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ATENEO
LAW
SCHOOL
TH
75
DIAMOND
ANNIVERSARY
06
JUNE
2011
This book is published as part of the celebrations of the ATENEO
LAW SCHOOL'S 75TH DIAMOND ANNIVERSARY, and the royalties shall
be devoted to funding the author's scholarship endowment
fund for scholarly students of the Ateneo Law School.
iv
To my first grandson, Marko V. Domingo,
a fair hope of our Nation
ill
NON-CORPORATE MEDIA OF DOING BUSINESS
AGENCY, TRUSTS,
PARTNERSHIPS & JOINT VENTURES
CESAR LAPUZ VILLANUEVA
cvillanueva@vgslaw.com
B.S.C. (HOLY ANGEL UNIVERSITY)
LL.B. (ATENEO DE MANILA LAW SCHOOL)
LL.M. (HARVARD LAW SCHOOL)
D.J.S. (SAN BEDA GRADUATE SCHOOL OF LAW)
DEAN
ATENEO LAW SCHOOL
ROCKWELL CENTER, MAKATI CITY
CHAIRMAN, COMMERCIAL LAW DEPARTMENT
PHILIPPINE JUDICIAL ACADEMY
MANILA
MEMBER
MCLE GOVERNING BOARD
FOUNDING
PARTNER
VILLANUEVA
GABIONZA
&
DE
SANTOS
attorneys vgsla w. com
20/F 139 CORPORATE CENTER, VALERO STREET
SALCEDO VILLAGE, MAKATI CITY 1200, PHILIPPINES
FELLOW
AUSTRALIAN INSTITUTE OF COMPANY DIRECTORS (AICD)
INSTITUTE OF CORPORATE DIRECTORS (ICD)
Published & Distributed by
/REX B ook S tore
856 Nicanor Reyes, Sr. St.
Tel. Nos. 736-05-67
735-13-64
1977 C.M. Recto Avenue
Tel. Nos. 735-55-27
735-55-34
Manila, Philippines
www.rexpublishlng.com.ph
tute y** vV vJtf&te ^ >u
Philippine Copyright, 2011
/7
CESAR
ISBN 978-971-23-5934-7
No portion of this book may be copied or
reproduced in books, pamphlets, outlines or notes,
whether printed, mimeographed, typewritten, cop-
ied in different electronic devices or in any other
form, for distribution or sale, without the written
permission of the author except brief passages in
books, a rticles, r eviews, legal p apers, a nd judicial o r
other o fficial p roceedings w ith p roper c itation.
Any copy of this book without the
corresponding number and the signature of the
author on this page either proceeds from an
illegitimate source or is in possession of one who
has n o a uthority t o d ispose o f t he s ame.
ALL R IGHTS R ESERVED
BY T HE A UTHOR
No. 0 4 9 5
ISBN 978-971-23-5934-7
9789712359347
05-PS-00015
05-PS-00015
9
Printed
by
RtxpRinTinpmpfinpc.
Typography
&
Creative
Lithography
84
P.
Florenlino
St.,
Quezon
Cily
Tel
No.
857-77-77
AEON FOUNDATION FOR LEGAL STUDIES,
RESEARCH AND PROGRAMS, INC.
This publication is part of the series of publications under the
auspices of the Aeon Foundation, an association of legal scholars
and practitioners in various fields of discipline and legal endeavors,
dedicated to promoting legal studies, research and programs,
geared towards the progressive development of the legal system of
the Philippines and the evolution of legal integration and
cooperation within the Asian region.
ACKNOWLEDGMENT
I wish to acknowledge the support of Atty. Jose U. Cochingyan, who over
the last couple of years, has worked with me in coming out with a more
dynamic and responsive course outline for our classes in "Agency, Trusts,
Partnerships & Joint Ventures" in the Ateneo Law School. Special thanks are
also extended to my law partner, Atty. Alexander C. Dy, a fellow Ateneo faculty,
who through the years has supported me in many of my projects.
My special "thank you" to all my students in the Ateneo Law School, who
have and continue to inspire me to be the best student of the Law.
Most of all, I again to acknowledge the love and patience of my family, for
their love and patience, and who always constitute my most loyal fans.
CESAR
L.
VILLANUEVA
May,
2011
PR E F A C E
This
book
came
from
the
author's
desire
to
teach
to
his
studentsfuture
practitioners
and
professors
of
the
need
to
treat
the
course
"Partnership
&
Agency"
more
as
commercial
vehicles
of
pursuing
business,
rather
than
as
mere
civil
law
subjects
of
the
Civil
Code
of
the
Philippines.
Over
the
years
that
the
author
has
been
teaching
Philippine
Corporate
Law,
he
came
to
the
realization
that
the
background
of
his
students
in
"Partnership
&
Agency"
did
not
well-complement
their
desire
to
become
conversant
with
a
common-law
based
commercial
subject
as
Corporation
Law.
Therefore,
the
author
felt
the
need
to
volunteer
himself
to
handle
a
section
in
"Partnership
&
Agency,"
in
order
to
develop
a
course
outline
that
would
look
at
noncorporate
media
of
doing
business
as
having
the
same
dynamic
and
progressive
stance
as
that
of
Philippine
Corporate
Law
to
teach
"Agency
&
Partnerships"
as
cornerstones
of
Philippine
Commercial
Laws
in
the
pursuit
of
national
development.
The
obsession
resulted
in
overhauling
the
course
to
place
together
into
a
more
practice-oriented
grouping
of
the
"Non-Corporate
Media
of
Doing
Business"
in
comparison
with
Philippine
Corporate
Law
from
where
it
has
imported
much
of
its
concepts,
doctrines
and
structures.
It
meant
studying
first
the
Law
on
Agency
and
the
Law
on
Trusts
before
going
into
Partnership
Law,
to
have
a
better
understanding
of
two
of
the
great
features
of
every
partnership
arrangement
mutual
agency
and
limited
liability.
Philippine
Partnership
Law
is
studied
on
the
basis
of
it
being
a
product
of
the
amalgam
of
civil
law
provisions
in
the
old
Civil
Code,
the
Spanish
Code
of
Commerce
and
American
laws
on
partnership,
including
limited
partnerships.
More
importantly,
the
book
discusses
in-depth
the
special
features
of
the
partnership
arrangement
as
a
business
vehicle
superior
in
the
field
in
which
vii
it is meant to operate essentially small and medium sized business
enterprises, where personal involvement is essential.
With the announcement by President Benigno S. Aquino, Jr., that the
"Public-Private Partnership" system or "PPP" would be the cornerstone of his
administration in achieving accelerated economic development in our country,
it is but fitting that the book presents the Law and Practice on Joint Ventures,
that treats of joint venture as whole system by which large infrastructural
projects, usually involving international partners, can be pursued. Although
there is word that the P-Noy Aquino Administration is preparing a new set of
rules governing Joint Venture arrangements, included in this first edition of the
book are the OGCC Rules on Joint Ventures which have been issued primarily in
support of PPP schemes.
Like the other legal publications of the author, this work recognizes what
has been implicit in the Philippine legal system: that our hybrid legal system
adheres to both the traditions of the civil law and the common law systems; and
although our system recognizes the primacy of statutory provisions, it also
places practically the same value to policy considerations as they evblVe in
actual settlement of disputes in bur society as expressed in decisions of the
Supreme Court. Necessarily, the complexion of various legal principles and
doctrines continue to evolve, if not altered or discarded, as policy considerations
are made to adjust to evolving contemporary settings.
CESAR L. VILLANUEVA
viii
TABLE OF CHAPTERS
AGENCY
CHAPTER 1 - AATURE, OBJECTIVE, AND KINDS OF AGENCY ...........................................
1
CHAPTER 2 - AORMALITIES OF AGENCY ...................................................................... 71
CHAPTER 3 - AOWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND THE RIGHTS OF THE AGENT ...................................
138
CHAPTER 4 - A BLIGATIONS OF THE PRINCIPAL ............................................................ 199
CHAPTER 5 - AXTINGUISHMENT OF AGENCY ............................................................... 221
TRUSTS
CHAPTER 1 - ANTRODUCTION ...................................................................................... TRO
CHAPTER 2 - AXPRESS TRUSTS ..................................................................................... UST
CHAPTER 3 - AMPLIED TRUSTS ...................................................................................... UST
CHAPTER 4 - ARESCRIPTION RULES FOR TRUSTS .............................................................. UST
PARTNERSHIPS
CHAPTER 1 - AISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAW ...................................................... 430
CHAPTER 2 - ARI-LEVEL EXISTENCE OF THE PARTNERSHIP .............................................. 442
CHAPTER 3 - ATTRIBUTES OF THE PARTNERSHIP .......................................................... 469
CHAPTER 4 - AHE CONTRACT OF PARTNERSHIP............................................................ 484
CHAPTER 5 - AORMAL REQUIREMENTS FOR PARTNERSHIPS .......................................... 517
CHAPTER 6 - ALASSES OF PARTNERS AND PARTNERSHIPS .............................................. 552
CHAPTER 7 - AIGHTS, POWER AND AUTHORITY OF PARTNERS ..
594
CHAPTER 8 - AUTIES AND OBLIGATIONS OF PARTNERS ................................................. 637
CHAPTER 9 - AISSOLUTION, WINDING-UP AND TERMINATION ......................................... RMI
CHAPTER 10 - AIMITED PARTNERSHIPS ...................................................................... 714
JOINT VENTURES ........................................................................................... OIN
ix
TABLE OF CONTENTS
AGENCY
CHAPTER 1 NATURE, OBJECTIVE, AND KINDS OF AGENCY
Definition and Objectives of Agency.........................................................
Parties to a Contract of Agency ................................................................
Elements of the Contract of Agency
The Element of Consent ..................................................................
Capacity of the Parties ..........................................................
The Element of Object or Subject Matter........................................
The Element of Consideration or Commission ...............................
Agent's Entitlement to Commission Anchored
on the Rendering of Service.........................................
Essential Characteristics of Agency
Nominate and Principal...................................................................
Consensual ......................................................................................
Unilateral and Primarily Onerous....................................................
Personal, Representative and Derivative .......................................
Principles Flowing from Agency Characteristics of
"Personal Representative and Derivative"..................
Fiduciary and Revocable .................................................................
Preparatory and Progressive ...........................................................
Kinds of Agency
Based on the Business or Transactions Covered .............................
Whether It Covers Litigation Matters .............................................
Whether It Covers Acts of Administration or Acts
of Ownership .........................................................................
Agency Distinguished from Similar Contracts
From an Employment Contract .......................................................
From a Contract for a Piece-of-Work...............................................
From a Management Agreement....................................................
xi
1
5
7
9
10
11
13
16
17
18
18
20
22
24
25
28
29
31
32
33
From a Contract of Sale ................................................................ 34
From a Contract of Brokerage ...................................................... 42
How Different Are the Duties and Responsibilities of the Agent and
the Broker to
Their Clients? ................................................................... 48
Broker Is Not Legally Incapacitated to Purchase
Property of the Principal ................................................. 52
Broker's Entitlement to Commission .................................... 52
Rules on Compensation for Brokers Applies
Also to Commission Agents............................................. 62
Aberrant Rulings on Commission Issues................................ 65
Broker of a Sale Distinguished from Broker
Himself Purchasing .......................................................... 69
CHAPTER 2 FORMALITIES OF AGENCY
How Agency May Be Constituted..................................................................... 71
Perfection from the Side of the Principal ......................................................... 73
Perfection from the Side of the Agent.............................................................. 74
Instances When There Is Deemed to Be Meeting
of Minds Between the Principal and the Agent..................... 76
Perfection of the Contract of Agency as It Affects
Third Persons ............................................................................... 78
Rules on the Existence of Agency, as to Third Parties .................. 80
Agency by Estoppel ............................................................... 82
Formal Requirements on Grant of Powers to the Agent.................................. 86
General Principles on Contracts Entered Into by Agents ... 86
General Powers of Attorney......................................................... 87
Must Powers of Attorney Be in Writing for the Judicial Acts Executed
Pursuant Thereto to
Be Valid and Enforceable? .............................................. 90
Special Powers of Attorney .......................................................... 98
What Makes an Agency a "Special Power
of Attorney"? ................................................................. 99
Must Special Powers of Attorney Be in Writing?................. 100
Specific Instances Where the Law Requires
a Special Power of Attorney.......................................... 101
To Make Payments as Are Not Usually
Considered as Acts of Administration........................... 101
To Effect Novation Which Put an End to Obligations Already in
Existence at the Time the Agency Was Constituted 102
xii
Special Power of Attorney With Respect to
Principal's Causes of Action ........................... 102
To Waive Any Obligation Gratuitously ................................ 105
To Enter Into Any Contract by Which the
Ownership of an Immovable Is
Transmitted or Acquired .............................. 106
Does the Grant of the Special Power to Sell
Include the Powers to
Mortgage, and Vice Versa?............................ 109
Sale of a Piece of Land Through an Agent...................... 110
Does Article 1874 Cover Agency to Purchase Land or
Any Interest
Therein?..................................................... 110
Is an Oral Contract of Agency to Sell
a Parcel of Land Not Itself Void?.................... 111
Is the Sale of a Piece of Land Made Pursuant to an Oral
Special Power to Sell Really Void or Actually
Unenforceable? ............................. 111
How Detailed Must the Special Power of
Attorney to Sell Be?................................ 117
Agent Cannot Validly Purchase Property
of Principal .................................................... 120
To Make Gifts....................................................................... 121
To Loan or Borrow Money................................................... 122
What Happens When Money Is Borrowed in the Name
of the Principle When There Was No Special
Power or
Attorney to Do So? ........................................ 124
When the Agent Has Been Expressly
Empowered to Borrow Money Can He
Himself Be the Lender Without Being
in Breach of Trust?......................................... 125
To Lease Real Property for More Than
One Year ....................................................... 125
To Bind the Principal to Render Some Service
Without Compensation................................. 127
To Bind the Principal in a Contract of
Partnership .................................................... 128
To Obligate the Principal as a Guarantor
or Surety ........................................................ 128
To Create or Convey Real Rights Over
Immovable .................................................... 130
xiii
To Accept or Repudiate an Inheritance............................... 131
To Ratify or Recognize Obligations Contracted
Before the Agency.................................................. 132
Any Other Act of Strict Dominion ....................................... 133
Doctrine of Implied Powers Flowing from Express
Powers......................................................................................... 135
Special Power of Attorney Excludes General Power of
Attorney Over the Matter Covered by the Special
Power of Attorney ............................................................... 136
CHAPTER 3
POWER & AUTHORITY, DUTIES & OBLIGATIONS, AND RIGHTS OF THE AGENT
General Obligation of Agent Who Accepts the Agency ................................. 138
Measure of Damage for Agent's Non-Performance
of Obligation ............................................................................... 140
Obligation of Agent Who Declines Agency..................................................... 141
General Rule on Agent's Power and Authority .............................................. 142
Statutory Measures of Compliance by the Agent of
His Fiduciary Duties of Obedience and Diligence ....................... 143
Duty of Obedience.......................................................................................... 143
Duty of Diligence ............................................................................................ 145
Measure of Liability to Breach of Duty of Diligence ........................ 147
When Agent Is Guilty of Fraud or Negligence ................................. 148
Duty of Loyalty ............................................................................................... 151
Duty of Loyalty in General ............................................................. 151
Measure of Damages Due to the Principal When
an Agent Violates His Duty of Loyalty ......................................... 152
When Agent Contracts in His Own
Name on a Matter that Falls Within the Scope
of the Agency .............................................................. 153
Particular Rules on Conflict-of-lnterests
Situations ............................................................................ 155
Purchase of Principals Property ......................................... 155
When Agent Empowered to Borrow or
Lend Money ................................................................ 157
What Happens When Agent Violates His
Obligations under Article 1890? .................................. 157
Obligation to Turn-Over to the Principal Whatever Received by Virtue
of the Agency ... .......... .............................................. 158
Obligation of Agent to Render Account ...................................... 158
xiv
When Agent May Legally
Withhold from the Principal .................................. 163
Specific Obligation Rules for Agents
Obligation to Advance Funds........................................................... 164
Liability of Agent for Interest .......................................................... 164
Power of Agent to Appoint a Substitute................................................... 165
Effects When Agent Appoints a Substitute When the Sub-Agent Appointed
Pursuant to the Instructions of the Principal ................. 168
When the Sub-Agent Not Prohibited
by the Principal.............................................................. 168
When the Sub-Agent Appointed Against
the Principal's Prohibition ............................................. 169
Consideration of the Fiduciary Duties of the Agent as
to Third Parties ...................................................................................... 169
Effects on the Agent of Contracts Entered Into Within
the Scope of His Authority........................................................... 173
General Rule: Agent Is Not Personally Liable
to Third Parties .................................................................... 174
Exception: When the Agent Expressly Makes
Himself Personally Liable .............................................. 177
Exception: When Agent Is Guilty of Fraud
or Negligence........................................................................ 178
Agent Has No Authority to Bring Suit in Contracts
Entered Into in the Name of the Principal............................ 181
Effects of Acts Done by Agent Without Authority or in
Excess of His Authority ................................................................ 182
General Rule: The Principal Is Not Liable; Agent
May Be Liable ....................................................................... 182
Exceptions When the Principal May Be Bound ..................... 187
Consequences When Agent Acts in His Own Name ............................. 188
Exception: When the Property Involved in the
Contract Belongs to the Principal ........................................ 190
Remedy of the Principal is to Recover Damages
from the Agent ..................................................................... 192
When Two or More Agents Appointed
by the Same Principal .................................................................. 194
When Third Party Liable to the Agent Himself ...................................... 194
Specific Obligation Rules for Commission Agents
Nature of Factor or Commission Agent ................................................. 195
Specific Obligations of a Commission Agent
Take Custody of Goods ................................................................ 195
Not to Commingle Similar Goods Belonging
to Different Principal ........................................................... 195
xv
Cannot Sell on Credit Without Principal's
Authorization......................................... ............................ 196
To Inform the Principal of Every Pre-Authorized
Sale on Credit....................................................................... 196
Shall Bear the Risk of Collection under Del
Credere Commission Set-up .......................................... 196
To Collect Credits of the Principal ............................................... 196
Responsibility for Fraud and Negligence ..................................... 197
CHAPTER 4
OBLIGATIONS OF THE PRINCIPAL
Binding Effect of the Terms of the Contract of Agency.................................... 199
Principal Bound by the Contracts Made by the Agent
in His Behalf ........................................................................................... 200
Principal Not Bound by Contracts Made Without
Authority or Outside the Scope of Authority............................... 203
When Principal Is Bound by the Acts of Done
Outside the Scope of Authority.................................................. 205 '
Liability of the Principal for Agent's Tort.......................................................... 212
Obligations of the Principal to the Agent
To Pay Agent's Compensation ............................................................... 212
To Advance Sums Requested for Execution
of the Agency ............................................................................... 214
When Principal Not Liable to Reimburse Agent
for His Expenses................................................................... 214
To Indemnify Agent for the Damages Sustained ................................... 216
Right of Agent to Retain Object of Agency in
Pledge for Advances and Damages ..................................... 217
Obligation of Two or More Principals to Agent Appointed
for Common Transactions...................................................................... 218
Rights of Persons When Faced With Conflicting Contracts ............................. 220
CHAPTER 5
EXTINGUISHMENT OF AGENCY
How and When Agency Extinguished.............................................................. 221
k
Principal's Revocation of the Agency ....................................................... 222
Express Revocation ................................ ........................................ - 224
Implied Revocation ........................... :L, ............................................... 225
Appointment of New Agent for Same Business........................... 225
When Principal Directly Manages the Business.................... 227 ^
xvi
Special Power of Attorney Revokes a General
Power of Attorney ........................................................
Revocation on the Bases of Breach of Trust ...................................
Effects of Revocation on Third Parties ............................................
When It Affects Dealings with Specified Third
Parties ............................................................................
Revocation of General Powers of Attorney...........................
Revocation of Special Powers of Attorney ............................
Irrevocable Agencies ......................................................................
Withdrawal of the Agent from the Agency...............................................
Death, Incapacity or Insolvency of the Principal .......................................
When the Agency Continues Despite Death of Principal...
Effect of Acts Done by Agent Without Knowledge
of Principal's Death................................................................
Death, Incapacity or Insolvency of the Agent ...........................................
In Case of Multiple Agents ..............................................................
Dissolution of a Corporation .....................................................................
Obligations of the Agent Even When the Agency
Is Extinguished ................................................................................
230
231
232
232
235
235
236
247
249
251
252
255
256
256
257
TRUSTS
CHAPTER
1
INTRODUCTION
Trusts
under
the
New
Civil
Code .....................................................................
258
Philippine
Trusts
Rooted
on
American
Law
on
Trusts
...........................
259
The
"Equity"
Essence
of
Implied
Trusts...........................................................
260
The
Nature
of
Trusts........................................................................................
263
Trusts
Do
Not
Create
Separate
Juridical
Entities
...................................
263
Trusts
Divorces
Naked
Title
of
the
Trustee
from
the
Rest
of
the
Trustee's
Estate
..........................................................
264
Trust
Is
Anchored
on
Splitting
or
Intention
to
Split
the
Naked
Title
and
Beneficial
Title
of
the
Res
................................................................................................
266
Kinds
of
Trusts
................................................................................................
268
CHAPTER
2
EXPRESS
TRUSTS
Definition
and
Nature
of
Express
Trusts ............... .........................................
273
Essential
Characteristics
of
Express
Trusts
.....................................................
275
Express
Trusts
Are
Essentially
Contractual
in
Character
..
276
xvii
Essential Elements of Express Trusts .......................................... 279
Express Trusts Establish Contractual Relationships
Built Around Property Relation ........................................... 280
Nominate and Principal, Yet Governed by Equity
Principles ..................................................................................... 283
Unilateral and Gratuitous ............................................................ 283
Express Trust as a Preparatory Contract...................................... 284
Trust Constitutes Fiduciary Duties on the Trustee....................... 285
Acquisitive Prescription on the Corpus Unavailing
to the Trustee ........... .......................................................... 286
Rules of Enforceability of Express Trusts .............................................. 287
Express Trust is Essentially a Real Contract, Not Merely
Consensual .................................................................................. 288
Express Trust Must Nevertheless Be Clearly Shown
to Have Been Intended ............................................................... 293
Essence of the Relationship Between Trustor and Trustee Prior to the
Conveyance of the Res to
the Trustee .................................................................................. 294
Express Trusts over Immovables Must Be in Writing .................. 295
Distinguishing Express Trusts from Other Similar Arrangements Splitting of Full
Dominion into Naked or Legal Title
and Beneficial or Equitable Title ................................................. 300
Compared with Usufruct............................................................. 300
Compared with Lease.................................................................. 300
Compared with Sale .................................................................... 301
On being Bound to Fiduciary Duties and Obligations
Compared with Agency............................................................... 301
Kinds of Express Trusts ......................................................................... 303
Contractual Trusts........................................................................ 306
Inter Vivos Trusts ......................................................................... 307
Testamentary Trusts ................................................................... 308
Eleemosynary or Charitable Trusts.............................................. 309
Publicly-Regulated Trusts ............................................................ 309
Capacities, Rights, Duties and Obligations of the Parties to the Express Trust
The Trustor
Trustor as the Creator of the Trust.............................................. 310
Trustor Must Have Legal Capacity to Convey
Trust Property...................................................................... 311
The Trustee
Trustee Is the Party Primarily Bound .......................................... 312
Trustee Must Have Legal Capacity to Accept
the Trust............................................................................... 312
When Trustee Declines the Designation..................................... 312
xviii
Obligations of the Trustee
Contractually Stated Duties and Obligations
of the Trustee ................................................................ 313
Common Law Duties of the Trustee ..................................... 313
Trustee is Prohibited from Donating Trust
Property ......................................................................... 315
Trustee Cannot Use Funds of the Trust to
Acquire Property for Himself ......................................... 315
Duties and Responsibilities of the Trustees
under the Rules of Court................................................ 315
Proper Proceedings for Sale or Encumbrance
of Trust Estate ................................................................ 319
Trustee Does Not Assume Generally Personal
Liability on the Trust ...................................................... 319
Trustee is Entitled to Compensation for
Management of the Trust Estate ................................... 320
Removal or Resignation of Trustee ...................................... 320
The Beneficiary
Beneficiary Is the Passive Recipient of Benefits
Flowing from the Trust.......................................................... 321
Beneficiary Need Not Have Legal Capacity .................................. 322
How Express Trust Extinguished or Terminated
Destruction of the Corpus...................................................................... 323
Revocation by the Trustor ..................................................................... 323
Achievement of the Objective, or Happening of the
Condition, Provided for in the Trust Instrument.......................... 324
Death or Legal Incapacity of the Trustee ............................................... 324
Confusion or Merger of Legal Title and Beneficial
Title in the Same Person .............................................................. 325
Breach of Trust ...................................................................................... 326
CHAPTER 3
IMPLIED TRUSTS
Nature and Types of Implied Trusts ..........................................................
The Two Types of Implied Trusts .....................................................
Implied Trusts Distinguished from Express Trusts ..........................
Nature of Evidence Required to Prove Implied Trusts ..............................
Resulting Trusts .........................................................................................
Burden of Proof in Resulting Trusts .................................................
Blurring of the Distinctions Between Express Trusts
and Resulting Trusts ...............................................................
Rules of Prescriptibility of Resulting Trusts ..........................
Constructive Trusts....................................................................................
xix
327
328
329
330
335
33
6
33
6
345
345
Distinguishing from Resulting Trusts .............................................. 346
Constructive Trusts Similar in Purpose to the Quasi-
Contracts of Solutio Indebiti ............. .................................... 349
Implied Trusts Particularly Constituted by Law .............................................. 352
Purchase of Property Where Title Placed in One Person,
But Price Paid by Another Person ........................................ 352
When Title Is Placed in the Name of a Child.......................... 355
When It Is the Child that Supplies the
Purchase Price .................................................................... 357
When a Contrary Intention Is Proved.................................... 358
When Purchase Price Extended as a Loan ............................ 359
When the Purchase Is Made in Violation of
an Existing Statute............................................................... 359
Purchase of Property Where Title Is Placed in the Name
of Person Who Loaned the Purchase Price ........................... 360
Similarly to an Equitable Mortgage Arrangement ................ 361
When Absolute Conveyance of Property Effected
as a Means to Secure Performance of Obligation .... 363 Two or
More Persons Purchase Property Jointly,
But Place Title in One of Them .............................................. 365
Property Conveyed to Person Merely as
Holder Thereof ...................................................................... 367
Donation of Property to a Donee Who Shall Have
No Beneficial Title.................................................................. 370
Land Passes By Succession But Heir Places Title
into a Trustee ........................................................................ 372
When Trust Fund Used to Purchase Property
Which Is Registered in Trustee's Name ................................ 376
When Property Is Acquired Through Mistake
or Fraud ................................................................................. 382
Application of Principle under the Old Civil Code ................. 384
Application under the New Civil Code................................... 388
Recent Applications of Article 1456 ...................................... 394
CHAPTER 4 PRESCRIPTION RULES FOR TRUSTS
Rules of Prescription for Express Trusts
General Rule: Express Trusts Not Susceptible to
Acquisitive Prescription ........................................................ 397
Exception: When Acquisitive Prescription May Arise
in Express Trusts ................. .................................................. 399
Valid"Repudiation" in Express Trusts ................................... 400
xx
Rules of Prescription for Implied Trusts.......................................................... 401
Old Civil Code Jurisprudence ................................................................ 402
Continuing Relevant Jurisprudence under the
Old Civil Code Regime ........................................................ 405
Jurisprudence under the New Civil Code .............................................. 407
When Prescription Is Allowed What is the Period
Applicable?................................................................................... 411
When Does the 10-Year Prescriptive Period Begin
to Run?......................................................................................... 416
When Registration in the Name of Trustee Was
Integral Part of the Trust Arrangement ..................... ................. 416
When Cestui Que Trust Is in Possession of the Res ............................... 417
When Prevailing Circumstances Did Not Grant
Cestui Que Trust Sufficient Time to Discover the
Fraud ........................................................................................... 417
For Land, Without Registration the 10-year Period
Does Not Even Begin to Run ........................................................ 421
When Registration Covers a Void Title.................................................. 422
Rules on Prescription on Resulting Trusts Follow
Those of Express Trusts....................................................... 423
When Res Has Passed-on to a Buyer in Good Faith
and for Value ............................................................................... 425
Reclassification of Trusts................................................................................. 425
PARTNERSHIPS
CHAPTER
1
HISTORICAL
BACKGROUND
OF
PHILIPPINE
PARTNERSHIP
LAW
Historical
Background
and
Sources
of
Philippine
Law
on
Partnership
................................................................................
Notion
of
Partnership
Is
of
Ancient
Origins ..............................................
Civil
and
Common
Law
Bases
of
Partnership
Laws .........................
Particular
Bases
of
the
Philippine
Law
on
Partnerships
....
Significance
of
Knowing
the
Historical
Background
of
Philippine
Partnership
Law ................................................
Old
Branches
of
Philippine
Partnership
Law.............................................
Distinguishing
Between
Civil
and
Commercial
Partnerships
..........................................................................
Significance
of
Knowing
the
Historical
Distinctions
Between
Civil
and
Commercial
Partnerships
........................
xxi
430
430
431
432
433
434
434
440
CHAPTER
2
TRI-LEVEL
EXISTENCE
OF
THE
PARTNERSHIP
Interplay
of
the
Tri-Level
Existence
of
the
Partnership.............................
Partnership
Is
Primarily
a
Contractual
Relationship .................................
Partnership
as
a
Means
of
Doing
Business,
Through
the
Partnership
Juridical
Person............................................................
Legal
Bases
of
the
Partnership
Juridical
Personality .......................
Underlying
Business
Ends
of
the
Partnership
Juridical
Person......................................................................
The
Case
for
"Secret
Associations"
...................................... .........
Jurisprudential
Application
of
the
Doctrine
of
Separate
Juridical
Personality
of
the
Partnership.................................
Applicability
of
the
Doctrine
of
Piercing
the
Veil
of
Separate
Juridical
Fiction
..................................................
Entitlement
to
Constitutional
Rights
and
Guarantees....................
Partnership
as
a
Business
Enterprise ........................................................
442
450
453
454
454
455
456
458
461
465
CHAPTER 3 ATTRIBUTES OF THE PARTNERSHIP
Non-Solemn or Consensual Juridical Personality......................................
Exceptions to Informal or Consensual Nature
of Juridical Personality...........................................................
Weak Juridical Personality ..............................................................
Mutual Agency .........................................................................................
Delectus Personae.....................................................................................
Partners Bound to Unlimited Liability.......................................................
470
472
474
476
478
481
CHAPTER 4 THE CONTRACT OF PARTNERSHIP
Essential Elements of the Contract of Partnership ...................................
Element of Consent.........................................................................
Consent to Pursue a Business Jointly Is the Nexus
of the Partnership Relationship ....................................
Legal Capacity to Contract ....................................................
Admission of New Partner into an Existing
Partnership ...................................................................
Subject Matter: Pursuit of a Business Enterprise ...........................
Co-Ownership or Co-Possession Does Not
Necessarily Constitute a Partnership ............................
Receipt By a Person of a Share of the Net Profit ..................
xxii
484
485
486
487
487
488
490
491
Meeting of Minds on the Establishing a Common Fund Is the
Essence of a Partnership
Contract................................................................................ 493
Proof of the Existence of the Business Enterprise
May Support the Existence of a Partnership ....................... 499
Doctrine of "Attributes of Proprietorship" as a Means to Prove the
Existence
of a Partnership ................................................................... 500
When Subject Matter (the Business Venture) Is
Unlawful or Against Public Policy......................................... 504
Cause or Consideration: Promised Contributions.................................. 505
Other Essential Elements of Partnership ............................................... 507
Essential Characteristics of the Partnership Contract
Nominate and Principal ......................................................................... 509
Consensual ............................................................................................. 509
Onerous and Bilateral ..................................................................................... 514
Preparatory and Progressive ........................................................................... 515
CHAPTER 5
FORMAL REQUIREMENTS FOR PARTNERSHIPS
Partnership Essentially Consensual in Character ......................................
517
Requirements Tied to Capital Contributions ............................................
518
When Capital Contributions Total P3,000.00 or More....................
518
Rationale for Article 1772 of the New Civil Code ................. 519
Registered Partnership Deemed Conclusive as to the Partnership
Set-up Among the
Partners.........................................................................
520
When Immovable Property Contributed........................................
524
Historical Background of Article 1773 ...................................524
Importance of Immovable Property in the
Partnership Scheme ......................................................
524
When Immovable Property Deemed Contributed ...............525
Rationale Behind the Formal Requirements
under Article 1773 ........................................................
526
Suggested Adverse Effect of Failure to Comply
Registration Requirements of Article 1773 ..................
528
Article 1773 Should Be Considered with Priority Rules for Claims of
Partnership Creditors
and Separate Debtors of the Partners ...........................
533
Requirements Tied to Partnership Name ................................................
534
Historical Basis of Article 1815 .......................................................
535
SEC Rules on Partnership Name .....................................................
539
xxiii
Registration of Little Usefulness in Partnership Law:
A Summation ................................................................................. 543
Intra-Partnership Relationship ........................ .............................. 544
Dealings with Third Parties............................................................. 545
Value of the Statutory Requirements on Form
and Registration .................................................................... 548
CHAPTER 6
CLASSES OF PARTNERSHIPS AND PARTNERS
Kinds of Partnerships ................... ..........................................................
552
As to Object: Universal Partnership versus Particular
Partnership ............................................................................ 553
As to Duration.................................................................... ........... 557
As to Extent of Partners'Liabilities ................................................. 560
Kinds of Partners.......................................................................................
561
Special Issues of Who May Validly Become Partners
May Spouses Validly Enter into a Partnership Relation? Spouses Cannot
Enter into a Universal
Partnership ...................................................................
563
Spouses Are Not Qualified to Enter into Other
Forms of Partnership for Gain ......................................
566
Spouses Governed by the Absolute
Community of Property Regime............................. 567
Spouses Governed by the Conjugal
Partnership of Gains .............................................. 568
Spouses Governed by the Complete
Separation of Property Regime.............................. 569
Contract of Partnership May Offend Against the
Provisions of the Family Code .......................................
569
Issue on Control and Binding Effects
of Acts of Partners .................................................. 570
Charges to Partnership Properties ...............................
571
Professional Partnerships .....................................................
572
May Corporations Validly Qualify to Become Partners? ....
573
Jurisprudential Rule .............................................................. 573
SEC Rules............................................................................... 574
Partnership Distinguished from Other Business Media............................
578
Distinguished from "Joint Venture" ............................................... 578
Distinguished from Co-Ownership ................................................. 580
Distinguished from Joint Account (Sociedad de Cuentas
en Participation) .................................................................... 581
Distinguished from Agency............................................................. 581
xxiv
Distinguishing Agency Principles from the Doctrine
of Mutual Agency in the Partnership Setting ................
Distinguished from the Business Trust ...........................................
Distinguished from the Corporation ...............................................
Does a Defective Incorporation Process Result
into a Partnership? ........................................................
Distinguished from Cooperatives ....................................................
582
583
584
585
591
CHAPTER
7
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
The
Property
Rights
of
Every
Partner ........................................................
Partner's
Right
to
Manage
the
Partnership
General
Rule
on
Partnership
Management ....................................
Default
Rule:
Every
Partner
Has
a
Right
to
Manage......................................................................
Overturning
of
the
Ruling
in
Council
of
Red
Men ..................
Effect
of
Internal
and
Non-Public
Arrangement
of
Partnership
Management .............................................
Transactions
Not
in
the
Ordinary
Course
of
Partnership
Business .................................................................................
Specific
Modifications
on
the
Power
of
Management....................
Specific
Rules
on
Dealings
with
Immovable
Properties
of
the
Partnership..................................................................
Partner's
Right
to
Specific
Partnership
Property ......................................
Partners'
Specific
Right
to
Partnership
Property
Limited
to
Pursuing
the
Partnership
Business
.......................................
Partners'
Contributed
Property
to
the
Partnership
Can
Be
Dealt
With
Only
for
Partnership
Purposes
......................
Equity
Rights
of
Partners ..........................................................................
Assignment
of
a
Partner's
Equity
Right ...........................................
Right
to
Participate
in
Profits;
Obligation
to
Participate
in
Losses
................................................................................
No
Guarantee
as
to
Profits ....................................................
When
the
Right
to
Profits
Accrues
........................................
Other
Rights
of
a
Partner ...........................................................................
Right
to
Be
Reimbursed
for
Expenses
Incurred
on
Behalf
of
the
Partnership .................................................
Right
to
Inspect................................................................................
Right
to
Demand
True
and
Full
Information ...................................
Right
to
Demand
Accounting
..........................................................
Right
to
Dissolve
the
Partnership
...................................................
Obligations
of
the
Partnership
to
Third
Parties .........................................
xxv
594
595
598
600
601
605
607
610
613
614
617
618
620
624
626
627
628
628
629
630
630
632
633
Liability Arising from the Firm Name .................................................... 635
Liability Arising from the Acts of the Agent .......................................... 635
CHAPTER 8 DUTIES AND OBLIGATIONS OF PARTNERS
Obligation to Contribute to the Common Fund........................................
When Promised Contribution Is a Sum of Money ..........................
When Promised Contribution Is PropertyIn General ..................
When Contribution in Goods ..........................................................
When Contribution in Real Property...............................................
Contribution of Service or Industry; the Industrial
Partner ..................................................................................
Obligation for "Additional Contribution"........................................
Remedies When There Is Default in Obligation
to Contribute..........................................................................
Personal Obligations for Partnership Debts; Doctrine of
Unlimited Liability Unlimited Liability of Existing
Partners ..........................................................................................
Obligation of Subsequently Admitted Partners..............................
Obligations of Non-Partners ...........................................................
Fiduciary Duties of Partners......................................................................
Duty of Diligence .............................................................................
Duty of Loyalty ........................................... ...................................
Duty to Account ..............................................................................
Specific Fiduciary Duties of Industrial Partner ................................
Specific Duty of Loyalty of Capitalist Partners.................................
637
640
641
643
644
645
648
648
650
651
652
653
655
656
658
659
662
CHAPTER
9
DISSOLUTION,
WINDING-UP
AND
TERMINATION
OF
THE
PARTNERSHIP
Introduction
and
Definition
of
Terms .............................................................
664
Dissolution
......................................................................................................
666
Dissolution
in
the
Light
of
the
Partnership
Being
Primarily
a
Contractual
Relationship
.........................................................
670
Dissolution
Effected
with
No
Violation
of
the
Partnership
Contract ...........................................................
672
Dissolution
Effected
in
Violation
of
the
Partnership
Contract...............................................................................
673
Force
Majeure
and
Other
Similar
Causes....................................
675
Causes
Equivalent
to
Rescission
of
the
Contract
of
Partnership
.........................................................................
676
xxvi
Legal Effects of Dissolution In General ....................................... 680
Effect of Dissolution on the Partnership Contract
and Juridical Personality ................................................ 685
Effect on the Partnership Business Enterprise....................... 686
Effects on Contracts Entered into with Third
Parties ................................................................................... 687
Effects on Determining Liability of Partners for
Damages to One Another ..................................................... 689
Effects of Dissolution Among the Partners Inter Se......................... 689
When Dissolution Is Caused not in
Contravention of the Partnership Agreement............... 689
When Dissolution Is Caused by the Bona Fide
Expulsion of a Partner.................................................... 690
When Dissolution Is Caused in Contravention
of the Partnership Agreement....................................... 690
When Dissolution Caused by Rescission of the
Partnership Agreement Due to Fraud or
Misrepresentation (i.e., By Judicial Decree) ......................... 692
Effects of Dissolution on Partnership Liabilities Existing
or Accrued at the that Time......................................................... 692
General Rule on Existing Partnership Liabilities ................... 693
Discharge of a Partner from Existing Partnership
Liabilities ............................................................................... 693
Effects of Dissolution on Partnership Liabilities
Contracted or Incurred After Dissolution .................................... 693
Liabilities Incurred Pursuant to Winding-up
Proceedings.................................................................... 694
Where Partnership Not Bound Even for
Winding-Up Liabilities ............................................ 694
Liabilities Incurred Constituting "New Business"
During the Winding-Up Process .................................... 695
When Dissolution Is by the Act, Insolvency
or Death of a Partner.................................................... 696
When Dissolution Is NOT by the Act, Insolvency
or Death of a Partner.................................................... 696
As To Third Party Creditors ................................................... 696
Particular Rule of "Limited Liability" ................ 698
When Creditors Not Deemed to Be in
Good Faith...................................................... 698
Particular Rule on Partner by Estoppel.... 699
Winding-Up of Partnership Affairs
Who Has Authority to Wind-up?........................................................... 699
Rules and Procedures for Winding-up and Liquidation
of Partnership Affairs .................................................................. 699
xxvii
Enforcing Contributions from Partners to Cover
Partnership Debts ..........................................................
702
Priority Rules Between Partners' Creditors and
Partnership Creditors........................................................... 702
Priority Rules When Partner Is Insolvent .............................
702
Partner May Demand Share in Net Assets Only After Liquidation and
Settlement
of Claims of Partnership Creditors.................................
703
Continuance of Partnership Business Instead of Winding-Up ....705 Who May
Continue Partnership Business and
Obligations Assumed? ..................................... ..................... 707
Disposition of Liabilities When Partnership Business
Continued ............................................................................. 708
Disposition of Liabilities When Dissolution Is Caused
by the Retirement or Death of a Partner..................................... 710
Partner's Right to Demand an Accounting ............................................ 712
CHAPTER 10 LIMITED PARTNERSHIPS
Nature, Formation and Registration ..................................................... 714
Essence of the Medium of Limited Partnership .................................... 716
Requirements for the Formation of a Limited Partnership . 718
False Statement in the SEC Certificate............................................
724
Name of Limited Partnership .........................................................
725
Surname of Limited Partner .................................................
726
The Inclusion of the Term "Limited"......................................
727
No Firm Name Provided in the Certificate................................... 728
Contributions to the Limited Partnership.......................................
728
Contribution of Service.........................................................
729
Indication of the Amount Contributed.................................
729
When Certificate Cancelled or Amended ........................................
730
When Certificate Must Be Cancelled ....................................
732
When Certificate Must Be Amended .................................... 733
Procedure to Amend Certificate...........................................
734
General and Limited Partners................................................................... 735
The General Partners
Who Is a General Partner in a Limited
Partnership? ..................................................................
736
Rights and Powers of General Partners................................
736
Duties and Obligations of General Partners .........................
740
The Limited Partners
Who Is a Limited Partner? .....................................................
742
xxviii
Erroneous But in Good Faith Limited Partner........................
When Limited and General Partner at the
Same Time .....................................................................
The Rights and Powers of the Limited Partner ................................
Right to Limited Liability .......................................................
Right to Return of Contributions ...........................................
Right to Profit or Compensation by Way of Income ..
Right to Assign Limited Partner's Interest .............................
Heirs of Deceased General Partner Succeed
Generally as Limited Partners .......................................
Limited Right as to Partnership Affairs .................................
Limited Partner May Loan Money to the
Partnership ....................................................................
Right to Dissolve the Limited Partnership .............................
Obligations of Limited Partners ......................................................
On Original Contributions to the Partnership .......................
On Additional Contributions..................................................
On Returned Contributions ..................................................
Liable as Trustee of the Partnership .....................................
Fiduciary Duties of Limited Partners......................................
General Lack of Standing in Partnership Suits ......................
Dissolution and Winding up of Limited Partnership..................................
Causes of Dissolution ....................................................................
Settling of Accounts ........................................................................
742
743
744
745
747
751
752
756
758
759
760
762
762
763
764
764
765
765
766
768
769
JOINT
VENTURES
Introduction
.............................................................................................
Nature
of
Joint
Ventures
in
Philippine
Setting
Joint
Venture
Arrangements
Primarily
Governed
by
Contract
Law
Principles .........................................................
Joint
Ventures
Are
Species
of
Partnership
.....................................
Partnership
Characteristics
of
the
Joint
Venture ............................
Special
Treatments
Given
to
Joint
Ventures...................................
SEC
Rulings.............................................................................
Alternative
Forms
in
Structuring
a
Joint
Venture ......................................
Accounting
for
Joints
Ventures
.......................................................
Jointly
Controlled
Operations
(JCO)
......................................
Jointly
Controlled
Assets
(JCA)...............................................
Jointly
Controlled
Entities
(JCE) .............................................
Informal
or
Contractual
Joint
Venture
Arrangement .....................
xxix
771
772
773
777
778
779
781
782
783
783
784
785
SEC Recognition of the Informal Joint Venture
Arrangement..................................................................
786
Jurisprudential Example of an Informal Joint
Venture Arrangement....................................................
787
Joint Venture Arrangement Hidden Through
Another Form of Contract ...... ......................................
789
Joint Venture Pursued under Formal Partnership
Arrangement ......................................................................... 793
Joint Venture Pursued under a Joint Venture
Corporation ........................................................................... 795
Corporate Principles Versus JVA Provisions .......................... 795
JV Company Organized as a Close Corporation..................... 800
Right of First Refusal a Delectus Personae
Feature in a JV Company Scheme........................................ 802
Aspects Which Influence Choice of JV Scheme ............................................... 804
Defining Joint Ventures Scope of Business Activity .......................
804
Limited Liability Features ...................................................................... 804
Exclusions of New Parties; Non-Dilution of Equity ............................... 805
Tax Issues Pertinent to Joint Ventures Like a
Partnership, a Joint Venture Is
Considered a Corporate Taxpayer ....................................... 805
Joint Ventures Exempt from Income Taxation............................ 806
Informal Joint Venture May Enjoy Tax Advantages ...
806
Zero-Rated Dividends for JV Corporation..............................
807
Guidelines and Procedure for Entering Into Joint Venture
(JV) Agreements Between Government and Private Entities ...................
808
Legal Basis for the Guidelines..........................................................
808
Joint Venture Arrangements Covered by the Guidelines ...
809
Nature of JV Covered by the Guidelines .........................................
811
Objectives and Principles Underpinning the Guidelines ....814 General Guidelines in Entering into Covered JV
Agreements Parameters for JV Agreements......................... 815
JV Company As Preferred Mode of Implementing
JV Agreement.................................................................
816
Process for Entering into JV Agreements ........................................
819
Approval in Principle by Head of GE......................................
819
Modes of Selecting a JV Partner
Competitive Selection....................................................
820
Negotiated Agreements.................................................
821
Deviation and Amendment of the JV Agreement.................
822
Reporting Requirements
Annual Report to the DOF.....................................................
823
Submission of Salient Features and Copy of JV
Agreement to NEDA....................................................... 823
xxx
PHILIPPINE LAW AND PRACTICE ON:
AGENCY
CHAPTER
1
NATURE,
OBJECTIVE,
AND
KINDS
OF
AGENCY
DEFINITION AND OBJECTIVES OF AGENCY
ART. 1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right to
represent him.
A contract entered into in the name of another by one who has
no authority or legal representation, or who has acted beyond
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed
before it is revoked by the other contracting party. (1259a)
ART. 1403. The following contracts are unenforceable, unless
they are ratified:
NON-CORPORATE MEDIA OF DOING BUSINESS
1 o
(1) Those entered into in the name of another
person by one who has been given no authority or
legal representation, or who has acted beyond his
powers;
x x x
ART. 1868. By the contract of agency a person
binds himself to render some service or to do
something in representation or on behalf of an-
other, with the consent or authority of the latter.
(1709a)
The
general
rule
embodied
in
Article
1317
of
the
New
Civil
Code
is
that
"No
one
may
contract
in
the
name
of
another
without
being
authorized
by
the
latter,
or
unless
he
has
by
law
a
right
to
represent
him."
The
consequence
of
one
entering
into
a
contract
on
behalf
of
another
person
without
the
latter's
consent
or
authority,
is
to
render
the
contract
"unenforceable,"
as
mandated
under
Article
1403(1)
of
the
Code.
1
In Phiipotts v. Philippine Manufacturing Co., the Supreme Court
expressed the counter-part principle that, as a general rule, what a person may
do personally, he may do through another. Consequently, Article 1868 of the
New Civil Code defines t he"contract of agencf as one whereby "a person binds
himself to render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter." The statutory
definition of the "contract of agency" is given from the viewpoint of the agent
who binds himself to enter into juridical acts in the name of the principal, and
thereby emphasizes the characteristic of the contract as that of being unilaterai.
The legal framework which necessitates the need on certain occasions for
the formal establishment of the agency relationship has been aptly discussed by
2
the Court in Ratios v. Felix Go Chan & Sons Realty Corp., where it held
40
Phil.
471
(1919).
81
SCRA251
(1978).
2
NATURE, OBJECTIVE, AND KINDS OF AGENCY
It is a basic axiom in civil law embodied in our Civil Code
that no one may contract in the name of another without
being authorized by the latter, or unless he has by law a
right to represent him. A contract entered into in the name of
another by one who has no authority or legal representation,
or who has acted beyond his powers, shall be unenforceable,
unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by
the other contracting p arty...
Out of the above given principles, sprung the creation
and acceptance of the relationship of agency whereby one
party, called the principal (mandante), authorizes another,
call the agent (mandatario), to act for and in his behalf in
3
transactions with third persons.
When an agency relationship is established, and the agent
acts in the name of the principal, the agent is, insofar as the world
is concerned, essentially the principal acting in the particular
contract or transaction on hand. Consequently, the acts of the
agent on behalf of the principal within the scope of the authority
given have the same legal effects and consequences as though
the principal had been the one so acting in the given situation.
This principle is referred to as t he"doctrine of representation."
In Orient Air Service & Hotel Representatives v. Court of
4
Appeals, the Court held that the purpose of every contract of
agency is the ability, by legal fiction, to extend the personality of
the principal through the facility of the agent; but that the same
can only be effected with the consent of the principal.
5
In Litonjua, Jr. v. Eternit Corp., the Court held that
It bears stressing that in an agent-principal relationship,
the personality of the principal is extended through the facility
of the agent. In so doing, the agent, by legal fiction, becomes
the principal, authorized to perform all acts which the latter
would have him do. Such a relationship can only be effected
lbid, at pp. 258-259; emphasis
supplied.
197 SCRA645 (1991).
5
490 SCRA 204 (2006).
4
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
with the consent of the principal, which must not, in anyway, be
6
compelled by law or by any court.
7
In Doles v. Angeles, in response to the legal argument that there could
not have been an agency relationship because the principal never confirmed
personally to the third parties the establishment of the agency, the Court held
The CA is incorrect when it considered the fact that the
"supposed friends of [petitioners], the actual borrowers, did not
present themselves to [respondent]" as evidence that negates the
agency relationship it is sufficient that petitioner disclosed to
respondent that the former was acting in behalf of her principals,
her friends whom she referred to respondent. For an agency to
arise, it is not necessary that the principal personally encounter the
third person with whom the agent interacts. The law in fact
contemplates, and to a great degree, impersonal dealings where
the principal need not personally know or meet the third person
with whom her agent transacts; precisely, the purpose of agency is
to extend the personality of the principal through the facility of the
8
agent.
In Eurotech Industrial Technologies, Inc. v. Cuizon* the Court held that
"The underlying principle of the contract of agency is to accomplish results by
using the services of others - to do a great variety of things like selling, buying,
manufacturing, and transporting. Its purpose is to extend the personality of the
principal or the party for whom another acts and from whom he or she derives
10
the authority to act."
Lately, Philex Mining Corp. v. Commissioner of Internal Revenue,"
reiterated the principle that the essence of an agency, even one that is coupled
with interest, is the agent's ability to
Nbid,
at
p.
223.
7
492SCRA
607
*lbid,
at
p.
622.
(2006).
9
521
SCRA584
(2007).
"
I
b
i
d
,
a
t
p
.
5
NATURE, OBJECTIVE, AND KINDS OF AGENCY
represent
his
principal
and
bring
about
business
relations
between
the
latter
and
third
persons.
PARTIES
TO
A
CONTRACT
OF
AGENCY
The
parties
to
a
contract
of
agency
are:
the PRINCIPAL - the person represented (mandante)
the AGENT - the person who acts for and in
representation of another (mandatario)
The
other
terms
used
for
the
position
of
agent
are
"attorney-
in-fact,"
"proxy,"
"delegate,"
or
"representative."
Although
Article
1868
of
the
New
Civil
Code
defines
agency
in
terms
of
being
a
contract,
it
should
also
be
considered
as
creating
between
the
principal
and
an
agent
an
on-going
legal
relationship
which
imposes
personal
obligations
on
both
parties.
This
is
in
consonance
with
the
"personal
nature"
of
every
contract
of
agency.
Thus,
Rallos
held
that
out
of
the
principle
that
no
one
may
contract
in
the
name
of
another
without
being
authorized
by
the
latter,
"sprung
the
creation
and
acceptance
of
the
relationship
of
agency
whereby
one
party,
called
the
principal
(mandante),
authorizes
another,
called
the
agent
12
(mandatario),
to
act
for
and
in
his
behalf
in
transactions
with
third
persons."
ELEMENTS
OF
THE
CONTRACT
OF
AGENCY
Like
any
other
contract,
agency
is
constituted
of
the
essential
elements
of
(a)
consent,
(b)
object
or
subject
matter,
and
(c)
cause
or
consideration.
3
In
Rallos
v.
Felix
Go
Chan
&
Sons
Realty
Corp.,'
the
Court
held
that
the
following
are
the
essential
elements
of
the
contract
of
agency:
"Ibid,
at
p.
259.
"81
SCRA251
(1978).
NON-CORPORATE MEDIA OF DOING BUSINESS
1 o
(a)
Consent, express or implied, of the parties to establish the
relationship;
(b)
Object, which is the execution of a juridical act in relation to
third parties;
(c)
Agent acts as a representative and not for himself; and
(d)
Agent acts within the scope of his authority.
14
The element not included in the Rallos enumeration is the cause or
consideration of every contract of agency.
The last two elements included in the Rallos enumeration should not be
understood to be essential elements for the perfection and validity of the
contract of agency, for indeed they are matters that do not go into perfection,
but rather into the performance stage of the agency relationship. The
non-existence of the two purported essential elements {i.e., that the agent
acted for herself and/or the agent acted beyond the scope of her authority),
does not affect the validity of the existing agency relationship, but rather the
enforceability of the contracts entered into by the agent on behalf of the
principal.
Thus, under Article 1883 of the New Civil Code, "If an agent acts in his own
name, the principal has no right of action against the person with whom the
agent has contracted; neither have such persons against the principal." Under
Article 1898 of the New Civil Code, "If the agent contracts in the name of the
principal, exceeding the scope of his authority, and the principal does not ratify
the contract, it shall be void" as to the principal.
The last two "elements" added by Rallos, which are based on specific
provisions of law, are meant to emphasize that the "relationship of agencf is
set-up essentially to comply with the "basic axiom embodied in our Civil Code
that no one may contract in the name of another without being authorized by
the lat
14
Reiterated
in
YuEng
Cho
v.
Pan
American
World
Airways,
Inc.,
328
SCRA
717
(2000);
Manila
Memorial
Park
Cemetery,
Inc.
v.
Linsangan,
443
SCRA
377
(2004);
Eurotech
Industrial
Technologies,
Inc.
v.
Cuizon,
521
SCRA
584
(2007).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
ter,...
A
contract
entered
into
in
the
name
of
another
by
one
who
has
no
authority
or
legal
representation
...
shall
be
unenforceable,
unless
it
is
ratified,
15
expressly
or
implied,
by
the
person
on
whose
behalf
it
has
been
executed."
1.
The
Element
of
CONSENT
The
essential
element
of
consent
is
manifest
from
the
principle
embodied
in
Article
1317
of
the
New
Civil
Code
that
"No
person
may
be
represented
by
another
without
his
will;
and
that
no
person
can
be
compelled
against
his
will
to
represent
another."
18
In Bordador v. Luz, in determining whether the purported principal
(Brigida) can be held liable solidarily with her alleged agent (Deganos) for failure
of the latter to return jewelries received allegedly on behalf of the purported
principal (Brigida), the Supreme Court held that "The basis for agency is
representation. Here, there is no showing that Brigida consented to the acts of
Deganos or authorized him to act on her behalf, much less with respect to the
17
particular transactions involved." In addition, the Court held -
Besides, it was grossly and inexcusably negligent of petitioners
to entrust to Deganos, not once or twice but on at least six
occasions as evidenced by six receipts, several pieces of jewelry of
substantial value without requiring a written authorization from his
alleged principal [Brigida]. A person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the
18
agent.
In Dizon v. Court of Appeals," the Court held that just because several
persons are constituted as co-owners of the same property does not make them
agents to one another. In
1S
81 SCRA 251, 258.
"283 SCRA 374
"Ibid, at p. 382.
(1997).
1B
lbid, at p. 382.
19
302 SCRA 288
(1999).
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
effect,
the
Court
held
that
a
co-owner
does
not
become
an
agent
of
the
other
co-owners,
and
that
any
exercise
of
an
option
to
buy
a
piece
of
land
transacted
with
one
co-owner
does
not
bind
the
other
co-owners
of
the
land.
30
In Victorias Milling Co., Inc. v. Court of Appeals, the Court held
It is clear from Article 1868 that the basis of agency is
representation. On the part of the principal, there must be an
actual intention to appoint or an intention naturally inferable from
his words or actions; and on the part of the agent, there must be
an intention to accept the appointment and act on it, and in the
21
absence of such intent, there is generally no agency.
32
In
Litonjua,
Jr.
v.
Eternit
Corp.,
the
Court
held
that
consent
(i.e.,
the
meeting
of
minds)
of
both
the
principal
and
the
agent
is
necessary
to
create
an
agency:
The
principal
must
intend
that
the
agent
shall
act
for
him;
the
agent
must
intend
to
accept
the
authority
and
act
on
it,
and
the
intention
of
the
parties
must
find
expression
either
in
words
or
conduct
between
them.
23
In the same manner, Dominion Insurance Corp. v. Court of Appeals, held
that since the basis for agency is representation, then there must be, on the
part of the principal, an actual intention to appoint or an intention naturally
inferable from his words or actions; on the part of the agent, there must be an
intention to accept the appointment and act on it; and in the absence of such
intent, there is generally no agency.
Perhaps the only exception to this rule is the principle of "agency by
estoppel;" but even then it is by the separate acts of the purported principal and
purported agent, by which they are brought into the relationship insofar as third
parties acting in good faith are concerned. More discussions on the essential
333
SCRA663
21
(2000).
/b/d,
at
p.
675.
*?490
SCRA
204
23
376
SCRA
239
(2006).
(2002).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
element of consent shall take place in the section on essential characteristic of
consensuality of contracts of agency.
a. Capacity of the Parties
For the validity of a contract of agency, it is required that the principal
24
must have capacity to contract, and principal may either be a natural or
25
juridical person.
There is legal literature holding that since the agent assumes no personal
liability, the agent does not have to possess full capacity to act insofar as third
26
persons are concerned.
Since a contract of agency is first and foremost a contract in itself, the
parties (both principal and agent) must have legal capacities to validly enter into
an agency. However, if one of the parties has no legal capacity to contract, then
the contract of agency is not void, but merely voidable by reason of vitiation in
consent, which means that it is valid until annulled.
A voidable contract of agency will produce legal consequences, when it is
pursued to enter into juridical relations with third parties. If the principal is the
one who has no legal capacity to contract, and his agent enters into a
contractual relationship in the principal's name with a third party, the resulting
contract is voidable and subject to annulment. On the other hand, if the
principal has legal capacity, and it is the agent that has no legal capacity to
contract, the underlying agency relationship is voidable; and when the
incapacitated agent enters into a contract with a third party, the resulting
contract would be valid, not voidable, for the agent's incapacity is irrelevant, the
contract having been entered into, for and in behalf of the principal, who has full
legal capacity.
The foregoing discussions support the fact that as a general proposition
the lack of legal capacity of the agent does not affect the constitution of the
agency relationship. Yet, it is clear under
24
Arts. 1327 and 1329, New Civil Code.
Art. 1919(4), New Civil Code.
^DE LEON AND DE LEON, COMMENT AND CASES ON PARTNERSHIP AGENCY AND
TRUSTS, 2005 ed., at p. 356; hereinafter referred to as "DE LEONS."
25
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
Article
1919(3)
of
the
New
Civil
Code
that
if
during
the
term
of
the
agency,
the
principal
or
agent
is
placed
under
civil
interdiction,
or
becomes
insane
or
insolvent,
the
agency
is
ipso
jure
extinguished.
It
is
therefore
only
logical
to
conclude
that
if
the
loss
of
legal
capacity
of
the
agent
extinguishes
the
agency,
then
necessarily
any
of
those
cause
that
have
the
effect
of
removing
legal
capacity
on
either
or
both
the
principal
and
agent
at
the
time
of
perfection
would
not
bring
about
a
contract
of
agency.
Obviously,
there
seems
to
be
an
incongruity
when
it
comes
to
principles
involving
the
legal
capacities
of
the
parties
to
a
contract
of
agency.
The
reason
being
that
the
principles
actually
occupy
two
different
legal
levels.
When
it
comes
to
creating
and
extinguishing
the
contractual
relationship
of
principal
and
agent,
the
provisions
of
law
take
into
consideration
purely
intramural
matters
pertaining
to
the
parties
thereto
under
the
principle
of
relativity.
Since
agency
is
essentially
a
personal
relationship
based
on
the
purpose
of
representation,
then
when
either
the
principal
or
agent
dies
or
becomes
legally
incapacitated,
then
the
agency
relation
should
ipso
jure
cease.
But
a
contract
of
agency
is
merely
a
preparatory
contract,
where
the
main
purpose
is
to
effect,
through
the
agent,
contracts
and
other
juridical
relationships
of
the
principal
with
third
parties.
The
public
policy
is
that
third
parties
who
act
in
good
faith
with
an
agent
have
a
right
to
expect
that
their
contracts
would
be
valid
and
binding
on
the
principal.
Therefore,
even
when
by
legal
cause
an
agency
relationship
has
terminated,
say
with
the
insanity
of
the
principal,
if
the
agent
and
a
third
party
enter
into
contract
unaware
of
the
situation,
then
the
various
provisions
on
the
Law
on
Agency
would
affirm
the
validity
of
the
contract.
More
on
this
point
will
be
covered
under
the
section
on
the
essential
characteristics
of
agency,
as
well
as
on
the
final
chapter
on
extinguishment
of
agency.
2.
The
Element
of
OBJECT
or
SUBJECT
MATTER
The
object
of
every
contract
of
agency
is
service,
which
particularly
is
the
legal
undertaking
of
the
agent
to
enter
into
juridical
acts
with
third
persons
on
behalf
of
the
principal.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
11
Therefore, the obligation created by the perfection of the contract of agency is
essentially an unilateral personal obligation "to do." More specifically, Rallos
ruled that the object of every contract of agency "is the execution of a juridical
27
act in relation to a third person."
Items (b), (c) and (d) in the enumerated elements of Rallos can actually be
summarized into the object or objective of every contract of agency to be that of
service, i.e., "the undertaking (obligation) of the agent to enter into a juridical
act with third parties on behalf of the principal and within the scope of his
authority."
3. The Element of CONSIDERATION or COMMISSION
ART. 1875. Agency is presumed to be for a compensation, unless
there is proof to the contrary, (n)
The cause or consideration in agency is the compensation or commission
that the principal agreed or committed to pay the agent for the latter's services.
Under Article 1875 of the New Civil Code, every agency is presumed to be for
compensation, unless there is proof to the contrary. In other words, it is clear
that there can be a valid agency contract which is supported by consideration of
liberality on the part of the agent; that although agency contracts are primarily
onerous, they may also be constituted as gratuitous contracts.
The value that Article 1875 brings into the Law on Agency is the
presumption that every agency contract entered into is for valuable
consideration that the agency serves for the benefit of the principal expecting
to be compensated for his efforts. It is the party who avers that the agency was
gratuitous that
27
Ibid, at p. 259.
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
the
agent
agreed
to
serve
gratuitously
who
has
the
burden
of
proving
such
arrangement.
26
The
old
decision
in
Aguna
v.
Larena,
did
not
reflect
the
principle
that
generally
agency
is
for
compensation,
which
is
now
embodied
in
Article
1875
of
the
New
Civil
Code.
In
Aguna,
although
the
agent
had
rendered
service
to
the
principal
covering
collection
of
rentals
from
the
various
tenants
of
the
principal,
and
in
spite
of
the
agreement
that
the
principal
would
pay
for
the
agent's
service,
nevertheless,
the
principal
allowed
the
agent
to
occupy
one
of
his
parcels
of
land
and
to
build
his
house
thereon.
The
Court
held
that
the
service
rendered
by
the
agent
was
deemed
to
be
gratuitous,
apart
from
the
occupation
of
some
of
the
house
of
the
deceased
by
the
plaintiff
and
his
family,
"for
if
it
were
true
that
the
agent
and
the
deceased
principal
had
an
understanding
to
the
effect
that
the
agent
was
to
receive
compensation
aside
from
the
use
and
occupation
of
the
houses
of
the
deceased,
it
cannot
be
explained
how
the
agent
could
have
rendered
services
as
he
did
for
eight
years
without
receiving
and
29
claiming
any
compensation
from
the
deceased."
If
Aguna
were
decided
under
the
New
Civil
Code,
then
under
Article
1875,
which
mandates
that
every
contract
of
agency
is
deemed
to
be
for
compensation,
the
result
would
have
been
quite
the
opposite.
30
Recently, in De Castro v. Court of Appeals, the Court upheld the
obligatory force of a compensation clause agreed upon in a contract of agency,
thus
A contract of agency which is not contrary to law, public
order, public policy, morals or good custom is a valid contract, and
constitutes the law between the parties. The contract of agency
entered into by Constante with Artigo is the law between them
and both are bound to comply with its terms and conditions in
good faith.
*57 Phil. 630
(1932).
mid, at p. 632.
30
384 SCRA607
(2002).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
13
The mere fact that "other agents" intervened in the con-
summation of the sale and were paid their respective commissions
could not vary the terms of the contract of agency with granting
31
Artigo a 5 percent commission based on the selling price.
The foregoing discussions emphasize the truism that as a commercial
contract, agency exhibits one of the three characteristics common to all
commercial contracts, which is that of being "customary and "equitable."
Ordinarily in Civil Law, the question of compensation must be an integral part of
the meeting of the minds of the parties to a contract of service; and that parties
to a civil contract cannot be held liable for compensation to which they never
expressly or impliedly agreed to.
In the realm of commercial contracts, customary rule or practice imputes
that parties enter into commercial transactions or relationship for profit or for
remuneration. Thus, in agency, the fact that such relationship has been
established puts into application customary law which presumes that both
parties knew that the services of the agent were for compensation. It is not even
critical that the amount and nature of the compensation had not been
previously agreed upon (as would have been critical for "obligatory force" to
come into play for civil or private contracts of service), since the courts are
empowered to apply customs to determine what compensation the agent is
entitled to that which the market customarily pays for the services rendered
by the agent.
a. Agent's Entitlement to Commission Anchored on the Rendering
of Service
The compensation that the principal agrees to pay to the agent is part of
the terms of the contract of agency upon which their minds have met.
Therefore, the extent and manner by which the agent would be entitled to
receive compensation or commission is based on the terms of the contract, or
the meeting of minds between the principal and the agent.
Ubid, at pp. 616-617.
NON-CORPORATE MEDIA OF DOING BUSINESS
1 o
Sometimes, the terms of the contract of agency on the agent's
entitlement to compensation are not clear, and decisions have had to deal with
the issue of when an agent has merited the right to receive the compensation
either stipulated or implied from the terms of the contract. The doctrine that
may be derived from the various decisions on the matter are anchored on the
nature of the contract of agency as a species of contracts of services in general.
When the rendering of service alone, and not the results, is the
primordial basis for which the compensation is given, then the proof that
services have been rendered should entitle the agent to the compensation
agreed upon.
On the other hand, if the nature of the service to be compensated is
understood to be based on the results to be achieved, e.g., that a particular
contract with a third party is entered into in behalf of the principal, then mere
rendering of service without achievement of the results agreed upon would
not entitle the agent to the compensation agreed upon.
In Inland Realty v. Court of Appeals* although the ultimate buyer was
introduced formally by the broker to the principal, nonetheless the Court held
that
. . . Petitioners did not succeed in outrightly selling said shares
under the predetermined terms and conditions set out by Araneta,
Inc., e.g., that the price per share is P1,500.00. They admit that they
could not dissuade Standford from haggling for the price of
P1,000.00 per share with the balance of 50% of the total purchase
price payable in five years at 12% per annum. . . the lapse of the
period of more than one (1) year and five (5) months between the
expiration of petitioners' authority to sell and the consummation
of the sale to Standford, to be a significant index of petitioners'
non-participation in the really critical events leading to the
consummation of said sale, i.e., the negotiations to convince
Standford to sell at Araneta, Inc.'s
32
273 SCRA 70 (1997).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
15
asking
price,
the
finalization
of
the
terms
and
conditions
of
the
sale,
the
drafting
of
the
deed
of
sale,
the
processing
of
pertinent
documents,
and
the
delivery
of
the
shares
of
stock
to
Standford
.
.
.
Petitioners
were
not
the
efficient
procuring
cause
in
bringing
about
the
sale
...
and
are,
therefore,
not
entitled
to
the
stipulated
33
broker's
commission...
"
3
In contrast, in Manotok Bros., Inc. v. Court of Appeals, * the Court held
that although the sale of the object of the agency to sell was perfected three
days after the expiration of the agency period, the agent was still entitled to
receive the commission stipulated based on the doctrine held in Prats v. Court
35
of Appeals, that when the agent was the "efficient procuring cause in bringing
about the sale," then the agent is entitled to compensation. In essence, the
Court ruled that when there is a close, proximate and causal connection
between the agent's efforts and labor and the principal's sale of his property,
the agent is entitled to a commission. It ought to be noted though that even
under the Prats doctrine, the ultimate objective of actual sale being effected,
must be present for the agent or broker to earned his commission.
The matter pertaining to entitlement to commission will be discussed in
greater details in the section below that distinguishes a contract of agency from
that of a broker's contract.
ESSENTIAL CHARACTERISTICS OF AGENCY
Aside from being a nominate, principal and consensual contract, Rallos v.
Felix Go Chan & Sons Realty Corp.* characterizes a contract of agency as
37
being"personal, representative, and derivative in nature."
mid, at pp. 77-78.
"221 SCRA 224
(1993).
*
8
1
S
C
R
A
3
6
0
(
NON-CORPORATE MEDIA OF DOING BUSINESS
1 o
1. Nominate and Principal
Not only is the contract of agency specifically named as such under the
New Civil Code, it is a principal contract because it can stand on its own
without need of another contract to validate it.
The real value of the contract of agency being a "nominate and principar
contract is that it has been so set apart by law and provided with its own set of
rules and legal consequences, that any other arrangement that essentially falls
within its terms shall be considered as an agency arrangement and shall be
governed by the Law on Agency, notwithstanding any intention of the parties
to the contrary. After all, a contract is what the law says it is, and not what the
parties call it.
In Doles v. Angelesit was held that if an act done by one person in behalf
of another is in its essential nature one of agency, the former is the agent of the
latter notwithstanding he or she is not so called - it will be an agency whether
the parties understood the exact nature of the relation or not.
Recently, in Manila Memorial Park Cemetery, Inc. v. Linsanganthe Court
reiterated the principle that whatever the parties name the contractual
relationship, when it has the essential elements of a contract of agency, then it
would be governed by the Law on Agency, thus
In an attempt to prove that Baluyot was not its agent, MMPCI
pointed out that under its Agency Manager Agreement, an agency
manager such as Baluyot is considered an independent contractor
and not an agent. However, in the same contract, Baluyot as
agency manager was authorized to solicit and remit to MMPCI
offers to purchase interment spaces belong to and sold by the
latter. Notwithstanding the claim of MMPCI that Baluyot was an
independent contractor, the fact remains that she was authorized
to solicit solely for and in behalf of MMPCI. As proper found both
by the trial court and the Court of Appeals,
38
492 SCRA 607
(2006).
443 SCRA 377
(2004).
39
NATURE, OBJECTIVE, AND KINDS OF AGENCY
17
Baluyot was an agent of MMPCI, having represented the
interest of the latter, and having been allowed by MMPCI
to represent it in her dealings with its clients/prospective
40
buyers.
2. Consensual
ART. 1869. Agency may be express, or implied from the acts of
the principal, from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person is acting on his
behalf without authority.
Agency may be oral, unless the law requires a specific form.
(1710a)
ART. 1870. Acceptance by the agent may also be express, or
implied from his acts which carry out the agency, or from his silence
or inaction, according to the circumstances, (n)
The contract of agency is perfected by mere consent, and is therefore a
consensual contract Under Article 1869 of the New Civil Code, an agency may be
express or implied from the act of the principal, from his silence or lack of action,
or failure to repudiate the agency; agency may be oral, unless the law requires a
41
specific form.
Under Article 1870 of the New Civil Code, acceptance by the agent may
also be express, or implied from his acts which carry out the agency, or from his
silence or inaction according to the circumstances.
In other words, the contract of agency is essentially a consensual contract,
and that as a general rule no form or solemnity is required in order to make it
valid, binding and enforceable.
*lbid,
at
p.
390.
41
See
also
Litonjua,
Jr.
v.
Etemit
Corp.,
490
SCRA204
(2006).
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
3. Unilateral and Primarily Onerous
Ordinarily, an agency is onerous in nature, where the agent expects
compensation for his services in the form of commissions. However, Article
1875 of the New Civil Code recognizes that an agency may be supported by pure
liberality, and thus would be gratuitous, but the burden of proof would be to
show that the agency was constituted gratuitously.
When it is gratuitous, the contract of agency is undoubtedly a unilateral
contract because it only creates an obligation on the part of the agent. But even
when it is supported by a valuable consideration (i.e., compensated or onerous
agency), it would still be characterized as a unilateral contract, because it is only
the fulfillment of the primary obligations of the agent to render some service
upon which the subordinate obligation of the principal to pay the compensation
agreed upon arises.
When an agent accepts the agency position without compensation, he
assumes the same responsibility to carry out the agency and shall incur the
same liability when he fails to fulfill his obligations to the principal. It is therefore
rather strange that Article 1909 of the New Civil Code provides that "The agent
is responsible not only for fraud, but also for negligence, which shall be judged
with more or less rigor by the courts, according to whether the agency was or
was not for a compensation."
4. Personal, Representative and Derivative
ART.
1897.
The
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts,
unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers.
(1725)
There is no doubt that agency is a species of the broad grouping of what
we call the "service contracts," which includes employment contract,
management contract, contract for a piece- of-work, and a brokerage
arrangement. There are also special
NATURE, OBJECTIVE, AND KINDS OF AGENCY
19
service contracts which include the rendering of professional service (e.g.,
doctors and lawyers), and consultancy work. But it is the characteristic
o f " representation" that is the most distinguishing mark of agency when
compared with other service contracts, in that the main purpose is to allow the
agent to enter into contracts with third parties on behalf of, and which would be
binding on, the principal.
Rallos holds that the personal, representative and derivative nature of the
contract of agency springs from the basic fact that "The authority of the agent to
act emanates from the powers granted to him by his principal; his act is the act
of the principal if done within the scope of the authority. Qui facit per alim facit
42
per se. 'He who acts through another acts himself.'"
43
In
Amon
Trading
Corp.
v.
Court
of
Appeals,
the
Court
decreed
that
"In
a
bevy
of
cases
as
the
avuncular
case
of
Victorias
Milling
Co.,
Inc.
v.
Court
Appeals,
44
the
Court
decreed
from
Article
1868
that
the
basis
of
agency
is
representation,"
and
that
consequently
one
of
the
strongest
feature
of
a
true
contract
of
agency
is
that
of
"control"
that
the
agent
is
under
the
control
and
instruction
of
the
5
principal.
Thus,
in
Victorias
Milling
Co.,
Inc.
v.
Court
of
Appeals,*
it
was
ruled
It
is
clear
from
Article
1868
that
the
basis
of
agency
is
representation.
On
the
part
of
the
principal,
there
must
be
an
actual
intention
to
appoint
or
an
intention
naturally
inferable
from
his
words
or
actions;
and
on
the
part
of
the
agent,
there
must
be
an
intention
to
accept
the
appointment
and
act
on
it,
and
in
the
absence
of
such
intent,
there
is
generally
no
agency.
One
factor
which
most
clearly
distinguishes
agency
from
other
legal
concepts
is
control;
one
person
-
the
agent
-
agrees
to
act
under
the
control
or
direction
of
another
-
the
principal.
Indeed,
the
very
word
"agency"
has
come
to
connote
control
by
the
principal.
The
control
factor,
more
than
any
other,
has
caused
the
courts
to
put
contracts
between
principal
and
agent
in
a
separate
category....
42
81
SCRA251,
259.
477
SCRA
552
"
(2005).
I
b
i
d
,
a
t
p
.
5
43
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
XXX
In the instant case, it appears plain to us that private
respondent CSC was a buyer of the SLDFR form, and not
an agent of STM. Private respondent CSC was not subject
to STM's control. The question of whether a contract is one
of sale or agency depends on the intention of the parties as
gathered from the whole scope and effect of the language
employed. That the authorization given to CSC contained
the phrase "for and in our (STM's) behalf did not establish
an agency. Ultimately, what is decisive is the intention of the
parties. That no agency was meant to be established by the
CSC and STM is clearly shown by CSC's communication
to petitioner that SLDR No. 1214M had been "sold and
endorsed" to it. The use of the words "sold and endorsed"
means that STM and CSC intended a contract of sale, and
46
not an agency.
