partner in the same partnership at
the same time, provided that this fact shall
be stated in the certificate provided for in
Article 1844 (Art. 1853).
SURNAME of a limited partner shall not
appear in the partnership name unless:
1. It is also the name of a general
partner, or
2. Prior to the time when the limited
partner became such, the business
had been carried on under a name in
which his surname appeared (Art.
1846).
Violation of such will make the limited
partner liable to partnership creditors
without, however, the rights of a general
partner.

MANAGEMENT
PARTNERSHIP

OF

General Rule: Limited


management powers

A
partner

LIMITED
has

no

Exception: A general partner in a limited


partnership however has no authority, without
written consent or ratification of all limited
partners, to (Art. 1850) (CIC-PAAC)
1. Do any act in contravention of the
certificate;
2. Do any act which would make it
impossible to carry on the ordinary
business of the partnership;
3. Confess
a
judgment
against
the
partnership;
4. Possess partnership property, or assign
their rights in specific partnership property,
for other than a partnership purpose;
5. Admit a person as a general partner;
6. Admit a person as a limited partner,
unless the right to do so is given in the
certificate
7. Continue the business with the partnership
property on the death, retirement, insanity,
civil interdiction or insolvency of a general
partner, unless the right to do so is given
in the certificate.
Limited and General Partner/Partnership
Distinguished: (R2EF-P2C2-TIME)
Limited Partner/
Partnership

General Partner/
Partnership

Rules governing dissolution and winding up


Governed by Art. 1863

Governed by Art. 1839

Right to participate in the management of

296

Limited Partner/
Partnership

General Partner/
Partnership

partnership
Limited partner has no
share in the
management of a
limited partnership and
renders himself liable to
partnership creditors as
a general partner if he
takes part in the control
of the business

General partners have


an equal right in the
management of the
business (when the
manner of management
has not been agreed
upon)

Extent of liability
Limited partners liability
extends only to his
capital contribution

General partner is
personally liable for
partnership obligations

Firm name
Firm name must be
followed by the word
limited

No such requirement

Proper party to proceedings by or against the


partnership
Limited partner is not a
proper party to
proceedings by or
against a partnership
Unless:
1. He is also a general
partner (his liability
is to the partners not
to the creditors), or
2. Where the object of
the proceeding is to
enforce a limited
partners right
against or liability to
the partnership

General partner is the


proper party to
proceedings by or
against a partnership

Prohibition to engage in other business

No such prohibition in
the case of a limited
partner
who
is
considered
a
mere
contributor
to
the
partnership

General
partner
is
prohibited
from
engaging in a business
which is of the SAME
kind of business in
which the partnership is
engaged, if he is a
capitalist partner, or in
ANY of business for
himself if he is an
industrial partner

Contribution
Limited partner must
General partner may
contribute
cash
or
contribute
money,
property
to
the
property or industry to
partnership
but
not
the partnership
services
Creation

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Limited Partner/
Partnership

General Partner/
Partnership

Limited partnership is
created
by
the
members
after
substantial compliance
in good faith with the
requirements set forth
by law

General partnership, as
a general rule, may be
constituted in any form
by contract or conduct of
the partnership

Transferability of interest
Limited
partners
interest
is
freely
assignable,
with
assignee acquiring all
the rights of the limited
partner
subject
to
certain qualifications

General
partners
interest
in
the
partnership may not be
assigned as to make the
assignee a new partner
without the consent of
the
other
partners,
although
he
may
associate a third person
with him in his share

5. To ask for dissolution and winding up by


decree of court (Art. 1851)
6. To receive a share in the profits or other
compensation by way of income provided:
that the partnership assets are in excess
of partnership liabilities after such payment
(Art. 1856)
7. To receive the return of his contribution
provided (Art. 1857):
a. All the liabilities of the partnership
have been paid OR the partnership
assets are sufficient to pay partnership
liabilities
b. The consent of all the members
(general and limited partners) has
been obtained
Exception: When the return of the
contribution
may
be
rightfully
demanded:
i. On the dissolution of the partnership
ii. Upon the arrival of the date
specified in the certificate for the
return
iii. After he has given 6 months notice
in writing to all other partners, if no
time is specified in the certificate
their for the return of the contribution
or for the dissolution of the
partnership

Inclusion of partners name in the firm name


As a general rule, name
Name of a general
of a limited partner must
partner may appear in
not appear in the firm
the firm name
name
Members of the partnership
Composed of one or
more general partners Composed
only
and one or more limited general partners
partners

of

c.

Effect of retirement, death, insanity or


insolvency
Retirement,
death,
insanity or insolvency of
a limited partner does
not
dissolve
the
partnership
for
his
executor
or
administrator shall have
the rights of a limited
partner for the purpose
of selling his estate

Retirement,
death,
insanity or insolvency of
a
general
partner
dissolves
the
partnership

RIGHTS OF A LIMITED PARTNER:


2
2
(BIF AR )
1. To have the partnership books kept at the
principal place of business of the
partnership (Art. 1851)
2. To inspect, at a reasonable hour,
partnership books and copy any of them
(Art. 1851)
3. To demand true and full information of the
things affecting the partnership (Art. 1851)
4. To demand a formal account of the
partnership
affairs
whenever
circumstances
render
it
just
and
reasonable (Art. 1851)

The certificate is cancelled or so


amended as to set forth the
withdrawal or reduction

ALLOWABLE TRANSACTIONS OF A
LIMITED PARTNER (Art. 1854)
1. Transacting other business with the
partnership
2. Receiving a pro rata share of the
partnership assets with the general
creditors if he is NOT also a general
partner
3. Granting loans to the partnership
Note: In transacting a business with the
partnership as a non-member, the limited
partner is considered a non-partner creditor
PROHIBITED
TRANSACTIONS
OF
A
LIMITED PARTNER (Art. 1854)
1. Receiving or holding as collateral security
any partnership property; or
2. Receiving any payment, conveyance, or
release from liability if it will prejudice the
partnership creditors
Note:

297

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
Violation of the prohibition will give rise to
the presumption that it has been made to
defraud partnership creditors
The prohibition is NOT ABSOLUTE, there
is no such prohibition if the partnership
assets are sufficient to discharge
partnership liabilities to persons not
claiming as general or limited partners.

empowered by the certificate must give


the assignee the right to become a limited
partner
2. The certificate must be amended in
accordance with Art. 1865
3. The certificate as amended must be
registered in the Securities and Exchange
Commission

LIABILITIES OF A LIMITED PARTNER (Art.


1858)
1. Liability for unpaid contribution
a. For the difference between his
contribution as actually made and that
stated in the certificate as having been
made; AND
b. For any unpaid contribution which he
has agreed in the certificate to make
in the future at the time and the
conditions stated in the certificate

DISSOLUTION
OF
A
LIMITED
PARTNERSHIP
1. Retirement, death, insolvency, insanity, or
2
civil interdiction (CDI R) of a GENERAL
PARTNER
Unless the business is continued by
remaining general partners (under a
right so to do stated in the certificate
or with the consent of all members)
(Art. 1860)

2. Liability as trustee
a. Specific property stated in the
certificate as contributed by him, but
which was not contributed or which
has been wrongfully returned; AND
b. Money or other property wrongfully
paid or conveyed to him on account of
his contribution
Note: These liabilities can be waived or
compromised only by consent of ALL the
members; but a waiver or compromise shall
NOT affect the right of a creditor of a
partnership who extended credit or whose
claim arose after the filling and before the
cancellation or amendment of the certificate, to
enforce such liabilities.