7
In Eurotech Industrial Technologies, Inc. v. Cuizon,* the
Court held
It is said that the basis of agency is representation, that
is, the agent acts for and on behalf of the principal on matters
within the scope of his authority and said acts have the
same legal effect as if they were personally executed by the
principal. By this legal fiction, the actual or real absence of
the principal is converted into his legal or juridical presence
48
qui facit per alium facit per se.
a. Principles Flowing from Agency Characteristics
of "Personal, Representative and Derivative"
The following principles flow from the application of the
essential characteristics of an agency of being a "personal, rep-
resentative and derivative" contract, thus:
(a) The contract entered into with third persons per-
tains to the principal and not to the agent; the
*
6
l
B
bi
* lbid,
at
p.
593.
d,
a
t
p
p.
6
7
6-
6
7
7;
e
NATURE, OBJECTIVE, AND KINDS OF AGENCY
agent is a stranger to said contract, although he physically
was the one who entered into it in a representative capacity;
The liabilities incurred shall pertain to the principal and not
the agent;
The agent has neither rights or obligations from the
resulting contract;
The agent has no legal standing to sue upon said
contract;
- The agent who acts as such is not personally liable to the
party with whom he contracts, unless he expressly binds
himself or exceeds the limits of his authority without
49
giving such party sufficient notice of his powers;
49
When an agent purchases the property in bad faith, the
50
principal is deemed to be a purchaser in bad faith.
(b)
Generally, all acts that the principal can do in person, he may
do through an agent, except those which under public policy
are strictly personal to the person of the principal.
(c)
A suit against an agent in his personal capacity cannot,
without compelling reasons, be considered a suit against the
51
principal.
(d)
Notice to the agent should always be construed as notice
binding on the principal, even when in fact the principal never
52
became aware thereof.
(e)
Knowledge of the agent is equivalent to knowledge of the
principal.
Art. 1897, New Civil Code; Eurotech Industrial Technologies, Inc. v.
Cuizon, 521 SCRA584 (2007).
50
Caram, Jr. v. Laureta, 103 SCRA7 (1981).
81
Philippine National Bank v. Ritratto Groups, Inc., 362 SCRA216 (2001).
52
Air France v. Court of Appeals, 126 SCRA448 (1983).
21
NON-CORPORATE MEDIA OF DOING BUSINESS
1 o
EXCEPT
WHERE:
(1)
Agent's interests are adverse to those of the principal;
(2)
Agent's duty is not to disclose the information, as where he
is informed by way of confidential information; and
(3)
The
person
claiming
the
benefit
of
the
rule
colludes
with
the
53
agent
to
defraud
the
principal.
Thus, in Eurotech Industrial Technologies, Inc. v. Cuizon* the Court held
Article 1897 reinforces the familiar doctrine that an agent,
who acts as such, is not personally liable to the party with whom
he contracts. The same provision, however, presents two instances
when an agent becomes personally liable to a third person. The
first is when he expressly binds himself to the obligation and the
second is when he exceeds his authority. In the last instance, the
agent can be held liable if he does not give the third party sufficient
55
notice of his powers.
56
In
Philpotts
v.
Phil.
Mfg.
Co.,
the
Court
held
that
the
right
of
inspection
given
to
a
stockholder
under
the
law
can
be
exercised
either
by
himself
or
by
any
proper
representative
or
attorney
in
fact,
and
either
with
or
without
the
attendance
of
the
stockholder.
This
is
in
conformity
with
the
general
rule
that
what
a
man
may
do
in
person
he
may
do
through
another.
5.
Fiduciary
and
Revocable
A
contract
of
agency
creates
a
legal
relationship
of
representation
by
the
agent
on
behalf
of
the
principal,
where
the
53
DE LEONS, at p. 367, citing TELLER, at p.
150. SCRA 584 (2007).
"521
55
lbid, at p. 593.
*40 Phil. 471 (1919).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
23
powers
of
the
agent
are
essentially
derived
from
the
principal,
and
consequently,
it
is
essentially
fiduciary
in
character.
One
of
the
legal
consequences
of
the
fiduciary
nature
of
the
contract
of
agency
is
that
it
is
revocable:
character
the
principal
nor
the
agent
can
be
legally
made
to
remain
in
the
relationship
when
they
choose
to
have
it
terminated.
57
Severino v. Severino, held that the relations of an agent to his principal
are fiduciary in character because they are based on trust and confidence, which
must flow from the essential nature a contract of agency that makes the agent
the representative of the principal. Consequently:
(a)
As regards property forming the subject matter of the agency,
the agent is estopped from asserting or acquiring a title
58
adverse to that of the principal;
(b)
In a conflict-of-interest situation, the agent cannot choose a
course that favors himself to the detriment of the principal;
59
he must choose to the best advantage of the principal;
(c)
The agent cannot purchase for herself the property of the
principal which has been given to her management for sale or
60
disposition;
UNLESS:
61
(i) There is an express consent on the part of the principal;
or
62
(ii) If the agent purchases after the agency is terminated.
OT
44 Phil. 343 (1923).
"Art. 1435, New Civil Code.
59
Thomas v. Pineda, 89 Phil. 312 (1951); Palma v. Cristobal, 77 Phil. 712
(1946).
^Art. 1491(2), New Civil Code.
61
Cui v. Cui, 100 Phil. 913 (1957).
"Valera v. Velasco, 51 Phil. 695 (1928).
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
63
In
Republic
v.
Evangelists,
the
Court
held
that
generally,
the
agency
may
be
revoked
by
the
principal
at
will,
since
it
is
a
personal
contract
of
representation
based
on
trust
and
confidence
reposed
by
the
principal
on
his
agent.
As
the
power
of
the
agent
to
act
depends
on
the
will
and
license
of
the
principal
he
represents,
the
power
of
the
agent
ceases
when
the
will
or
permission
is
withdrawn
by
the
principal.
M
In
Orient
Air
Services
v.
Court
of
Appeals,
it
was
held
that
the
decision
of
the
lower
court
ordering
the
principal
airline
company
to
"reinstate
defendant
as
its
general
sales
agent
for
passenger
transportation
in
the
Philippines
in
accordance
with
said
GSA
Agreement,"
was
unlawful
since
courts
have
no
authority
to
compel
the
principal
to
reinstate
a
contract
of
agency
it
has
terminated
with
the
agent,
thus:
Such
would
be
violative
of
the
principles
and
essence
of
agency,
defined
by
law
as
a
contract
whereby
"a
person
binds
himself
to
render
some
service
or
to
do
something
in
representation
or
on
behalf
of
another,
WITH
THE
CONSENT
OR
AUTHORITY
OF
THE
LATTER."
In
an
agent-principal
relationship,
the
personality
of
the
principal
is
extended
through
the
facility
of
the
agent.
In
so
doing,
the
agent,
by
legal
fiction,
becomes
the
principal,
authorized
to
perform
all
acts
which
the
latter
would
have
him
do.
Such
a
relationship
can
only
be
effected
with
the
consent
of
the
principal,
which
must
not,
in
any
way,
be
compelled
by
law
or
by
any
court.
The
Agreement
itself
between
the
parties
states
that
"either
party
may
terminate
the
Agreement
without
cause
by
giving
the
other
30
days
notice
by
letter,
telegram
or
65
cable."
6.
Preparatory
and
Progressive
A
contract
of
agency
does
not
exist
for
its
own
purpose;
it
is
a
preparatory
contract
entered
into
for
other
purposes
that
deal
with
the
public
in
a
particular
manner:
for
the
agent
to
enter
into
juridical
acts
with
the
public
in
the
name
of
the
principal.
<3466
SCRA544
M
(2005).
197
SCRA645
^Ibid,
at
p.
656.
(1991).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
This characteristic of an agency is reflected in various provisions
in the Law on Agency and in case-law, that seek to protect the
validity and enforceability of contracts entered into pursuant to
the agency arrangement, even when to do so would contravene
strictly agency principles.
In another way of putting it, an agency contract is merely a
tool or medium resorted to achieve a greater objective of being
able to enter into juridical relations on behalf of the principal;
considerations that pertain merely to the tool or medium certainly
cannot outweigh considerations that pertain to the main objective
of the agency. Since under the Ratios ruling "the object [of every
relationship of agency] is the execution of a juridical act in relation
66
to a third person," then considerations that seek to protect the
interests of third parties dealing in good faith with an agent
must, in case of conflict, prevail over principles pertaining to the
intramural relationship between the principal and his agent.
KINDS OF AGENCY
1. Based on the Business or Transactions Covered
There are two types of agencies based on the business or
transactions covered, namely:
(a)
General Agency, and
(b)
Universal Agency.
Under Article 1876 of the New Civil Code, an agency is
termed to be a"general agency" when it encompasses all of the
business of the principal. As demonstrated in the discussions
hereunder, the better term for such an agency would be a
"universal agency," for the term "general agency" is one that
is addressed to the general public, and not just a particular
person or group of persons which whom the agent is to transact.
(Besides, the term "universal agency" is more consistent w ith.
a similar coverage of "universal partnership" under the Law on
Partnerships.)
81 SCRA 251, 259.
25
NON-CORPORATE MEDIA OF DOING BUSINESS
1 o
On
the
other
hand,
Article
1876
of
the
New
Civil
Code
defines
a
"special
agency"
as
one
which
covers
only
one
or
more
specific
transactions.
The
better
term
for
such
an
agency
is
"particular
agency,"
for
indeed,
the
term
"special
agency
has
been
used
in
decisions
of
the
Supreme
Court
to
refer
to
one
which
is
addressed
to
a
particular
person
or
group
of
persons
with
whom
the
agent
is
to
transact.
(Again,
the
use
of
the
term
"particular
agency"
is
more
consistent
with
a
similar
coverage
of
"particular
partnership"
under
the
Law
on
Partnerships.)
In
Siasatv.
Intermediate
Appellate
Court*
the
Court
held
that
a
power
of
attorney
which
provides
that
-
'This
is
to
formalize
our
agreement
for
you
to
represent
United
Flag
Industry
to
deal
with
any
entity
or
organization,
private
or
government,
in
connection
with
the
marketing
of
our
productsflags
and
all
its
accessories.
For
your
services,
you
will
be
entitled
to
a
commission
of
30%,"
-
was
construed
to
authorize
the
agent
to
enter
into
a
contract
of
sale
over
the
products
covered
and
for
which
he
would
be
entitled
to
receive
commissions
stipulated.
Siasat
distinguished
three
types
of
agency,
namely
universal,
general,
and
special,
in
the
following
manner:
An
agent
may
be
(1)
universal;
(2)
general,
or
(3)
special.
A
universal
agent
is
one
authorized
to
do
all
acts
for
his
principal
which
can
lawfully
be
delegated
to
an
agent.
So
far
as
such
a
condition
is
possible,
such
an
agent
may
be
said
to
have
universal
authority...
A
general
agent
is
one
authorized
to
do
all
acts
pertaining
to
a
business
of
a
certain
kind
or
at
a
particular
place,
or
all
acts
pertaining
to
a
business
of
a
particular
class
or
series.
He
has
usually
authority
either
expressly
conferred
in
general
terms
or
in
effect
made
general
by
the
usages,
customs
or
nature
of
the
business
which
he
is
authorized
to
transact.
An
agent,
therefore,
who
is
empowered
to
transact
all
the
business
of
his
principal
of
a
particular
kind
or
in
a
particular
place,
would
for
this
reason,
be
ordinarily
deemed
a
general
a gent...
67
139 SCRA 238 (1985).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
27
A special agent is one authorized to do some particular act or
to act upon some particular occasion. He acts usually in accordance
with specific instructions or under limitations necessarily implied
from the nature of the act to be d one.. >
According to Siasat, the express authority given to the agent should be
that it was a general agency and the transactions entered into in behalf of the
principal which pursued the sale of the principal's products, were valid and
binding and justified the agent's right to receive the commission promised her,
thus
One does not have to undertake a close scrutiny of the
document embodying the agreement between the petitioners and
the respondent to deduce the latter was instituted as a general
agent. Indeed, it can easily be seen by the way general words were
employed in the agreement that no restrictions were intended as
to the manner the agency was to be carried out or in the place
where it was to be executed. The power granted to the respondent
was so broad that it practically covers the negotiations leading to,
and the execution of, a contract of sale of petitioner's merchandise
69
with any entity or organization.
A good illustration of the principle pertaining to a "special or particular
n
agency" would be the decision in Insular Drug v. PNB, where the Court held
that the only power given to an agent is to indorse commercial paper (checks),
then such power is a very responsible power and will not be lightly inferred; and
consequently a salesman with authority to collect money belonging to his
principal does not have the implied authority to indorse checks received in
payment; and that any person taking checks made payable to a corporation
which can act only by agents does so at his peril, and must abide by the
consequence if the agent who indorses the same is without authority.
M/bid,
at
p.
245,
quoting
from
PADILLA,
CIVIL
LAW,
THE
NEW
CIVIL
CODE
ANNO-
TATED,
Vol.
VI,
1969
ed.,
p.
204.
69
RO
!bid, at p. 245. 58 Phil. 684 (1933).
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
The
classifications
under
Article
1876
of
the
New
Civil
Code
are
more
academic
than
practical,
since
outside
of
guardianship
proceedings,
hardly
anybody
in
the
modern
world
empowers
an
agent
to
cover
every
business
aspect
owned
by
the
principal.
Besides,
as
shown
by
the
discussions
hereunder
on
"general
powers
of
attorney,"
and
"special
powers
of
attorney,"
such
a
classification
is
not
really
useful
because
a"general
or
universal
agency
can
by
law
only
cover
general
powers
of
attorney
covering
merely
acts
of
administration;
and
cannot,
without
express
or
detailed
description,
cover
special
powers
of
attorney,
covering
particular
acts
of
strict
ownership.
Therefore,
a
general
agency
is
better
achieved
by
other
contractual
forms
such
as
a
contract
of
employment,
or
a
universal
partnership.
2.
Whether
It
Covers
Litigation
Matters
Although
not
specifically
treated
in
the
New
Civil
Code,
we
should
distinguish
between
these
two
types
of
agency:
(a) Attorney-at-Law,
and
(b) Attorney-in-Fact.
We
can
begin
the
discussions
with
the
ruling
in
J-Phil
Marine,
Inc.
v.
71
A/LRC,
where
the
Court
held
that
the
relation
of
attorney
and
client
is
in
many
respects
one
of
agency,
and
that
the
general
rules
of
agency
apply
to
such
relation.
This
is
not
necessarily
a
straight
forward
proposition,
for
indeed
both
a
regular
agency-principal
and
attorney-client
relationship
are
fiduciary
in
character,
and
yet
the
fiduciary
character
under
the
agency-principal
relationship
is
based
on
the
doctrine
of
representation
for
purpose
of
entering
into
juridical
acts
that
bind
the
principal,
while
that
in
an
attorney-client
relationship
is
based
on
the
need
to
rely
upon
the
competence
and
integrity
of
the
lawyer
in
the
disposition
of
certain
matters
relating
to
law
that
have
a
direct
effect
on
the
property,
liberty
or
life
of
the
client.
"561 SCRA 675 (2008).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
29
An attomey-at-law, necessarily means the appointment of an agent to
represent the principal on legal matters, particularly on matters pertaining to
litigation or court matters. But not every attorney-client relationship is a contract
of agency, such as where the essential objective is not representation, such as
when an attorney is retained to draw-up legal documents. But when it comes to
litigation, the retaining of an attorney is truly in representation of the
client-principal before the courts, such that the acts of the attorney for and in
behalf of the client, that notice to the attorney, and service of judicial process to
the attorney, are equivalent to service to the client-principal. Under existing
rules and jurisprudence, such an agent would be practicing law and would have
to be a licensed lawyer. The relationship is one that is fiduciary and professional
in character, and is governed by separate rules, including the legal professional
code and the rules promulgated by the Supreme Court covering the practice of
law.
Consequently, the term "attorney-in-facf is intended to describe all agents
appointed by a principal to act on juridical relations that have nothing to do with
legal matters and do not constitute a practice of law on the part of the agent.
This is the classification that covers the "contract of agency" governed by the
New Civil Code.
It should be noted, however, that even in the case of an attorney-at-law
representing a client in a court case, there are certain powers which are not
inherent in the position of an attor- ney-at-law to legally bind the client, such as
the power to compromise, to arbitrate, etc. Whether an attorney-at-law has
power to bind the client principal in such matters are governed by the rules of
the New Civil Code on special agency or special powers of attorney.
3. Whether It Covers Acts of Administration or Acts of Ownership
It is in the realm o f " attorney-in-facf that we would more appropriately
use the classifications of:
(a) General Power of Attorney; and
(b) Special Power of Attorney.
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
Simply stated, a general power of attorney covers only "acts of
administration;" or expressed in commercial terms, it only covers power "to
pursue the ordinary or regular course of business" On the other hand, a special
power of attorney covers "acts of dominion or strict ownership," or represents a
situation that is described as "extraordinary conditions or those pursued not in
the ordinary course of business."
Whether a power of attorney is general or special, really depends on the
nature of the business to which it is directed at. To illustrate, although on their
own the power "to sell," is considered acts of strict ownership, nevertheless,
when they pertain to the ordinary pursuit of the business to which the agent has
been designated to manage, say a merchandising store, the sale of the goods in
the ordinary course of business would be part of the general power of attorney
given to him to "administer and manage the store," and such sales contracts are
mere in the ordinary pursuit of the business.
Article 1877 of the New Civil Code provides that "An agency couched in
general terms comprises only acts of administration, even if the principal should
state that he withholds no power or that the agent may execute such acts as he
may consider appropriate, or even though the agency should authorize a
general and unlimited management."
The general rule is that unless so expressly stated, when an agency is
constituted {i.e., when a person is designated as an agent), it only covers the
powers to execute acts of administration in relation to the business, venture or
transaction referred to in the commission. In other words, whenever it is clear
that an agent has been duly designated or appointed by the principal, in the
absence of limiting conditions or provision, then such agent is deemed to have
full powers to pursue any act in the name of the principal which are in the
"ordinary course of business."
72
In Macke v. Camps, the Court held
It seems easy to answer that acts of administration are
those which do not imply the authority to alienate for the
7 Phil. 553 (1907).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
31
exercise of which an express power is necessary. Yet what are acts
of administration will always be a question of fact, rather than of
law, because there can be no doubt that sound management will
sometimes require the performance of an act of ownership. (12
Manresa 468) But, unless the contrary appears, the authority of an
agent is presumed to include all the necessary and usual means to
73
carry out the agency into effect.
Distinctions between general power of attorney and special power of
attorney shall be covered in the succeeding chapter on the "Power and
Authority, Duties and Obligations, of the Agent."
Parenthetically, it has been held in Teodoro v. Metropolitan Bank and
74
Trust Co., that a special power of attorney executed in a foreign country is
generally not admissible in evidence as a public documents in our local courts.
AGENCY DISTINGUISHED FROM SIMILAR CONTRACTS 1. From an Employment
Contract
Unlike an agency relationship which is essentially contractual in nature, an
employment contract under Article 1700 of the New Civil Code is "The
relationship between capital and labor [which] are not merely contractual. They
are so impressed with public interest that labor contracts must yield to the
common good. Therefore, such contracts are subject to the special laws on labor
unions, collective bargaining, strikes and lockouts, closed shop, wages, working
conditions, hours of labor and similar subjects."
More specifically, the purpose of an employer-employee relationship is for
the employee to render service for the direct benefit of the employer or of the
business of the employer; while agency relationship is entered into to enter into
juridical relationship on behalf of the principal with third parties. There is,
therefore, no element of "representation" in a contract of
lbid,
at
p.
555.
575
SCRA
82
(2008).
74
NON-CORPORATE MEDIA OF DOING BUSINESS
1 o
employment,
the
employee
does
not
have
the
power
to
enter
into
juridical
relations
on
behalf
of
the
employer.
75
In
Dela
Cruz
v.
Northern
Theatrical
Enterprises,
the
Court
held
that
the
relationship
between
the
corporation
which
owns
and
operates
a
theatre,
and
the
individual
it
hires
as
a
security
guard
to
maintain
the
peace
and
order
at
the
entrance
of
the
theatre
was
not
that
of
principal
and
agent,
because
the
principle
of
representation
was
in
no
way
involved.
The
security
guard
was
not
employed
to
represent
the
defendant
corporation
in
its
dealings
with
third
parties;
he
was
a
mere
employee
hired
to
perform
a
certain
specific
duty
or
task,
that
of
acting
as
special
guard
and
staying
at
the
main
entrance
of
the
movie
house
to
stop
gate
crashers
and
to
maintain
peace
and
order
within
the
premises.
2.
From
a
Contract
for
a
Piece-of-Work
Under
Article
1713
of
the
New
Civil
Code,
"By
the
contract
for
a
piece
of
work
the
contractor
binds
himself
to
execute
a
piece
of
work
for
the
employer,
in
consideration
of
a
certain
price
or
compensation.
The
contractor
may
either
employ
only
his
labor
or
skill,
or
also
furnish
the
material."
Under
a
contract
for
a
piece-of-work,
the
contractor
is
not
an
agent
of
the
"principal"
(i.e.,
the
client),
and
the
contractor
has
no
authority
to
represent
the
principal
in
entering
into
juridical
acts
with
third
parties.
The
essence
of
every
contract
for
a
piece-of-work
is
that
the
services
rendered
must
give
rise
to
the
manufacture
or
production
of
the
object
agreed
upon.
Although
the
description
of
the
subject
matter
to
be
manufactured
or
produced
is
agreed
upon
by
the
parties
in
a
contract-for-a-piece-of-work,
there
is
no
element
of
"control"
since
the
contractor
cannot
be
dictated
upon
by
the
client
on
how
to
go
about
accomplishing
the
objective
of
the
contract.
76
In
Fressel
v.
Mariano
Uy
Chaco
Sons
&
Co.,
it
was
held
that
where
the
contract
entered
into
is
one
where
the
individual
75
95
Phil.
739
(1954).
34
Phil.
122
(1915).
76
NATURE, OBJECTIVE, AND KINDS OF AGENCY
33
undertook
and
agreed
to
build
for
the
other
party
a
costly
edifice,
the
underlying
contract
is
one
for
a
contract
for
a
piece-of-
work,
and
not
a
principal
and
agency
relation.
Consequently,
the
contract
is
authorized
to
do
the
work
according
to
his
own
method
and
without
being
subject
to
the
client's
control,
except
as
to
the
result
of
the
work;
he
could
purchase
his
materials
and
supplies
from
whom
he
pleased
and
at
such
prices
as
he
desired
to
pay.
The
Court
held
that
the
mere
fact
that
it
was
stipulated
in
the
contract
that
the
client
could
take
possession
of
the
work
site
upon
the
happening
of
specified
contingencies
did
not
make
the
relation
into
that
of
an
agency.
Consequently,
it
was
ruled
that
when
the
client
did
take
over
the
unfinished
works,
he
did
not
assume
any
direct
liability
to
the
suppliers
of
the
contractor.
3.
From
a
Management
Agreement
77
In
Nielson
&
Co.,
Inc.
v.
Lepanto
Consolidated
Mining
Co., the
Court
held
that
in
both
agency
and
lease
of
services
(i.e.,
management
contract),
one
of
the
parties
binds
himself
to
render
some
service
to
the
other
party,
thus:
Agency,
however,
is
distinguished
from
lease
of
work
or
services
in
that
the
basis
of
agency
is
representation,
while
in
the
lease
of
work
or
services
the
basis
is
employment.
The
lessor
of
services
does
not
represent
his
employer,
while
the
agent
represents
his
principal,
x
x
x
.
There
is
another
obvious
distinction
between
agency
and
lease
of
services.
Agency
is
a
preparatory
contract,
as
agency
"does
not
stop
with
the
agency
because
the
purpose
is
to
enter
into
other
contracts."
The
most
characteristic
feature
of
an
agency
relationship
is
the
agent's
power
to
bring
about
business
relations
between
his
principal
and
third
persons.
"The
agent
is
destined
to
execute
juridical
acts
(creation,
modification
or
extinction
of
relations
with
third
parties).
Lease
of
78
services
contemplate
only
material
(non-juridical)
acts."
"26 SCRA540 (1968).
lbid, at pp. 546-547; quoting from REYES AND PUNO, AN OUTLINE OF
PHILIPPINE CIVIL LAW, Vol. V, p. 277.
63
1 o
NON-CORPORATE MEDIA OF DOING BUSINESS
Nielson
&
Co.
also
held
that
where
the
principal
and
paramount
undertaking
of
the
"manager"
under
a
Management
Contract
was
the
operation
and
development
of
the
mine
and
the
operation
of
the
mill,
and
all
other
undertakings
mentioned
in
the
contract
are
necessary
or
incidental
to
the
principal
undertaking
these
other
undertakings
being
dependent
upon
the
work
on
the
development
of
the
mine
and
the
operation
of
the
mill.
In
the
performance
of
this
principal
undertaking
the
manager
was
not
in
any
way
executing
juridical
acts
for
the
principal,
destined
to
create,
modify
or
extinguish
business
relations
between
the
principal
and
third
person.
In
other
words,
in
performing
its
principal
undertaking
the
manager
was
not
acting
as
an
agent
of
the
principal,
in
the
sense
that
the
term
agent
is
interpreted
under
the
law
of
agency,
but
as
one
who
was
performing
material
acts
for
an
employer,
for
compensation.
Consequently,
the
management
contract
not
being
an
agency
cannot
be
revoked
at
will
and
was
binding
to
its
full
contracted
period.
79
In Shell Co. v. Firemen's Insurance of Newark, in ruling that the
operator was an agent of the Shell company, the Court took into consideration
the following facts: (a) that the operator owed his position to the company and
the latter could remove him or terminate his services at will; (b) that the service
station belonged to the company and bore its tradename and the operator sold
only the products of the company; that the equipment used by the operator
belonged to the company and were just loaned to the operator and the
company took charge of their repair and maintenance; (c) that an employee of
the company supervised the operator and conducted periodic inspection of the
company's gasoline and service station; and (d) that the price of the products
sold by the operator was fixed by the company and not by the operator.
4. From a Contract of Sale
ART. 1466. In construing a contract containing provisions
characteristic of both the contract
79
1Q0 Phil. 757 (1957).
NATURE, OBJECTIVE, AND KINDS OF AGENCY
35
of sale and of the contract of agency to sell, the essential clauses of
the whole instrument shall be considered, (n)
Under
Article
1466
of
the
New
Civil
Code,
"In
construing
a
contract
containing
provisions
characteristic
of
both
the
contract
of
sale
and
of
the
contract
of
agency
to
sell,
the
essential
clauses
of
the
whole
instrument
shall
be
considered."
Jurisprudence
has
indicated
what
the
"essential
clauses"
that
should
indicate
whether
it
is
one
of
sale
or
agency
to
sell/purchase,
refers
to
stipulations
in
the
contract
which
places
obligations
on
the
part
of
the
purported
"agent"
having
to
do
with
what
should
be
a
seller's
obligation
to
transfer
ownership
and
deliver
possession
of
the
subject
matter,
or
the
buyer's
obligation
on
the
payment
of
the
price.
80
In Quiroga v. Parsons, although the parties designated the arrangement
as an agency agreement, the Court found the arrangement to be one of sale
since the essential clause provided that "Payment was to be made at the end of
sixty days, or before, at the [principal's] request, or in cash, if the [agent] so
preferred, and in these last two cases an additional discount was to be allowed
81
for prompt payment." These conditions to the Court were "precisely the
essential features of a contract of purchase and sale" because there was the
obligation on the part of the purported principal to supply the beds, and, on the
part of the purported agent, to pay their price, thus
These features exclude the legal conception of an agency or
order to sell whereby the mandatory or agent received the thing to
sell it, and does not pay its price, but delivers to the principal the
price he obtains from the sale of the thing to a third person, and if
he does not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the latter, on
receiving the beds, was necessarily obliged to pay their price within
the term
"38 Phil. 501
(1918).
lbid, at p. 505.
36
NON-CORPORATE MEDIA OF DOING BUSINESS
fixed, without any other consideration and regardless as to
82
whether he had or had not sold the beds.
As a consequence, the "revocation" sought to be made by the principal on
the purported agency arrangement was denied by the Court, the relationship
being one of sale, and the power to rescind is available only when the purported
principal is able to show substantial breach on the part of the purported agent.
Quiroga further ruled that when the terms of the agreement compels the
purported agent to pay for the products received from the purported principal
within the stipulated period, even when there has been no sale thereof to the
public, the underlying relationship is not one of contract of agency to sell, but
one of actual sale. A true agent does not assume personal responsibility for the
payment of the price of the object of the agency; his obligation is merely to
turn-over to the principal the proceeds of the sale once he receives them from
the buyer. Consequently, since the underlying agreement was ruled not an
agency agreement, it could not be revoked except for cause.
In GonzaloPuyat&Sons, Inc. v. Arco Amusement Company* which
covered a purported agency contract to purchase, the Court looked into the
provisions of their contract, and found that the letters between the parties
clearly stipulated for fixed prices on the equipment ordered, which "admitted
no other interpretation than that the [principal] agreed to purchase from the
[agent] the equipment in question at the prices indicated which are fixed and
84
determinate." The Court held that "whatever unforeseen events might have
taken place unfavorable to the [agent], such as change in prices, mistake in their
quotation, loss of the goods not covered by insurance or failure of the Starr
Piano Company to properly fill the orders as per specifications, the [principal]
85
might still legally hold the [agent] to the prices fixed." It was ruled that the true
relationship between the parties was in effect a contract
e2
lbid.
72
Phil.
402(1941).
lbid,
at
p.
407.
^Ibid,
at
p.
407.
M
NATURE, OBJECTIVE, AND KINDS OF AGENCY
37
of sale. Consequently, the demand by the purported principal of all discounts
and benefits obtained by the purported agent from the American suppliers
under the theory that all benefits received by the agent under the transactions
were to be accounted for the benefit of the principal, was denied by the Court.
Gonzalo Puyat also ruled that when under the terms of the agreement,
the purported agent becomes responsible for any changes in the acquisition cost
of the object he has been authorized to purchase from a supplier in the United
States, the underlying agreement is not an contract of agency to buy, since an
agent does not bear any risk relating to the subject matter or the price. Being
truly a contract of sale, any profits realized by the purported agent from
discounts received from the American supplier, pertain to it with no obligation
86
to account for it, much less to turn it over, to the purported principal.
In Chua Ngo v. Universal Trading Co., Inc.* where a local importing
company was contracted to purchase from the United States several boxes of
oranges, most of which were lost in transit, the purchaser sought to recover the
advance purchased price paid, which were refused by the local importing
company on the ground that it merely imported the oranges as agent of the
purchaser for which it could not be held liable for their loss in transit. The Court,
in reviewing the terms and conditions of the agreement between the parties,
held that the arrangement was a sale rather than a contract of agency to
purchase on the following grounds: (a) no commission waspaid by the purchaser
to the local importing company; (b) the local importing company was given the
option to "resell" the oranges if the balance of the purchase price was not paid
within 48 hours from notification, which clearly implies that the local importing
company did in fact "sell" the oranges to the purchaser; (c) the local importing
company placed order for the oranges a lower the price agreed upon with the
purchaser which "it could not properly do" if
86
Reiterated
in
Far
Eastern
Export
&
Import
Co.
v.
Lim
Tech
Suan,
97
Phil.
171
(1955).
87
87
Phil.
331
(1950).
38
NON-CORPORATE MEDIA OF DOING BUSINESS
indeed
it
were
merely
acting
as
an
agent;
(d)
the
local
importing
company
charged
the
purchaser
with
a
sales
tax,
showing
that
the
arrangement
was
indeed
a
sale;
and
(e)
when
the
losses
occurred,
the
local
importing
company
made
claims
against
the
insurance
company
in
its
own
name,
indicating
that
he
imported
the
oranges
as
his
own
products,
and
not
merely
as
agent
of
the
local
purchaser.
3
In
Pearl
Island
Commercial
Corp.
v.
Lim
Tan
Tong* the
Supreme
Court
was
unsure
of
its
footing
when
it
tried
to
characterize
a
contract
of
sale
("Contract
of
Purchase
and
Sale")
between
the
manufacturer
of
wax
and
its
appointed
distributor
in
the
Visayan
area,
as
still
being
within
a
contract
of
agency
in
that
"while
providing
for
sale
of
Bee
Wax
from
the
plaintiff
to
Tong
and
purchase
of
the
same
by
Tong
from
the
plaintiff,
also
designates
Tong
as
the
89
sole
distributor
of
the
article
within
a
certain
territory."
Such
reasoning
in
Pearl
Island
is
not
sound,
since
as
early
as
in
Quiroga
v.
Parson,
the
Court
had
already
ruled
that
appointing
one
as
"agent"
or
"distributor,"
when
in
fact
such
appointee
assumes
the
responsibilities
of
a
buyer
of
the
goods,
does
not
make
the
relationship
one
of
agency,
but
that
of
sale.
Perhaps
the
best
way
to
understand
the
ruling
in
Pearl
Island
was
that
the
suit
was
not
between
the
buyer
and
seller,
but
by
the
seller
against
the
surety
of
the
buyer
who
had
secured
the
shipment
of
the
wax
to
the
buyer,
and
the
true
characterization
of
the
contract
between
the
buyer
and
seller
was
not
the
essential
criteria
by
which
to
fix
the
liability
of
the
surety,
thus:
True,
the
contract
(Exhibit
A)
is
not
entirely
clear.
It
is
in
some
respects,
even
confusing.
While
it
speaks
of
sale
of
Bee
Wax
to
Tong
and
his
responsibility
for
the
payment
of
the
value
of
every
shipment
so
purchased,
at
the
same
time
it
appoints
him
sole
distributor
within
a
certain
area,
the
plaintiff
undertaking
is
not
to
appoint
any
other
agent
or
distributor
within
the
same
area.
Anyway,
it
seems
to
have
been
the
sole
concern
and
interest
of
the
plaintiff
to
be
sure
that
it
was
paid
the
value
of
all
shipments
of
Bee
Wax
to
88101 Phil. 789
(1957).
mid, at p. 792.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
39
Tong
and
the
Surety
Company
by
its
bond,
guaranteed
in
the
final
90
analysis
said
payment
by
Tong,
either
as
purchaser
or
as
agent.
In
Ker
&
Co.,
Ltd.
v.
Ling
ad,covering
a
contract
of
distributorship,
it
was
specifically
stipulated
in
the
contract
that
"all
goods
on
consignment
shall
remain
the
property
of
the
Company
until
sold
by
the
Distributor
to
the
purchaser
or
purchasers,
but
all
sales
made
by
the
Distributor
shall
be
in
his
name;"
and
that
the
Company
"at
its
own
expense,
was
to
keep
the
consigned
stock
fully
insured
against
loss
or
damage
by
fire
or
as
a
result
of
fire,
the
policy
of
such
insurance
to
be
payable
to
it
in
the
event
of
loss."
It
was
further
stipulated
that
the
contract
"does
not
constitute
the
Distributor
the
agent
or
legal
representative
of
the
Company
for
any
purpose
whatsoever.
Distributor
is
not
granted
any
right
or
authority
to
assume
or
to
create
any
obligation
or
responsibility,
express
or
implied
in
behalf
of
or
in
the
name
of
the
Company,
or
to
bind
the
Company
in
any
manner
or
thing
whatsoever."
In
spite
of
such
stipulations,
the
Court
did
find
the
relationship
to
be
one
of
agency,
because
it
did
not
transfer
ownership
of
the
merchandise
to
the
purported
distributor,
even
though
it
was
supposed
to
enter
into
sales
agreements
in
the
Philippines
in
its
own
name,
thus
The
transfer
of
title
or
agreement
to
transfer
it
for
a
price
paid
or
promised
is
the
essence
of
sale.
If
such
transfer
puts
the
transferee
in
the
attitude
or
position
of
an
owner
and
makes
him
liable
to
the
transferor
as
a
debtor
for
the
agreed
price,
and
not
merely
as
an
agent
who
must
account
for
the
proceeds
of
a
resale,
the
transaction
is
a
sale;
while
the
essence
of
an
agency
to
sell
is
the
delivery
to
an
agent,
not
as
his
property,
but
as
the
property
of
the
principal,
who
remains
the
owner
and
has
the
right
to
control
the
sale,
fix
the
price,
and
terms,
demand
and
receive
the
proceeds
92
less
the
agent's
commission
upon
sales
made.
*>lbid,
at
p.
793.
91
38
SCRA
524
(1971).
*lbid,
at
p.
530.
40
NON-CORPORATE MEDIA OF DOING BUSINESS
83
In Lim v. Court of Appeals, it was held that as a general rule, an agency
to sell on commission basis does not belong to any of the contracts covered by
Articles 1357 and 1358 of the New Civil Code requiring them to be in a particular
form, and not one enumerated under the Statutes of Frauds in Article 1403.
Hence, unlike a sale contract which must comply with the Statute of Frauds for
enforceability, a contract of agency to sell is valid and enforceable in whatever
form it may be entered into.
In Victoria Milling Co., Inc. v. Court of Appeals," the Court held that an
authorization given to the buyer of goods to obtain them from the bailee "for
and in behalf of the bailor-seller does not necessarily establish an agency, since
the intention of the parties was for the buyer to take possession and ownership
over the goods with the decisive language in the authorization being "sold and
endorsed."
95
The
old
decision
in
National
Rice
and
Corn
Corp.
v.
Court
of
Appeals,
presents
an
interesting
situation
where
it
is
possible
for
a
party
to
enter
into
an
arrangement,
where
a
portion
thereof
is
as
agent,
and
the
other
portion
would
be
as
buyer,
and
still
be
able
to
distinguish
and
set
apart
to
the
two
transactions
to
determine
the
rights
and
liabilities
of
the
parties.
In
National
Rice
a
formal
contract
was
entered
into
between
the
National
Rice
&
Corn
Corp.
(NARIC)
and
the
Davao
Merchandising
Corp.
(DAMERCO),
where
they
agreed
that
DAMERCO
would
act
as
an
agent
of
NARIC
"in
exporting
the
quantity
and
kind
of
corn
and
rice"
mentioned
in
the
contract
(Exhibit
"A"),
"as
well
as
in
importing
the
collateral
goods
that
will
be
imported
thru
barter
on
a
back
to
back
letter
of
credit
or
no-dollar
remittance
basis;"
and
with
DAMERCO
agreeing
"to
buy
the
aforementioned
collateral
goods."
Although
the
corn
grains
were
duly
exported,
the
Government
had
issued
rules
banning
the
barter
of
goods
from
abroad.
NARIC
then
brought
suit
against
DAMERCO
seeking
recovery
of
the
price
of
the
254 SCRA 170 (1996).
333 SCRA 663 (2000).
"91 SCRA 437 (1979).
M
NATURE, OBJECTIVE, AND KINDS OF AGENCY
41
exported
grains.
The
Court
ruled
that
insofar
as
the
exporting
of
the
grains
was
concerned,
DAMERCO
acted
merely
as
agent
of
NARIC
for
which
it
cannot
be
held
personally
liable
for
the
shortfall
considering
that
it
had
acted
within
the
scope
of
its
authority.
The
Court
had
agreed
that
indeed
the
other
half
of
the
agreement
whereby
DAMERCO
bound
itself
"as
the
purchaser
of
the
collateral
goods
to
be
imported
from
the
proceeds
of
the
sale
of
the
corn
and
rice,"
was
a
valid
and
binding
contract
of
sale,
but
for
which
DAMERCO
could
not
be
made
to
pay
the
purchase
price,
because
NARIC
itself
was
no
longer
in
a
position
to
import
any
of
such
goods
into
the
country,
by
reason
of
force
majeure,
thus
It is clear that if after DAMERCO had spent big sums incident
to carrying out the purpose of the contract, the importation of the
remaining collateral goods worth about US$480,000.00 could not
be effected due to suspension by the government under a new
administration of barter transactions, the NARIC (now Rice and
Corn Administration) ought to make the necessary representations
with the government to enable DAMERCO to import the said
remaining collateral goods. The contract, Exhibit "A," has
reciprocal stipulations which must be given force and effect *
Although
it
is
clear
from
the
decision
that
DAMERCO
had
assumed
also
the
position
of
being
a
buyer
of
goods
from
NARIC,
the
Court
in
National
Rice
was
able
to
segregate
his
role
as
merely
an
agent
of
NARIC
insofar
as
the
export
of
the
grains
was
concerned,
and
apply
the
doctrine
that
an
agent
does
not
assume
any
personal
obligation
with
respect
to
the
subject
matter
of
the
agency
nor
of
the
proceeds
thereof,
his
obligation
being
merely
to
turn-over
the
proceeds
to
the
principal
whenever
he
receives
them.
National
Rice
also
demonstrated
the"progressive
nature"
of
every
contract
of
agency,
in
that
it
presents
a
pliable
legal
relationship
which
may
be
adopted
into
other
relationships,
such
a
contract
of
sale,
to
be
able
to
achieve
commercial
ends.
"Ibid, at p. 449.
NON-CORPORATE MEDIA OF DOING BUSINESS
42
5. From a Contract of Brokerage
In the early decision in Behn, Meyer and Co., Ltd. v. Nolting
and Garcia* decided under the old Civil Code the Supreme
Court defined "broker" to mean as follows
. . . A broker is generally defined as one who is engaged, for
others, on a commission, negotiating contracts relative to property
with the custody of which he has no concern; the negotiator
between other parties, never acting in his own name, but in the
name of those who employed him; he is strictly a middleman and
for some purpose the agent of both parties. (19 Cyc., 186;
Henderson vs. The State, 50 Ind., 234; Black's Law Dictionary.) A
broker is one whose occupation it is to bring parties together to
bargain, or to bargain for them, in matters of trade, commerce or
navigation. (Mechem on Agency, sec. 13; Wharton on Agency, sec.
695). Judge Storey, in his work on Agency, defines a broker as an
agent employed to make bargains and contracts between other
persons, in matters of trade, commerce or navigation, for
compensation commonly called brokerage. (Storey on Agency, sec.
28)"
Behn, Meyer and Co., was a tax case where the Court needed
to define the coverage of the term "broker" to determine the
liability of a commercial enterprise for taxes and licenses as a
broker. The commercial enterprise itself was engaged "in the
business ... of buying and selling copra, hemp, and other native
products of the Islands, and in such business the aforesaid plaintiff
advanced money for the future delivery of copra and hemp, and
took as security for the future delivery of such copra and hemp so
contracted for a mortgage on the land upon which said copra or
hemp was produced, and charging a discount on the future
deliveries of said copra or hemp, which was in compensation for
99
the money so advanced." Based on the definition of a broker
(quoted above), the Court held that "A real-estate broker
negotiates the purchase or sale of real property. He may
97
35
Phil.
274
(1916).
^Ibid,
at
p.
279-280.
"Ibid,
at
p.
277.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
43
also procure loans on mortgaged security, collect rents, and attend
to the letting and leasing of houses and lands. (Bouvier's Law
Dictionary.) A broker acts for another. In the present case the
plaintiff was acting for itself. Whatever was done with reference to
the taking of the mortgages in question was done as an incident of
its own business. By the contract of brokerage a person binds
himself to render some service or to do something in behalf of or at
100
the request of another person (Art. 1209, Civil Code.)."
Note therefore that the term "broker" is considered to be a commercial
term for a person or entity engaged as a middleman to bring parties together in
matters pertaining to trade, commerce or navigation. If the person has not
been given the power to enter into the contract or commerce in behalf of the
parties, then he is a "broker" in the sense that his job mainly is "to bring parties
together to bargain," and in this sense, the broker does not assume the role of
an agent because he has no power to enter into a contract in behalf of any of
the parties. He also assumes no fiduciary obligations to either or both parties,
since they are expected to use their own judgment in deciding whether or not
to bind themselves to a contract.
On the other hand, a broker may also be appointed with powers to enter
into juridical acts on behalf of the principal, in which case, he is truly an agent.
Thus, Behn, Meyer & Co. cites also the definition of an agent under Article 1209
of the New Civil Code in order to define a broker.
m
In
Pacific
Commercial
Co.
v.
Yatco,
which
was
also
a
tax
case,
presented
a
more
specific
discussion
of
distinguishing
between
a
specific
type
agency,
which
is
that
of
a
commission
agent
or
then
known
as
"commission
merchant"
from
that
of
commercial
broker,
as
one
who
does
not
execute
juridical
acts
in
behalf
of
the
principal.
In
that
decision,
Pacific
Commercial
Company
looked
for
purchasers
of
the
sugar
products
of
Victorias
Milling,
"and
once
the
corresponding
purchase
order
is
obtained
from
them,
the
same
is
sent
to
the
office
of
Victorias
Milling
Co.,
in
100
/f>/d,
at
p.
280.
68
Phil.
398(1939).
101
44
NON-CORPORATE MEDIA OF DOING BUSINESS
Manila,
which,
in
turn,
endorsed
the
order
to
its
office
in
Negros,
with
instructions
to
ship
the
sugar
thus
ordered
to
Manila,
Cebu
or
lloilo,
as
the
case
may
be.
At
times,
the
purchase
is
made
for
the
delivery
of
the
sugar
ex-warehouse
of
plaintiff
[Pacific]
and
at
other
times
for
delivery
ex-ship.
In
all
cases,
the
bill
of
lading
is
sent
to
the
plaintiff
[Pacific].
If
the
sugar
was
to
be
delivered
ex-ship,
all
that
the
plaintiff
did
was
to
hand
over
the
bill
of
lading
to
the
purchaser
and
collect
the
price.
If
it
was
for
delivery
ex-
warehouse,
the
sugar
is
first
deposited
in
the
warehouse
of
the
plaintiff
before
delivery
to
the
102
purchaser."
On
the
issue
of
whether
Pacific
Commercial
Company
acted
as
a
commission
merchant,
as
to
the
sugar
delived
ex-
warehouse,
the
Court
held
The
question
of
whether
the
appellant
[Pacific],
in
connection
with
the
sugar
delivered
ex-warehouse
and
thereafter
sold
to
the
purchasers,
acted
as
a
commission
merchant,
present
no
doubt.
A
commission
merchant
is
one
engaged
in
the
purchase
or
sale
for
another
of
personal
property
which,
for
this
purpose,
is
placed
in
his
possession
and
at
his
disposal.
He
maintains
a
relation
not
only
with
his
principal
and
the
purchasers
or
vendors,
but
also
with
the
property
which
is
the
subject
matter
of
the
transaction.
In
the
present
case,
the
sugar
was
shipped
by
Victorias
Milling
Co.,
and
upon
arrival
at
the
port
of
destination,
the
plaintiff
received
and
transferred
it
for
deposit
in
its
warehouses
until
the
purchaser
called
for
it.
The
deposit
of
the
sugar
in
the
warehouses
of
the
plaintiff
was
made
upon
its
own
account
and
at
its
own
risk
until
it
was
sold
and
taken
by
the
purchaser.
There
is,
therefore,
no
doubt
that
the
plaintiff,
after
taking
the
sugar
on
board
until
it
was
sold,
had
it
in
its
possession
and
at
its
own
risk,
circumstances
determinative
of
its
status
as
a
commissioner
merchant
in
103
connection
with
the
sale
of
sugar
under
these
conditions.
The
notion
of
a
commission
merchant
is
still
maintained
in
the
New
Civil
Code
in
Articles
1902
to
1909
on
the
duties
and
responsibilities
of
a
"commission
agent."
i02
lbid,
at
p.
400.
/b/d,
at
pp.
401-402.
103
NATURE, OBJECTIVE, AND KINDS OF AGENCY
45
On the issue of whether Pacific Commercial Company acted as a
commercial broker as to the sugar delivered ex-ship, the Court held
There is also no doubt on the question of whether the plaintiff
merely acted as a commercial broker as to the sale of the sugar
delivered to the purchaser ex-ship. The broker, unlike the
commission merchant, has no relation with the thing he sells or
buy. He is merely an intermediary between the purchaser and the
vendor. He acquires neither the possession nor the custody of the
things sold. His only office is to bring together the parties to the
transaction. These circumstances are present in connection with
the plaintiff's sale of the sugar which was delivery to the purchaser
ex- ship. The sugar sold under these conditions was shipped by the
plaintiff at its expense and risk ex-ship by the purchaser. The
plaintiff never had possession of the sugar at any time. The
circumstance that the bill of lading was sent to the plaintiff does
not alter its character of being merely a broker, or constitute
possession by it of the sugar shipped, inasmuch as the same was
sent to it for the sole purpose of turning it over to the purchaser for
the collection of the price. The sugar did not come to its possession
104
in any sense.
Since Pacific Commercial Company, the Court had began to recognize
that unless otherwise so indicated the term "broker" is meant to cover a
commercial broker acting not as an agent, but merely a middleman, who bears
no relation with the thing he has been retained to buy or to sell; that he is
merely an intermediary between the purchaser and the vendor. He acquires
neither the custody nor the possession of the thing he sells; his only office is to
bring together the parties to the transaction.
105
In
Reyes
v.
Mosqueda,
the
Court
held
that
when
a
person
has
been
engaged
to
negotiate
with
the
owner
of
a
parcel
of
land
only
the
lowest
purchase
price
that
could
be
bargained
for
and
in
turn
the
owner
set
a
final
price
and
engaged
the
same
person
lbid,
at
p.
402.
99
Phil.
241
(1956).
105
46
NON-CORPORATE MEDIA OF DOING BUSINESS
to
find
a
buyer
who
would
buy
at
such
a
price,
such
engagement
was
"only
as
a
broker,
then
in
order
to
earn
her
commission,
it
was
not
sufficient
for
her
to
find
a
prospective
buyer
but
to
find
one
who
will
actually
buy
the
property
on
108
the
terms
and
conditions
imposed
by
the
owner."
The
all-encompassive
definition
of
"broker"
(which
may
include
that
of
a
commission
agent)
in
Behn,
Meyer
&
Co.
was
reiterated
under
the
new
Civil
07
Code
in
Schmid
and
Oberly,
Inc.
v.
RJL
Martinez,'
as
"one
who
is
engaged,
for
others,
on
a
commission,
negotiating
contracts
relative
to
property
with
the
custody
of
which
he
has
no
concern;
the
negotiator
between
other
parties,
never
acting
in
his
own
name
but
in
the
name
of
those
who
employed
h i m . . . .
a
broker
is
one
whose
occupation
is
to
bring
the
parties
together,
in
matters
of
108
trade,
commerce
or
navigation."
It
should
be
noted,
however,
that
Schmid
&
Oberly,
Inc.
involved
the
issue
of
whether
the
breach
of
the
implied
warranties
of
the
seller
in
a
contract
of
sale
under
an
indent
arrangement,
which
includes
a
recovery
of
the
purchase
price,
could
be
pursued
against
the
agent
who
effected
the
sale
on
behalf
of
the
foreign
principal-seller.
It
should
therefore
be
clear
that
legally
speaking,
whether
the
intermediary
was
acting
as
a
commission
merchant/
agent
or
a
pure
commercial
broker,
the
general
principal
is
neither
of
them
would
be
liable
personally
for
the
breach
of
warranty
of
the
principal-seller.
A
commission
agent
who
acts
in
the
name
of
the
principal
and
within
the
scope
of
his
authority
is
protected
by
the
principle
in
Agency
Law
that
he
does
not
therefore
become
personally
liable
for
the
contracts
he
entered
into
in
the
name
of
the
principal.
A
commercial
broker,
who
merely
intermediates
between
the
seller
and
the
buyer
and
for
whom
he
has
not
executed
any
juridical
act,
is
a
complete
stranger
to
the
resulting
contract
of
sale
and
certainly
cannot
be
held
liable
thereon
for
lack
of
privity.
After
quoting
from
both
Behn,
Meyer
&
Co.
and
Pacific
Commercial
Co.,
the
Court
held
that
lbid,
at
p.
245.
166
SCRA
493
108
to/d,
at
p.
501.
(1988).
107
NATURE, OBJECTIVE, AND KINDS OF AGENCY
47
Thus, the chief features of a commercial broker and a
commercial merchant is that in effecting a sale, they are merely
intermediaries or middlemen, and act in a certain sense as the
agent of both parties to the transaction.
Webster defines an indent as "a purchase order for goods
especially when sent from a foreign county." [Webster's Ninth New
Collegiate Dictionary 6 1 2 ( 1 9 8 6 ) . ] . . . A n indentor may
therefore be best described as one who, for compensation, acts as
a middleman in bringing about a purchase and sale of goods
109
between a foreign supplier and a local purchaser."
In Schmid & Oberly, Inc. it was not critical for the resolution of the main
issue to distinguish between a commission agent or a true broker, since in
either case, the intermediary would not be liable for the warranties of the
principal-seller. Were the distinction between agent and a broker has been
most critical is on the issue of entitlement to the commission or compensation
promised by the principal.
From all the foregoing, it may be concluded that as distinguished from an
agent who is duly authorized to enter into juridical acts in behalf of the
principal, the services of a broker is to find third parties who may be interested
in entering into contracts with other parties over particular matter, and may
include negotiating in behalf of both parties the perfection of a contract, but
that the actual perfection must still be done by the parties represented. A
broker essentially is not a legal extension of the persons of the parties he is
negotiating for since he has no legal power to enter into juridical acts in the
name of the party he represents.
Nevertheless, it must be noted though that a broker may at the same
time be an agent, in which case he really becomes a commission agent if the
subject matter involves goods, when he acts is duly authorized to enter into
juridical acts in the name of the client.
109
Ab/d, at p. 502.
48
NON-CORPORATE MEDIA OF DOING BUSINESS
A good illustration of a situation where a real estate broker had been
granted powers of an agent is in the decision in J.M. Tuason & Co. v. Collector
of Internal Revenue, where the real estate broker was paid "administration
fees" for overseeing the development of parcels of land of the owners into a
subdivision project. In addition, the real estate broker was granted the powers
"such as recommending sales prices of l o t s . . . , signing contracts of sale or
lease, or contracts to sell, releases of mortgage . . ., collecting sales prices or
other accounts due the Owner. . ., organizing offices and personnel to attend
111
to the work relating to all the above." In that decision, the Court held that
under the Tax Code a broker can be held liable for all compensation received
under the contract appointing him as broker
A broker engaged in the sale of real estate is not limited to
bringing vendor and vendee together and arranging the terms and
conditions of a sale of real estate. As sales of real estate must be in
writing the preparation of the documents is part of the functions of
the broker. So the only function entrusted to petitioner under the
contract Exhibit "A" which may not be embraced in those of a
broker, is that of constructing the subdivision, as above explained
and detailed out. It follows, therefor, that the parties have agreed
on giving compensation denominated administration fees for
112
services which may well be included in the duties of a broker.
a. How Different Are the Duties and Responsibilities of the Agent
and the Broker to Their Clients?
A true broker, one who merely acts as a negotiating middleman, and
who is not authorized to execute juridical acts in behalf of the clients, does not
owe fiduciary duties to his clients, although like any ordinary professional or
businessman, he is supposed to act with due diligence in carrying out the
affairs of his clients. If his negligence causes damage to a client, his
110
108 Phil. 700
m
(1960).
lbid, at p. 705.
112
/b/d, at p. 706.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
49
liability
is
based
on
tort
or
gi/as/-delict,
rather
than
that
arising
from
breach
of
the
duty
of
diligence.
However,
if
the
broker
has
been
in
addition
authorized
to
enter
into
juridical
acts
in
the
name
of
the
client,
then
he
has
in
addition
assumed
the
role
of
an
agent,
and
in
that
case
has
assumed
the
fiduciary
duties
of
the
agent,
including
the
duties
of
diligence
and
loyalty
to
the
client's
cause
or
interest.
Such
broker,
who
has
assumed
the
duties
of
an
agent,
would
be
prohibited
from
taking
secret
profits
on
the
transaction,
and
is
bound
to
account
to
the
client
all
sums
received
on
the
transactions
even
those
which
were
given
to
him
by
the
other
party
for
his
own
account
as
broker.
This
distinction
between
the
duties
and
responsibilities
between
a
true
broker
and
a
broker-agent
were
borne
out
clearly
in
the
decision
in
Domingo
v.
Domingo,
which
resolved
the
issue
on
whether
the
broker
designated
by
the
owner
of
a
parcel
of
land
to
offer
the
property
for
sale
to
the
public,
could
be
held
to
have
forfeited
his
commission
when
he
received
from
the
buyer
a
propina
or
compensation
for
having
convinced
the
seller
to
accept
a
lower
price,
and
which
amount
was
never
revealed
to
the
seller.
In
the
decision,
the
Court
did
lay
out
the
principle
that
a
true
broker,
who
merely
acts
as
a
middleman,
would
have
no
fiduciary
duties
to
the
seller-client,
not
even
the
duty
to
account
under
Article
1891
of
the
New
Civil
Code,
thus
The
duty
embodied
in
Article
1891
of
the
New
Civil
Code
will
not
apply
if
the
agent
or
broker
acted
only
as
a
middleman
with
the
task
of
merely
bringing
together
the
vendor
and
vendee,
who
themselves
thereafter
will
negotiate
on
the
terms
and
conditions
114
of
the
transaction."
But
the
Court
did
find
that
the
real
estate
broker
appointed
by
the
land
owner
was
not
merely
a
broker,
but
accepted
the
role
of
an
agent:
"Herein
defendant-appellee
Gregorio
Domingo
was
not
merely
a
middleman
of
the
petitioner-appellant
Vicente
Domingo
and
the
buyer
Oscar
de
Leon.
He
was
the
broker
and
113
42
SCRA131
(1971).
at
p.
140.
"*lbid,
NON-CORPORATE MEDIA OF DOING BUSINESS
50
115
agent of said petitioner-appellant only." Consequently, the Court laid down
the ruling that "The duties and liabilities of a broker to his employer are
essentially those which an agent owes to his principal. Consequently, the
decisive legal provisions [on the duty to account and the obligation arising from
fraud and negligence] are found in Articles 1891 and 1909 of the New Civil
6
Code."" The Court held that in such a situation, the decisive legal provisions to
determine whether a broker has violated his duty or obligation are found in
Articles 1891 and 1909 of the New Civil Code, whereby every agent is bound to
render an account of his transactions and to deliver to the principal whatever
he may have received by virtue of the agency, even though it may not be
owning to the principal; and that an agent is responsible not only for fraud, but
also for negligence. Domingo thus held that
The aforesaid provisions [Articles 1891 and 1909 of the New
Civil Code] demand the utmost good faith, fidelity, honesty, candor
and fairness on the part of the agent, the real estate broker in this
case, to his principal, the vendor. The law imposes upon the agent
the absolute obligation to make a full disclosure or complete
account to his principal of all his transactions and other material
facts relevant to the agency, so much so that the law as amended
does not countenance any stipulation exempting the agent from
such an obligation and considers such an exemption as void. The
duty of an agent is likened to that of a trustee. This is not a
technical or arbitrary rule but a rule founded on the highest and
117
truest principle of morality as well as of the strictest justice.
The foregoing ruling is only applicable to a situation where a broker has
accepted the role of an agent, and thereby bound himself to the fiduciary
duties of the latter. Domingo should not be quoted or cited out of context to
support a proposition that a true broker who merely accepts the role of a
middleman is then bound to the fiduciary duties and liabilities of a commercial
agent.
lbid,
at
p.
141.
6
" lbid,
at
p.
136.
m
lbid,
at
p.
137;
emphasis
supplied.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
51
More recently, in Litonjua, Jr. v. Eternit Corp., where the services of a
real estate broker (Marquez) were retained by a corporation "so that the
properties [eight parcels of land] could be offered for sale to prospective
119
buyers," resulted in the striking of negotiations with the Litonjuas who gave a
firm offer therefore, which were accepted by the officers of the corporation and
conveyed through Marquez. Later on the corporation, acting formally through its
board of directors, backed-out of the deal. When the Litonjuas sued the
corporation for specific performance under a contract of sale that was perfected,
it was argued that the provisions of Articled 1874 of the New Civil Code which
rendered void a sale of a piece of land effected through an agent where the
latter's authority was not in writing, was not applicable since Marquez was not
an agent but merely a broker who merely conveyed the consent of the
corporation to the sale effected through its principal officers. Apart from the
main ruling of the Court in Litonjua, Jr. that the sale of the parcels of land done
without the consent or authority of the board of directors does not bind the
corporation, it also distinguished the powers of a broker from an agent when it
comes to binding the principal in the sale of immovables, thus
It appears that Marquez acted not only as real estate broker
for the petitioners but also as their agent. As gleaned from the
letter of Marquez to Glanville, on February 26, 1987, he confirmed,
for and in behalf of the petitioners, that the latter had accepted
such offer to sell the land and the improvements thereon.
However, we agree with the ruling of the appellate court that
Marquez had no authority to bind respondent EC to sell the subject
properties. A real estate broker is one who negotiates the sale of
real properties. His business, generally speaking, is only to find a
purchaser who is willing to buy the land upon terms fixed by the
owner. He has no authority to bind the principal by signing a con-
tract of sale. Indeed, an authority to find a purchaser of real
120
property does not include an authority to se//.
118
490 SCRA 204 (2006).
lbid, at p. 208.
m
lbid, at p. 224; emphasis
supplied.
m
NON-CORPORATE MEDIA OF DOING BUSINESS
52
b. Broker Is Not Legally Incapacitated to Purchase
Property of the Principal
The distinction between a broker and an agent becomes also critical when
it comes to the legal capacity of an agent to purchase the property of the
principal as prohibited under Article 1491 of the New Civil Code.
In Araneta, Inc. v. Del Paterno, it was held that the prohibition in the
old Civil Code of the counterpart of Article 1491(2) of the New Civil Code which
renders an agent legally incapable of buying the properties of his principal
connotes the idea of trust and "confidence; and so where the relationship does
not involve considerations of good faith and integrity the prohibition should not
and does not apply. To come under the prohibition, the agent must be in a
122
fiduciary relation with his principal."
The Court held that a broker does not come within the meaning of Article
1491 of the New Civil Code, because he is "nothing more than a go-between or
middleman between the defendant and the purchaser, bringing them together
to make the contract themselves. There is no confidence to be betrayed ... [since
the broker] was not authorized to make a binding contract for the [purported
principal]. He was not to sell and he did not sell t h e . . . property. He was to
look for a buyer and the owner herself was to make, and did make, the sale, He
was not to fix the price of the sale because the price had to be already fixed in
his commission, He was not to make the terms of payment because these, too,
would be clearly specified in his commission. In fine, [the broker] was left no
power or discretion whatsoever, which he could abuse to his advantage and to
123
the owner's prejudice."
c. Broker's Entitlement to Commission
In quite a number of decisions, the Supreme Court has held that the
determination of whether one is an agent or a broker
121
91
Phil.
786
m
(1952).
lbid,
at
p.
804.
123
/Wof,
at
pp.
804-805.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
53
constitutes a critical factor of whether he would be entitled to the commission
stipulated in the contract.
The very terms "broker" or "brokering" are commercial terms where the
essence of the activity or occupation undertaken is to earn a commission. Thus,
124
in Reyes v. Rural Bank of San Miguel, the Court held that "brokering" clearly
indicates the performance of certain acts "for monetary consideration or
compensation," which it concluded from the following definitions of "brokering"
and "broker," thus
. . . Case law defines a "broker" as "one who is engaged, for
others, on a commission, negotiating contracts relative to property
with custody of which he has no concern; the negotiation between
other parties, never acting in his own name but in the name of
those who employed h i m . . . a broker is one whose occupation is
to bring the parties together, in mattrs of trade, commerce or
navigation." According to Bouvier's Law Dictionary, "brokerage"
refers to "the trade or occupation of a broker; the commisons paid
to a broker for his services," while "brokers" are "those who are
engaged for others on the negotiation of contracts relative to
125
property, with the custody of which they have no concern."
The other principle that should be kept in mind when determining the
proper rules on the entitlement of a broker to the commission promised by the
126
client is what was held in Abacus Securities Corp. v. Ampil, that "Since a
brokerage relationship is essentially a contract for the employment of an agent,
principles of contract law also govern the broker-principal relationship." In other
words, whether the relationship is a pure broker-middleman one, or a
broker-agency, the right of the broker to the commission promised by the
client-principle is primarily governed by the terms and conditions agreed upon
them at the time of the perfection of the contract.
124
424 SCRA 135
(2004).
/b/d, at p. 144.
126
483 SCRA 315
(2006).
125
NON-CORPORATE MEDIA OF DOING BUSINESS
54
In the absence of clear provisions in the contract of brokerage, Danon v.
127
Antonio A. Brimo & Co., established the following rules on the right of the
broker to receive the commission or compensation agreed upon with the client,
and using American jurisprudence, planted into Philippine jurisprudence the
"efficient agent or the procuring cause of the sale" doctrine, thus
"The broker must be the efficient agent or the procuring
cause of the sale. The means employed by him and his efforts
must result in the sale. He must find the purchaser, and the sale
12B
must proceed from his efforts acting as broker."
A leading case on the subject is that of Sibbald vs. Bethlehem
Iron Co. (83 N.Y., 378; 38 Am. Rep., 441). In that case, after an
exhaustive review of various cases, the Court of Appeals of New
York stated the rule as follows:
In all the cases, under all and varying forms of expression, the
fundamental and correct doctrine is, that the duty assumed by the
broker is to bring the minds of the buyer and seller to an
agreement for a sale, and the price and terms on which it is to be
made, and until that is done his right to commissions does not
29
accrue.'
It follows, as a necessary deduction from the established rule,
that a broker is never entitled to commissions for unsuccessful
efforts. The risk of a failure is wholly his. The reward comes only
with his success. That is the plain contract and contemplation of
the parties. The broker may devote his time and labor, and expend
his money with ever so much of devotion to the interest of his
employer, and yet if he fails, if without effecting an agreement or
accomplishing a bargain, he abandons the effort, or his authority is
fairly and in good faith terminated, he gains no right to
commissions. He
127
42 Phil. 133 (1921).
Wylie v. Marine National Bank, 61 N.Y., 415, 416, citing: McClure v.
Paine, 49 N.Y., 561; Lloyd v. Mathews, 51 id., 124; Lyon v. Mitchell, 36 id., 235;
Briggs v. Rowe, 4 Keyes, 424; Murray v. Currie, 7 Carr. & Payne, 584; Wilkinson
v. Martin, 8 id., 5.
Citing McGavock v. Woodlief, 20 How., 221; Barnes v. Roberts, 5 Bosw.,
73; Holly v. Gosling, 3 E. D. Smith, 262; Jacobs v. Kolff, 2 Hilt., 133; Kock v.
Emmerling, 22 How., 72; Corning v. Calvert, 2 Hilt., 56; Trundy v. N.Y. & Hartf.
Steamboat Co., 6 Robt., 312; Van Lien v. Burns, 1 Hilt., 134.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 84
loses
the
labor
and
effort
which
was
staked
upon
success.
And
in
such
event
it
matters
not
that
after
his
failure,
and
the
termination
of
his
agency,
what
he
has
done
proves
of
use
and
benefit
to
the
principal.
In
a
multitude
of
cases
that
must
necessarily
result.
He
may
have
introduced
to
each
other
parties
who
otherwise
would
have
never
met;
he
may
have
created
impressions,
which
under
later
and
more
favorable
circumstances
naturally
lead
to
and
materially
assist
in
the
consummation
of
a
sale;
he
may
have
planted
the
very
seed
from
which
others
reap
the
harvest;
but
all
that
gives
him
no
claim.
It
was
part
of
his
risk
that
failing
himself,
not
successful
in
fulfilling
his
obligation,
others
might
be
left
to
some
extent
to
avail
themselves
of
the
fruit
of
his
labors.
As
was
said
in
Wylie
vs.
Marine
National
Bank
(61
N.
Y.,
416),
in
such
a
case
the
principal
violates
no
right
of
the
broker
by
selling
to
the
first
party
who
offers
the
price
asked,
and
it
matters
not
that
sale
is
to
the
very
party
with
whom
the
broker
had
been
negotiating.
He
failed
to
find
or
produce
a
purchaser
upon
the
terms
prescribed
in
his
employment,
and
the
principal
was
under
no
obligation
to
wait
longer
that
he
might
make
further
efforts.
The
failure
therefore
and
its
consequences
were
the
risk
of
the
broker
only.
This
however
must
be
taken
with
one
important
and
necessary
limitation.
If
the
efforts
of
the
broker
are
rendered
a
failure
by
the
fault
of
the
employer,
if
capriciously
he
changes
his
mind
after
the
purchaser,
ready
and
willing,
and
consenting
to
the
prescribed
terms,
is
produced;
or
if
the
latter
declines
to
complete
the
contract
because
of
some
defect
of
title
in
the
ownership
of
the
seller,
some
unremoved
encumbrance,
some
defect
which
is
the
fault
of
the
latter,
then
the
broker
does
not
lose
his
commissions.
And
that
upon
the
familiar
principle
that
no
one
can
avail
himself
of
the
nonperformance
of
a
condition
precedent,
who
has
himself
occasioned
its
nonperformance.
But
this
limitation
is
not
even
an
exception
to
the
general
rule
affecting
the
broker's
right
for
it
goes
on
the
ground
that
the
broker
has
done
his
duty,
that
he
has
brought
buyer
and
seller
to
an
agreement,
but
that
the
contract
is
not
consummated
and
fails
though
the
after-fault
of
the
seller.
The
cases
are
uniform
in
this
respect.
(Moses
147;
Van
Lien
vs.
Burns,
1
130
Hilt.,
134.)
,30
42 Phil. 133,139-141; emphasis supplied.
56
NON-CORPORATE MEDIA OF DOING BUSINESS
In
other
words,
there
is
only
one
form
of
"service"
for
which
the
broker
is
entitled
to
his
agreed
compensation
(unless
otherwise
stipulated
of
course):
that
his
services
procured
the
buyer
and
which
eventually
resulted
into
a
perfected
and
consummated
contract
of
sale.
Where
the
services
and
efforts
expended
by
the
broker
were
of
such
sufficient
amount
that
they
would
have
brought
about
the
sale,
but
that
the
principal
terminated
his
services
in
bad
faith
with
every
intention
to
proceed
with
the
sale
to
the
person
procured
by
the
broker,
then
the
latter
would
still
be
entitled
to
his
compensation
under
the
principle
of
"efficient
or
procuring
cause."
On
the
other
hand,
Danon
also
discussed
the
American
law
principle
that
held
that
every
client
has
the
power
to
terminate
the
brokerage
relationship,
thus
"One
other
principle
applicable
to
such
a
contract
as
existed
in
the
present
case
needs
to
be
kept
in
view.
Where
no
time
for
the
continuance
of
the
contract
is
fixed
by
its
terms
either
party
is
at
liberty
to
terminate
it
at
will,
subject
only
to
the
ordinary
requirements
of
good
faith.
Usually
the
broker
is
entitled
to
a
fair
and
reasonable
opportunity
to
perform
his
obligation,
subject
of
course
to
the
right
of
the
seller
to
sell
independently.
But
having
been
granted
him,
the
right
of
the
principal
to
terminate
his
authority
is
absolute
and
unrestricted,
except
only
that
he
may
not
do
it
in
bad
faith,
and
as
a
mere
device
to
escape
the
payment
of
the
broker's
commissions.
Thus,
if
in
the
midst
of
negotiations
instituted
by
the
broker,
and
which
were
plainly
and
evidently
approaching
success,
the
seller
should
revoke
the
authority
of
the
broker,
with
the
view
of
concluding
the
bargain
without
his
aid,
and
avoiding
the
payment
of
commission
about
to
be
earned,
it
might
be
well
said
that
the
due
performance
his
obligation
by
the
broker
was
purposely
prevented
by
the
principal.
But
if
the
latter
acts
in
good
faith,
not
seeking
to
escape
the
payment
of
commissions,
but
moved
fairly
by
a
view
of
his
own
interest,
he
has
the
absolute
right
before
a
bargain
is
made
while
negotiations
remain
unsuccessful,
before
commissions
are
earned,
to
revoke
the
broker's
authority,
and
the
latter
cannot
thereafter
claim
compensation
for
a
sale
made
by
the
principal,
even
though
it
be
to
a
customer
with
whom
the
broker
unsuccessfully
negotiated,
NATURE, OBJECTIVE, AND KINDS OF AGENCY
57
arid
even
though,
to
some
extent,
the
seller
might
justly
be
said
to
have
availed
himself
of
the
fruits
of
the
broker's
labor."
{Ibid,
pp.
1
444-446.)"
This
is
in
fact
a
reiteration
of
the
principle
first
discussed
in
Macondray
&
Co.
v.
Sellner,
where
the
Court
held
that
a
broker
is
entitled
to
the
usual
commission
whenever
he
brings
to
his
principal
a
party
who
is
able
and
willing
to
take
the
property
and
enter
into
a
valid
contract
upon
the
terms
then
named
by
the
principal,
although
the
particulars
may
be
arranged
and
the
matter
negotiated
and
consummated
between
the
principal
and
the
purchaser
directly.
The
Court
held
that
it
would
be
the
height
of
injustice
to
permit
the
principal
then
to
withdraw
the
authority
as
against
an
express
provision
of
the
contract,
and
reap
the
benefits
of
the
agent's
labors,
without
being
liable
to
him
for
his
commission.
Succinctly,
when
the
otherwise
plenary
power
of
the
principal/
client
to
terminate
the
brokerage
relationship
is
exercised
in
bad
faith
{i.e.,
meant
to
frustrate
the
ability
of
the
broker
to
receive
the
commission
to
which
his
efforts
would
have
led
to
its
realization),
then
the
fundamental
principle
embodied
in
the
"efficient
and
procuring
cause"
doctrine
would
still
be
applicable
to
allow
the
broker
to
recover
his
commission
from
the
principal.
m
The foregoing principles were well-articulated in Reyes v. Mosqueda,
which involved the claim of a true broker (i.e., no authority to enter into juridical
acts in the name of the owner of a parcel of land), where the Supreme Court
then held that
. . . If as found by the Court of Appeals plaintiff Reyes was
engaged only as a broker, then in order to earn her commission, it
was not sufficient for her to find a prospective buyer but to find
one who will actually buy the property on the terms and conditions
imposed by the owner. In the case of Danon v. Brimo & Co., 42
Phil. 133, we said:
131
/jb/d,
at
pp.
141-
33
1P42.
hil.
370
133
(1916).
99
Phil.
241
(1956).
132
58
NON-CORPORATE MEDIA OF DOING BUSINESS
"The broker must be the efficient agent or the procuring cause
of the sale. The means employed by him and his efforts must
result in the sale. He must find the purchaser, and the sale must
proceed from his efforts acting as a broker, n (Cases cited.)
Besides, according to the finds of the Court of Appeals, the
actual sale was perfected and consummated without the
intervention of plaintiff Reyes, and what is more, before that, her
authority to sell the property had been withdrawn, at a time when
134
there was still no meeting of the minds of buyer and seller.
The Court noted in Reyes that "there are times when the owner of a
property for sale may not legally cancel or revoke the authority given by him to
a broker when the negotiations through the broker's efforts have reached such
a stage that it would be unfair to deny the commission earned, especially when
the property owner acts in bad faith and cancels the authority only to evade the
135
payment of said commission." But it held that the doctrine would not be
applicable in the case because "there is nothing to show that bad faith was
involved in the cancellation of the authority of plaintiff Reyes before the
136
consummation of the sale."
More importantly, the Court found in Reyes that "the actuations of
plaintiff Reyes are not entirely above suspicion," meaning that the underlying
facts do not show that he was the "efficient or procuring cause" for the sale
between the seller- owner (Mosqueda) and the eventual buyer (Lim) because it
was the interested buyer-Lim that first dispatched broker Reyes to go to
owner-Mosqueda to bargain for a lower price, thus
. . . As observed by the Court of Appeals she did not explain
how she came to know that defendant Mosqueda was interested
in selling his land and was looking for a buyer thereof. It is highly
possible that after Reyes was commissioned by her employer Lim
to approached (sic)
lbid,
at
p.
135
245.
/b/d,
at
i36
p.
lbid,
245.
at
p.
246.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
59
Mosqueda with a view to reducing the price of P8 per square
meter, it was then and only then that Reyes came to know about
the desire of Mosqueda to sell his land to cover his obligations with
the bank inasmcuh as he failed to secure a loan from the Insurance
Company, and as said by the Court of Appeals
"* * *, Perhaps, when she was requested by Lim to intercede
in his behalf with respect to the sale of Mosgueda's land, Vicenta
Reyes grabbed this opportunity to make spare money as a
137
sideline."
In other words, the broker could not even claim with merit in Reyes that
his services were the "efficient or procuring cause" that became the basis of the
eventual sale between Mosqueda and her employer Lim. She just took
advantage of Mosqueda who then did not know that she was representing Lim
with whom Mosqueda had previously negotiated the sale of the land.
In Ramos v. Court of Appeals, the Court reiterated the ruling in Danon
that a broker is not entitled to any commission until he has successfully done the
job given him, arid that a broker is never entitled to commission for unsuccessful
efforts.
In Prats v. Court of Appeals, where the Court found itself bound by the
findings of the trial court that the broker "was not the efficient procuring cause
in bringing about the sale (prescinding from the fact of expiration of his exclusive
authority) which are admittedly final for purposes of the present petition,
1 0
provide no basis in law to grant relief to the petitioner [broker]. * Nevertheless,
the broker was awarded a token P100,000 (of the original claim for commission
of P1,380,000.00) on the ground that "In equity, however, the Court notes that
petitioner [broker] had diligently taken steps to bring back together respondent
141
Doronila and the SSS. x x x Under the circumstances, the Court grants in
equity
137
Ibid,
at
p.
246.
63
SCRA
331
139
(1975).
81
SCRA
360
140
/6/d,
at
p.
381.
(1978).
141
/b/d,
at
p.
383.
138
60
NON-CORPORATE MEDIA OF DOING BUSINESS
the sum of One Hundred Thousand Pesos (P100,000.00) by way of
compensation for his efforts and assistance in the transaction, which however
was finalized and consummated after the expiration of his exclusive
142
authority."
The real lesson that Prats teaches is that as a rule the services for which
the broker or agent can claim compensation for as the basis for the application
of the "efficient or procuring cause" doctrine was be those rendered when the
brokerage or agency relationship existed; and that after the termination of the
period of the contractual relationship there is no basis by which to be paid for
services that were not contracted for.
The most recent ruling of the Supreme Court applying the "efficient or
143
procuring cause" doctrine is in the decision in Medrano v. Court of Appeals,
where it was equated to the doctrine of "proximate cause." In Medrano, the
brokers were given written authority "to negotiate with any prospective buyer
for the sale of a certain real estate property more specifically a mango
plantation which is described more particularly therein below." Although
several trips were scheduled to be made to the property by the brokers with
their client, due to force majeure the same did not take place, and that in fact
one time when the client was in the area he had received telephone direction
from one of the brokers to locate the property and essentially at that visit
purchased the same. When the brokers sought to recover their stipulated
commission, the sellers refused on the ground that they were not the procuring
cause for the sale that was effected in their absence: "The petitioners pointed
out that the respondents [brokers] (1) did not verify the real owners of the
property [which was registered in the name of the bank owned by the
petitioners]; (2) never saw the property in question; (3) never got in touch with
the registered owner of the property; and (4) neither did they perform any act
144
of assisting their buyer in having the property inspected and verified."
u2
lbid,
at
pp.
384-
385.
452
SCRA
77
m
(2005).
lbid,
at
p.
86.
143
NATURE, OBJECTIVE, AND KINDS OF AGENCY
61
In
brushing
aside
the
contention
of
the
sellers
that
the
brokers
did
not
perform
the
service
demanded
of
them
under
the
letter-authority
of
negotiation,
the
Court
characterized
the
jurisprudential
meaning
of
the
"efficient
or
procuring
cause"
doctrine,
thus
"Procuring
cause"
is
meant
to
be
the
proximate
cause.
The
term
"procuring
cause,"
in
describing
a
broker's
activity,
refers
to
a
cause
originating
a
series
of
events
which,
without
break
in
their
continuity,
result
in
accomplishment
of
prime
objective
of
the
employment
of
the
broker
producing
a
purchaser
ready,
willing
and
able
to
buy
real
estate
on
the
owner's
terms.
A
broker
will
be
regarded
as
the
"procuring
cause"
of
a
sale,
so
as
to
be
entitled
to
commission,
if
his
efforts
are
the
foundation
on
which
the
negotiations
resulting
in
a
sale
are
begun.
The
broker
must
be
the
efficient
agent
or
the
procuring
cause
of
the
sale.
The
means
employed
by
him
and
his
efforts
must
result
in
the
sale.
He
must
find
the
purchaser,
and
the
sale
must
proceed
from
his
efforts
145
acting
as
broker.
Evaluating
the
proven
facts,
the
Court
held:
"It
can
thus
be
readily
inferred
that
the
respondents
[brokers]
were
the
only
ones
who
knew
about
the
property
for
sale
and
were
responsible
for
leading
a
buyer
to
its
consummation.
All
these
circumstances
lead
us
to
the
inescapable
conclusion
that
the
respondents
[brokers]
were
the
procuring
cause
of
the
sale.
When
there
is
a
close,
proximate
and
causal
connection
between
the
broker's
efforts
and
the
principal's
sale
of
his
property,
the
broker
is
entitled
to
a
commission"
It
should
be
emphasized
that
the
"efficient
or
procuring
cause"
doctrine
cannot
overcome
express
stipulations
in
the
agreement
providing
when
exactly
the
broker
is
entitled
to
have
earned
his
commission.
Thus,
in
Fiege
and
Brown
147
v.
Smith,
Bell
&
Co.,
which
was
decided
a
year
after
Danon,
the
Court
held
that
when
under
the
terms
of
the
agreement
the
brokers
were
entitled
to
"one-half
of
the
profits
earned
from
the
sale,"
then
the
u5
lbid,
at
p.
88.
//w'd,
at
pp.
91-92;
emphasis
147
supplied.
43
Phil.
113
(1922).
148
62
NON-CORPORATE MEDIA OF DOING BUSINESS
brokers
would
not
be
entitled
to
have
earned
their
commission
from
the
various
deals
that
were
perfected
through
their
efforts
until
they
are
able
to
show
the
profits
earned
from
such
deals.
d.
Rules
on
Compensation
for
Brokers
Applies
Also
to
Commission
Agents
There
is
nothing
in
the
nature
and
essence
of
a
contract
of
agency,
or
in
the
situation
of
a
real
estate
broker
who
has
been
designated
also
with
power
to
enter
into
juridical
acts
in
the
name
of
the
principal,
that
prevents
the
same
principles
discussed
from
being
applicable
to
a
commission
agency
relationship.
In
fact,
the
essence
of
any
compensation
or
commission
formula
that
entitles
an
intermediary
to
a
fixed
percentage
of
the
selling
price
or
to
any
amount
above
a
fixed
price
(i.e.,
overprice
arrangement)
would
make
the
"efficient
or
procuring
cause"
doctrine
applicable,
whether
the
intermediary
is
only
a
broker-middleman
or
a
broker-agent.
In
other
words,
since
both
a
pure
brokerage
and
commercial
agency
arrangement
have
"service"
as
their
very
subject
matter,
there
is
nothing
in
the
applicability
of
the
"efficient
or
procuring
cause"
doctrine
in
a
given
situation
determinative
of
whether
it
is
a
broker-middleman
or
a
broker-agency
situation.
iAS
This state of things is best illustrated in the decision in Guardex v. NLRC,
where the claim for unpaid commission of an alleged agent was filed with the
NLRC. In deciding whether there was proper jurisdiction assumed by the arbiter
and the NLRC on the claim, the Court had to determine what the legal
relationship was established between the purported principal who expressly
authorized a freelance salesman "to look after (follow-up) the [purported
principal's] pending proposal to sell a fire truck to Rubberworld, and asked for
P250.00 as representation expenses. [Purported plaintiff] agreed and gave him
149
[purported agent] the money." The purported agent never followed up on the
matter and after the purported principal had concluded the sale of the firetruck
to Rubberworld, the purported agent reappeared and demand the payment of
his commission.
148
191 SCRA 487
(1990).
lbid, at p. 489.
U9
NATURE, OBJECTIVE, AND KINDS OF AGENCY
63
The Court held in effect that whether the relationship established
between purported principal and purported agent was a mere brokerage (to
represent or follow-up) or an agency relations would not make a difference on
the claim for commission: "Even a finding that under these circumstances, an
agency had indeed been constituted will not save the day for [the purported
agent], because nothing in the record tends to prove that he succeeded in
carrying out its terms or even as much as attempted to do so. The evidence in
fact clearly indicates otherwise. The terms of [purported principal's] letter. . .,
assuming that it was indeed an "authority to s e l l , " . . . are to the effect that
entitlement to the P15,000 commission is contingent on the purchase by a
customer of a fire truck, the implicit condition being that the agent would earn
the commission if he was instrumental in bring the sale about. [Purported agent]
certainly had nothing to do with the sale of the fire truck and is not therefore
150
entitled to any commission at all."
In Manotok Brothers, Inc. v. Court of Appeals, the Court cited Ramos to
state matter-of-factly, what seemed then to be the established principle that
rules on entitlement to commission were basically the same whether the
contract is one of brokerage or agency, that "the established principle [is] that a
broker or agent is not entitled to any commission until he has successfully done
152
the job given to him."
What is further of interest to us in Manotok Brothers, Inc. is that the
relationship started merely as one of brokerage, where the owner of the parcel
of land rented by the City of Manila merely authorized the broker "to negotiate
with the City of Manila the sale of the aforementioned property for not less than
P425,000.00. In the same writing, [registered owner] agreed to pay [broker] a
five percent (5%) commission in the event the sale is finally consummated and
153
paid." The arrangement was extended several times because of what was
then perceived to be successful negotiations being undertaken by the broker
with the
150
/fc/d,
at
pp.
490-
491.
221
SCRA
224
152
to/d,
at
p.
231.
(1993).
iS3
lbid,
at
pp.
226-227.
151
64
NON-CORPORATE MEDIA OF DOING BUSINESS
city
officers.
The
final
letter
authority
given
to
the
broker
actually
reconstituted
the
broker
into
an
agent
since
it
"authorized
private
respondent
[agent]
to
finalize
and
consummate
the
sale
of
the
property
to
the
City
of
Manila
for
not
less
than
P410,000.00.
With
this
letter
came
another
extension
of
180
days."
The
City
of
Manila
eventually
formalized
the
purchase
and
paid
the
purchase
price,
but
only
after
the
180-day
extension
period
had
expired.
When
the
principal
refused
to
pay
the
commission
demanded
by
the
agent
on
the
ground
that
the
sale
was
consummated
only
after
the
period
of
agency
had
terminated,
an
action
was
brought
to
seek
collection
of
the
commission.
Both
the
trial
court
and
the
Court
of
Appeals
found
that
since
the
sale
was
perfected
and
consummated
after
the
period
of
agency,
under
the
express
terms
covering
the
commission
right,
the
broker-agent
was
no
longer
entitled
to
the
same.
On
appeal,
the
Court
held
At
first
sight,
it
would
seem
that
private
res-pondent
is
not
entitled
to
any
commission
as
he
was
not
successful
in
consummating
the
sale
between
the
parties,
for
the
sole
reason
that
when
the
Deed
of
Sale
was
finally
executed,
his
extended
authority
had
already
expired.
By
this
alone,
one
might
be
misled
to
believe
that
this
case
squarely
falls
within
the
ambit
of
the
established
principle
that
a
broker
or
agent
is
entitled
to
any
commission
until
he
has
successfully
done
the
job
given
to
him.
Going
deeper
however
into
the
case
would
reveal
that
it
is
within
the
coverage
of
the
exception
rather
than
of
the
general
rule,
the
exception
being
that
enunciated
in
the
case
of
Prats
vs.
Court
of
Appeals.
In
the
said
case,
this
Court
ruled
in
favor
of
claimant-agent,
despite
the
expiration
of
his
authority,
when
a
sale
was
finally
consummated.
In
its
decision
in
the
abovecited
case,
this
Court
said,
that
while
it
was
respondent
court's
(referring
to
the
Court
of
Appeals)
factual
findings
that
petitioner
Prats
(claimant-
agent)
was
not
the
efficient
procuring
cause
in
bringing
about
the
sale
(prescinding
from
the
fact
of
expiration
of
his
exclusive
authority),
still
154
petitioner
was
awarded
compensation
for
his
services.
154
/Wof, at pp. 230-231.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
65
Note
that
in
Manotok
Brothers,
Inc.,
in
spite
of
the
clear
wordings
in
the
covering
letter-contract
on
the
manner
of
entitlement
of
the
broker-agent
to
his
5%
commission,
and
there
being
no
indication
that
there
was
in
fact
malice
on
the
part
of
the
principal
landowner
(since
the
period
simply
lapsed
without
the
sale
being
consummated),
the
Court
applied
nevertheless
the
underlying
rationale
(or
perhaps
the
equity
principle)
of
the
"efficient
or
procuring
cause"
doctrine
to
allow
the
broker-agent
to
receive
the
commission
he
had
earned
by
the
nature
of
the
services
he
had
extended
to
the
principal's
cause.
e.
Aberrant
Rulings
on
Commission
Issues
Despite
the
well-established
principle
that
what
differentiates
a
broker-middleman
from
a
commercial
agent
is
the
nature
of
the
power
given
or
granted
to
the
intermediary
by
the
principal-client,
the
Supreme
Court
had
evolved
a
line
of
decisions
where
they
based
the
determination
of
when
an
intermediary
is
a
broker
or
a
commercial
agent,
simply
from
the
manner
by
which
he
is
to
earn
his
commission.
Hahn
v.
Court
of
Appeals,
where
the
issue
was
whether
a
foreign
corporation
was
deemed
doing
business
in
the
Philippines
through
the
appointment
of
a
local
distributor,
and
the
resolution
thereof
dependent
on
whether
the
local
distributor
acted
merely
as
agent
of
the
foreign
corporation
or
was
selling
the
foreign
corporation's
products
for
its
own
account
and
not
in
the
name
of
the
foreign
corporation.
Although
the
Court
was
able
to
conclude
that
the
local
distributor
was
acting
as
an
agent
of
the
foreign
corporation
since
it
was
entering
into
local
transactions
of
the
products
under
the
control
of
the
foreign
corporation,
nonetheless,
the
Court
held
in
addition:
"Contrary
to
the
appellate
court's
conclusion,
this
arrangement
shows
an
agency.
An
agent
receives
a
commission
upon
the
successful
conclusion
of
a
sale.
On
the
other
hand,
a
broker
earns
his
pay
merely
by
bringing
the
buyer
and
the
seller
together,
even
if
no
1S5
266 SCRA537 (1997).
66
NON-CORPORATE MEDIA OF DOING BUSINESS
156
sale
is
eventually
made."
The
quoted
portion
of
the
decision
does
not
cite
authority
for
such
conclusion,
and
essentially
was
not
consistent
with
the
established
jurisprudence
starting
with
Danon
that
unless
otherwise
stipulated
by
the
parties,
a
broker
earns
his
commission
only
when
through
his
services
there
is
eventually
a
contract
that
is
perfected
and
consummated.
In
Tan
v.
Gullas,
where
a
real
estate
broker
was
granted
a
special
power
of
attorney
to
negotiate
only
the
sale
of
a
parcel
of
land
at
certain
rate
(which
meant
that
there
was
no
authority
to
enter
into
juridical
acts
in
behalf
of
the
owner
of
the
land),
the
broker
had
introduced
a
interested
buyer,
but
eventually
the
owner
appointed
another
person
to
consummate
the
sale
with
the
same
buyer.
The
Court
quoted
from
Schmid
&
Oberly,
Inc.
v.
RJL
Martinez
158
Fishing
Co/p.,
it
defined
a
"broker"
as
"one
who
is
engaged,
for
others,
on
a
commission,
negotiating
contracts
relative
to
property
with
the
custody
of
which
he
has
no
concern;
the
negotiator
between
other
parties,
never
acting
in
his
own
name
but
in
the
name
of
those
who
employed
him.
x
x
x
a
broker
is
one
whose
occupation
is
to
bring
the
parties
together,
in
matters
of
trade,
159
commerce
or
navigation." Although
the
Court
never
used
the
"efficient
or
procuring
cause"
doctrine,
it
went
carefully
through
the
evidence
to
sustain
the
proposition
that
the
broker
had
actually
earned
his
right
to
the
commission.
Nonetheless,
it
quoted
from
Hanh
that
"An
agent
receives
a
commission
upon
the
successful
conclusion
of
a
sale.
On
the
other
hand,
a
broker
earns
his
pay
merely
by
bringing
the
buyer
and
the
seller
together,
even
if
no
sale
is
160
eventually
made."
Citing
no
other
authority
for
such
perplexing
doctrine,
Tan
v.
Gullas
began
to
perpetuate
the
myth
started
in
Hanh
that
a
broker
earns
his
commission
merely
by
bringing
the
buyer
and
the
seller
together,
even
if
no
sale
is
eventually
made.
ibid,
at
p.
549.
157
393
SCRA334
1S8
(2002).
166
SCRA
493
m
(1988).
lbid,
at
p.
339.
lbid,
at
p.
341.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
67
181
In Lim v. Saban, the Court invoked the compensation rules covering
brokers to be applicable to contracts of agency, thus
To deprive Saban of his commission subsequent to the sale
which was consummated through his efforts would be a breach of
his contract of agency with Ybanez which expressly states that
Saban would be entitled to any excess in the purchase price after
deducting the P200,000.00 due to Ybanez and the transfer taxes
and other incidental expenses of the sale.
In Macondray & Co. v. Sellner [33 Phil. 370 (1916).], the Court
recognized the right of a broker to his commission for finding a
suitable buyer for the seller's property even though the seller
himself consummated the sale with the buyer. The Court held that
it would be in the height of injustice to permit the principal to
terminate the contract of agency to the prejudice of the broker
when he had already reaped the benefits of the broker's efforts.
In Infante v. Cunanan, et al. [93 Phil. 692 (1953).], the Court
upheld the right of the brokers to their commissions although the
seller revoked their authority to act in his behalf after they had
found a buyer for his properties and negotiated the sale directly
with the buyer whom he met through the broker's efforts. The
Court ruled that the seller's withdrawal in bad faith of the brokers'
authority cannot unjustly deprive the brokers of their commissions
162
as the seller's duty constituted agents.
Fortunately, in the more recent decision in Phil. Health-Care Providers
163
(Maxicare) v. Estrada, the Court held firm that the controlling principle in a
broker's entitled to the commission agreed upon would by the "procuring
cause" doctrine. Although presaged with quotations from Hahn and Tan v.
Gullas, the Court did define the importance of and the meaning of the "efficient
or procuring cause" doctrine, thus:
161
447 SCRA 232 (2004).
/b/d, at pp. 239-240; emphasis
163
supplied.
542 SCRA 616 (2008).
162
NON-CORPORATE MEDIA OF DOING BUSINESS
68
In relation thereto, we have held that the term "procuring
cause" in describing a broker's activity, refers to a cause
originating a series of events which, without break in their
continuity, result in the accomplishment of the prime objective of
the employment of the broker producing a purchaser ready,
willing and able to buy on the owner's terms. To be regarded as
the "procuring cause" of a sale as to be entitled to a commission, a
broker's efforts must have been the foundation on which the
164
negotiations resulting in a sale began.
In Philippine Health-Care Providers, Inc. (Maxicare), the "efficient or
procuring cause" doctrine was made to apply and even overcome provisions in
the brokerage agreement which provided that to be entitled to the commission,
the broker (Estrada) must be the one to collect the premium and
contemporaneously remit them to Maxicare. The Court held -
Maxicare's contention that Estrade may only claim com-
missions from membership dues which she has collected and
remitted to Maxicare as expressly provided for in the
letter-agreement does not convince us. It is readily apparent that
Maxicare is attempting to evade payment of the commission
which rightfully belongs to Estrada as the broker who brought the
parties together. In fact, Maxicare's former Chairman Roberto K.
Macasaet testified that Maxicare had been trying to land the
Meralco account for two (2) years prioer to Estrada's entry in
1 9 9 0 . . .
x x x
At the very least, Estrada penetrated the Meralco market,
initially closed to Maxicare, and laid the groundwork for a business
relationship. The only reason Estrada was not able to participate in
the collection and remittance of premium dues to Maxicare was
because she was prevented from doing so by the acts of Maxicare,
165
its officers, and employees.
164
/b/d,
at
p.
625.
at
p.
lbid,
624.
NATURE, OBJECTIVE, AND KINDS OF AGENCY
69
The
aforequoted
ruling
has
the
same
effect
as
that
in
Manotok
Brothers,
Inc.,
where
the
Court
upheld
that
even
terms
and
conditions
agreed
upon
in
the
brokerage
or
agency
contract
that
undermine
the
"efficient
or
procuring
cause"
doctrine
would
be
brushed
aside
to
allow
under
equity
principles
a
broker
or
an
agent
to
collect
the
commissions
he
has
in
fact
earned.
f.
Broker
of
a
Sale
Distinguished
from
Broker
Himself
Purchasing
Just
as
an
agency
to
sell
or
agency
to
buy
is
sometimes
confused
with
a
contract
of
sale,
the
same
confusion
can
happen
in
the
case
of
a
brokerage.
This
is
best
illustrated
in
Collector
of
Internal
Revenue
v.
Tan
Eng
Hong,
where
the
Bureau
of
Internal
Revenue
imposed
a
broker's
tax
on
the
proceeds
of
an
importer
who
had
won
and
serviced
the
bid
of
the
Philippine
Council
For
United
States
Aid
(PHILCUSA)
for
the
supply
of
certain
material
which
it
intended
to
give
as
aid
to
the
Philippines.
The
Collector
held
that
Tan
Eng
Hong
"was
acting
as
a
commercial
broker
in
supplying
the
goods"
to
PHILCUSA
under
the
provisions
of
the
then
Tax
Code
which
defined
a
"commercial
broker"
as
including
"all
persons,
other
than
importers,
manufacturers,
producers,
or
bona
fide
employees,
who,
for
compensation
or
profit,
sell
or
bring
about
sales
or
purchases
of
merchandise
for
other
persons,
or
bring
proposed
buyers
and
sellers
together,
or
negotiate
freights
or
other
business
of
owners
of
vessels,
or
other
means
of
transportation,
for
the
shoppers,
or
consignors
or
consignees
of
freight
carried
by
vessels
or
other
means
of
transportation.
The
term
includes
commission
187
merchants."
The
Court
ruled
that
Tan
Eng
Hong
was
not,
in
winning
and
servicing
the
bid
of
PHILCUSA,
acting
as
a
commercial
broker,
for
in
effecting
the
importation
of
the
goods,
"he
was
discharging
his
own,
personal
obligation
as
the
winner
in
the
bidding
called
by
PHILCUSA.
He
imported
the
commodities
not
because
PHILCUSA
has
asked
him
to
but
because
had
obligated
himself
166
18
SCRA
431
(1966).
to/of,
at
p.
434.
167
70
NON-CORPORATE MEDIA OF DOING BUSINESS
to
deliver
the
same
to
PHILCUSA
when
he
participated
and
won
in
the
public
bidding
called
by
the
said
agency.
Tan
Eng
Hong
would
have
been
liable
in
damages
to
PHILCUSA
if
he
had
failed
to
import
the
said
goods
so
that
when
he
carried
out
the
importation,
he
was,
first
and
foremost,
serving
his
own
168
interest
and
no
one
else's."
Moreover,
the
Court
ruled
that
Tan
Eng
Hong
had
contracted
directly
with
PHILCUSA's
foreign
supplier,
and
that
"The
foreign
supplier
and
PHILCUSA
had
no
privity
of
contractual
relations
whatsoever
to
the
end
that
neither
of
them
could
have
had
any
claim
against
each
other
for
whatever
fault
or
breach
Tan
Eng
Hong
might
have
committed
relevant
to
the
transactions
in
dispute.
It
would
indeed
be
quite
difficult
to
sustain
any
assertion
that
Tan
Eng
Hong
was
189
acting
for
and
in
behalf
of
PHILCUSA
or
his
foreign
supplier
or
both."
The
Court
then
reiterated
the
essence
of
the
role
of
a
broker,
thus
The
broker
must
be
the
efficient
agent
or
the
procuring
cause
the
sale.
The
means
employed
by
him
and
his
efforts
must
result
in
the
sale.
He
must
find
the
purchaser,
and
the
sale
must
proceed
from
his
efforts
acting
as
a
broker.
.
.
.This
condition
may
not
be
said
to
obtain
in
the
case
on
hand.
Tan
Eng
Hong
did
not
merely
bring
PHILCUSA
and
his
foreign
supplier
to
come
to
an
agreement
for
the
sale
of
certain
commodities.
It
was
he
himself
who
contracted
with
his
foreign
supplier
for
the
purchase
of
the
said
goods.
If,
for
one
reason
or
another
PHILCUSA
had
refused
to
accept
the
delivery
of
the
said
goods
to
it
by
Tan
Eng
Hong,
the
foreign
supplier
could
not
have
compelled
PHILCUSA
otherwise.
Similarly,
if
somehow
the
foreign
supplier
had
defaulted
in
the
performance
of
its
obligations
to
Tan
Eng
Hong,
PHILCUSA
could
not
have
had
any
action
or
remedy
against
the
said
foreign
supplier.
All
these
indicate
the
distinct
and
independent
personality
of
Tan
Eng
Hong
as
an
importer
and
not
a
commercial
170
broker."
0O0
168
/b/d,
at
p.
435.
lbid,
at
p.
435.
lbid,
at
pp.
435-436.
CHAPTER
2
FORMALITIES
OF
AGENCY
How AGENCY MAY BE CONSTITUTED
ART. 1869. Agency may be express, or implied from the acts of
the principal, from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person is acting on his
behalf without authority.
Agency may be oral, unless the law requires a specific form.
(1710a)
ART. 1870. Acceptance by the agent may also be express, or
implied from his acts which carry out the agency, or from his silence
or inaction according to the circumstances, (n)
The contract of agency, being a consensual contract, is perfected by mere
consent, or merely by the meeting of the minds on the object (service: to enter
into juridical acts on behalf of the principal) and upon the consideration agreed
upon, which primarily is a valuable consideration or may be pure liberality on
the part of the agent. Article 1869 of the New Civil Code emphasizes the
consensual nature of the contract of agency, as it provides that "Agency may be
express, or i m p l i e d . . . may be oral, unless the law requires a specific form."
In Lim v. Court of Appeals,' the Court noted that there are some
provisions of law which require certain formalities for
'254 SCRA 170 (1996).
71
72
NON-CORPORATE MEDIA OF DOING BUSINESS
particular
contracts:
the
first
is
when
the
form
is
required
for
the
validity
of
the
contract;
the
second
is
when
it
is
required
to
make
the
contract
effective
as
against
third
parties
such
as
those
mentioned
in
Articles
1357
and
1358
of
the
New
Civil
Code;
and
the
third
is
when
the
form
is
required
for
the
purpose
of
proving
the
existence
of
the
contract,
such
as
those
provide
in
the
Statute
of
Frauds
in
Article
1403.
Lim
held
that
since
a
contract
of
agency
to
sell
pieces
of
jewelry
on
commission
does
not
fall
into
any
of
the
three
categories,
it
was
considered
valid
and
enforceable
in
whatever
form
it
may
have
been
entered
into.
Lim
also
ruled
that
when
the
agent
signs
her
signature
on
any
face
of
the
receipt
showing
that
she
receives
the
jewelry
for
her
to
sell
on
commission,
she
is
bound
to
the
obligations
of
an
agent.
The
exact
position
of
the
agent's
signature
in
the
receipt
(in
this
case
near
the
description
of
the
goods
and
not
on
top
of
her
printed
name)
was
ruled
immaterial.
2
In contrast, in Bordador v. Luz where absence of the signature of the
purported principle on the receipts covering the delivery of jewelries to the
purported agent was one clear indication to show that the purported principles
never appointed the recipient as their agent, and that no agency relationship
arose between them. The Court held
The basis for agency is representation. Here, there is no
showing that Brigida consented to the acts of Deganos or
authorized him to act on her behalf, much less with respect to the
particular transactions involved. Petitioners' attempt to foist
liability on respondent spouses through the supposed agency
relation with Deganos is groundless and ill-advised. Besides, it was
grossly and inexcusably negligent of petitioners to entrust to
DeganoS, not once or twice but on at least six occasions as
evidenced by six receipts, several pieces of jewelry of substantial
value without requiring a written authorization from his alleged
principal. A person dealing with an agent is put upon inquiry and
3
must discover upon his peril the authority of the agent.
283 SCRA374 (1997).
*lbid, at p. 382.
FORMALITIES OF AGENCY
73
1. Perfection from the Side of the Principal
On the side of the principal, Article 1869 of the New Civil Code provides
that an agency is constituted (i.e., principal has given his consent to the agency
arrangement) from his acts formally adopting it, or from his silence or inaction,
or particularly from his failure to repudiate the agency knowing someone is
acting in his name.
Certainly, the ideal form by which the principal is deemed to have entered
into a contract of agency is when he issues a written power of attorney to the
person designated as agent; nonetheless, there is no requirement that for
agency to arise the same must be in writing, for in fact Article 1869 says it may
be oral or may be deduced from the act of the principle.
4
Equitable
PCI-Bank
v.
Ku,
held
that
an
agency
may
be
express
but
it
may
also
be
implied
from
the
acts
of
the
principal,
from
his
silence,
or
lack
of
action
or
his
failure
to
repudiate
the
agency
knowing
that
another
person
is
acting
on
his
behalf
without
authority.
In
that
case,
the
Court
ruled
that
where
the
law
firm
allowed
the
employee
of
its
client
to
occasionally
receive
its
mail,
and
not
having
formally
objected
to
the
receipt
by
said
employee
of
a
court
process,
or
taken
any
steps
to
put
a
stop
to
it,
it
was
construed
to
mean
that
an
agency
relationship
had
been
established,
to
which
receipt
of
the
court
process
by
said
employee
was
legally
deemed
to
be
service
to
the
law
firm.
5
In Conde v. Court of Appeals, the Court held that when the
buyers-a-retro failed for several years to clear their title to the property
purchased and allowed the seller-a-retro to remain in possession in spite of the
expiration of the period of redemption, then the execution of the memorandum
of repurchase by the buyers' son-in-law, which stood unrepudiated for many
years, constituted an implied agency under Article 1869 of the New Civil Code,
from their silence or lack of action, or their failure to repudiate the agency.
355
SCRA309
(2001).
119SCRA
245
(1982).
5
NON-CORPORATE MEDIA OF DOING BUSINESS
74
2. Perfection from the Side of the Agent
On the side of the agent, Article 1870 of the New Civil Code provides that
his acceptance of the agency {i.e., agent has given his consent to the agency
arrangement) may be express, or implied from his acts which carry out the
agency, or from his silence or inaction according to the circumstances.
Equitable PCI-Bank v. Ku, reiterated the principle that acceptance by the
agent may also be express, although it may also be implied from his acts which
carry out the agency, or from his silence or inaction according to the
circumstances.
One will note that Article 1870 of the New Civil Code has no counterpart
in the old Civil Code; and based on the points raised below, it may be considered
a surplusage at best, and misleading at worse.
Firstly, there seems to be an indication that there is such a thing as
implied acceptance of the appointment on the part of the agent "from acts
which carry out the agency." From a purely transactional point of view, every act
of the agent in pursuance of the agency is never implied, but always express,
because the requirement is that he must enter into a contract "in the name of
the principal." Thus, whenever any agent enters into any contract in pursuance
of the agency, his acceptance of his designation as an agent is never "implied"
nor "presumed," for precisely he enters into such contract clearly in the name of
the principal. In fact, under Article 1898 of the New Civil Code, if an agent enters
into a contract pursuant to the terms of the agency but in his own name, the
contract is deemed to be, insofar as third parties are concerned, that of the
agent in his personal capacity, as the principal is not deemed a party to the
contract.
It may in fact be wrong to presume that the agent has accepted the
appointment, and bound himself to fiduciary duties of diligence and fidelity,
when having not accepted it expressly, he pursues the transaction in his own
name and precisely for his own behalf. There can be no contract of agency
unless both the purported principal and the purported agent give their consent.
355 SCRA 309 (2001).
FORMALITIES OF AGENCY
75
Secondly, there seems to be an indication in Article 1870 that there is such
a thing as implied acceptance of the appointment on the part of the agent "from
his silence or inaction according to the circumstances." Since a contract of
agency is essentially a preparatory contract, which has no commercial
significance of its own without juridical acts being pursued in the name of the
principal, it is hard to imagine that there is constituted a contract of agency by
the mere silence or inaction of the agent. In fact, the proper interpretation of the
silence or inaction of the designated agent is that he has not accepted the
appointment, and that is the reason why he has not acted one way or the other
in pursuance of the terms of the purported agency. But if an agent says nothing
at the time he is appointed, and subsequently goes out into the world and
pursues the agency in the name of the principal, then rather than being an
implied acceptance, the juridical act entered into in the name of the principal is
an express acceptance.
However, the usefulness of providing presumptive rules of implied
acceptance on the part of the agent do serve some commercial end in the sense
that one who accepts an agency is from that time on bound by the fiduciary
duties of diligence and fidelity, such that if the fails to act when the
circumstances required that he should have so acted to protect the interests of
the principal, he can be made liable for breach of duty, and cannot claim later on
that he had not accepted the designation. In the same, manner, it would be
wrong for an agent to take advantage of confidential information or trade
secrets relayed to him by the principal, and in order to avoid liability, he should
claim that he never accepted the appointment since he enter into the
transaction in his own name.
But such policy is not well-served under the broad and all- encompassing
provisions of Article 1870, since the better rule would be that a principal should
never presume that a designated person has accepted the agency by mere
silence so that he should be vigilant in protecting his rights. The subsidiary rules
of implied acceptance on the part of the agency are better laid out in Articles
1871 and 1872 of the New Civil Code for, as discussed immediately hereunder,
the silence or inaction on the part of the agent from a commercial sense would
tend to indicate that indeed such person has accepted his designation as an
agent.
76
NON-CORPORATE MEDIA OF DOING BUSINESS
3. Instances When There Is Deemed to Be Meeting of Minds Between the
Principal and the Agent
ART. 1871. Between persons who are present, the acceptance of
the agency may also be implied if the principal is delivers his power
of attorney to the agent and the latter receives it without any
objection, (n)
ART. 1872. Between persons who are absent, the acceptance of
the agency cannot be implied from the silence of the agent, except:
(1) When the principal transmits his power of attorney to the
agent, who receives it without any objection;
(2) When the 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, (n)
Under
Article
1871
of
the
New
Civil
Code,
which
describes
the
most
ideal
form
evidencing
the
perfection
of
the
contract
of
agency,
when
the
constitution
of
the
agency
is
made
with
both
principal
and
agent
being
physically
present
at
the
time
of
perfection
of
the
contract
of
agency
{i.e.,"Between
persons
who
are
presenf),
the
acceptance
of
the
agency
may
be
implied
if
the
principal
"delivers
his
power
of
attorney"
to
the
agent
and
the
latter"receives
it
without
objection"
On
the
other
hand,
under
Article
1872
of
the
New
Civil
Code,
when
the
constitution
of
the
agency
is
made
with
the
would-be
principal
and
the
would-be
agent
not
being
physically
present
in
one
place
{i.e.,
"Between
persons
who
are
absent'),
then
there
can
be
no
implied
acceptance
of
the
agency
from
the
silence
or
inaction
of
the
agent,
except
in
two
instances:
FORMALITIES OF AGENCY
(a)
When the principal "transmit his power of attorney" to the
agent (i.e., it is in writing or some other form),"who receives it
without any objection;" or
(b)
When the principal entrusts to the agent "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.
77
The
general
principle
laid
out
under
Article
1872
is
that,
other
than
the
two
situations
described
therein,
there
can
be
no
implied
acceptance
from
the
silence
or
inaction
of
the
part
of
the
purported
agent.
The
general
rule
under
Article
1872
of
no
implied
acceptance
on
the
part
of
the
agent,
is
actually
contrary
to
the
implied
acceptance
rule
laid
down
in
Article
1870
that
"Acceptance
by
the
agent
may
also
b e
. .
.
implied
f r o m
. . .
his
silence
or
inaction
according
to
the
circumstances."
According
to
Article
1872,
under
than
the
two
circumstances
laid
out
therein,
courts
should
not
draw
any
conclusion
of
implied
acceptance
on
the
part
of
the
purported
agent
by
his
silence
or
inaction.
As
we
stated
earlier,
it
would
be
better
that
Article
1870
be
deleted
entirely,
as
Article
1872
provides
for
the
better
rule.
The
language
used
in
Articles
1871
and
1872
indicate
that
the
"power
of
attorney"
must
constitute
a
written
instrument,
because
in
both
cases
the
articles
refer
to
situations
where
"the
principal
delivers
his
power
of
attorney
to
the
agent,"
and
when
"the
principal
transmits
his
power
of
attorney
to
the
agent,"
which
require
that
it
must
be
in
writing,
which
today
would
include
electronic
document
and
electronic
mail,
which
are
considered
to
be
equivalent
to
a
written
instrument
under
the
Electronic
Commerce
Law.
Consequently,
when
the
other
provisions
of
the
Law
on
Agency
refer
to
"general
power
of
attorney"
and
"special
power
of
attorney,"
does
the
law
mean
that
they
conform
to
the
rudimentary
requirement
that
they
be
in
writing
and
signed
by
the
principal?
We
will
address
this
issue
in
the
instances
covered
below.
78
NON-CORPORATE MEDIA OF DOING BUSINESS
PERFECTION OF THE CONTRACT OF AGENCY As IT AFFECTS THIRD PERSONS
ART. 1873. If a person specially informs another or states by
public advertisement that he has given a power of attorney to a third
person, the latter thereby becomes a duly authorized agent, in the
former case with respect to the person who received the special
information, and in the latter case with regard to any person.
ART. 1922. If the agent had general powers, revocation of the
agency does not prejudice third persons who acted in good faith and
without knowledge of the revocation. Notice of the revocation in a
newspaper of general circulation is a sufficient warning to third
persons, (n)
The power shall continue to be in full force until the notice is
rescinded in the same manner in which it was given, (n)
ART. 1921. If the agency has been entrusted for the purpose of
contracting with specified persons, its revocation shall not prejudice
the latter if they were not given notice thereof. (1734)
The previous rules on when a contract of agency is deemed constituted
(i.e., perfected) are taken from the intramural point of view: as between the
parties to the contract of agency. However, a contract of agency is merely a
preparatory contract, and is meant to achieve goals beyond "its own being;"
consequently, the Law on Agency contained in the New Civil Code provides for
additional rules that address most essentially the target of every contract of
agency: the third parties intended to be contracted with by the agent in behalf
of the principal.
Under Article 1873 of the New Civil Code, when the principal informs
another person that he has given a power of attorney
FORMALITIES OF AGENCY
79
to
a
third
person
(the
agent),
the
latter
thereby
becomes
a
duly
authorized
agent
with
respect
to
the
person
who
received
the
special
information.
The
clear
implication
of
the
provision
is
that
even
when
in
fact
there
has
been
no
meeting
of
the
minds
between
the
purported
principal
and
agent
(i.e.,
there
is
strictly
speaking
no
contract
of
agency),
there
is
deemed
to
have
arisen
one
with
respect
to
the
third
party
who
has
been
so
informed
by
the
principal
in
all
contracts
entered
into
with
the
purported
agent
in
the
name
of
the
principal.
On
the
other
hand,
when
the
principal
states
by
public
advertisement
that
he
has
given
a
power
of
attorney
to
a
particular
individual
(the
agent),
the
latter
thereby
becomes
a
duly
authorized
agent
with
regard
to
any
person.
And
it
is
specifically
provided
in
said
article
that
"The
power
[of
the
agent]
shall
continue
to
be
in
full
force
until
the
notice
is
rescinded
in
the
same
manner
in
which
it
was
given."
Both
of
the
scenarios
immediately
discussed
above
would
presume
that
ultimately
the
agent
would
have
accepted
the
designation
of
the
principal,
for
it
must
come
to
pass
that
he
enters
into
contracts
with
such
third
parties
in
the
name
of
the
principal.
Also,
the
rules
on
constitution
of
agency
as
regards
third
parties,
must
be
consistent
with
the
rules
providing
for
their
revocation.
Thus,
under
Article
1921
of
the
New
Civil
Code,
if
the
agency
has
been
entrusted
for
the
purpose
of
contracting
with
specific
persons
(referred
to
as
"special
agency"),
the
revocation
of
the
agency
shall
not
prejudice
the
latter
if
they
were
not
given
notice
thereof.
Under
Article
1922,
if
the
agent
had
been
granted
general
powers
(referred
to
as
"general
agency"),
the
revocation
of
the
agency
will
not
prejudice
third
persons
who
acted
in
good
faith
and
without
knowledge
of
the
revocation;
however,
notice
of
the
revocation
in
a
newspaper
of
general
circulation
constitutes
sufficient
notice
to
bind
third
persons.
7
In Rallos v. Yangco, the Court held that a long-standing client, acting in
good faith and without knowledge, having
20 Phil. 269 (1911).
80
NON-CORPORATE MEDIA OF DOING BUSINESS
sent
goods
to
sell
on
commission
to
the
former
agent
of
the
defendant,
could
recover
from
the
defendant,
when
no
previous
notice
of
the
termination
of
agency
was
given
said
client.
The
Court
emphasized
that
having
advertised
the
fact
that
Collantes
was
his
agent
and
having
given
special
notice
to
the
plaintiff
of
that
fact,
and
having
given
them
a
special
invitation
to
deal
with
such
agent,
it
was
the
duty
of
the
defendant
on
the
termination
of
the
relationship
of
principal
and
agent
to
give
due
and
timely
notice
thereof
to
the
plaintiffs.
Failing
to
do
so,
the
defendant
was
held
responsible
to
them
for
whatever
goods
may
have
been
in
good
faith
and
without
negligence
sent
to
the
agent
without
knowledge,
actual
or
constructive,
of
the
termination
of
such
relationship.
In
Conde
v.
Court
of
Appeals*
the
Court
held
that
when
the
right
of
redemption
by
sellers-a-refro
is
exercised
by
their
son-in-
law
who
was
given
no
express
authority
to
do
so,
and
the
buyer-
a-retro
accepted
the
exercise
and
done
nothing
for
the
next
ten
years
to
clear
their
title
of
the
annotated
right
of
repurchase
on
their
title,
and
possession
had
been
given
to
the
sellers-a-retro
during
the
same
period,
then
"an
implied
agency
must
be
held
to
have
been
created
from
their
silence
or
lack
of
action,
or
their
failure
to
repudiate
the
agency."
1.
Rules
on
the
Existence
of
Agency,
As
to
Third
Parties
Are
Concerned
Although
an
agency
contract
is
consensual
in
nature
and
generally
requires
no
formality
to
be
perfected,
valid
and
binding,
the
Supreme
Court
has
9
stressed
in
Lopez
v.
Tan
7/oco,
that
an
agency
arrangement
is
never
presumed.
10
In People v. Yabut, the Court held that although the perfection of a
contract of agency may take an implied form, the existence of an agency
relationship is never presumed. The relationship of principal and agent cannot
be inferred from mere family relationship; for the relation to exist, there must
be consent
119SCRA
245
(1982).
8
Phil.
693
(1907).
10
76
SCRA
624
(1977).
9
FORMALITIES OF AGENCY
81
by
both
parties.
The
law
makes
no
presumption
of
agency;
it
must
exist
as
a
fact.
This
principle
was
reiterated
in
Lim
v.
Court
of
Appeals."
12
In
Harry
E.
Keeler
Electric
Co.
v.
Rodriguez,
the
Court
ruled
that
a
third
person
must
act
with
ordinary
prudence
and
reasonable
diligence
to
ascertain
whether
the
agent
is
acting
and
dealing
with
him
within
the
scope
of
his
powers.
Obviously,
if
he
knows
or
has
good
reason
to
believe
that
the
agent
is
exceeding
his
authority,
he
cannot
claim
protection.
So,
if
the
character
assumed
by
the
agent
is
of
such
a
suspicious
or
unreasonable
nature,
or
if
the
authority
which
he
seeks
is
of
such
an
unusual
or
improbable
character,
as
would
suffice
to
put
an
ordinarily
prudent
man
upon
his
guard,
the
party
dealing
with
him
may
not
shut
his
eyes
to
the
real
state
of
the
case
but
should
withal
refuse
to
deal
with
the
agent
at
all,
or
should
ascertain
from
the
principal
the
true
condition
of
affairs.
13
In Compania Maritima v. Limson, the Court held that the declaration of
one that he is an agent of another is never to be accepted at face value, except in
those cases where an agency arises by express provision of law.
4
In
Dizon
v.
Court
of
Appeals,'
the
Court
held
that
a
co-owner
does
not
become
an
agent
of
the
other
co-owners,
and
therefore,
any
exercise
of
an
option
to
buy
a
piece
of
land
transacted
with
one
co-owner
does
not
bind
the
other
co-owners
of
the
land.
The
Court
held
that
the
basis
for
agency
is
representation
and
a
person
dealing
with
an
agent
is
put
upon
inquiry
and
must
discover
upon
his
peril
the
authority
of
the
agent.
Since
there
was
no
showing
that
the
other
co-owners
consented
to
the
act
of
one
co-owner
nor
authorized
her
to
act
on
their
behalf
with
regard
to
her
transaction
with
purported
buyer.
The
most
prudent
thing
the
purported
buyer
should
have
done
was
to
ascertain
the
extent
of
the
authority
said
co-owner;
being
negligent
in
this
regard,
the
"251 SCRA 408
12
(1995).
44 Phil. 19(1922).
"
1
4
1
S
C
R
A
4
0
7
82
NON-CORPORATE MEDIA OF DOING BUSINESS
purported buyer cannot seek relief on the basis of a supposed agency.
On the other hand, Article 1873 of the New Civil Code provides that the
declaration of a person that he has appointed another as his agent is deemed to
have constituted the person alluded to as an agent (even when the designated
person is at that point unaware of his designation as agent), insofar as the
person to whom such declaration has been made. What is clear therefore is that
third parties must never take the words or representation of the purported
agent at face value; they are mandated to apprise themselves of the
commission and extent of powers of the purported agent. On the other hand,
third parties (to the contract of agency) can take the word, declaration and
representation of the purported principal with respect to the appointment and
extent of powers of the purported agent. The principle is self-evident from the
nature of agency as a relation of representation - that an agent acts as though
he were the principal - and therefore if the principal himself says so, then it is
taken at face value as a contractual commitment.
a. Agency by Estoppel
ART. 1873. If a person specially informs another or states by
public advertisement that the has given a power of attorney to a
third person, the latter thereby becomes a duly authorized agent, in
the former case with respect to the person who received the special
information, and in the latter case with regard to any person.
The power shall continue to be in full force until the notice is
rescinded in the same manner in which it was given, (n)
ART. 1911. 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, (n)
FORMALITIES OF AGENCY
83
Under
Article
1873
of
the
New
Civil
Code,
if
a
person
specially
informs
another
or
states
by
public
advertisement
that
he
has
given
a
power
of
attorney
to
a
third
person,
the
latter
thereby
becomes
a
duly
authorized
agent,
even
if
previously
there
was
never
a
meeting
of
minds
between
them.
Under
Article
1911
of
the
New
Civil
Code,
even
when
the
agent
has
exceeded
his
authority
(i.e.,
he
acts
without
authority
from
the
principal),
the
principal
shall
be
held
solidarity
liable
with
the
agent
if
he
allowed
the
agent
to
act
as
though
he
had
full
powers.
In
Macke
v.
Camps*
where
the
owner
of
a
hotel/cafe
business
allowed
a
person
to
use
the
title
"managing
agent"
and
during
his
prolonged
absences
allowed
such
person
to
take
charge
of
the
business,
performing
the
duties
usually
entrusted
to
managing
agent,
then
such
owner
was
held
bound
by
the
acts
of
such
person.
The
Court
held
that:
One
who
clothes
another
apparent
authority
as
his
agent,
and
holds
him
out
to
the
public
as
such,
can
not
be
permitted
to
deny
the
authority
of
such
person
to
act
as
his
agent,
to
the
prejudice
of
innocent
third
parties
dealing
with
such
person
in
good
faith
and
in
the
following
pre-assumptions
or
deductions,
which
the
law
expressly
directs
to
be
made
from
particular
facts,
are
deemed
16
conclusive.
The
hotel
owner
was
deemed
bound
by
the
contracts
entered
into
by
said
managing
agent
that
were
within
the
scope
of
authority
pertinent
to
such
position,
including
the
purchasing
such
reasonable
quantities
of
supplies
as
might
from
time
to
time
be
necessary
in
carrying
on
the
business
of
hotel
bar.
This
is
also
consistent
with
the
principal
that
an
agent
given
general
power
of
attorney
to
manage
a
particular
business,
has
full
powers
to
pursue
any
and
all
transactions
that
are
deemed
to
be
in
the
ordinary
course
of
that
business.
1S
7
Phil.
553
(1907).
at
p.
lbid,
555.
84
NON-CORPORATE MEDIA OF DOING BUSINESS
In
De
la
Pena
v.
Hidalgoit
was
held
that
when
a
person
who
took
charge
of
the
administration
of
property
without
express
authorization
and
without
a
power
of
attorney
executed
by
the
owner
thereof,
and
performed
the
duties
of
his
office
without
opposition
or
absolute
prohibition
on
the
owner's
part,
expressly
communicated
to
the
said
person,
is
concluded
to
have
administered
the
said
property
by
virtue
of
an
implied
agency,
in
accordance
with
the
provisions
of
Article
1710
of
the
old
Civil
Code
(now
Art.
1869
of
the
New
Civil
Code),
since
the
said
owner
of
the
property,
knowing
perfectly
well
that
the
said
person
took
charge
of
the
administration
of
the
same,
through
designation
by
such
owner's
former
agent
who
had
to
absent
himself
from
the
place
for
well-founded
reasons,
remained
silent
for
nearly
nine
years.
Although
the
owner
did
not
send
a
new
power
of
attorney
to
the
said
person
who
took
charge
of
his
property,
the
fact
remained
that,
during
the
period
stated,
he
neither
opposed
nor
prohibited
the
new
agent
with
respect
to
the
administration,
nor
did
he
appoint
another
person
in
his
confidence.
Wherefore
the
Court
held
that
it
must
be
concluded
that
this
new
agent
acted
by
virtue
of
an
implied
agency,
equivalent
to
a
legitimate
agency,
tacitly
conferred
by
the
owner
of
the
property
administered.
Central
Surety
&
Insurance
Co.
v.
C.N.
Hodges,
held
that
by
the
opening
of
branch
office
with
the
appointment
of
its
branch
manager
and
honoring
several
surety
bonds
issued
in
its
behalf,
the
insurance
company
induced
the
public
to
believe
that
its
branch
manager
had
authority
to
issue
such
bonds.
As
a
consequence,
the
insurance
company
was
estopped
from
pleading,
particularly
against
a
regular
customer
thereof,
that
the
branch
manager
had
no
authority.
18
In Naguiat v. Court of Appeals, the Court applied the provisions of
Article 1873 of the New Civil Code to rule that if by the interaction between a
purported principal and a purported agent in the presence of a third person, the
latter was given the impression of the existence of a principal-agency relation,
and
"16 Phil. 450 (1910).
"38 SCRA 159 (1971).
"412 SCRA 592 (2003).
FORMALITIES OF AGENCY
85
the
purported
principal
did
nothing
to
correct
the
third
person's
impression,
an
"agency
by
estoppel
is
deemed
to
have
been
constituted,
and
the
rule
is
clear:
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
to
act
as
his
agent,
to
the
prejudice
of
innocent
third
parties
dealing
with
such
person
in
good
faith,
and
in
the
honest
belief
that
he
is
what
he
appears
to
20
be."
2
In
Litonjua,
Jr.
v.
Eternit
Corp., '
the
Court
held
that
for
an
agency
by
estoppel
to
exist,
the
following
must
be
established:
(a) the
principal
manifested
a
representation
of
the
agent's authority or knowingly allowed the agent
to assume such authority;
(b) the third person, in good faith, relied upon such
representation;
(c) relying upon such representation, such third person
has changed his position to his detriment.
An agency by estoppel, which is similar to the doctrine of apparent
authority, requires proof of reliance upon the representations, and that, in turn,
needs proof that the representations predated the action taken in reliance.
Looking at both the statutory provisions and jurisprudence, one begins to
wonder whether there is indeed such a thing as an "agency by estoppel," for in
the end it covers merely the formation of an agency by implied consent by either
or both the purported principal and the purported agent, in that even when
there was no previous meeting of minds between the two to formally constitute
an agency, the pursuit of juridical acts with third parties in the name of the
principal, with knowledge of the principal, would constitute a meeting of the
minds (not a mere estoppel) as consent is defined under Articles 1869 and 1870
of the New Civil Code: that "Agency may be express, or implied,"
lbid,
at
p.
599.
21
490
SCRA
204
(2006).
86
NON-CORPORATE MEDIA OF DOING BUSINESS
from
the
acts
of
the
principal
and/or
the
agent
which
carry
out
the
agency,
or
from
the
silence
or
inaction
of
the
principal
"knowing
that
another
person
is
acting
on
his
behalf
without
authority."
The
foregoing
discussions
emphasize
the
fact
that
the
contract
of
agency
is
merely
a
preparatory
contract,
with
the
main
objective
of
the
agent
being
able
to
enter
into
valid,
binding
and
enforceable
contracts
with
third
parties
in
the
name
of
the
principal
and
within
the
scope
of
authority;
and
that
when
such
juridical
acts
are
indeed
entered
into
with
third
parties
who
act
in
good
faith
(i.e.,
due
diligence),
the
contract
of
agency
is
deemed
to
have
been
duly
constituted
ex
post
facto.
FORMAL REQUIREMENTS ON GRANT OF POWERS TO THE AGENT
While the preceding sections discussed the rules on how a contract of
agency is constituted (i.e., perfected into a valid and binding legal relationship),
the succeeding sections will discuss the rules that govern the extent of power
granted to the agent once the agency relationship is established. The discussions
are therefore based on the premise that even when an agent has been duly
appointed by the principal, such agent must still act "within the scope of his
authority" in order to make the resulting juridical acts entered into in the name
of the principal, valid and binding on the latter. This is consistent with the duty
of obedience owed by the agent to the principal.
1. General Principles on Contracts Entered into by Agents
It should be recalled that since a contract of agency is a preparatory and
representative contract, then it gives rise to a host of juridical acts or contracts
that are entered into in representation of one or both parties to the contract
(when both parties are represented by agents). The rules pertaining to such
contracts also delve on the sufficiency or insufficiency of authority of the
representative or that such representative acted beyond the scope of his
authority. The issues fall within those types of
FORMALITIES OF AGENCY
87
contracts that are "unenforceable," rather than void, as provided in Articles
1317 and 1403 of the New Civil Code, thus:
ART. 1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right to
represent him.
A contract entered into in the name of another by one who has
no authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party. (1259a)
ART. 1403. The following contracts are unenforceable, unless
they are ratified:
(1) Those entered into in the name of another person by one
who has been given no authority or legal representation, or who has
acted beyond his powers;
x x x .
A careful consideration of the formal requirements pertaining to
contracts of agency, and issues relating to the powers of agents to enter into
contracts in the name of the principle, go into issues of "enforceability," and not
into issues of "nullity." Of course from the point of view of the principal a
contract that has been entered in his name by another without consent or
outside the scope of authority is non-existent or void (and the law uses such
term when referring to the principal), but from the point of view of the courts
looking at the contract, the same is not void but actually unenforceable.
2. General Powers of Attorney
ART. 1877. An agency couched in general terms
comprises only acts of administration, even if
the principal should state that he withholds no
88
NON-CORPORATE MEDIA OF DOING BUSINESS
power
or
that
the
agent
may
execute
such
acts
as
he
may
consider
appropriate,
or
even
though
the
agency
should
authorize
a
general
and
unlimited
management,
(n)
As long as the agency relationship exists, then in the
absence of the grant of special power of attorney to the agent,
he is deemed to have been extended only a general power
of attorney by the principal, and his powers cover only acts of
administration. Thus, under Article 1877 of the New Civil Code, it
is provided that every agency couched in general terms can only
be construed as granting to the agent the power to execute acts
of administration, even if the principal:
(a)
States that he withholds no power from the agent;
(b)
States that the agent may execute acts he con-
siders appropriate; or
(c)
Authorizes general and unlimited management:
The term "acts of administration" has the same commercial
and legal significance as "to act in the ordinary course of
business," which is a commercial test of what can be expected to
confront the owner of the business (i.e., the principal) on the day-
to-day running of the affairs of the business enterprise, and which
is something that he would leave to an agent. What constitutes
an act, transaction or contract that is within the "ordinary course
of business," is determined by the nature of the business itself
that has been given under the administration of the agent: If
the act, transaction or contract in question is a matter that from
the nature of the business is expected to occur and for which
action is expected without much changing the course of the
business, then it is a mere act of administration. On the other
hand, if the act, transaction or contract in contemplation is of a
nature, considering the business being managed, as something
that is not expected to happen or decided upon in the day-to-
day affairs, then it would constitute an act of ownership or strict
dominion, one which is extraordinary, not in the ordinary course
of business.
FORMALITIES OF AGENCY
89
In one of the earliest cases decided by the Philippine Supreme Court on
22
the matter, Germann & Co. v. Donaldson, Sim & Co., it held that when the
agent is given a written power of attorney to be the manager of the Manila
branch of the principals business, "with the same general authority with
reference to its conduct which his principal would himself possess if he were
personally directing it," the powers granted included the power to bring suit to
recover sums due the business, for "It cannot be reasonably supposed, in the
absence of very clear language to that effect, that it was the intention of the
principal to withhold from his agent a power so essential to the efficient
management of the business entrusted to his control as that to sue for the
23
collection of debts." The Court held
We should not be inclined to regard the institution of a suit
like the present, which appears to be brought to collect a claim
accruing in the ordinary course of the plaintiffs business, as
properly belonging to the class of acts described in Article 1713
[now Art. 1880] of the Civil Code as acts "of strict ownership." It
seems rather to be something which is necessarily a part of the
mere administration of such a business as that described in the
instrument in question and only incidentally, if at all, involving a
power to dispose of the title to property.
. . . The main object of the instrument is clearly to make
Kammerzell the manager of the Manila branch of the plaintiffs
business, with the same general authority with reference to its
conduct which his principal would himself possess if he were
personally directing it. It can not be reasonably supposed, in the
absence of very clear language to that effect, that it was the
intention of the principal to withhold from his agent a power so
essential to the efficient management of the business entrusted to
24
his control as that to sue for the collection of debts.
The rationale for the afore-quoted ruling no longer holds true under
Article 1877 of the New Civil Code which provides
22
1
Phil.
63
(1901).
lbid,
at
pp.
65-66.
at
pp.
"Ibid,
65-66.
23
90
NON-CORPORATE MEDIA OF DOING BUSINESS
that "An agency couched in general terms comprises only acts of
administration, even if the principal should state that he withholds no power
or that the agent may execute such acts as he may consider appropriate, or
even though the agency should authorize a general and unlimited
management." Today, the power to sue is considered a power of "strict
ownership." In any event, the Germann & Co. decision did find that the written
instrument expressly authorized the agent to "exact the payment of sums of
25
money by legal means," which was construed to be an express power to sue.
28
In
Yu
Chuck
v.
Kong
Li
Po,
it
was
held
that
an
officer
who
has
control
and
management
of
the
corporation's
business,
or
a
specific
part
thereof,
is
deemed
to
have
power
to
employ
such
agents
and
employees
as
are
usual
and
necessary
in
the
conduct
of
the
corporation's
business,
except
only
where
such
authority
is
expressly
vested
in
the
Board
of
Directors.
Therefore,
the
manager
of
the
business
enterprise
does
not
need
a
special
power
of
attorney
to
validly
employ
personnel.
3.
Must
Powers
of
Attorney
Be
In
Writing
for
the
Juridical
Acts
Executed
Pursuant
Thereto
to
Be
Valid
and
Enforceable?
The
discussions
hereunder
are
premised
on
the
fact
that
the
purported
principal
in
the
contracts
that
have
been
entered
into
in
his
name
alleges
that
the
agent
was
never
appointed
or
that
such
agent
acted
beyond
the
scope
of
his
authority.
The
issues
relating
to
the
extent
of
the
power
and
authority
of
the
agent,
and
the
nature
of
the
evidence
required
to
prove
the
same,
should
arise
only
when
the
purported
principal
denies
being
bound
by
the
contracts
entered
into
by
the
agent
with
third
parties.
Indeed,
even
if
in
fact
the
agent
acted
without
or
in
excess
of
authority,
or
there
is
no
reasonable
to
prove
the
extent
of
his
power
and
authority,
if
the
principal
accepts
or
ratifies
the
contract,
then
there
is
no
issue
to
be
resolved.
Every
unenforceable
contract
is
25
lbid, pp. 65-66.
46 Phil. 608
(1924).
28
FORMALITIES OF AGENCY
91
subject to ratification, which cleanses it of all defects as though it was perfected
without flaws.
We begin discussion on this section by quoting from a portion of the
decision in Bordador v. Luz? where the Court held
The basis for agency is representation. Here, there is no
showing that Brigida consented to the acts of Deganos or
authorized him to act on her behalf, much less with respect to the
particular transactions i n v o l v e d . . .
Besides, it was grossly and inexcusably negligent of petitioners
to entrust to Deganos, not once or twice but on at least six
occasions as evidenced by six receipts, several pieces of jewelry of
substantial value without requiring a written authorization from
his alleged principal. A person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the
2
agent." *
Bordador reiterates a principle in Agency Law, that every person dealing
with an agent is duty bound to determine the extent of such agent's authority.
In other words, a third party is bound to exercise due diligence in determining
the extent of authority of the agent to bind his principal. A third party who does
not exercise that modicum of diligence is deemed not to be dealing in good
faith and he cannot enforce the contract against the principal who has given no
such authority to the agent. The first exception to this rule of course, as
discussed previously, is that every agent is deemed granted with authority to
bind the principal for acts of administration.
In addition, Bordador puts forth the minimum requirement on how such
third party shall be deemed to have acted with due diligence: he must demand
a written authority coming from the principal; otherwise, it would be "grossly
and inexcusably negligent" for such third party to enter into a contract with
such agent "without a written authorization from his alleged principal."
"283 SCRA 374 (1997).
26
lbid, at p. 382; italics
supplied.
92
NON-CORPORATE MEDIA OF DOING BUSINESS
That a power of attorney be in writing seems to be more critical to the
constitution of a special power of attorney, than to a general power of attorney.
In both types of agencies, because of the absence of a written evidence, the
burden of proof to show that there was indeed a contract of agency and the
extent of the power and authority of the agent is on the part of the person who
purports to act for and in behalf of a principal, and even then third parties are
directed to ensure the nature and extent of the agent's power.
When what was constituted was a general power of attorney, it covers
merely acts of administration, and therefore third parties would be less wary
that the contract or transaction they entered into is not within the powers of the
agent, especially when it is one which is in the ordinary course of business. On
the other hand, when what was constituted was an oral special power of
attorney, then lacking the written evidence of what particular power of
ownership has been granted to the agent, the third party may only reasonably
presume that the agent is granted powers of administration.
Article 1878 of the New Civil Code provides that a special power of
attorney is necessary to confer power in the agency that would constitute acts
of ownership; ideally the agency contract must be in writing. When therefore a
special power of attorney, or the conferment of powers to the agent to execute
acts of strict ownership on behalf of the principal, is done orally, the agency
relationship may be valid as between the principal and agent, but that third
parties who deal with him must require written evidence of his power to
execute acts of strict ownership, otherwise, they are bound to enter into the
contract at their own risk.
29
In
Home
Insurance
Co.
v.
United
States
Lines
Co.,
the
Court
held
that
Article
1878
does
not
state
that
the
special
power
of
attorney
be
in
writing;
be
that
as
it
may,
the
same
must
be
duly
established
by
evidence
other
than
the
self-serving
assertion
of
the
party
claiming
that
such
authority
was
verbally
given
him.
21 SCRA 863 (1967).
FORMALITIES OF AGENCY
93
In Home Insurance Co., in spite of counsel's assurance that he had verbal
authority to enter into compromise for purpose of pre-trial proceedings, the
Rules of Court require for attorneys to compromise the litigation of their clients a
"special authority" (then Section 23, Rule 138, Rules of Court):
And while the same does not state that the special authority
must be in writing, the court has every reason to expect that, if not
in writing, the same be duly established by evidence other than the
self-serving assertion of counsel himself that such authority was
verbally given h i m . . . . For authority to compromise cannot lightly
be presumed. And if, with good reason, the judge is not satisfied
that said authority exists, as in this case, dismissal of the suit for
30
non-appearance of plaintiff in pre-trial is sanctioned by the Rules.
3
In
Veloso
v.
Court
of
Appeals, '
the
Court
ruled
that
although
in
Barretto
32
v.
Tuason,
it
was
held
that
there
is
no
requirement
that
the
power
of
attorney
to
be
valid
and
binding
must
be
notarized
or
in
a
public
instrument,
nonetheless,
a
notarized
power
of
attorney
carries
the
evidentiary
weight
conferred
upon
it
with
respect
to
its
due
execution.
Therefore,
outside
of
Article
1874
which
renders
the
sale
of
a
piece
of
land
void
if
the
power
of
attorney
is
not
in
writing,
every
contract
entered
into
by
the
agent
on
behalf
of
the
principal
covering
acts
of
ownership
made
pursuant
to
a
verbal
special
power
of
attorney
would
not
be
void,
but
rather
unenforceable,
for
the
principal
has
every
authority
to
pursue
the
resulting
contract,
and
the
third-party
would
be
estopped
from
refusing
to
comply
with
a
contract
he
willingly
entered
into
absent
the
written
authority
of
the
agent.
mid,
at
p.
866.
31
260
SCRA
593
M
(1996).
59
Phil.
845
(1934).
94
NON-CORPORATE MEDIA OF DOING BUSINESS
In Linan v. Punothe Court laid down the general rules on construction or
interpretation of written contracts of agency, thus
Contracts of agency as well as general powers of attorney must
be interpreted in accordance with the language used by the parties.
The real intention of the parties is primarily to be determined from
the language used. The intention is to be gathered from the whole
instrument. In case of doubt resort must be had to the situation,
surroundings and relations of the parties. Whenever it is possible,
effect is to be given to every word and clause used by the parties. It
is to be presumed that the parties said what they intended to say
and that they used each word or clause with some purpose and that
purpose is, if possible, to be ascertained and enforced. The
intention of the parties must be sustained rather than defeated. If
the contract be open to two constructions, one of which would
uphold while the other would overthrow it, the former is to be
chosen. So, if by one construction the contract would be illegal, and
by another equally permissible construction it would be lawful, the
latter must be adopted. The acts of the parties in carrying out the
contract will be presumed to be done in good faith. The acts of the
parties will be presumed to have been done in conformity with and
not contrary to the intent of the contract. The meaning of general
words must be construed with reference to the specific object to be
accomplished and limited by the recitals made in reference to such
34
object.
In Linan, the Court held that the written power of attorney whereby the
agent was appointed so that "he may administer the interest I possess within
this municipality of Tarlac, purchase, sell, collect and pay, as well as sue and be
sued before any authority, appear before the courts of justice and
administrative officers in any proceedings or business concerning the good
administration and advancement my interest, and may, in necessary cases,
appoint attorneys at law or attorneys in fact to
"31 Phil. 259
(1915).
"Ibid, at pp.
262-263.
FORMALITIES OF AGENCY
95
35
represent
him,"
was
deemed
to
have
authorized
the
agent
to
validly
sell
a
piece
of
land
situated
in
the
place
designated
by
the
principal,
holding
that
. . .
The
words
"administer,
purchase,
sell,"
etc.
seem
to
be
used
coordinately.
Each
has
equal
force
with
the
other.
There
seems
to
be
no
good
reason
for
saying
that
Puno
had
authority
to
administer
and
not
to
sell
when
"to
sell"
was
an
advantageous
to
the
plaintiff
in
the
administration
of
his
affairs
as
"to
administer."
To
hold
that
the
power
was
"to
administer"
only
when
the
power
"to
sell"
was
equally
conferred
would
be
to
give
effect
to
a
portion
of
the
contract
only.
That
would
give
to
special
powers
of
the
contract
a
special
and
limited
meaning
to
the
exclusion
of
other
36
general
words
of
equal
import.
The
lesson
learned
from
Linan
is
that
in
a
power
of
attorney
where
the
intention
of
the
principal
is
only
to
confer
powers
of
administration,
it
would
be
dangerous
to
use
words
that
have
always
been
associated
with
powers
of
strict
dominion,
such
as
"to
sell,"
"to
purchase,"
"to
borrow,"
"to
mortgage,"
etc.
Subsequent
to
the
Linan
decision,
the
rules
of
construction
or
interpretation
of
contracts
of
agency
have
taken
a
stricter
route.
Today,
the
rule
is
that
whether
what
is
granted
is
an
authority
to
merely
administer
(general
power
of
attorney),
or
to
do
an
act
of
strict
ownership
(special
power
of
attorney),
is
not
determined
from
the
title
given
to
the
instrument,
but
on
the
nature
of
the
power
given
under
the
operative
provisions
of
such
instrument.
When
what
is
granted
to
the
agent
is
entitled
a
"general
power
of
attorney"
or
a
"special
power
of
attorney,"
the
rule
of
strict
construction
still
prevails,
thus:
37
Olaguer v. Purugganan, Jr. Even when a special power of
attorney is granted by the principal to his agent, it is still the
general rule that a power of
^Ibid, at p. 260; emphasis
supplied.
mid, at p. 263.
37
515 SCRA 460 (2007).
96
NON-CORPORATE MEDIA OF DOING BUSINESS
attorney must be strictly construed; the instrument will be
held to grant only those powers that are specified, and the
agent may neither go beyond nor deviate from the power of
attorney.
Woodchild Holdings, Inc. v. Roxas Electric & Construction Co.,
3
Inc.: * Powers of attorney are generally construed strictly
and courts will not infer or presume broad powers from
deeds which do not sufficiently include property or subject
under which the agent is to deal. The act done must be
legally identical with that authorized to be done.
Litonjua v. Fernandezciting Yu Eng Cho v. Pan American
40
World Airways, Inc. : The declaration of the agent alone is
generally insufficient to establish the fact or extent of her
authority. The settled rule is that persons dealing with an
assumed agent are bound at their peril, and if they would
hold the principal liable to ascertain not only the fact of
agency but also the nature and extent of authority, and in
case either is controverted, the burden of proof is upon them
to prove it.
1
In Pineda v. Court of Appeals* where the beneficiaries in a group insurance
had executed a pro-forma "Special Power of Attorney" in favor of Capt. Nuval
giving him the power "To follow- up, ask, demand, collect and receipt for my
benefit indemnities or sum of money due me relative to the sinking of M.V.
NEMOS, in the vicinity of El Jadida, Casablance, Morrocco on the evening of
February 17,1986," it was held not sufficient to have granted the agent the
power to collect from the insurance company the proceeds coming from the
group insurance taken out by the employer. The Court held the insurance
company grossly negligent for having paid the proceeds of the group insurance
436 SCRA 235
(2004).
427 SCRA 478
*328 SCRA 717
(2004).
41
(2000).
226 SCRA 754
(1993).
39
FORMALITIES OF AGENCY
97
to
Capt.
Nuval,
especially
when
the
commercial
practice
for
group
insurance,
and
the
terms
of
the
insurance
policy,
is
to
the
effect
that
it
is
the
employer
who
is
deemed
the
agent
for
the
beneficiaries,
thus
We
agree
with
the
Insurance
Commission
that
the
special
powers
of
attorney
"do
not
contain
unequivocal
and
clear
terms
authority
to
Capt.
Nuval
to
obtain,
receive,
receipt
from
respondent
company
insurance
proceeds
arising
from
the
death
of
the
seaman-insured.
On
the
contrary,
the
said
powers
of
attorney
are
couched
in
terms
which
could
easily
arouse
suspicion
of
an
42
ordinary
man."
x
x
x.
Certainly,
it
would
be
highly
imprudent
to
read
into
the
special
powers
of
attorney
in
question
the
power
to
collect
and
receive
the
insurance
proceeds
due
to
the
petitioners
from
Group
Policy
No.
G-004694.
Insular
Life
knew
that
a
power
of
attorney
in
favor
of
Capt.
Nuval
for
the
collection
and
receipt
of
such
proceeds
was
a
n43
deviation
from
its
practice
with
respect
to
group
policies..
.
The
Court
held
in
Pineda
that
the
instruments
were
denominated
as
"Special
Power
of
Attorney,"
and
consequently
"The
execution
by
the
principals
of
special
powers
of
attorney,
which
clearly
appeared
to
be
in
prepared
forms
and
only
had
to
be
filled
up
with
their
names,
residences,
dates
of
execution,
dates
of
acknowledgment
and
others,
excludes
any
intent
to
grant
a
general
power
of
attorney
or
to
constitute
a
universal
agency.
Being
special
powers
of
44
attorney,
they
must
be
strictly
construed."
5
Only recently, in Wee v. De Castro,* the Court defined a "power of
attorney" to essentially be an "instrument"
A power of attorney is an instrument in writing by which one
person, as principal, appoints another as his
42
Ibid,
at
p.
762.
"Ibid,
at
p.
763.
"Ibid,
at
pp.
45
762-
562
7S63.
CRA
695
(2008).
98
NON-CORPORATE MEDIA OF DOING BUSINESS
agent and confers upon him the authority to perform certain
specified acts or kinds of acts on behalf of the principal. The
written authorization itself is the power of attorney, and this is
clearly indicated by the fact that it has also been called a "letter of
46
attorney."
4. Special Powers of Attorney
ART. 1878. Special powers of attorney are necessary in the
following cases:
(1) To make such payments as are not usually considered as
acts of administration;
(2) To effect novations which put an end to obligations
already in existence at the time the agency was constituted;
(3) To compromise, to submit questions to arbitrations, to
renounce the right to appeal from a judgment, to waive objections to
the venue of an action or to 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;
(6) To make gifts, except customary ones for charity or those
made to employees in the business managed by the agent;
(7) To loan or borrow money, unless the latter act be urgent
and indispensable for the preservation of the things which are to
under administration;
(8) To lease any real property to another person for more than
one year;
46
Ibid, at p. 712; emphasis supplied.
FORMALITIES OF AGENCY
99
(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 immo-
vable property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations con-
tracted before the agency;
(15) Any other act of strict dominion, (n)
ART. 1879. A special power to sell excludes
the power to mortgage; and a special power to
mortgage does not include the power to sell, (n)
ART. 1880. A special power to compromise does
not authorize submission to arbitration. (1713a)
Article
1878
of
the
New
Civil
Code
enumerates
fourteen
instances
which
are
described
as
"acts
of
strict
dominion,"
and
which
cannot
be
deemed
to
be
within
the
scope
of
authority
of
the
agent
unless
expressly
granted
(which
then
is
referred
to
as
a
"special
power
of
attorney").
The
fifteenth
case
enumerated
in
Article
1878
actually
covers
the
general
rule:
A
duly
appointed
agent
has
no
power
to
exercise
on
behalf
of
the
principal
any
act
of
strict
dominion
unless
it
is
under
a
special
power
of
attorney.
a.
What
Makes
an
Agency
a
"Special
Power
of
Attorney?"
It
is
not
the
name
or
title
given
in
the
deed
issued
by
the
principal
that
determines
whether
the
agent
can
exercise
acts
of
strict
dominion
for
and
in
behalf
of
the
principal.
An
agent
has
special
power
of
attorney
only
when
the
act
or
contract
enumerated
specifically
under
Article
1878
has
been
literally
100
NON-CORPORATE MEDIA OF DOING BUSINESS
"named"
in
the
grant
of
commission
by
the
principal,
i.e.,
the
term
of
the
power
("sell,"
"mortgage,"
etc.)
must
literarily
be
written
or
expressed
for
the
commission
to
constitute
a
special
power
of
attorney.
7
In Orbeta v. Sendiong* the Court, even as it defined a "special power of
attorney [as]... a clear mandate specifically authorizing the performance of a
specific power and of express acts subsumed therein," reiterated the
well-established principle that even a document captioned as"General Power of
Attorney" cannot militate against its being construed to grant specific powers to
the agent, "a general power of attorney may include a special power if such
48
special power is mentioned or referred to in the general power."
b. Must Special Powers of Attorney Be in Writing?
Kuenzle and Streiffv. Collector of Customs," held that when no particular
formality is required by law, rules or regulation, then the principal may appoint
his agent in any form which might suit his convenience or that of the agent, in
this case a letter addressed to the agent requesting him to file a protest in
behalf of the principal with the Collector of Customs against the appraisement
of the merchandise imported into the country by the principal. However, such
doctrine pertains only to the constitution of an agency relationship or the
formal designation of the principal of the agent. The power or authority of the
agent is deemed to be only to cover "acts of administration" unless there be
specific granting of acts of ownership. And it seems therefore, that the clearest
manner by which there is specific grant of power of strict ownership is that it be
in writing; otherwise, the presumption under Article 1877 of the Civil Code must
prevail: that the agent can only pursue acts of administration.
47
463 SCRA 180 (2005).
**lbid, at p. 200, citing PARAS, V CIVIL CODE OF THE PHILIPPINES ANNOTATED (Fifth
ed., 1990), at p. 675.
49
31 Phil. 646 (1915).
FORMALITIES OF AGENCY
101
c. Specific Instances Where the Law Requires a Special Power of
Attorney
(1) To Make Payments as Are Not Usually Considered as Acts of
Administration
Payments made in the ordinary course of business constitute acts of
administration, since they go into mere acts of management, and they are
expected to occur on a day-to-day basis. Under Article 1877, an agency couched
in general terms comprises acts of administration which would include "general
and unlimited management."
All other forms of payment for and in behalf of the principal which are not
within the ordinary course of business, would constitute acts of strict dominion,
which are not deemed within the power of even a duly appointed agent, unless
granted specially or under a special power of attorney.
In Dominion Insurance v. Court of Appealsalthough a deed issued by the
insurance company to its area manager was denominated as a "Special Power of
Attorney," its wordings showed that it sought only to establish an agency that
comprises all the business of the principal with the designated locality, but
couched in general terms, and consequently was limited only to acts of
administration. The Court held that a general power permits the agent to do all
acts for which the law does not require a special power. Thus, the acts
enumerated in or similar to those enumerated in the "Special Power of
Attorney" (i.e., really a general power of attorney) did not require a special
power of attorney, and could only cover acts of administration.
Dominion Insurance held that the payment of insurance claims was an act
of strict dominion and cannot be deemed with the powers of administration of
the area. manager; and that since the settlement of claims was not included
among the acts enumerated in the Special Power of Attorney issued by the
insurance company, nor is of a character similar to the acts enumerated therein,
then a special power of attorney was
we SCRA329 (2002).