Substituted Limited Partner (Art. 1859)


A person admitted to all the rights of a limited
partner who has died or has assigned his
interest in the partnership.
General Rule: He has all the rights and
powers, and is subject to all the restrictions
and liabilities of his assignor.
Exception: Those liabilities which he was
ignorant at the time he became a limited
partner AND which could not be ascertained
from the certificate.
Requisites in Order that the Assignee May
Become a Substituted Limited Partner
1. All the members must consent to the
assignee becoming a substituted limited
partner, OR the limited partner, being

298

2. When all limited partners ceased to be


such (Art. 1864, par. 1)
3. Expiration of the term or period of
existence of the partnership (Art. 1844,
par. 1)
4. By agreement of all partners before the
lapse of the period of existence;
5. Misconduct of a general partner or fraud
committed by a general partner against
the limited partner/s
6. When the limited partner demanded the
return of his contribution but same was
unjustifiably denied.
Not exclusive
Note:
The executor or administrator of the estate
of the deceased LIMITED PARTNER shall
acquire all the rights of a limited partner for
the purpose of settling the estate (Art.
1861).
The estate of the deceased limited partner
shall be liable for all his obligations or
liabilities to the partnership as a limited
partner.
LIQUIDATION
OF
A
LIMITED
PARTNERSHIP (Art. 1863)
Order of priority in the payment of the liabilities
of the limited partnership:
1. Those owing to creditors, in order of
priority as provided by law, except those to
limited partners on account of their
contributions and to general partners.
2. Those owing to limited partners in respect
to their share of the profits and other
compensation by way of income on their
contributions.
3. Those owing to limited partners in respect
to the capital of their contributions.

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4. Those owing to general partners other
than for capital and profits.
5. Those owing to general partners in respect
to profits.
6. Those owing to general partners in respect
to capital.
CANCELLATION OF CERTIFICATE OR
ARTICLES OF PARTNERSHIP (Art. 1864)
1. When the partnership is dissolved.
2. When all the limited partners ceased to be
such.
AMENDMENT
OF
CERTIFICATE
OR
ARTICLES OF PARTNERSHIP (Art. 1865)
In case any of the ten enumerated
changes and circumstances in Art. 1864,
par. 2 are present.
Must be signed and sworn to by all the
members including the new members if
some are added; in case of substitution,
the assigning limited partner must also
sign.
Cancellation or amendment must be
recorded in the SEC.
A limited partner is a mere contributor,
hence, he CANNOT be a proper party in a
case for or against the partnership (Art.
1866).
1. Unless the action is to enforce his
individual rights against the partnership as
authorized in Art. 1851.
2. He can be a defendant on an action filed
against him by the partnership to enforce
his liability to the latter (Art. 1858)
AGENCY
A CONTRACT OF AGENCY is a contract
whereby a person (agent) binds himself to
render some service or to do something in
representation or on behalf of another
(principal), with the consent or authority of the
latter (Art. 1868).
CHARACTERISTICS OF
CONTRACT: (PF-BORN)
1. Preparatory
2. Fiduciary
3. Bilateral
4. Onerous (generally)
5. Representative Relation
6. Nominate

AN

AGENCY

PARTIES TO THE CONTRACT OF AGENCY

1. Principal one whom the agent


represents and from whom he derives
authority;
2. Agent one who acts for and represents
another.
PURPOSE OF AN AGENCY
To extend the personality of the principal
through the facility of the agent. It enables the
activity of man which is naturally limited in its
exercise by the impositions of his physiological
conditions to be legally extended by permitting
him to be constructively present in many
different places and to perform diverse juridical
acts and carry on many different activities
through another when physical presence is
impossible or inadvisable at the same time (11
Manresa 434).
ELEMENTS OF AN AGENCY (COC)
1. Consent
Express or Implied
Any person or entity having juridical
capacity and capacity to act and not
otherwise disqualified, may enter into
an agency
But as regards the party with whom
the agent acts or contracts, the legal
capacity of the principal rather than
the agent, is of the greater import.
2. Object: execution of a juridical act in
relation to a third person.
May cover all acts pertaining to a
business of the principal (general
agency) or one or more specific
transactions (special agency)
The extent of the agents authority to
act, whether it be a general or a
special agency, depends on how the
agency is couched.
3. Cause: may be onerous or gratuitous but
presumed for compensation (Art. 1875)
Note:
The agent may not be deprived of his right
to compensation by an unjustified
revocation of the agency.
The agent must act as a representative
and not for himself, and he must act within
the scope of his authority.
One
factor
which
most
clearly
distinguishes agency from other legal
concepts is control (Victorias Milling Co.,
Inc. v. CA, G.R. No. 117356, June 19,
2000; Amon Trading Corp., et al. v. CA, et

299

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
al., G.R. No. 158585, December 13,
2005).

b. Special one which comprises one or


more specific transactions

ACTS WHICH MAY BE DELEGATED TO AN


AGENT

FORMS OF AGENCY
1. Express
2. Implied
a. From the acts of the principal
b. From his silence or lack of action
c. Failure to repudiate the agency
knowing that another person is acting
on his behalf without authority (Art.
1869).

General Rule: What a man may do in person,


he may do thru another.
Exceptions:
1. Personal acts
2. Criminal Acts / Acts not allowed by law
Knowledge of Agent is imputed to Principal
General Rule: The knowledge of the agent is
imputed to the principal even though the agent
never communicated such knowledge to the
principal.
Exceptions: (CAD)
1. Where the agents interest are adverse to
those of the principal;
2. Where the agents duty is not to disclose
the information, as where he is informed
by way of confidential information; and
3. Where the person claiming the benefit of
the rule colludes with the agent to defraud
the principal
2

KINDS OF AGENCY (C ANE)


1. As to manner of creation
a. Express
b. Implied
2. as to its character
a. Gratuitous
b. Compensated or onerous
3. As to authority conferred
a. Couched in general terms- one which
is created in general terms and is
deemed to comprise only acts of
administration;
b. Couched in specific terms

Note: In an implied agency, the principal is still


bound by the acts of the agent just as in case
of express agency
General Rule: There are no formal
requirements governing the appointment of an
agent.
Exception: When the law requires a specific
form (i.e., sale of a piece of land thru an agent:
authority of the agent shall be in writing,
otherwise, the sale is void) (Art. 1874).
Agency to Sell and Sale Distinguished
Agency to Sell

Sale

Agent receives the goods


The buyer receives
as the goods of the
goods as owner
principal.
Agent delivers the
proceeds of the sale

Buyer pays the price.

Agent can return the


object in case he is
unable to sell it

The buyer, as a rule,


cannot return the object
sold

Bound to act according


to the instructions of his
principal.

The buyer can deal with


the thing as he pleases
being the owner.

Agency
and
Distinguished
Agency

Lease

of

Services

Lease Of Services

Principle of
Principle of employment
representation is applied. is applied.
Extinguished at will of the Concurrence of parties is
principal.
necessary.

4. As to its nature and effects


a. Ostensible / representative - agent
acts in the name and in representation
of the principal.
b. Simple / commission - agent acts in
his own name but for the account of
the principal.
5. As to extent of business covered
a. General one which comprises all the
business of the principal

300

Agent exercises
discretionary power

Employee exercises
ministerial functions only

Preparatory contract

Principal contract

FORM OF ACCEPTANCE BY AGENT


1. Express
2. Implied
a. From his acts which carry out the
agency
b. From his silence or inaction according
to the circumstances.