102
NON-CORPORATE MEDIA OF DOING BUSINESS
required
before
such
area
manager
could
settle
the
insurance
claims
of
the
insured.
Consequently,
the
amounts
paid
by
the
area
manager
to
settle
such
claims
were
not
allowed
to
be
reimbursed
from
the
principal
insurance
company.
(2) To
Effect
Novation
Which
Put
an
End
to
Obligations
Already in Existence at the Time the Agency Was
Constituted
The power of an agent to novate obligations "already in existence at the
time the agency was constituted," which must be covered by a special power of
attorney, would imply that if the obligation was created only during the agency
relationship, the power to create such obligation granted to the agent includes
with it the implied power to novate it.
What happens if the agent is clearly empowered under a special power
of attorney to incur an obligation in behalf of the principal, and in the process
of doing so, the agent novates an pre-existing obligation? In Villa v. Garcia
Bosque* it was held that where the terms of power granted to the substituted
attorney-in-fact was to the end that the principal-seller may be able to collect
the balance of the selling price of the printing establishment sold, such
substitute agent had no power to enter into new sales arrangements with the
buyer, or to novate the terms of the original sale.
(3) Special Power of Attorney With Respect to Principal's
Causes
of
Action
Article
1878(2)
of
the
Civil
Code
specifically
refers
to
the
following
matters
related
to
litigation
which
cannot
be
entered
into
or
exercised
by
the
agent
in
thi
name
of
the
principal
unless
covered
by
a
special
power
of
attorney,
thus:
To Compromise
To Submit Questions to Arbitration
S1
49 Phil. 126 (1926).
FORMALITIES OF AGENCY
103
To Renounce the Right to Appeal from a Judgment
To Waive Objections to the Venue of an Action
To Abandon a Prescription Already Acquired
Under Article 2028 of the Civil Code, "compromise" is a contract whereby
the parties, by making reciprocal concessions, avoid a litigation or put an end to
one already commenced.
In Acener v. Sisonthe Supreme Court held that confession of judgment
stands on the same footing as a compromise, and may not be entered into by
counsel except with the knowledge and consent of the client, or upon his special
empowerment.
Section 3(d) of the Alternative Dispute Resolution Act of 2004 (R.A. No.
9285) defines "arbitration" as "a voluntary dispute resolution process in which
one or more arbitrators, appointed in accordance with the agreement of the
parties, or rules promulgated pursuant to this Act, resolve a dispute by
rendering an award."
Under Article 1880 of the Civil Code, the power to compromise excludes
the power to submit to arbitration. It would also be reasonable to conclude that
the power to submit to arbitration does not carry with it the power to
compromise.
With such special exclusion rule under Article 1880 as to the powers to
compromise and arbitrate, would that mean all other powers covered under
the paragraph numbered 3 of Article 1868 are not mutually exclusive? In order
words, the grant of the special power to compromise would mean that the
implied power of the agent to renounce the right to appeal from a judgment of a
lower court, if that be essential in arriving at a compromise resolution before the
appellate court. Same thing could be said of the special power to waive
objections to the venue of an action,
8 SCRA 711 (1963).
104
NON-CORPORATE MEDIA OF DOING BUSINESS
or to waive a prescription already acquired, vis-a-vis the special power to
compromise.
53
It was settled in Alviar v. Court of First Instance of La Union, and Jacinto
5
v. Montesa, * that a judgment based on a compromise entered into by an
attorney without specific authority from the client is void, and that such
judgment may be impugned and its execution restrained in any proceeding by
the party against whom it is sought to be enforced.
55
In
Cosmic
Lumber
v.
Court
of
Appeals,
the
Court
ruled
that
when
the
attorney-in-fact
has
been
authorized
in
writing
to
institute
any
action
in
court
to
eject
all
persons
found
in
a
specified
parcel
of
land
"and
for
this
purpose,
to
appear
at
the
pre-trial
and
enter
into
any
stipulation
of
facts
and/or
compromise
agreement
but
only
insofar
as
this
was
protective
of
the
rights
and
interests
of
the
principal
in
the
property,"
the
same
did
not
constitute
authority
to
enter
into
a
compromise
agreement
that
provides
for
the
sale
of
the
property
to
the
defendant
in
the
case
thus
filed.
The
judgment
based
on
compromise
entered
into
by
the
attorney
who
has
not
shown
specific
authority
to
do
so
was
declared
void.
Nonetheless,
earlier
in
Dungo
v.
Lopenathe
Court
characterized
a
compromise
entered
into
by
the
lawyer
without
the
special
power
of
attorney
of
client
not
to
be
void
but
merely
unenforceable.
57
In
the
early
decision
in
Robinson
Fleming
v.
Cruz;
the
Court
ruled
that
when
an
agent
has
been
empowered
to
sell
hemp
in
a
foreign
country,
that
express
power
carries
with
it
the
implied
power
to
make
and
enter
into
the
usual
and
customary
contract
for
its
sale,
which
sale
contract
may
provide
for
settlement
of
issues
by
arbitration.
Under
the
present
provisions
of
Article
1878
of
the
Civil
Code,
the
power
to
enter
into
arbitration
cannot
be
S3
64 Phil. 301 (1937).
19 SCRA513
(1967).
SCRA168
56
6 SCRA1007
(1996).
57
(1962).
49 Phil. 42 (1926).
M
FORMALITIES OF AGENCY
107
(b)
In
all
other
immovables,
other
than
land
or
any
interest
therein,
the
fact
that
the
special
power
of
attorney
to
sell
or
to
purchase
is
not
in
writing,
would
not
render
the
contract
of
sale
or
contract
of
purchase
(depending
on
how
one
looks
at
it)
to
be
void,
but
merely
unenforceable.
Yet,
it
Rodriguez
v.
Court
of
Appeals,
the
Supreme
Court
held
that
"Neither.
.
.
Articles
1874
and
1878(5)
and
12
of
the
Civil
Code
relevant,
for
they
refer
to
sales
made
by
an
agent
for
a
principal
and
not
the
sales
made
by
the
owner
personally
to
another,
whether
that
other
[i.e.,
the
buyer]
be
acting
60
personally
or
through
a
representative."
The
implication
of
the
Rodriguez
ruling
is
to
limit
the
coverage
of
Article
1878(5)
only
to
agency
to
sell
or
dispose
of
immovables,
whereas
the
language
of
Article
1878(5)
covers
both
a
special
power
to
attorney
refers
to
both
"transmit
or
acquire"
ownership
of
immovables.
Article
1878(5)
provides
for
the
"general
rule"
of
special
power
of
attorney
when
it
comes
to
immovable
property,
and
generally
renders
the
resulting
contracts
merely
unenforceable,
and
not
void.
When
it
comes
to
a
particular
type
of
immovable
property,
namely
land
or
any
interest
therein,
Article
1874
applies
specifically:
not
only
must
the
power
be
granted
under
a
special
power
of
attorney
(i.e.,
expressly
given),
it
must
be
in
writing;
otherwise,
the
resulting
contract
of
sale
is
void,
not
merely
unenforceable.
Obviously,
in
the
purchase
of
a
piece
of
land
or
any
interest
therein
through
an
agent,
Article
1874
does
not
apply,
and
would
be
covered
by
Article
1878.
Likewise,
donations
of
immovables
through
an
agent
are
covered
entirely
under
paragraph
5
of
Article
1878.
61
Much earlier, in Jimenez v. Rabot, the Court held that a power of
attorney to convey real property need not be in a public document, it need only
be in writing, since a private document is
2
61
9 38
Phil.
378
(1918).
S
C
R
A
4
1
9
(
NON-CORPORATE MEDIA OF DOING BUSINESS
108
competent to create, transmit, modify, or extinguish a right in real property.
Jimenez was quite instructive of the legal requirements when it came to a
special power of attorney to sell land under the aegis of the old Civil Code. At
that time, "Article 1713 of the [old] Civil Code require[d] that the authority to
alienate land shall be contained in an express mandate" and not necessarily in
writing, "while [then] subsection 5 of Section 335 of the [old] Code of Civil
Procedure says that the authority of the agent must be in writing and subscribed
62
by the party to be charged." So it was then ruled in Jimenez that the express
authority to sell land contained in a letter of the principal to the agent was
sufficient authority to validly effect the sale of the land in question.
This was the same conclusion drawn by the Court under the applicable
provision of the old Civil Code in its decision in Rio y Olabbarrieta v. Yutecwhere
it held that an agreement for the leasing for a longer period than one year, or for
the sale of real property, or of an interest therein, and such agreement, if made
by the agent of the party sought to be charged, is invalid unless the authority of
the agent be in writing and subscribed by the party sought to be charged. Rio y
Olabbarrieta quoted Section 335 of the Code of Civil Procedure to read as
follows:
"Agreements Invalid Unless Made in Writing. In the
following cases an agreement hereafter made shall be
unenforceable by action unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement
cannot be received without the writing or secondary evidence of its
contents:
"5.
An
agreement
for
the
leasing
for
a
longer
period
than
one
year,
or
for
the
sale
of
real
property,
or
of
an
interest
therein,
and
such
agreement,
if
made
by
the
agent
of
the
party
sought
to
be
charged,
is
invalid
unless
the
authority
of
62
lbid,
at
p.
381.
"49
Phil.
276
(1926).
FORMALITIES OF AGENCY
109
the agent be in writing and subscribed by the party sought
64
to be charged."
Under the New Civil Code, when it comes to the sale of immovables (other
than land), the provisions of Article 1878(5) merely provides that a special power
of attorney (i.e., an express power) must cover the power "To enter into any
contract by which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration." While the old Code of Civil
Procedure provision requiring that the authority of the agent to sell immovables
no longer applies, and only the sale of land or interest therein is required to be in
writing under Article 1874 of the Civil Code, then it may be concluded that the
sale of immovables other than land need only be express, rather than in writing,
in order to be valid.
66
In
Pineda
v.
Court
of
Appeals,
it
was
held
that
when
a
house
and
lot
was
sold
by
an
agent
who
had
no
authority
from
the
registered
owner
to
do
so,
the
resulting
sale
was
declared
void.
The
principle
has
been
reiterated
in
Raet
v.
66
67
Court
of
Appeals, City-Lite
Realty
Corp.
v.
Court
of
Appeals,
and
Litonjua
v.
Fernandez
(i)
Does
the
Grant
of
the
Special
Power
to
Sell
Include
the
Power
to
Mortgage,
and
Vice
Versa?
Obviously,
the
answer
to
this
question
is
in
the
negative,
since
under
Article
1879,
"A
special
power
to
sell
excludes
the
power
to
mortgage;
and
a
special
power
to
mortgage
does
not
include
the
power
to
sell."
It
should
be
noted
however
that
in
Bico
Savings
&
Loan
Assn.
v.
Court
of
69
Appeals,
the
Court
held
that
the
sale
proscribed
"Ibid,
at
p.
281.
65
376
SCRA
222
66
(2002).
295
SCRA
677
CT
(1998).
325
SCRA
385
6fl
(2000).
427
SCRA
478
(2004).
"171
SCRA630
(1989).
110
NON-CORPORATE MEDIA OF DOING BUSINESS
under Article 1879 refers to a voluntary sale effected through the
agent; it does not cover the public sale that happens as part of
the foreclosure on the mortgage duly constituted.
(5-A) Sale of a Piece of Land Through an Agent
ART. 1874. When a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void, (n)
The discussions immediately hereunder are intended to focus on the issue
of whether a "special power of attorney" must be in writing for the juridical acts,
transactions and contracts entered into pursuant to such power can be
considered valid (i.e., that is they are void, rather than unenforceable). Although
agency is a consensual contract and may thus be constituted by mere meeting of
minds, it seems that when the law requires the agency to be in the form of a
"power of attorney," it means that ideally (but not necessarily) it must be in
writing. When the agency is not in writing, then it does not necessarily mean
that the contract of agency is void, but that failure to comply with the form
required would have serious legal consequences on the juridical acts pursued
under such oral agency.
(i) Does Article 1874 Cover Agency to Purchase Land or Any Interest
Therein?
70
The answer is in the negative. In Rodriguez v. Court of Appeals, the
Court held "Neither .. .Articles 1874 and 1878(5) and 12 of the Civil Code
relevant, for they refer to sales made by an agent for a principal and not the
sales made by the owner personally to another, whether that other [i.e., the
71
buyer] be acting personally or through a representative."
70
29
SCRA419
(1969).
"Ibid,
at
p.
433;
emphasis
supplied.
FORMALITIES OF AGENCY
111
It
seems
clear
therefore
that
Article
1874
does
not
cover
an
agency
to
purchase
a
piece
of
land
or
an
interest
therein;
and
that
if
the
special
power
of
the
agent
who
acts
for
the
buyer
is
not
in
writing,
the
resulting
sale
would
be
valid.
(ii)
Is
an
Oral
Contract
of
Agency
to
Sell
a
Parcel
of
Land
Not
Itself
Void?
The
answer
must
be
in
the
negative,
for
essentially
every
contract
of
agency
is
consensual
in
character,
even
those
special
powers
of
attorney
covered
by
Article
1878,
which
need
only
be
formally
expressed
or
"named"
by
the
principle
for
the
powers
to
arise,
and
can
never
be
presumed
from
the
fact
of
appointment
of
the
agent,
or
from
the
nature
of
the
business
assigned
under
powers
of
administration.
(ill)
Is
the
Sale
of
a
Piece
of
Land
Made
Pursuant
to
an
Oral
Special
Power
to
Sell
Really
Void
or
Actually
Unenforceable?
Article
1874
itself
provides
that
"When
a
sale
of
a
piece
of
land
or
any
interest
therein
is
through
an
agent,
the
authority
of
the
latter
shall
be
in
writing;
otherwise,
the
sale
shall
be
void."
Recent
decisions
of
the
Supreme
Court
convey
the
clear
implication
that
a
special
power
of
attorney
required
under
Article
1878
in
the
conveyance
of
immovable
property
must
that
which
is
writing
as
mandated
under
Article
1874
for
the
sale
of
a
piece
of
land.
This
was
the
clear
implication
from
the
language
of
the
decision
in
Pineda
72
v.
Court
of
Appeals,
where
it
ruled
.
.
.
The
Civil
Code
provides
that
in
a
sale
of
a
parcel
of
land
or
any
interest
therein
made
through
an
agent,
a
special
power
of
attorney
is
essential
[citing
Article
1878].
This
authority
must
be
in
writing,
otherwise
the
sale
shall
be
void,
[citing
Article
1874]
In
his
testimony,
petitioner
"376 SCRA 222 (2002).
112
NON-CORPORATE MEDIA OF DOING BUSINESS
Adeodato Duque confirmed that at the time he "purchased"
respondents' property from Pineda, the latter had no Special
Power of Attorney to sell the property.
A special power of attorney is necessary to enter into any
contract by which the ownership of an immovable is transmitted or
acquired for a valuable consideration. Without an authority in
writing, petitioner Pineda could not validly sell the subject
property to petitioners Dugue. Hence, any "sale" in favor of
73
petitioners Duque is void.
74
In Estate of Lino Olaguer v. Ongjoco, the Court seemed to take it for
granted that the requirement under Article 1874 that the authority of the agent
to sell a piece of land must be in writing, had the same requirement as that
under Article 1878, thus
. . . According to the provisions of Article 1874 of the Civil Code
on Agency, when the sale of a piece of land or any interest therein
is made through an agent, the authority of the latter shall be in
writing. Absent this requirement, the sale shall be void. Also under
Article 1878, a special power of attorney is necessary in order for
an agent to enter into a contract by which the ownership of an
immovable property is transmitted or acquired, either gratuitously
or for a valuable consideration.
We note that the resolution of this case, therefore, hinges on
the existence of the written power of attorney upon which
75
respondent Ongjoco bases his good faith.
The De Leons have opined that the status of such a sale effected through
an agent whose special power of attorney is not in writing, is not really void, but
merely voidable "since the sale can be ratified by the principal (see Arts. 1901,
1910, par. 2) such as by availing himself, of the benefits derived from the'
76
contract." The author believes that the more appropriate term
lbid, at pp. 228-229; emphasis
supplied.
563 SCRA 373 (2008).
7S
lbid, at pp. 393-394; emphasis
7
*lbid, at p. 416.
supplied.
74
FORMALITIES OF AGENCY
113
would be "unenforceable," since ratification process is also applicable to
unenforceable contracts.
77
Earlier, in Gutierrez Hermanos v. Orense, the Court held that although
the seller had not previously authorized a person to sell his parcel of land, but
when such person subsequently approved the action of the purported agent,
this produced the effect of ratification converting the relationship into an
express agency. However, the ruling in Guitierrez Hermanos cannot be relied
upon to support the conclusion that a sale of a piece of land through an agent
without a written authority would merely be unenforceable in spite of the clear
language of Article 1874 since the decision was rendered under the terms of the
old Civil Code, and Article 1874 is an entirely new provision in the New Civil
Code. Likewise, apart from the deed of sale effected by the agent in Gutierrez
Hermanos, the registered owner subsequently thereto affirmed the sale under
public documentation. The procedure is also possible under Article 1874, which
means that if the agent enters into a sale of a piece of land without written
authority, indeed the sale would be void; but that if the principal subsequently,
enters directly again with the same buyer into a formal deed of sale, then the
second transactions would be valid for it is no longer covered under Article 1874.
The Supreme Court's mood on the matter has changed and current rule is
70
best expressed in Raet v. Court of Appeals, where the Court held that Article
1874 of the Civil Code requires for the validity of a sale involving land that the
agent should have an authorization in writing; otherwise any sale concluded on
the land is void. This principle has been reiterated in Litonjua, Jr. v. Eternit
79
m
81
Corp., Yasuma v. Heirs of Cecilio S. De Villa, and Gozun v. Mercado.
"
2
8
P
h
i
l
.
5
7
2
(
1
9
NON-CORPORATE MEDIA OF DOING BUSINESS
114
Nonetheless, in Escueta v. Lim,'* the Court affirmed the ruling in Gutierrez
Hermanos. Escueta involved the sale is parcels of land effected by the sub-agent
appointed by the attorney-in-fact of the owner, who claims that that the
sub-agent was not given any special power of attorney to sell the parcels of
land. The Court held
Even assuming that [the sub-agent] has no authority to sell
the subject properties, the contract she executed in favor of the
respondents is not void, but simply unenforceable, under the
second paragraph of Article 1317 of the Civil Code which reads... a
contract entered into in the name of another by one who has no
authority or legal representation, or who acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly,
by the persons on whose behalf it has been executed, before it is
83
revoked by the other contracting party.
The
Supreme
Court's
latest
word
on
the
matter
is
found
in
its
recent
6
decision
in
Pahud
v.
Court
of
Appeals, *
where
the
issue
was
raised
squarely
of
the
status
of
a
sale
by
one
co-heir
of
the
property
owned
pro-indiviso
where
the
authority
that
was
given
by
the
other
co-heirs
was
merely
verbal
in
character.
In
direct
answer
to
the
issue,
and
before
discussing
the
jurisprudence
involved,
the
Court
directly
held:
The
focal
issue
to
be
resolved
in
the
status
of
the
sale
of
the
subject
property
by
Eufemia
and
her
co-heirs
to
the
Pahuds.
We
find
the
transaction
to
be
valid
and
enforceable
The
Court
noted
that
Article
1874
"plainly
provides"
that
when
the
sale
of
a
piece
of
land
or
any
interest
therin
is
through
an
agent,
the
authority
of
the
latter
shall
be
in
writing;
otherwise,
the
sale
shall
be
void.
In
then
referred
to
the
similar
provision
contained
in
Article
1878
which
provides
that
a
special
power
of
attorney
is
necessary
for
an
agent
to
enter
into
a
contract
by
512 SCRA411 (2007).
/fa/'d, at p. 424.
M
597 SCRA13 (2009).
^Ibid, at p. 21; emphasis
supplied.
a3
FORMALITIES OF AGENCY
115
which the ownership of an immovable property is transmitted or acquired,
either gratuitously or for a valuable consideration, and held that "Such stringent
statutory requirements has been explained in Cosmic Lumber Corporation v.
Court of Appeals: ... '[T]he authority of an agent to execute a contract [of] sale of
real estate must be conferred in writing and must give him specific authority,
. . . A special power of attorney is necessary to enter into any contract by
which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration. 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 convert the right upon an
agent to sell real estate, a power of attorney must so express the powers of the
agent in clear and unmistakable language. When there is any reasonable doubt
that the language so used conveys such power, no such construction shall be
,8S
given the document." Then it summarized the doctrine then prevailing:
In several cases, we have repeated 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
87
prejudiced by the unwarranted act of another.
In other words, the language of Article 1874 declaring the sale "void,"
means that it is void only as to the principal, "precisely to protect the interest of
an unsuspecting owner from being prejudiced by the unwarranted act of
another." The net effect of the ruling considers the sale as being unenforceable,
subject to ratification on the part of the principal, owner of the piece of land
subject of the sale. However, the Court in Pahud approached it from the angle of
estoppel on the part of the principal, thus
While the sale with respect to the 3/8 portion is void by
express provision of law and not susceptible to ratification, we
nevertheless uphold its validity on the basis of the
w
lbid, at p. 22; emphasis
supplied.
Ibid, at p. 22.
87
116
NON-CORPORATE MEDIA OF DOING BUSINESS
common law principle of estoppel. . . [under] Article 1431 of the
Civil Code . . . "Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon."
True, at the time of sale to the Pahuds, Eufemia was not
armed with the requisite special power of attorney to dispose of
the 3/8 portion of the property. . . . During the pre-trial
conference, however, they admitted that they had indeed sold 7/8
of the property to the Pahuds sometime in 1992. Thus, the
previous denial was superseded, if not accordingly amended, by
88
their subsequent admission.
The doctrine of estoppel used in the majority decision was criticized by
Justice Carpio-Morales in her concurring and dissenting opinion, since a sale that
offended the provision under Article 1874 is declared void therein, then under
Article 1409 on void and inexistent contracts, the same was not subject to
ratification, and that the provisions of Article 1431 of the Civil Code on estoppel
is governed by the dictate of Article 1432 that provides that the principles of
estoppel are adopted "insofar as they are not in conflict with the provisions of
this Code," and concluded "Indeed, estoppel, being a principle in equity, cannot
be applied in the presence of a law clearly applicable to the case. The Court is
first and foremost a court of law. While equity might tilt on the side of one
party, the same cannot be enforced so as to overrule positive provisions of law
89
in favor of the other."
Perhaps the better principle to apply under Article 1874 is to consider
contracts of sale over parcels of land or any interest therein effected through the
agent of the seller that offend the requirement of being supported by written
special power of attorney, to be unenforceable rather than void, or to consider
them "void as to the principal," and therefore subject to ratification on the part
of the principal whose interest in the first place is the one sought to be
protected by the requirements under Article
*lbid,
at
p.
23.
mid,
at
pp.
30-31.
FORMALITIES OF AGENCY
117
1874.
Such
a
construction
of
Article
1874
would
not
be
unique
nor
offensive
to
principles
in
the
Law
on
Agency,
for
indeed
in
the
following
articles
the
law
uses
the
term
"void"
but
actually
means
"unenforceable"
for
it
allows
ratification
on
the
part
of
the
principal,
thus
ART.
1898.
If
the
agent
contracts
in
the
name
of
the
principal,
exceeding
the
scope
of
his
authority,
and
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.
In
this
case,
however,
the
agent
is
liable
if
he
undertook
to
secure
the
principal's
ratification,
(n)
ART.
1901.
A
third
person
cannot
set
pup
the
fact
that
the
agent
has
exceeded
his
powers,
if
the
principal
has
ratified,
or
has
signified
his
willingness
to
ratify
the
agent's
acts,
(n)
(iv)
How
Detailed
Must
the
Special
Power
of
Attorney
to
Sell
Be?
Other
than
the
requirement
be
in
writing,
no
other
formality
is
required
for
the
special
power
of
attorney
under
Article
1874.
Thus,
Jimenez
v.
Rabot
held
that
a
letter
containing
the
specific
authority
to
sell
is
sufficient.
91
In Strong v. Gutierrez Rep/de, the Court clarified that the express
mandate required to what is now the equivalent of Article 1874 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. The power of attorney need not contain a specific description of
the land to be sold, such that giving the agent the power to sell "any or all tracts,
lots, or parcels" of land belonging to the principal was deemed adequate.
*>38 Phil. 387
9,
(1918). 6 Phil.
680(1906).
NON-CORPORATE MEDIA OF DOING BUSINESS
118
In
Lifian
v.
Puno,
the
Court
held
that
when
the
power
of
attorney
contains
the
power
"to
sell
the
Interest
I
possess
within
this
municipality
of
Tarlac,"
the
language
was
deemed
sufficient
to
construe
that
a
special
power
of
attorney
to
sell
land
within
said
municipality
had
been
properly
conferred
on
the
agent.
In
other
words,
it
is
the
specification
of
the
"power
to
sell"
that
is
necessary,
rather
than
a
specification
of
the
particular
piece
of
land
that
controls
compliance
with
the
requirement
of
the
law.
93
In
Katigbak
v.
Tai
Hing
Co.,
it
was
held
that
the
authority
to
sell
any
kind
of
realty
that
"might
belong"
to
the
principal
was
held
to
include
also
such
as
the
principal
might
afterwards
have
during
the
time
it
was
in
force.
54
In
P.
Amico
and
J.
Amigo
v.
S.
Teves,
the
Court
held
that
where
the
power
of
attorney
says
that
the
agent
can
enter
into
any
contract
concerning
a
land,
or
can
sell
the
land
under
any
term
or
condition
and
covenant
he
may
think
fit,
he
is
certainly
granted
power
to
deal
with
the
land,
and
sell
it,
in
the
same
manner
and
with
the
same
breadth
and
latitude
as
the
principal
could.
95
In Velosov. Court of Appeals, where the document executed by the
owner of the land was denominated as a "General Power of Attorney," the
Court held nevertheless that it was with respect to the authority given to sell
the land a special power of attorney, for it properly described the title of the
land and the clear power to sell it. The Court ruled that there was no need to
execute a separate and special power of attorney for the agent to effect the
sale of the land in the name of the principal: "The special power of attorney
can be included in the general power when it is specified therein the act or
96
transaction for which the special power is required."
"
3
1
*
P
2
h
6
i0
l
S.
C
2
R
5
A
9
5
(
9
1
3
9
FORMALITIES OF AGENCY
119
7
In Cosmic Lumber Corp. v. Court of Appeals,* the Court summarized the
rules pertaining to the various scenarios involving the sale of a piece of land
through an agent, thus
When the sale of a piece of land or any interest thereon is
through an agent, the authority of the latter shall be in writing;
otherwise the sale shall be void. Thus the authority of an agent to
execute a contract for the 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. A special power of attorney is necessary to enter into any
contract by which the ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable consideration. 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 include 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 unmistakable
language. When there is any reasonable doubt that the language
so used conveys such power, no such construction shall be given
98
the document.
99
|n
City
Lite
Realty,
Inc.
v.
Court
of
Appeals,
where
written
letter
issued
by
a
landowner
read:
"We
will
appreciate
Metro
Drug's
assistance
in
referring
to
us
buyers
for
property.
Please
proceed
to
hold
preliminary
negotiations
with
interested
buyers
and
endorse
formal
offers
to
us
for
our
final
evaluation
and
appraisal,"
the
Court
held
that
the
language
of
the
letter
did
not
constitute
written
authority
to
sell
the
land,
and
the
appointed
individual
was
only
designated
as
a
contact
person
or
a
broker
with
no
authority
to
conclude
a
sale
of
the
property.
It
held
that
any
sale
on
the
parcel
of
land
concluded
by
such
an
appointee
97
265
SCRA168
(1996).
lbid,
at
p.
176.
"325
SCRA
385
(2000).
m
NON-CORPORATE MEDIA OF DOING BUSINESS
120
would
be
void,
and
the
sale
could
not
produce
any
legal
effect
as
to
transfer
the
subject
property
from
its
lawful
owner.
100
In Litonjua v. Fernandez, the letter by which the agent (Fernandez)
purported to have authority to sell the real properties of the purported
principle was signed only by Fernandez and contained no signature of the
registered owners of the offered parcels of land. The Court held
The settled rule is that persons dealing with an assumed agent
are bound at their peril, and if they would hold the principal liable,
to ascertain not only the facts of agency but also the nature and
extent of authority, and in case either is controverted, the burden
of proof is upon them to prove it. In this case, respondent
Fernandez specifically denied that she was authorized by the
respondents-owners to sell the properties, both n her answer to
the complaint and when she testified. The Letter dated January 16,
1996 relied upon by the petitioners was signed by respondent
Fernandez alone, without any authority from the
respondents-owners. There is no actuations of respondent
Fernandez in connection with her dealings with the petitioners. As
such, said letter is not binding on the respondents as owners of the
101
subject properties.
Litonjua ruling constitutes the jurisprudential basis of concluding that for
special power of attorney to be valid and give rise to acts, transactions and
contracts that are valid and enforceable against the principle, it must be in
writing and signed by the principal.
(5-B) Agent Cannot Validly Purchase Property of Principal
Under Article 1491(2) of the Civil Code, unless so expressly authorized, an
agent cannot purchase the property of his principal; and if he does so, the sale
would be void. Even when
100
427 SCRA 478
(2004).
lbid, at p. 494.
FORMALITIES OF AGENCY
121
the
agent
has
been
granted
a
special
power
of
attorney
to
sell
a
piece
of
land
or
any
interest
in
it,
such
power
does
not
include
by
implication
the
power
to
sell
to
himself
under
the
clear
provisions
of
Article
1491(2)
of
the
Civil
Code,
unless
there
was
such
prior
authorization
given
by
the
principal.
102
Olaguerv. Purugganan, Jr., recognized that the prohibition against
agents purchasing property in their hands for sale or management is clearly not
absolute; when so authorized by the principal, the agent is not disqualified
from purchasing the property he holds under a contract of agency to sell.
(6) To Make Gifts
A gift or a donation is defined under Article 725 of the Civil Code as an act
of liberality whereby a person disposes gratuitously of a thing or right in favor
of another person who accepts it.
Under paragraph 6 of Article 1878, for an agent to have the power to
make gifts or donations on behalf of the principal it would require the same to
be in the form of a special power of attorney, except.
Customary ones for charity; or
(a)
(b) Those made to employees in the business managed
by the agent.
When a gift or donation is made by an agent on behalf of the principal
which is not covered by a special power of attorney, it does not become void
for failure to comply with these requirement in Agency Law (because such
deficiency merely renders the contract unenforceable), but rather it is void or
not depending on whether it complies with the formalities required under the
Law on Donation, for every act of donation constitutes a solemn contract. The
net effect of compliance with the formalities required by the
102
515 SCRA 460 (2007).
122
NON-CORPORATE MEDIA OF DOING BUSINESS
Law on Donation would be to make the resulting gift or donation
unenforceable, when it does not comply with the special power of attorney
requirement.
(7) To Loan or Borrow Money
Under paragraph 7 of Article 1878, the power of an agent to either loan
or borrow money, is an act of strict ownership, and requires the same to be in
the form of a special power of attorney. The exception would be when the act
"be urgent and indispensable for the preservation of the things which are
under administration."
In Philippine National Bank v. Tan Ong Sze the Court held that a power
of attorney, like any other instrument, is to be construed according to the
natural import of its language; and the authority which the principal has
conferred upon his agent is not to be extended by implication beyond the
natural and ordinary significance of the terms in which that authority has been
given; and that an attorney-in-fact has only such authority as the principal has
chosen to confer upon him, and one dealing with him must ascertain at his
own risk whether his acts will bind the principal. Thus, in PNB, the Court ruled
that a power of attorney which vested the agent with authority "for me and in
my name to sign, seal and execute, and as my act and deed, delivery any lease,
any other deed for conveying any real or personal property" or "any other
deed for the conveying of any real or personal property" does not carry with it
or imply that the agent for and on behalf of his principal has the power to
execute a promissory note or a mortgage to secure its payment.
104
In
Hodges
v.
Salas
and
Salas,
the
Court
held
that
when
the
power
granted
to
the
agent
was
only
to
borrow
money
and
mortgage
principal's
property
to
secure
the
loan,
it
cannot
be
interpreted
to
include
the
authority
to
mortgage
the
properties
to
support
the
agent's
personal
loans
and
use
the
proceeds
thereof
for
his
own
benefit.
The
lender
who
lends
money
to
103
53
Phil.
451
(1929).
63
Phil.
567
(1936).
104
FORMALITIES OF AGENCY
123
the
agent
knowing
that
is
was
for
personal
purpose
and
not
for
the
principal's
account,
is
a
mortgagee
in
bad
faith
and
cannot
foreclose
on
the
mortgage
thus
constituted
for
the
account
of
the
agent.
The
Court
ruled:
The
pertinent
clauses
of
the
power
of
attorney
for
which
may
be
determined
the
intention
of
the
principals
in
authorizing
their
agent
to
obtain
a
loan,
secure
it
with
their
real
property,
were
quoted
at
the
beginning.
The
terms
thereof
are
limited;
the
agent
was
thereby
authorized
only
to
borrow
any
amount
of
money
which
he
deemed
necessary.
There
is
nothing,
however,
to
indicate
that
the
defendants
had
likewise
authorized
him
to
convert
the
money
obtained
by
him
to
his
personal
use.
With
respect
to
a
power
of
attorney
of
special
character,
it
cannot
be
interpreted
as
also
authorizing
the
agent
to
dispose
of
the
money
as
he
please,
particularly
when
it
does
not
appeal
that
such
was
the
intention
of
the
principals,
and
in
applying
part
of
the
funds
to
pay
his
personal
obligations,
he
exceeded
his
authority
(Art.
1714,
Civil
Code;
Bank
of
the
Philippine
Islands
v.
De
Coster,
47
Phil.,
594
and
49
Phil.,
574).
In
cases
like
the
present
one,
it
should
be
understood
that
the
agent
was
obligated
to
turn
over
the
money
to
the
principals,
or,
at
least
place
it
at
their
disposal.
In
the
case
of
Manila
Trading
&
Supply
Co.
v.
Uy
Tiepo
(G.R.
No.
30339,
March
2,1929,
not
reported),
referring
to
a
power
of
attorney
to
borrow
any
amount
of
money
in
cash
and
to
guarantee
the
payment
thereof,
by
the
mortgage
of
certain
property
belonging
to
the
principals,
this
Court
held
that
the
agent
exceeded
his
authority
in
guaranteeing
his
personal
account
for
automobile
parts
by
the
mortgage,
not
having
105
specially
authorized
to
do
so.
106
De Villa v. Fabricante, construed Article 1878(7) to cover only the
borrowing of money under mutuum, and does cover the purchasing of goods
on credit on behalf of the principal, especially when the same is in the ordinary
course of business.
10S
lbid,
at
pp.
577-
578.
105
Phil.
672
(1959).
10e
124
NON-CORPORATE MEDIA OF DOING BUSINESS
107
Philippine
National
Bank
v.
Sta.
Maria,
held
that
the
special
authority
to
borrow
money
for
the
principal
is
not
to
be
implied
from
the
special
power
of
attorney
to
mortgage
real
estate,
especially
when
the
power
was
granted
only
to
make
the
principal
an
accommodation
or
third-party
mortgagor.
Since
the
authority
to
borrow
money
is
rarely
inferred,
in
Rural
Bank
of
Caloocan,
Inc.
v.
Court
of
Appeals,
the
Court
ruled
that
a
creditor
should
require
the
execution
of
a
power
of
attorney
in
order
that
one
may
be
understood
to
have
granted
another
the
authority
to
borrow
on
behalf
of
the
former.
In
other
words,
although
Article
1878
does
not
require
the
special
powers
of
attorney
to
be
in
writing,
both
practice
and
jurisprudence
confirm
that
it
is
the
written
form
that
is
practically
the
only
conclusive
basis,
in
the
face
of
denial
on
the
part
of
the
principal,
by
which
to
affirm
that
the
agent
was
granted
a
special
power
of
attorney.
(i)
What
Happens
When
Money
Is
Borrowed
in
the
Name
of
the
Principle
When
There
Was
No
Special
Power
to
Attorney
to
Do
So?
109
In Gozun v. Mercado, the Court held that a special power of attorney is
necessary for an agent to borrow money, unless it be urgent and indispensable
for the preservation of the things which are under administration; and that such
contract entered into in the name of another person by one who has been given
no authority or legal representation or who has acted beyond his powers are
classified as unauthorized contracts and are unenforceable, unless they are
ratified.
In Rural Bank of Caloocan v. Court of Appeals, the Court held that
although it is the principle that a person whose acts holding another person to
be his agent and would lead a third person to believe such purported agent was
authorized to speak and bind him, cannot now be permitted to deny the
authority of
107
29
SCRA
303
(1969).
104
SCRA
151
109
(1981).
511
SCRA
305
(2006).
110104
SCRA
151
(1981).
108
FORMALITIES OF AGENCY
125
the
purported
agent;
but
this
is
only
true
when
the
purported
agent
was
clothed
with
apparent
authority.
In
this
case,
where
the
authority
of
the
purported
agent
was
only
to
follow
up
the
principal's
loan
application
with
the
bank,
it
cannot
be
presumed
that
he
was
also
granted
authority
to
borrow
on
behalf
of
the
principal,
especially
when
the
principal
herself
went
to
the
bank
to
sign
the
promissory
note
for
the
loan
obtained
from
the
bank.
If
the
principal's
act
had
been
understood
by
the
bank
to
be
a
grant
of
an
authority
to
the
agent
to
borrow
on
behalf
of
the
principal,
the
bank
should
have
required
a
special
power
of
attorney
covering
such
power
to
borrow.
(ii)
When
the
Agent
Has
Been
Expressly
Empowered
to
Borrow
Money,
Can
He
Himself
Be
the
Lender
Thereof
Without
Being
in
Breach
of
Trust?
Under
Article
1890
of
the
Civil
Code,
if
the
agent
has
been
empowered
to
borrow
money,
then
he
is
not
disqualified
from
being
himself
the
lender
at
the
current
rate
of
interest.
On
the
other
hand,
the
article
also
provides
that
if
the
agent
has
been
empowered
to
lend
money
at
interest,
he
cannot
borrow
it
without
the
consent
of
the
principal.
(8)
To
Lease
Real
Property
for
More
Than
One
Year
It
seems
clear
from
paragraph
numbered
8
of
Article
1878,
that
the
lease
of
real
property
for
more
than
one
year
is
an
act
of
strict
ownership,
since
a
lease
of
more
than
one
year
creates
a
right
in
rem\
whereas,
the
act
of
entering
into
a
contract
of
lease
for
one
year
or
less,
would
be
considered
an
act
of
administration,
and
may
be
in
the
form
of
general
power
of
attorney.
111
Thus, in Shopper's Paradise Reaity v. Roque, the Court held that in a
contract of agency, the agent acts in representation or in behalf of another with
the consent of the latter, and that Article 1878 of the Civil Code expresses that a
special power
111
419 SCRA 93 (2004).
NON-CORPORATE MEDIA OF DOING BUSINESS
126
of
attorney
is
necessary
to
lease
any
real
property
to
another
person
for
more
than
one
year.
It
reiterated
the
principle
that
the
lease
of
real
property
for
more
than
one
year
is
considered
not
merely
an
act
of
administration
but
an
act
of
strict
dominion
or
of
ownership.
A
special
power
of
attorney
is
thus
necessary
for
its
execution
through
an
agent.
Article
1878(8)
also
does
not
cover
leases
of
personal
property,
which
may
then
lead
to
the
conclusion
that
any
power
given
to
the
agent
to
lease
personal
property,
for
whatever
period,
would
constitute
merely
a
general
power
of
attorney;
and
may
be
implied
from
the
express
powers
given.
The
more
reasonable
conclusion
to
draw
is
that
while
a
lease
for
more
than
one
year
of
real
property
can
never
be
considered
to
be
acts
of
administration,
and
would
require
always
a
special
power
of
attorney,
when
it
comes
to
personal
property,
a
lease
for
more
than
one
year
may
or
may
not
be
an
act
of
administration,
or
may
be
in
the
ordinary
course
of
business,
depending
of
the
circumstances
involved,
or
the
nature
of
the
business
given
to
the
agent
for
administration
and
management.
In
this
connection,
it
should
be
noted
that
under
Article
1403(2)
of
the
Civil
Code,
an
agreement
for
the
leasing
of
real
property
for
a
period
longer
than
one
year
is
unenforceable
unless
made
in
writing.
Therefore,
even
when
the
agency
possess
a
special
power
of
attorney
to
lease
real
property,
when
the
lease
itself
for
more
than
a
year
is
not
in
writing,
the
resulting
contract
would
still
be
unenforceable.
2
In Vda. De Chua v. Intermediate Appellate Court," where the issue was
"the affirmance by the Court of Appeals of %e decision of the trial court,
ordering their ejectment from the premises in question and the demolition of
the improvements introduced thereon," the lessees relied on the contract of
lease entered into by on behalf of the principal-lessor, by her attorney in fact
who was not armed to lease the premises for more than one year. However, the
facts showed that the lessees
112
229 SCRA99 (1994).
FORMALITIES OF AGENCY
127
stayed
in
the
premises
during
the
term
of
the
lease,
and
which
was
impliedly
renewed
through
tacita
reconduccion.
The
Court
expressly
agreed
with
the
Court
of
Appeals
resolution
"declaring
the
contract
of
lease
(Exh
'C')
void"
on
the
ground
that
the
agent
"was
not
armed
with
a
special
power
of
attorney
to
enter
into
a
lease
contract
for
a
period
of
more
than
one
year,
thus:
We
agree
with
the
Court
of
Appeals.
The
lease
contract
(Exh.
"C"),
the
linchpin
of
petitioners'
cause
of
action,
involves
the
lease
of
real
property
for
a
period
of
more
than
one
year.
The
contract
was
entered
into
by
the
agent
of
the
lessor
and
not
the
lessor
herself.
In
such
a
case,
the
law
requires
that
the
agent
be
armed
with
a
special
power
of
attorney
to
lease
the
premises,
x
x
x.
It
is
true
that
respondent
Herrera
allowed
petitioners
to
occupy
the
leased
premises
after
the
expiration
of
the
lease
contract
(Exh.
"C")
and
under
Article
1670
of
the
Civil
Code
of
the
Philippines,
a
tacit
renewal
of
the
lease
(tacita
reconduccion)
is
deemed
to
have
taken
place.
However,
as
held
in
Bernardo
M.
Dizon
v.
Ambrosio
113
Magsaysay,
a
tacit
renewal
is
limited
only
to
the
terms
of
the
contract
which
are
germane
to
the
lessee's
right
of
continued
enjoyment
of
the
property
and
does
not
extend
to
alien
matters,
114
like
the
option
to
buy
the
leased
premises.
(9)
To
Bind
the
Principal
to
Render
Some
Service
Without
Compensation
Although
the
agent
may
bind
himself
to
the
contract
of
agency
without
compensation
(Article
1875),
in
order
to
bind
the
principal
to
enter
into
service
without
compensation
would
be
unenforceable
without
a
special
power
of
attorney.
Can
we
draw
as
a
necessary
implication
under
paragraph
numbered
9
of
Article
1878
that
to
bind
the
principal
to
render
service
for
compensation
would
be
deemed
a
mere
act
of
administration,
and
constituted
in
a
mere
general
power
of
57
SCRA
250
(1974).
lbid,
at
p.
106.
m
128
NON-CORPORATE MEDIA OF DOING BUSINESS
attorney, or more specifically, to be an implied power of every agent? We posit
that no such conclusion may be drawn from the language of Article 1878(9).
Any contract of service to be entered into on behalf of the principal
should properly be considered an act of strict ownership, for it obliges the
principal to render a personal obligation, which if he refuses makes him liable
for damages. Precisely, a contract of agency is entered into by the principle to
allow him to participate in juridical acts through an agent, and without need of
his physical presence. Therefore, it does not make sense that a contract of
service, even when for compensation, would be deemed to be within implied
powers of the agent to bind the principal.
(10) To Bind the Principal in a Contract of Partnership
Under Article 1878(10), every agreement by the agent on behalf of the
principal which has the effect of obliging the principal to contribute money or
industry to a common fund with the intention of deriving profits therefrom
would be unenforceable without a special power of attorney having been
previously given to the agent, for it in effect makes the principal a partner in a
partnership, as defined under Article 1767 of the New Civil Code.
Consequently, contracts of partnership or joint venture arrangements
cannot be entered into in the name of the principal without a covering special
power of attorney.
(11) To Obligate the Principal as a Guarantor or
Surety
Under
Article
2047
of
the
Civil
Code,
by
the
contract
of
guaranty,
the
guarantor
binds
himself
to
fulfill
the
obligation
of
the
principal
debtor
in
case
the
latter
should
fail
to
do
so;
and
if
the
person
binds
himself
solidarily
with
the
principal
debtor,
he
becomes
a
surety
under
a
contract
of
suretyship.
Therefore,
under
paragraph
numbered
11
of
Article
1878,
no
contract
of
guaranty
or
surety
is
enforceable
against
the
principal
when
it
has
been
entered
into
by
an
agent
who
possesses
no
special
power
of
attorney
to
do
so.
FORMALITIES OF AGENCY
129
Bank
of
P.I.
v.
Coster,
held
that
a
power
of
attorney
to
loan
money
does
not
include
the
implied
power
to
make
the
principal
a
surety
for
the
payment
of
the
debt
a
third
person.
116
In Director of Public Works v. Sing Juco, where a power of attorney was
executed primarily to enable the attorney-in-fact, as manager of a mercantile
business, to conduct its affairs for and on behalf of the owner of the business,
and to this end the attorney-in-fact was authorized to execute contracts relating
to the principal's property ["act and deed delivery, any lease, or any other deed
for the conveying any real or personal property" and "act and deed delivery, any
lease, release, bargain, sale, assignment, conveyance or assurance, or any other
deed for the conveying any real or personal property"], the Court held that such
grant of power will not be interpreted as giving the attorney-in-fact power to
bind the principal by a contract of independent guaranty or surety unconnected
with the conduct of the mercantile business. General words contained in such
power will not be so interpreted as to extent the power to the making of a
contract of suretyship, but will be limited, under the well-know rule of
construction indicated in the express ion ejusdem generis, as applying to
matters similar to those particularly mentioned.
Sing Juco emphasized that "In Article 1827 of the Civil Code it is declared
that guaranty shall not be presumed; it must be expressed and cannot be
extended beyond its specified limits. By analogy a power of attorney to execute
a contract of guaranty should not be inferred from vague or general words,
especially when such words have their origin and explanation in particular
117
powers of a wholly different nature."
BA Finance Corp. v. Court of Appeals, held that a contract of guaranty or
surety cannot be inferred from the use of vague or general words of
commitment. Thus, the authority given by the corporation to its agent to
approve a loan up to ^350,000 without
115
47
Phil.
594
(1925).
53
Phil.
205
7
" lbid,
at
p.
213.
(1929).
118
211
SCRA
112
(1992).
116
130
NON-CORPORATE MEDIA OF DOING BUSINESS
any
security
requirement
does
not
include
the
authority
to
issue
guarantees
for
any
amount.
It
should
be
recalled
that
under
Article
1403(2)(b)
of
the
Civil
Code,
a
contract
of
guaranty
is
unenforceable
unless
it
is
made
in
writing.
Consequently,
even
when
the
agent
has
the
requisite
special
power
of
attorney
to
enter
into
a
contract
of
guaranty
in
behalf
of
the
principal,
the
result
contract
would
be
unenforceable
if
not
reduced
in
writing.
(12)
To
Create
or
Convey
Real
Rights
Over
Immovable
Under
paragraph
numbered
12
of
Article
1878,
an
agent
cannot,
in
the
name
of
the
principal,
create
or
convey
real
rights
over
immovable
property
without
being
possessed
of
a
special
power
of
attorney;
otherwise,
the
resulting
contract
would
be
unenforceable
against
the
principal.
The
paragraph
intends
to
cover
dealings
on
immovable
property
outside
of
the
sale
of
a
piece
of
land
or
any
interest
therein
covered
specifically
under
Article
1874,
or
contracts
of
dispositions
of
immovables
by
which
ownership
is
conveyed,
whether
gratuitously
or
for
valuable
consideration,
under
paragraph
numbered
5
of
Article
1878.
"Real
rights"
over
immovable
property
would
cover
such
contracts
as
mortgages,
usufruct,
easement,
etc.
It
obviously
covers
the
entering
into
a
lease
contract
over
an
immovable
with
a
period
exceeding
one
year
(separately
covered
under
paragraph
numbered
8
of
Article
1878).
Under
Article
1879
of
the
New
Civil
Code,
the
power
to
sell
excludes
the
power
to
mortgage;
and
that
the
power
to
mortgage
excludes
the
power
sell.
This
supports
the
proposition
held
in
Rodriguez
v.
Pamintuan
and
De
Jesus,
that
each
of
the
powers
enumerated
under
Article
1878,
are
named
"acts
of
strict
dominion,"
and
cannot
be
implied
powers;
and
that
one
form
of
named
special
power
cannot
give
the
presumption
that
it
includes
119
37 Phil. 876 (1918).
FORMALITIES OF AGENCY
131
under any form of construction or interpretation another special power of
attorney. Thus, Valmonte v. Court of Appeals, held that the power to
mortgage does not carry the implied power to represent the principal in
litigation.
121
In
Philippine
Sugar
Estates
Dev.
Co.
v.
Poizat,
the
Court
held
that
it
is
a
general
rule
in
the
law
of
agency
that,
in
order
to
bind
the
principal
by
a
mortgage
on
real
property
executed
by
an
agent,
it
must
upon
its
face
purpose
to
be
made,
signed
and
sealed
in
the
name
of
the
principal,
otherwise,
it
will
bind
the
agent
only.
It
is
not
enough
merely
that
the
agent
was
in
fact
authorized
to
make
the
mortgage,
if
he
has
not
acted
in
the
name
of
the
principal.
Neither
is
it
ordinarily
sufficient
that
in
the
mortgage
the
agent
described
himself
as
acting
by
virtue
of
the
power
of
attorney,
if
in
fact
the
agent
has
acted
in
his
own
name
and
has
set
his
own
hand
and
seal
to
the
mortgage.
This
is
especially
true
where
the
agent
himself
is
a
party
to
the
instrument.
However
clearly
the
body
of
the
mortgage
may
show
and
intend
that
it
shall
be
the
act
of
the
principal,
yet,
unless
in
fact
it
is
executed
by
the
agent
for
and
on
behalf
of
his
principal,
it
is
not
valid
as
to
the
principal.
22
In Rural Bank of Bombon v. Court of Appeals,' although the agent was
given a special power of attorney to mortgage the property of the principal,
nonetheless, when he signed the Deed of Real Estate Mortgage in his name
alone as mortgagor, without any indication that he was signing for and in behalf
of the property owner, the mortgage was declared void for being entered into
by one who had no ownership over the property mortgaged, and the agent
bound himself as the only debtor of under the loan obtained from the bank.
(13) To Accept or Repudiate an Inheritance
Under Article 1044 of the Civil Code, any person "having the free disposal
of his property may accept or repudiate an
120
252
SCRA
92
(1996).
1
2
1
4
8
P
h
i
l
.
5
3
132
NON-CORPORATE MEDIA OF DOING BUSINESS
inheritance," which obviously under paragraph 13 of Article 1878 constitute acts
of strict dominion.
While there is no doubt that repudiation of an inheritance is an act that
goes against the interest of the principal and would require the grant of a special
power of attorney if it is to be done through an agent, the acceptance of
inheritance has another basis upon which it cannot be an implied power of his
agent: the acceptance of an inheritance involves an act of gratitude on the part
of the heir, and therefore cannot be presumed to be a "burden" that the
principal is presume to accept as a matter of course.
(14) To Ratify or Recognize Obligations Contracted Before the Agency
"Ratify" is a legal term that involves the acceptance of a contract, which is
either voidable or unenforceable, and has the effect cleansing such contract of
its legal defects that retroacts to the date of its perfection. Under Articles 1392
and 1396, "Ratification extinguishes the action to annul a voidable contract,"
and "cleanses the contract from all its defects from the moment it was
constituted." When it comes to unenforceable contracts, under Article 1404,
those contracts that are governed by the Statutes of Frauds "are ratified by the
failure to object to the presentation of oral evidence to prove the same, or by
the acceptance of benefits under them."
Paragraph numbered 14 of Article 1878 clearly recognizes that the act of
ratifying or cleansing a defect contract that therefore could validly be enforced
against the principal is an act of strict ownership, and cannot be effected by the
agent without special power of attorney.
"Recognition" of an obligation refers to acknowledging what was a
natural obligation which was not therefore the subject of civil enforcement; it
has the effect of making a former natural obligation be transformed into a civil
obligation that can be enforced against the estate of the principal. Recognition is
an act of strict ownership which can only be performed by an agent on behalf of
the principal who possesses a special power of attorney.
FORMALITIES OF AGENCY
133
In Bank of PI v. De Coster, where it appeared that a wife gave her
husband a power of attorney "to loan and borrow money" and to mortgage her
property, the Court held that such fact did not carry with it or imply that he had
a legal right to sign her name to a promissory note which would make her liable
for the payment of a pre-existing debt of the husband or that of his firm, for
which she was not previously liable, or to mortgage her property to secure the
pre-existing debt.
(15) Any Other Act of Strict Dominion
Generally, the sale or purchase of even personal properties should be
treated as acts of strict dominion and would require a special power of attorney
to be executed by the agent in behalf of the principal. But under Article 1877, a
sale or purchase made in the ordinary course of management is merely an act of
administration and, therefore, included in agency couched in general terms.
The clear implication under paragraph numbered 15 of Article 1878, is that
those that may be constituted as acts of strict ownership, but not so specifically
named in the first fourteen paragraphs, would always need a special power of
attorney to be executed in behalf of the principal by the agent, but not being
specifically enumerated in the first fourteen paragraphs, it is possible that such
acts which are nominally perceived as acts of strict ownership may, depending
on circumstances prevailing in each case, be shown to be mere acts of
administration, and may be governed by a general power of attorney, or may be
implied or incidental from express powers or from the nature of the business
covered by the agency arrangement.
In Garcia v. De Manzano, one of the issues to be resolved was whether a
power of attorney that granted the son the following powers: "To enable him to
buy or sell, absolutely or under pacto de retro, any of the rural or urban estates
that I now own and
1
2
3
4
7
P
h
i
l
.
5
9
NON-CORPORATE MEDIA OF DOING BUSINESS
134
may
acquire
in
the
future,
at
such
price
as
he
may
deem
most
advantageous,
which
he
shall
collect
in
cash
or
by
installments
and
under
such
conditions
as
he
may
consider
proper,
and
he
shall
set
forth
the
encumbrances
on
the
properties
and
their
origin.
I
bind
myself
to
warrant
and
defend,
in
accordance
with
law,
the
titles
to
such
properties;
and
if
the
properties
alienated
by
this
agreement
should
be
redeemed,
he
is
empowered
to
redeem
them
by
paying
the
price
that
may
have
been
fixed,
and,
for
this
purpose,
shall
execute
the
proper
instrument,"
would
grant
him
authority
to
sell
the
half-interest
that
the
principal
had
in
a
boat.
The
court
held
in
the
affirmative,
ruling
as
follows
The power-of-attorney authorizes the sale of real property, the
buying of real property and mortgaging the same, the borrowing of
money and in fact is general and complete.
The power does not expressly state that the agent may sell the
boat, but a power so full and complete and authorizing the sale of
real property, must necessarily carry with it the right to sell a half
interest in a small boat. The record further shows the sale was
necessary in order to get money or a credit without which it would
be impossible to continue the business which was being conducted
125
in the name of Narciso L. Manzano and for his benefit.
De Manzano is authority to show that although the power to sell
immovables must be contained in a special power of attorney, and therefore
always constitutes an act of strict ownership, the sale or encumbrance of
movables may constitute either acts of administration or acts of strict
ownership, depending on the prevailing circumstances. Thus, in De Manzano,
the grant of the express power to manage the entire business affairs of the
principal, was deemed to include the power to sell co-ownership interest in
movable property, especially when the sale was necessary to conduct the
business of the principal.
lbid, at p. 585.
135
FORMALITIES OF AGENCY
d. Doctrine of Implied Powers Flowing from Express
Powers
Even when the rule In special powers of attorney is that in any of the cases
covered within the first fourteen paragraphs of Article 1878 are deemed to have
been granted to the agent only when so "named" or "expressly granted" by the
principal, there is still applicable the doctrine of "implied powers" that the
grant of express powers or special power of attorney must necessarily include all
power implied or incidental to such express powers, even if they amount to acts
of ownership or strict dominion.
For example, an agent granted under a power of attorney the authority to
deal with property which the principal might or could have done if personally
present, is deemed authorized to engage the services of a lawyer to preserve the
ownership and possess of the properties of the principal.
Thus, in Government of PI v. Wagner, the Court held that a co-owner
who is made an attorney-in-fact, with the same power and authority to deal
with the property which the principal might or could have had if personally
present, may adopt the usual legal means to accomplish the object, including
acceptance of service and engaging of legal counsel to preserve the ownership
and possession of the principal's property.
27
In Municipal Council oflloilo v. Evangelists,' it was held that an
attorney-in-fact empowered to pay the debts of the principal and to employ
legal counsel to defend the principal's interest, has certainly the implied power
to pay on behalf of the principal the attorney's fees charged by the lawyer.
In Robinson Fleming v. Cruz, it was held that when an agent has been
duly empower to sell hemp in a foreign country, such authority necessarily
includes the power of the agent to making a contract of sale in behalf of the
principal, since his
126
54
Phil.
132
(1929).
55
Phil.
290
128
(1930).
94
Phil.
42
(1926).
i27
136
NON-CORPORATE MEDIA OF DOING BUSINESS
power
to
sell
carries
with
it
the
authority
to
make
and
enter
into
the
usual
and
customary
contract
for
its
sale.
e.
Special
Power
of
Attorney
Excludes
General
Power
of
Attorney
Over
the
Matter
Covered
by
the
Special
Power
of
Attorney
ART. 1926. A general power of attorney is revoked by a special
one granted to another agent, as regards the special matter involved
in the latter, (n)
Under
Article
1926
of
the
Civil
Code,
"A
general
power
of
attorney
is
revoked
by
a
special
one
granted
to
another
agent,
as
regards
the
special
matter
involved
in
the
latter."
The
article
does
not
really
cover
"general
power
of
attorneys"
as
those
which
empowers
an
agent
to
executed
only
powers
of
administration,
and
a
"special
power
of
attorneys"
as
those
which
grants
to
the
agent
the
power
to
enter
into
acts
of
ownership
in
the
name
of
the
principal,
for
indeed
the
two
types
of
powers
of
attorney
cover
different
aspects
of
the
principal's
affair
and
can
exists
consistently
together
in
two
different
agents.
The
powers
of
attorneys
referred
to
in
Article
1926
are
the
ones
covered
under
Article
1876
where
the
general
power
of
attorney
is
really
the
"universal
agency"
which
"comprises
all
the
business
of
the
principal,"
whereas,
the
"special
power
of
attorney"
is
more
properly
termed
as
the
"particular
agency"
which
covers
"one
or
more
specific
transactions."
The
issues
raised
under
this
section
are
properly
discussed
in
detail
in
Chapter
5
on
Extinguishment
of
Agency.
What
seems
more
appropriate
to
address
is
the
proposition:
Does
the
grant
of
specific
power
of
attorney
(whether
general
or
special)
exclude
the
grantee-agent
the
power
to
executed
all
other
acts
of
administration?
The
answer
seems
to
be
in
FORMALITIES OF AGENCY
137
the
affirmative
under
the
principle
that
if
the
principle
decides
to
detail
the
powers
he
grants
to
the
agent,
then
he
means
to
exclude
all
other
powers
of
administration
other
than
those
that
are
incidental
to
those
specifically
granted.
129
Thus, Pineda v. Court of Appeals, covered the principle that when an
agent has been granted an express power of attorney, then the agent cannot
execute any other act, whether it be an act of administration or an act of
ownership outside the language of the power of attorney.
Pineda held that where the instrument which grants to the agent the
power "To follow-up, ask, demand, collect and receipt for my benefit
indemnities or sum due me relative to the sinking of M.V. NEMOS in the vicinity
of El Jadida, Casablanca, Morocco on the evening of February 17, 1986," which is
a special power of attorney (i.e., particular agency), excluded any intent to grant
a general power of attorney or to constitute a universal agency. Being special
powers of attorney, they must be strictly construed. The instrument cannot be
read to give power to the attorney- in-fact "to obtain, receive, receipt from" the
insurance company the proceeds arising from the death of the seaman-insured,
especially when the commercial practice for group insurance of this nature is
that it is the employer-policyholder who took out the policy who is empowered
to collect the proceeds on behalf of the covered insured or their beneficiaries.
oOo
129
226 SCRA 754 (1993).
CHAPTER
3
POWER
&
AUTHORITY,
DUTIES
&
OBLIGATIONS,
AND
RIGHTS
OF
THE
AGENT
GENERAL OBLIGATION OF AGENT WHO
ACCEPTS THE AGENCY
ART. 1884. The agent is bound by his acceptance
to carry out the agency and is liable for the damages
which, through his non-performance, the principal
may suffer.
He must also finish the business already begun
on the death of the principal, should delay entail
any danger. (1718)
Under
Article
1884
of
the
New
Civil
Code,
when
an
agent
accepts
the
appointment
of
the
principal,
a
contract
of
agency
arises,
and
at
that
point
the
agent
is
legally
bound
to
carry
out
the
terms
of
the
agency;
otherwise,
if
he
fails
or
refuses
to
carry
on
the
agency,
he
shall
be
liable
for
damages
suffered
by
the
principal
by
reason
of
his
nonfeasance
or
non-performance.
The
article
emphasizes
the
principle
that
once
the
agent
accepts
the
principal's
appointment,
the
agent
is
bound
to
comply
with
his
duty
of
diligence
or
care.
Article
1884
also
expresses
in
the
realm
of
Agency
Law
the
contract
law
principles
of
consensuality,
mutuality
and
obligatory
138
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
139
force
expressed
in
Articles
1159
and
1315
of
the
New
Civil
Code,
which
provide
that
"Obligations
arising
from
contracts
have
the
force
of
law
between
the
contracting
parties
and
should
be
complied
with
in
good
faith,"
and
that
"Contracts
are
perfected
by
mere
consent,
and
from
that
moment
the
parties
are
bound
not
only
to
the
fulfillment
of
what
has
been
expressly
stipulated
but
also
to
all
the
consequences
which,
according
to
their
nature,
may
be
in
keeping
with
good
faith,
usage
and
law."
Likewise,
Article
1356
of
the
New
Civil
Code
provides
that
"Contracts
shall
be
obligatory,
in
whatever
form
they
may
have
been
entered
into,
provided
all
the
essential
requisites
for
their
validity
are
present."
Finally,
Article
1308
provides
that
the
"contract
must
bind
both
contracting
parties;
its
validity
or
compliance
cannot
be
left
to
the
will
of
one
of
them."
Despite
the
obligatory
nature
of
every
contract
of
agency,
note
that
Article
1884
emphasizes
the
point
that
when
an
agent
refuses
to
comply
with
his
obligations,
the
remedy
of
the
principal
is
to
sue
him
for
damages,
since
an
action
for
specific
performance
is
not
available
for
personal
obligations
to
do.
The
liability
of
an
agent
for
damages
when
he
fails
to
carry
out
his
obligations
is
consistent
with
the
terms
of
Article
1170
of
the
New
Civil
Code
which
provides
that
"Those
who
in
the
performance
of
their
obligations
are
guilty
of
fraud,
negligence,
or
delay,
and
those
who
in
any
manner
contravene
the
tenor
thereof,
are
liable
for
damages."
This
same
principle
is
expressed
in
Article
1909
of
the
Law
on
Agency,
which
provides
that
"The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
adjudged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation."
Although
a
contract
of
agency
is
terminated
ipso
jure
upon
the
death
of
the
principal,
nonetheless,
Article
1884
of
the
New
Civil
Code
expressly
provides
that
the
agent
must
finish
the
business
already
begun
upon
death
of
principal
should
delay
entail
any
danger.
In
other
the
words,
the
obligatory
force
of
the
duty
of
the
agent
to
act
with
diligence
exceeds
the
formal
termination
of
the
agency
relationship,
which
automatically
comes
about
by
the
death
of
the
principal.
The
provision
emphasizes
the
characteristic
of
agency
as
a
preparatory
and
progressive
contract:
that
it
is
140
NON-CORPORATE MEDIA OF DOING BUSINESS
constituted
not
for
its
own
sake,
by
primarily
to
be
the
basis
by
which
the
agent
may
enter
into
juridical
acts
on
behalf
of
the
principal
with
respect
to
third
parties.
Consequently,
even
when
the
agency
relation
is
terminated
upon
the
death
of
the
principal,
the
commenced
but
unfinished
contracts
and
transactions
then
pending
must
be
fulfilled
by
the
agent
on
behalf
of
the
decedent,
when
continuation
of
representation
is
necessary.
1.
Measure
of
Damage
for
Agent's
Non-Performance
of
Obligation
We
begin
with
the
principle
enunciated
early
on
in
Heredia
v.
Salinas
construing
the
original
version
of
Article
1884
(Article
1718
of
the
old
Civil
Code),
where
the
Supreme
Court
held
that
the
burden
is
on
the
person
who
seeks
to
make
an
agent
liable
to
show
that
the
losses
and
damage
caused
were
occasioned
by
the
fault
or
negligence
of
the
agent;
mere
allegation
without
substantiation
is
not
enough
to
make
the
agent
personally
liable.
2
In Philippine National Bank v. Manila Surety, where the holder of an
exclusive and irrevocable power of attorney to make collections, failed to collect
the sums due to the principal and thereby allowed the allotted funds to be
exhausted by other creditors, such agent was adjudged to have failed to act with
the care of a good father of a family required under Article 1887 of the New Civil
Code and became personally liable for the damages which the principal suffered
through his non-performance.
3
In BA Finance v. Court of Appeals, under the deed of chattel mortgage,
the finance company was constituted as an attorney- in-fact for the mortgagors
with full power and authority to file, follow-up, prosecute, compromise or settle
insurance claims; to sign execute and deliver the corresponding papers, receipts
and documents to the insurance company as may be necessary to prove the
claim, and to collect from the latter the proceeds
'10 Phil. 157 (1908).
2
14 SCRA 776
3
(1965).
201 SCRA 157
(1991).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
141
of
insurance
to
the
extent
of
its
interests,
in
the
event
that
the
mortgaged
car
suffers
any
loss
or
damage,
the
grant
of
power
constituted
the
finance
company
as
the
agent
of
the
mortgagors.
When
the
mortgaged
motor
vehicle
figured
in
an
accident
that
would
have
allowed
recovery
for
total
loss
on
the
insurance
claim,
and
the
mortgagors
had
instructed
the
finance
company
to
make
such
claim,
but
instead
it
opted
to
have
the
motor
vehicle
repaired,
the
Court
decreed
that
the
failure
and
refusal
of
the
finance
company
to
seek
total
loss
claims
on
the
vehicle
mortgaged
against
the
insurance
company,
constituted
negligence
and
not
outright
refusal
to
comply
with
the
instructions
of
the
principals,
and
rendered
it
liable
for
damages.
It
held
that
under
Article
1884
of
the
New
Civil
Code,
the
finance
company
was
bound
by
its
acceptance
to
carry
out
the
agency,
and
is
liable
for
damages
which,
through
its
non-performance,
the
principals-mortgagors
may
suffer.
Consequently,
by
reason
of
the
loss
suffered
by
the
principals,
the
Court
held
that
the
finance
company
could
no
longer
collect
on
the
unpaid
balance
of
the
promissory
note
secured
by
the
chattel
mortgage.
OBLIGATION
OF
AGENT
WHO
DECLINES
AGENCY
ART. 1885. In case a person declines an agency, he is bound to
observe the diligence of a good father of a family in the custody and
preservation of the goods forwarded to him by the owner until the
latter should appoint an agent. The owner shall as soon as practicable
either appoint an agent or take charge of the goods, (n)
When a person declines the offer to make him an agent, generally no
contract of agency arises and thereby no obligation is assumed by such person to
the offeror based on the absence of privity. However, Article 1885 of the New
Civil Code provides for the following exceptions (i.e., when the offeree, in spite
of his
142
NON-CORPORATE MEDIA OF DOING BUSINESS
refusal to accept the appointment, assumes certain liabilities), thus: "he is
bound to observe the diligence of a good father of a family in the custody and
preservation of the goods forwarded to him by the owner until the latter should
appoint an agent." The duty of care over goods given to his custody can only
cover a "reasonable period," because the same article provides that "The owner
shall as soon as practicable either appoint an agent or take charge of the goods."
We should compare the obligations of a person who declines an agency,
from one who withdraws from an agency he previously accepted. Under Article
1929, even if an agent withdraws from the agency for a valid reason, "he must
continue to act until the principal has had reasonable opportunity to take the
necessary steps to meet the situation."
The provisions of Articles 1885 and 1929 constitute rare instances where a
duty of diligence is owed by a person to another outside of an existing
contractual bond.
GENERAL RULE ON AGENT'S POWER AND AUTHORITY
ART.
1881.
The
agent
must
act
within
the
scope
of
his
authority.
He
may
do
such
acts
as
may
be
conducive
to
the
accomplishment
of
the
purpose
of
the
agency.
(1714a)
ART.
1882.
The
limits
of
the
agent's
authority
shall
not
be
considered
exceeded
should
it
have
been
performed
in
a
manner
more
advantageous
to
the
principal
than
that
specified
by
him.
(1715)
ART.
1887.
In
the
execution
of
the
agency,
the
agent
shall
act
in
accordance
with
the
instructions
of
the
principal.
In
default
thereof,
he
shall
do
all
that
a
good
father
of
a
family
would
do,
as
required
by
the
nature
of
the
business.
(1719)
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
143
ART.
1888.
An
agent
shall
not
carry
out
an
agency
if
its
execution
would
manifestly
result
in
loss
or
damage
to
the
principal,
(n)
ART.
1889.
The
agent
shall
be
liable
for
damages
if,
there
being
a
conflict
between
his
interests
and
those
of
the
principal,
he
should
prefer
his
own.
(n)
1. Statutory Measures of Compliance by the Agent of His Fiduciary Duties of
Obedience and Diligence
Article 1887 of the New Civil Code provides succinctly the twin measures
of how an agent should act "In the execution of the agency," which ought to be
as follows:
(a)
Agent must act "in accordance with the instructions of the
principal;"
(b)
In default of guiding instructions, the agent "shall do all that a
good father of a family would do, as required by the nature of
the business."
The
twin
duties
of
the
agent
in
the
execution
of
the
agency
can
be
summarized
in
the
Agency
Law
doctrine
embodied
in
Article
1881
of
the
New
Civil
Code
that
"The
agent
must
act
within
the
scope
of
his
authority"
In
Corporate
Law
parlance,
that
same
concept
in
covered
by
the
terms
"duty
of
obedience"
and
"duty
of
diligence."
DUTY
OF
OBEDIENCE
On
the
first
level,
the
duty
to
act
in
accordance
with
the
instructions
of
the
principal
lies
as
the
heart
of
the
principal
agency
relations,
and
best
encapsulized
in
the
term
"duty
of
obedience"
Since
by
definition
under
Article
1868
of
the
New
Civil
Code,
the
agent
assumes
the
obligation
to
represent
the
principal,
then
the
foremost
duty
of
every
agent
so
appointed
must
be
to
follow
the
144
NON-CORPORATE MEDIA OF DOING BUSINESS
instructions of the principal. Thus, in Victorias Milling Co. v. Court of Appeals* in
trying to distill the essence of what distinguishes a contract of agency from a
contract of agency to sell, the Supreme Court held
It is clear from Article 1868 that the basis of agency is
representation. . . . One factor which most clearly distinguishes
agency from other legal concepts is control', one person - the agent
- agrees to act under the control or direction of another - the
principal. Indeed, the very word "agency has come to connote
5
control by the principal.
Another way of looking at the same principle is to consider that since the
essence of every contract of agency is for the agent to enter into contractual or
juridical relationships in the name of the principal, then in orderforthe principal
to be bound by the contracts or transactions entered into by his agent with third
parties, it is essential under Contract Law principle of consensuality, that it is the
principal's consent that is given by the agent to the contract or transaction;
otherwise, the principal cannot be held liable for a contract or transaction to
which he never gave his consent. Article 1881 of the New Civil Code provides
that the agent must act "within the scope of his authority," which means that
since the agent acts in representation of the principal, he must enter into
juridical relations on behalf of the principal and representing the will or consent
of the principal, and not his (agent's) own will.
One of the clearest examples that the agent has given the consent of the
principal to a contract or a transaction, is when he acts in accordance with the
instructions of the principal. There is no doubt that when an agent complies
with the instructions of his principal, he is acting within the scope of his
authority.
Nonetheless, the underlying obligation of the agent to follow the
instructions of the principal, is still a personal obligation "to do," and the
expression of the principal's will depends much on how the agent obeys his
instructions. In the event that the
<333 SCRA 663
(2000).
*lbid, at pp.
675-676.
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
145
agent
refuses
to
follow
the
Instructions
of
the
principal,
then
the
obligatory
nature
of
the
agency
relationship
is
preserved
by
two
legal
consequences
mandated
by
law:
First,
the
agent
becomes
personally
liable
for
damages
arising
from
a
breach
of
his
duty
of
obedience
to
the
principal.
Second,
since
the
agent
had
not
given
the
principal's
consent
to
the
contract
or
transaction
entered
into
with
a
third
party,
the
principal
is
not
personally
bound
by
the
terms
of
such
contract
or
transactions.
Third,
it
would
then
be
the
agent
who
may
become
personally
liable
for
the
contract
or
transaction.
Thus,
Article
1898
of
the
New
Civil
Code
provides
"If
the
agent
contracts
in
the
name
of
the
principal,
exceeding
the
scope
of
his
authority,
and
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.
In
this
case,
however,
the
agent
is
liable
if
he
undertook
to
secure
the
principal's
ratification."
DUTY
OF
DILIGENCE
Often,
agency
relation
is
entered
into
mainly
for
business
or
commercial
ventures,
and
it
is
not
expected
that
the
principal
can
cover
all
contingencies
with
specific
instructions,
or
that
every
act
of
the
agent
must
be
based
on
detailed
instructions
of
the
principal.
The
agent
is
expected
to
use
his
business
discretion
as
the
principal
would
or
could,
if
personally
present.
Therefore,
we
should
consider
the
principal's
instructions
as
the
limit
of
an
agent's
power;
and
that
in
the
absence
of
limiting
instructions,
it
is
expected
that
the
agent
uses
his
best
judgment
to
stay
within
the
scope
of
the
principal's
authority
granted
to
him.
This
is
part
of
the
"duty
of
diligence"
of
every
agent
who
accepts
an
agency
designation.
Thus,
Article
1887
of
the
New
Civil
Code
provides
that
in
default
of
the
principal's
instructions,
the
agent
"shall
do
all
that
a
good
father
of
a
family
would
do,
as
required
by
the
nature
of
the
business."
This
is
not
to
say
that
when
the
principal
has
given
detailed
instructions
to
the
agent,
that
the
agent
is
no
longer
bound
to
146
NON-CORPORATE MEDIA OF DOING BUSINESS
exercise
due
diligence,
for
indeed
every
agent
is
a
party
to
a
contract
of
agency,
not
a
mere
robot,
who
is
expected
to
exercise
prudence
in
following
the
instructions
of
the
principal.
This
principle
is
also
expressed
under
Article
1881
of
the
New
Civil
Code,
which
provides
that
the
agent
"may
do
such
acts
as
may
be
conducive
to
the
accomplishment
of
the
purpose
of
the
agency."
Likewise,
Article
1882
provides
that
"The
limits
of
the
agent's
authority
shall
not
be
considered
exceeded
should
it
have
been
performed
in
a
manner
more
advantageous
to
the
principal
than
that
specified
by
him."
In
other
words,
an
agent
not
only
has
express
powers,
but
also
implied
powers
emanating
from
the
express
powers
granted
to
him;
as
well
as
incidental
powers
necessary
in
order
to
achieve
the
purpose
for
which
the
agency
was
constituted.
6
In
Tan
Tiong
v.
SEC,
it
was
held
that
the
agent
is
not
deemed
to
have
exceeded
his
authority
should
he
perform
the
agency
in
a
manner
more
advantageous
to
the
principal
than
that
indicated
by
the
principal.
Thus,
when
the
agent
sold
the
car
of
the
principal
for
more
than
the
amount
indicated
by
the
principal,
then
he
had
not
exceeded
his
authority
because
a
higher
price
was
more
advantageous
to
the
principal.
The
principle
was
reiterated
in
the
syllabus
of
the
published
decision
in
7
Olaguer
v.
Purugganan,
Jr.,
where
it
is
written
that
under
Article
1882
of
the
New
Civil
Code
the
limits
of
an
agent's
authority
shall
not
be
considered
exceeded
should
it
have
been
performed
in
a
manner
advantageous
to
the
principal
than
that
specified
by
him.
In
that
decision,
the
manner
by
which
the
attorney-in-fact
pursued
the
sale
of
the
shares
of
the
principal,
and
the
payment
of
the
consideration
so
as
not
to
reveal
that
he
owned
such
shares
as
requested
by
the
principal,
were
all
deemed
to
have
been
executed
by
the
agent
within
the
scope
of
his
authority.
In
essence,
the
duty
of
diligence
requires
of
the
agent
to
act
on
behalf
of
the
principal
exercising
the
due
diligence
of
a
"69 Phil. 425
7
(1940).
515 SCRA460
(2007).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
147
good
father
of
a
family;
and
he
is
in
breach
of
such
fiduciary
duty
when
he
acts
in
fraud
or
in
negligence,
even
when
he
pursues
the
business
of
the
principal.
Articles
1887
and
1909
of
the
New
Civil
Code
confirm
the
truism
that
in
the
pursuit
of
the
agency,
it
is
expected
that
the
agent
would
have
to
act
based
on
his
own
assessment
of
what
is
necessary
under
the
situation
when
it
is
not
covered
by
an
express
instruction
from
the
principal.
The
agent
is
supposed
to
exercise
the
business
judgment
expected
from
the
principal
when
entering
into
juridical
relations
with
third
parties
or
pursuing
the
business
under
his
management.
As
a
matter
of
guideline
of
what
is
within
his
power,
Article
1888
provides
that
the
agent
"shall
not
carry
out
an
agency
if
its
execution
would
manifestly
result
in
loss
or
damage
to
the
principal."
Notice
that
the
article
covers
only
acts
that
would
"manifestly"
lead
to
losses;
in
other
words,
the
agent
cannot
be
a
guarantor
that
the
principal
would
suffer
no
loss
or
damage
in
the
pursuit
of
the
agency;
human
nature
as
it
is,
the
sustaining
of
losses
due
to
human
error
is
part
of
the
risk
of
every
owner
or
principal
assumes,
even
when
he
himself
carries
on
the
business.
The
obligation
of
the
agent
is
to
avoid
losses
which
are
clearly
avoidable
from
the
exercise
of
due
diligence
of
a
good
father
of
a
family.
1.
Measure
of
Liability
for
Breach
of
Duty
of
Diligence
When
an
agent
violates
his
duty
of
diligence,
he
becomes
personally
liable
to
the
principal
for
the
damages
caused
to
the
principal
by
reason
of
his
fraud
or
negligence.
It
should
be
emphasized
however,
that
when
the
agent
acts
in
accordance
with
the
instructions
of
the
principal,
the
agent
cannot
be
deemed
to
have
acted
in
fraud
against
the
principal
or
to
have
acted
negligently,
even
when
damage
was
caused
to
the
principal.
Thus,
Article
1899
provides
that
"If
a
duly
authorized
agent
acts
in
accordance
with
the
orders
of
the
principal,
the
[principal]
cannot
set
up
the
ignorance
of
the
agent
as
to
circumstances
whereof
he
himself
was,
or
ought
to
have
been,
aware."
148
NON-CORPORATE MEDIA OF DOING BUSINESS
2. When Agent Is Guilty of Fraud or Negligence
ART.
1909.
The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation.
(1726)
Article
1909
of
the
New
Civil
Code
provides
that
"The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation."
8
Domingo
v.
Domingo,
in
noting
that
"Article
1909
of
the
New
Civil
Code
9
is
essentially
a
reinstatement
of
Article
1726
of
the
old
Spanish
Civil
Code,"
held
that
the
provisions
of
Article
1909
-
. . .
demand
the
utmost
good
faith,
fidelity,
honesty,
candor
and
fairness
on
the
part
of
the
agent,
the
real
estate
broker
in
this
case,
to
his
principal,
the
vendor.
The
law
imposes
upon
the
agent
the
absolute
obligation
to
make
a
full
disclosure
or
complete
account
to
his
principal
of
all
his
transactions
and
other
material
facts
relevant
to
the
agency,
so
much
so
that
the
law
as
amended
does
not
countenance
any
stipulation
exempting
the
agent
from
such
an
obligation
and
considers
such
an
exemption
as
void.
The
duty
of
an
agent
is
likened
to
that
of
a
trustee.
This
is
not
a
technical
or
arbitrary
rule
but
a
rule
founded
on
the
highest
and
10
truest
principle
of
morality
as
well
as
of
the
strictest
justice.
The
provisions
of
Article
1909
are
an
implementation
of
the
duty
of
diligence
expressed
in
Article
1887
which
provides
that
in
the
execution
of
the
agency,
the
agent
shall
act
in
accordance
42
SCRA
131
(1971).
ibid,
at
p.
137.
10
/b/d,
at
p.
137.
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
149
with
the
instructions
of
the
principal,
and
in
default
of
instructions,
the
agent
"shall
do
all
that
a
good
father
of
a
family
would
do,
as
required
by
the
nature
of
the
business;"
and
Article
1888,
which
provides
that
an
agent
"shall
not
carry
out
an
agency
if
its
execution
would
manifestly
result
in
loss
or
damage
to
the
principal."
On
the
other
hand,
an
agent
cannot
be
held
personally
liable
by
the
principal
for
damages
caused
where,
as
provided
under
Article
1899,
the
"agent
acts
in
accordance
with
the
orders
of
the
principal,
the
principal
cannot
set-up
the
ignorance
of
the
agent
as
to
circumstances
whereof
he
himself
was,
or
ought
to
have
been,
aware."
This
refers
to
the
liability
incurred
by
the
principal
as
to
third
parties:
having
appointed
an
ignoramus
for
an
agent,
who
acts
in
accordance
with
the
principal's
instruction
(i.e.,
does
not
use
good
judgment),
the
principal
cannot
avoid
his
obligations
arising
from
the
contract.
Article
1909
is
also
the
legal
basis
by
which
an
agent
becomes
personally
liable
to
third
parties
who
are
injured
by
his
act
of
fraud
or
negligence.
In
Cadwallader
v.
Smith
Bell,"
where
the
agent
by
means
of
misrepresentation
of
the
condition
of
the
market
induces
his
principal
to
sell
to
him
the
property
consigned
to
his
custody,
at
a
price
less
than
that
for
which
he
has
already
contracted
to
sell
part
of
it,
and
who
thereafter
disposed
of
the
whole
at
an
advance,
was
held
liable
to
principal
for
the
difference.
The
Court
held
that
such
conduct
on
the
part
of
the
agent
constituted
fraud,
entitling
the
principal
to
annul
the
contract
of
sale.
Although
commission
earned
by
the
agent
on
the
fraudulent
sale
may
be
disallowed,
nonetheless
commission
earned
from
other
transactions
which
were
not
tainted
with
fraud
should
be
allowed
the
agent.
12
Austria v. Court of Appeals, held that in consignment of goodsforsale, as
aform of agency, the consignee-agent is relieved from his liability to return the
goods received from the consignor- principal when it is shown by preponderance
of evidence in the
11
7
Phil.
461
(1907).
39
SCRA
527
(1971).
12
150
NON-CORPORATE MEDIA OF DOING BUSINESS
civil
case
brought
that
the
goods
were
taken
from
the
custody
of
the
consignee
by
robbery,
and
no
separate
conviction
of
robbery
is
necessary
to
avail
of
the
exempting
provisions
under
Article
1174
of
the
New
Civil
Code
for
force
majeure.
3
In Metrobank v. Court of Appeals,' the Court brushed aside the
contention that since it was merely acting as collecting bank, it was the drawee
bank that should be held liable for the loss of a depositor: "In stressing that it
was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not
exactly true. On the contrary, Article 1909 of the New Civil Code clearly provides
that" the agent is responsible not only for fraud, but also for negligence.
In British Airways v. Court of Appeals,'* in overturning the ruling of the
appellate court that a principal airline company which is made to pay damages
to one of its passengers, had no cause of action to recover the amount paid from
its agent airline company which it accused of causing the negligent act, the
Supreme Court held that
Parenthetically, the Court of Appeals should have been
cognizant of the well-settled rule that an agent is also responsible
for any negligence in the performance of its function [Art. 1909, Civil
Code] and is liable for the damages which the principal may suffer
by reason of its negligent act [Art. 1884, Civil Code]. Hence, the
Court of Appeals erred when it opined that BA, being the principal,
15
had no cause of action against PAL, its agent or sub-contractor.
The Court also noted in British Airways, that since the passenger was
seeking damages for breach of contract of carriage, its cause of actic>n was only
against the principal airline (BA), and not PAL since the latter was not a party to
the contract; but that "this is not to say that PAL is relieved from any liability
"
1
9
4
S
C
R
A
1
6
9
(
1
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
151
16
due
to
any
of
its
negligent
acts."
The
Court
then
affirmed
that
the
procedural
remedy
that
BA
took,
that
of
filing
a
third-party
complaint
against
PAL,
was
correct,
"for
the
purpose
of
ultimately
determining
who
was
primarily
at
fault
as
between
them."
DUTY
OF
LOYALTY
1.
Duty
of
Loyalty
in
General
ART.
1889.
The
agent
shall
be
liable
for
damages
if,
there
being
a
conflict
between
his
interests
and
those
of
the
principal,
he
should
prefer
his
own.
(n)
Article
1889
of
the
New
Civil
Code
sets-out
what
in
corporate
parlance
is
known
as
the
"duty
of
loyalty
as
it
pertains
to
an
agent:
"The
agent
shall
be
liable
for
damages
if,
there
being
a
conflict
between
his
interest
and
those
of
the
principal,
he
should
prefer
his
own."
Agency
relation
is
essentially
fiduciary
in
character,
which
requires
of
the
agent
to
observe
utmost
good
faith
and
loyalty
to
the
principal.
When
an
agent
violates
his
duty
of
loyalty,
as
where
in
a
conflict-of-interests
situation
he
prefers
his
own
interest
to
the
detriment
of
the
principal,
Article
1899
does
not
declare
the
contract
or
transaction
he
entered
into
to
be
void,
but
merely
makes
the
agent
liable
for
the
damages
suffered
by
the
principal.
In
Corporate
Law,
when
a
director
or
officer
violates
his
duty
of
loyalty
to
the
corporation,
he
is
bound
to
disgorge
to
the
corporation
all
the
profits
and
earnings
he
obtain
from
his
breach
of
duty,
even
when
he
used
his
17
own
capital
or
funds
for
the
contract
or
transaction.
The
"claw-back
doctrine"
is
applicable
in
Agency
Law.
lbid,
at
p.
464.
"Sees.
31
and
34,
Corporation
Code.
152
NON-CORPORATE MEDIA OF DOING BUSINESS
a. Measure of Damages Due to the Principal When Agent Violates His
Duty of Loyalty
Article 1891 of the New Civil Code provides that the agent "is bound to
render an account of his transactions and to deliver to the principal whatever he
may have received by virtue of the agency, even though it may not be owing to
the principal." The principal therefore has the right to demand that the agent
should turn-over to him whatever contract, property or business has been
acquired by the agent in breach of his duty of loyalty.
18
Sing
Juco
and
Sing
Bengco
v.
Sunyantong
and
Llorente, held
that
a
confidential
employee
who,
knowing
that
his
principal
was
negotiating
with
the
owner
of
some
land
for
the
purchase
thereof,
surreptitiously
succeeds
in
buying
the
land
in
the
name
of
his
wife,
committed
an
act
of
disloyalty
and
infidelity
to
his
principal,
whereby
he
becomes
liable,
among
other
things,
for
the
damages
caused,
which
meant
to
transfer
the
property
back
to
the
principal
under
the
terms
and
conditions
offered
to
the
original
owner.
19
In
Severino
v.
Severino,
the
Court
reiterated
the
rule
that
the
relations
of
an
agent
to
his
principal
are
fiduciary
and
in
regard
to
the
property
forming
the
subject-matter
of
the
agency,
he
is
estopped
from
acquiring
or
asserting
a
title
adverse
to
that
of
the
principal.
Consequently,
an
action
in
personam
will
lie
against
an
agent
to
compel
him
to
return
or
retransfer
to
his
principal,
or
the
latter's
estate,
the
real
property
committed
to
his
custody
as
such
agent
and
also
to
execute
the
necessary
documents
of
conveyance
to
effect
such
retransfer.
20
Aboitiz
v.
De
Silva,
held
that
an
agent
cannot
represent
both
himself
and
his
principal
in
a
transaction
involving
the
shifting
to
another
person
of
the
agent's
liability
for
a
debt
to
the
principal.
The
agent
was
held
to
remain
liable
for
the
account
to
the
principal.
18
43
Phil.
589
(1922).
1
0
4
4
P
h
i
l
.
3
4
3
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
153
In jurisprudence, a guilty agent is made to forfeit the commission that
21
otherwise should be due to him, as penalty for violation of his duty of loyalty.
In Criminal Law, the agent who refuses or fails to return to the principal
22
the funds or property received may be held liable for estafa.
b. When Agent Contracts in His Own Name on a Matter that Falls
Within the Scope of the Agency
Article 1883 of the New Civil Code provides that "If an agent acts in his
own name, the principal has no right of action against the person with whom the
agent has contracted; neither have such persons against the principal." In such a
case, it is the agent who "is the one directly bound in favor of the person with
whom he has contracted, as if the transaction were his own, except when the
contract involves things belonging to the principal."
If the matters entered into by the agent in his own name are matters that
are within the scope of his authority or those pertaining to matters that should
pertain to the business of the principal, there would be no doubt that the agent
has breached his fiduciary duty of loyalty, by having preferred his own interests
to that of the principal's. Whether the agent has used his own funds or property,
or those of the principal's, he would still be in breach of this fiduciary duty, and
under Article 1891 of the New Civil Code, he "is bound to render an account of
his transactions and to deliver to the principal whatever he may have received
by virtue of the agency, even though it may not be owing to the principal." In
either case, therefore, the principal has the right to demand that the agent
should turn-over to him whatever contract, property or business has been
acquired by the agent in breach of his duty of loyalty.
23
In Strong v. Guiterrez Repide, the U.S. Supreme Court, in reversing a
decision of the Philippine Supreme Court during
21
U.S. v. Reyes, 36 Phil. 792 (1917); Domingo v. Domingo, 42 SCRA 131
(1971).
22
U.S. v. Kiene, 7 Phil. 736 (1907).
*41 Phil. 947 (1909).
154
NON-CORPORATE MEDIA OF DOING BUSINESS
the
American
colonization
era,
held
that
the
director
and
general
manager
of
the
stock
corporation,
who
also
was
the
majority
stockholder,
and
was
designated
to
be
the
main
negotiator
for
the
company
with
the
Government
for
the
sale
of
its
large
tract
of
land,
having
special
knowledge
of
commercial
information
that
would
increase
the
value
of
the
shares
in
relation
to
the
sale
of
the
parcels
of
land
to
the
Government,
could
legally
be
treated
as
being
an
agent
of
the
stockholders
of
the
company,
with
a
fiduciary
obligation
to
reveal
to
the
other
stockholders
such
special
information
before
proceeding
to
purchase
from
the
other
stockholders
their
shares
of
stock.
Consequently,
since
such
director
purchased
the
shares
of
a
stockholder
without
having
disclosed
important
facts
or
to
render
the
appropriate
report
on
the
expected
increase
in
value
of
the
company,
there
was
fraud
committed
for
which
the
director
was
held
liable
for
the
earnings
earned
against
the
stockholder
on
the
sale
of
shares.
24
In Miguel v. Court of Appeals, the Court held that
. . . a fiduciary relation arises where one man assumes to act
as agent for another and the other reposes confidence in him,
although there is no written contract or no contract at all. If the
agent violates his duty as fiduciary, a constructive trust arises. It is
immaterial that there was no antecedent fiduciary relation and that
25
it arose contemporaneously with the particular transaction.
If the agent had used the funds belonging to the principal, under Article
1896 of the New Civil Code he "owes interest on the sums he has applied to his
own use from the day on whteh he did so, and on those which he still owes after
the extinguishment of the agency." The provisions of this article presumes that
the property or business acquired by the agent for his own in violation of his
fiduciary duty is one that the principal is not demanding to be delivered to him.
This is clear from Article 1918
24
29 SCRA 760 (1969).
^Ibid, at p. 777, citing Scott on Trusts, 3rd ed., Vol. V, p. 2544, citing Harrop
v. Cole,, 85 N.J. Eq. 32, 95 A. 378, affd 86 N.J. Ea. 250, 98 A. 1085.
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
155
of
the
New
Civil
Code
which
provides
that
"The
principal
is
not
liable
for
the
expenses
incurred
by
the
agent.
.
.
[i]f
the
agent
acted
in
contravention
of
the
principal's
instructions,
unless
the
latter
should
wish
to
avail
himself
of
the
benefits
derived
from
the
contract."
In
other
words,
if
the
contract
or
business
acquired
by
the
agent
in
breach
of
his
duty
of
loyalty
is
demanded
by
the
principal
to
be
turned
over
to
him,
then
the
use
of
the
principal's
sum
to
acquire
such
business
would
be
deemed
to
have
been
ratified,
and
the
agent
is
not
personally
liable
for
the
interests
due
on
said
amount.
In
addition,
Article
1455
of
the
New
Civil
Code
(on
implied
trusts),
provides
that
"When
any
trustee,
guardian
or
other
person
holding
a
fiduciary
relationship
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
to
him
or
to
a
third
person,
a
trust
is
established
by
operation
of
law
in
favor
of
the
person
to
whom
the
funds
belong."
c.
Particular
Rules
on
Conflict-of-lnterests
Situations
(1)
Purchase
of
Principal's
Property
ART. 1491. The following persons cannot
acquire by purchase, even at a public or judicial
auction, either in person or through the mediation
of another:
x x x
(2) Agents, the property whose administration
or sale may have been entrusted to them, unless
the consent of the principal has been given;
xxx (1459a)
ART. 1492. The prohibitions in the two preceding
articles are applicable to sales in legal redemption,
compromises and renunciation, (n)
NON-CORPORATE MEDIA OF DOING BUSINESS
156
Article
1491(2)
of
the
New
Civil
Code
provides
for
any
conflict-of-interest
situation
when
it
provides
that
an
agent
is
prohibited
from
buying
property
entrusted
to
him
for
administration
or
management,
without
the
principal's
consent.
Even
when
an
agent
is
authorized
to
sell
the
property,
and
he
sells
it
to
himself
for
valuable
consideration
but
without
the
consent
of
the
principal,
the
sale
would
be
void.
x
In
Barton
v.
Leyte
Asphalt,
where
the
prevailing
statutory
rule
then
was
Article
267
of
the
Code
of
Commerce
which
declared
that
no
agent
shall
purchase
for
himself
or
for
another
that
which
he
has
been
ordered
to
sell,
the
Court
held
that
a
sale
by
a
broker
to
himself
without
the
consent
of
the
principal
would
be
void
and
ineffectual
whether
the
broker
has
been
guilty
of
fraudulent
conduct
or
not.
Consequently,
such
broker
is
not
entitled
to
receive
any
commission
under
the
contract,
much
less
any
reimbursement
of
expenses
incurred
in
pursuing
and
closing
such
sales.
Araneta,
Inc.
v.
Del
Paterno*
held
that
the
prohibition
in
Article
1491(2)
of
the
New
Civil
Code
which
renders
an
agent
legally
incapable
of
buying
the
properties
of
his
principal
connotes
the
idea
of
trust
and
"confidence;
and
so
where
the
relationship
does
not
involve
considerations
of
good
faith
and
integrity
the
prohibition
should
not
and
does
not
apply.
To
come
under
the
28
prohibition,
the
agent
must
be
in
a
fiduciary
relation
with
his
principal."
29
Olaguerv. Purugganan, Jr.i, recognized that the prohibition against
agents purchasing property in their hands for sale or management is clearly not
absolute; when so authorized by the principal, the agent is not disqualified from
purchasing the property he holds under a contract of agency to sell.
46
Phil.
938
27
(1924).
91
Phil.
786
2B
(1952).
lbid,
at
p.
804.
SCRA460
(2007).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
157
(2) When Agent Empowered to Borrow or Lend Money
ART. 1890. If the agent has been empowered to borrow money,
he may himself be the lender at the current rate of interest. If he has
been authorized to lend money at interest, he cannot borrow it
without the consent of the principal, (n)
Article 1890 provides that when the agent is empowered to borrow or
lend money by the principal, then:
(a) If empowered to borrow money, he may be the
lender at current interest; and
(b) If empowered to lend money at interest, he cannot
borrow without principal's consent.
(i) What Happens When the Agent Violates His Obligations
under Article 1890?
In the case where the agent was the lender to the principal and charged
interest higher than the current rate, the difference would have to be returned
to the principal. If the agent borrows for himself without the principal's consent
the money which the principal has authorized him to lend out, he would not
only be liable for the current interest that the principal would have earned had it
been lent out to a third party, he would also be liable for damages that the
principal may have suffered.
30
In
Hodges
v.
Salas
and
Salas,
the
Court
held
that
when
the
power
granted
to
the
agent
was
only
to
borrow
money
and
mortgage
principal's
property
to
secure
the
loan,
it
cannot
be
interpreted
to
include
the
authority
to
mortgage
the
properties
to
support
the
agent's
personal
loans
and
use
the
proceeds
63 Phil. 567 (1936).
158
NON-CORPORATE MEDIA OF DOING BUSINESS
thereof
for
his
own
benefit.
The
lender
who
lends
money
to
the
agent
knowing
that
is
was
for
personal
purpose
and
not
for
the
principal's
account,
is
a
mortgagee
in
bad
faith
and
cannot
foreclose
on
the
mortgage
thus
constituted
for
the
account
of
the
agent.
In
addition,
the
Court
ruled
that
"In
cases
like
the
present
one,
it
should
be
understood
that
the
agent
was
obligated
to
turn
over
31
the
money
to
the
principals,
or,
at
least
place
it
at
their
disposal."
(3)
Obligation
To
Turn-Over
to
the
Principal
Whatever
Received
by
Virtue
of
the
Agency
Under
Article
1891
of
the
New
Civil
Code,
every
agent
is
bound
to
deliver
to
the
principal
whatever
he
may
have
received
by
virtue
of
the
agency,
even
though
it
may
not
be
owing
to
the
principal,
and
even
when
given
to
him
for
his
benefit.
32
In
Ojinaga
v.
Estate
of
Perez,
the
Court
held
that
it
matters
not
how
fair
the
conduct
of
the
agent
may
have
been
in
a
particular
case,
nor
that
the
principal
would
have
been
no
better
of
if
the
agent
had
strictly
pursued
his
power,
nor
that
the
principal
was
not,
in
fact,
injured
by
the
intervention
of
the
agent
for
his
own
profit.
The
result
in
both
cases
is
the
same;
the
profits
shall
still
pertain
to
the
principal.
The
matter
shall
be
discussed
immediately
hereunder
in
conjunction
with
the
duty
of
every
agent
to
account.
d.
Obligation
of
Agent
to
Render
an
Account
ART. 1891. Every agent is bound to render an account of his
transactions and to deliver to the principal whatever he may have
received by virtue of the agency, even though it may not be owing to
the principal.
3i
lbid,
at
p.
578.
9
Phil.
185
(1907).
32
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
159
Every stipulation exempting the agent from the obligation to
render an account shall be void. (1720a)
Under
1891
of
the
New
Civil
Code,
"Every
agent
is
bound
to
render
an
account
of
his
transactions
and
to
deliver
to
the
principal
whatever
he
may
have
received
by
virtue
of
the
agency,
even
though
it
may
not
be
owing
to
the
principal.
Every
stipulation
exempting
the
agent
from
the
obligation
to
render
an
account
shall
be
void."
The
duty
to
account
and
to
turn
over
to
the
principal
all
profits
and
gains
received
in
the
pursuit
of
the
agency
is
an
integral
part
of
the
agent's
fiduciary
duty
of
loyalty.
The
Supreme
Court
explained
in
Domingo
v.
Domingo
the
present
version
under
Article
1891
was
taken
from
Article
1720
of
the
old
Spanish
New
Civil
Code,
with
the
first
paragraph
consisting
"in
changing
the
phrase
'to
pay'
to
'to
34
deliver,'
which
latter
term
is
more
comprehensive
than
the
former."
Domingo
also
noted
that
the
second
paragraph
of
Article
1891
which
declared
void
any
stipulation
seeking
to
exempt
an
agent
from
the
obligation
to
render
an
account,
"is
a
new
addition
designed
to
stress
the
highest
loyalty
that
is
required
to
an
agent
condemning
as
void
any
stipulation
exempting
the
35
agent
from
the
duty
and
liability
imposed
on
him
in
paragraph
one
thereof."
Domingo
discussed
the
legal
consequences
when
the
duty
of
fidelity
is
breached
by
an
agent,
thus
Hence,
an
agent
who
takes
a
secret
profit
in
the
nature
of
a
bonus,
gratuity
or
personal
benefit
from
the
vendee,
without
revealing
the
same
to
his
principal,
the
vendor,
is
guilty
of
a
breach
of
his
loyalty
to
the
principal
and
forfeits
his
right
to
collect
the
commission
from
his
principal,
even
if
the
principal
does
not
suffer
any
injury
by
reason
of
such
breach
of
fidelity,
or
that
he
obtained
better
results
or
that
42 SCRA 131 (1971).
"Ibid, at p. 137. *lbid,
at p. 137.
160
NON-CORPORATE MEDIA OF DOING BUSINESS
the agency is a gratuitous one, or that usage or customs allows it;
because the rule is to prevent the possibility of any wrong, not to
remedy or repair an actual damage. By taking such profit or bonus
or gift or propina from the vendee, the agent thereby assumes a
position wholly inconsistent with that of being an agent for his
principal, who has a right to treat him, insofar as his commission is
concerned, as if no agency had existed. The fact that the principal
may have been benefited by the valuable services of the said agent
does not exculpate the agent who has only himself to blame for
38
such a result by reason of his treachery or perfidy.
The Court then went on to cite cases under the old Spanish Civil Code
where a rigorous application of Article 1720 was made:
In U.S. v. Kiene an insurance agent was convicted of estafa for
his failure to deliver sums of money paid to him as an insurance
agent for the account of his employer;
In In Ojinaga v. Estate of Perez an administrator of an estate
was made liable under Article 1720 for failure to render an
account of his administration to the heirs unless the heirs
consented thereto or are estopped by having accepted the
correctness of his account previously rendered;
In
U.S.
v.
Reyes,
an
agent
was
made
liable
for
estate
for
failure
to
deliver
to
his
principal
the
total
amount
collected
by
him
in
behalf
of
his
principal
and
could
not
retain
the
commission
pertaining
to
him
by
subtracting
the
same
from
his
collection.
In In Re: Bambergera lawyer was made liable under Article 1720
when he failed to deliver to his
39
lbid,
at
pp.
137-138.
3
7
7
P
h
i
l
.
7
3
6
(
1
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
client all the money and property received by him for
his client despite his attorney's lien; and
41
In Duhart v. Macias, the duty of a commission
agent to render a full account of his operations to his
principal was reiterated.
Domingo also cited American jurisprudence that apply the
doctrine under Article 1891, thus:
The American jurisprudence on this score is well-nigh
unanimous.
Where a principal has paid an agent or broker a
commission while ignorant of the fact that the latter has been
unfaithful, the principal may recover back the commission
paid, since an agent or broker who has been unfaithful is not
entitled to any compensation.
x x x
In discussing the right of the principal to recover
commissions retained by an unfaithful agent, the court in
Little vs. Phipps (1911) 208 Mass. 33I, 94 NE 260, 34 LRA
(NS) 1046, said: 'It is well settled that the agent is bound
to exercise the utmost good faith in his dealings with his
principal. As Lord Cairns said, this rule "is not a technical or
arbitrary rule. It is a rule founded on the highest and truest
principles of morality." Parker vs. McKenna (1874) LR10 Ch
(Eng) 96, 118.. If the agent does not conduct himself with
entire fidelity towards his principal, but is guilty of taking a
secret profit or commission in regard the matter in which
he is employed, he loses his right to compensation on the
ground that he has taken a position wholly inconsistent
with that of agent for his employer, and which gives his
employer, upon discovering it, the right to treat him so far
as compensation, at least, is concerned as if no agency had
existed. This may operate to give to the principal the benefit
of valuable services rendered by the agent, but the agent
has only himself to blame for that result.
x x x
"54 Phil. 513(1930).
161
162
NON-CORPORATE MEDIA OF DOING BUSINESS
The
intent
with
which
the
agent
took
a
secret
profit
has
been
held
immaterial
where
the
agent
has
in
fact
entered
into
a
relationship
inconsistent
with
his
agency,
since
the
law
condemns
the
corrupting
tendency
of
the
inconsistent
relationship.
Little
vs.
Phipps
(1911),
94
NE
260.
As
a
general
rule,
it
is
a
breach
of
good
faith
and
loyalty
to
his
principal
for
an
agent,
while
the
agency
exists,
so
to
deal
with
the
subject
matter
thereof,
or
with
information
acquired
during
the
course
of
the
agency,
as
to
make
a
profit
out
of
it
for
himself
in
excess
of
his
lawful
compensation:
and
if
he
does
so
he
may
be
held
as
a
trustee
and
may
be
compelled
to
account
to
his
principal
for
all
profits,
advantages,
rights,
or
privileges
acquired,
by
him
in
such
dealings,
whether
in
performance
or
in
violation
of
his
duties,
and
be
required
to
transfer
them
to
his
principal
upon
being
reimbursed
for
his
expenditures
for
the
same,
unless
the
principal
has
consented
to
or
ratified
the
transaction
knowing
that
benefit
or
profit
would
accrue,
or
had
accrued,
to
the
agent,
or
unless
with
such
knowledge
he
has
allowed
the
agent
so
as
to
change
his
condition
that
he
cannot
be
put
in
status
quo.
The
application
of
this
rule
is
not
affected
by
the
fact
that
the
principal
did
not
suffer
any
injury
by
reason
of
the
agent's
dealings,
or
that
he
in
fact
obtained
better
results;
nor
is
it
affected
by
the
fact
that
there
is
a
usage
or
42
custom
to
the
contrary,
or
that
the
agency
is
a
gratuitous
one.
However,
Domingo
also
held
that
the
duty
embodied
in
Article
1891
to
account
will
not
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
43
object
thereto."
The
Court
also
held
in
Domingo
that
Paragraph
2
of
Article
1891
(waiver
of
duty
to
account
is
void)
is
designed
to
stress
the
highest
loyalty
that
is
required
of
an
agent.
Article
1891
(and
Article
1909)
imposed
upon
the
agent
the
absolute
obligation
to
make
a
full
disclosure
or
complete
account
to
his
principal
of
all
his
transactions
and
other
material
facts
relevant
to
the
agency,
so
much
so
that
the
law
does
not
countenance
any
stipulation
"Ibid,
at
pp.
138-140.
lbid,
at
p.
140.
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
163
exempting
the
agent
form
such
obligation
and
condemns
as
void
such
stipulation.
The
duty
of
an
agent
is
likened
to
that
of
a
trustee.
This
is
not
a
technical
or
arbitrary
rule
but
a
rule
founded
on
the
highest
and
truest
principle
of
morality
as
well
as
of
the
strictest
justice.
In
Dumaguin
v.
Reynoldsthe
Court
held
that
it
is
immaterial
whether
such
money
or
property
is
the
result
of
the
performance
or
violation
of
the
agent's
duty,
if
it
be
the
fruit
of
the
agency,
it
must
be
accounted
for
and
turned
over
to
the
principal.
If
his
duty
is
strictly
performed,
the
resulting
profit
accrues
to
the
principal
as
the
legitimate
consequence
of
the
relation;
if
profit
accrues
from
his
violation
of
duty
while
executing
the
agency,
that
likewise
belongs
to
the
principal,
not
only
because
the
principal
has
to
assume
the
responsibility
of
the
transaction,
but
also
because
the
agent
cannot
be
permitted
to
derive
advantage
from
his
own
default.
In
Guzman
v.
Court
of
Appeals,
it
was
held
that
an
agent,
unlike
a
servant
or
messenger,
has
both
the
physical
and
juridical
possession
of
the
goods
received
in
agency,
or
the
proceeds
thereof,
which
take
the
place
of
the
goods
after
their
sale
by
the
agent.
His
duty
to
turn
over
the
proceeds
of
the
agency
depends
upon
his
discharge
as
well
as
the
result
of
the
accounting
between
him
and
the
principal,
and
he
may
not
set
up
his
right
of
possession
as
against
that
of
the
principal
until
the
agency
is
terminated.
Therefore,
when
the
agent
enters
into
a
contract
that
should
pertain
to
the
principal,
but
in
his
own
name,
it
would
be
a
violation
of
his
duty
of
loyalty
to
the
principal,
and
as
between
the
principal
and
the
agent,
the
latter
must
account
to
the
principal
for
ail
profits
earned
from
the
transaction.
(i)
When
Agent
may
Legally
Withhold
Property
from
the
Principal
Under
Article
1914
of
the
New
Civil
Code,
the
agent
may
retain
in
pledge
the
things
which
are
the
object
of
the
agency
until
"92
Phil.
66
45
(1952).
99
Phil.
703
(1956).
164
NON-CORPORATE MEDIA OF DOING BUSINESS
the
principal
effects
the
reimbursement
and
pays
the
indemnity
provided
in
Articles
1912
and
1913.
SPECIFIC
OBLIGATION
RULES
FOR
AGENTS
1.
Obligation
to
Advance
Funds
ART. 1886. Should there be a stipulation that the agent shall
advance the necessary funds, he shall be bound to do so except when
the principal is insolvent, (n)
There is no common-law duty or obligation on the part of the agent to
advance his own funds in behalf of the principal; for indeed, one of the
distinguishing characteristic of every agency is that the agent does not
personally become liable for the contracts and transactions pursued in behalf of
the principal.
Under Article 1886 of the New Civil Code, the only time that an agent is
legally bound to advance personal funds in the pursuit of the agency is when
such obligation has been expressly agreed upon in the creation of the contract of
agency. But even in such a case, the agent may refuse to advance any personal
funds when the principal is insolvent. Indeed, under Article 1919(3) of the New
Civil Code, insolvency of the principal extinguishes the agency.
2. Liability of Agent for Interest
ART.
1896.
The
agent
owes
interest
on
the
sums
he
has
applied
to
his
own
use
from
the
day
on
which
he
did
so,
and
on
those
which
he
still
owes
after
the
extinguishment
of
the
agency.
(1724a)
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
165
Under
Article
1896
of
the
New
Civil
Code,
the
agent
would
owe
interest
to
the
principal
on
the
following
items:
(a)
On
sums
the
agent
applied
to
his
own
use
from
the
time
he
used
them;
and
(b)
On sums owing the principal which remain outstanding at the
time of extinguishment of the agency, with interest to run
from the time of such extinguishment.
6
47
In Ojinaga v. Estate of Perez,* Mendezona v. Vda. De Goitia, and A.L.
6
Ammen Transportation Co. v. De Margallo,* the Supreme Court recognized the
two distinct cases covered under Article 1896.
9
In Borja v. De Botja,* the Court ruled that there is no interest due on
sums owed by the agent to the principal which have not been the result of
agent's conversion to his own use, such agent would be liable for interests to
run from the date the agency is extinguished until he pays such sums.
POWER OF AGENT TO APPOINT A SUBSTITUTE
ART. 1892. The agent may appoint a substitute if the principal
has not prohibited him from doing so; but he shall be responsible for
the acts of the substitute:
(1) When he was not given the power to appoint one;
48
9
Phil.
185(1907).
54
Phil.
557
"54
Phil.
570
(1930).
49
(1930).
58
Phil.
811
(1933).
47
166
NON-CORPORATE MEDIA OF DOING BUSINESS
(2)
When
he
was
given
such
power,
but
without
designating
the
person,
and
the
person
appointed
was
notoriously
incompetent
or
insolvent.
All
acts
of
the
substitute
appointed
against
the
prohibition
of
the
principal
shall
be
void.
(1721)
ART.
1893.
In
the
cases
mentioned
in
Nos.
1
and
2
of
the
preceding
article,
the
principal
may
furthermore
bring
an
action
against
the
substitute
with
respect
to
the
obligations
which
the
latter
has
contracted
under
the
substitution.
(1722a)
Article
1892
of
the
New
Civil
Code
sets
the
default
rule
that
the
agent
may
appoint
a
substitute
if
the
principal
has
not
prohibited
him
from
doing
so.
This
has
reversed
the
rule
under
the
old
Civil
Code
that
without
express
power
to
do
so,
an
agent
is
without
authority
to
appoint
a
substitute.
In
Del
Rosario
v.
La
Badenia,the
principal
was
held
liable
upon
a
sub-agency
contract
entered
into
by
its
selling
agent
in
the
name
of
the
principal,
where
it
appears
that
the
general
agent
was
clothed
with
such
broad
powers
as
to
justify
the
interference
that
he
was
authorized
to
execute
contracts
of
this
kind,
and
it
not
appearing
from
the
record
what
limitations,
if
any,
were
placed
upon
his
powers
to
act
for
his
principal,
and
more
so
when
the
principal
had
previously
acknowledged
the
transactions
of
the
subagent.
51
Therefore, Baltazarv. Ombudsman erroneously expressed the old rule
when it held that The legal maxim potestas delegate non delegare potest; a
power once delegated cannot be re- delegated, while applied primarily in
political law to the exercise of legislative power, is a principle of agency for
another, a re- delegation of the agency would be detrimental to the principal as
52
the second agent has no privity of contract with the former.
33
Phil.
316
51
(1916).
510
SCRA
74
"Ibid,
at
p.
85.
(2006).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
167
3
The prevailing rule is better expressed in Escueta v. Lim,* where the
father who had given her daughter a special power of attorney to sell real
properties, was held incapable of legally seeking the declaration of nullity of the
sale effected by the substitute agent appoint by the daughter: "Applying [Article
1892 of the New Civil Code] to the special power of attorney executed by [the
father] in favor of his daughter..., it is clear that she is not prohibited from
appointing a substitute. By authorizing [the sub-agent] to sell the subject
properties, [the daughter] merely acted within the limits of the authority given
by her father, but she will have to be 'responsible for the acts of the sub-agent,'
among which is precisely the sale of the subject properties in favor of
54
respondents."
Although the last paragraph of Article 1892 provides that "All acts of the
substitute appointed against the prohibition of the principal shall be void," the
contracts are really unenforceable insofar as the principal is concerned and
55
subject to his ratification. Thus, in Escueta v. Lim, the Court held that in a
situation where the special power of attorney to sell a piece of land contains a
prohibition to appoint a substitute, but nevertheless the agent appoints a
substitute who executes the deed of sale in name of the principal, while it may
be true that the agent may have acted outside the scope of his authority, that
did not make the sale void, but merely unenforceable under the second
paragraph of Article 1317 of the New Civil Code. And only the principal denied
the sale, his acceptance of the proceeds thereof are tantamount to ratification
thereof.
56
International
Films
(China)
v.
Lyric
Film,
held
that
a
sub-
agent
cannot
be
held
at
greater
liability
that
the
main
agent,
and
when
the
subagent
has
not
received
any
special
instructions
from
the
agent
to
insure
the
object
of
the
agency,
the
subagent
cannot
be
held
liable
for
the
loss
of
the
thing
from
fire,
which
was
shown
to
be
truly
a
force
majeure.
512 SCRA 411
(2007).
"
I
b Phil. 778
"63
i
(1936).
d
,
a
t
p
p
.
NON-CORPORATE MEDIA OF DOING BUSINESS
168
1. Effects When Agent Appoints a Substitute
a. When the Sub-agent Appointed Pursuant to the Instructions of
the Principal
When the agent appoints a substitute agent in accordance with the
instructions of the principal, clearly the sub-agent is really an agent of the
principal as well, and privity exists between the principal and the sub-agent.
Any act done by the agent or the substitute in behalf of the principal is
deemed the act of the principal.
In addition, the agent does not bear personal responsibility for the fraud
or negligence of the sub-agent, for the agent merely acted within the scope of
his authority or in accordance with the instructions of the principal when he
appointed the sub-agent. The exception to this rule of course is that provided
under Article 1892(2), "When [the agent] has been given the power, but without
[the principal] designating the person, and the person appointed was
notoriously incompetent or insolvent."
b. When the Sub-agent Not Prohibited by Principal
Under the terms of Article 1892, when there is no prohibition on the part
of the principal on the matter, then every agent has the power to appoint a
sub-agent, but in such a case, the agent is responsible for acts of substitute.
(a)
he was not given power to appoint one; or
(b)
he was given such power without designating the person and
substitute is notoriously incom-petent or insolvent.
In
either
case,
under
Article
1893
of
the
New
Civil
Code,
the
principal
may
furthermore
bring
an
action
against
the
substitute
with
respect
to
the
obligations
which
the
latter
has
contracted
under
the
substitution.
57
In Villa v. Garcia Gosque, a sub-agent appointed by the agent to collect
the deferred installments from the sale of property
OT
49 Phil. 126 (1920).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
169
made by an attorney-in-fact was held to be without authority to enter into a
new contract with the transferee by modifying the terms of the sale and
releasing the solidary sureties in the original contract. The releases were
deemed to be invalid insofar as the principal was concerned.
56
In Serona v. Court of Appeals, the Court held that if the appointment of a
sub-agent which was neither prohibited or authorized, has occasioned the
incurring of damages by the principal, the agent shall be primarily responsible
for the acts of the substitute, in accordance with the provisions of Article
1892(1).
c. When the Sub-Agent Appointed Against the Principal's Prohibition
The clear implication under Article 1892, is that when the principal has
prohibited the agent from appointing a substitute, and yet the agent goes ahead
and appoints one, then the agent is personally liable for the acts of the
substitute, as though the contracts of the substitute were his own. In addition,
Article 1892 provides that in such a case "All acts of the substitute appointed
against the prohibition of the principal shall be void."
The implication from the language used in Article 1893 specifically
referring only to case covered under paragraphs (1) and (2) of Article 1892, is
that the principal would have no cause of action against the substitute.
CONSIDERATION OF THE FIDUCIARY DUTIES OF THE AGENT AS TO THIRD
PARTIES
ART. 1900. So far as third persons are concerned, an act is deemed
to have been performed within the scope of the agent's authority, if
such act is within
*392 SCRA 35 (2002).
170
NON-CORPORATE MEDIA OF DOING BUSINESS
the
terms
of
the
power
of
attorney,
as
written,
even
if
the
agent
has
in
fact
exceeded
the
limits
of
his
authority,
according
to
an
understanding
between
the
principal
and
the
agent,
(n)
ART.
1901.
A
third
person
cannot
set
up
the
fact
that
the
agent
has
exceeded
his
powers,
if
the
principal
has
ratified,
or
has
signified
his
willingness
to
ratify
the
agent's
acts,
(n)
ART.
1902.
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.
Private
or
secret
orders
and
instructions
of
the
principal
do
not
prejudice
third
persons
who
have
relied
upon
the
power
of
attorney
or
instructions
shown
them,
(n)
ART.
1911.
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,
(n)
The
terms
of
Article
1887
of
the
New
Civil
Code
which
effectively
states
that
when
an
agent
acts
contrary
to
the
instructions
of
his
principal,
he
is
deemed
to
have
acted
without
or
in
excess
of
authority,
is
a
rule
that
governs
the
relationship
of
the
principal
and
agent;
it
is
not
a
rule
that
essentially
addresses
the
interests
of
third
parties
with
whom
the
agent
enters
into
juridical
relations
on
behalf
of
the
principal.
Thus,
under
Article
1911
of
the
New
Civil
Code,
"Even
when
the
agent
has
exceeded
his
authority,
the
principal
remains
solidarily
liable
with
the
agent
if
the
[principal]
allowed
the
[agent]
to
act
as
though
he
had
full
powers."
Under
Article
1900
of
the
New
Civil
Code,
insofar
as
third
persons
are
concerned,
"an
act
is
deemed
to
have
been
performed
within
the
scope
of
the
agent's
authority,
if
such
act
is
within
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
171
the
terms
of
the
power
of
attorney,
as
written,
even
if
the
agent
has
in
fact
exceeded
the
limits
of
his
authority
according
to
an
understanding
between
the
principal
and
agent."
In
other
words,
as
to
third
parties
acting
in
good
faith,
the
written
instructions
of
the
principal
are
the
binding
powers
of
the
agent,
and
cannot
be
overcome
by
non-written
instructions
of
the
principal
not
made
known
to
them.
Thus,
under
the
old
Civil
Code,
where
there
was
no
counterpart
of
what
is
ss
now
Article
1900,
in
Bank
of
P.l.
v.
De
Coster,
the
Court
held
that
the
powers
and
duties
of
an
agent
are
confined
and
limited
to
those
which
are
specified
and
defined
in
his
written
power
of
attorney,
which
limitation
is
a
notice
to,
and
is
binding
upon,
the
person
dealing
with
such
agent.
In
effect,
when
the
power
of
attorney
of
the
agent
has
been
reduced
in
writing
by
the
principal,
it
constitute,
even
as
to
third
parties
dealing
with
the
agent,
the
highest
form
of
expression
of
the
extent
and
limitation
of
the
powers
of
the
agent,
and
third
parties
should
contract
on
the
basis
of
such
written
instrument.
Thus,
Article
1902
of
the
New
Civil
Code
provides
that
"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."
In
addition,
it
provides
that
"Private
or
secret
orders
and
instructions
of
the
principal
do
not
prejudice
third
persons
who
have
relied
upon
the
power
of
attorney
or
instruction
shown
them."
In
Eugenio
v.
Court
of
Appeals
the
Court
held
that
as
far
as
third
persons
are
concerned,
an
act
is
deemed
to
have
been
performed
within
the
scope
of
the
agent's
authority,
if
such
is
within
the
terms
of
the
power
of
attorney,
as
written,
even
if
the
agent
has
in
fact
exceeded
the
limits
of
his
authority
according
to
an
understanding
between
the
principal
and
his
agent.
Outside
of
the
written
power
of
attorney
of
an
agent,
third
parties
who
deal
with
such
agent
are
not
supposed
to
presume
that
the
agent
is
fully
authorized.
The
rule
has
always
been
that
59
47
Phil.
594
(1925).
SCRA
207
239
(1994).
NON-CORPORATE MEDIA OF DOING BUSINESS
172
every
person
dealing
with
an
assumed
agent
is
put
upon
an
inquiry
and
must
discover
upon
his
peril,
if
he
would
hold
the
principal
liable,
not
only
the
fact
of
61
the
agency
but
the
nature
and
extent
of
the
authority
of
the
agent.
62
In
Bacaltos
Coal
Mines
v.
Court
of
Appeals,
the
Court
held
that
every
person
dealing
with
an
agent
is
put
upon
inquiry
and
must
discover
upon
his
peril
the
authority
of
the
agent.
If
he
does
not
make
such
inquiry,
he
is
chargeable
with
knowledge
of
the
agent's
authority,
and
his
ignorance
of
that
authority
will
not
be
any
excuse.
Persons
dealing
with
an
assumed
agent,
whether
the
assumed
agency
be
a
general
or
special
one,
are
bound
at
their
peril,
if
they
would
hold
the
principal,
to
ascertain
not
only
the
fact
of
the
agency
but
also
the
nature
and
extent
of
the
authority,
and
in
case
either
is
63
controverted,
the
burden
of
proof
is
upon
them
to
establish
it.
In
Litonjua
v.
Fernandezthe
Court
held
that
a
person
dealing
with
a
known
agent
is
not
authorized,
under
any
circumstances,
blindly
to
trust
the
agents;
statements
as
to
the
extent
of
his
powers;
such
person
must
not
act
negligently
but
must
use
reasonable
diligence
and
prudence
to
ascertain
whether
the
agent
acts
within
the
scope
of
his
authority.
The
settled
rule
is
that,
persons
dealing
with
an
assumed
agent
are
bound
at
their
peril,
and
if
they
would
hold
the
principal
liable,
to
ascertain
not
only
the
fact
of
agency
but
also
the
nature
and
extent
of
authority,
and
in
case
either
is
controverted,
the
burden
of
proof
is
upon
them
to
prove
it.
This
was
reiterated
in
Litonjua,
Jr.
v.
65
Eternit
Corp.
66
In
Yu
Eng
Cho
v.
Pan
American
World
Airways,
Inc.,
the
Court
held
that
the
fact
that
one
is
dealing
with
an
agent,
whether
61
Strong v. Gutierrez Repide, 6 Phil. 680 (1960); Deen v. Pacific Commercial
Co., 42 Phil. 738 (1922); Veloso v. La Urbana, 58 Phil. 681 (1933); Toyota Shaw,
Inc. v. Court of Appeals, 244 SCRA320 (1995).
62
245 SCRA460 (1995).
^Reiterated in Escueta v. Lim, 512 SCRA411,420 (2007).
M
427 SCRA478 (2004).
^490 SCRA 204 (2006).
66
328 SCRA717 (2000).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
173
the agency be general or special, should be a danger signal. The mere
representation or declaration of one that he is authorized to act on behalf of
another cannot of itself serve as proof of his authority to act as agent or of the
extent of his authority as agent.
The authority or extent of authority of an agent cannot be established by
his own representations but upon the basis of the manifestations of the
principal himself. In case the fact of agency or the extent of the authority of the
agent is controverted, the burden of proof is upon the third person to establish
67
it
Nonetheless, in spite of the fact that the purported agent acts without
authority or in excess of authority, under Article 1901 of the New Civil Code, a
third person cannot set-up the fact that the agent has exceeded his powers, if
the principal has ratified, or has signified his willingness to ratify the agent's
acts.
Recently, in Villegas v. Lingan,<* the Court held that since, as a rule, the
agency, as a contract, is binding only between the contradicting parties, then
only the parties, as well as the third person who transacts with the parties
themselves, may question the validity of the agency or the violation of the
terms and conditions found therein.
1. Effects on the Agent of Contracts Entered Into Within the Scope of His
Authority
ART.
1897.
The
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts,
unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers.
(1725)
61
Velasco v. La Urbana; BA Finance Corp. v. Court of Appeals; Bacaltos Coal
Mines v. Court of Appeals', SaficAlcan & Cie v. Imperial Vegetable Oil Co., Inc.;
M
Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc. 526 SCRA
63 (2007).
174
NON-CORPORATE MEDIA OF DOING BUSINESS
ART.
1910.
The
principal
must
comply
with
all
the
obligations
which
the
agent
may
have
contracted
within
the
scope
of
his
authority.
As
for
any
obligation
wherein
the
agent
exceeded
his
power,
the
principal
is
not
bound
except
when
he
ratifies
it
expressly
or
tacitly.
(1727)
a. General Rule: Agent Is Not Personally Liable to Third Parties
Article 1897 of the New Civil Code expressly provides that "The agent who
acts as such is not personally liable to the party with whom he contracts," and
this is supplemented by Article 1910, which provides that "The principal must
comply with all the obligations which the agent may have contracted within the
scope of his authority."
According to the Court in Eurotech Industrial Technologies, Inc. v.
CuizonArticle 1897 of the New Civil Code reinforces the well-established
doctrine that an agent, who acts as such, is not personally liable to the party
with whom he contracts.
The basis of the rule set-out in Article 1897 finds its roots in the principle
of relativity in Contract Law which provides that a contract is binding only as
between the parties and their successors-in interest. Consequently, a person
acting as a mere representative of another acquires no rights whatsoever, nor
does he incur any liabilities arising from the said contract between his principal
70
and another party.
71
In
Ang
v.
Fulton
Fire
Insurance
Co.,
the
Court
held
that
when
the
agent
has
acted
within
the
scope
of
his
authority,
the
action
on
the
contract
must
be
brought
against
the
principal
and
69
521 SCRA 584 (2007).
Angeles v. Philippine National Railways (PNR), 500 SCRA 444 (2006).
Chua v. Total Office Products and Sen/ices (Topros), Inc., 471 SCRA 500 (2005);
Tan v. Engineering Sen/ices, 498 SCRA 93 (2006); Chong v. Court of Appeals, 527
SCRA 144 (2007).
7,
2 SCRA 945 (1961).
70
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
175
not
against
the
agent,
since
in
such
an
instance
the
agent
is
not
a
party
to
the
contract
sued
upon,
and
the
party
suing
has
no
cause
of
action
against
the
agent.
72
In Nepomuceno v. Heredia, where pursuant to the instructions of the
principals, the agent purchased a piece of land in their names and in the sums
given to him by the principal, and that after the fact of purchase the principals
had ratified the transaction and even received profits arising from the
investment in the land, but that eventually a defect in the title to the land arose,
the Court ruled that the principals could recover their lost investment from the
agent: "There is nothing in the record which would indicate that the defendant
failed to exercise reasonable care and diligence in the performance of his duty as
such agent, or that he undertook to guarantee the vendor's title to the land
73
purchased by direction of the plaintiffs."
In the same manner, in Esperanza and Bullo v. Catindigan action brought
in the name of the agent and not in the name of the principal who is the real
party in interest, must be dismissed not upon the merits, but upon the ground
that it has not been properly instituted.
75
In
Bay
View
Hotel
v.
Ker
&
Co.,
where
admissions
were
made
in
a
case
filed
by
an
agent
prior
to
the
amendment
of
the
petition
which
formally
included
the
principal
as
a
party
to
the
case,
the
Court
denied
the
argument
that
since
the
implied
admission
was
made
before
the
amendment
of
its
complaint,
it
cannot
work
to
the
benefit
of
the
principal,
thus
Moreover,
since
an
agent
may
do
such
acts
as
may
be
conducive
to
the
accomplishment
of
the
purpose
of
the
agency,
admissions
secured
by
the
agent
within
the
scope
of
the
agency
ought
to
favor
the
principal.
This
has
to
be
the
rule,
for
the
act
or
declarations
of
an
agent
of
the
party
within
the
scope
of
the
agency
and
during
its
existence
are
"7 Phil. 563 (1907).
n
lbid, at p. 566.
74
27 Phil. 397
75
(1914).
116 SCRA 327
(1982).
176
NON-CORPORATE MEDIA OF DOING BUSINESS
considered and treated in turn as declarations, acts and
representations of his principal and may be given in evidence
76
against such party.
77
Caoile
v.
Court
of
Appeals,
held
that
one
who
signs
a
receipt
as
a
witness
with
the
word
agent
typed
below
his
signature,
but
never
received
the
alleged
amount
or
anything
on
account
of
the
subject
transaction,
is
not
personally
liable.
78
In Uyv. Court of Appeals, agents who have been authorized to sell
parcels of land cannot claim personal damages in the nature of unrealized
commission by reason of the act of the buyer is refusing to proceed with the
sale: "Petitioners [agents] are not parties to the contract of sale between their
principals and NHA. They are mere agents of the owners of the land subject of
the sale. As agents, they only render some service or do something in
representation or on behalf of their principals. [Article 1868, New Civil Code.]
The rendering of such service did not make them parties to the contracts of sale
executed in behalf of the latter. Since a contract may be violated only by the
parties thereto as against each other, the real parties-in-interest, either as
plaintiff or defendant, in an action upon that contract must, generally, either be
79
parties to said contract."
0
In
Tan
v.
Engineering
Services,"
the
Court
held
that
the
essence
of
agency
being
the
representation
of
another,
it
is
evident
that
the
obligations
contracted
are
for
and
on
behalf
of
the
principal
as
a
consequence
of
this
representation
is
the
liability
of
the
principal
for
the
acts
of
his
agent
performed
within
the
limits
of
his
authority
that
is
equivalent
to
the
performance
by
the
principal
himself
who
should
answer
therefor.
An
agent
is
not
personally
liable
to
the
party
with
whom
he
contracts
unless
he
expressly
binds
himself
or
he
exceeds
the
76
lbid, at pp. 332-333.
"226 SCRA 658 (1993).
78
314 SCRA 69 (1999).
n
lbid, at p. 77, citing Marimperio Compania Naviera, S.A. v. Court of
Appeals, 156 SCRA 368 (1987).
498 SCRA 93 (2006).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
177
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers. '
Only
recently,
in
Soriamont
Steamship
Agencies,
Inc.
v.
Sprint
Transport
2
Services,
Inc.,*
the
Court
held
that
the
principle
embodied
in
Article
1897
would
require
that
if
the
principal
seeks
to
avoid
liability
on
the
principle
that
the
agent
acted
beyond
the
scope
of
his
authority
as
embodied
in
the
instrument,
then
the
burden
falls
upon
the
principal
to
prove
its
affirmative
allegations.
b.
Exception:
When
the
Agent
Expressly
Makes
Himself
Personally
Liable
Under
Article
1897
of
the
New
Civil
Code,
an
agent
can
be
held
personally
liable
on
a
contract
entered
into
in
the
name
of
the
principal
and
within
the
scope
of
authority,
when
such
agent
"expressly
binds
himself."
Thus,
the
personal
liability
of
the
agent
arises
from
voluntary
contractual
commitment.
In
such
an
instance,
unless
otherwise
indicated
in
the
contract,
the
liability
of
the
agent
with
the
principal
is
merely
joint,
and
not
solidary.
Early
on,
Tuason
v.
Orozcoheld
that
when
the
agent
expressly
bind
himself,
he
thereby
obligates
himself
personally
by
his
own
act,
but
that
does
not
relieve
the
principal
from
his
obligation
to
pay
the
debt
incurred
for
his
benefit.
M
In E. Macias and Co. v. Warner Barnes, and in Salonga v. Warner
Barnesthe Court held that since the scope and extent of the functions of an
adjustment and settlement agent are merely to settle and adjust claims in behalf
of his principal, and the same cannot be taken to mean that it includes the
assumption of personal liability. Thus, if claims are disapproved by the principal,
the agent does not assume any personal liability,
81
Zialcita-Yuseco v. Simmons, 97 Phil. 487 (1955); Banque Generate Beige v.
Walter, Bull & Co., Inc., 84 Phil. 164 (1949); Salmon & Pacific Commercial Co. v.
Tan Cueco, 36 Phil. 556 (1917).
82
592 SCRA 622 (2009).
"5 Phil. 596(1906).
M
43 Phil. 155 (1922).
"88 Phil. 125 (1951).
178
NON-CORPORATE MEDIA OF DOING BUSINESS
and
the
recourse
of
the
insured
is
to
press
his
claim
against
the
principal.
66
In
Smith
Bell
v.
Court
of
Appeals,
the
Court
held
that
the
appointment
by
a
foreign
insurance
company
of
a
local
settling
or
claim
agent,
clothed
with
power
to
settle
all
the
losses
and
claims
that
may
arise
under
the
policies
that
may
be
issued
by
or
in
behalf
of
the
foreign
company,
does
not
amount
to
a
contractual
acceptance
of
personal
liability
on
the
part
of
the
local
settling
or
claim
agent:
"An
adjustment
and
settlement
agent
is
no
different
from
any
other
agent
from
the
point
of
view
of
his
responsibilities,
for
he
also
acts
in
a
representative
capacity."
In
the
same
manner,
a
resident
agent,
as
a
representative
of
the
foreign
insurance
company,
is
tasked
only
to
receive
legal
processes
on
behalf
of
its
principal
and
not
to
answer
personally
for
the
any
insurance
claims.
67
Benguet
v.
BCI
Employees
held
that
under
Article
1897
of
the
New
Civil
Code,
when
the
agent
expressly
binds
himself
to
the
contract
entered
into
on
behalf
of
the
principal,
then
he
becomes
personally
bound
thereto
to
the
same
extent
as
the
principal.
But
the
doctrine
is
not
applicable
vice-versa,
since
everything
agreed
upon
by
the
principal
to
be
binding
on
himself
is
not
legally
binding
personally
on
the
agent.
Thus,
when
the
previous
agent
of
the
union
bound
itself
personally
liable
on
the
contracts
of
the
union,
the
new
agent
is
need
deemed
bound
by
the
assumption
undertaken
by
the
original
agent.
c.
Exception:
When
Agent
is
Guilty
of
Fraud
or
Negligence
ART.
1909.
The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation.
(1726)
B8
267 SCRA 530
(1997).
23 SCRA 465
(1968).
87
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
179
When
an
agent,
though
acting
within
the
scope
of
his
authority,
acts
with
fraud
or
negligence,
it
affects
two
levels
of
legal
relationships:
(a)
that
between
the
principal
and
the
agent;
and
(b)
insofar
a
third
parties
are
concerned,
when
they
have
entered
into
a
contract
with
the
agent
in
the
name
of
the
principal.
In
other
words,
an
agent's
fraudulent
or
negligent
acts
produces
two
sets
of
liabilities
for
him,
one
insofar
as
the
principal
is
concerned,
the
other
insofar
as
third
parties
are
concerned.
Article
1909
of
the
New
Civil
Code
provides
that
"The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation."
Article
1909
therefore
set
forth
the
general
principal
in
Agency
Law
that
when
an
agent,
in
executing
the
orders
and
commissions
of
his
principal,
carries
out
the
instructions
he
has
received
from
his
principal,
and
does
not
appear
to
have
exceeded
his
authority
or
to
have
acted
with
negligence,
deceit,
or
fraud,
he
cannot
be
held
responsible
for
the
failure
of
his
principal
to
88
accomplish
the
object
of
the
agency.
89
In
National
Bank
v.
Welch,
Fairchild
&
Co.,
the
Court
held
that
while
it
is
true
that
an
agent
who
acts
for
a
revealed
principal
in
the
making
of
a
contract
does
not
become
personally
bound
to
the
other
party
in
the
sense
that
an
action
can
ordinarily
be
maintained
upon
such
contract
directly
against
the
agent,
yet
that
rule
does
not
control
when
the
agent
cannot
intercept
and
appropriate
the
thing
which
the
principal
is
bound
to
deliver,
and
thereby
make
the
performance
of
the
principal
impossible.
The
agent
in
any
event
must
be
precluded
from
doing
any
positive
act
that
could
prevent
performance
on
the
part
of
his
principal,
otherwise
the
agent
becomes
liable
also
on
the
contract.
In
the
same
manner,
in
National
Power
Corp.
v.
National
Merchandising
Corp.,
the
Court
held
that
an
agent
becomes
88
Gutierrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915); G. Puyat &
Sons, Inc. v. Arco Amusement Company, 72 Phil. 402 (1941).
89
44 Phil. 780 (1923).
"117 SCRA 789 (1982).
180
NON-CORPORATE MEDIA OF DOING BUSINESS
personally
liable
when
by
his
wrong
or
omission,
he
deprives
the
third
person
with
whom
he
contracts
of
any
remedy
against
the
principal;
otherwise,
the
third
person
would
be
defrauded
if
he
would
not
be
allowed
to
recover
from
the
agent.
It
should
be
noted
that
the
provisions
of
Article
1909
should
not
be
read
to
conclude
that
because
the
agent
becomes
liable
personally
on
a
contract
entered
into
or
pursued
in
the
name
of
the
principal
tainted
with
fraud
or
negligence,
the
principal
is
therefore
exempted
from
liability
on
the
contract.
On
the
contrary,
Article
1909
presumes
that
the
fraudulent
or
negligent
act
of
the
agent
were
in
pursuit
of
the
business
or
affairs
of
the
principal,
and
since
the
acts
of
the
agent
are
by
law
those
of
the
principal,
it
means
that
both
the
principal
and
the
agent
are
deemed
joint
torfeasors,
and
are
deemed
liable
solidarily
insofar
as
third
parties
are
concerned.
The
remedy
of
the
principal
is
to
sue
the
agent
for
damages
sustained
due
to
agent's
fradulent
or
negligent
acts.
91
Thus, in Lopez v. Alvendia, the petitioners had issued a check in payment
of the judgment debt and made arrangements with the bank for the latter to
allow the encashment thereof; but the check was dishonored by the bank which
increased the amount of the judgment debt. When the petitioners sought not to
be made liable for the increased amount of the judgment debt on the ground
that the alleged "oversight" was on the part of the bank, the Court denied such
defense on the ground that "The principal is responsible for the acts of the
agent, done within the scope of his authority, and should bear the damages
02
caused upon third parties." The Court also noted that if indeed "the fault
(oversight) lies on the agent bank, the petitioners are free to sue said bank for
93
damages occasioned thereby."
9
Likewise, in British Airways v. Court of Appeals, * it was held that when
one airline company (British Airways) subcontracts a leg of the international trip
of its passenger to another airline
91
12
SCRA
634
*(1964).
l
b
i
d
,
a
t
p
.
6
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
181
company (PAL), the contract of air transportation was exclusively between
passenger and BA, with PAL merely acting as its agent on the Manila to Hong
Kong leg of the journey. The well-settled rule is that an agent is also responsible
for any negligence in the performance of its function and is liable for damages
which the principal may suffer by reason of the agent's negligent act.
95
In Maritime Agencies & Securities, Inc. v. Court of Appeals, in a charter
party where the charterer had expressly assumed responsibility towards
off-loading the cargo from the vessel and damage was caused thereto due to the
acts of the charterer, its local agent was sought to be the entity made liable for
the damage caused. The Court held: "The difficulty is that [the principal
charterer] has not been impleaded in these cases and so is beyond our
jurisdiction. The liability imposable upon it cannot be borne by [local
counterpart] which, as a mere agent, is not answerable for injury caused by its
principal. It is a well-settled principle that the agent shall be liable for the act or
96
omission of the principal only if the latter is undisclosed."
d. Agent Has No Authority to Bring Suit in Contracts Entered into in
the Name of the Principal
97
In
Uy
v.
Court
of
Appeals,
the
Court
held
that
the
agents
of
the
parties
to
a
contract
do
not
have
the
right
to
bring
an
action
based
on
said
contract
even
if
they
rendered
some
service
on
behalf
of
their
principal:
"Petitioners
are
not
parties
to
the
contract
of
sale
between
their
principals
and
NHA.
They
are
mere
agents
of
the
owners
of
the
land
subject
of
the
sale.
As
Agents,
they
only
render
some
service
or
do
something
in
representation
or
on
behalf
of
their
principals.
The
rendering
of
such
service
did
not
make
them
parties
to
the
contracts
of
sale
executed
in
behalf
of
the
latter.
Since
a
contract
may
be
violated
only
by
the
parties
thereto
as
against
each
other,
the
real
parties-in-interest,
either
1
8
7
S
C
R
A
3
4
6
182
NON-CORPORATE MEDIA OF DOING BUSINESS
as plaintiff or defendant, in an action upon that contract must, generally, either
98
be parties to said contract."
2. Effects of Acts Done by Agent Without Authority or in Excess of His
Authority
ART. 1898. If the agent contracts in the name of the principal,
exceeding the scope of his authority, and 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. In this case, however, the agent is liable if he undertook to
secure the principal's ratification, (n)
a. General Rule: The Principal Is Not Liable; Agent May Be Liable
The general rule is set under Article 1317 of the New Civil Code that "No
one may contract in the name of another without being authorized by the
latter, or unless he has by law a right to represent him. A contract entered into
in the name of another by one who has no authority or legal representation, or
who has acted beyond his powers, shall be unenforceable, unless it is ratified,
expressly or impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other party."
The rules under Article 1317 are supported under Article 1403, which
includes among those classified an "unenforceable contracts," "(1) Those
entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his power."
lbid, at p. 77. Reiterated in Ormoc Sugarcane Planters'Association, Inc.
(OSPA) v. Court of Appeals, 596 SCRA630 (2009).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
183
Specifically,
in
the
Law
on
Agency,
Article
1898
provides
that
"If
the
agent
contracts
in
the
name
of
the
principal,
exceeding
the
scope
of
his
authority,
and
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.
In
this
case,
however,
the
agent
is
liable
if
he
undertook
to
secure
the
principal's
ratification."
The
following
consequences
shall
flow
in
situations
where
the
agent
has
acted
without
or
in
excess
of
his
authority:
(a)
The contract entered into in the name of the principal shall be
void as to the principal and the third party, if such third party
with whom the agent contracted was aware of the limits of
the powers granted by the principal;
(b)
In such case, the agent would be liable per-sonally to such
third party, if he undertook to secure the principal's
ratification;
(c)
If the agent did not undertake to secure the principal's
ratification, the agent does not become liable on the contract
since the third party has no one to blame but himself,
knowing fully well the limits to the agent's authority.
00
Thus, in Safic Alcan v. Imperial Vegetable, and DBP v. Court of Appeals,'
the Court held that the liability of an agent who exceeds the scope of his
authority depends upon whether the third person was aware of the limits of the
agent's power. The agent is not bound nor liable for damages in case he gave
notice of his power to the person with whom he has contracted, nor in case such
person is aware of the limits of the agent's powers. The resulting contract would
be void even as between the agent and the third person, and consequently not
legally binding as between them. However, if the agent promised or undertook
"355 SCRA 559
100
(2001).
231 SCRA 370
(1994).
184
NON-CORPORATE MEDIA OF DOING BUSINESS
to secure the principal's ratification and failed, he is personally liable. If the
ratification is obtained, then the principal becomes liable.
In Eurotech Industrial Technologies, Inc. v. Cuizon, the Court noted a
claim interposed under Article 1898 would not allow the third party to recover
against both the principal and the agent, thus: "We likewise take note of the
fact that in this case, petitioner is seeking to recover both from respondents
ERWIN, the principal, and EDWIN, the agent. It is well to state here that Article
189[8] of the New Civil Code upon which petitioner anchors its claim against
respondent EDWIN does not hold that in case of excess of authority, both the
102
agent and the principal are liable to the other contracting party."
Although Article 1898 describes the contract entered into by the agent in
the name of the principal without or in excess of authority as being "void," if the
party with whom the agent contract is unaware of the limits of the powers
granted by the principal, the contract is unenforceable under Article 1403(1) of
the New Civil Code.
103
In
Cervantes
v.
Court
of
Appeals,
the
Court
held
the
effects
under
Article
1898
of
the
New
Civil
Code
when
the
agent
acts
beyond
the
scope
of
his
authority,
thus:
Under
Article
1898
of
the
New
Civil
Code,
the
acts
of
an
agent
beyond
the
scope
of
his
authority
do
not
bind
the
principal,
unless
the
latter
ratifies
the
same
expressly
or
impliedly.
Furthermore,
when
the
third
person
.
.
.
knows
that
the
agent
was
acting
beyond
his
power
or
authority,
the
principal
cannot
be
held
liable
for
the
acts
of
the
agent.
If
the
said
third
person
is
aware
of
the
limits
of
the
authority,
he
is
to
blame,
and
is
not
entitled
to
recover
damages
from
the
agent,
unless
the
latter
undertook
to
secure
the
104
principal's
ratification.
101
521 SCRA 584
(2007).
lbid, at p. 595.
103
304 SCRA 25
104
/b/d, at p. 31.
(1999).
m
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
185
105
In
Borja,
Sr.
v.
Sulyap,
/nc.,
the
Court
held
that
even
when
the
agent,
in
this
case
the
attorney-at-law
who
represented
the
client
in
forging
a
compromise
agreement,
had
exceeded
his
authority
in
inserting
penalty
clause,
the
status
of
the
said
clause
was
not
void
but
merely
voidable,
i.e.,
capable
of
being
ratified.
Indeed,
the
client's
failure
to
question
the
inclusion
of
the
penalty
in
the
judicial
compromise
despite
several
opportunities
to
do
so
and
with
the
representation
of
new
counsel,
was
tantamount
to
ratification;
hence,
the
client
was
stopped
from
assailing
the
validity
thereof.
06
In Pineda v. Court of Appeals,' where it was admitted by the buyer of a
parcel of land that "at the time he 'purchased' respondents' property from [the
agent] Pineda, the latter had no Special Power of Attorney to sell the property,
ruled the contract of sale to be void for lack of consent, rather than
unenforceable for having been entered into the names of the registered owner
by one who was not duly authorized, thus:
Further, Article 1318 of the New Civil Code lists the requisites
of a valid and perfected contract, namely: "(1) consent of the
contracting parties; (2) object certain which is the subject matter of
the contract; (3) cause of the obligation which is established."
Pineda was not authorized to enter into a contract to sell the
property. As the consent of the real owner of the property was not
107
obtained, no contract was perfect.
It
may
be
true
that
the
resulting
sale
was
void
under
the
terms
of
Article
1874
of
the
New
Civil
Code
that
declares
a
sale
void
the
sale
of
a
piece
of
land
effected
through
an
agent,
when
the
authority
of
the
agent
is
not
in
writing,
but
it
was
wrong
for
the
Court
to
reason
out
as
afore-quoted,
that
the
sale
is
void
when
made
in
the
name
of
the
real
owner
whenever
the
purported
agent
had
in
fact
no
authority,
since
it
is
clear
under
Article
1403
105
399 SCRA 601
(2003). SCRA 222
376
W7
(2002).
lbid, at p. 229.
186
NON-CORPORATE MEDIA OF DOING BUSINESS
of
the
New
Civil
Code,
that
such
legal
infirmity
does
not
render
the
sale
void,
but
merely
unenforceable.
m
In
National
Bank
v.
Welsh
Fairchild,
the
Court
held
that
while
it
is
true
that
an
agent
who
acts
for
a
revealed
principal
in
the
making
of
a
contract
does
not
become
personally
bound
to
the
other
party
in
the
sense
that
an
action
can
ordinarily
be
maintained
upon
such
contract
directly
against
the
agent,
yet
that
rule
does
not
control
when
the
agent
cannot
intercept
and
appropriate
the
thing
which
the
principal
is
bound
to
deliver,
and
thereby
make
the
performance
of
the
principal
impossible.
The
agent
in
any
event
must
be
precluded
from
doing
any
positive
act
that
could
prevent
performance
on
the
part
of
his
principal,
otherwise
the
agent
becomes
liable
also
on
the
contract.
In
Zayco
v.
Serra,
it
was
held
that
when
the
administration
enters
into
a
contract
that
is
outside
of
the
scope
of
authority,
the
contract
would
nevertheless
not
be
an
absolute
nullity,
but
simply
voidable
at
the
instance
of
the
parties
who
had
been
improperly
represented,
and
only
such
parties
can
assert
the
nullity
of
said
contracts
as
to
them.
110
National Power Corp. v. National Merchandising Corp., clarified that the
rule that a contract entered into by one who has acted beyond his powers shall
be unenforceable refers to the unenforceability of the contract against the
principal, and does not apply where the action is against the agent himself for
contracting in excess of the limits of his authority.
In DBP v. Court of Appeals,'" the Court held that the rule that the agent is
liable when he acts without authority is founded upon the supposition that
there has been some wrong or omission on his part either in misrepresenting, or
in affirming, or concealing the authority under which he assumes to act.
Inasmuch as the nondisclosure of the limits of the agency carries with it the
implication that a deception was perpetuated on the unsuspecting client, the
108
44
Phil.
780
(1923).
49
Phil.
985
110
(1925).
117
SCRA
789
111
(1982).
231
SCRA
370
(1994).
109
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
187
provisions
of
Articles
19,
20
and
21
of
the
New
Civil
Code
come
into
play.
Otherwise,
the
basis
of
the
personal
liability
on
the
part
of
the
agent
is
tort.
b.
Exceptions:
When
the
Principal
May
Be
Bound
In
the
following
cases,
even
though
the
agent
acts
without
or
in
excess
of
his
authority,
he
would
not
be
personally
liable
for
the
contracts
or
transactions
he
entered
into
in
the
name
of
the
principal:
(a)
When the principal ratifies the contract or transactions (Arts.
1898 and 1910);
(b)
As to third parties who relied upon the terms of the power of
attorney as written, even if in fact the agent had exceeded the
limits of his authority according to an understanding between
the principal and the agent (Arts. 1900 and 1903);
Article
1898
of
the
New
Civil
Code
acknowledges
that
the
contract
may
be
"validated"
if
the
principal
ratifies
or
acknowledges
the
contracts
entered
into
without
or
in
excess
of
authority
of
the
agent.
This
principle
is
reiterated
in
the
second
paragraph
of
Article
1910
of
the
New
Civil
Code,
which
provides
that
"As
for
any
obligation
wherein
the
agent
has
exceeded
his
power,
the
principal
is
not
bound
except
when
he
ratifies
it
expressly
or
tacitly."
In
Cason
v.
Richards,
where
money
was
received
as
a
deposit
by
an
agent,
and
that
money
is
turned
over
by
the
agent
to
the
principal,
with
notice
that
it
is
the
money
of
the
depositor,
the
principal
was
held
bound
to
deliver
to
the
depositor,
even
if
his
agent
was
not
authorized
to
receive
such
deposit,
since
there
was,
in
effect,
ratification
of
the
unauthorized
act
of
the
agent.
Under
Article
1901,
a
third
person
cannot
set
up
the
fact
that
the
agent
has
exceeded
his
powers,
if
the
principal
has
ratified,
112
5 Phil. 611 (1906).
188
NON-CORPORATE MEDIA OF DOING BUSINESS
or
has
signified
his
willingness
to
ratify
the
agent's
act.
Thus,
in
Phil.
Products
Co.
v.
Primateria
Pour
Le
Commerce
Exterieur:
Primaterial
[Phil.],
Inc.,
the
Court
held
that
when
agent
exceeds
his
authority,
the
matter
can
be
raised
only
by
the
principal,
and
when
not
so
raised,
recovery
can
be
made
by
the
third
party
only
against
the
principal.
Article
1897
does
not
hold
that
in
case
of
excess
of
authority,
both
the
agent
and
the
principal
are
liable
to
the
other
contracting
party.
4
In Commissioner of Public Highways v. San Diego," the Court held that in
an expropriation proceeding, the State cannot raise the alleged lack of
authority of the counsel of the owner of the property to bind his client in a
compromise agreement because such lack of authority may be questioned only
by the principal or client. This was so because it is within the right or
prerogative of the principal to ratify even the unauthorized acts of the agent.
3. Consequences When Agent Acts in His Own Name
ART.
1883.
If
an
agent
acts
in
his
own
name,
the
principal
has
no
right
of
action
against
the
persons
with
whom
the
agent
has
contracted;
neither
have
such
persons
against
the
principal.
In
such
case
the
agent
is
the
one
directly
bound
in
favor
of
the
person
with
whom
he
has
contracted,
as
if
the
transaction
were
his
own,
except
when
the
contract
involves
things
belonging
to
the
principal.