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KINDS OF IMPLIED ACCEPTANCE
1. Where persons are present (Art. 1871)
a. Principal delivers his power of attorney
to the agent and
b. Agent receives it without any objection
2. Where persons are absent (Art. 1872)
General Rule: Acceptance cannot be
implied from silence of the agent
Exceptions:
a. Principal transmits his power of
attorney to the agent, who receives it
without any objection;
b. Principal entrusts to him by letter or
telegram a power of attorney with
respect to the business in which he is
habitually engaged as an agent, and
he did not reply to the letter or
telegram

As a rule, agency is not presumed. A


presumption of agency may arise,
however, in those few cases where
agency may arise by operation of law
(i.e. Art. 1803) or to prevent unjust
enrichment. (De Leon, p. 400-401)

RULE ON AGENCY BY ESTOPPEL


One who clothes another with apparent
authority as his agent, and holds him out to the
public as such, cannot be permitted to deny
the authority of such person in good faith, and
in the honest belief that he is what he appears
to be (Cuison v. CA, GR No.88531. October
26, 1993).
The applicability of the doctrine of apparent
authority in the field of hospital liability has
been upheld in Irving v. Doctor Hospital of
Lake Worth Inc. In this case, it was said that
there does not appear to be any rational basis
for excluding the concept of apparent authority
from the field of hospital liability. In cases
where it can be shown that a hospital, by its
actions, has held out a particular physician as
its agent and/or employee and that the patient
has accepted treatment from the physician in
the reasonable belief that it is being tendered
in behalf of the hospital, then the hospital will
be liable for the physicians negligence.
Notice:
1. By special information
2. By public advertisement
Manner of Termination or Rescission
Notice/information or advertisement had been

rescinded in the same manner it is given (Art.


1873).
CLASSES AND KINDS OF AGENTS
1. Universal Agent one employed to do all
acts that the principal may personally do,
and which he can lawfully delegate to
another the power of doing.
2. General Agent one employed to transact
all the business of the principal, or all the
business of a particular kind or in a
particular place, or in other words to do all
acts, connected with a particular trade,
business or employment.
3. Special or Particular Agent one
authorized to act in one or more specific
transactions, or to do one or more specific
acts, or to act upon a particular occasion.
General and Special Agent Distinguished:
2
(SEC T)
General Agent

Special Agent

Scope of Authority
Usually authorized to do
all acts connected with
the business or
employment in which he
is engaged.

Authorized to do only
acts in pursuance of
particular instructions or
with restrictions
necessarily implied from
the acts to be done

Extent by which agent may bind principal


Binds his principal by an
act within the scope of
his authority although it
may be contrary to his
special instructions

Cannot bind his principal


in a manner beyond or
outside the specific acts
which he is authorized to
perform on behalf of the
principal

Continuity
Conducts a series of
transactions involving a
continuity of service.

Usually involves a single


transaction or a series of
transactions not involving
continuity

Construction of Instructions of Principal


Statement of principal
with respect to the
agents authority would
ordinarily regarded as
advisory only

Authority of agent must


be strictly pursued

Termination of Authority
Apparent authority does
not terminate by the
mere revocation of his
authority without notice
to the third party

Mere revocation is
effective to terminate the
authority as to third
persons because the
third person has a duty to
inquire

Note: Agency comprises all the business of


the principal (Article 1876) but couched in

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CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
general terms, it is limited only to acts of
administrations. (Dominion Insurance Corp. v.
CA, G.R. No. 129919, February 6, 2002)
Acts of administration are those which do
not imply the authority to alienate (De
Leon, p.436)
SPECIAL POWER OF ATTORNEY (SPA)
An instrument in writing by which one person,
as principal, appoints another as his agent and
confers upon him the authority to perform
certain specified acts or kinds of acts on behalf
of the principal.
Art. 1878 does not state that the special
authority be in writing (De Leon, p.443)
However, should the law require that such
special authority be in writing in order for the
same or the resulting contract to be valid or
enforceable, such requirement is absolute and
indispensable.
Note: It need not be notarized; except where it
is executed in a foreign country, must be
certified in accordance with the Rules of Court.
Instances Where SPA is Necessary (Art.
1878) (PECWEM-LLB-BOCARO)
1. To make payments as are not usually
considered as acts of administration;
2. To effect novations which put an end to
obligations already in existence at time the
agency was constituted;
3. To compromise, submit questions to
arbitration, renounce the right to appeal
from a judgment, waive objections to the
venue of an action or abandon a
prescription already acquired;
4. To waive any obligation GRATUITOUSLY;
5. To enter into any contract by which the
ownership of AN IMMOVABLE is
transmitted or acquired either gratuitously
or for a valuable consideration.
Note: The authority of an agent to execute
a contract of sale of real estate must be
conferred in writing and must give him
specific authority, either to conduct the
general business of the principal or to
execute a binding contract containing
terms and conditions which are in the
contract he did execute. The express
mandate required by law to enable an
appointee of an agency (couched) in
general terms to sell must be one that
expressly mentions a sale or that includes
a sale as a necessary ingredient of the act
mentioned. For the principal to confer the
right upon an agent to sell real estate, a
power of attorney must so express the
powers of the agent in clear and

302

unmistakable language. When there is any


reasonable doubt that the language so
used conveys such power, no such
construction shall be given to the
document (332 Phil. 948 (1996).
It has been repeatedly held that the
absence of a written authority to sell a
PIECE OF LAND is ipso jure, void,
precisely to protect the interest of an
unsuspecting owner from being prejudiced
by the unwarranted act of another.
(Pahud, et al. v. CA, et al., G.R. No.
160346, August 25, 2009)
6. To make gifts, except customary ones for
charity or those made to employees in the
business managed by the agents;
7. To loan or borrow MONEY, unless the
latter act be urgent and indispensable for
the preservation of the things which are
under administration;
8. To lease any real property to another
person for more than one year;
9. To bind the principal to render some
service without compensation;
10. To bind the principal in a contract of
partnership;
11. To obligate the principal as guarantor or
surety;
12. To create or convey real rights over
immovable property;
13. To accept or repudiate an inheritance;
14. To ratify or recognize obligations
contracted before the agency;
15. Any other act of strict dominion.
Note:
A third person with whom the agent
wishes to contract on behalf of the
principal may require the presentation of
the power of attorney or the instructions as
regards the agency; except private or
secret orders and instructions of the
principal.(Art. 1902)
The scope of the agents authority is what
appears in the written terms of the power
of attorney. While third persons are bound
to inquire into the extent or scope of the
agents authority, they are not required to
go beyond the terms of the written power
of attorney. Third persons cannot be
adversely affected by an understanding
between the principal and his agent as to
the limits of the latters authority. In the
same way, third persons need not concern
themselves with instructions given by the
principal to his agent outside the written
power of attorney (Siredy Enterprises, Inc.
v. CA, et al. GR No. 129039. September
27, 2002).

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SPA to sell does not include the power to


mortgage; and vice versa (Art. 1879).
Note: A special power of attorney cannot
be the basis of a valid mortgage contract
(Lao v. Villones-Lao, 106 SCRA 42, April
29, 1999).

SPA to mortgage includes the power to


allow the extrajudicial foreclosure of the
mortgaged property (Art. 1879).
SPA to compromise does not authorize
submission to arbitration (Art. 1880).