The
provisions
of
this
article
shall
be
understood
to
be
without
prejudice
to
the
actions
between
the
principal
and
agent.
(1717)
1,3
15
SCRA
301
(1965).
31
SCRA
617
(1970).
114
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
189
Under
Article
1883
of
the
New
Civil
Code,
if
an
agent
acts
in
his
own
name,
the
principal
has
no
right
of
action
against
the
persons
with
whom
the
agent
has
contracted;
and
neither
have
such
persons
a
right
or
cause
of
action
against
the
principal.
It
a
well-established
doctrine
in
jurisprudence
that
when
an
agent,
in
a
matter
that
is
within
the
scope
of
his
authority,
enters
into
the
covered
contract
in
his
own
name,
then
the
contract
is
binding
only
against
the
agent,
and
the
principal
is
not
bound,
nor
does
he
have
legal
standing
to
enforce
it;
this
is
because
the
contract
is
deemed
to
have
been
entered
115
between
the
third
party
and
the
agent
as
his
own
principal.
In
Philippine
Sugar
Estates
Dev.
Cor.
v.
Poizat,
the
Supreme
Court
discussed
the
meaning
and
effect
of
Article
1883
of
the
New
Civil
Code,
thus:
It
is
a
general
rule
in
the
law
of
agency
that,
in
order
to
bind
the
principal
by
a
mortgage
on
real
property
executed
by
an
agent,
it
must
upon
its
face
purport
to
be
made,
signed
and
sealed
in
the
name
of
the
principal,
otherwise,
it
will
bind
the
agent
only.
It
is
not
enough
merely
that
the
agent
was
in
fact
authorized
to
make
the
mortgage,
if
he
has
not
acted
in
the
name
of
the
principal.
Neither
is
it
ordinarily
sufficient
that
in
the
mortgage
the
agent
describes
himself
as
acting
by
virtue
of
a
power
of
attorney,
if
in
fact
the
agent
has
acted
in
his
own
name
and
has
set
his
own
hand
and
seal
to
the
mortgage.
This
is
especially
true
where
the
agent
himself
is
a
party
to
the
instrument.
However
clearly
the
body
of
the
mortgage
may
show
and
intend
that
it
shall
be
the
act
of
the
principal,
yet,
unless
in
fact
it
is
executed
by
the
agent
for
and
on
behalf
of
his
principal
and
as
the
act
and
deed
of
the
principal,
it
is
7
not
valid
as
to
the
principal."
115
Herranz
&
Garriz
v.
Ker
&
Co.;
Lim
Tiu
v.
Ruiz;
Smith
Bell
v.
Sotelo
Matti;
Behn
Meyer
&
Co.
v.
Banco
Espanol-Filipino;
Lim
Tek
Goan
v.
Azores;
Ortega
v.
Bauang
Farmers
Cooperative
Marketing
Assn.
116
48
Phil.
536
(1925).
7
" lbid,
at
p.
538;
emphasis
supplied.
190
NON-CORPORATE MEDIA OF DOING BUSINESS
The
ruling
was
reiterated
in
Rural
Bank
of
Bombon
(Camarines
Sur),
Inc.
v.
118
Court
of
Appeals,
where
the
Court
held:
"In
view
of
this
rule,
Aquino's
act
of
signing
the
Deed
of
Real
Estate
Mortgage
in
his
name
alone
as
mortgagor,
without
any
indication
that
he
was
signing
for
and
in
behalf
of
the
property
owner,
Ederlinda
Gallardo,
bound
himself
alone
in
his
personal
capacity
as
debtor
of
the
petitioner
bank
and
not
as
the
agent
or
attorney-in-fact
of
119
Gallardo."
20
In Marimperio Compania Naviera, S.A. v. Court of Appeals,' the Court
held that under Article 1883 of the New Civil Code, if an agent acts in his own
name, the principal has no right of action against the persons with whom the
agent has contracted; neither have such persons against the principal. In such
case the agent is the one directly bound in favor of the person with whom he
has contracted, as if the transaction were his own, except when the contract
involves things belonging to the principal. In that case, since the principals had
caused their agent to enter into a charter party in his own name and without
disclosing that he acted for any principal, then the principals have no standing to
sue upon any issue or cause of action arising from said charter party.
Lately, Gozun v. Mercado, reiterated the general rule in the Law on
Agency that, in order to bind the principal by a mortgage on real property
executed by an agent, it must upon its face purport to be made, signed and
sealed in the name of the principal, otherwise, it will bind the agent only.
a. Exception: When the Property Involved in the Contract Belongs to
the Principal
In Gold Star Mining Co., Inc. v. Lim-Jimena, the Court held that the
exception, as provided in Article 1883, is when the properties of the principal
are involved, in which case the
118
212
SCRA
25
9
"(1992).
ibid,
at
p.
30.
120
156
SCRA
368
121
(1987).
511
SCRA
305
122
(2006).
25
SCRA
597
(1968).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
191
principal
is
bound
even
when
the
contract
was
entered
into
in
the
name
of
the
123
agent,
which,
according
to
Philippine
National
Bank
v.
Agudelo,
is
a
rule
necessary
for
the
protection
of
third
persons
against
possible
collusion
between
the
agent
and
the
principal.
Thus,
in
Sy-Juco
v.
Sy-Juco,*
the
Court
held
that
the
fact
that
money
used
by
the
agent
belonged
to
the
principal
is
covered
by
the
exception.
In
Rural
Bank
of
Bombon
(Camarines
Sur),
Inc.
v.
Court
of
Appeals,
it
was
argued
that
even
though
the
real
estate
mortgage
was
executed
by
the
authorized
agent
in
his
own
name,
nonetheless,
the
mortgage
was
binding
on
the
principal
under
the
second
paragraph
of
Article
1883
which
would
make
the
mortgage
binding
on
the
principal
because
"the
contract
involves
things
126
belonging
to
the
principal."
The
Court
held
that
for
the
paragraph
to
apply,
it
is
essential
that
the
transactions
undertaken
were
still
for
the
account
or
interest
of
the
principal,
unlike
in
the
case
at
bar
where
the
real
estate
mortgage
was
executed
to
secure
the
personal
loans
of
the
agent,
thus
The
above
provision
of
the
Civil
Code
relied
upon
by
the
petitioner
Bank,
is
not
applicable
to
the
case
at
bar.
Herein
respondent
Aquino
acted
purportedly
as
an
agent
of
Gallardo,
but
actually
acted
in
his
personal
capacity.
Involved
herein
are
properties
titled
in
the
name
of
respondent
Gallardo
against
which
the
Bank
proposes
to
foreclose
the
mortgage
constituted
by
an
agent
(Aquino)
acting
in
his
personal
capacity.
Under
these
circumstances,
we
hold,
as
we
did
in
Philippine
sugaHEstates
Development
Co.
vs.
Poizat,
supra,
that
Gallardo's
property
is
not
127
liable
on
the
real
estate
mortgage:"
123
58
Phil.
655
(1933).
"MO
Phil.
634
125212
SCRA
25
(1920).
126
(1992).
/Jb/d,
at
p.
31.
lbid,
at
p.
31.
192
NON-CORPORATE MEDIA OF DOING BUSINESS
b. Remedy of the Principal Is to Recover Damages from the
Agent
Article 1883 of the New Civil Code makes it clear that the foregoing rules
are without prejudice to actions between principal and agent.
128
Aivad
v.
Filma
Mercantile
Co.,
held
that
the
rule
in
this
jurisdiction
is
that
where
the
merchandise
is
purchased
from
an
agent
with
undisclosed
principal
and
without
knowledge
on
the
part
of
the
purchaser
that
the
vendor
is
merely
an
agent,
the
purchaser
takes
title
to
the
merchandise
and
the
principal
cannot
be
sued
on
actions
against
him
for
the
recovery
of
the
merchandise
or
even
for
damages,
but
can
only
proceed
against
the
agent.
129
In Phil. Bank of Commerce v. Aruego, the party who signed a bill of
exchange as an agent (as the President of the company) failed to disclose his
principal and was held personally liable for the drafts he accepted, even when
he did so expressly as an agent> Section 20 of the Negotiable Instruments Law
provides expressly that when an agent signs in an representative capacity, but
does not indicate or disclose his principal would incur personal liability on the
bill of exchange.
130
In Beaumont v. Prieto, the Court held that although according to Article
1883, when the agent acts in his own name he is not personally liable to the
person with whom he enters into a contract when things belonging to the
principal are the subject thereof; yet such third person has a right of action not
only against the principal but also against the agent, when the rights and
obligations which are the subject matter of the litigation cannot be legally and
juridically determined without hearing both of them.
National Food Authority v. Intermediate Appellate Court, held that
when a commission agent enters into a shipping
128
49
Phil.
816
(1926).
102
SCRA
530
130
41
Phil.
670
(1981).
131
(1921).
184
SCRA
166
(1990).
129
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
193
contract
in
his
own
name
to
transport
the
grains
of
NFA
on
a
vessel
owned
by
a
shipping
company,
NFA
could
not
claim
it
is
not
liable
to
the
shipping
company
under
Article
1883
of
the
New
Civil
Code
"since
it
had
no
knowledge
of
the
fact
of
agency
between
respondent
Superior
Shipping
and
Medalla
at
the
time
132
when
the
contract
was
entered
into
between
them
(NFA
and
Medalla)."
The
Court
further
held
Petitioner
submits
that
"(A)n
undisclosed
principal
cannot
maintain
an
action
upon
a
contract
made
by
his
agent
unless
such
principal
was
disclosed
in
such
contract.
One
who
deals
with
an
agent
acquires
no
right
against
the
undisclosed
principal."
Petitioner
NFA's
contention
holds
no
water.
It
is
an
undisputed
fact
that
Gil
Medalla
was
a
commission
agent
of
respondent
Superior
Shipping
Corporation
which
owned
the
vessel
"MV
Sea
Runner^
that
transported
the
sacks
of
rice
belonging
to
petitioner
NFA.
The
context
of
the
law
is
clear
[under]
Art.
1883,
which
is
the
applicable
law
in
the
case
at
bar.
x x x
Consequently,
when
things
belong
to
the
principal
(in
this
case,
Superior
Shipping
Corporation)
are
dealt
with,
the
agent
is
bound
to
the
principal
although
he
does
not
assume
the
character
of
such
agent
and
appears
acting
in
his
own
name.
In
other
words,
the
agent's
apparent
representation
yields
to
the
principal's
true
representation
and
that,
in
reality
and
in
effect,
the
contract
must
be
considered
as
entered
into
between
the
principal
and
the
third
person
(Sy
Juco
and
Viardo
v.
Sy
Juco,
40
Phil.
634).
Corollarily,
if
the
principal
can
be
obliged
to
perform
his
duties
under
the
contract,
then
it
can
also
demand
the
enforcement
of
its
rights
arising
from
133
the
contract.
132
/b/d,
at
p.
168.
lbid,
at
pp.
168-169.
m
194
NON-CORPORATE MEDIA OF DOING BUSINESS
4. When Two or More Agents Appointed by the Same Principal
Article 1894 provides for the rule of responsibility (liability) of two or more
agents serving the same principal, even when they have been appointed
simultaneously:
(a)
Joint, when nothing is stipulated; and
(b)
Solidary, only when so stipulated.
Under
Article
1895,
when
solidarity
has
been
agreed
upon,
each
of
the
agents
is
responsible
for
the
non-fulfillment
of
the
agency,
and
for
the
fault
or
negligence
of
his
fellow
agents,
except
in
the
latter
case
when
the
fellow
agents
acted
beyond
the
scope
of
their
authority.
Compare
the
rule
in
Article
in
1894
with
the
general
rule
of
solidary
liability
under
Article
1915:
when
the
agent
is
serving
two
or
more
principals,
the
liability
of
the
principals
is
solidary.
In
Municipal
Council
oflloilov.
Evangeliststhe
Court
set
the
general
rule:
when
a
person
appoints
two
agents
independently,
the
consent
of
one
will
not
be
required
to
validate
the
acts
of
the
other,
unless
that
appears
positively
to
have
been
the
principal's
intention.
5. When Third Party Liable to the Agent Himself
In the following cases, a third party would be directly liable to the agent
himself even on contracts entered into pursuant to the agency arrangement,
thus:
(a)
Where the agent contracts in his own name, on a matter that
it within the scope of the agency (Art. 1883);
(b)
Where the agent possesses a beneficial interest in the subject
matter of the agency, such as a
134
55 Phil. 290 (1930).
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
195
factor selling under a del credere commission (Art. 1907);
(c) Where a third party commits a tort against the agent.
SPECIFIC OBLIGATION RULES FOR COMMISSION AGENTS
1. Nature of Factor or Commission Agent
A commission agent is one whose business it is to receive and sell goods
for a commission, and who is entrusted by the principal with the possession of
the goods to be sold, and usually selling in his own name. An ordinary agent
need not have possession of the goods of his principal, while the commission
135
agent must be in possession.
2. Specific Obligations of a Commission Agent
a. Take Custody of Goods
Under Article 1903 of the New Civil Code, a commission agent is
responsible for the goods received by him in the terms and conditions and as
described in the consignment, unless upon receiving them he should make a
written statement of the damage and deterioration suffered by the same.
b. Not to Commingle Similar Goods Belonging to Different
Principals
Under Article 1904 of the New Civil Code, a 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 belong to each principal. In other words, the default rule is that
commission agent cannot commingle goods of the same kind belonging to
different principals.
135
De Leon, at p. 544.
NON-CORPORATE MEDIA OF DOING BUSINESS
196
Distinguish this default rule in the case of a contract of deposit, which
under Article 1976, the depositary is allowed to commingle grain or other
articles of similar nature and quality (Contract of Deposit): "Depositary may
commingle grain or other articles of similar nature and quality, and the result
would be prorata ownership among the owners thereof."
c. Cannot Sell on Credit Without Principal's Authorization
Under Article 1905 of the New Civil Code, if the commission agent sells on
credit, the principal may still demand from his payment in cash, but the agent
shall be entitled to any interest or benefit which may result from such sale.
d. To Inform the Principal of Every Pre- Authorized Sale
on Credit
Under Article 1906, should the agent sell on credit with the authority of
the principal, then the agent shall so inform the principal with a statement of
the names of the buyers. If he fails to do so, the sale shall be deemed to have
been made for cash insofar as the principal is concerned.
e. Shall Bear the Risk of Collection under Del Credere
Commission Set-up
Under Article 1908, should the commission agent receive on a sale, in
addition to the ordinary commission, another called a guarantee commission,
then:
(a)
He shall bear the risk of collection; and
(b)
He shall pay the principal the proceeds of sale on same terms
agreed with purchaser.
f. To Collect Credits of the Principal
Under Article 1908, a commission agent who does not collect the credits
of his principal at the time when they become due and demandable shall be
liable for damages, unless he proves that he exercise due diligence for that
purpose.
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
AND RIGHTS OF THE AGENT
197
g. Responsibility for Fraud and Negligence
Under Article 1909 of the New Civil Code, the agent is responsible to the
principal for the damages suffered for his fraud and his negligence, which shall
be judged with more or less rigor by the courts according to whether the
agency was or was not for a compensation.
138
International
Films
v.
Lyric
Film
Exchange,
held
that
the
failure
of
the
sub-agent
who
has
custody
of
the
film
to
insure
against
loss
by
fire,
where
there
was
no
instruction
received
from
the
principal
to
so
insure
or
that
the
insurance
of
the
film
was
not
a
part
of
the
obligation
imposed
upon
an
agent
by
law,
does
not
constitute
either
negligence
or
fraud.
137
In
Tan
Tiong
Teck
v.
SEC,
where
the
client
ordered
the
broker
to
sell
the
shares
giving
a
floor
or
minimum
price,
and
the
broker
did
sell
at
the
minimum
price
indicated
even
though
the
prevailing
ranging
prices
were
much
higher
than
them,
the
broker
was
liable
for
the
difference
suffered
by
the
principal
because
the
broker
failed
to
exercise
the
prudence
and
tact
of
a
good
father
of
a
family
which
the
law
required
of
him.
36
In Philippine National Bank v. Bagamasbad and Ferrer,' where the
manager of the bank released the proceeds of an unauthorized loan to
unqualified borrower, the Court ruled that the bank may recover both against
the borrower and its manager, and the suit could not be considered as the
principal- bank ratifying the unauthorized act of its agent-manager, but was
merely seeking to diminish as much as possible the loss to itself.
m
In
Green
Valley
v.
IAC,
the
purported
agent
refused
to
be
held
liable
for
merchandise
received
from
the
principal
on
the
ground
that
it
was
a
mere
agent
to
sell
and
the
ultimate
buyers
of
the
products
should
be
the
one
made
liable
for
the
purchase
price,
(whereas
the
purported
principal
insisted
that
it
was
a
sale
arrangement).
The
Court
ruled
that
whether
the
contract
between
136
63
Phil.
778
(1936).
69
Phil.
425
138
(1940).
89
Phil.
365
(1951).
139133
SCRA
697
(1984).
137
198
NON-CORPORATE MEDIA OF DOING BUSINESS
the
parties
be
one
of
sale
or
agency
to
sell,
there
is
no
doubt
that
the
purported
agent
would
be
personally
liable
for
the
price
of
the
merchandise
sold.
Being
a
commission
agent
under
its
authority,
then
pursuant
to
Article
1905,
it
should
not
have
sold
the
merchandise
on
credit.
Under
Article
1905,
the
commission
agent
cannot,
without
the
express
or
implied
consent
of
the
principal,
sell
on
credit;
and
should
he
do
so,
the
principal
may
demand
from
him
payment
in
cash.
oOo
CHAPTER 4
OBLIGATIONS OF THE PRINCIPAL
BINDING EFFECT OF THE TERMS OF THE CONTRACT OF AGENCY
Since a contract of agency is merely a preparatory contract, it is well
within the legal capacity of both parties to enter into any stipulation, obligation
and undertaking by which they can tailor- fit the relationship to best achieve the
purposes or objectives of the agency. Like any other contract governed by the
principles of autonomy, mutuality and obligatory force, the principal is bound by
the terms agreed upon under the contract of agency.
1
In
De
Castro
v.
Court
of
Appeals,
the
Supreme
Court
held
that
"A
contract
of
agency
which
is
not
contrary
to
law,
public
order,
public
policy,
morals
or
good
custom
is
a
valid
contract,
and
constitutes
the
law
between
the
parties.
The
contract
of
agency
entered
into
[by
the
principal
and
the
agent]
is
the
law
between
them
and
both
are
bound
to
comply
with
its
terms
and
conditions
in
2
good
faith."
On
the
other
hand,
since
the
contract
of
agency
is
one
of
representation
and
bounded
by
fiduciary
duties
on
the
part
of
the
agent,
then
the
principal
has
the
power
to
evolve
the
relationship
beyond
the
written
terms
of
the
instrument,
and
the
agent
under
his
fiduciary
duty
of
obedience,
must
comply
with
such
new
instructions
of
the
principal.
This
point
highlights
the
essential
characteristic
of
agency
as
a
progressive
contract
384 SCRA 607
(2002).
lbid, at p. 616.
2
199
200
NON-CORPORATE MEDIA OF DOING BUSINESS
PRINCIPAL BOUND BY THE CONTRACTS MADE BY THE AGENT IN HIS BEHALF
ART.
1910.
The
principal
must
comply
with
all
the
obligations
which
the
agent
may
have
contracted
within
the
scope
of
his
authority.
As
for
any
obligation
wherein
the
agent
has
exceeded
his
power,
the
principal
is
not
bound
except
when
he
ratifies
it
expressly
or
tacitly.
(1727)
ART.
1897.
The
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts,
unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers.
(1725)
The
central
principle
In
the
Law
on
Agency
is
that
all
contracts
and
transactions
entered
into
by
the
agent
on
behalf
of
the
principal
within
the
scope
of
his
authority
are
binding
on
the
principal
as
though
he
himself
had
entered
into
them
directly.
This
tenet,
referred
to
as
the
doctrine
of
representation
is
repeatedly
expressed
in
various
provisions
in
the
Law
on
Agency.
Article
1897
of
the
New
Civil
Code
provides
that
the
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts
when
acting
within
the
scope
of
his
authority,
"unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
3
powers."
Tuason
v.
Orozco,
held
that
even
when
the
agent
has
expressly
bound
himself
to
the
contract
entered
in
the
name
of
the
principal,
the
act
does
not
relieve
the
principal
from
the
obligations
incurred,
thus
5 Phil. 596 (1906).
OBLIGATIONS OF THE PRINCIPAL
201
. . . a debt thus incurred by the agent is binding directly upon
the principal, provided the former acted, as in the present case,
within the scope of his authority. (Art. 1727 [now Art. 1910] of the
Civil Code.) The fact that the agent has also bound himself to pay
the debt does not relieve from liability the principal for whose
benefit the debt was incurred. The individual liability of the agent
constitutes in the present case a further security in favor of the
creditor and does not affect or preclude the liability of the
principal. In the present case the latter's liability was further
guaranteed by a mortgage upon his property. The law does not
provide that the agent can not bind himself personally to the
fulfillment of an obligation incurred by him in the name and on
behalf of his principal. On the contrary, it provides that such act on
the part of an agent would be valid. (Art. 1725 [now Art. 1897] of
4
the Civil Code).
Article 1910 of the New Civil Code provides that the principal must comply
with all the obligations which the agent may have contracted within the scope of
his authority.
5
Lim
Chai
Seng
v.
Trinidad,
held
that
since
the
general
rule
is
that
the
principal
is
bound
by
the
acts
of
his
agent
in
the
scope
of
the
agency,
therefore
when
the
agent
had
full
authority
to
make
the
tax
returns
and
file
them,
together
with
the
check
payments,
with
the
Collector
of
Internal
Revenue
on
behalf
of
the
principal,
then
the
effects
of
dishonesty
of
the
agent
must
be
borne
by
the
principal,
not
by
an
innocent
third
party
who
has
dealt
with
the
dishonest
agent
in
good
faith.
6
Gonzales v. Haberer, held that where a sale of land is effected through an
agent who made misrepresentations to the buyer that the property can be
delivered physically to the control of the buyer when in fact it was in adverse
possession of third parties, the seller-principal is bound for such
misrepresentations and cannot insist that the contract is invalid and
unenforceable;
lbid,
at
pp.
599-
00.
544
41
P6hil.
6
(1921).
47
Phil.
380
(1925).
5
NON-CORPORATE MEDIA OF DOING BUSINESS
202
the seller-principal cannot accept the benefits derived from such
representations of the agent and at the same time deny the responsibility for
them.
7
In Air France v. Court of Appeals, employing the principle that knowledge
of the agent is chargeable as knowledge of the principal, the Court held that an
airline company cannot be held liable for breach of contract when it dishonored
the tickets given to the spouses, whose travel arrangement were handled by
their travel agent, since the evidence showed that their travel agent was duly
informed by the airline company's proper officers that the tickets in question
could riot be extended beyond the period of their validity without paying the
fare differentials and additional travel taxes brought about by the increased fare
rate and travel taxes. The Court held that "To all legal intents and purposes,
Teresita was the agent of the GANAS and notice to her of the rejection of the
request for extension of the validity of the tickets was notice to the GANAS, her
8
principals."
9
In Pleasantville Dev. v. Court of Appeals, on the basis of the general
principle that "the principal is responsible for the acts of the agent, done within
the scope of his authority, and should bear the damage caused to third
persons," the Court ruled that the principal could not absolve itself from the
damages sustained by its buyer on the premise that the fault was primarily
caused by its agent in pointing to the wrong lot, since the agent "was acting
within its authority as the sole real estate representative [of the principal-seller]
when it made the delivery to" the buyer, although "[i]n acting within its scope of
10
authority, [the agent] was, however, negligent," since it is negligence that is
the basis of principal's liability, and that under Articles 1909 and 1910 of the
New Civil Code, the liability of the principal for acts done by the agent within the
scope of his authority do not exclude those done negligently.
126 SCRA 448
(1983).
*lbid,
at p. 455.
9
253 SCRA 10
"Ibid, at p. 20.
(1996).
OBLIGATIONS OF THE PRINCIPAL
203
In Filipinas Life Assurance Company v. Pedroso," the Court found occasion
to reiterate the facets of the doctrine, thus
By the contract of agency, a person binds himself to render
some service or to do something in representation or on behalf of
another, with the consent or authority of the latter. The general
rule is that the principal is responsible for the acts of its agent done
within the scope of its authority, and should bear the damage
caused to third persons. When the agent exceeds his authority, the
agent becomes personally liable for the damage. But even when
the agent exceeds his authority, the principal is still solidarity liable
together with the agent if the principal allowed the agent to act as
though the agent had Kill powers. In other words, the acts of an
agent beyond the scope of his authority do not bind the principal,
unless the principal ratifies them, expressly or implied. Ratification
in agency is the adoption or confirmation by one person of an act
12
performed on his behalf by another without authority.
In Filipinas Life, despite the allegation of the insurance company "that it
was only a life insurance company and was not engaged in the business of
collecting investment money," nonetheless it was made liable to persons who
invested money with its confirmed agent, when it was shown that other
officers of the company had confirmed the power of said agent, and the
investments were receipted in the official receipts of the company itself.
1. Principal Not Bound by Contracts Made Without Authority or Outside the Scope
of Authority
Article 1403 of the New Civil Code provides the corollary rule that "for
any obligation wherein the agent has exceeded his power," or acts done by the
agent outside of the scope of his
"543 SCRA 542
12
(2008).
/Wd, at p. 547.
204
NON-CORPORATE MEDIA OF DOING BUSINESS
authority,
even
when
entered
into
in
the
name
of
the
principal,
would
not
bind
the
principal,
and
would
thus
not
be
void,
but
merely
unenforceable.
13
Nantes v. Madriguera, held that a person with whom an agent has
contracted in the name and for the account of his principal, has a right of action
against the purported principal, even when the latter denies the commission or
authority of the agent, in which case the party suing has the burden of proving
the existence of the agency notwithstanding the purported principal's denial
thereof. If the agency relation is proved, then the principal shall be held liable,
and the agent who is made a party to the suit cannot be held personally liable.
On the other hand, if the agency relationship is not proven, it would be the
agent who would become liable personally on the contract entered into.
14
Wise
and
Co.
v.
Tanglao,
held
that
when
the
principal
has
duly
empowered
his
agent
to
enter
into
a
contract
of
mortgage
over
his
property
as
well
as
a
contract
of
surety,
but
the
agent
only
entered
into
a
contract
of
mortgage,
no
inference
from
the
power
of
attorney
can
be
made
to
make
the
principal
liable
as
a
surety,
because
under
the
law,
a
surety
must
be
express
and
cannot
be
presumed.
15
In Philippine National Bank v. Bagamaspad, the Court held that when
bank officers, acting as agent, had not only gone against the instructions, rules
and regulations of the bank in releasing loans to numerous borrowers who
were qualified, then such bank officers are liable personally for the losses
sustained by the bank. The fact that the bank had also filed suits against the
borrowers to recover the amounts given does not amount to ratification of the
acts done by the bank officers.
16
In Lopez v. Alvendia, pursuant to the terms of the compromise
judgment, the judgment debtors had issued a check
"42 Phil. 389
(1921).
"63 Phil. 372
"89 Phil. 365
(1936).
1B
(1951).
12 SCRA 634
(1964),
OBLIGATIONS OF THE PRINCIPAL
205
In
payment
of
the
judgment
debt
and
made
arrangements
with
the
bank
for
the
latter
to
allow
the
encashment
thereof;
but
the
check
was
dishonored
by
the
bank
which
increased
the
amount
of
the
judgment
debt.
When
the
judgment
debtors
sought
not
to
be
made
liable
for
the
alleged
"oversight"
of
the
bank,
the
Court
denied
such
defense
on
the
ground
that
"And,
the
bank,
having
accepted
the
alleged
arrangement,
had
constituted
itself
as
the
agent
of
the
petitioners
[judgment
debtors].
The
principal
is
responsible
for
the
acts
of
the
agent,
done
within
the
scope
of
his
authority,
and
should
bear
the
damages
caused
upon
third
parties.
If
the
fault
(oversight)
lies
on
the
bank,
the
17
petitioners
are
free
to
sue
said
bank
for
damages
occasioned
thereby."
2. When Principal Is Bound By the Acts Done Outside the Scope of Authority
ART. 1910. x x x As for any obligation wherein the agent has
exceeded his power, the principal is not bound except when he
ratifies it expressly or tacitly. (1727)
ART. 1911. 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, (n)
In
the
following
acts
done
by
the
agent
in
the
name
of
the
principal,
but
outside
of
the
scope
of
his
authority,
the
principal
would
still
be
bound
personally,
thus:
(a)
When
the
principal
ratifies
such
contract,
expressly
or
tacitly
(Art.
1910,
New
Civil
Code);
"Ibid, at p. 641.
/
/
206
NON-CORPORATE MEDIA OF DOING BUSINESS
(b)
When the principal has allowed the purported agent to act as
though he had full powers (Art. 1911, New Civil Code); and
(c)
When
the
principal
has
revoked
the
agency,
but
the
third
party
have
acted
in
good
faith
without
notice
of
such
revocation.
Under
Article
1911
of
the
New
Civil
Code,
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.
This
is
termed
as
"agency
by
estoppel"
It
is
also
referred
to
as
the
doctrine
of
apparent
authority
in
Corporate
Law.
10
In Manila Remnants v. Court of Appeals, the Court noted that Article
1911 "is intended to protect the rights of innocent persons. In such a situation,
both the principal and the agent may be considered as joint tortfeasors whose
19
liability is joint and solidary."
An early example of ratification act that binds the principal to the
20
unauthorized act of the agent is the one found in Cason v. Rickards, where
money was received as a deposit by an agent, and that money was
subsequently turned over by the agent to the principal, with notice that it is the
money of the depositor. The Court held that even if it is proven that the agent
was not duly authorized to receive such deposit, the principal was bound to
deliver to the depositor, since the act of receiving the sum was a ratification of
the previous unauthorized act of the agent.
21
In Blondeau v. Nano, the registered owner who placed in the hands of
another an executed document of transfer of the registered land was held to
have effectively represented to a third party that the holder of such document is
authorized to deal with the property. The principle was reiterated in Domingo v.
22
Robles.
18
191 SCRA 622
(1990).
lbid, at p. 629.
*>5 Phil. 639 (1906).
21
61 Phil. 625
*453 SCRA 812
(1935).
(2005).
n
OBLIGATIONS OF THE PRINCIPAL
207
In
the
same
manner,
in
Commercial
Bank
&
Trust
Co.
v.
Republic
Armored
23
Car
Services
Corp.,
the
Court
held
that
under
the
general
rules
and
principles
of
law,
the
mismanagement
of
the
business
of
a
party
by
his
agents
does
not
relieve
said
party
from
the
responsibility
that
he
had
contracted
with
third
persons.
2
In Dy Peh v. Collector of Internal Revenue, * where the principal issued the
checks in full payment of the taxes due, but his agents had misapplied the check
proceeds, it was held that the principal would still be liable, because when a
contract of agency exists, the agent's acts bind his principal, without prejudice to
the latter seeking recourse against the agent in an appropriate civil or criminal
action.
2S
In
Cuison
v.
Court
of
Appeals
the
fact
that
the
agent
defrauded
the
principal
in
not
turning
over
the
proceeds
of
the
transactions
to
the
latter
cannot
in
any
way
relieve
or
exonerate
such
principal
from
liability
to
the
third
persons
who
relied
on
his
agent's
authority.
It
is
an
equitable
maxim
that
as
between
two
innocent
parties,
the
one
who
made
it
possible
for
the
wrong
to
be
done
should
be
the
one
to
bear
the
resulting
loss.
26
In
Bedia
v.
White,
the
Court
held
that
when
a
third
party
admitted
in
her
written
correspondence
that
he
had
contracted
with
the
principal
through
a
duly
authorized
agent,
and
then
sues
both
the
principal
and
the
agent
on
an
alleged
breach
of
that
contract,
and
in
fact
later
on
dismisses
the
suit
insofar
as
the
principal
is
concerned,
there
can
be
no
cause
of
action
against
the
agent.
Since
it
is
the
principal
who
should
be
answerable
for
the
obligation
arising
from
the
agency,
it
is
obvious
that
if
a
third
person
waives
his
claims
against
the
principal,
he
cannot
assert
them
against
the
agent.
In
Manila
Remnants,
the
principal
real
estate
company
had
pleaded
non-liability
for
the
act
of
the
agent
in
engaging
in
double
sales
of
the
properties.
While
noting
initially
that
there
was
legal
23
8 SCRA 425 (1963).
28 SCRA 216
25
227 SCRA 391
(1969).
(1993).
^204 SCRA 273
(1991).
24
NON-CORPORATE MEDIA OF DOING BUSINESS
208
basis
in
the
position
of
the
principal
the
agent
"had
clearly
overstepped
the
bounds
of
its
authority
as
agent
and
for
that
matter,
even
the
law
when
it
undertook
the
double
sale
of
the
disputed
lots"
and
that
the
principal
would
27
have
been
clear
pursuant
to
Article
1897
of
the
New
Civil
Code
nonetheless,
the
Court
found
that
the
principal,
by
evidence
adduced,
was
adjudge
guilty
of
estoppel
under
Article
1911,
because
it
had
accepted
the
payments
remitted
by
the
agent
without
objection
to
the
double
sales
effected
by
its
agent.
Manila
Remnants
also
ruled
that
a
principal
becomes
liability
for
the
acts
and
contracts
done
by
its
agent
outside
the
scope
of
its
authority,
when
it
fails
to
take
measures
to
protect
the
dealing
public
once
it
learns
of
the
unlawful
acts
of
its
agent,
including
the
need
to
publish
in
a
newspaper
of
general
circulation
the
abrogation
of
the
powers
of
the
agent,
and
failing
to
take
steps
to
determine
the
tainted
transactions
of
the
agent
before
the
termination
of
relations,
thus:
"Even
assuming
that
Manila
Remnants
was
as
much
a
victim
as
the
other
innocent
buyers,
it
cannot
be
gainsaid
that
it
was
precisely
its
negligence
and
laxity
in
the
day
to
day
operations
of
the
real
estate
business
which
made
it
28
possible
for
the
agent
to
deceive
unsuspecting
vendees."
In
Rural
Bank
of
Milaor
v.
Ocfemiait
was
held
that
when
a
bank,
by
its
acts
and
failure
to
act,
has
clearly
clothed
its
manager
with
apparent
authority
to
sell
an
acquired
asset
in
the
normal
course
of
business,
it
is
legally
obliged
to
confirm
the
transaction
by
issuing
a
board
resolution
to
enable
the
buyers
to
register
the
property
in
their
names.
The
Court
held
that
the
bank
manager
had
a
duty
to
perform
necessary
and
lawful
acts
to
enable
the
other
parties
to
enjoy
all
benefits
of
the
contract
which
it
had
authorized.
How
does
Ocfemia
ruling
jive
with
the
other
rulings
of
the
Supreme
Court
that
hold
that
even
in
the
case
of
a
corporation,
27
Ibid,
at
p.
628.
**lbid,
at
p.
630.
29
325
SCRA
99
(2000).
OBLIGATIONS OF THE PRINCIPAL
209
the
sale
through
its
agent
of
a
piece
of
land
requires
that
the
authority
of
the
corporate
officer
to
sell
on
behalf
of
the
corporation
must
be
in
writing,
otherwise
the
resulting
transaction
is
void
pursuant
to
Article
1874?
The
Ocfemia
ruling
shows
that
the
use
of
the
term
"void"
under
Article
1874,
is
relative,
in
that
it
is
void
only
insofar
as
the
principal
is
concerned;
and
that
any
attempt
to
enforce
the
purchase
by
a
third
party
is
void
when
the
principal
refuses
to
accept
the
sale
of
a
piece
of
land
effected
by
an
agent
in
his
name
without
written
power
of
attorney.
In
other
words,
if
the
principal,
after
the
fact
of
sale,
accepts
the
contract,
does
not
oppose
the
validity
of
the
sale,
or
in
other
words,
ratifies
the
sale,
it
would
then
be
valid
and
binding
on
the
principal.
In
Ocfemia,
when
an
action
was
brought
by
the
buyer
against
the
bank
to
enforce
the
sale,
it
failed
to
contest
the
genuineness
and
due
execution
of
the
deed
of
absolute
sale
executed
by
its
general
manager.
The
Court
held
Respondents
based
their
action
before
the
trial
court
on
the
Deed
of
Sale,
the
substance
of
which
was
alleged
in
and
a
copy
thereof
was
attached
to
the
Petition
for
Mandamus.
The
Deed
named
Fe
S.
Tena
as
the
representative
of
the
bank.
Petitioner,
however,
failed
to
specifically
deny
under
oath
the
allegations
in
that
contract.
In
fact,
it
filed
no
answer
at
all,
for
which
reason
it
was
30
declared
in
default _________________________________
x x x
In
failing
to
file
its
answer
specifically
denying
under
oath
the
Deed
of
Sale,
the
bank
admitted
the
due
execution
of
the
said
contract.
Such
admission
means
that
it
acknowledged
that
Tena
was
authorized
to
sign
the
Deed
of
Sale
on
its
behalf.
Thus,
defenses
that
are
inconsistent
with
the
due
execution
and
the
genuineness
of
the
written
instrument
are
cut
off
by
an
admission
implied
from
a
31
failure
to
make
a
verified
specific
denial.
x x x
mid,
at
pp.
31
107-
108.
Ibid,
at
p.
108.
210
NON-CORPORATE MEDIA OF DOING BUSINESS
In any event, the bank acknowledged, by its own acts or
failure to act, the authority of Fe S. Tena to enter into binding
contracts. After the execution of the Deed of Sale, respondents
occupied the properties in dispute and paid the real estate taxes
due thereon. If the bank management believed that it had title to
the property, it should have taken some measures to prevent the
infringement or invasion of its title thereto and possession thereof.
Likewise, Tena had previously transacted business on behalf
of the bank, and the latter had acknowledged her authority. A
bank is liable to innocent third persons where representation is
made in the course of its normal business by an agent like
Manager Tena, even though such agent is abusing her authority.
Clearly, persons dealing with her could not be blamed for believing
that she was authorized to transact business for and on behalf of
32
the b ank...
Settled jurisprudence has it that where similar acts have been approved
by the directors as a matter of general practice, custom, and policy, the general
manager may bind the company without formal authorization of the board of
directors. In varying language, existence of such authority is established, by
proof of the course of business, the usages and practices of the company and
by the knowledge which the board of directors has, or must be presumed to
have, of acts and doings of its subordinates in and about the affairs of the
corporation. So also Ocfemia held that
x x x authority to act for .and bind a corporation may be
presumed from acts of recognition in other instances where the
power was in fact exercised.
x x x Thus, when, in the usual course of business of a
corporation, an officer has been allowed in his official capacity to
manage its affairs, his authority to represent the corporation may
be implied from the manner in which he has been permitted by
the directors to manage its business.
32
lbid, at pp. 108-109.
OBLIGATIONS OF THE PRINCIPAL
211
Notwithstanding the putative authority of the manager to bind
the bank in the Deed of Sale, petitioner has failed to file an answer
to the Petition below within the reglamentary period, let alone
present evidence controverting such authority. Indeed, when one
of herein respondents, Marife S. Nino, went to the bank to ask for
the board resolution, she was merely told to bring the receipts. The
bank failed to categorically declare that Tena had no authority.
As to the merits of the case, it is a well-established rule that
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 to act as his agent, to the prejudice of
innocent third parties dealing with such person in good faith and in
the honest belief that he is what he appears to be . . . From the
facts and the evidence on record, there is no doubt that this rule
33
obtains. The petition must therefore fail.
M
In Doles v. Angeles, it was held that since the basis of agency is
representation, then the question of whether an agency has been created is
ordinarily a question which may be established in the same way as any other
fact, either by direct or circumstantial evidence. It was held that though that
fact or extent of authority of the agents may not, as a general rule, be
established from the declarations of the agents alone, if one professes to act as
agent for another, she may be estopped to deny her agency both as against the
asserted principal and the third persons interested in the transaction in which
he or he is engaged.
Recently, in Pahud v. Court of Appeals * the Court summarized the
instances when the principal can be held personally liable for his agent's
deceitful acts exercised on third parties: "It is a basic rule in the law of agency
that a principal is subject to liability for loss caused to another by the latter's
reliance upon a deceitful representation by an agent in the course of his
employment (1) if the representation is authorized; (2) if it is within the implied
authority of the agent to make for the principal; or (3)
mid, at pp. 107-109.
"492 SCRA 607
35
(2006).
597 SCRA 13
(2009).
212
NON-CORPORATE MEDIA OF DOING BUSINESS
if it is apparently authorized, regardless of whether the agent was authorized
36
by him or not to make the representation."
LIABILITY OF THE PRINCIPAL FOR AGENT'S TORT
The general rule is that the principal is liable to injured third parties for
the torts committed by the agent at the principal's direction or in the course of
and within the scope of the agent's authority. It goes without saying, that since
the act of negligence was that of the agent, he also becomes civilly liable to the
injured parties, even when he acts in representation of the principal.
Thus, Article 1909 of the New Civil Code provides that "The agent is
responsible not only for fraud, but also for negligence, which shall be judged
with more or less rigor by the courts, according to whether the agency was or
was not for a compensation."
37
In
Versoza
v.
Lim,
it
was
held
that
when
a
collision
with
another
vessel
has
been
caused
by
the
negligence
of
the
ship
agent,
both
the
owner
of
the
vessel
and
the
ship
agent
can
be
sued
together
for
the
recovery
of
damages.
OBLIGATIONS
OF
THE
PRINCIPAL
TO
THE
AGENT
1.
To
Pay
Agent's
Compensation
In
an
onerous
or
compensated
agency,
the
obligation
of
the
principal
to
pay
the
agent
shall
be
in
accordance
with
the
terms
agreed
upon
when
the
agency
was
constituted.
If
no
particular
formula
has
been
agreed
upon
on
the
agent's
compensation,
then
the
following
rules
should
apply:
(a)
The
principal
shall
pay
the
agent's
commission
only
on
the
legal
basis
that
the
agent
has
complied
with
his
obligations
with
the
principal;
and
lbid,
at
pp.
24-
25.
45
Phil.
416
(1923).
37
OBLIGATIONS OF THE PRINCIPAL
213
(b)
The
principal
shall
be
liable
to
the
agent
for
the
reasonable
value
of
the
agent's
services.
It
should
be
noted
that
under
Article
1875
of
the
New
Civil
Code,
"Agency
is
presumed
to
be
for
a
compensation,
unless
there
is
proof
to
the
contrary."
36
Valenzuela v. Court of Appeals, held that when the revocation of the
agency was effected by the principal primarily because of the refusal of the
agent to share half of the commissions earned under the contract of agency,
such revocation was done in bad faith, and for which the principal can be held
liable for damages including the payment of full commissions earned by the
agent at the time of the revocation of the agency.
In De Castro v. Court of Appealsprescinding from the principle that the
terms of the contract of agency constituted the law between the principal and
the agent, it was ruled by the Court that the mere fact that "other agents"
intervened in the consummation of the sale and were paid their respective
commissions could not vary the terms of the contract of agency with the plaintiff
of a 5 percent commission based on the selling price.
Parenthetically, the Court also noted in De Castro that an action upon a
written contract, such as a contract of agency, must be brought within ten years
from the time the right of action accrues.
The doctrines on the right of a broker to compensation or commission as
discussed in Chapter 1 apply equally to contracts of agency, since they both
constitutes acts of service. For a better understanding of the compensation rights
of an agent, you may wish to refer to the discussion in Chapter 1 on
distinguishing a contract of brokerage from a contract of agency.
191 SCRA1 (1990).
384 SCRA 607
(2002).
39
214
NON-CORPORATE MEDIA OF DOING BUSINESS
2. To Advance Sums Requested for Execution
of the Agency
ART.
1912.
The
principal
must
advance
to
the
agent,
should
the
latter
so
request,
the
sums
necessary
for
the
execution
of
the
agency.
Should
the
agent
have
advanced
them,
the
principal
must
reimburse
him
therefor,
even
if
the
business
or
undertaking
was
not
successful,
provided
the
agent
is
free
from
all
fault.
The
reimbursement
shall
include
interest
on
the
sums
advanced,
from
the
day
on
which
the
advance
was
made.
(1728)
Under
Article
1912
of
the
New
Civil
Code,
the
principal
must
advance
to
the
agent,
should
the
latter
so
request,
the
sums
necessary
for
the
execution
of
the
agency.
Should
the
agent
have
advanced
them,
the
principal
must
reimburse
the
agent
therefore,
even
if
the
business
or
undertaking
was
not
successful,
provided
the
agent
is
free
from
fault.
The
reimbursement
shall
include
interest
on
the
sums
advanced,
from
the
day
on
which
the
advance
was
made.
We
should
compare
this
to
the
provisions
in
Article
1886
where
the
agent
is
bound
to
advance
the
sums
necessary
to
carry
out
the
agency,
but
only
when
he
so
consents
or
it
is
stipulated
in
the
agreement.
a.
When
Principal
Not
Liable
to
Reimburse
Agent
for
His
Expenses
ART.
1918.
The
principal
is
not
liable
for
the
expenses
incurred
by
the
agent
in
the
following
cases:
OBLIGATIONS OF THE PRINCIPAL
215
(1) If the agent acted in contravention of the principal's
instructions, unless the latter should wish to avail himself of the
benefit 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.
(n)
Under
Article
1918
of
the
New
Civil
Code,
the
principal
is
not
liable
for
the
expenses
incurred
by
the
agent
in
the
following
cases:
(a)
if the agent acted in contravention of the principal's
instructions, unless the latter should wish to avail himself of
the benefits derived from the contract;
(b)
When the expenses were due to the fault of the agent;
(c)
When the agent incurred them with knowledge that an
unfavorable result would ensue, if the principal was not aware
thereof; or
(c)
When
it
was
stipulated
that
the
expenses
would
be
borne
by
the
agent,
or
that
the
latter
would
be
allowed
only
a
certain
sum.
In
Dominion
Insurance
v.
Court
of
Appeals
it
was
held
that
when
the
authority
of
the
area
manager
to
settle
the
claims
<376 SCRA 239 (2002).
216
NON-CORPORATE MEDIA OF DOING BUSINESS
is
further
limited
by
the
written
standard
authority
to
pay,
which
states
that
the
payment
shall
come
from
his
revolving
fund
or
collection,
the
settlement
beyond
such
fund
was
a
clear
deviation
from
the
instructions
of
the
principal.
Consequently,
the
expenses
incurred
by
the
area
manager
in
the
settlement
of
the
claims
of
the
insured
may
not
be
reimbursed
from
the
insurance
company
pursuant
to
the
clear
provision
of
Article
1918(1)
of
the
New
Civil
Code.
However,
it
was
also
ruled
in
Dominion
Insurance
that
while
the
Law
on
Agency
prohibits
the
area
manager
from
obtaining
reimbursement,
his
right
to
recover
may
still
be
justified
under
the
general
law
on
obligations
and
contracts,
particularly
Article
1236
of
the
New
Civil
Code
on
payment
by
a
third
party
of
the
obligation
of
the
debtor,
allows
recovery
only
insofar
as
the
payment
has
been
beneficial
to
the
debtor.
Thus,
to
the
extent
that
the
obligation
of
the
insurance
company
has
been
extinguished,
the
area
manager
may
demand
for
reimbursement
from
his
principal;
to
rule
otherwise
would
result
in
unjust
enrichment
of
petitioner.
3.
To
Indemnify
Agent
for
the
Damages
Sustained
ART.
1913.
The
principal
must
also
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.
(1729)
Under
Article
1913
of
the
New
Civil
Code,
the
principal
must
indemnify
the
agent
for
all
the
damages
which
the
execution
of
the
agency
may
have
caused
the
agent,
without
fault
or
negligence
on
agent's
part.
Article
1913
is
the
counter-balance
to
the
provision
in
Article
1884
that
makes
the
agent
liable
for
damages
sustained
by
the
principal
for
agent's
refusal
to
perform
his
obligations
under
the
agency.
OBLIGATIONS OF THE PRINCIPAL
217
41
In
Albaladejo
y
Cia
v.
PRC,
the
Court
ruled
that
when
the
purchase
by
one
company
of
the
copra
of
another
company
is
by
way
of
contract
of
purchase
rather
than
an
agency
to
purchase,
the
former
is
not
liable
to
reimburse
the
latter
for
expenses
incurred
by
the
latter
in
maintaining
it
purchasing
organization
intact
over
a
period
during
which
the
actual
buying
of
copra
was
suspended.
The
Court
noted
that
the
circumstances
that
the
buying
company
encouraged
the
selling
company
to
keep
its
organization
intact
during
such
period
of
suspension
and
suggested
that
when
the
company
resumed
buying
the
selling
company
would
be
compensated
for
all
loss
which
it
had
suffered
meaning
that
the
profits
then
to
be
made
would
justify
such
expenses,
did
not
render
the
buying
company
liable
for
such
losses
upon
its
subsequent
failure
to
resume
the
buying
of
copra:
"The
inducements
thus
held
out
to
the
plaintiff
were
not
intended
to
lay
the
basis
of
any
contractual
liability,
and
the
law
will
not
infer
the
existence
of
a
contract
contrary
to
the
revealed
intention
of
the
42
parties."
The
clear
implication
in
Albaledejo
&
Cia
is
that
under
a
contract
of
sale,
the
relationship
between
the
buyer
and
the
seller
is
strictly
at
arms'
length
and
unless
expressly
or
implied
contracted,
one
cannot
assume
any
liability
arising
beyond
the
terms
of
the
meeting
of
the
minds
of
the
party.
On
the
other
hand,
if
the
relationship
is
one
of
principal
and
agent,
then
equity
demands,
and
Articles
1911
and
1913
of
the
New
Civil
Code
provide,
that
all
expenses
incurred
and
any
losses
sustained,
by
the
agent
in
pursuit
of
the
business
of
the
principal
and
those
undertaken
upon
instruction
of
the
principal,
should
be
reimbursed
by
the
principal
to
the
agent.
a.
Right
of
Agent
to
Retain
Object
of
Agency
in
Pledge
for
Advances
and
Damages
ART. 1914. The agent may retain in pledge the things
which are the object of
41
45
Phil.
556
(1923).
"Ibid,
at
p.
571.
NON-CORPORATE MEDIA OF DOING BUSINESS
218
the agency until the principal effects the reimbursement
and pays the indemnity set forth in the two preceding
articles. (1730)
Under
Article
1914
of
the
New
Civil
Code,
the
agent
is
granted
the
power
to
retain
in
pledge
the
things
which
are
the
object
of
the
agency
until
the
principal
effects
the
reimbursement
and
pays
the
indemnity
covering
advances
made
and
damages
sustained.
This
is
an
exception
to
the
duty
of
the
agent,
expressed
in
Article
1891
of
the
New
Civil
Code,
to
deliver
to
the
principal
everything
he
received
even
if
not
due
to
the
principal.
OBLIGATION OF TWO OR MORE PRINCIPALS TO AGENT APPOINTED FOR COMMON
TRANSACTIONS
ART. 1915. If two or more persons have appointed an agent for a
common transaction or undertaking, they shall be solidarily liable to
the agent for all the consequences of the agency. (1731)
Under
Article
1915
of
the
New
Civil
Code,
if
two
or
more
persons
have
appointed
an
agent
for
a
commbn
transaction
or
undertaking,
they
shall
be
solidarily
liable
to
the
agent
for
all
the
consequences
of
the
agency.
43
In De Castro v. Court of Appeals, which involved the issue on whether all
the co-owners must be impleaded as indispensable parties to a suit brought by
the agent against one of the co-owners
43
384 SCRA 607 (2002).
219
OBLIGATIONS OF THE PRINCIPAL
who
executed
a
special
power
of
attorney,
the
Court
quotes
from
Tolentino
to
explain
the
significance
of
Article
1915,
thus:
The
rule
in
this
article
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
the
agency.
By
virtue
of
this
solidarity,
the
agent
can
recover
from
any
principal
the
whole
compensation
and
indemnity
owing
to
him
by
the
others.
The
parties,
however,
may,
by
express
agreement,
negate
this
solidary
responsibility.
The
solidarity
does
not
disappear
by
the
mere
partition
effected
by
the
principals
after
the
accomplishment
of
the
agency.
If
the
undertaking
is
one
in
which
several
are
interested,
but
only
some
create
the
agency,
only
the
latter
are
solidary
liable,
without
prejudice
to
the
effects
of
negotiorum
gestio
with
respect
to
the
others.
And
if
the
power
granted
includes
various
transantions
some
of
which
are
common
and
others
are
not,
nonly
44
those
interested
in
each
transaction
shall
be
liable
for
it.
In
summary,
the
Court
ruled
in
De
Castro
that
"When
the
law
expressly
provides
for
solidarity
of
the
obligation,
as
in
the
liability
of
co-principals
in
a
contract
of
agency,
each
obligor
may
be
compelled
to
pay
the
entire
obligation.
The
agent
may
recover
the
whole
compensation
from
any
one
of
the
45
co-principals,
as
in
this
case."
The
matter
of
the
right
of
the
agent
to
receive
his
compensation
or
commission
is
discussed
in
detail
in
the
earlier
Chapter
1.
**lbid,
at
p.
615,
quoting
from
TOLENTINO,
ARTURO
M.,
COMMENTARIES
AND
JU-
RISPRUDENCE
ON
THE
CIVIL
CODE
OF
THE
PHILIPPINES
(1992
ed.),
Vol.
5,
pp.
428-429.
5
* lbid, at p. 615.
i.
220
NON-CORPORATE MEDIA OF DOING BUSINESS
RIGHTS OF PERSONS WHEN FACED WITH CONFLICTING CONTRACTS
ART.
1916.
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,
without
prejudice
to
the
provisions
of
Article
1544.
(n)
ART.
1917.
In
the
case
referred
to
in
the
preceding
article,
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
acted
in
bad
faith,
he
alone
shall
be
responsible,
(n)
Under
Article
1916
of
the
New
Civil
Code,
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,
without
prejudice
to
the
provisions
of
Article
1544
of
the
New
Civil
Code
on
the
rules
on
double
sales.
Article
1917
of
the
New
Civil
Code
provides
that
in
such
a
case,
if
the
agent
had
acted
in
good
faith,
the
principal
shall
be
liable
in
damages
to
the
third
person
whose
contract
miist
be
rejected.
On
the
other
hand,
if
the
agent
acted
in
bad
faith,
the
agent
alone
shall
be
responsible.
oOo
CHAPTER
5
EXTINGUISHMENT
OF
AGENCY
How AND WHEN AGENCY EXTINGUISHED
ART. 1919. Agency is extinguished:
(1) By its revocation;
(2) By the withdrawal of the agent;
(3) By the death, civil interdiction, insanity or
insolvency of the principal or of the agent;
(4) By the dissolution of the firm or corporation
which entrusted or accepted the agency;
(5) By the accomplishment of the object or
purpose of the agency;
(6) By the expiration of the period for which the
agency was constituted. (1732a)
Article 1919 of the New Civil Code enumerates the modes
by which an agency contract is extinguished, thus:
(a) Revocation by the principal;
(b) Withdrawal of the agent;
(c) By the death, civil interdiction, insanity or insol-
vency of either the principal or agent;
221
222
NON-CORPORATE MEDIA OF DOING BUSINESS
(d) By the dissolution of the juridical entity which
entrusted or accepted the agency;
(e) By the accomplishment of the object or purpose of
the agency; and
(f) By the expiration of the period for which the agency
was constituted.
Other modes of extinguishment of an agency would be:
(g)
Mutual withdrawal from the relationship by the
principal and agent;
(h)
By the happening of a supervening event that
makes illegal or impossible the objective or
purpose for which the agency was constituted, like
the destruction of the subject matter which is the
object of the agency.
PRINCIPAL'S REVOCATION OF THE AGENCY
ART.
1920.
The
principal
may
revoke
the
agency
at
will,
and
compel
the
agent
to
return
the
document
evidencing
the
agency.
Such
revocation
may
be
express
or
implied.
(1733a)
ART.
1925.
When
two
or
more
principals
have
granted
a
power
of
attorney
for
a
common
transaction,
any
one
of
them
may
revoke
the
same
without
the
consent
of
the
others,
(n)
The law recognizes the power to revoke an agency relation by principal, in
keeping with the truism that an agency is a highly personal relationship and one
built upon trust and confidence.
EXTINGUISHMENT OF AGENCY
223
Unlike the remedy of rescission which requires the existence of substantial
breach of contract, revocation is literally at the will of the principal.
Under Article 1925 of the New Civil Code, when two or more principals
have granted a power of attorney for a common transaction, any one of them
may revoke the same without the consent of the other. This rule is consistent
with the rule under Article 1915 of the New Civil Code that the obligation of two
or more principals to a common agent is solidary, and consequently, the power
to revoke the agency can be made by the will of only one of the principals.
But the near absolute power of the principal to revoke the agency should
not be confused with the thought that there can be no breach of contract
committed by a principal who revokes the agency which was constituted as
"irrevocable" or for a definite term or period. In such a case, the agreement as to
the term of the agency would not make the principal lose his power to revoke,
and when he does so revoke, the agency is terminated, but he would be liable to
the agent for the damages caused, including the compensation due the agent
when the revocation was done in bad faith, i.e., that the revocation of the
agency relationship was done to avoid the payment of the commission earned
by the agent.
Thus, Dahon v. Brimos held that where no time for the continuance of the
agency is fixed by the terms, the principal is at liberty to terminate it at will
subject only to the requirements of good faith.
Likewise, the sole exception to the revocability rule of every agency
relationship is when it comes to agency "coupled with interest."
42 Phil. 133 (1921).
224
NON-CORPORATE MEDIA OF DOING BUSINESS
1. Express Revocation
ART.
1921.
If
the
agency
has
been
entrusted
for
the
purpose
of
contracting
with
specified
persons,
its
revocation
shall
not
prejudice
the
latter
if
they
were
not
given
notice
thereof.
(1734)
ART.
1922.
If
the
agent
had
general
powers,
revocation
of
the
agency
does
not
prejudice
third
persons
who
acted
in
good
faith
and
without
knowledge
of
the
revocation.
Notice
of
the
revocation
in
a
newspaper
of
general
circulation
is
a
sufficient
warning
to
third
persons,
(n)
Under
Article
1920
of
the
New
Civil
Code,
the
principal
may
revoke
the
agency
at
will,
express
or
implied,
and
thereby
compel
the
agent
to
return
the
document
evidencing
the
agency.
This
would
ensure
that
the
document,
i.e.,
written
power
of
attorney,
would
not
fall
into
the
hands
of
third
parties
who
then
would
be
acting
in
good
faith
in
entering
into
a
contract
in
the
name
of
the
principal,
believing
there
is
still
existing
agency
relation.
If
the
agent
fails
or
refuses
to
return
the
power
of
attorney,
it
is
incumbent
upon
the
principal
to
give
proper
notice
to
the
members
of
the
public
who
may
be
affected
by
the
revocation.
Under
Article
1921
of
the
New
Civil
Code,
if
the
agency
has
been
entrusted
for
the
purpose
of
contracting
with
specified
persons,
its
revocation
shall
not
prejudice
the
latter
if
they
were
not
given
notice
thereof.
Under
Article
1922,
if
the
agent
had
general
powers
(i.e.,
not
directed
towards
specific
persons),
notice
of
the
revocation
in
a
newspaper
of
general
circulation
is
a
sufficient
warning
to
third
persons.
The
rules
are
consistent
with
the
one
set
in
Article
1873
of
the
New
Civil
Code,
which
provides
that
"If
a
person
specially
informs
another
or
states
by
public
advertisement
that
he
has
given
a
power
of
attorney
to
a
third
person,
the
latter
thereby
becomes
a
duly
authorized
agent,
in
the
former
case
with
respect
EXTINGUISHMENT OF AGENCY
225
to
the
person
who
received
the
special
information,
and
in
the
latter
case
with
regard
to
any
person."
In
addition,
Article
1873
provides
that
"The
power
shall
continue
to
be
in
full
force
until
the
notice
is
rescinded
in
the
same
manner
in
which
it
was
given."
It
should
be
noted
that
although
the
power
of
the
principal
to
expressly
revoke
the
contract
of
agency
cannot
generally
be
denied,
it
may
nevertheless
amount
to
breach
of
contract
that
would
make
the
principal
liable.
2
Thus, in Dialosa v. Court of Appeals, where the terms of the agency
contract allowed the agent "to dispose of, sell, cede, transfer and convey
x x x until all the subject property as subdivided is fully disposed of," it was
held that the agency was one with a period or one with a specific purpose, and
it was not extinguished until all the lots have been disposed of. Consequently, if
the contract were terminated by the principal before all the lots in the
subdivision has been disposed off, there would be a breach of contract for
which the principal would be liable for damages.
3
In Valenzuela v. Court of Appeals, the Court held that when the
revocation of the agency was effected by the principal primarily because of the
refusal of the agent to share half of the commissions earned under the contract
of agency, such revocation was done in bad faith, and for which the principal
can be held liable for damages including the payment of full commissions
earned by the agent at the time of the revocation of the agency.
2. Implied Revocation
ART. 1923. The appointment of a new agent for the same
business or transaction revokes the previous agency from the day on
which notice
2
130 SCRA 350
(1984).
191 SCRA1 (1990).
3
226
NON-CORPORATE MEDIA OF DOING BUSINESS
thereof was given to the former agent, without prejudice to the
provisions of the two preceding articles. (1735a)
ART. 1924. The agency is revoked if the principal directly
manages the business entrusted to the agent, dealing directly with
third persons, (n)
ART. 1926. A general power of attorney is revoked by a special
one granted to another agent, as regards the special matter involved
in the latter, (n) - --------------
The following have been enumerated as to constitute implied revocation,
thus:
a. Appointment of New Agent for Same Business
Under Article 1923 of the New Civil Code, the appointment of a new agent
for the same business or transaction revokes the previous agency from the day
on which notice thereof was given to the former agent. The effect of revocation
is without prejudice to the rights of third parties who were not aware of or
notified of such situation.
The critical time when the agency is revoked is "from the day on which
4
notice thereof was given to the former agent." Thus, in Garcia v. De Manzano,
where the father first gave a power of attorney over the business to his son, and
subsequently to the mother, the Court held that without evidence showing that
the son was informed of the issuance of the power of attorney to the mother,
the transaction effected by the son pursuant to his power of attorney, was valid
and binding, thus
There is no proof in the record that the first agent, the
son, knew of the power-of-attorney of his mother.
"39 Phil. 577 (1919).
EXTINGUISHMENT OF AGENCY
227
It was necessary under the law for the defendants, in order to
establish their counterclaim, to prove that the son had notice of
the second power-of-attorney. They have not done so, and it must
be considered that Angel L. Manzano was acting under a valid
power-of-attorney from his father which had not been legally
revoked on the date of the sale of the half interest in the steamer
to the plaintiffs son, which half interest was legally inherited by the
5
plaintiffs.
b. When Principal Directly Manages the Business
Under Article 1924 of the New Civil Code, the agency is revoked when the
principal directly manages the business entrusted to the agent, dealing directly
with third persons. The provision does not state when the act of revocation
takes place, and it can be presumed therefore that the moment the principal
directly manages the business by dealing directly with third persons, the agency
is revoked. But that would only mean that the revocation of the agency is only
with respect to the third persons with whom the principal deals directly; as to
third parties who have previously known of the power of attorney of the agent
and who have not dealt with the principal, the agency cannot be considered
revoked. It is also apparent that unless the agent is aware or given notice that
the principal has directly managed the business which is covered by his power
of attorney, then insofar as the agent is concerned there is as yet no revocation
of his powers.
It must be made clear that the continued involvement of the principal in
the management of the business or the property which is the object of a power
of attorney given to an agent does not necessarily mean there is intent to
revoke. For indeed, agency arrangements are not meant to curtail the power of
the principal to execute acts of ownership and administration, but as a matter
of business sense, to allow the principal, by legal fiction, to extend his
6
personality through the facility of the agent. In other
lbid,
at
p.
584.
^Orient
Air
Service
&
Hotel
Representatives
v.
Court
of
Appeals.
228
NON-CORPORATE MEDIA OF DOING BUSINESS
words,
the
direct
management
of
the
business
by
the
principal
and
directly
dealing
with
third
parties
shall
be
deemed
to
produce
the
effect
of
revocation
when
such
acts
would
be
inconsistent
with
the
terms
of
the
power
of
attorney
previously
given
to
the
agent.
7
Such principle is best illustrated in CMS Logging v. Court of Appeals,
where the principal appointed the agent "as his sole and exclusive export sales
agent with full authority .. .to sell and export under a firm sales contract... all
logs produced by [the principal] for a period of five (5) years commencing upon
the execution of the agreement x x x [and for which the agent] shall receive five
(5%) per cent commission of the gross sales of logs of [the principal] based on
F.O.B. invoice value which commission shall be deducted from the proceeds of
any and/or all moneys received by [agent] for and in behalf and for the account
of [the principal]." During the five year-period, the principal sold logs directly to
Japanese firms, and for which the agent now seeks to recover the commission
to which he was entitled to under the exclusive agency arrangement. In denying
any right on the part of the agent to receive commission from the principal's
direct sales of logs to its Japanese customers, the Court held
However, We find merit in [principal's] contention that the
appellate court erred in holding that [the agent] was entitled to its
commission from the sales made by [the principal] to Japanese
firms.
The principal may revoke a contract of agency at will, and such
revocation may be express, or implied, and may be availed of even
if the period fixed in the contract of agency as not yet expired. As
the principal has this absolute right to revoke the agency, the
agent can not object thereto; neither may he claim damages
arising from such revocation, unless it is shown that such was done
6
in order to evade the payment of agent's commission.
211 SCRA 374
(1992).
Ibid, at pp.
381-382.
8
EXTINGUISHMENT OF AGENCY
229
CMS
Logging
confirms
the
legal
position
that
the
indication
of
a
period
in
the
contract
of
agency
does
not
mean
that
the
contract
was
contractually
deemed
irrevocable
within
the
period
granted,
and
to
the
effect
revocation
within
the
period
would
amount
to
breach
of
contract
for
which
the
principal
may
be
held
liable
for
damages.
In
addition,
the
ruling
also
confirms
the
position
that
the
grant
to
a
person
of
an
"exclusive
agency"
position
does
not
mean
that
the
agency
is
irrevocable
within
the
period
provided
in
the
contract
of
agency,
but
that
merely
it
means
that
the
principal
would
not
appoint
another
agent
to
handle
the
business
covered.
Earlier,
in
Infante
v.
Cunanan*
the
Court
ruled
that
if
the
purpose
of
the
principal
in
dealing
directly
with
the
purchaser
and
himself
effecting
the
sale
of
the
principal's
property
is
to
avoid
payment
of
his
agent's
commission,
the
implied
revocation
is
deemed
made
in
bad
faith
and
cannot
be
sanctioned
without
according
to
the
agent
the
commission
which
is
due
him.
Subsequently,
in
New
Manila
Lumber
Company,
Inc.
v.
Republic
of
the
10
Philippines,
the
Court
ruled
that
the
act
of
a
contractor,
who,
after
executing
powers
of
attorney
in
favor
of
another
entity
empowering
the
latter
to
collect
whatever
amounts
may
be
due
from
the
Government,
and
thereafter
demanded
and
collected
from
the
Government
the
money
the
collection
of
which
he
entrusted
to
his
attorney-in-fact,
constituted
revocation
of
the
agency.
Much
later,
in
Guardez
v.
NLRC,
where
the
principal
had
authorized
the
purported
agent
to
"follow
up"
principal's
previous
offer
to
sell
a
firetruck
to
a
company,
the
Court
held
that
when
the
agent
dropped
out
of
the
scene
and
it
was
the
principal
that
directly
negotiated
with
the
company
to
oversee
the
perfection
and
consummation
of
the
sale,
no
commission
was
due
to
the
agent
because
"such
agency
would
have
been
deemed
revoked
upon
the
resumption
of
direct
negotiations
between"
the
principal
and
the
company.
93 Phil. 693 (1953).
1
0
1
0
7
P
h
i
l
.
8
2
230
NON-CORPORATE MEDIA OF DOING BUSINESS
The rulings in the above-discussed cases indicate that the issue of
"implied revocation" arising when the principal directly manages the business or
property covered by a power of attorney really go into the issue of entitlement
of the agent to the commission or remuneration agreed upon under the
contract of agency. In other words, it seems that jurisprudence indicates that
agency being a contract of service, the agent must earn through his service or
efforts the commission or remuneration agreed upon with the principal; such
that if it is the principal himself, through his own efforts, who is able to effect
the transaction contemplated by the agency arrangement, then the agent
would not be entitled to receive any commission.
c. Special Power of Attorney Revokes a General
Power of Attorney
Under Article 1926 of the New Civil Code, "A general power of attorney is
revoked by a special one granted to another agent, as regards the special matter
involved in the" general power of attorney. It is unfortunate that Article 1926
fuses two distinct situations into one statutory rule.
For example, the implication from the language of Article 1926 is that "a
special power of attorney granted to one person is not revoked by a general
power of attorney subsequently granted in favor of another person as to the
special matter involved in the special power of attorney;" for indeed the
proposition is illogical. The use of the terms "general power of attorney" and
"special power of attorney" is completely misleading in Article 1926, for the rule
is properly embodied in Article 1923, in that "the appointment of a new agent
for the same business or transaction revokes the previous agency from the day
on which notice thereof was given to the former agent."
In addition, if we look at the language of Article 1926, it would mean that
"a general power of attorney is not revoked by a special one granted to the
same agent" The falsity of such an implication is best shown in the decision in
2
Dy Buncio and Co. v. Ong Guan Can.'
"60 Phil. 696 (1934).
EXTINGUISHMENT OF AGENCY
231
In
that
decision,
the
son
executed
on
behalf
of
the
father,
the
deed
covering
the
sale
of
a
rice-mill
and
camarin,
in
favor
of
buyers
who
relied
upon
a
1928
power
of
attorney
attached
to
the
deed,
but
which
turned
out
was
"not
a
general
power
of
attorney
but
a
limited
one
and
[did]
not
give
the
express
power
13
to
alienate
the
properties
in
question."
When
the
creditors
of
the
principal
sought
to
have
the
sale
declared
void,
the
buyers
claimed
that
the
defect
in
the
son's
authority
to
sell
on
behalf
of
the
father
was
cured
by
an
earlier
1920
"general
power
of
attorney
given
to
the
same
agent
[son]"
by
the
father.
The
Court
nonetheless
declared
the
sale
void
on
the
ground
that
"The
making
and
accepting
of
a
new
power
of
attorney,
whether
it
enlarges
or
decreases
the
power
of
the
agent
under
a
prior
power
of
attorney,
must
be
held
to
supplant
and
revoke
the
latter
when
the
two
are
inconsistent.
If
the
new
appointment
with
limited
powers
does
not
revoke
the
general
power
of
attorney,
the
14
execution
of
the
second
power
of
attorney
would
be
a
mere
futile
gesture."
3.
Revocation
on
the
Basis
of
Breach
of
Trust
Deciding
under
the
provisions
of
Article
300
of
the
Code
of
Commerce,
Barretto
v.
Santa
Marina*
held
that
the
time
during
which
the
agent
may
hold
his
position
is
indefinite
or
undetermined,
when
no
period
has
been
fixed
in
his
commission
and
so
long
as
the
confidence
reposed
in
him
by
the
principal
exist;
but
as
soon
as
this
confidence
disappears
the
principal
has
a
right
to
revoke
the
power
he
conferred
upon
the
agent,
especially
when
the
latter
has
resigned
his
position
for
good
reasons.
Barretto
also
held
that
even
though
a
period
is
stipulated
during
which
the
agent
is
to
hold
his
position
in
the
service
of
the
owner
or
head
of
a
mercantile
establishment,
yet
the
latter
may,
for
any
of
the
special
reason
specified
in
Article
300
of
the
Code
of
Commerce,
dismiss
such
agent
even
before
the
termination
of
the
period,
including
breach
of
trust
on
the
part
of
the
agent.
13
/b/d,
at
pp.
697-698.
"ibid,
at
p.
698.
15
26
Phil.
440
(1913).
232
NON-CORPORATE MEDIA OF DOING BUSINESS
In Manila Trading v. Manila Trading Laborers Assn., the Court ruled
that it is now well-settled that a principal may discharge or dismiss his agent for
just cause for malfeasance or misfeasance in the performance of his duties. The
provisions of Article 300 of the Code of Commerce expressly authorizes a
merchant to discharge his employee or agent for fraud or breach of trust, or
engaging in any commercial transaction for their own account without the
express knowledge and permission of the principal.
The principles of breach of confidence as the lawful basis for revocation of
the agency arrangement are valid even under the New Civil Code. The position
of agent is essentially one of confidence, and the fiduciary role of the agent
implies that when he has breach the trust or confidence reposed in him by the
principal, then it would constitute a basis for revocation, which is equivalent to
the remedy of rescission for contracts in general.
n
In
Bacaling
v.
Muya,
the
Court
ruled
that
even
an
agency
coupled
with
interest
may
indeed
be
revoked
on
the
ground
of
fraud
committed
by
the
agent,
which
is
really
an
act
of
rescission,
the
same
must
be
clearly
be
proven.
4.
Effects
of
Revocation
on
Third
Parties
a.
When
It
Affects
Dealings
with
Specified
Third
Parties
Under
Article
1921
of
the
New
Civil
Code,
if
the
agency
has
been
entrusted
for
the
purpose
of
contracting
with
specified
persons,
its
revocation
shall
not
prejudice
the
latter
if
they
were
not
given
notice
thereof.
It
seems
clear,
when
compared
with
the
situation
in
Article
1873,
that
notice
by
public
advertisement
would
not
constitute
sufficient
notice
to
bind
such
specified
third
parties.
1
8
8
3
P
h
i
l
.
2
9
7
EXTINGUISHMENT
OF
AGENCY
18
233
In Ratios v. Yangco, the former principal refused to be personally liable
for any account handled by his agent (Collantes) for transactions that occurred
after the principal had terminated the agency relations, even to a long-standing
customer who had done business with the principal through the agent who was
specially endorsed. In affirming the liability of the principal, the Court held
It appears, however, that prior to the sending of said tobacco
the defendant had severed his relations with Collantes and that the
latter was no longer acting as his factor.
This fact was not known to the plaintiffs; and it is conceded in
the case that no notice of any kind was given by the defendant to
the plaintiffs of the termination of the relations between the
defendant and his agent. The defendant refused to pay the said sum
upon demand of the plaintiffs, placing such refusal upon the ground
that at the time the said tobacco was received and sold by Collantes
he was acting personally and not as agent of the defendant. This
action was brought to recover said sum.
As is seen, the only question for our decision is whether or not
the plaintiffs, acting in good faith and without knowledge, having
sent produce to sell on commission to the former agent of the
defendant, can recover of the defendant under the circumstances
above set forth. We are of the opinion that the defendant is liable.
Having advertised the fact that Collantes was his agent and having
given special notice to the plaintiffs of that fact, and having given
them a special invitation to deal with such agent, it was the duty of
the defendant on the termination of the relationship of principal
and agent to give due and timely notice thereof to the plaintiffs.
Failing to do so, he is responsible to them for whatever goods may
have been in good faith and without negligence sent to the agent
without knowledge, actual or constructive, of the termination of
19
such relationship.
18
20
Phil.
269
(1911).
to/d,
at
pp.
272-273.
19
234
NON-CORPORATE MEDIA OF DOING BUSINESS
20
Lustan v. Court of Appeals, held that when the special power of
attorney duly authorized the agent to represent and act on behalf of the
principal, the power granted thereto can be relied upon by third parties for
whom specifically the authority was issued, thus:
As far as third persons are concerned, an act is deemed to have
been performed within the scope of the agent's authority if such is
within the terms of the power of attorney as written even if the
agent has in fact exceeded the limits of his authority according to
the understanding between the principal and the agent. The Special
Power of Attorney particularly provides that the same is good not
only for th principal loan but also for subsequent commercial,
industrial, agricultural loan or credit accommodation that the
attorney- in-fact may obtain and until the power of attorney is
revoked in a public instrument and a copy of which is furnished to
PNB. Even when the agent has exceeded his authority, the principal
is solidarity liable with the agent if the former allowed the latter to
act as though he had full powers (Article 1911, Civil Code). The
mortgage directly and immediately subjects the property upon
which it is imposed. The property of third persons which has been
expressly mortgaged to guarantee an obligation to which the said
persons are foreign, is directly and jointly liable for the fulfillment
thereof; it is therefore subject to execution and sale for the purpose
of paying the amount of the debt for which it is liable. However,
petitioner has an unquestionable right to demand proportional
indemnification from Parangan with respect to the sum paid to PNB
from the proceeds of the sale of her property in case the same is
21
sold to satisfy the unpaid debts.
Lustan holds that where the special power of attorney provides that the
same is good not only for the principal loan but also for subsequent commercial,
individual, agricultural loan or credit accommodation that the attorney-in-fact
may obtain and until the power of attorney is revoked in a public instrument
and a copy of which is furnished to the bank, in the absence of any
266
SCRA663
2r
(1997).
lbid,
at
p.
676.
EXTINGUISHMENT OF AGENCY
235
proof
that
the
bank
had
knowledge
that
the
last
three
loans
were
without
the
express
authority
of
the
principal,
the
bank
cannot
be
prejudiced.
b. Revocation of General Powers of Attorney
Under Article 1922 of the New Civil Code, if the agent had general powers,
revocation of the agency does not prejudice third persons who acted in good
faith and without knowledge of the revocation. Notice of the revocation in a
newspaper of general circulation is a sufficient warning to third persons.