Effect of Lack of SPA Where One is


Required: Unenforceable
When Principal is Bound by Act of Agent
1. Agent must act within the scope of his
authority (Art. 1881); and
2. Agent must act in behalf of the principal
Note: The limits of the agents authority shall
not be considered exceeded should it have
been performed in a manner more
advantageous to the principal than that
specified by him (Art. 1882).
WHEN A PERSON IS NOT BOUND BY THE
ACT OF ANOTHER
1. Latter acts without or beyond the scope of
his authority in the formers name; and
2. Latter acts within the scope of his authority
but in his own name (UNDISCLOSED
PRINCIPAL), except when the transaction
involves a thing belonging to the principal
(Art. 1883).
EFFECTS OF AGENTS ACTS
1. With Authority
a. In principals name valid; principal is
bound; agent not personally liable
UNLESS he bound himself (Art. 1897)
b. In his own name Apply Art. 1883;
generally not binding on the principal;
agent and stranger are the only
parties, EXCEPT regarding things
belonging to the principal or when the
principal ratifies the contract or derives
benefit therefrom.
2. Without Authority
a. In principals name unauthorized &
unenforceable BUT may be ratified by
the principal, in which case, may be
validated retroactively from the
beginning (Art. 1407)
b. In his own name valid (in case of
sale), whether or not the subject

matter belongs to the principal,


provided that at the time of delivery,
the agent can transfer legally the
ownership of the thing. Otherwise, he
will be held liable for breach of
warranty against eviction; Art. 1883
does NOT apply
Note: If not on sale, ALWAYS invalid
Occasions When Principal is Bound by the
Acts of the Agent Beyond the Latters
Powers (DL-BR)
1. Where
the
principals
acts
have
contributed to deceive the third persons;
2. Where the limitations upon the power
created by him could not have been
known by the third person;
3. Where the principal has placed in the
hands of the agent instruments signed by
him in blank
4. Where the principal has ratified the acts of
the agent.
DOCTRINE OF AGENCY BY NECESSITY
By virtue of the existence of an emergency,
the authority of an agent is correspondingly
enlarged in order to cope with the exigencies
or the necessities of the moment.
Requisites:
1. Real existence of an emergency
2. Inability of the agent to communicate with
the principal
3. Exercise of the additional authority for the
principals own protection
4. Adoption of fairly reasonable means,
premises duly considered
Note: Agency can never be created by
necessity; what is created is additional
authority in an agent appointed and authorized
before the emergency arose.

OBLIGATIONS OF THE AGENT

GENERAL OBLIGATIONS OF AN AGENT


TO PRINCIPAL (AOE)
1. To act with utmost good faith and loyalty
for furtherance of principals interests
2. To obey all lawful orders and instructions
of principal within the scope of the agency

303

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
3. To exercise reasonable care, skill and
diligence
SPECIFIC OBLIGATIONS OF AN AGENT TO
2
PRINCIPAL (CAFO-A DALARPD-IBIR)
1. To carry out the agency which he has
accepted (Art. 1884)
2. To answer for damages which through his
performance the principal may suffer (Art.
1884)
3. To finish the business already begun on
the death of the principal should delay
entail any danger (Art. 1884)
4. To observe diligence of a good father of a
family in the custody and preservation of
the goods forwarded to him by the owner
in case he declines an agency, until an
agent is appointed (Art. 1885)
5. To advance the necessary funds should
there be a stipulation to do so (Art. 1886)
6. To act in accordance with the instructions
of the principal, and in default thereof, to
do all that a good father of a family would
do (Art. 1887)
7. Not to carry out the agency if its execution
would manifestly result in loss or damage
to the principal (Art. 1888)
8. To answer for damages if there being a
conflict between his interest and those of
the principal, he should prefer his own
(Art. 1889)
9. Not to loan to himself if he has been
authorized to lend money at interest (Art.
1890)
10. To render an account of his transactions
and to deliver to the principal whatever he
may have received by virtue of the agency
(Art. 1891)
Note: A stipulation exempting the agent
from the obligation to render an account
shall be VOID (Art. 1891).
Obligation to account not applicable
(MIL):
a. The duty embodied in Art. 1891 will
not apply if the agent or broker acted
only as a middleman with the task of
merely bringing together the vendor
and the vendee, who themselves
thereafter will negotiate on the terms
and conditions of the transaction
(Domingo vs. Domingo, 42 SCRA 131
1971).
b. Neither would the rule apply if the
agent or broker had informed the
principal of the gift or bonus or profit
he received from the purchaser and
his principal did not object thereto.
(Ibid.)

304

c.

Where a right of lien exists in favor of


the agent, the rule is not also
applicable.
i. The agent may, under Art.1914,
retain in pledge the things which
are the object of the agency until
the
principal
effects
the
reimbursement and pays the
indemnity provided in Articles
1912 and 1913.
ii. A lawyer shall have a lien upon
the funds, documents and papers
of his client and may retain the
same until his lawful fees and
disbursements have been paid
(Sec. 37, Rule 138, Rules of
Court)

11. To be responsible in certain cases for the


acts of the substitute appointed by him
(Art. 1892)
12. To pay interest on funds he has applied to
his own use (Art. 1896) - from the day on
which he did so and on those which he still
owes after the extinguishment of the
agency.
13. To distinguish goods by countermarks and
designate the merchandise respectively
belonging to each principal, in the case of
a commission agent who handles goods of
the same kind and mark, which belong to
different owners (Art. 1904)
14. To inform the principal, where an
authorized sale of credit has been made,
of such sale (Art. 1906)
15. To bear the risk of collection, should he
receive also on sale, a guarantee
commission (Art. 1907)
16. To indemnify the principal for damages for
his failure to collect the credits of his
principal at the time that they become due
(Art. 1908)
17. To be responsible for fraud or negligence
(Art. 1909)
Sub-Agent
A person to whom the agent delegates as his
agent the performance of an act for the
principal which the agent has been
empowered
to
perform
through
his
representative.
Note: The agent may appoint a substitute
except when he has been prohibited by the
principal (Art. 1892).
INSTANCES WHEN AGENT SHALL BE
RESPONSIBLE FOR THE ACTS OF THE
SUBSTITUTE:
1. He is not given the power to appoint;

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2. He was given such power but without
designating the person, and the person
appointed was notoriously incompetent or
insolvent.

In these two cases the principal MAY


further bring an action against the
substitute with respect to the obligations
which the latter has contracted under the
substitution (Art. 1893).

Note: All acts of the substitute appointed


against the prohibition of the principal shall be
VOID.
JOINT AGENTS
Agents appointed by one or more principals
under such circumstances as to induce the
inference that it was the principals intent that
all should act in conjunction in consummating
the transaction for which they were appointed.
Their responsibility is JOINT; except if
solidarity has been expressly stipulated
(Art. 1894).
If solidarity has been agreed upon, each
agent is responsible for the:
1. Non-fulfillment of the agency, and
2. Fault or negligence of his fellow
agents; except when the fellow agents
acted beyond the scope of their
authority (Art. 1895).
Note: An innocent agent has a right later on to
recover from the guilty or negligent agent (Art.
1217(2))
INSTANCES WHEN AGENT MAY INCUR
PERSONAL LIABILITY (Art. 1897):
1. Agent expressly binds himself
The individual liability of the agent can
be considered a further security in
favor of the creditor and does not
affect or preclude the liability of the
principal; both are liable
2. Agent exceeds his authority
If the principal does not ratify the
contract, it shall be VOID if the party
with whom the agent contracted is
aware of the limits of the powers
granted by the principal. The agent is
liable if he undertook to secure the
principals ratification (Art. 1898).
3. Acts of the agent prevents performance on
the part of the principal
4. When a person acts as an agent without
authority or without a principal
5. A person who acts as an agent of an
incapacitated principal unless the third

party was aware of the incapacity at the


time of the making of the contract
Instructions
Directs the manner of
transacting the
authorized business and
contemplates only a
private rule of guidance
to the agent and are
independent and distinct
in character
Refers to the manner or
mode of his action with
respect to matters which
in their substance are
within the scope of
permitted action
Without significance as
against those dealing
with the agent with
neither knowledge nor
notice of them because
they concern only the
principal and the agent.
Not expected to be
made known to those
with whom the agent
deals

Authority
The sum total of the
powers committed or
permitted to the agent
by the principal, may be
limited in scope and
such limitations are
themselves a part of the
authority
Relates to the subject
with which the agent is
empowered to deal or
the kind of business or
transactions upon which
he is empowered to act
Limitations of authority
are operative as against
those who have or are
charged with knowledge
of them and ignorance
of the authority will not
be any excuse (see Art.
1900).
Contemplated to be
made known to the third
person dealing with the
agent. Third persons
must therefore verify or
investigate the authority.

WHEN DEPARTURE FROM PRINCIPALS


INSTRUCTIONS JUSTIFIED: (SAI)
1. Sudden emergency Where some
unexpected emergency or unforeseen
event occurs which will admit no delay for
communication with the principal, the
agent is justified in adopting the course
which seems best to him under the
circumstances.
2. Ambiguous
instructions

Where
instructions are ambiguous, the agent is
not chargeable with disobedience or its
consequences in case he makes an
honest mistake and adopts a construction
different from that intended by the
principal. It is the duty of the principal to
couch his instructions in clear terms.
3. Insubstantial departure An agent may
not be said to have breached the agency
contract by reason of an insubstantial
departure from the principals instructions,
which does not affect the result.
SCOPE OF AGENTS AUTHORITY AS TO
THIRD PERSONS (Art. 1900)
Includes not only the actual authorization
conferred upon the agent by his principal, but

305

CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
also that which was apparently or impliedly
delegated to him.
1. Where authority not in writing very
person dealing with an assumed agent is
put upon inquiry and must discover upon
his peril, if he would hold the principal
liable, not only the fact of the agency but
the nature and extent of the authority of
the agent.
Note: If he does not make such inquiry, he
is chargeable with knowledge of the
agents authority, and his ignorance of that
authority will not be any excuse (Pineda v.
CA, 45 SCAD 30, 226 SCRA 754).
2. Where authority in writing such person is
not required to inquire further than the
terms of the written power of attorney.
METHODS
OF
BROADENING
AND
RESTRICTING
AGENTS
AUTHORITY
(IUNDE)
1. By implication
2. By usage and custom
Except:
a. Where it is sought to vary the terms of
an express authorization;
b. Where it is sought thereby to dispose
with a legal requirement enacted for
the principals benefit;
c. Where it is sought thereby to change a
rule of law or as to dispense with a
formality required by law; and
d. Where it is sought to vary an essential
quality of the agency relationship.
3. By necessity
Requisites:
a. The emergency really exists;
b. The agent is unable to communicate
with the principal;
c. The agents enlarged authority is
exercised for the principals protection;
and
d. The means adopted are reasonable
under the circumstances.
4. By certain doctrines
a. Of apparent authority;
b. Of liability by estoppel; and
c. Of ratification.
5. By the rule of ejusdem generis.
Third partys liabilities toward agent (CBIT)
1. Where the agent contracts in his own
name for an undisclosed principal, in

306

which case, the agent may sue the third


party to enforce the contract;
2. Where the agent possesses a beneficial
interest in the subject matter of the
agency;
3. Where the agent pays money of his
principal to a third party by mistake or
under
a
contract
which
proves
subsequently to be illegal, the agent being
ignorant with respect to its illegal nature;
and
4. Where the third party commits a tort
against the agent.
Factor/ Commission Agent one engaged in
the purchase and sale for a principal of
personal property, which for this purpose, has
to be placed in his possession and at his
disposal.
If the commission agent received goods
consigned to him, he is responsible for any
damage or deterioration suffered by the
same in the terms and conditions and as
described in the consignment (Art. 1903).
The commission agent who handles goods
of the same kind and mark, which belong
to different owners, shall distinguish them
by countermarks, and designate the
merchandise respectively belonging to
each principal (Art. 1904).
A commission agent can sell on credit only
with the express or implied consent of the
principal. If such sale is made without
authority, the principal is given two
alternatives (Art. 1905):
a. He may require payment in cash, in
which case any interest or benefit from
the sale on credit shall belong to the
agent since the principal cannot be
allowed to enrich himself at the
agents expense;
b. He may ratify the sale on credit in
which case it will have all the risks and
advantages to him.

If the commission agent is authorized to


sell on credit, he shall inform the principal
with a statement of the names of the
buyers. With such statement, the sale
shall be deemed to be for cash as far as
the principal is concerned (Art. 1906).
Should the commission agent receive on a
sale, in addition to the ordinary
commission, another one called a
guarantee commission, he shall bear the
risk of collection and shall pay the principal
the proceeds of the sale on the same
terms agreed upon with the purchaser
(Art. 1907).
The commission agent who does not
collect the credits of his principal at the

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time when they become due and
demandable shall be liable for damages,
unless he proves the exercise of due
diligence for that purpose (Art. 1908).
Broker A middleman or intermediary who, in
behalf of others and for a commission or fee,
negotiates contracts/transactions relating to
real or personal property.
The brokers are entitled to their commission
because they were instrumental in the sale of
the property. They were the procuring cause
(Tan v. Gullas, 393 SCRA 330 (2002).
In the absence of an express contract between
the broker and his principal, the implication
generally is that the broker becomes entitled to
the usual commissions (Medrano, et al. v. CA.
et al., G.R. No. 150678, February 18, 2005).
Factorage Compensation of a factor or
commission agent.
Ordinary Commission Compensation for
the sale of goods which are placed in his
possession or at his disposal.
Guaranty Commission (Del Credere) (Art.
1907):
Fee, in addition to the ordinary commission
agreed upon, that is given in return for the risk,
which the agent has to bear in the collection of
credits.
An agent with a del credere commission is
liable to the principal if the buyer fails to
pay or is incapable of paying.
Either the principal or the del credere
agent may sue the buyer. The suit of one
will bar the subsequent suit of the other.
Doctrine of Procuring Cause
In order for an agent to be entitled to a
commission, he must be the procuring
cause of the sale, which simply means
that the measures employed by him and
the efforts he exerted must result in the
sale (Ramos v. CA, G.R. No. 25463, April
4, 1975).
However, for the purpose of EQUITY, an
agent who is not the efficient procuring
cause is nonetheless entitled to his
commission, where he, notwithstanding
the expiration of his commission,
nonetheless took diligent steps to bring
back together the parties, such that a sale
was consummated (Prats v. CA, GR No.
39822, January 31, 1978).

OBLIGATIONS OF THE PRINCIPAL


General Obligations of Principal to Agent
Duties and liabilities of the principal are
primarily based upon the contract and the
validity of the contract between them
SPECIFIC OBLIGATIONS OF PRINCIPAL
TO AGENT (CARIP)
1. To comply with all the obligations which
the agent may have contracted within the
scope of his authority and in the name of
the principal (Art. 1910)
2. To advance to the agent, should the latter
so request, the sums necessary for the
execution of the agency (Art. 1912)
3. To reimburse the agent for what the latter
has advanced (plus interest), even if the
business was not successful, provided the
agent was free from fault (Art. 1912)
4. To indemnify the agent for all the
damages, which the execution of the
agency may have caused the latter without
fault or negligence on his part (Art. 1913)
Note: The agent may retain in pledge the
things which are the object of the agency
until
the
principal
effects
this
reimbursement and pays the indemnity
(Art. 1914). Unlike contractual pledges,
however, the agent is not entitled to the
excess in case the things are sold to
satisfy is claim and the proceeds thereof
are more than the amount due (De Leon,
p. 602)
5. To pay the agent the compensation
agreed upon, or if no compensation was
specified, the reasonable value of the
agents services
Note: Even when the agent has exceeded
his authority, the principal is solidarily
liable with the agent if the former allowed
the latter to act as though he had full
powers. (Art. 1911).
LIABILITY FOR AGENTS ILLICIT ACTS
Rule: Where the fault or crime committed by
agent is not in the performance of an
obligation of the principal, the latter is not
bound by the illicit act of the agent, even if it is
not done in connection with his functions.