22
In Rammani v. Court of Appeals, the Court held that in a case covering a
power of attorney to deal with the general public, the fact that the revocation
was advertised in a newspaper of general circulation would be sufficient
warning to third persons.
c. Revocation of Special Powers of Attorney
23
In Philippine National Bank v. Intermediate Appellate Court, the Court
held that while Article 1358 of the New Civil Code requires that the contracts
involving real property must appear in a proper document, a revocation of a
special power of attorney to mortgage a parcel of land, embodied in a private
writing, is valid and binding between the parties, such requirement of Article
1358 being only for the convenience of the parties and to make the contract
effective as against third persons.
In C/a. Gen. De Tobacos v. Diaba the Court held that where a principal
has been engaged, through his agent, in a series of purchase and sell
transactions with a merchant, and purported suspended the agent without
informing the merchant, the suspension of the agent could not work to the
detriment of the merchant, thus: "There is no convincing proof in the record that
the orders given by the plaintiff to its agent (Gutierrez) had ever been
communicated to the defendant. The defendant had a
22196 SCRA 731
(1991).
23189 SCRA 680
24
(1990).
20 Phil. 321
(1911).
236
NON-CORPORATE MEDIA OF DOING BUSINESS
perfect
right
to
believe,
until
otherwise
informed,
that
the
agent
of
the
plaintiff,
in
his
purchase
of
abaca
and
other
effects,
was
still
representing
the
plaintiff
in
25
said
transactions."
The
Court
also
found
anomalous
the
position
taken
by
the
principal
whereby
he
was
willing
to
ratify
the
acts
of
the
agent
in
selling
goods
to
the
merchant,
but
unwilling
to
ratify
the
agent's
acts
in
purchasing
goods
from
the
same
merchant.
5.
Irrevocable
Agencies
ART. 1927. An agency cannot be revoked if a bilateral contract
depends upon itf or if it is the means of fulfilling an obligation already
contracted, or if a partner is appointed manager of a partnership in
the contract of partnership and his removal from the management is
unjustifiable, (n)
Under
Article
1927
of
the
New
Civil
Code,
an
agency
cannot
be
revoked
when:
a bilateral contract depends upon the agency for its
fulfillment;
it is the means of fulfilling an obligation already
contracted;
a partner is appointed manager of a partnership in the
contract of partnership and the removal from
management is unjustifiable.
An example of an agency coupled with interest is when a power of
attorney is constituted in a contract of real estate mortgage pursuant to the
requirement of Act No. 3135, which would empower the mortgagee upon the
default of the mortgagor
**lbid, at p. 322.
EXTINGUISHMENT OF AGENCY
237
to
payment
the
principal
obligation,
to
effect
the
sale
of
the
mortgage
property
through
extrajudicial
foreclosure.
Thus,
in
Perez
v.
PNBthe
Supreme
Court
The
argument
that
foreclosure
by
the
Bank
under
its
power
of
sale
is
barred
upon
death
of
the
debtor,
because
agency
is
extinguished
by
the
death
of
the
principal,
under
Article
1732
of
the
Civil
Code
of
1889
and
Article
1919
of
the
Civil
Code
of
the
Philippines,
neglects
to
take
into
account
that
the
power
to
foreclose
is
not
an
ordinary
agency
that
contemplates
exclusively
the
representation
of
the
principal
by
the
agent
but
is
primarily
an
authority
conferred
upon
the
mortgagee
for
the
latter's
own
protection.
It
is,
in
fact,
an
ancillary
stipulation
supported
by
the
same
causa
or
consideration
for
the
mortgage
and
forms
an
essential
and
inseparable
part
of
that
bilateral
agreement.
As
can
be
seen
in
the
preceding
quotations
from
Pasno
vs.
Ravina,
54
Phil.
382,
both
the
majority
and
the
dissenting
opinions
conceded
that
the
power
to
foreclose
extrajudicially
survived
the
death
of
the
mortgagor,
even
under
the
law
prior
to
the
Civil
Code
of
the
27
Philippines
now
in
force.
The
Perez
decision
effectively
reversed
the
earlier
rulings
in
Pasno
v.
29
Ravina
and
Del
Rosario
v.
Abad,
where
the
Court
held
that
a
power
of
attorney
to
sell
lodged
in
a
real
estate
mortgage
does
not
constitute
an
irrevocable
agency.
30
In
Sevilla
v.
Court
of
Appeals,
the
Court
found
that
when
the
petitioner,
Lina
Sevilla,
agreed
to
manage
the
respondent,
Tourist
World
Service,
Inc.'s
Ermita
office,
she
must
have
done
so
pursuant
to
a
contract
of
agency.
It
is
the
essence
of
this
contract
that
the
agent
renders
services
"in
representation
or
on
behalf
of
another."
The
Court
then
held
. . .
In
the
case
at
bar,
Sevilla
solicited
airline
fares,
but
she
did
so
for
and
on
behalf
of
her
principal,
Tourist
World
Service,
17 SCRA 833 (1966).
"Ibid, at p. 839. **54
Phil. 382 (1930). ^104
M
Phil. 648 (1958). 160
SCRA 171 (1968).
238
NON-CORPORATE MEDIA OF DOING BUSINESS
Inc. As compensation, she received 4% of the proceeds in the
concept of commissions. And as we said, Sevilla herself, based on
her letter of November 28, 1961, presumed her principal's
authority as owner of the business undertaking. We are convinced,
considering the circumstances and from the respondent Court's
recital of facts, that the parties had contemplated a principal-agent
relationship, rather than a joint management or a partnership.
But unlike simple grants of a power of attorney, the agency
that we hereby declare to be compatible with the intent of the
parties cannot be revoked at will. The reason is that it is one
coupled with an interest, the agency having been created for the
mutual interest of the agent and the principal. It appears that Lina
Sevilla is a bona fide travel agent herself, and as such, she had
acquired an interest in the business entrusted to her. Moreover,
she had assumed a personal obligation for the operation thereof,
holding herself solidarily liable for the payment of rentals. She
continued the business, using her own name, after Tourist World
had stopped further operations. Her interest, obviously, is not
limited to the commissions she earned as a result of her business
transactions, but one that extends to the very subject matter of the
power of management delegated to her. It is an agency that, as we
said, cannot be revoked at the pleasure of the principal.
Accordingly, the revocation complained of should entitle the
petitioner, Lina Sevilla, to damages.
x x x
This conduct on the part of Tourist World Service, Inc. betrays
a sinister effort to punish Sevilla for what it had perceived to be
disloyalty on her part. It is offensive, in any event, to elementary
norms of justice and fair play.
We rule, therefore, that for its unwarranted revocation of the
contract of agency, the private respondent, Tourist World Service,
Inc., should be sentenced to pay damages. Under the Civil Code,
moral damages may be awarded for "breaches of contract where
31
the defendant acted ... in bad faith."
Ibid, at p. 184.
EXTINGUISHMENT
OF
AGENCY
32
239
Valenzuela v. Court of Appeals, is a clear illustration of the situation that
where the appointment of the agent is not merely for the benefit of the
principal, but allows the agent to build business interests that would yield him
gains in terms of commission on a long-term basis, such as in the case of an
insurance agent, the same is deed an agency coupled with an interest and
cannot just be revoked, thus:
In the insurance business in the Philippines, the most difficult
and frustrating period is the solicitation and persuasion of the
prospective clients to buy insurance policies. Normally, agents
would encounter much embarrassment, difficulties, and
oftentimes frustrations in the solicitation and procurement of the
insurance policies. To sell policies, an agent exerts great effort,
patience, perseverance, ingenuity, tact, imagination, time and
money. In the case of Valenzuela, he was able to build up an
agency from scratch in 1965 to a highly productive enterprise with
gross billings of about Two Million Five Hundred Thousand Pesos
(P2,500,000.00) premiums per annum. The records sustain the
finding that the private respondent started to covet a share of the
insurance business that Valenzuela had built up, developed and
nurtured to profitability through over thirteen (13) years of patient
work and perseverance. When Valenzuela refused to share his
commission in the Delta account, the boom suddenly fell on him.
The private respondent by the simple expedient of
terminating the General Agency Agreement appro-priated the
entire insurance business of Valenzuela. With the termination of
the General Agency Agreement, Valenzuela would no longer be
entitled to commission on the renewal of insurance policies of
clients sourced from his agency. Worse, despite the termination of
the agency, Philamgen continued to hold Valenzuela jointly and
severally liable with the insured for unpaid premiums. Under these
circumstances, it is clear that Valenzuela had an interest in the
continuation of the agency when it was unceremoniously
terminated not only because of the commissions he should
continue to
191 SCRA 1 (1990).
240
NON-CORPORATE MEDIA OF DOING BUSINESS
receive from the insurance business he has solicited and procured
but also for the fact that by the very acts of the respondents, he
was made liable to Philamgen in the event the insured failed to
pay the premiums due. Therefore, the respondents cannot state
that the agency relationship between Valenzuela and Philamgen is
not coupled with interest. "There may be cases in which an agent
has been induced to assume a responsibility or incur a liability, in
reliance upon the continuance of the authority under such
circumstances that, if the authority be withdrawn, the agent will
be exposed to personal loss or liability....
Furthermore, there is an exception to the principle that an
agency is revocable at will and that is when the agency has been
given not only for the interest of the principal but for the interest
of third persons or for the mutual interest of the principal and the
agent. In these cases, it is evident that the agency ceases to be
33
freely revocable by the sole will of the principal.
In Bacaling v. Muyawhere the special power of attorney was granted to
the agent by the landowner primarily to enable the agent to effectively settle
the sale of several lots, the Court held the irrevocability of the agency relation,
thus:
Substantively, we rule that Bacaling [principal-landowner]
cannot revoke at her whim and pleasure the irrevocable special
power of attorney which she had duly executed in favor of
petitioner Jose Juan Tong [agent] and duly acknowledged before a
notary public. The agency, to stress, is one coupled with interest
which is explicitly irrevocable since the deed of agency was
prepared and signed and/or accepted by petitioner Tong and
Bacaling with a view to completing the performance of the
contract of sale of the one hundred ten (110) sub-lots. It is for this
reason that the mandate of the agency constituted Tong as the
real party in interest to remove all clouds on the title of Bacaling
and that, after all theses cases are resolved, to use the
^Ibid,
at
pp.
12-13,
citing
PADILLA,
CIVIL
CODE
ANNOTATED,
Vol.
IV,
p.
350.
"380
SCRA
714
(2002).
EXTINGUISHMENT OF AGENCY
241
irrevocable special power of attorney to ultimately "cause and
effect the transfer of the aforesaid lots in the name of the vendees
[Tong with two (2) other buyers] and execute and deliver
document/s or instruments of whatever nature necessary to
accomplish the foregoing acts and deeds." The fiduciary
relationship inherent in ordinary contracts of agency is replaced by
material consideration which in the type of agency herein
established bars the removal or dismissal of petitioner Tong as
Bacaling's attorney-in-fact on the ground of alleged loss of trust
35
and confidence.
36
In National Sugar Trading v. PNB, NASUTRA, in order to finance its
undertaking as the marketing agent of PHILSUCOM (which was by law the sole
buying and selling agent of sugar on the quedan permit level), applied for and
was grant a P408 Million Revolving Credit Line by PNB, by which every time
NASUTRA availed of the credit line, it executed a promissory note in favor of
PNB. Eventually, in order to stabilize sugar liquidation prices,
PHILSUCOM/NASUTRA adopted a liquidation scheme of the sugar quedans by
constituting PNB as the attorney-in-fact under written instructions "Upon notice
from NASUTRA, PNB shall credit the individual producer and millers loan
accounts for their sugar proceeds and shall treat the same as loans of
37
NASUTRA." In resolving the issue on whether the agency relation was that
coupled with interest, and therefore irrevocable, the Court held:
Also, the relationship between NASUTRA/SRA and PNB when
the former constituted the latter as its attorney- in-fact is not a
simple agency. NASUTRA/SRA has assigned and practically
surrendered its rights in favor of PNB for a substantial
consideration. To reiterate, NASUTRA/SRA executed promissory
notes in favor of PNB every time it availed of the credit line. The
agency established between the parties is one coupled with
interest which cannot be revoked or cancelled at will by any of the
33
parties.
mid,
at
p.
729.
"396
SCRA
528
37
Ibid,
at
p.
531.
(2003).
38
Ibid,
at
pp.
537-538.
242
NON-CORPORATE MEDIA OF DOING BUSINESS
In
Lim
v.
Sabanreiterated
the
principle
that
just
because
the
terms
of
the
agency
agreement
grants
to
the
agent
by
way
of
commission,
such
amount
of
the
purchase
price
that
is
above
the
indicated
price
of
the
principal
(over-price),
does
not
constitute
the
agency
one
that
is
coupled
with
an
interest,
thus:
"Stated
differently,
an
agency
is
deemed
as
one
coupled
with
an
interest
where
it
is
established
for
the
mutual
benefit
of
the
principal
and
of
the
agent,
or
for
the
interest
of
the
principal
and
of
third
persons,
and
it
cannot
be
revoked
by
the
principal
so
long
as
the
interest
of
the
agent
or
of
a
third
person
subsists.
In
an
agency
coupled
with
an
interest,
the
agent's
interest
must
be
in
the
subject
matter
of
the
power
conferred
and
not
merely
an
interst
in
the
exercise
of
the
power
because
it
entitles
him
to
compensation.
When
an
agent's
interest
is
confined
to
earning
his
agreed
compensation,
the
agency
is
not
one
coupled
with
an
interest,
since
an
agent's
interest
in
obtaining
his
compensation
as
such
40
agent
is
an
ordinary
incident
of
the
agency
relationship."
41
In Republic v. Evangelista, the Court noted that an exception to the
revocability of a contract of agency is when it is coupled with interest, i.e., if a
bilateral contract depends upon the agency. The reason for its irrevocability is
because the agency becomes part of another obligation or agreement. It is not
solely the rights of the principal but also that of the agent and third persons
which are affected. Hence, the law provides that in such cases, the agency
cannot be revoked at the sole will of the principal.
The ruling emphasizes the character of contract of agency as being
primarily a preparatory contract, in the sense that it is meant to the medium by
which contracts and other juridical acts are entered into with third parties, and
consequently, principles that are inherently only for "agency-consideration,"
such as its features of being fiduciary and essentially revocable, cannot
overcome more important consideration such as preserving the contractual
expectations of third parties who deal in good faith with
39
447 SCRA 232
(2004). at p. 240:
*lbid,
41
466 SCRA 544
(2005).
EXTINGUISHMENT OF AGENCY
243
the
principal
through
the
agent.
In
the
case
of
agency
coupled
with
interest,
the
revocable
nature
of
the
agency
relationship
must
give
way
to
making
effective,
binding
and
enforceable
any
"bilateral
contract
[which]
depends
upon"
the
existence
of
the
agency
for
its
enforcement
and
realization.
The
recent
decision
in
Philex
Mining
Corp.
v.
Commissioner
of
Internal
42
Revenue
,
offers
a
interesting
study
on
what
constitutes
"irrevocability"
in
an
agency
relationship.
In
that
case,
Philex
Mining,
as
manager,
and
Baguio
Gold,
as
principal,
had
entered
into
a
"Power
of
Attorney,"
whereby
Philex
Mining
was
to
develop
the
mining
resources
of
Baguio
Gold
and
to
make
advances.
When
the
ventured'did
not
prosper,
the
two
mining
companies
did
a
settlement
of
accounts
between
them
leaving
a
large
amount
of
advances
by
Philex
Mining,
which
was
partly
settled
by
Baguio
Gold.
Eventually
Philex
Mining
wrote-off
as
bad
debts
the
remaining
balance
of
the
advances
when
it
was
shown
that
Baguio
Gold
had
become
insolvent.
The
BIR
refused
to
accept
the
writing-off
as
being
deductible
from
the
income
tax
due
from
Philex
Mining
on
the
ground
that
the
arrangement
between
the
two
mining
companies
was
a
partnership
or
a
joint
venture
arrangements,
and
the
advances
were
not
really
receivables
but
equity
placements
into
the
venture.
In
ruling
that
the
arrangement
under
the
"Power
of
Attorney"
was
really
a
partnership
arrangement,
rather
than
an
agency,
the
Court
seemed
to
imply
in
Philex
Mining
Corp.
that
it
is
the
stipulation
of
"irrevocability"
found
in
a
contract
of
agency
that
makes
it
an
"agency
coupled
with
interest,"
thus:
In
an
agency
coupled
with
interest,
it
is
the
agency
that
cannot
be
revoked
or
withdrawn
by
the
principal
due
to
an
interest
of
a
third
party
that
depends
upon
it,
or
the
mutual
interest
of
both
principal
and
agent.
In
this
case,
the
non-revocation
or
non-withdrawal
under
paragraph
5(c)
[of
the
"Power
of
Attorney"]
applies
to
the
advances
made
by
petitioner
[agent]
who
is
supposedly
the
agent
and
not
the
principal
under
the
contract.
Thus,
it
cannot
be
inferred
42
551 SCRA 428 (2008).
244
NON-CORPORATE MEDIA OF DOING BUSINESS
from
the
stipulation
that
the
parties'
relation
under
the
agreement
43
is
one
of
agency
coupled
with
an
interest
and
not
a
partnership.
By
indicating
that
"it
cannot
be
inferred
from
the
stipulation
[of
irrevocability]
that
the
parties'
relation
under
the
agreement
is
one
of
agency
coupled
with
an
interest,"
the
Court
seems
to
imply
when
irrevocability
on
the
part
of
the
principal
is
stipulated,
then
the
agency
becomes
one
that
is
coupled
with
interest.
This
ruling
is
not
consistent
with
the
provisions
of
Article
1927
of
the
New
Civil
Code
which
provides
that
it
is
not
stipulation
of
irrevocability
that
makes
an
agency
coupled
with
an
interest,
but
by
the
fact
that
the
contract
of
agency
has
been
entered
into
upon
which
the
fulfillment
of
the
another
contract
is
dependent.
Indeed,
even
if
it
is
clearly
that
the
principal
in
a
contract
of
agency
cannot
revoke
the
agency
within
a
specified
time
or
until
an
objective
is
achieved,
what
the
stipulation
merely
does
is
to
make
the
agency
one
that
is
not
"at
will,"
but'
it
would
still
be
revocable
by
the
principal,
albeit
it
would
constitute
a
breach
of
contract
for
which
the
principal
may
be
held
liable
for
damages.
Philex
Mining
Corp.
found
that
although
the
instrument
executed
between
the
two
mining
companies
was
denominated
as
a
"Power
of
Attorney,"
what
it
constituted
was
essentially
a
partnership
or
joint
venture
between
the
parties,
thus
It
should
be
stressed
that
the
main
object
of
the
"Power
of
Attorney"
was
not
to
confer
a
power
in
favor
of
petitioner
to
contract
with
third
persons
on
behalf
of
Baguio
Gold
but
to
create
a
business
relationship
between
petitioner
and
Baguio
Gold,
in
which
the
former
was
to
manage
and
operate
the
latter's
mine
through
the
parties'
mutual
contribution
of
material
resources
and
industry.
The
essence
of
an
agency,
even
one
that
is
coupled
with
interest,
is
the
agent's
ability
to
represent
his
principal
and
bring
about
the
business
relations
between
the
latter
and
third
persons.
Where
representation
for
and
in
behalf
of
the
principal
is
merely
incidental
or
necessary
for
the
proper
discharge
of
"Ibid, at p. 441; emphasis supplied.
EXTINGUISHMENT OF AGENCY
245
one's paramount undertaking under a contract, the latter may not
necessarily be a contract of agency, but some other agreement
depending on the ultimate undertaking of the parties.
In this case, the totality of the circumstances and the
stipulations in the parties' agreement indubitably lead to the
conclusion that a partnership was formed between petitioner and
44
Baguio Gold.
The above-quoted reasoning in Philex Mining Corp. seem to imply that
agency and partnership are mutually exclusive, when in fact one of the essential
features of a contract of agency is that it brings about mutual agency between
and among the partners in the partnership. In fact, Article 1927, as it enumerates
what constitutes "irrevocable agencies" includes as the third enumeration those
"if a partner is appointed manager of a partnership in the contract of partnership
and his removal from the management is unjustifiable." In essence the
resolution in Philex Mining Corp. is correct that finding the relationship between
the two mining companies under a "Power of Attorney" contract to still be a
partnership or joint venture arrangement, since the agency features in the
contract cannot be considered antagonistic to the partnership arrangements
intended by the parties.
It ought to be noted that earlier, in Coleongco v. Claparols the Court
held that "it must not be forgotten that a power of attorney although coupled
with interest in a partnership can be revoked for a just cause, such as when the
attorney-in-fact betrays the interest of the principal, as happened in this case. It
is not open to serious doubt that the irrevocability of the power of attorney may
not be used to shield the perpetration of acts in bad faith, breach of confidence,
or betrayal of trust, by the agent for that would amount to holding that a power
coupled with an interest authorizes the agent to commit frauds against the
48
principal."
"Ibid, at pp. 441-442.
^10 SCRA 577 (1964).
"Ibid, at pp. 581-582.
246
NON-CORPORATE MEDIA OF DOING BUSINESS
Perhaps
the
best
way
to
end
this
section
is
to
discuss
the
decision
in
7
Mendoza
v.
Paule,*
which
applied
the
"agency
coupled
with
interest"
provisions
of
Article
1927
of
the
New
Civil
Code.
In
that
case,
Mendoza
and
Paule
entered
into
an
informal
partnership
arrangement
to
bid
for
NIA
project
under
the
following
terms:
"PAULE's
contribution
thereto
is
his
contractor's
license
and
expertise,
while
MENDOZA
would
provide
and
secure
the
needed
funds
for
labor,
materials
and
services;
deal
with
the
suppliers
and
sub-contractors;
and
in
general
and
together
with
PAULE,
oversee
the
effective
implementation
of
the
project.
For
this,
PAULE
would
receive
as
his
share
three
percent
(3%)
of
the
project
cost
while
the
rest
48
of
the
profits
shall
go
to
MENDOZA." However,
since
only
Paule
had
the
accredited
business
enterprise
to
qualify
for
the
bid,
no
partnership
arrangement
was
drawn-up,
and
instead
Paule
executed
a
Special
Power
of
Attorney
in
favor
of
Mendoza
"To
represent
me
(PAULE)
in
my
capacity
as
General
Manager
of
the
E.M.
PAULE
CONSTRUCTION
AND
TRADING,
in
all
meetings,
conferences
and
transactions
exclusively
for
the
construction
of
the
49
projects"
with
NIA.
When
Paule
had
received
his
3%
share
in
the
project
costs,
and
the
rest
of
the
collections
from
the
NIA
project
all
pertained
to
MENDOZA,
Paule
revoked
the
Special
Power
of
Attorney,
depriving
Mendoza
of
the
legal
means
by
which
to
collect
the
unpaid
billings
from
NIA.
One
of
the
issues
raised
is
whether
Paule
could
legal
revoke
the
Special
Power
of
Attorney,
and
his
liability
to
Mendoza
for
such
revocation.
The
Court
held
in
Mendoza
held
There
was
no
valid
reason
for
PAULE
to
revoke
MENDOZA's
SPAs.
Since
MENDOZA
took
care
of
the
funding
and
sourcing
of
labor,
materials
and
equipment
for
the
project,
it
is
only
logical
that
she
controls
the
finances,
which
means
that
the
SPAs
issued
to
her
were
necessary
for
the
proper
performance
of
her
role
in
the
partnership,
and
to
discharge
the
obligations
she
had
already
contracted
47
579 SCRA 341
(2009).
"Ibid, at p. 354.
49
Ibid, at p. 347.
EXTINGUISHMENT OF AGENCY
prior
to
revocation.
Without
the
SPA,
she
could
not
collect
from
NIA,
because
as
far
as
it
is
concerned,
EMPCT
and
not
the
PAULE-MENDOZA
partnership
is
the
entity
it
had
contracted
with.
Without
these
payments
from
NIA,
there
would
be
no
source
of
funds
to
complete
the
project
and
to
pay
off
obligations
incurred.
As
MENDOZA
correctly
argues,
an
agency
cannot
be
revoked
if
a
bilateral
contract
depends
upon
it,
or
if
it
is
the
means
of
fulfilling
an
obligation
already
contracted,
or
if
a
partner
is
appointed
manager
of
a
partnership
in
the
contract
of
partnership
and
his
removal
from
the
management
is
unjustifiable.
PAULE's
revocation
of
the
SPAs
was
done
in
evident
bad
faith.
Admitting
all
throughout
that
his
only
entitlement
in
the
partnership
with
MENDOZA
is
his
3%
royalty
for
the
use
of
his
contractor's
license,
he
knew
that
the
rest
of
the
amounts
collected
from
NIA
was
owing
to
MENDOZA
and
suppliers
of
materials
and
services,
as
well
as
the
laborers.
Yet,
he
deliberately
revoked
MENDOZA's
authority
such
that
the
latter
could
no
longer
collect
from
NIA
the
amounts
necessary
to
proceed
with
the
project
and
50
settle
outstanding
obligations.
WITHDRAWAL OF THE AGENT FROM THE AGENCY
ART.
1928.
The
agent
may
withdraw
from
the
agency
by
giving
due
notice
to
the
principal.
If
the
latter
should
suffer
any
damage
by
reason
of
the
withdrawal,
the
agent
must
indemnify
him
therefor,
unless
the
agent
should
base
his
withdrawal
upon
the
impossibility
of
continuing
the
performance
of
the
agency
without
grave
detriment
to
himself.
(1736a)
ART.
1929.
The
agent,
even
if
he
should
withdraw
from
the
agency
for
a
valid
reason,
must
continue
sofbid, at pp. 356-357.
247
248
NON-CORPORATE MEDIA OF DOING BUSINESS
to
act
until
the
principal
has
had
reasonable
opportunity
to
take
the
necessary
steps
to
meet
the
situation.
(1737a)
Under
Article
1928
of
the
New
Civil
Code,
the
agent
may
withdrawal
from
the
agency
by
giving
due
notice
to
the
principal.
If
the
principal
should
suffer
any
damage
by
reason
of
the
withdrawal,
the
agent
must
indemnify
him
therefore,
unless
the
agent
should
base
his
withdrawal
upon
the
impossibility
of
continuing
the
performance
of
the
agency
without
grave
detriment
to
himself.
Under
Article
1929
of
the
New
Civil
Code,
even
when
the
agent
should
withdraw
for
a
valid
reason,
he
must
continue
to
act
until
the
principal
has
had
reasonable
opportunity
to
take
the
necessary
steps
to
meet
the
situation.
In
De
la
Peha
v.
Hidalgoit
was
held
that
when
the
agent
and
administrator
of
property
informs
his
principal
by
letter
that
for
reasons
of
health
and
medical
treatment
he
is
about
to
depart
from
the
place
where
he
is
executing
his
trust
and
wherein
the
said
property
is
situated,
and
abandons
the
property,
turns
it
over
to
a
third
party,
renders
accounts
of
its
revenues
up
to
the
date
on
which
he
ceases
to
hold
his
position
and
transmits
to
his
principal
a
general
statement
which
summarizes
and
embraces
all
the
balances
of
his
accounts
since
he
began
the
administration
to
the
date
of
the
termination
of
his
trust,
and,
without
stating
when
he
may
return
to
take
charge
of
the
administration
of
the
said
property,
asks
his
principal
to
execute
a
power
of
attorney
in
due
form
in
favor
of
and
transmit
the
same
to
another
person
who
took
charge
of
the
administration
of
the
said
property,
it
is
but
reasonable
and
just
to
conclude
that
the
said
agent
had
expressly
and
definitely
renounced
his
agency
and
that
such
agency
was
duly
terminated,
in
accordance
with
the
provisions
of
article
1732
of
the
old
Civil
Code,
now
Arts.
1919
and
1928
of
the
New
Civil
Code.
51
16 Phil. 450(1910).
EXTINGUISHMENT OF AGENCY
249
In
Valera
v.
Velasco,
it
was
held
that
the
fact
that
an
agent
instituted
an
action
against
his
principal
for
the
recovery
of
the
balance
in
his
favor
resulting
from
the
liquidation
of
the
accounts
between
them
arising
from
the
agency,
and
rendered
a
final
account
of
his
operations,
was
equivalent
to
an
express
renunciation
of
the
agency,
and
terminated
the
juridical
relation
between
them,
thus:
.
.
.
for,
although
the
agent
has
not
expressly
told
his
principal
that
he
renounced
the
agency,
yet
neither
dignity
nor
decorum
permits
the
latter
to
continue
representing
a
person
who
has
adopted
such
an
antagonistic
attitude
towards
him.
When
the
agent
filed
a
complaint
against
his
principal
for
the
recovery
of
a
sum
of
money
arising
from
the
liquidation
of
the
accounts
between
them
in
connection
with
the
agency,
[the
principal]
could
not
have
understood
otherwise
because
his
act
was
more
expressive
that
words
and
could
not
have
caused
any
doubt...
In
order
to
terminate
their
relations
by
virtue
of
the
agency,
the
defendant,
as
agent,
63
rendered
his
final
account...
to
the
plaintiff,
as
principal.
Thus,
the
Court
held
that
the
subsequent
purchase
by
the
former
agent
of
the
principal's
usufructuary
rights
in
a
public
auction
was
valid,
since
no
fiduciary
relationship
existed
between
them
at
that
point.
DEATH, INCAPACITY OR INSOLVENCY OF THE PRINCIPAL
Since agency is both a fiduciary and a representative relationship, the
death of the principal automatically extinguishes the contract, for certainly even
if the agent is willing to go on, he has nobody to represent and bind in juridical
5
relations. Thus, Ratios v. Felix Go Chan & Sons Realty Corp., * held
51 Phil. 695 (1928).
^Ibid, at p. 699. "81
SCRA 251 (1978).
250
NON-CORPORATE MEDIA OF DOING BUSINESS
By reason of the very nature of the relationship between
principal and agent, agency is extinguished by the death of the
principal or the agent. This is the law in this jurisdiction.
Manresa commenting on Art. 1709 of the Spanish Civil Code
explains that the rationale for the law is found in the juridical basis
of agency which is representation. There being an integration of
the personality of the principal into that of the agent it is not
possible for the representation to continue to exist once the death
of either is establish. Pothier agrees with Manresa that by reason
of the nature of agency, death is a necessary cause for its
extinction. Laurent says that the juridical tie between the principal
and the agent is severed ipso jure upon the death of either without
necessity for the heirs of the principal to notify the agent of the
fact of death of the former.
The same rule prevails at common law the death of the
principal effects instantaneous and absolute revocation of the
authority of the agent unless the power be coupled with an
interest. This is the prevalent rule in American Jurisprudence
where it is well-settled that a power without an interest conferred
upon an agent is dissolved by the principal's death, and any
attempted execution of the power afterwards is not binding on the
55
heirs or representatives of the deceased.
In Lavina v. Court of Appeals," the Court held that the death of a client
divests his lawyer of authority to represent him as counsel, since a dead client
has no personality and cannot be represented by an attorney.
57
Only
recently,
in
Sarsaba
v.
Vda.
de
Te,
the
Court
summarized
the
rules
pertaining
to
the
effect
of
the
death
of
the
principal
on
the
agency
relationship
Agency
is
extinguished
by
the
death
of
the
principal.
The
only
exception
where
the
agency
shall
remain
in
full
force
^Ibid,
at
p.
260.
"171
SCRA
691
(1988).
OT
594
SCRA
410
(2009).
EXTINGUISHMENT OF AGENCY
251
and
effect
even
after
the
death
of
the
principal
is
when
if
it
has
been
constituted
in
the
common
interest
of
the
latter
and
of
the
agent,
or
in
the
interest
of
a
third
person
who
has
accepted
the
58
stipulation
in
his
favor.
1. When the Agency Continues Despite
Death of Principal
ART. 1930. The agency shall remain in full force
and effect even after the death of the principal, if it
has been constituted in the common interest of the
latter and of the agent, or in the interest of a third
person who has accepted the stipulation his favor,
(n)
Under Article 1930 of the New Civil Code, the agency shall remain in full
force and effect even after the death of the principal, if it has been constituted in
the common interest of the latter and of the agent, or in the interest of a third
person who has accepted the stipulation in his favor.
Earlier on in Pasno v. Ravinathe Court recognized that "the power of sale
given in a mortgage is a power coupled with an interest which survives the
death of the grantor."
In Perez v. PNBthe Court noted that an example of an agency coupled with
interest is when a power of attorney is constituted in a contract of real estate
mortgage pursuant to the requirement of Act No. 3135, which would empower
the mortgagee upon the default of the mortgagor to payment the principal
obligation, to effect the sale of the mortgage property through extrajudicial
foreclosure. It has been held that the power of sale in the deed of real estate
mortgage is not revoked by
mid,
at
p.
430.
54
Phil.
378
(1930).
17
SCRA
833
(1966).
NON-CORPORATE MEDIA OF DOING BUSINESS
252
the death of the principal-mortgagor, on the ground that it is an ancillary
stipulation supported by the same cause or consideration that supports the
mortgage and forms an essential inseparable part of that bilateral agreement.
The power of attorney therefore survives the death of the mortgagor, and
allows the mortgagee to effect the foreclosure of the real estate mortgage even
61
after the death of the principal-mortgagor.
2. Effect of Acts Done by Agent Without Knowledge of
Principal's Death
ART. 1931. Anything done by the agent, without knowledge of
the death of the principal or of any other cause which extinguishes
the agency, is valid and shall be fully effective with respect to third
persons who may have contracted with him in good faith. (1738)
Under
Article
1931
of
the
New
Civil
Code,
anything
done
by
the
agent,
without
knowledge
of
the
death
of
the
principal
or
of
any
other
cause
which
extinguishes
the
agency,
is
valid
and
shall
be
fully
effective
with
respect
to
third
persons
who
may
have
contracted
with
him
in
good
faith.
It
is
obvious,
that
third
parties
who
deal
with
the
agent
in
bad
faith
(i.e.,
knowing
that
the
principal
is
dead)
would
not
be
protected,
and
the
contract
would
be
void,
not
just
unenforceable,
for
lack
of
the
essential
element
of
consent.
In
Buason
v.
Panuyas*
the
Court
applied
the
provisions
of
Article
1931
in
upholding
the
validity
of
the
sale
of
the
land
effected
by
the
agent
only
after
the
death
of
the
principal,
when
no
evidence
was
adduced
to
show
that
at
the
time
of
sale
both
61
Reiterated in Del Rosario v. Abad and Abad, 104 Phil. 648
(1958).
105 Phil. 795 (1959).
62
EXTINGUISHMENT OF AGENCY
253
63
the
agent
and
the
buyers
were
unaware
of
the
death
of
the
principal.
6
In
Rallos
v.
Felix
Go
Chan
&
Sons
Realty
Corp., *
the
Court
emphasized
that
lack
of
knowledge
of
the
death
of
the
principal
must
exist
at
the
time
of
contract
with
both
the
agent
and
the
third
parties
for
the
provision
of
Article
1931
to
apply,
thus
Article
1931
is
the
applicable
law.
Under
this
provision,
an
act
done
by
the
agent
after
the
death
of
his
principal
is
valid
and
effective
only
under
two
conditions,
viz.:
(1)
that
the
agent
acted
without
knowledge
of
the
death
of
the
principal,
and
(2)
that
the
third
person
who
contracted
with
the
agent
himself
acted
in
good
faith.
Good
faith
here
means
that
the
third
son
was
not
aware
of
the
death
of
the
principal
at
the
time
he
contracted
with
said
agent.
These
two
requisites
must
concur:
the
absence
of
one
will
render
the
act
of
the
agent
invalid
unenforceable.
In
the
instant
case,
it
cannot
be
questioned
that
the
agent,
Simeon
Rallos,
knew
of
the
death
of
his
principal
at
the
time
he
sold
the
latter's
share
in
Lot
No.
5983
to
respondent
corporation.
The
knowledge
of
the
death
is
clearly
to
be
inferred
from
the
pleadings
filed
by
Simeon
Rallos
before
the
trial
court.
That
Simeon
Rallos
knew
of
the
death
of
his
sister
Concepcion
is
also
a
finding
of
fact
of
the
court
a
quo
and
of
respondent
appellate
court
when
the
latter
stated
that
Simeon
Rallos
"must
have
known
of
the
death
of
his
sister,
and
yet
he
proceeded
with
the
sale
of
the
lot
in
the
name
of
both
his
sisters
Concepcion
and
Gerundia
Rallos
without
informing
appellant
(the
realty
corporation)
of
the
death
of
the
former."
On
the
basis
of
the
established
knowledge
of
Simeon
Rallos
concerning
the
death
of
his
principal,
Concepcion
Rallos,
Article
1931
of
the
Civil
Code
is
inapplicable.
The
law
expressly
requires
for
its
application
lack
of
knowledge
on
the
part
of
the
agent
of
the
death
of
his
principal;
it
is
not
enough
that
the
third
person
acted
in
65
good
faith.
^Reiterated in Herrera v. Uy Kim Guan, 1 SCRA 406
(1961).
"81 SCRA 251 (1978).
65
/b/d, at p. 262.
281
NON-CORPORATE MEDIA OF DOING BUSINESS
The Court further held in Rallos:
. . . Another argument advanced by respondent court is that
the vendee acting in good faith relied on the power of attorney
which was duly registered on the original certificate of title
recorded in the Register of Deeds of the Province of Cebu, that no
notice of the death was ever annotated on said certificate of title
by the heirs of the principal and accordingly they must suffer the
66
consequences of such omission.
To support such argument reference is made to a portion in
Manresa's Commentaries which We quote:
"If the agency has been granted for the purpose of contracting
with certain persons, the revocation must be made known to them.
But if the agency is general in nature, without reference to
particular person with whom the agent is to contract, it is sufficient
that the principal exercise due diligence to make the revocation of
the agency publicly known.
"In case of a general power which does not specify the persons
to whom representation should be made, it is the general opinion
that all acts executed with third persons who contracted in good
faith, without knowledge of the revocation, are valid. In such case,
the principal may exercise his right against the agent, who, knowing
of the revocation, continued to assume a personality which he no
67
longer had. (Manresa, Vol. 11, pp. 561 and 575; pp. 15-16, rollo)"
The above discourse, however, treats of revocation by an act of
the principal as a mode of terminating an agency which is to be
distinguished from revocation by operation of law such as death of
the principal which obtains in this case. On page six of this Opinion
We stressed that by reason of the very nature of the relationship
between principal and agent, agency is extinguished ipso jure upon
the death of either principal or agent. Although a revocation of a
power of attorney to be effective must be communicated to the
parties concerned, yet a revocation by operation of law, such as by
death of the principal is, as a rule, instantaneously effective
inasmuch as "by legal fiction the agent's exercise of authority is
regarded as an execution of the principal's continuing will." With
death, the principal's will ceases or is terminated; the source of
authority is extinguished.
<lbid,
at
p.
263.
67
Ibid,
at
p.
263.
EXTINGUISHMENT OF AGENCY
255
The
New
Civil
Code
does
not
impose
a
duty
on
the
heirs
to
notify
the
agent
of
the
death
of
the
principal.
What
the
Code
provides
in
Article
1932
is
that,
if
the
agent
dies,
his
heirs
must
notify
the
principal
thereof,
and
in
the
meantime
adopt
such
measures
as
the
circumstances
may
demand
in
the
interest
of
the
latter.
Hence,
the
fact
that
no
notice
of
the
death
of
the
principal
was
registered
on
the
certificate
of
title
of
the
property
in
the
Office
of
the
Register
68
of
Deeds,
is
not
fatal
to
the
cause
of
the
estate
of
the
principal.
DEATH, INCAPACITY OR INSOLVENCY OF THE AGENT
ART.
1932.
If
the
agent
dies,
his
heirs
must
notify
the
principal
thereof,
and
in
the
meantime
adopt
such
measures
as
the
circumstances
may
demand
in
the
interest
of
the
latter.
(1739)
Article 1919(3) provides that the death, civil interdiction, insanity or
insolvency of the agent extinguishes the agency.
In Terrado v. Court of Appeals, the Court held that contract of agency
establishes a purely personal relationship between the principal and the agent,
such that the agency is extinguished by the death of the agent, and his rights and
obligations arising from the contract of agency are not transmittable to his heirs.
However, under Article 1932 of the New Civil Code, if the agent dies
during the term of the agency, his heirs must notify the principal thereof, and in
the meantime must adopt such measures as the circumstances may demand in
the interest of the principal. The provision establishes a rare situation where an
obligation is imposed by law upon persons who are not parties to a contractual
relationship, and that in fact of one that has already been extinguished by the
death of the agent.
^Ibid,
at
p.
264.
ra
131
SCRA
371
(1984).
NON-CORPORATE MEDIA OF DOING BUSINESS
256
1. In Case of Multiple Agents
Generally, without showing an intention to the contrary, in case of an
agency where there are several agents constituted for the same business or
property, the death of one or more, but not all of them would not extinguish
the agency, with respect to those who remain living. The same rule would apply
in case of civil interdiction, insanity or insolvency of any but not all of the
common agents.
On the other hand, when it is clear at the constitution of the agency that
the common agents were intended to be considered as having capacity as a
group and not individually (such as by the use of the term and in defining their
powers), then the death, legal incapacity, or insolvency of one would legally
terminate the agency.
DISSOLUTION
OF
A
CORPORATION
The
dissolution
of
a
corporation
extinguishes
its
juridical
personality
for
70
every
purpose
that
seeks
to
pursue
"new
business,"
or
that
of
"a
going
71
concern."
Consequently,
upon
the
dissolution
of
a
corporation,
its
Board
of
Directors
and
corporate
officers
lose
every
legal
right
to
enter
into
an
contract
or
transaction
to
pursue
new
business
or
done
in
the
ordinary
course
of
business,
and
any
of
such
contract
entered
into
would
be
void,
even
as
against
third
parties
who
act
in
good
faith,
for
at
the
point
of
dissolution,
existing
creditors
of
the
corporations
must
be
protected
under
the
trust
fund
doctrine.
However,
the
corporation
after
dissolution,
and
within
three
years
therefrom
continues
to
have
juridical
personality
for
only
for
purposes
of
liquidation.
Consequently,
the
Board
of
Directors
and
corporate
officers
continue
to
have
agency
powers
to
represent
70
Alhambra Cigar v. Securities and Exchange Commission, 24 SCRA 269
(1968).
71
PA/B v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294
(1992).
EXTINGUISHMENT OF AGENCY
257
the
corporation
for
any
and
all
purpose
that
seek
the
liquidation
of
its
assets
and
the
payment
of
all
its
liabilities.
OBLIGATIONS OF THE AGENT WHEN THE AGENCY IS EXTINGUISHED
The fiduciary nature of the contract of agency requires that even when
the agency relation is terminated, the agent is bound to keep confidential such
matters and information which he learned in the course of the agency when
the nature of such matter or information is confidential, such as business
secrets.
Just as the principal cannot legally revoke an agency in order to evade the
payment of compensation due to the agent, then in the same manner an agent
cannot legally terminate an agency in order to take advantage of the principal's
condition or to profit by information resulting from his agency, for such would
be in breach of his duty of loyalty.
0O0
PHILIPPINE LAW AND PRACTICE ON:
TRUSTS
CHAPTER
1
INTRODUCTION
TRUSTS UNDER THE NEW CIVIL CODE
Title V in the New Civil Code on "TRUSTS" has no counterpart
in the old Civil Code. On this matter, the Code Commission
reported as follows
The law on trusts is comprehensive in American law.
Trusts are divided into express and implied. The former are
constituted by the intention of the trustor or of the parties.
Implied trusts come into being by operation of law.
The doctrine of implied trust is founded upon equity. The
principle is applied in the American legal system to numerous
cases where an injustice would result if the legal estate or
title were to prevail over the equitable right of the beneficiary.
A number of instances of implied trusts are specified in the
Project of Civil Code, but this enumeration does not exclude
other cases established by the general law on trust.
In article 1462 [now Article 1442 of the New Civil Code]
the principle of the general law on trusts insofar as they are
not in conflict with the proposed Civil Code, the Code of
258
INTRODUCTION
259
Commerce,
the
Rules
of
Court
and
special
laws
are
adopted.
This
article
incorporates
a
large
part
of
the
American
Law
on
trusts
and
thereby
the
Philippine
legal
system
will
be
amplified
and
will
be
rendered
more
suited
to
a
just
and
equitable
solution
of
many
1
questions.
Other
than
the
foregoing,
the
Code
Commission
provided
for
no
further
explanations
or
amplifications
on
the
Law
on
Trusts,
and
most
of
what
is
commented,
found
expression
in
the
few
provisions
of
the
New
Civil
Code.
What
is
clear
from
the
brief
comments
of
the
Code
Commission
is
that
the
growth
of
Philippine
Law
on
Trusts
will
find
its
impetus
from
common
law
from
where
it
was
derived,
and
expressed
in
jurisprudential
rulings
of
the
Supreme
Court.
1. Philippine Trusts Rooted on American Law on Trusts
Trusts, the doctrines and principles that arise from their establishment,
are rooted in the Philippine legal system based on American Law principles on
Trusts. Thus, Article 1442 of the New Civil Code now provides:
ART. 1442. The principles of the general law of trusts, insofar as
they are not in conflict with this Code, the Code of Commerce, the
Rules of Court and special laws are hereby adopted.
The foundation of Article 1442 may be drawn from the decision in
2
Government v. Abad ilia, where the Court held
As the law of trusts has been much more frequently applied in
England and in the United States than it has in Spain, we may draw
freely upon American precedents in
MALOLOS
AND
MARTIN,
REPORT
OF
THE
CODE
COMMISSION,
Domerte
Book
Supply,
2116
Azcarraga,
Manila,
Philippines,
(1951
ed.),
at
p.
60.
2
46
Phil.
642
(1924).
260
NON-CORPORATE MEDIA OF DOING BUSINESS
determining the effect of the testamentary trust here under
consideration, especially so as the trusts known to American and
English equity jurisprudence are derived from the fidei commissa
3
of the Roman law and are based entirely upon Civil Law principles.
THE "EQUITY" ESSENCE OF IMPLIED TRUSTS
Express trusts are founded on the intention of the trustor or the
intentions of the parties to the trust which bring about the application of
principles applicable to contractual relationships (i.e., consensuality, mutuality,
and relativity). On the other hand, implied trusts are created by operation of
law based on equity principles. Nonetheless, both types of trusts are deemed to
be vested with equitable considerations.
When it comes to express trusts, for example, equity consideration is
expressed in Article 1445 of the Civil Code when it provides that "No trust shall
fail because the trustee appointed declines the designation, unless the contrary
should appear in the instrument constituting the trust."
Under the aegis of the New Civil Code, the Court reiterated the equity
basis of trusts when it held in Deluao v. Casteel,* that as a legal consequence of
trust being essentially founded on equity principles, is that no trust, whether
express or implied, can be held valid and enforceable when it is violative of the
law, morals or public policy.
5
In Miguel v. Court of Appeals, the Court held that
Furthermore, because the case presents prob-lems not
directly covered by statutory provisions or by Spanish or local
precedents, resort for their solution must be had to the underlying
principles of the law on the subject. Besides, our Civil Code itself
[Article 1442] directs the adoption of the
lbid,
at
pp.
646-S6CRA
47.
231
"22
5
(1962).
29
SCRA
760
(1969).
INTRODUCTION
261
principles of the general law of trust, insofar as they are not in
conflict with said Code, the Code of Commerce, the Rules of Court
6
and special laws.
In other words, application of implied trusts principles on given
transactions covering proprietary relations are mandated not by specific
reference to statutory provisions, but by seeking equitable solutions to render
justice to the parties involved or affected by the transaction.
7
Later, in Sa/ao v. Sa/ao, the Court characterized the equity nature of
trusts, as follows
In its technical legal sense, a trust is defined as the right,
enforceable solely in equity, to the beneficial enjoyment of
property, the legal title to which is vested in another, but the word
"trust" is frequently employed to indicate duties, relations, and
responsibilities which are not strictly technical trusts.
A person who establishes a trust is called the trustor; one in
whom confidence is reposed as regards property for the benefit of
another person is known as the trustee; and the person for whose
9
benefit the trust has been created is referred to as the beneficiary.
There is a fiduciary relation between the trustee and the cestui que
trust as regards certain property, real, personal, money or choses in
10
action.
The equity nature of a trust supports the proposition that the intention of
the trustor to create a trust for the benefit of intended beneficiary should as
much as possible be realized. Thus, Article 1444 provides that "No particular
words are required for the creation of an express trust, it being sufficient that a
trust is clearly intended." An application of this doctrine
*lbid, at pp. 775-776.
7
70 SCRA 65 (1976).
89 C.J.S. 712.
9
Art. 1440, New Civil Code.
w
lbid, at p. 80, citing Pacheco v. Arm, 85 Phil.
505.
262
NON-CORPORATE MEDIA OF DOING BUSINESS
(not
the
article)
can
be
found
in
Government
v.
Abadilla,"
where
after
holding
that
the
testamentary
trust
was
"very
unskillfully
drawn;
its
language
is
ungrammatical
and
at
first
blush
seems
to
somewhat
obscure,"
the
Court
nonetheless
held:
"but
on
closer
examination
it
sufficiently
reveals
the
purpose
of
the
testator.
And
if
its
provisions
are
not
in
contravention
of
some
established
rule
of
laws
or
public
policy,
they
must
be
respected
and
given
12
effect."
In
applying
the
equity
nature
of
trusts,
Abadilla
held
that
the
intention
of
the
trustor
is
the
more
essential
consideration,
and
that
In
regard
to
private
trusts
it
is
not
always
necessary
that
the
cestui
que
trust
should
be
named,
or
even
be
in
esse
at
the
time
13
the
trust
is
created
in
his
favor. ...
Thus
a
devise
to
a
father
in
trust
for
accumulation
for
his
children
lawfully
begotten
at
the
time
of
his
death
has
been
held
to
be
good
although
the
father
had
no
children
at
the
time
of
the
vesting
of
the
funds
in
him
as
trustee.
In
charitable
trusts
such
as
the
one
here
under
discussion,
the
rule
is
14
still
further
relaxed.
16
In Ramos v. Court of Appeals, the payor of the purchase price of the
property had intended that it be held by the purported trustee for her because
she was not qualified to hold such parcel of land. Although a resulting trust
should have arisen under the provisions of Article 1448 of the Civil Code,
nonetheless, the Court refused to grant to the payor the relief of compelling the
purported trustee to convey the land to her, ruling that
However, if the purpose of the payor of the consideration in
having title placed in the name of another was to evade some rule
of the common or statute law, the courts will
"46 Phil. 642 (1924).
12
Ibid, at p. 646.
^Citing FLINT ON TRUSTS AND TRUSTEES, section 25; citing Frazier v. Frazier, 2 Hill
Ch., 305; Ashurst v. Given, 5 Watts & S., 329; Carson v. Carson, 1 Wins [N.C.], 24.
14
46
Phil.
642,
647,
citing
PERRY
ON
TRUSTS
(5th
ed.)
sec.
66.
232
SCRA
348
(1994).
15
INTRODUCTION
263
not assist the payor in achieving his improper purpose by enforcing
a resulting trust for him in accordance with the "clean hands"
doctrine. The courts generally refuses to give aid to claims from
rights arising out of an illegal transaction, such as where the payor
could not lawfully take title to land in his own name and he used
the grantee as a mere dummy to hold for him and enable him to
evade the land laws, i.e., an alien who is ineligible to hold title to
land, who pays for it and has the title put in the name of a citizen.
Otherwise stated, as an exception to the law on trust, "[a] trust or a
provision in the terms of a trust is invalid if the enforcement of the
trust or provision would be against public policy, even though its
performance does not involve the commission of a criminal or
16
tortious act by the trustee."
THE NATURE OF TRUSTS
1. Trusts Do Not Create Separate Juridical Entities
It should be noted that there is no statutory provision or case- law which
recognizes a trust relationship as creating a separate juridical entity. Indeed, the
essence of what constitute a trust is the recognition that the trustee holds
directly legal or naked title to the trust properties. Nevertheless, the naked or
legal title held by the trustee should be looked upon as being held "in his official
capacity as trustee" and cannot be deemed included in his estate to which he
has full ownership.
These principles are best exemplified in Development Bank of the
17
Philippines v. CO/A, where the DBP contributed funds into a retirement plan
for its officers and employees, and constituted a board of trustees vesting it with
the control and administration of the fund. Augmentation to the retirement fund
were made through loans extended to the qualified officers and employees,
which were invested in shares of stocks and other marketable securities, and the
earnings from which were directed to be distributed to the beneficiaries even
before they had retired.
lbid, at p. 361, quoting from RESTATEMENT (SECOND) OF TRUSTS 62
(1959).
"422
SCRA 465 (2004).
264
NON-CORPORATE MEDIA OF DOING BUSINESS
The COA objected to the distribution of the earnings from the
investments made through the retirement fund on the ground that is was
contrary to an express provision of law which prohibits the distribution of
retirement benefits to government employees prior to their actual retirement.
COA also directed that the earnings from the investment be included in DBP's
books of account as part of its own earnings, since the retirement and its income
were actually owned by DBP having made the contributions thereto. DBP
objected to the COA resolution on the ground "the express trust created for the
benefit of qualified DBP employees under the Trust Agreement... gave the Fund
18
a separate legal personality," and therefore the earnings pertained to the
employees and should be credited as income of DBP.
Based on the reasoning discussed below, the Supreme Court rejected in
DPB v. COA the proposition that an express trust creates a separate juridical
person.
2. Trusts Divorces Naked Title of the Trustee from the Rest of the Trustee's
Estate
While DBP v. COA characterized an "employees' trust" as "a trust
maintained by an employer to provide retirement, pension or other benefits to
its employees... [and ] is a separate taxable entity established for the exclusive
19
benefit of the employees," still the Court did not consider the such employees'
trust as a separate juridical person. The Court ruled that "The principal and
income of the Fund [of employees' trust] would be separate and distinct from
the funds of DBP, on the ground that DBP as trustor already conveyed legal title
thereto to the Board of Trustees of the employees' trust, and with DBP officers
and employees having acquired beneficial title thereto," thus:
In a trust, one person has an equitable ownership in the
property while another person owns the legal title to such
property, the equitable ownership of the former entitling him
"Ibid,
at
p.
19
467.
/b/d,
at
p.
473.
INTRODUCTION
265
to the performance of certain duties and the exercise of certain
powers by the latter...
In the present case, DBP, as the trustor, vested in the trustees
of the Fund legal title over the Fund as well as control over the
investment of the money and assets of the Fund. The powers and
duties granted to the trustees of the Fund under the Agreement
were plainly more than just administrative [but included the power
of control, the right to hold legal title, and the power to invest and
20
reinvest].. -
x x x .
Clearly, the trustees received and collected any income and
profit derived from the Fund, and they maintained separate books
of account for this purpose. The principal and income of the Fund
will not revert to DBP even if the trust is subsequently modified or
terminated. The Agreement states that the principal and income
must be used to satisfy all of the liabilities to the beneficiary
21
officials and employees under the Gratuity Plan .. .
On the issue that the DBP officials and employees had no right to the
fund nor to the income earned until they actually retire, which therefore did
not qualify them to be considered cestui que trust or beneficiary, and therefore
the same should still accrue to DBP, the Court ruled
As COA correctly observed, the right of the employees to claim
their gratuities from the Fund is still inchoate. [The law], does not
allow employees to receive their gratutities until they retire.
However, this does not invalidate the trust created by DBP or the
concomitant transfer of legal title to the trustees. As far back as in
Government v. Abadilla, the Court held that "it is not always
necessary that the cestui que trust should be named, or even be in
esse at the time the trust is created in his favor." It is enough that
22
the beneficiaries are sufficiently certain or identifiable.
*>lbid,
at
p.
474.
"Ibid,
at
p.
475.
*lbid,
at
pp.
476-477.
266
NON-CORPORATE MEDIA OF DOING BUSINESS
The Court resolved in DBP v. COA, that "The Agreement indisputably
transferred legal title over the income and properties of the Fund to the Fund's
trustees. Thus, COA's directive to record the income of the Fund in DBP's books
of account as the miscellaneous income of DBP constitutes grave abuse of
discretion. The income of the Fund does not form part of the revenues or profits
of DBP, and DBP may not use such income for its own benefit. The principal and
income of the Fund together constitute the res or subject matter of the trust.
The Agreement established the Fund precisely so that it would eventually be
sufficient to pay for the retirement benefits of DBP employees under [the law]
without additional outlay from DBP. COA itself acknowledged the authority of
DBP to set up the Fund. However, COA's subsequent directive would divest the
23
Fund of income, and defeat the purpose for the Fund's creation."
3. Trust Is Anchored on Splitting or Intention to Split the Naked Title and
Beneficial Title
The essence of trusts, whether express or implied, is that the fiduciary
relationship or the enforcement of equity principles is built upon property
relations; unless, the dispute involved claims arising from property rights, then
trusts principles do not apply. In other words, there is no real trust relationship
based only on the meeting of the minds, and that the trustee does not even
begin to assume fiduciary duties towards the beneficiary, unless and until title
to the res is transferred to him in either of three ways:
(a)
When only naked title is given to him (i.e., he is registered as
the naked or legal title holder or "trustee" for the benefit of
an identified beneficiary), then an express trust has been
constituted; or
(b)
When
full
title
has
been
registered
in
his
name,
but
with
a
clear
undertaking
to
hold
it
for
the
benefit
of
another
person
or
pursuant
to
a
clear
arrangement
23
lbid, at p. 477.
INTRODUCTION
267
with another person as the beneficiary, then an express trust
at best, or resulting trust at least, has been constituted; or
(c) When full title to the property has been acquired by a person
under circumstances that the law or equity imposes upon him
the obligation to convey it to another person who has a better
claim to such property, in which case a constructive trust is
deemed constituted by force of law.
This principle has been confirmed by the Supreme Court in Canezo v.
Rojas, where it held:
24
What distinguishes a trust from other relations is the
separation of the legal title and equitable ownership of the
property. In a trust relation, legal title is vested in the fiduciary while
equitable ownership is vest in a cestui que trust. Such is not true in
this case. The petitioner alleged in her complaint that the tax
declaration of the land was transferred to the name of [the
purported trustee] Crispulos without her consent. Had it been her
intention to create a trust and make Crispulo her trustee, she would
not have made an issue out of this because in a trust agreement,
legal title is vested in the trustee. The trustee would necessarily
have the right to transfer the tax declaration in his name and to pay
the taxes on the property. These acts would be treated as beneficial
to the cestui que trust and would not amount to an adverse
25
possession.
The existence of valid title in the person of the trustee for the benefit of
the cestui que trust is so essential that in cases where the title of the purported
trustee was found to be void, the Supreme Court had refused to apply trust
principles at all. Thus, in Ferrer v. Bautista, where the free patent and original
certificate of title issued in the name of the occupant of a strip of
24
538
SCRA242
2
(2007).
5
l
b
i
d
,
a
t
p
.
268
NON-CORPORATE MEDIA OF DOING BUSINESS
land
that
had
arisen
by
accretion
was
held
to
be
void,
the
Court
refused
to
apply
the
principle
that
an
action
for
reconveyance
on
an
implied
trust
prescribes
in
ten
(10)
years
after
the
issuance
of
the
title,
on
the
ground
that
no
implied
trust
could
arise
from
a
void
title
held
by
the
purported
trustee,
and
hence
the
action
to
reconvey
was
deemed
imprescriptible.
Likewise,
in
Macababbad,
Jr.
V.
Masiragwhere
the
title
to
the
registered
land
was
obtained
through
forging
the
signatures
of
the
heirs
in
the
purported
extrajudicial
settlement
of
estate,
the
Court
held
title
by
the
heir
who
exercised
fraud,
was
void
and
the
rules
on
implied
trust
to
limit
the
period
to
file
an
action
for
reconveyance
to
ten
(10)
years
was
deemed
inapplicable.
KINDS OF TRUSTS
ART.
1441.
Trusts
are
either
express
or
implied.
Express
trusts
are
created
by
the
intention
of
the
trustor
or
of
the
parties.
Implied
trusts
come
into
being
by
operation
of
law.
Article
1441
of
the
Civil
Code
expressly
recognizes
the
following
kinds
of
trust,
thus:
Express
Trust
-
which
is
created
by
the
intention
of
the
trustor
or
of
the
parties;
Implied
Trust
-
which
comes
into
being
by
operation
of
law.
In
turn,
jurisprudence
has
distinguished
between
two
types
of
implied
trusts,
namely:
(a)
Resulting
Trusts;
and
(b)
Constructive
Trusts.
"576 SCRA 70 (2009).
269
INTRODUCTION
Express
trusts
are
the
product
of
contractual
intents;
they
are
essentially
creatures
of
Contract
Law,
and
therefore
are
animated
by
the
agreed
intentions
of
the
parties
under
the
principle
of
autonomy
or
the"freedom
to
contract
doctrine.
2B
Ramos v. Ramos, defined express trusts as "those which are created by
the direct and positive acts of the parties, by some writing or deed, or will, or by
29
words either expressly or impliedly evincing an intention to create a trust."
30
Lately, in Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, the Court
held that "Trust is the right to the beneficial enjoyment of property, the legal
title to which is vested in another. It is a fiduciary relationship that obliges the
trustee to deal with the property for the benefit of the beneficiary. Trust
relations between parties may either be express or implied. An express trust is
created by the intention of the trustor or of the parties. An implied trust comes
31
into being by operation of law."
On the other hand, implied trusts, particularly constructive trusts, are
creatures of the law; they exist in circumstances where the law mandates it so,
and in all similar situations where justice or equity has to be achieved. Implied
trusts are essentially a product of equitable consideration.
Ramos defined implied trusts as "those which, without being expressed,
are deducible from the nature of the transaction as matters of intent, or which
are superinduced on the transaction by operation of law as matters of equity,
32
independently of the particular intention of the parties."
The difference in legal effects between an express trust and an implied
trust, according to Ramos, was that the former is not susceptible to charges of
prescription or laches, whereas in the latter, it is possible that the cause of action
of the cestui que trust may be extinguished by prescription or laches.
28
61 SCRA 284 (1974).
^Ibid, quoting from 89 C.J.S.
30
122.
587 SCRA 417 (2009).
"Ibid, at p. 418.
32
lbid, quoting from 89 C.J.S.
724.
270
NON-CORPORATE MEDIA OF DOING BUSINESS
33
In Philippine National Bank v. Court of Appeals, the Court applied the
principles of constructive trust under Article 1456 of the Civil Code to rule on a
situation where a bank had mistakenly credited to the account of a person an
amount not due to the depositor (although the Court held that the primary
resolution of the issues was under quasi-contract on solutio indebiti). Although
money or other forms of legal tender do not constitute "property" for the
holder thereof can claim ownership, the commercial value they represent is a
proprietary interest where trust principles can be made to apply. Indeed, it is
not unusual that trust agreements are executed with the trust departments of
banks, where a good part of the corpus would constitute a large sum of money.
3
Earlier,
under
the
old
Civil
Code,
in
Diaz
v.
Gorricho
and
Aguado, *
the
Court
held
that
The
reason
for
the
difference
in
treatment
is
obvious.
In
express
trusts,
the
delay
of
the
beneficiary
is
directly
attributable
to
the
trustee
who
undertakes
to
hold
the
property
for
the
former,
or
who
is
linked
to
the
beneficiary
by
confidential
or
fiduciary
relations.
The
trustee's
possession
is,
therefore,
not
adverse
to
the
beneficiary,
until
and
unless
the
latter
is
made
aware
that
the
trust
has
been
repudiated.
But
in
constructive
trusts
(that
are
imposed
by
law),
there
is
neither
promise
nor
fiduciary
relation;
the
so-called
trustee
does
not
recognize
any
trust
and
has
no
intent
to
hold
for
the
beneficiary;
therefore,
the
latter
is
not
justified
in
delaying
action
to
recover
his
property.
It
is
his
fault
if
he
delays;
35
hence,
he
may
be
estopped
by
his
own
laches.
As
will
be
discussed
in
the
last
chapter,
it
used
to
be
the
judicial
position
that
under
an
express
trust
arrangement,
the
trustee
can
never
claim
either
acquisitive
prescription
in
his
favor
to
obtain
title
to
the
property
held
in
trust,
or
the
benefit
of
extinctive
prescription
in
order
to
defeat
the
right
of
the
217 SCRA 347
(1993).
"103
Phil. 261
3S
(1958).
lbid, at p. 266.
INTRODUCTION
271
beneficiary
to
demand
the
exercise
of
his
rights.
The
reason
was
that
in
an
express
trust
arrangement,
which
is
created
only
by
the
express
or
implied
acceptance
by
the
trustee
that
he
holds
the
trust
property
for
the
benefit
of
the
beneficiary,
his
possession
thereof
is
not
adverse
to,
nor
in
repudiation
of,
the
rights
and
beneficial
title
of
the
beneficiary.
Consequently,
the
long
passage
of
time
cannot
give
rise
to
either
prescription,
much
less
laches;
there
must
be
an
express
repudiation
of
the
trust
arrangement
by
the
trustee,
and
notice
to
the
beneficiary
that
he
now
holds
title
adverse
to
the
beneficiary,
for
prescription
or
laches
to
begin
commencing.
On
the
other
hand,
under
an
implied
trust
arrangement,
where
there
is
really
no
implied
acceptance
of
a
trust
obligation
on
the
purported
trustee,
the
mere
fact
that
title
has
been
registered
in
the
name
of
the
purported
trustee
and
he
holds
possession
thereof
for
his
own
benefit
is
constituted
as
a
repudiation
of
any
trust
arrangement
that
the
purported
beneficiary
may
expect
from
the
arrangement.
Consequently,
the
mere
passage
of
time
with
the
purported
trustee
exercising
dominion
over
the
purported
trust
properties
for
his
own
benefit,
without
need
of
express
repudiation
could
eventually
lead
to
successfully
claiming
the
effects
of
prescription
or
laches
on
the
part
of
the
trustee,
to
the
detriment
of
the
beneficiary.
This
critical
distinction
has
been
blurred
in
the
years
since
the
Ramos
decision,
with
both
kinds
of
trusts
being
considered
capable
of
being
subject
to
the
defense
of
prescription
or
laches,
with
the
difference
remaining
on
whether
there
is
a
need
for
express
repudiation,
and
the
nature
required
for
any
of
such
repudiation
to
take
effect.
The
matter
is
better
discussed
in
the
last
chapter.
One
other
distinction
between
express
trusts
and
implied
trusts,
is
that
express
trusts
over
an
immovable
property
cannot
be
enforced
by
parol
evidence,
but
must
be
properly
supported
by
a
written
instrument,
whereas,
implied
trusts,
regardless
of
the
nature
of
the
trust
property,
may
always
be
enforced
even
when
constituted
orally.
In
other
words,
implied
trusts
are
not
within
the
operative
cover
of
the
Statute
of
Frauds,
as
expressed
272
NON-CORPORATE MEDIA OF DOING BUSINESS
succinctly
in
Article
1457:
"An
implied
trust
may
be
proved
by
oral
evidence."
Although
express
trusts
and
implied
trusts
are
governed
by
different
principles,
the
common
denominator
between
them
is
that
they
are
legal
relationships
built
upon
property
rights;
there
can
be
no
express
or
implied
trusts
among
individuals
unless
some
property
lies
in
the
middle
of
such
relationship.
oOo
CHAPTER
2
EXPRESS
TRUSTS
DEFINITION AND NATURE OF EXPRESS TRUSTS
ART. 1440. A person who establishes a trust is called the trustor;
one in whom confidence is reposed as regards property for the
benefit of another person is known as the trustee; and the person for
whose benefit the trust has been created is referred to as the
beneficiary.
ART. 1441. Trusts are either express or implied. Express trust are
created by the intention of the trustors or of the parties. Implied
trusts come into being by operation of law.
Title
V
of
the
New
Civil
Code
does
not
contain
a
particular
definition
of
"Trust',
but
its
first
article
-
Article
1440
-
defines
the
persons
who
constitute
the
parties
in
a
trust
relationship,
thus:
TRUSTOR
-
the
person
who
establishes
a
trust
(referred
to
as
"grantor",
"settlor",
or
"founder"
in
common-law
parlance);
TRUSTEE
-
the
person
in
whom
confidence
is
reposed
as
regards
the
property
placed
in
trust
(referred
to
as
the
273
274
NON-CORPORATE MEDIA OF DOING BUSINESS
"corpus"); it is the trustee who assumes
certain duties relating to the res or the
trust property with respect to the person
for whose benefit the trust is created; and
BENEFICIARY - the person for whose benefit the trust has been
created (the "cestui que trust).
We can therefore define express trust under the terms of Article 1440 of
the New Civil Code as a legal relationship based primarily on the parties'
relationship to the property that constitutes the corpus or the trust estate,
whereby a person, called the "trustor," conveys the naked or legal title to a
property to another person, called the "trustee," who takes title thereto under
a fiduciary obligation to administer, manage and dispose of the property for
the benefit of another person, called the "beneficiary," to whom therefore
beneficial or equitable title pertains.
Quoting from American legal literature, Tolentino defines trust as "the
legal relationship between one person having an equitable ownership in
property and another person owning the legal title to such property, the
equitable ownership of the former entitling him to the performance of certain
1
duties and exercise of certain powers by the latter."
2
In Barretto v. Tuason, the Supreme Court noted that "trusf is known as
fideicomiso under Spanish legal system, with the trustee being designated as
the fiduciario, and the beneficiary referred to as the fidecomisario or the cestui
que trustant.
3
In Philippine National Bank v. Court of Appeals, the Court described a
"typical trust" (when distinguished from a constructive
TOLENTINO,
CIVIL
CODE
OF
THE
PHILIPPINES,
Vol.
IV,
at
p.
669,
citing
54
AM.
JUR.
21,
hereinafter
referred
to
as
"TOLENTINO".
Reiterated
in
Morales
v.
Court
of
Ap-
peals,
274
SCRA
282,
297
(1997).
2
50
Phil.
888
(1926).
3
217
SCRA
347
(1993).
EXPRESS TRUSTS
275
trust
under
Article
1456
of
the
New
Civil
Code)
as
one
wherein
"confidence
is
reposed
in
one
person
who
is
named
a
trustee
for
the
benefit
of
another
who
is
called
the
cestui
que
trust,
respecting
property
which
is
heid
by
the
trustee
for
the
benefit
of
the
cestui
que
trust.
A
constructive
trust,
unlike
an
express
trust,
does
not
emanate
from,
or
generate
a
fiduciary
relation.
While
in
an
express
trust,
a
beneficiary
and
a
trustee
are
linked
by
confidential
or
fiduciary
relations;
in
a
constructive
trust,
there
is
neither
a
promise
nor
any
fiduciary
relation
to
speak
of
and
the
so-called
trustee
neither
accepts
any
trust
or
4
intends
holding
the
property
for
the
beneficiary."
In
addition,
PNB
distinguished
between
the
obligations
of
the
trustee
in
an
express
trust
from
that
in
a
constructive
trust:
"Under
American
Law,
a
court
of
equity
does
not
consider
a
constructive
trustee
for
all
purposes
as
though
he
were
in
reality
a
trustee;
although
it
will
force
him
to
return
the
property,
it
will
not
impose
upon
him
the
numerous
fiduciary
obligations
ordinarily
demanded
from
a
trustee
of
an
express
trust.
It
must
be
borne
in
mind
that
in
an
express
trust,
the
trustee
has
active
duties
of
management
while
in
a
constructive
trust,
5
the
duty
is
merely
to
surrender
the
property."
ESSENTIAL CHARACTERISTICS OF EXPRESS TRUSTS
6
In Morales v. Court of Appeals, after adopting Tolentino's definition of
trusts, the Court enumerated the following "essential characteristics" of trust
following the enumeration in the esteemed author's book:
(a)
It is a relationship;
(b)
It is a relationship of fiduciary character;
(c)
It is a relationship with respect to property, not one involving
merely personal duties;
lbid, at pp. 353-354; italics
s
supplied.
lbid, at p. 356.
6
274 SCRA 282 (1997).
276
NON-CORPORATE MEDIA OF DOING BUSINESS
(d)
It involves the existence of equitable duties imposed upon
the holder of the title to the property to deal with it for the
benefit of another; and
(e)
It arises as a result of a manifestation of intention to create
7
the relationship.
Morales actually involved an application of the principles pertaining to
implied trusts (particularly the application of Article 1448 of the New Civil
Code), and although one gets the impression that the characteristics pertain to
all forms of trusts, both express and implied, the above enumerated "essential
characteristics" actually pertain to express trusts, and perhaps even to resulting
trusts, but not to constructive trust arrangements, since it has already been
held by the Supreme Court that technically speaking, the purported trustee in a
constructive trust actually owes no fiduciary duty or obligation to the cestui
que trust, and certainly a constructive trust arises b y " operation of law" and
not "as a result of a manifestation of intention to create the relationship."
1. Express Trusts Are Essentially Contractual in
Character
ART. 1445. No trust shall fail because the trustee appointed
declines the designation, unless the contrary should appear in the
instrument constituting the trust.
ART. 1446. Acceptance by the beneficiary is necessary.
Nevertheless, if the trust imposes no onerous condition upon the
beneficiary, his acceptance shall be presumed, if there is no proof to
the contrary.
Ibid,
at
p.
B
298.
lbid.
EXPRESS TRUSTS
277
Generally speaking, an express trust is essentially contractual in character
because it can only be constituted through contractual intention on the part of
the trustor to dispose of his property by dividing its full ownership between the
trustee and the beneficiary, and requires generally the full acceptance of the
naked title and fiduciary obligations on the part of the trustee, and the
concomitant obligations that go with it. This is the reason why Morales indicates
that one of the essential characteristic of a trust that "it arises as a result of a
manifestation of intention to create the relationship."
Thus, Article 1441 of the New Civil Code provides that "Express trusts are
created by the intention of the trustor or of the parties," and in addition Article
1444 provides that "No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended"
While Article 1441 of the New Civil Code defines an express trust as
"created by the intention... of the parties," which clearly supports the
proposition that the nexus of every express trust arrangement is a contractual
relationship, nonetheless, it also defines an express trust as "created by the
intention of the trustor" alone, which seems to defy the essence of mutual
consent as a necessary element in bringing about a contractual relationship. Yet
it cannot be denied that no person may find himself bound to the fiduciary
duties and obligations of a trustee, unless he previously consented thereto, or
expresses his consent by voluntarily assuming such relationship to the trust
property which necessarily brings about the duties and obligations of a trustee.
On the other hand, Article 1445 of the New Civil Code provides that "No
trust shall fail because the trustee appointed declines the designation, unless the
contrary should appear in the instrument constituting the trust." Read plainly,
Article 1445 seems to imply that the element of "consent" or "meeting of
minds," so essential for a valid contract to arise, does not pertain to express trust
and thus may lead to the conclusion that express trusts are not necessarily
contractual relationships. Such
Ibid.
278
NON-CORPORATE MEDIA OF DOING BUSINESS
impression would be wrong, as will be explained in the sections below
discussing the characteristic of express trust as being a real and preparatory
contract
There can be no denying the legal truism that an express trust constitutes
essentially a contractual relationship between and among the parties thereto.
This is supported by Article 1446 which states that "Acceptance by the
beneficiary is necessary," and that if the trust does not impose any onerous
condition upon the beneficiary, then "his acceptance shall be presumed, if there
is no proof to the contrary."
Express trusts are essentially the product of contractual intent, and most
express trust relationships are overtly contractual in nature since they are
executed in a formal Deed of Trust.
An express trust may also be constituted in a will, it which case it becomes
a testamentary trust, and the validity of the trust arrangement would be
depended on the validity of the testamentary disposition. In such case, the
issues as to the validity of the trust arrangements would have to be resolved
under the Laws on Succession.
An express trust may also be constituted in the form of a donation, in
which case it is embodied in a solemn contract, and many of the issues on
validity would have to be resolved under the Law on Donations.
It should be noted, however, that when the beneficiary constituted in a
trust is other than the trustor, then the deed of trust actually provides for
stipulation\j)our autrui in favor of the designated beneficiary, and under Article
1446 of the New Civil Code, acceptance by the beneficiary is deemed presumed.
More importantly, a designation of a beneficiary which does no impose onerous
conditions, partakes essentially of a gift or a donation in favor of the beneficiary,
and strictly speaking is governed by the Law on Donation which makes the
disposition a solemn contract. Likewise, in the Law on Taxation, the same
constitute taxable gift or donation for which the proper gift tax should be paid.
Nonetheless, the non-compliance with the solemnities required of donation in
the realm of trust does not render the trust void. Indeed,
EXPRESS TRUSTS
279
under
Article
1444
of
the
New
Civil
Code
"No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended;"
and
under
Article
1457,
it
is
provided
that
"An
implied
trust
may
be
proved
by
oral
evidence."
In
practice,
therefore,
many
trust
dispositions
are
constituted
in
a
manner
that
the
trustor
seeks
to
"gift"
the
designated
beneficiary
with
all
the
beneficial
title
to
the
estate
property
held
in
the
hands
of
the
trustee.
In
such
cases,
what
is
executed
is
merely
a
"Deed
of
Trust,"
the
solemnities
of
which
do
not
fall
under
the
Law
on
Donations,
and
generally
would
comply
with
the
formalities
of
an
ordinary
deed
of
conveyance.
2.
Essential
Elements
of
Express
Trusts
Title
V
of
the
New
Civil
Code
does
not
expressly
state
under
any
of
its
article
that
express
trusts
are
contractual
relationships.