Exceptions:

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CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
1. Where the delict or the quasi-delict was
committed by the agent because of
defective instructions from the principal, or
due to the lack of necessary vigilance or
supervision on his part, the principal is
liable for his own negligence;
2. When the agent secures a contract
through fraud, or makes a fraudulent
alienation, or executes a simulated
contract, all of these acts are imputable to
the principal as if done by him, because
the illicit act is inseparable from the
transaction executed for him.
3. When the crime consists in the
performance of an act which is within the
powers of the agent, but becomes criminal
only because of the manner in which the
agent has performed it, the principal is
liable to third persons who act in good
faith. (5 Tolentino, p.426)
APPARENT AUTHORITY
That which though not actually granted, the
principal knowingly permits the agent to
exercise or holds him out as possessing. It is
founded in the conscious permission of acts
beyond the powers granted.
ESTOPPEL BY PRINCIPAL
Where the principal, by his culpable
negligence, permits his agent to exercise
power not granted to him, even though the
principal has no notice or knowledge of the
conduct of the agent.
Note: In implied agency, there is an actual
agency. The principal alone is liable. In agency
by estoppel, the authority of the agent is not
real but only apparent. If the estoppel is
caused by the principal, he is liable to any third
person who relied on the misrepresentation. If
the estoppel is caused by the agent, then the
agent alone is liable.

5. Act must be done in behalf of the principal


Liability of Principal for Tort of Agent Rule:
The principal is civilly liable to third persons for
torts of an agent committed at the principals
direction or in the course and within the scope
of the agents authority. The agent is also
liable with the principal and their liability is
solidary.
Motivation-Deviation Test
The bounds of the agents authority are not the
limits of the principals tort liability, but rather
the scope of the employment which may or
may not be within the bounds of authority.
Scope of employment is much wider than
scope of authority.
Requisites for vicarious liability:
1. Satisfactory evidence that the employee in
doing the act, in doing of which the tort
was committed, was motivated in part, at
least, by a desire to serve his employer;
and
2. Satisfactory evidence that the act, in the
doing of which the tort is committed, was
not an extreme deviation from the normal
conduct of such employee.
JOINT PRINCIPALS
Two or more persons who appoint an agent for
a common transaction or undertaking.
Liability: Solidarily liable to the agent for all
the consequences of the agency (Art. 1915).
Requisites of Solidary Liability:
1. There are two or more principals
2. The principals have all concurred in the
appointment of the same agent; and
3. The agent is appointed for a common
transaction or undertaking
Note: Any one of them may revoke the agency

AGENCY BY OPERATION OF LAW OR


FROM NECESSITY
An agency from necessity is created, or the
ordinary powers of an agent may be enlarged,
when an emergency occurs and an employee
or an agent is unable to get in touch with his
employer (De Leon, p,560)
CONDITIONS FOR RATIFICATION (CKECB)
1. Principal must have capacity and power to
ratify
2. Principal must have had knowledge of
material facts
3. Principal must ratify the acts in its entirety
4. Act must be capable of ratification

308

The rule in Art. 1945 applies even when the


appointments were made by the principals in
separate acts, provided that they are for the
same transaction. The solidarity arises from
the common interest of the principals, and not
from the act of constituting agency (Constante
Amor de Castro v. CA, G.R. No. 115838, July
18, 2002).
RULES ON DOUBLE SALE BY PRINCIPAL
AND AGENT
1. When two persons contract with regard to
the same thing, one of them with the agent
and the other with the principal, and the
two contracts are incompatible with each
other, that of prior date shall be preferred,

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without prejudice to Art. 1544 (double
sale) (Art. 1916).
2. If the agent has acted in good faith, the
principal shall be liable in damages to the
third person whose contract must be
rejected. If the agent is in bad faith, he
alone shall be responsible (Art. 1917).
INSTANCES WHEN PRINCIPAL IS NOT
LIABLE FOR THE EXPENSES INCURRED
BY THE AGENT (Art. 1918):
1. If the agent acted in contravention of the
principals instructions, unless the latter
should wish to avail himself of the benefits
derived from the contract;
2. When the expenses were due to the fault
of the agent;
3. When the agent incurred them with
knowledge that an unfavorable result
would ensure, if the principal was not
aware thereof;
4. When it was stipulated that the expenses
would be borne by the agent, or that the
latter would be allowed only a certain sum.
MODES OF EXTINGUISHMENT OF
AGENCY (EDWARD)

1. Expiration of the period


2. Death, civil interdiction, insanity or
insolvency of the principal or of the agent
3. Withdrawal of the agent
Agent may withdraw by giving notice to the
principal, but must indemnify the principal
for damages that he may suffer by reason
of such withdrawal.
4. Accomplishment of the object or the
purpose of the agency
5. Revocation
6. Dissolution of the firm or corporation,
which entrusted or accepted the agency.
REVOCATION OF AGENCY BY PRINCIPAL
General Rule: Agency is revocable at will of
the principal, regardless of the term of the
agreement.
Exceptions (Art. 1927):
1. If a bilateral contract depends upon it;
Example: Joe wanted to make Gil his
surety so Joe made Gil his agent as a sort
of inducement to safeguard him from
eventual loss. (5 Paras 820)
2. If it is the means of fulfilling an obligation
already contracted;

Example: Joe is indebted to Gil for the


purchase price of a fountain pen. But Joe
in the meantime has no money. So he
appoints Gil as his agent to collect from
Renz some money which Renz owes him,
which money will in turn be applied to the
purchase price of the fountain pen.
3. If a partner is appointed manager of a
partnership and his termination is
unjustifiable; and
4. If it is created not only for the interest of
the principal but also for the interest of
third persons, who have accepted the
stipulation in their favor

Agency for purpose of contracting with


specified third persons: must be timely
notified of the revocation (Art. 1921).
Agents with general powers: revocation of
the agency does not prejudice third
persons who acted in good faith and
without knowledge of the revocation.
Notice in a newspaper of general
circulation is a sufficient warning to third
persons (Art. 1922).

IMPLIED
REVOCATION
MAY
BE
EFFECTED:
1. By the act of the principal in appointing
another agent for the same business or
transaction (Art. 1923);
2. By the act of the principal in directly
managing the business entrusted to the
agent (Art. 1924); or
3. By the act the principal in subsequently
granting a special power of attorney as
regards the same business to another
agent, where he had previously granted a
general power of attorney to one agent
(Art. 1926).
A special power is not revoked by a
subsequent general power of attorney
given to another agent, unless the
latter refers also to the act authorized
under the special power, (5 Tolentino,
p.436)
AGENT MAY WITHDRAW FROM THE
AGENCY
1. Must give notice to the principal
2. Must indemnify should the principal suffer
damages by reason of the withdrawal
unless the agent should base his
withdrawal from the impossibility of
continuing the performance of the agency

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CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
without grave detriment to himself (Art.
1928).
Note: The agent, even if he should withdraw
from the agency for a valid reason, must
continue to act until principal has had
reasonable opportunity to take the necessary
steps to meet the situation (Art. 1929).
Instances When Death of the Principal Does
Not Terminate Agency
1. If the agency has been constituted in the
common interest of the principal and the
agent
2. If it has been constituted in the interest of
a third person who has accepted the
stipulation in his favor (Art. 1930).
AGENCY COUPLED WITH AN INTEREST
An agency wherein the agent has acquired
some interest of his own in the execution of
the authority granted to him, in addition to his
mere interest in the contract of employment
with the resulting gains.

Trust and Donation Distinguished


Trust

Donation

There is a transfer of
An existing legal
property as well as the
relationship and involves disposition of both legal
the separation of legal
and equitable ownership
and equitable title
except in cases of gifts in
trust.
The beneficiary of a trust
may demand
performance of the
obligation without having
formally accepted the
benefit of the trust in
public document, upon
mere acquiescence in
the formation of the trust
and acceptance under
the second paragraph of
Art. 1311 (stipulations
pour autrui).

The donee must comply


with the legal
requirements in
accepting donations.

Trust and Debt Distinguished


TRUST

A legal relationship between one person


having an equitable ownership in property and
another owning the legal title to such property,
the equitable ownership of the former entitling
him to the performance of certain duties and
the exercise of certain powers by the latter for
the benefit of the former.

Implies confidence in a relationship.


Founded in equity such that it cannot
result from a contract formed for an illegal
purpose. Neither may a trust be created
for the purpose of evading a legal
prohibition. Example: there cannot be a
trust created for the purpose of obtaining
homestead patents, in favor of a person
already disqualified to obtain additional
homesteads.

Trust and Contract Distinguished


Trust
Always involves ownership, embracing a set of
rights and duties
fiduciary in character
which may be created by
a declaration without
consideration.

310

Contract
A legal obligation based
on an undertaking
supported by a
consideration, which
obligation may or may
not be fiduciary in
character.

Trust

Debt

The beneficiary of a trust A creditor has merely a


has a beneficial interest personal claim against
in the trust property.
the debtor.
There is a fiduciary
There is no beneficiary
relationship between a
relationship between a
trustee and a beneficiary. debtor and creditor.

Persons Involved in a Trust


1. Trustor the one who intentionally creates
a trust
2. Trustee the person who holds the legal
title to the trust property, for the benefit of
another, and with certain powers and
subject to certain duties
3. Beneficiary or the cestui que trust the
person who has the equitable interest in
the property and enjoys the benefit of
administration by the trustee. He may be a
natural person or a legal entity. The trustor
may establish a trust with himself as the
beneficiary (usual case).
TRUST PROPERTY
The property so held is referred to as the
trust property of trust res, which is the
subject matter of the trust.
It must consist of property actually in
existence in which the trustor has a
transferable interest or title although it
may, as a rule, be any kind of transferable
property either realty or personalty. But it
cannot be a mere expectancy without right
or interest or a mere interest in the

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performance of a contract although such


interest is in the nature of a property right.
The trust property is owned by two
persons at the same time, the relation
between the two owners being such that
one of them is under an obligation to use
his ownership for the benefit of the other.
The ownership of the trustee is a mere
matter of form rather than substance, and
nominal rather than real. The trustee is not
a mere agent, but an owner.
The trustee acts for himself in the
administration of the trust estate, although
subject to the terms of the trust and the
law on trusts.

Note: A trust is not void for indefiniteness if by


its terms the whole property will go to
beneficiaries who are undetermined but will be
determined at the termination of the trust, at
the latest. It is not necessary to the creation of
a trust that the cestui que trust be named or
even be in existence at the time of its creation.
CLASSIFICATIONS OF TRUSTS
1. As to effectivity from the viewpoint of
whether they become effective after the
death of the trustor or during his life, it may
be either:
a. Testamentary trusts
b. Trusts inter vivos (sometimes called
living trusts)
2. As to creation from the viewpoint of the
creative force bringing them into
existence, it may be either:
a. Express trust created by the
intention of the trustor or of the parties
Elements:
i. Competent trustor and trustee;
ii. Ascertainable trust res; and
iii. Sufficiently certain beneficiaries
b. Implied trust one which comes into
being by operation of law. This may be
either:
i. Resulting trust one in which the
intention to create a trust is
presumed by law to exist from the
transaction and facts of the case
ii. Constructive trust one imposed
by law irrespective of and even
contrary to the intention of the
parties. It is designed to promote
justice, frustrate fraud and prevent
unjust enrichment.

Reason: no one shall be unjustly


enriched at the expense of
another

PROOF OF TRUST
General Rule: Trust whether express or
implied may be proved by parol or oral
evidence.
Exception: An express trust over an
immovable or any interest therein (Art. 1443).
This latter requirement is not for validity but for
purposes of proof.
NECESSITY OF ACCEPTANCE FOR THE
CREATION AND VALIDITY OF A TRUST
RELATIONSHIP
1. Acceptance of the trustee
Not necessary to its existence and
validity since if he declines, the courts
will appoint a trustee to fill the office
that he declines (see Sec. 3 Rule 98
of the Rules of Court).
Note: But a trustees acceptance of an
express trust is necessary to charge him
with the office of the trustee and the
administration of the trust and to vest the
legal title in him.
2. Acceptance of the beneficiary
Essential to the creation and validity of
a trust. However, such acceptance is
presumed if there is no proof to the
contrary and the trust does not impose
any onerous condition upon the
beneficiary.
REQUISITES OF A TRUSTEE TO CLAIM
TITLE BY PRESCRIPTION (RK-CP)
1. He has performed open and unequivocal
acts of repudiation
2. Such positive acts of repudiation have
been made known to the beneficiary or the
cestui que trust
3. The evidence thereon should be clear and
convincing and
4. The period fixed by law has expired (10
years from the time that the repudiation is
made known to the beneficiary in cases of
express trust or resulting trust while 10
years from the time a constructive trust
arises).

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CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
Note: The reckoning point is repudiation of
the trust by the trustee because from that
moment his possession becomes adverse
which gives rise to a cause of action.
A mere silent possession by the trustee
unaccompanied by acts amounting to an
ouster of the cestui que trust cannot be
construed as an adverse possession.
Mere collection of the rents and profits by
the trustee and erecting fences and
buildings adapted for cultivation of the land
held in trust are not equivalent to
unequivocal acts of ouster of the cestui
que trust (Laguna v. Levantino, 71 Phil.
566; Valdez v. Olorga, 51 SCRA 71,
1976).

The
existence
of
express
trusts
concerning real property may not be
established by parol evidence (Art. 1443).
It must be proven by some writing or deed.
Bare allegations do not constitute
evidence
adequate
to
support
a
conclusion. They are not equivalent to
proof under the Rules of Court (Filipinas
Port Services, Inc. v. Go. GR No. 161886.
March 16, 2007).
Respondents cannot rely on the fact that
the Torrens title was issued in the name of
Epifanio and the other heirs of Jose. It has
been held that a trustee who obtains a
Torrens title over property held in trust by
him for another cannot repudiate the trust
by relying on the registration. (Sotto v.
Teves, 175 SCRA 343 (1978). The rule
requires a clear repudiation of the trust
duly communicated by the beneficiary.
The only act that can be construed as
repudiation was when respondents filed
the petition for reconstitution in October
1993. And since petitioners filed their
complaint in January 1995, their cause of
action has not yet prescribed, laches
cannot be attributed to them.
While implied trusts may be proved by oral
evidence,
the
evidence
must
be
trustworthy and received by the courts with
extreme caution, and should not be made
to rest on loose, equivocal or indefinite
declarations. The proof should be as fully
convincing as if the acts giving rise to the
trust obligation are proven by an authentic
document (Filipinas Port Services Inc. v.
Go, supra).

312

Express
Trust
and
Distinguished (CPR):
Express Trust

Implied

Trust

Implied Trust

As to Creation
Created by the intention
of the parties

Come into being by


operation of law

As to Proof of trust
An express trust over an
immovable property or
any interest therein
cannot be proved by
parol evidence

An implied trust over an


immovable or any
interest therein may be
proved by oral evidence

As regards Repudiation of trust


An express repudiation
made known to the
beneficiary is necessary
in order that laches or
acquisitive prescription
may bar an action to
enforce an express trust

In constructive trusts,
even if there is no
repudiation, laches may
bar an action to enforce
an implied trust
Exception: if there is
concealment

Note: The 10-year prescriptive period in case


of implied trust begins to run from the date the
trustee repudiates the express trust. In the
case of Sps. Pascual, et al. v. CA, et al. (GR
No. 115925, August 15, 2003) it was held that
repudiation takes place when the adverse
party registers the land.

The 4-year prescriptive period under Art.


1391 applies only if the fraud does not
give rise to an implied trust, and the action
is to annul a voidable contract under Art.
1390.

TRUST PURSUIT RULE


Equity will pursue property that is wrongfully
converted by the fiduciary, or otherwise
compel restitution to the beneficiary. A trust
will follow the property through all changes in
its state and form, provided its product or
proceeds are capable of identification.
IMPLIED TRUST
Those which, without being express, are
deducible from the nature of the transaction as
matters
of
intention,
or
which
are
superinduced on the transaction by operation
of law, as matters of equity independently of
the particular intention of the parties.

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c.

Resulting
and
Distinguished
Resulting Trust

Constructive

Trust

Constructive Trust

Intention to create trust:


The intent of the parties
to create a trust is
presumed or implied by
law from the nature of
their transaction

The trust is created


irrespective of or even
contrary to the intention
of the parties to promote
justice, frustrate fraud
and to prevent unjust
enrichment.

Prescriptive period:
The 10 year prescriptive
period shall be counted
from the time repudiation
is made known to
beneficiary.

The 10 year prescriptive


period shall be counted
from the time that the
constructive trust arises.

Examples:
Illustrated in Articles
Illustrated in Articles
1448, 1449, 1451, 1452,
1450, 1454, 1455, 1456
1453

Kinds of Implied Trusts


1. Purchase money resulting trust (Art. 1448)
When property is sold, and the legal estate
is granted to one party but the price is paid
by another party for the purpose of having
the beneficial interest of the property.
To give rise to a purchase money resulting
trust, it is essential that there be:
a. An actual payment of money, property
or services or an equivalent,
constituting valuable consideration;
b. Such consideration must be furnished
by the alleged beneficiary of a
resulting trust.
Exceptions:
a. Where A pays the purchase money
and title is conveyed by absolute deed
to As child or to a person to whom A
stands in loco parentis and who
makes no express promise, a trust
does not result, the presumption being
that a gift was intended;
b. Where an actual contrary intention is
proved;

Where the purchase is made in


violation of an existing statute and in
evasion of its express provision, no
trust can result in favor of the party
who is guilty of fraud (Tigno vs. Court
of Appeals. GR No. 110115, October
8, 1997).

2. Donations made to a person but the


beneficial interest is vested in another.
The donee is the trustee while the
designated third person is the beneficiary
(Art. 1449).
3. Purchase with borrowed funds and the
conveyance is made to lender to secure
payment of debt (Art. 1450).
4. Legal title to land inherited by heir placed
in the name of another (Art. 1451).
5. Legal title to property purchased taken in
one co-owner (Art. 1452).
6. Conveyance under a promise to hold for,
or transfer to another (Art. 1453).
7. Absolute conveyance to a person to
secure performance of grantors obligation
(Art. 1454).
8. Purchase of property with use of trust
funds (Art. 1455).
9. Acquisition of property through mistake or
fraud (Art. 1456).
Note: Discovery of the fraud must be deemed
to have taken place from the issuance of the
certificate of title because registration of real
property is considered a constructive notice to
all persons and it shall be counted from the
time of such registering, filing or entering.
(Serna, et al. v. Fontanilla, et al., G.R. No.
124605, June 18, 1999, 107 SCAD 648)

Enumeration is NOT exclusive.


An action for reconveyance of a parcel of
land based on an implied or constructive
trust prescribes in ten years, the point of
reference being the date of registration of
the deed or the date of the issuance of the
certificate of title over the property. BUT,
this rule applies only when the plaintiff (or
person enforcing the trust) is not in
possession of the property, since if a
person claiming to be the owner thereof is
in actual possession of the property, the
right to seek reconveyance, which in effect
seeks to quiet title to property, does not
prescribe.

Requisites before period of prescription


may start in regard to an action based on
an implied trust:

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CIVIL LAW
PARTNERSHIP, AGENCY AND TRUST
a. The trustee has performed unequivocal
acts of repudiation amounting to an ouster
of the cestui que trust.
b. Such positive acts of repudiation have
been made know to the cestui que trust;
and
c. Evidence thereon is clear and positive
(Vda. De Cabrera v. CA, GR No. 108547.
February 3, 1997).
Other Examples of Implied Trust:
1. The registration of land under Torrens in
the name of one person do not bar
evidence to show it was only held in trust
for another.
2. Certificate of registration of vehicle placed
in the name of a person although the price
was not paid by him but by another.
3. One arising from the agents willful
violation of the trust reposed in him by the
principal by buying for himself the property
he was supposed to buy for the principal
who designated and appointed him to
negotiate with the owner.
4. In consonance with the trust fund doctrine
in Corporation Law, the assets of the
corporation, as represented by the capital
stock, are regarded as trust fund to be
maintained unimpaired for the payment of
corporate creditors.
COMPROMISE
A compromise is a contract whereby the
parties, by making reciprocal concessions,
avoid litigation or put an end to one already
commenced (Art. 2028)
Requisites:
1. Uncertainty of juridical relation;
2. An agreement to eliminate the uncertainty
through
reciprocal
concessions
(5
Tolentino, p.485)
Kinds:
1. Judcial-end a pending litigation
2. Extra-judicial- to prevent a litigation from
arising.
Characteristics:
1. Consensual
2. Reciprocal
3. Onerous
4. Nominate
5. Accessory (in the sense that a prior
conflict is presupposed)
Questions on Which There Can be NO Valid
Compromise
1. The civil status of persons;

314

2. The validity of a marriage or a legal


separation;
3. Any ground for legal separation;
4. Future support;
5. The jurisdiction of courts;
6. Future legitime. (Art. 2035)
Effects of Compromise
A compromise has upon the parties the
effect and authority of res judicata; but
there shall be no execution except in
compliance with a judicial compromise.
(Art. 2037)
If one of the parties fails or refuses to
abide by the compromise, the other
party
may
either
enforce
the
compromise or REGARD it as rescinded
and insist upon his original demand.
(Art. 2041)
A compromise extinguishes the rights
and actions which gave rise to it and
new
obligations
are
created
in
substitution of those extinguished (5
Tolentino,p.492).
If a writ of execution is issued to enforce
a judgment based on compromise, the
writ cannot be enforced against a
person who although a party to the
case, was not a party to the compromise
agreement, and who in fact was
absolved from liability (5 Paras, p.942)