However,
as
explained
above,
it
would
be
more
useful
on
our
part
to
consider
express
trusts,
as
distinguished
from
implied
trusts,
to
be
essentially
contractual
in
nature,
i.e.,
of
being
created
under
contractual
intents,
and
with
the
rights,
duties
and
responsibilities
arising
from
contractual
relationship.
Much
of
the
discussions
hereunder,
unless
otherwise
indicated,
cover
essentially
contractual
trusts
arrangements
those
that
are
created
by
the
intention
of
the
trustor
or
of
the
parties,
without
taking
the
form
of
donation
or
testamentary
disposition.
Therefore,
we
will
discuss
immediately
hereunder
the
essential
characteristics
of
express
trusts
as
contractual
relationship
of
being:
(a)
nominate
and
principal;
(b)
unilateral;
(c)
primarily
gratuitous;
(d)
real;
(e)
preparatory;
and
(f)
fiduciary.
The
essential
characteristic
of
an
express
trust
being
a
real
contract
will
be
discussed
in
the
next
section
on
"The
Rules
of
Enforcement
of
Express
Trusts."
0
In Mindanao Development Authority v. Court of Appeals,' the Supreme
Court held that "It is fundamental in the law of trusts that certain requirements
must exist before an express trust will
10
113 SCRA 429 (1982).
280
NON-CORPORATE MEDIA OF DOING BUSINESS
11
be recognized," and it affirmed the following to be the essential elements of
12
an express trust, enumerated earlier in Francisco v. Leyco, thus:
(a) Trustee: who holds the trust property and is
subject to equitable duties to deal with it
for another's benefit;
(b) Beneficiary: to whom the trustee owes
equitable duties to deal with the trust
property for his; and
(c) Res: which is the trust property which the
trustee manages for the sake or the interest
of the beneficiary, which can be created in
anything that the law recognizes to be
13
"property."
The enumeration of the "essential elements" of every express trust
indicates that every trust relationship is truly a legal relationship built on
property rights, and without the res or the corpus, there is really no obligation
upon the trustee who cannot be expected to manage the property for the
benefit of the beneficiary, simply because he has no control over property that
has not been transferred to his name.
a. Express Trusts Establish Contractual Relationships Built Around
Property Relation
14
Morales v. Court of Appeals, enumerates that one of the essential
characteristic of trusts is that "it is a relationship with
"Ibid,
at
p.
436.
3
C.A.R.
2s
1384,
citing
Rous,
Florimond
C.,
The
Trust
Relationship,
96
SCRA
186,191.
13
See
also
Aquino,
Ranhilio
Callangan,
Resulting
Trusts
and
Public
Policy,
232
SCRA
364,
366,
citing
DUKEMINIER
at
128.
14
274
SCRA
282
(1997).
12
281
EXPRESS
TRUSTS
15
respect
to
property,
not
one
involving
merely
personal
duties." On
this
matter,
0
Mindanao
Development
Authority,'
held
that
Stilted
formalities
are
unnecessary,
but
nevertheless
each
of
the
above
elements
is
required
to
be
established,
and,
if
any
one
of
them
is
missing,
it
is
fatal
to
the
trusts.
Furthermore,
there
must
be
a
present
and
complete
disposition
of
the
trust
property,
notwithstanding
that
the
enjoyment
in
the
beneficiary
will
take
place
in
the
future.
It
is
essential,
too,
that
the
purpose
be
an
active
one
to
prevent
trust
from
being
executed
into
a
legal
estate
or
interest,
and
one
that
is
not
in
contravention
of
some
prohibition
of
statute
or
rule
of
public
policy.
There
must
also
be
some
power
of
administration
other
than
a
mere
duty
to
perform
a
contract
although
the
contract
is
for
a
third-party
beneficiary.
A
declaration
of
terms
is
essential,
and
these
must
be
stated
with
reasonable
certainty
in
order
that
the
trustee
may
administer,
and
that
the
17
court,
if
called
upon
so
to
do,
may
enforce
the
trust.
Thus,
when
the
deed
of
sale
upon
which
an
express
trust
was
sought
to
be
established
in
Mindanao
Development
Authority
merely
provided
that
the
seller
agree[s]
to
work
for
the
titling
of
the
entire
area
of
my
land
under
my
own
expense
and
the
expenses
for
the
titling
of
the
portion
sold
to
me
shall
be
under
the
expenses
of
the
said
Juan
Cruz
Yap
Chuy,"
the
Court
held
that
no
express
trust
was
constituted,
since
other
than
undertaking
to
pay
for
the
expenses
of
titling
of
the
property:
"The
stipulation
does
not
categorically
create
an
obligation
on
the
part
of
[the
seller]
to
hold
the
property
in
trust
for
Juan
Cruz.
Hence
there
is
no
express
trust.
It
is
essential
to
the
creation
of
an
express
trust
that
the
settlor
[trustor]
presently
and
unequivocally
make
a
disposition
of
property
and
make
himself
the
trustee
of
the
property
for
the
benefit
of
10
another."
i5
lbid, at p. 298; italics supplied.
113 SCRA 429 (1982).
"Ibid, at p. 437, citing 76 AM JUR 2D, Sec. 31, pp. 278-279; emphasis supplied.
18
18
Ibid; at p. 437, citing 76 AM JUR 2D, sec. 35, p. 281.
NON-CORPORATE MEDIA OF DOING BUSINESS
282
Finally,
the
Court
also
noted
in
Mindanao
Development
Authority
that
the
provision
in
the
deed
of
sale
that
the
buyer
will
work
for
the
titling
of
"the
entire
area
of
my
land
under
my
own
expense,"
it
was
not
clear
what
particular
property
of
the
seller
was
referred
to,
and
thus
no
express
trust
could
be
validly
constituted
since
"A
failure
on
the
part
of
the
settlor
definitely
to
describe
the
subject-matter
of
the
supposed
trust
or
the
beneficiaries
or
object
thereof
is
19
strong
evidence
that
he
intended
no
trust."
20
In Cahezo v. Rojas, reiterating the ruling in Morales v. Court of Appeals
on what constitutes the "essential elements" of an express trust, the Court held:
. . . The presence of the following elements must be proved:
(1) a trustor or settlor who executes the instrument creating the
trust; (2) a trustee, who is the person expressly designated to carry
out the trust; (3) the trust res, consisting of duly identified and
definite real property; and (4) the cestui que trusts, or beneficiaries
21
whose identity must be clear.
Note that in Cahezo, aside from reiterating that among the essential
elements of an express trust is "the trust res, consisting of duly identified and
definite real property," it merely requires that the "beneficiaries whose identity
must be clear," and not that there must be prior acceptance by the beneficiary
of the trust benefits for the contractual trust relationship between the trustor
and the trustee can come into existence.
This would indicate that the nexus of the contractual meeting of the
minds in an express trust'is that between the trustor and the trustee, and the
acceptance of the benefits by the beneficiary under the trust arrangement
would constitute normally merely stipulation pour autrui. Although the proper
identification of the beneficiary constitutes an essential element of a valid trust,
as it determines the nature and extent of the fiduciary duties and
"Ibid,
at
p.
438.
538
SCRA
242
2i
lbid,
at
p.
253.
(2007).
20
EXPRESS TRUSTS
283
obligations of the trustee, formal acceptance of the benefits by the beneficiary is
generally not an essential element of a valid trust. This is the reason why the lack
of acceptance by the beneficiary does not generally render the trust void. The
provisions of the law mandating acceptance by the beneficiary, whether express
or implied, or presumed, are meant to cover the principle of law that nobody
can be compelled to accept the gift or charity of another person without his
consent.
3. Nominate and Principal, Yet Governed by Equity Principles
As a contract, an express trust is nominate and principal, having been
given particular name and essentially defined by the New Civil Code, and not
needing another contract to be valid and binding.
Usually, the essential characteristics of "nominate and principar bring
about the application of the doctrine that when a legal relationship is created
between the parties that embodies the essence of a trust, then in spite of the
intention or nomenclature used by the contracting parties, it would still be
characterized by the law, and governed by the Law on Trusts. Unfortunately,
under the New Civil Code, the "Law on Trusts" is not a complete set of law and
has a general reference under Article 1442 to the "principles of the general law
of trusts," which are invoked as part of the Philippine Law on Trusts. In fact,
many of the obligations and duties of the trustee prevail on the basis of equity
and not necessarily upon the contractual intentions of the parties.
4. Unilateral and Gratuitous
An express trust is a unilateral contract since only the trustee assumes
obligations to carry on the trust for the benefit of the beneficiary.
Article 1446, which provides that "acceptance by the beneficiary is
necessary," not only confirms the contractual nature of every trust contract, but
supports the position that an express
284
NON-CORPORATE MEDIA OF DOING BUSINESS
trust is essentially a gratuitous contract, supported by the consideration of
liberality, especially when the article provides that the beneficiary's acceptance
is presumed "if the trust imposes no onerous condition upon the beneficiary,"
unless there is proof that he has not accepted the benefits of the trust
arrangement. Generally, therefore, a trust relationship imposes no obligation or
burden upon the beneficiary.
5. Express Trust as a Preparatory Contract
Express trust is preparatory contract because it is not constituted for its
own sake in that the trust relationship is essentially a medium established by
the trustor to allow full authority and discretion on the part of the trustee to
enter into various juridical acts on the corpus to earn income or achieve other
goals given for the benefit of the beneficiary.
An express trust may create of a form of contract pour autrui, in the sense
that if the trustor does not make himself the beneficiary, but constitutes the
trust for the benefit of another person, the transfer of the naked or legal title of
the property to the trustee who accepts the fiduciary obligations, creates the
trust, even if the beneficiary does not formally accept the beneficial titled
conveyed under the trust arrangement. In such a manner, an express trust
relationship creates no obligation on the part of the trustor to the designated
beneficiary, nor does the beneficiary have any right against the trustor, except
those voluntarily assumed by the trustor under the terms of the deed of trust.
Generally, the fiduciary duties under an express trust are imposed on the
trustee, and the rights of the beneficial are exercisable against the trustee.
One would therefore arrive at the conclusion that insofar as the trustor is
concerned, the act of establishing an express trust for the benefit of the
beneficiary, is an act of donation or a gift, which often is taxable under the Tax
Code for donor's or gift tax. Yet, the constitution of an express trust, is not
considered to be a form of solemn contract. This is clear under Article 1444 of
the New Civil Code that provides that "No particular words are
EXPRESS TRUSTS
285
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended."
Nonetheless,
being
essentially
an
act
of
liberality,
and
under
the
premise
that
no
person
can
be
obliged
to
accept
the
kindheartedness
of
others,
Article
1446
expressly
provides
that
"Acceptance
by
the
beneficiary
is
necessary."
But
since
the
constitution
of
an
express
trust
is
usually
for
the
benefit
of
the
designated
beneficiary,
Article
1446
presumes
the
acceptance
thereof
by
the
designated
beneficiary,
thus:
"Nevertheless,
if
the
trust
imposes
no
onerous
condition
upon
the
beneficiary,
his
acceptance
shall
be
presumed,
if
there
is
no
proof
to
the
contrary."
What
happens
when
the
designated
beneficiary
expressly
refuses
to
accept
the
benefits
of
the
trust
arrangement,
and
yet
the
naked
or
legal
title
to
the
corpus
has
already
been
transferred
to
the
trustee?
Does
the
express
trust
therefore
fail?The
essential
characteristic
of
express
trust
being
a
preparatory
contract
would
mean
that
with
the
purpose
of
the
trust
no
longer
availing,
since
the
designated
beneficiary
has
refused
the
trust
relationship,
the
trust
ceases
to
have
an
objective.
But
since
the
naked
or
legal
title
remains
with
the
trustee,
his
obligations
is
to
comply
with
the
instructions
of
the
trustor,
and
dispose
of
the
properties
in
accordance
with
the
instructions
of
the
trustor.
6.
Trust
Constitutes
Fiduciary
Duties
on
the
Trustee
Article
1440
defines
the
"trustee"
as
"one
in
whom
confidence
is
reposed
as
regards
property
for
the
benefit
of
another
person
is
known
as
the
trustee."
In
other
words,
express
trust
creates
a
fiduciary
obligations
in
the
trustee
by
virtue
of
his
having
assumed
naked
or
legal
title
to
the
properties
constituting
the
corpus,
under
express
provisions
to
use,
control,
administer
and
management
them
for
the
benefit
of
the
trustee.
An
express
trust
constitute
the
trustee
as
a
fiduciary
for
the
benefit
of
the
beneficiary,
since
both
by
contractual
stipulations
and
by
the
fact
that
the
trustee
accepts
title
to
the
properties
for
the
benefit
of
the
beneficiary,
constitutes
necessary
the
duties
of
diligence
and
fidelity.
286
NON-CORPORATE MEDIA OF DOING BUSINESS
a. Acquisitive Prescription on the Corpus Unavailing to the
Trustee
One of the consequences of the fiduciary relationship existing in a trust
relationship is the inability of the trustee to invoke the statute of limitations or
prescription against the beneficiary. Thus, in Pacheco v. Arro * the Court held
that a "trustee cannot invoke the statute of limitations to bar the action and
defeat the right of the cestui que trustent. If the pretense of counsel for the
petitioners that the promise above adverted to cannot prevail over the final
decree of the cadastral court holding the predecessor-in-interest of the
petitioners to be the owner of the lots claimed by the respondents were to be
sustained and upheld, then actions to compel a party to assign or convey the
undivided share in a parcel of land registered in his name to his co-owner or
23
co-heir could no longer be brought and could no longer succeed and prosper."
24
In the same manner, in the earlier decision of Escobar v. Locsin, where
the plaintiff was the owner of a parcel of land, but being illiterate, asked the
defendant's predecessor-in- interest to claim the same for her, but that instead
he committed a breach of trust by claiming the lot for himself, the trial court,
while recognizing that the plaintiff had the equitable title and the defendant the
legal title, nevertheless dismissed the complaint because the period of one year
provided for under the Torrens system for the review of a decree had elapsed,
and the plaintiff had not availed herself of that remedy. In overturning the trial
court's decision, the Court held
A trust such as that which was created between the plaintiff
and [defendant's predecessor-in-interest]is sacred and inviolable.
The Courts have therefore shielded fiduciary relations against every
manner of chicanery or detestable design cloaked by legal
technicalities. The Torrens system was never calculated to foment
25
betrayal in the performance of a trust.
^85 Phil. 505 (1950).
23
lbid, at p. 515.
24
74 Phil. 86 (1943).
25
lbid, at p. 87.
Jf "'
EXPRESS TRUSTS
287
26
The much earlier decision in Barretto v. Tuazon characterized the old
institution of mayorazgo - a fiduciary charge made to the first-born, as tho
usufructuary possessor, to preserve the entailed property in the family and to
deliver them at the proper time to the succeeding first-bom, who shall possess
and enjoy them - as a species of the genus trust, "the essence of which, in
concise terms, is nothing more than the confiding of a thing to one in order that
27
he may preserve it and deliver it to another." Thus, the cause of action of the
successors-in-interest who were entitled to benefits of the mayorazgo could not
be defeated by claims of prescription or failure to fail any claims in the
proceedings for the settlement of the estate of the deceased.
28
In
Yu
Tiong
v.
Yu,
the
Court
held
that
in
view
of
the
fiduciary
nature
of
the
legal
relation
that
exists
between
the
trustee
and
the
cestui
que
trust,
the
statute
of
limitations
or
prescription
and
the
principle
of
laches
cannot
be
invoked
by
the
trustee
with
respect
to
the
right
of
action
of
the
latter.
The
29
principle
was
reiterated
in
De
Buencamino
v.
De
Matias.
RULES OF ENFORCEABILITY OF EXPRESS TRUSTS
ART. 1443. No express trusts concerning an immovable or any
interst therein may be proved by parol evidence.
ART. 1444. No particular words are required for the creation of
an express trust, it being sufficient that a trust is clearly intended.
^50 Phil. 888
27
(1926).
Ibid, at p. 918.
^6 SCRA 950
(1962).
16
SCRA 849
(1966).
288
NON-CORPORATE MEDIA OF DOING BUSINESS
1. Express Trust Is Essentially a Real Contract, Not Merely Consensual
Discussions on the rules governing the "enforceabilityof an express trust
may imply that as a contractual relationship between the trustor and the
trustee, it has the essential characteristic of being consensual (i.e., perfected,
valid and binding upon mere meeting on the minds on the subject matter and
the consideration), as contrasted from the characteristics of real (i.e., requiring
the fourth element of delivery), and solemn (i.e., requiring the fourth element
of form or solemnity, for validity). After all, Article 1444 of the New Civil Code,
which applies particularly to express trusts, provides that "No particular words
are required for the creation of an express trust, it being sufficient that a trust is
clearly intended." Yet by its very definition, an express trusts constitute a real
contract, that is, it is not merely perfected by a mere meeting of minds between
the trustor and trustee to constitute a trust. Indeed, no trust relationship exists,
until and unless, the property constituting the res is conveyed to the trustee.
30
Morales v. Court of Appeals, held that trust "is a relationship with
respect to property, not one involving merely personal duties," and "involves
the existence of equitable duties imposed upon the holder of the title to the
31
property to deal with it for the benefit of another."
Trusteeship is essentially a proprietary relationship, not merely from
acceptance of the duties and responsibilities of a trustee. Indeed, a designated
trustee may formally accept the duties and responsibilities laid out in the deed
of trust, but no fiduciary obligation arises without the properties being
transferred to his name. Without naked or legal title in the properties of the
corpus being transferred in the name of the trustee, there is no moral or legal
basis upon which his fiduciary obligations can arise.
30
274 SCRA 282
31
(1997).
M/, at p. 298.
EXPRESS TRUSTS
289
Thus,
when
Article
1445
of
the
New
Civil
Code
provides
that
"No
trust
shall
fail
because
the
trustee
appointed
declines
the
designation,"
it
can
only
mean
two
things.
No
contractual
relationship
has
been
established
yet
because
the
actual
transfer
of
naked
or
legal
title
to
the
designated
trustee
has
been
effected,
and
the
trust
could
not
be
said
to
fail
because
its
final
establishment
may
still
be
effected
by
another
persons
who
accepts
the
trust
and
to
whom
the
naked
or
legal
title
to
the
corpus
may
be
instituted.
It
may
also
mean
that
naked
or
legal
title
has
been
effected
by
the
trustor
in
the
name
of
the
trustee
before
the
latter
has
expressly
accepted
the
designation;
but
his
refusal
of
the
trust
designation
cannot
also
work
to
"fail"
the
trust,
because
it
is
then
possible
to
transfer
naked
or
legal
title
to
the
corpus
to
another
person
who
accepts
the
trust
designation.
Article
1445
of
the
New
Civil
Code
recognizes
that
"unless
the
contrary
should
appear
in
the
instrument
constituting
the
trust,"
that
the
designation
of
the
particular
individual
was
primordial
in
the
establishment
of
the
trust
(which
by
contractual
intent
made
the
express
trust
as
personality-centered
relationship),
trusteeship
is
essentially
a
property-based
relationship,
that
the
transfer
of
naked
or
legal
title
of
the
trust
estate
to
the
"trustee-
as-a-professional-fiduciary"
for
the
benefit
of
another
person,
is
the
moving
spirit
behind
the
trust
relationship.
With
respect
to
the
essential
characteristic
that
trust
relationship
is
always
based
upon
a
splitting
of
dominion
over
the
trust
property
(a
legal
relation
based
on
property
rights),
Pacheco
v.
Arro,
held
that
"The
juridical
concept
of
a
trust,
which
in
a
broad
sense
involves,
arises
from,
or
is
the
result
of,
a
fiduciary
relation
between
the
trustee
and
the
cestui
que
trust
as
regards
certain
33
property-real,
personal,
funds
or
money,
or
choses
in
action." In
more
pinpointed
language,
Julio
v.
Dalandancharacterizes
"trust"
as
"a
method
of
35
disposition
of
property."
85
Phil.
505
(1950).
^Ibid,
at
p.
514.
2
1
S
C
R
A
5
4
3
(
290
NON-CORPORATE MEDIA OF DOING BUSINESS
There is no doubt that the ideal form of an express trust is constituted
pursuant to a written Deed of Trust whereby naked or legal title to the trust
property is conveyed to the specified trustee under clear terms and conditions
providing for his duties and responsibilities towards the indicated beneficiary of
the res. In this case, it must be remembered that the execution of the Deed of
Trust as a public document which has the effect, as between the trustor and the
trustee, of constructive delivery of the covered trust properties.
When it comes to immovables, especially registered land or any interest
therein, express trusts take the ideal form of legal or naked title being registered
in the name of trustee who holds the property for the benefit of the indicated
beneficiary. In other words, the best form of an express trust is when the
trustee is expressly registered as "naked title owner."
Do we presume then that when the purported trustee holds title as "full
owner" of the res, the underlying trust relationship is no longer express trust,
but rather resulting trust? The answer do this is that it is legally possible to still
have an express trust even when the registered title in the name of the trustee
is full ownership as distinguished from naked or legal title. This is clear from
both statutory provisions and jurisprudence.
Firstly, apart from the lone requirement under Article 1443 that "No
express trusts concerning an immovable or any interest therein may be proved
by parol evidence;" the controlling principle is actually found in Article 1444
which provides that "No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended."
Jurisprudence supports the contractual basis of express trusts as "those
which are created by the direct and positive acts of the parties, by some writing
or deed, or will or by words either expressly or impliedly evincing an action to
create a trust." In Julio v. Dalandan, the Supreme Court observed that "In
reality, the development of the trust as a method of disposition of property,
21 SCRA543 (1967).
EXPRESS TRUSTS
291
so
jurisprudence
teaches,
'seems
in
large
part
due
to
its
freedom
from
formal
requirements.'
This
principle
perhaps
accounts
for
the
provision
in
Article
37
1444."
In
Julio,
the
evidence
of
an
express
trust
"was
in
the
form
of
an
affidavit
subscribed
and
sworn
to
by
[purported
trustee]
Clemente
Dalandan
...
By
the
terms
of
this
writing,
Clemente
Dalandan,
deceased
father
of
defendants
Emiliano
and
Maria
Dalandan,
acknowledged
that
a
four-hectare
piece
of
riceland
in
Las
Pinas,
Rizal
belonging
to
Victoriana
Dalandan,
whose
only
child
and
heir
is
plaintiff
Victoria
Julio,
was
posted
as
security
for
an
obligation
which
he,
Clemente
Dalandan,
assumed
but,
however,
failed
to
fulfill
The
result
was
38
that
Victoriana's
said
land
was
foreclosed."
The
trial
court
had
dismissed
on
the
complaint
seeking
reconveyance
of
the
property
to
the
heir
of
Victoriana
Julio
on
the
ground
of
prescription:
"the
lower
court
ruled
that
plaintiffs
suit,
viewed
either
as
an
action
for
specific
performance
or
for
the
fixing
of
a
term,
had
prescribed.
Reason:
the
10-year
period
from
the
date
of
the
document
had
39
elapsed."
In
ruling
that
the
document
embodied
an
express
trust,
and
that
prescription
could
not
commence
unless
there
was
an
express
repudiation
of
the
trust,
the
Court
further
held:
. . .
For,
"technical
or
particular
forms
of
words
or
phrases
are
not
essential
to
the
manifestation
of
intention
to
create
a
trust
or
to
such
words
as
"trust"
or
"trustee"
essential
to
the
constitution
of
a
trust
as
we
have
held
in
Lorenzo
vs.
Posadas,
64
Phil.
353,368.
Conversely,
the
mere
fact
that
the
word
"trust"
or
"trustee"
was
employed
would
not
necessarily
prove
an
intention
to
create
a
trust.
What
is
important
is
whether
the
trustor
manifested
an
intention
to
create
the
kind
of
relationship
which
in
law
is
known
as
a
trust.
It
is
unimportant
that
the
trustor
should
know
that
the
relationship
"which
he
intends
to
create
is
called
a
trust,
and
whether
or
not
he
knows
the
precise
characteristics
of
the
relationship
which
is
called
a
trust.
Here,
that
trust
is
effective
as
against
37
Ibid, at p. 550, quoting from 54 AM.JUR., p.
50.
lbid, at pp. 545-546.
39
lbid, at p. 548.
M
292
NON-CORPORATE MEDIA OF DOING BUSINESS
defendants and in favor of the beneficiary thereof, plaintiff
40
Victoria Julio, who accepted it in the document itself."
41
In
Cuaycong
v.
Cuaycong,
the
Court
held
that
"Our
Civil
Code
defines
an
express
trust
as
one
created
by
the
intention
of
the
trustor
or
of
the
parties,
and
an
implied
trust
as
one
that
comes
into
being
by
operation
of
law.
[Article
1441]
Express
trusts
are
those
created
by
the
direct
and
positive
acts
of
the
parties,
by
some
writing
or
deed
or
will
or
by
words
evidencing
an
intention
to
create
a
trust _________We
find
it
clear
that
the
plaintiffs
alleged
an
express
trust
over
an
immovable,
especially
since
it
is
alleged
that
the
trustor
expressly
told
the
defendants
of
his
intention
to
establish
the
trust.
Such
42
a
situation
definitely
falls
under
Article
1443
of
the
Civil
Code."
3
Ramos
v.
Ramos,*
held
that
"Express
trusts
are
those
which
are
created
by
the
direct
and
positive
acts
of
the
parties,
by
some
writing
or
deed,
or
will,
or
44
by
words
either
expressly
or
impliedly
evincing
an
intention
to
create
a
trust."
The
principle
that
an
express
trust
may
still
be
constituted
outside
of
formal
designation
of
the
trustee
as
naked
or
legal
titleholder
of
the
corpus,
and
can
be
deduced
from
the
words
or
actuations
of
the
party
has
been
consistently
45
upheld
in
decisions
of
the
Supreme
Court.
Only
recently,
in
Heirs
ofTranquilino
Labiste
v.
Heirs
of
Jose
Labistethe
Court
held
that
since
under
Article
1444
of
the
New
Civil
Code,
"No
particular
words
are
required
for
the
creation
of
lbid, at pp. 550-551.
41
21 SCRA 1192 (1967).
42
ibid, at p. 1197.
43
61 SCRA 284 (1974).
"Ibid, at p. 298, quoting from 89 C.J.S. 722.
45
Sotto v. Teves, 86 SCRA 154 (1978); Philippine National Bank v. Court of
Appeals, 217 SCRA 347 (1993); Rizal Surety & Ins. Co. v. Court of Appeals, 261
SCRA 69 (1996); Spouses Rosario v. Court of Appeals, 310 SCRA 464
(1999); DBP v. COA, 422 SCRA 459 (2004); Cahezo v. Rojas, 538 SCRA 242
(2007); Peflalberv. Ramos, 577 SCRA 509 (2009).
48
587 SCRA 417 (2009).
EXPRESS TRUSTS
293
an express trust, it being sufficient that a trust is clearly intended," then an
affidavit executed by eventual registered owner of a registered land "that the lot
brought in his name was co-owned by him, as one of the heirs of Jose, and his
uncle Tranquilino. And by agreement, each of them has been in possession of
half of the property," qualifies it to be as an express trust, and consequently,
"prescription and laches will run only from the time the express trust is
47
repudiated."
2. Express Trust Must Nevertheless Be Clearly Shown to Have Been
Intended
The rule under Article 1444 of the New Civil Code is that "No particular
words are required for the creation of an express trust, it being sufficient that a
48
trust is clearly intended," reminds us that an express trust will never be
presumed to exist; that the party who claims are right under a trust
arrangement must prove the existence thereof, thus: "A trust must be proven by
clear, satisfactory, and convincing evidence. It cannot rest on vague and
uncertain evidence or on loose, equivocal or indefinite declarations. As already
49
noted, an express trust cannot be proven by parol evidence."
De Leon v. Molo-Pecksonreiterated the principle that "to establish a trust
the proof must be clear, satisfactory and convincing. It cannot rest on vague,
51
uncertain evidence, or on a loose, equivocal or indefinite declaration."
However, when the trustees themselves (/.., the donees in a donation inter
vivos), have executed a declaration of trust (which is defined as an act by which
a person acknowledges that the property, title to which
A7
lbid,
at
p.
426.
See
also
Tuason
de
Perez
v.
Caluag,
96
Phil.
981
(1955);
Julio
v.
Da-
landan,
21
SCRA
543,
546
(1967),
nonetheless
Ramos
v.
Ramos,
61
SCRA
284
(1974).
9
* lbid,
at
pp.
300-301;
Citing
De
Leon
v.
Peckson,
62
O.
G.
994;
Pascual
v.
Meneses,
20
SCRA
219,228
(1967);
Cuaycong
vs.
Cuaycong,
21
SCRA
1192
(1967).
"6
SCRA
978
(1962).
5i
lbid,
at
p.
984.
48
294
NON-CORPORATE MEDIA OF DOING BUSINESS
he
holds
Is
held
by
him
for
the
use
of
another),
which
constituted
clearly
and
unequivocally
the
trust
"even
if
the
same
was
executed
subsequent
to
the
death
of
the
trustor,
Juana
Juan,
for
it
has
been
held
that
the
right
creating
or
declaring
a
trust
need
not
be
contemporaneous
or
inter-parties.
It
was
even
held
that
an
express
trust
may
be
declared
by
a
writing
made
after
the
legal
52
estate
has
been
vested
in
the
trustee."
53
Lately,
in
Canezo
v.
Rojas,
held
that
"As
a
rule,
however,
the
burden
of
proving
the
existence
of
a
trust
is
on
the
party
asserting
its
existence,
and
such
proof
must
be
clear
and
satisfactorily
show
the
existence
of
the
trust
and
its
54
elements."
3.
Essence
of
the
Relationship
Between
Trustor
and
Trustee
Prior
to
the
Conveyance
of
the
Res
to
the
Trustee
A
Deed
of
Trust
setting-up
the
trust
relationship,
constituting
the
trustee,
providing
for
his
duties
and
responsibilities
and
designating
the
beneficiary,
would
not
give
rise
to
a
true
trust
relationship
even
with
the
formal
acceptance
of
the
designated
trustee,
unless
and
until
the
property
that
would
constitute
the
corpus
of
the
trust
relationship
is
actually
conveyed
to
the
trust
relationship.
If
the
fourth
element
of
delivery,
i.e.,
transfer
of
legal
title
over
the
trust
property
to
the
trustee,
is
necessary
in
order
that
a
contract
of
express
trust
is
constituted,
then
the
proper
question
that
ought
to
be
ask
is:
What
is
the
status
of
a
Deed
of
Trust,
duly
executed
by
the
trustor
and
the
trustee
and
accepted
in
the
same
instrument
by
the
beneficiary,
before
title
to
the
designated
trust
property
is
actually
placed
in
the
name
of
the
trustee?
One
answer
to
this
issue
is
that
before
delivery
of
title
over
the
trust
estate
to
the
trustee,
there
is
no
valid
contract
of
trust,
but
only
a
nominate
contract
of
do
ut
facia,
that
is
that
the
trustor
^Ibid,
at
p.
984.
M
538
SCRA
242
mid,
at
p.
253.
(2007).
EXPRESS TRUSTS
295
has
contractually
bound
himself
to
deliver
and
transfer
title
over
the
trust
property
to
the
trustee
(essentially
a
real
obligation
to
give),
and
the
trustee
has
bound
himself
to
accept
delivery
and
to
manage
the
properties
to
be
delivered
for
the
interests
of
the
beneficiary
(essentially
a
personal
obligation
"to
do").
If
the
so-called
"contract
of
trust"
is
valid
at
this
point
(i.e.,
upon
mere
meeting
of
the
minds),
then
in
order
to
be
a
real
contract,
it
must
mean
that
it
creates
a
binding
obligation.
But
the
only
enforceable
obligation
so
far
created
by
meeting
of
the
minds
is
that
of
the
trustor
to
deliver
legal
title
to
the
trust
property
to
the
trustee
and
beneficial
title
to
the
beneficiary,
which
does
not
fall
within
the
essence
of
a
trust
which
is
supposed
to
create
an
obligation
on
the
part
of
the
trustee
to
manage
the
trust
property
for
the
benefit
of
the
beneficiary.
The
trustor
of
a
true
trust
does
not
assume
any
obligation;
he
is
the
creator
of
the
trust.
4.
Express
Trusts
Over
Immovables
Must
Be
in
Writing
Article
1443
of
the
New
Civil
Code
provides
that
"No
express
trusts
covering
an
immovable
or
any
interest
therein
may
be
proved
by
parol
evidence."
The
clear
legal
implication
of
the
language
of
Article
1443
is
that
an
express
trust
concerning
movables
or
any
interests
therein
may
be
proved
by
parol
evidence;
which
means
that
the
mere
meeting
of
minds
over
the
creation
of
an
express
trust
over
movables
creates
a
valid
and
enforceable
contract
of
trust
once
the
movable
is
delivered
to
the
trustee.
\r
It
is
the
author's
submission
that
Article
1443
of
the
New
Civil
Code
is
a
lame
provision,
and
really
serves
no
useful
purpose
in
the
realm
of
express
trusts
arrangements
involving
immovables
or
any
interest
therein.
Firstly,
Article
1443
does
not
render
the
express
trusts
over
immovables
void
when
it
is
not
effected
in
writing,
it
merely
renders
the
contractual
relationship
unenforceable.
Since
it
is
only
the
grantor
or
the
accepting
beneficiary
who
have
rights
to
enforce
under
the
terms
of
the
contractual
relationship,
it
is
they
who
are
unfavorably
affected
by
the
provisions
of
Article
296
NON-CORPORATE MEDIA OF DOING BUSINESS
1443:
they
cannot
adduce
parol
evidence
in
order
to
enforce
the
fiduciary
duties
and
obligations
of
the
trustee
through
court
action.
This
means
that
Article
1443
constitutes
a
mere
species
of
the
Statute
of
Frauds.
Thus,
in
Penalber
v.
Ramos,the
Supreme
Court
confirmed
that
"The
requirement
in
Article
1443
that
the
express
trust
concerning
an
immovable
or
an
interest
therein
be
in
writing
is
merely
for
purposes
of
proof,
not
for
the
validity
of
the
trust
agreement,"
and
it
went
on
to
rule
.
.
.
Therefore,
the
said
article
is
in
the
nature
of
a
statute
of
frauds.
The
term
statute
of
frauds
is
descriptive
of
statutes
which
require
certain
classes
of
contracts
to
be
in
writing.
The
statute
does
not
deprive
the
parties
of
the
right
to
contract
with
respect
to
the
matters
therein
involved,
but
merely
regulates
the
formalities
of
the
contract
necessary
to
render
it
enforceable.
The
effect
of
non-compliance
is
simply
that
no
action
can
be
proved
unless
the
requirement
is
complied
with.
Oral
evidence
of
the
contract
will
be
excluded
upon
timely
objection.
But
if
the
parties
to
the
action,
during
the
trial,
make
no
objection
to
the
admissibility
of
the
oral
evidence
to
support
the
contract
covered
by
the
statute,
and
thereby
permit
such
contract
to
be
proved
orally,
it
will
be
just
as
56
binding
upon
the
parties
as
if
it
had
been
reduced
to
writing.
Nonetheless,
Penalbar
did
not
find
for
the
establishment
of
an
express
trust
from
the
oral
testimony
given,
on
the
ground
that
the
parol
evidence
failed
to
prove
clearly
that
an
express
trust
had
been
constituted,
thus
A
careful
perusal
of
the
records
of
the
case
reveals
that
respondent
spouses
Ramos
did
indeed
fail
to
interpose
their
objections
regarding
the
admissibility
of
the
aforementioned
testimonies
when
the
same
were
offered
to
prove
the
alleged
verbal
trust
agreement
between
them
and
^
5
7
7
S
C
R
A
5
0
9
EXPRESS TRUSTS
297
petitioner. Consequently, these testimonies were rendered
admissible in evidence. Nevertheless, while admissibility of
evidence is an affair of logic and law, determined as it is by its
relevance and competence, the weight given to such evidence, once
admitted, still depends on judicial evaluation. Thus, despite the
admissibility of the said testimonies, the Court holds that the same
carried little weight in proving the alleged verbal trust agreement
57
between petitioner and respondent.
Civil Law provides that the Statute of Frauds, which is meant to prevent
fraud and cannot be used to perpetuate fraud, and therefore has no application
to contracts that have either been partially or fully executed. If that were so,
and Article 1443 is merely a species of the Statute of Frauds, then it would have
no application to a true express trust over an immovable, since by definition an
express trust exists by virtue of the trustor having conveyed the res or the
corpus to the trustee who assumes naked or legal title to it. In other words,
since express trust over an immovable presents a real contract where
ownership has in fact been conveyed to the purported trustee, then it is
exempted from the coverage of the Statute of Frauds, and parol evidence may
now be adduced to prove the existence of such express trust.
Secondly, considering that express trust over immovables are necessarily
covered by the characteristic of being a real contract, ineluctably no express
trust over immovables can be constituted by mere meeting of the minds. To
even be validly constituted, an express trust over immovable requires the
fourth requisite of delivery to have taken placethat naked or legal title over
the properties constituting the corpus have been transferred in the name of the
designated trustee. Under current legislation, no title to registered land or any
interest therein may be registered with the Register of Deeds and title
transferred in the name of a trustee, unless the deeds are in a public
instrument, and all taxes thereto have been paid and certified to have been
paid.
S7
lbid, at pp. 529-530.
298
NON-CORPORATE MEDIA OF DOING BUSINESS
Even if Article 1443 were to be construed as referring to an express trust
that has been constituted not only by the meeting of the minds of the parties,
but coupled with delivery of the immovable trust property to the trustee, it
would also lead to the absurd consequence of declaring as unenforceable an
oral express trust contract, where there has been execution. It is an established
doctrine that the Statute of Frauds consideration has no application to fully or
partially executed contracts. In any event, registration of naked or legal title in
the registered land in the name of the trustee is certainly equivalent to the trust
being in writing.
Article 1445 supports the proposition that a contract of express trust is not
a consensual contract, but essentially requires transfer of title to the trust
properties for its valid constitution, when it provides that "No trust shall fail
because the trustee appointed declines the designation, unless the contrary
should appear in the instrument constituting the trust." Under Article 1441, an
express can be "created by the intention of the trustor" alone, and that Article
1445 follows up by stating that ones that intention has created the express trust,
it cannot fail simply "because the trustee appointed declines the designation,"
which can only mean that the intention of the trustor to create the trust can
only be manifested by the act of placing title in the trust properties in the name
of the designated trustee for the benefit of the designated beneficiary. The
refusal by the designated trustee (i.e., non-giving of his consent), does not make
the express trust contract involving immovables to be void for lack of consent,
for indeed the transfer of title to the property has been effected, most especially
of the beneficial or equitable title to the beneficiary, whose acceptance of the
grant of the trustor is deemed to have taken place when no onerous condition
has been placed upon him under the terms of the trust agreement.
Thirdly, it is now well-settled in Philippine jurisprudence that when an
express trust over immovable is not in writing, nonetheless, it can still be proven
by clear and convincing parol evidence to be a resulting trust, under the aegis of
Article 1457 that provides that "An implied trust may be proved by oral
EXPRESS TRUSTS
299
evidence."
This
matter
is
thoroughly
covered
in
the
next
chapter
on
the
section
on
Resulting
Trusts.
Even
under
the
terms
of
the
public
instrument
creating
an
express
trust
over
immovables,
the
mere
actual
or
physical
delivery
of
possession
or
control
over
land
and
any
interest
therein
to
the
designated
trustee
would
not
create
a
valid
and
binding
express
trust
yet
because
naked
or
legal
title
has
not
yet
been
constituted
in
the
name
of
the
trustee
by
which
he
is
therefore
able
to
exercise
the
prerogatives
of
title
holder
for
the
benefit
of
the
designated
beneficiary.
Thus,
when
an
express
trust
has
been
constituted
over
land
or
any
interest
therein,
especially
those
registered
under
the
Torrens
system,
but
there
has
been
no
effective
transfer
of
naked
or
legal
title
to
the
properties
constituting
the
corpus,
there
is
as
yet
no
real
express
trust
that
has
arisen.
Lacking
the
fourth
requisite
of
delivery,
the
purported
express
trust
over
immovables
cannot
even
be
said
to
be
unenforceable,
for
it
is
as
yet
non-existent.
It
may
further
be
argued
that
the
foregoing
discussions
are
really
for
academic
purposes,
since
even
when
the
express
trust
has
not
been
legally
constituted
by
non-transfer
of
naked
or
legal
title
to
the
trustee,
the
intentions
of
the
parties
may
still
be
pursued
to
equitable
ends
under
the
principles
of
implied
trusts.
Yet
even
for
implied
trust,
particularly
resulting
trusts
as
discussed
in
the
next
chapter,
no
fiduciary
relationship
will
arise
in
the
person
of
the
trustee
unless
and
until
title
to
the
property
in
dispute
is
transferred
in
his
name.
Perhaps,
if
Article
1443
is
to
have
any
legal
significance
at
all,
its
provisions
must
be
understood
to
apply
to
"an
agreement
to
create
an
express
trust
over
an
immovable
or
any
interest
therein"
(which
is
the
innominate
contract
"do
ut
facia"
referred
to
earlier).
In
other
words,
an
oral
agreement
between
the
trustor
and
the
trustee
to
constitute
a
trust
over
an
immovable
or
any
interest
therein
which
is
not
followed-up
with
an
actual
conveyance
of
the
covered
res
is
not
enforceable
by
parol
evidence.
300
NON-CORPORATE MEDIA OF DOING BUSINESS
DISTINGUISHING EXPRESS TRUSTS FROM SIMILAR ARRANGEMENTS
We can learn more of the essence and characteristics of express trusts by
comparing them with other similar contracts.
1. Splitting of Full Dominion Into Naked or Legal Title and Beneficial or
Equitable Title
The situation whereby there is a split of the full dominion of a particular
property between legal title in one person and beneficial ownership in another,
does not necessarily create the trust relationship.
a. Compared with Usufruct
For example a usufruct is a property arrangement recognized under
Articles 562 and 563 of the New Civil Code, whereby a usufructuary enjoys the
property of another (the naked title owner), and may be constituted on the
whole or a part of the fruits of the thing. Consequently, it is the usufructuary
who directly possess and enjoys the fruits and benefits of on the subject
property.
In fact under Articles 566 and 589 of the New Civil Code, it is the
usufructuary who is obliged to preserve the form and substance of the property
held in usufruct, and to take care of its with the diligence of a good father of a
family for the benefit of the naked title holder at the end of the usufruct. In
contrast, under a trust relationship, it is the trustee, the naked title holder, who
actively manages and administers the trust property, and the beneficiary mainly
is a passive receiver of the fruits and benefits arising from the trust property.
b. Compared with Lease
Another example would be a lease agreement, whereby the lessor retains
not only naked title to the property leased and many other beneficial titles, and
what is contracted out to the lessee is the narrow enjoyment of the possession
and use of
EXPRESS TRUSTS
301
the
leased
property,
and
only
for
a
limited
period
provided
in
the
lease
agreement.
In
contradistinction,
in
a
trust
relationship,
full
beneficial
ownership
over
the
trust
property
is
for
the
account
of
the
beneficiary,
and
really
what
is
assumed
by
the
trustee
is
the
obligation
to
manage
the
trust
property
as
the
legal
title
holder
for
the
benefit
and
interest
of
the
beneficiary.
In
addition,
unlike
in
a
lease
arrangement
where
the
benefits
enjoyed
by
lessee
are
only
for
a
limited
contracted
period,
those
of
the
beneficiary
in
a
trust
arrangement
are
usually
of
a
permanent
nature.
c.
Compared
with
Sale
Express
trusts
therefore
belong
to
those
genre
of
contracts
which
involve
the
disposition
of
title
to
property.
However,
unlike
a
contract
of
sale
which
is
defined
under
Article
1458
of
the
New
Civil
Code
as
one
whereby
the
seller
obliges
himself
to
transfer
ownership
and
deliver
possession
to
the
buyer,
an
express
trust
is
not
perfected
by
mere
consent,
but
requires
the
actual
delivery
of
the
naked
or
legal
title
to
the
trustee
for
the
relationship
to
arise.
Likewise,
unlike
sale
where
the
buyer
takes
full
ownership
of
the
subject
matter
for
his
sole
benefit,
the
trustee
in
an
express
trust
only
takes
naked
or
legal
title
and
for
the
benefit
of
another
person,
the
beneficiary.
Thus,
a
contract
of
sale
is
entered
into
for
its
own
end,
the
acquiring
of
title
of
the
subject
matter
by
the
buyer,
an
express
trust
is
constituted
merely
as
a
preparatory
arrangement,
a
medium,
by
which
the
trustee
is
expected
to
pursue
other
juridical
acts
for
the
benefit
of
the
beneficiary.
2.
On
Being
Bound
to
Fiduciary
Duties
and
Obligations
a.
Compared
with
Agency
The
essence
of
what
makes
a
party
in
a
trust
arrangement
the
"trustee"
is
by
reason
of
the
fact
that
he
receives
naked
or
legal
title
302
NON-CORPORATE MEDIA OF DOING BUSINESS
to
the
property
to
be
held
in
trust;
and
the
reason
why
the
office
of
the
trustee
is
fiduciary
in
character
is
because
he
holds
title
to
the
property
for
the
benefit
of
another
person,
the
beneficiary.
Thus,
there
is
no
trust
relationship
merely
because
the
trustor
stipulates
in
a
contract
that
he
reposes
trust
and
confidence
in
the
person
denominated
as
trustee;
trust
relationship
is
essentially
borne
out
of
a
property
relationship
whereby
full
dominion
over
a
property
is
split
between
naked
title
in
the
name
of
the
trustee
where
he
would
manage
and
administer
the
property
for
the
benefit
of
the
another
person
in
whom
beneficial
ownership
is
given.
In
the
case
of
an
agent,
the
fiduciary
relationship
is
strictly
based
on
a
personal
level:
that
he
has
been
commissioned
by
the
principal
to
represent
him
and
his
interest
in
dealings
with
third
parties.
The
agent
is
therefore
bound
by
the
duties
of
obedience,
diligence
and
loyalty
by
reason
of
his
contractual
commitment
to
act
for
and
represent
the
principal
and
the
latter's
interest
with
third
parties;
he
does
not
purport
to
act
for
himself
or
upon
his
own
powers,
but
by
the
principal's
authority,
and
therefore
the
agent
does
not
have
any
title
to
the
property
placed
in
his
custody.
An
agent
therefore
is
bound
to
act
in
accordance
with
the
instructions
of
the
principal,
and
in
the
name
of
the
principal;
consequently,
the
agent
is
not
a
party
to
the
contracts
entered
into
by
him
in
the
name
of
the
principal,
and
has
no
rights,
or
assumes
no
obligations,
under
such
contracts.
On
the
other
hand,
the
trustee
is
given
naked
title
to
the
property
to
be
held
in
trust,
and
he
transacts
business
with
third
parties
under
the
trust
in
his
own
behalf
as
a
trustee
and
legal
title
holder
and
not
in
the
name
of
the
beneficiary.
Although,
a
trustee
is
bound
by
the
duty
of
loyalty,
i.e.,
he
must
act
for
the
best
interest
of
the
beneficiary,
and
that
in
a
conflict-of-interests
situation,
he
must
prefer
the
interest
of
the
beneficiary
over
that
of
his
own
estate;
nonetheless,
he
is
not
bound
by
any
duty
of
obedience,
for
indeed
he
has
been
given
legal
title
to
the
trust
property
precisely
because
he
is
expected
to
use
his
discretion
and
best
judgment
in
pursuing
transactions
under
the
trust
arrangement.
He
is
not
expected
to
be
bound
by
the
instructions
of
the
beneficiary,
who
often
is
an
infant,
or
who
has
no
legal
capacity,
like
an
insane
person.
Since
the
trustee
is
obliged
to
EXPRESS TRUSTS
303
manage
the
trust
property
for
the
benefit
of
the
beneficiary,
he
is
bound
to
exercise
due
diligence
in
his
dealings
in
relation
to
the
trust.
While
both
trust
and
agency
relationships
are
fiduciary
in
nature,
the
agency
relation
is
essentially
revocable
"at
the
will
of
the
principal,"
being
based
primarily
on
willingness
of
the
principal
to
be
represented
by
another
person.
On
the
other
hand,
a
trust
being
essentially
based
on
a
property
relationship,
is
not
revocable
at
will;
and
although
"revocation
of
trust"
is
the
term
used,
it
is
not
at
the
will
of
the
trustor
or
the
beneficiary,
unless
that
is
so
stated
in
the
trust
instrument,
but
can
only
be
based
on
a
"breach
of
trust,"
or
only
upon
showing
that
the
trustee
has
breached
his
duty
of
loyalty
or
duty
of
diligence.
In
other
words,
a
trustee
cannot
generally
be
stripped
of
the
legal
title
unless
it
is
shown
that
he
is
unfit
for
the
position
of
trustee,
or
he
has
breached
his
trust
obligations.
M
Thus, in De Leon v. Molo-Peckson, the Court held that in the absence of
any reservation of the power to revoke, an express trust (referred to as
"voluntary trust"), is irrevocable without the consent of the beneficiary.
KINDS OF EXPRESS TRUSTS
It has been held that the development of trust as a method of disposition
59
of property is to a large part due to its freedom from formal requirements.
Thus, Article 1444 of the New Civil Code provides that "No particular words are
required for the creation of an express trust, it being sufficient that a trust is
clearly intended."
60
In the early case of Gamboa v. Gamboa, the Supreme Court
demonstrated how mere oral assertions of trustee obligations against the
registered owner of a parcel of land was held unavailing, the Court holding a
person who has held legal title to
M
6 SCRA 798 (1962).
Lucenario, Domingo, Parol Evidence of Express Trust, 109 SCRA 451,
453, citing 54 AM. JUR. 50; also Julio v. Dalandan, 21 SCRA 543, 550 (1967).
%2 Phil. 503 (1928).
59
NON-CORPORATE MEDIA OF DOING BUSINESS
304
land,
coupled
with
possession
and
beneficial
use
of
the
property
for
more
than
ten
years,
will
not
be
declared
to
have
been
holding
such
title
as
trustee
for
himself
and
his
brothers
and
sisters
upon
doubtful
oral
proof
tending
to
show
a
recognition
by
such
owner
of
the
alleged
rights
of
his
brother
and
sisters
to
share
in
the
produce
of
the
land.
In
other
words,
the
best
evidence
to
show
a
trust
relationship
is
written
admission
of
the
purported
trustee
that
he
or
she
has
agreed
to
hold
title
to
the
property
in
question
for
the
benefit
of
the
claimants.
81
In Sa/ao v. Salao, the Court held mandatory the provisions of Article
1443, which requires that an express trust involving immovable property must
be covered in a written instrument, thus
Not a scintilla of documentary evidence was presented by the
plaintiffs to prove that there was an express trust over the
Calunuran fishpond in favor of Valentin Salao.
Purely parol evidence was offered by them to prove the
alleged trust. Their claim that in the oral partition in 1919 of the
two fishponds the Calunuran fishpond was assigned to Valentin
Salao is legally untenable.
It is legally indefensible because the terms of article 1443 of
the Civil Code (already in force when the action herein was
instituted) are peremptory and unmistakable: parol evidence
82
cannot be used to prove an express trust concerning realty.
Although Article 1444 provides that "No particular words are required for
the creation of an express trust," it still requires that the circumstances indicate
that "a trust is clearly intended." When it comes to immovable property, that "a
trust is clearly intended" takes only one form: a written instrument as
mandated under Article 1443. In the absence of such written instrument then
public policy expressed under Article 1443 is that no such intent to create a trust
exists, and consequently, there are not trust obligations on the part of the
purported trustee.
6
1
7
0
S
C
R
A
6
5
(
EXPRESS TRUSTS
305
When it comes to other forms of trust properties, the element of
"intention to create trust" must still come into play, which is any evidence
tending to show that the trustor had transferred title to the trust property with
intention to have them managed for the benefit of the beneficiary, coupled with
an intention on the part of the trutee to have accepted title to the trust property
with the obligation to manage them for the benefit of the beneficiary. An
express trust is never presumed to exist merely on the basis that title to
property has been transferred to another person; in the absence of written
evidence, the intention to create a trust must be proved by clear and convincing
evidence. Thus, De Leon v. Molo-Peckson, held
True, it is that to establish a trust the proof must be clear,
satisfactory and convincing. It cannot rest on vague, uncertain
evidence, or on a loose, equivocal or indefinite declaration... but
here the document in question clearly and unequivocally declares
the existence of the trust even if the same was executed
subsequent to the death of the trustor, Juana Juan, for it has been
held that the right creating or declaring a trust need not be
contemporaneous or inter- parties . . It was even held that an
express trust may be declared by a writing made after the legal
64
estate has been vested in the trustee.
In De Leon, the instrument showed that the appellants agreed to sell to
the appellee the lots at a nominal price of P1.00 per lot, which to the Court
represented a recognition of a preexisting trust or a declaration of an express
trust, based on the provision in the donor's will to the effect that the titles to the
land should be conveyed to appellants with the duty to hold them in trust for
the appellee.
But in Salao, after it was held that no express trust could have been
constituted over immovables without a written trust, the Court went on to
determine whether a trust over immovable
"
6
S
C
R
A
9
7
8
(
1
306
NON-CORPORATE MEDIA OF DOING BUSINESS
property, which cannot be enforced in the absence of written evidence thereof,
can still be pursued under the provisions of implied trust: "Is plaintiffs' massive
oral evidence sufficient to prove an implied trust, resulting or constructive,
65
regarding the two fishpondsP" The matter will be covered under the chapter
on implied trusts.
1. Contractual Trusts
The manner of splitting the legal title and beneficial ownership over the
property (i.e., the corpus) to be held in trust may be done in several ways. For
example, the situation covered under Article 1440 would involve a situation
where the full owner of a property, defined as the trustor, conveys the naked
title to one person, say a banking institution, as trustee, under the terms of the
trust agreement for the benefit of another person called the beneficiary, say the
retarded child of the trustor. In this case, you would have three parties to the
trust arrangement.
Another mode would be for the trustor to convey the naked title of the
trust property to a trustee, say a banking institution, with trustor himself to
become the beneficiary of the trust. In this case you would only have two
parties to the trust agreement, the trustor-beneficiary and the trustee.
A third mode would be for the trustor to convey the title to the property
to himself merely as trustee for the benefit of a beneficiary, such as when a
father donates a property to his son by constituting himself as the trustee during
the infancy of the son. In this case, there are essentially only two parties, the
trustor-turned-trustee and the beneficiary. Such an arrangement essentially
covers a gift by the trustor to the beneficiary.
What is clear from the foregoing illustrations is that express trust
relationship is the product of contractual intentions. Express trusts therefore are
the creature of what we term in Contract Law as the "freedom to contract" or
the doctrine of autonomy, and
^Ibid, at p. 81; italic format supplied
EXPRESS TRUSTS
307
the
right
of
every
owner
to
deal
with
proprietary
arrangements
over
property
owned
by
him
in
a
manner
that
serves
his
purpose,
provided
it
is
not
contrary
to
laws,
moral
or
public
policy.
2.
Inter
Vivos
Trusts
As
discussed
previously,
inter
vivos
trusts
are
expressed
trust
pursued
in
the
form
of
donations,
and
which
therefore
become
solemn
contracts
which
must
comply
with
the
solemnities
mandated
by
the
Law
on
Donations.
A
good
example
of
an
express
trust
created
through
a
donation
is
found
in
the
decision
in
De
Leon
v.
Molo-Peckson,
where
the
husband,
Mariano
Molo
y
Legaspi,
died
leaving
a
will
wherein
he
bequeathed
his
entire
estate
to
his
wife,
Juana
Juan,
who
in
turn
executed
a
will
naming
therein
many
devisees
and
legatees,
including
Guillermo
San
Rafael.
Subsequently,
Juana
Juan
executed
a
donation
inter
vivos
in
favor
of
her
two
daughters
for
almost
the
entire
property,
which
included
the
ten
parcels
of
land
located
in
Pasay
City
and
subject
of
the
suit.
Six
months
after
the
mother
died,
the
donees-daughters
executed
a
"Mutual
Agreement"
whereby
the
bound
themselves
to
sell
for
P1.00
each
the
ten
lots
to
the
issues
of
Guillermo
San
Rafael
under
the
express
purpose
"That
this
agreement
is
made
in
conformity
with
the
verbal
wish
of
the
late
Don
Mariano
Molo
y
Legaspi
and
the
later
Dona
Juana
Francisco
Juan
y
Molo.
These
obligations
were
repeatedly
told
to
[the
donees-daughters]
before
their
death
and
that
the
same
should
be
fulfilled
after
their
death."
Although
the
donees-daughter
subsequently
tried
to
revoke
the
Mutual
Agreement,
the
Court
held
that
an
express
trust
had
been
duly
constituted,
since
the
instrument,
"wherein
the
appellants
[donees-daughters]
agreed
to
sell
to
the
appellee
the
lots
at
a
nominal
price
of
P1.00
pier
lot,
represents
a
recognition
of
a
pre-existing
trust
or
a
declaration
of
an
express
trust,
based
on
the
provision
in
the
donor's
will
to
the
effect
that
the
titles
to
"6 SCRA 978 (1982).
NON-CORPORATE MEDIA OF DOING BUSINESS
308
the
land
should
be
conveyed
to
appellants
with
the
duty
to
hold
them
in
trust
67
for
the
appellee."
3.
Testamentary
Trusts
When
an
express
trust
is
created
under
the
terms
of
the
last
will
and
testament
of
the
testator,
it
is
a
testmentary
trust
and
is
governed
by
the
Law
on
Succession.
Unless
the
will
conforms
with
the
solemnities
and
conditions
set
by
law,
it
will
be
void
together
with
the
testmentary
trust
sought
to
be
created
therein.
Palad
v.
Province
of
Quezon
shows
where
an
express
trust
was
embodied
in
a
holographic
will
containing
testamentary
dispositions,
through
which
the
testator
created
a
trust
for
the
establishment
and
maintenance
of
a
high
school
to
be
financed
with
tie
income
of
certain
specified
properties
for
the
benefit
of
the
inhabitants
of
a
town,
naming
as
trustee
whomsoever
may
be
the
governor
of
the
province.
In
Perez
v.
Araneta,the
Court
held
that
the
provisions
of
the
will
of
the
decedent
explicitly
authorizing
the
trustee
constituted
therein
to
sell
the
property
held
in
trust
and
to
acquired,
with
the
proceeds
of
the
sale,
other
properties,
leaves
no
room
for
doubt
about
the
intent
of
the
testatrix
to
keep,
as
part
of
the
trust
estate,
said
proceeds
of
sale,
and
not
turn
the
same
over
to
the
beneficiary
as
net
rental
or
income.
70
In De Leon v. Molo-Pecson, the Court held that the execution by the
appellants of the agreement to sell the parcels of land at a nominal price of
P1.00 per lot, represent a recognition of a pre-existing trust or a declaration of
an express trust, based on the provisions in the donor's will to the effect that
the titles to the parcels of land covered should be conveyed to appellants with
the duty to hold them in trust for the appellee.
67
lbid,
at
p.
984.
46
SCRA
354
<*4
SCRA
430
(1972).
70
(1962).
6
SCRA
798
(1962).
EXPRESS TRUSTS
4.
309
Eleemosynary or Charitable Trusts
7
A description of a charitable trusts is found in Lopez v. Court of Appeals, '
where in the notarial will, the testator "expressed that she wished to constitute
a trust fund for her paraphernal properties, denominated as Fideicomiso de
Juliana Lopez Manzano (Fideicomiso), to be administered by her husband. . .
Two-thirds (2/3) of the income from rentals over theses properties were to
answer for the education of deserving but needy honor students, while
one-third (1/3) was to shoulder the expenses and fees of the administrator."
However, the properties designated for the Fideicomiso were excluded
and instead adjudicated to the husband (Jose) as sole heir. Consequently, the
Court ruled that "On the premise that the disputed properties were the
paraphernal properties of Juliana which should have been included in the
Fideiocomiso, their registration in the name of Jose would be erroneous and
Jose's possession wuld be that of a trustee in an implied trust... [which from] the
factual milieu of this case is provided in Article 1456 of the Civil Code.""
5. Publicly-Regulated
Trusts
Publicly-regulated
trusts
would
be
those
where
the
State
provides
the
vehicle
by
which
institutions
are
allowed
to
administer
large
funds
for
the
benefit
of
the
public.
Among
such
funds
created
under
the
law
would
be
the
pension
and
benefits
funds
administered
by
the
GSIS,
the
SSS
and
the
Pag-lbig
Fund.
Tax
laws
provide
for
incentives
to
the
setting-up
of
retirement
funds
for
employees.
All
such
funds
are
really
being
administered
for
the
beneficiaries
thereof
through
the
medium
of
trust.
A
good
example
of
a
retirement
trust
is
that
discussed
in
Development
73
Bank
of
the
Philippines
v.
Commission
on
Audit, which
the
Court
described
as
follows:
71
574
SCRA
26
(2008).
mid,
at
p.
36.
73
422
SCRA
459
(2004).
310
NON-CORPORATE MEDIA OF DOING BUSINESS
In the present case, the DBP Board of Governors' (now Board
of Directors) Resolution No. 794 and the agreement executed by
former DBP Chairman Rafael Sison and the trustees of the Plan
created an express trust, specifically, an employees' trust. An
employees' trust is a trust maintained by an employer to provide
retirement, prson or other benefits to its employees. It is a
separate taxable entity established for the exclsuivse benefit of the
employees. Resolution No. 794 shows that DBP intended to
establish a trust fund to cover the retirement benefits of certain
employees under Republic Act No. 1616 ("RA 1616"). The principal
and income of the Fund would be separate and distinct from the
74
funds of DBP.
Although
the
Supreme
Court
held
that
the
principal
and
income
of
the
fund
no
longer
pertained
in
ownership
to
DBP,
since
naked
title
has
been
devolved
to
the
trustees
of
the
Fund,
and
that
beneficial
interest
was
with
the
qualified
officers
and
employees
of
DBP,
nonetheless
it
found
that
DBP,
as
trustor,
has
legal
standing
to
sue
on
matters
relating
to
the
Fund,
thus:
As
a
party
to
the
Agreement
and
a
trustor
of
the
Fund,
DBP
has
a
material
interest
in
the
implementation
of
the
Agreement,
and
in
the
operation
of
the
Gratuity
Plan
and
the
Fund
as
prescribed
in
the
Agreement.
The
DBP
also
possesses
a
real
interest
in
upholding
the
legitimacy
of
the
policies
and
programs
approved
by
its
Board
of
Directors
for
the
benefit
of
DBP
75
employees.
CAPACITIES, RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTIES TO THE EXPRESS
TRUST
1. The Trustor
a. Trustor as the Creator of the Trust
Under Article 1440, the "trustor" is defined as the "person who
establishes a trust;" and under Article 1441, an express
"Ibid,
at
p.
75
473.
Ibid;
at
p.
472.
EXPRESS TRUSTS
311
trust
may
be
"created
by
the
intention
of
the
trustor."
The
trustor
therefore,
disposes
of
his
full
ownership
of
the
designated
trust
properties
in
favor
of
the
trustee
who
assumes
legal
title
thereto,
and
the
beneficiary,
to
whom
beneficial
or
equitable
title
shall
pertain.
It
is
possible
that
under
an
express
trust,
the
trustor
transfers
naked
or
legal
title
to
properties
to
the
trustee,
but
with
the
trustor
designated
as
the
beneficiary.
b.
Trustor
Must
Have
Legal
Capacity
to
Convey
Trust
Property
76
Gayondato v. Treasurer of the P. I., distinguishes an express trust from
an implied trust in the sense that in an express trust, the trustor must have legal
capacity to create the trust, which effectively requires the ability to convey
naked or legal title in the trust property to the trustee to be held by the latter for
the benefit of the beneficiary. The Court held
Bouvier defines a trust in its technical sense as "a right of
property, real or personal, held by one party for the benefit of
another." In the present case we have this situation: The plaintiff
was a minor at the time of the registration of the land and had no
legal guardian. It is true that her mother in whose name the land
was registered was the natural guardian of her person, but that
guardianship did not extend to the property of the minor and
conferred no right to the administration of the same... and the
plaintiff, being a minor and under disability, could not create a
technical trust of any kind. Applying Bouvier's definition to this
state of facts, it is clear that there was no trust in its technical
signification. The mother had no right of property or
administration in her daughter's estate and was nothing but a
77
mere trespasser.
In effect, capacity of the parties is not essential in implied trusts, because
the arrangement is imposed by operation of law;
76
49
Phil.
244
(1926).
"Ibid,
at
p.
250.
312
NON-CORPORATE MEDIA OF DOING BUSINESS
whereas, in an express trust, capacity to transfer title on the trust properties, in
order to have legal title held by the trustee, is critical.
2. The Trustee
a. Trustee Is the Party Primarily Bound
Under Article 1440 of the New Civil Code, the "trustee" is the person in
the trust relation in whom confidence is reposed as regards property for the
benefit of another person. It is the trustee therefore who is the party primarily
bound under the trust relation, and being possessed of the legal title to the trust
property held for the benefit of another person, he is bound by the fiduciary
duties of diligence and loyalty.
b. Trustee Must Have Legal Capacity to Accept the
Trust
It is to the trustee that naked or legal title to the trust properties is
transferred. Consequently, the trustee must also have legal capacity to accept
the trust, especially when upon acceptance of the trust, he binds himself to
certain obligations.
c. When Trustee Declines the Designation
Article 1445 of the New Civil Code provides that "No trust shall fail
because the trustee appointed declines the designation, unless the contrary
should appear in the instrument constituting the trust." On this matter,
Tolentino wrote
Want of Trustee. The principle that equity will not allow a
trust to fail for want of a trustee is clearly established. Where a
trust has once been created and the trustee dies, becomes insane
or subject to some other legal incapacity, or resigns or is removed,
the trust does not fail, but a new trustee will be appointed. Such
an appointment will be made by the proper court unless by the
terms of the trust other provision is made for the appointment of a
successor trustee. The reason why a trust does not fail for want of
a trustee is that to permit it to fail for this reason would be
contrary to
EXPRESS TRUSTS
313
the intention of the trustor in creating the trust. The trustor is
primarily interested in the disposition of the beneficial interest in
the property, and the matter of its administration is a subsidiary
consideration.
x x x
There are cases, however, in which it may appear that the
trustor intended the trust to continue only so long as the person
designated by him as trustee should continue as such. It may be so
provided by the terms of the trust, or it may appear that the
purposes of the trust cannot be carried out unless the person
named as trustee continues to act. In such a case, the trust will fail,
if the trustee resigns, dies, is removed, or otherwise ceased to be a
70
trustee.
The principle that the law will not allow a trust to fail due non- acceptance,
resignation, incapacity or death of the designated trustee in recognized under
our Rules of Court which provide for the duties of the trustee and the manner of
appointment or replacement, as discussed hereunder.
d. Obligations of the Trustee
(1) Contractually Stated Duties and Obligations of the Trustee
An express trust constituted under a trust agreement normally provides
for the powers and functions of the trustee, and would enumerate such powers
which under the law need to be covered by a special power of attorney to
remove any doubt as to the duties of the trustee, and provide for the
parameters of his obligations as well.
(2) Common Law Duties of the Trustee
The position of trustee being fiduciary in nature, a trustee is expected to
carry out the trust using the diligence of a good father of a family. The trustee
becomes personally liable for gross
78
TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, at pp. 676-677 [1991 ed.].
NON-CORPORATE MEDIA OF DOING BUSINESS
314
negligence committed even when it is in the pursuit of the trust arrangement;
for negligence which causes damage to another person constitutes a wrong
committed by the tort-feasor for which he can be held personally liable. Every
trustee has the common law duty of diligence.
In addition, the trustee is expected to be loyal to the affairs and interest of
the beneficiary. He cannot appropriate for himself any opportunity which in the
course of his functions as trustee should pertain to the beneficiary. He has the
duty to account t the beneficiary for the affairs of the trust. And he cannot
convert the use of the trust properties, and the incomes, fruits and proceeds for
his own benefit. Every trustee has the common law duty of loyalty.
76
Perez v. Araneta, held that although the beneficiaries may be entitled to
receive the income flowing from the trust estate, the profits realized in the sale
of trust properties are part of the capital held in trust, to which the beneficiaries
are entitled to receive as income.
De Leon v. Molo-Pecksonheld that the other duties of the trustee, which
flow out of the main duty of loyalty, would be the duty to account to the
beneficiary of the trust estate. It would be the duty of the trustee also to deliver
the property in trust to the cestui que trust, when it is time to so do it, free all
liens and encumbrances.
Under Article 1455, when the trustee uses trust funds for the purchase of
property and causes the conveyance to be made in his name or a third person, a
trust is established in favor pf the beneficiary.
A violation of the duties of the trustee may constitute a "breach of trust"
that would be the legal basis by which the trustee may be removed, or the trust
revoked entirely.
re
4 SCRA 434 (1962).
6SCRA978 (1962).
ro
EXPRESS TRUSTS
315
(3) Trustee Is Prohibited from Donating Trust Property
Under
Article
736
of
the
New
Civil
Code,
"trustees
cannot
donate
the
property
entrusted
to
them."
Such
prohibition
is
in
accordance
with
the
fiduciary
duty
of
loyalty
of
a
trustee,
that
the
holds
the
trust
property
for
the
benefit
of
the
beneficiary.
He
therefore
cannot
exercise
acts
of
beneficence
employing
the
81
property
that
he
holds
for
the
benefit
of
another
person.
(4) Trustee
Cannot
Use
Funds
of
the
Trust
to
Acquire
Property
for
Himself
Under
Article
1455
of
the
New
Civil
Code
(on
implied
trusts),
"When
any
trustee
...
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
to
him
or
to
a
third
person,
a
trust
is
established
by
operation
of
law
in
favor
of
the
person
to
whom
the
funds
belong."
Article
1455
actually
establishes
the
parameters
of
the
duty
of
loyalty
that
every
trustee
owes
to
the
beneficiary
-
that
the
trustee
is
obliged
to
use
the
funds
of
the
trust
estate
for
the
sole
benefit
of
the
beneficiary.
Every
trustee
in
express
trust,
being
the
naked
title
holder,
of
course
has
the
power
to
use
funds
of
the
trust
estate
to
acquire
properties
to
be
placed
in
his
name,
but
that
would
have
to
be
officially
as
"trustee."
Article
1455
applies
in
a
situation
where
the
property
is
placed
in
the
name
of
the
trustee
without
indicating
that
he
holds
it
as
trustee.
That
would
then
later
authorize
him
to
claim
the
property
as
his
own,
in
breach
of
his
duties
of
loyalty.
(5) Duties
and
Responsibilities
of
the
Trustees
under
the
Rules
of
Court
Rule
98
of
the
Rules
of
Court
grants
to
the
courts
the
authority
to
appoint
a
trustee
when
"necessary
to
carry
into
effect
the
provisions
of
a
will
or
a
written
instrument."
(Section
1),
and
that
title
to
the
trust
estate
will
vest
in
the
trustee
thus
appointed
by
the
courts
(Section
2).
"See Araneta v: Perez, 5 SCRA 338 (1962).
316
NON-CORPORATE MEDIA OF DOING BUSINESS
In particular, Section 3 of Rule 98, provides that
When a trustee under a written instrument declines, resigns,
dies, or is removed before the objects of the trust are
accomplished, and no adequate provision is made in such
instrument for supplying the vacancy, the proper [Regional Trial
Court] may, after due notice to all persons interested, appoint a
new trustee to act alone or jointly with the others, as the case may
be. Such new trustee shall have and exercise the same powers,
rights, and duties as if he had been originally appointed, and the
trust estate shall vest in him in like manner as it had vested or
would have vested, in the trustee in whose place he is substituted;
and the court may order such conveyance to be made by the
former trustee or his representatives, or by the other remaining
trustees, as may be necessary or proper to vest the trust estate in
the new trustee, either alone or jointly with others.
The provisions of Rule 38 of the Rules of Court are meant to implement
the rule in this jurisdiction that the non-acceptance, death, civil interdiction,
insanity, insolvency, or even the resignation of a designated trustee, shall not of
itself prevent a trust from coming into fruition or extinguish one that has been
already constituted. The doctrine flows from the equity nature of the trust as a
legal institution in the Philippines.
An example of the application of this principle is in the decision in Lorenzo
v. Pasadas, where the will of the decedent never used the term "trust," but
nevertheless the intention to create one was deemed implicit to the Court, thus
The appointment of P.J.M. Moore as trustee was made by the
trial court in conformity with the wishes of the testator as
expressed in his will. It is true that the word "trust" is not
mentioned or used in the will but the intention to create one is
clear. No particular or technical words are required to create a
testamentary trust (69 C.J., p. 711). The words "trust" and
"trustee," though apt for the purpose, are not necessary.
^64 Phil. 353 (1937).
EXPRESS TRUSTS
317
In fact, the use of these two words is not conclusive on the
question that a trust is created (69 C.J., p. 714). "To create a trust
by will the testator must indicate in the will his intention so to do
by using language sufficient to separate the legal from the
equitable estate, and with sufficient certainty designate the
beneficiaries, their interest in the trust, the purpose or object of
the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be
concurrence of three circumstances: (1) Sufficient words to raise a
trust; (2) a definite subject; (3) a certain or ascertained object;
statutes in some jurisdictions expressly or in effect so providing."
(69 C. J., pp. 705, 705.) There is no doubt that the testator intended
to create a trust. He ordered in his will that certain of this
properties be kept together undisposed during a fixed period, for a
stated purpose. The probate court certainly exercised sound
judgment in appointing a trustee to carry into effect the provisions
83
of the will, (see sec. 582, Code of Civil Procedure).
Following up on this principle, the Supreme Court held in Julio v.
Dalandanthat:
For, technical or particular forms of words or phrases are not
essential to the manifestation of intention to create a trust or to
the establishment thereof. Nor would the use of some such words
as "trust" or "trustee" essential to the constitution of a trust as we
have held in Lorenzo v. Posadas, 64 Phil. 453,368. Conversely, the
mere fact that the word "trust" or "trustee" was employed would
not necessarily prove an intention to create a trust. What is
important is whether the trustor manifested an intention to create
the kind of relationship which in law is known as a trust. Is it
important that the trustor should know that the relationship which
intents to create is called a trust, and whether or not he knows the
precise characteristics of the relationship which is called a trust.
Here, that trust is effective as against defendants and
^
I
b
i
d
,
a
t
p
p
.
318
NON-CORPORATE MEDIA OF DOING BUSINESS
in favor of the beneficiary thereof, plaintiff Victoria Julio, who
85
accepted it in the document itself."
Under Sections 5 and 6 of Rule 98 of the Rules of Court,
the following are the duties and responsibilities of the trustee
appointed by the courts:
(a)
Before entering on the duties of his trust, a trustee
shall file a bond with the court conditioned upon
compliance with his duties;
(b)
To make and return to the court, at such time as
it may order, a true inventory of all the real and
personal estate belonging to him as trustee, which
at the time of the making of such inventory shall
have come to his possession or knowledge;
(c)
To manage and dispose of all such estate, and
faithfully discharge his trust in relation thereto,
according to law and the will of the testator or the
provisions of the instrument or order under which
he is appointed;
(d) To render upon oath at least once a year until his
trust is fulfilled, unless he is excused therefrom
in any year by the court, a true account of the
property in his hands and of the management
and disposition thereof, and will render such other
account as the court may order; and
(e)
Upon the expiration of his trust, he will settle his
accounts in court and pay over and deliver all the
estate remaining in his hands, or due from him on
such settlement, to the person or persons entitled
thereto.
mid, at pp. 550-551.
EXPRESS TRUSTS
319
(6) Proper Proceedings for Sale or Encumbrance
of Trust Estate
Under Section 9 of Rule 98 of the Rules of Court, when the sale or
encumbrance of any real or personal estate held in trust is necessary or
expedient, the Regional Trial Court (RTC) having proper jurisdiction of the trust
may, on petition and after due notice and hearing, order such sale or
encumbrance to be made, and the reinvestment and application of the proceeds
thereof in such manner as will best effect the objects of the trust.
(7)
Trustee Does Not Assume Generally Personal Liability on the
Trust
Although
a
trustee
enters
upon
the
fulfillment
of
his
duties
by
his
own
name,
and
not
in
the
name
of
the
trustor
or
the
beneficiary,
nonetheless,
it
should
be
understood
that
the
performance
of
the
functions
of
the
trustee
and
the
contracts
entered
into
in
pursuit
of
the
trust,
as
performed
under
"official
capacity"
as
a
trustee.
Consequently,
the
liabilities
assumed
by
the
trustee
is
such
capacity
can
only
be
enforced
to
the
extent
of
the
trust
properties.
In
other
words,
the
trustee,
unless
he
so
stipulates,
does
not
become
personally
liable
to
his
separate
properties
outside
of
the
trust
properties,
for
contracts
and
transactions
arising
from
the
trust
and
entered
into
in
his
official
capacity
as
trustee.
86
Thus,
in
Tan
Senguan
and
Co.
v.
Phil.
Trust
Co.,
where
the
properties
for
which
the
trust
company
had
entered
into
transaction
were
received
not
in
a
trustee
capacity,
the
Court
held
that
the
trustee
would
be
liable
for
such
transactions
in
its
personal
capacity,
and
not
as
a
trustee.
A
trustee
who
acts
within
the
scope
of
the
trust
therefore,
has
a
right
to
charge
to
the
trust
estate
the
expenses
incurred
by
reason
thereof.
On
the
other
hand,
a
trustee
is
expected
to
exercise
due
diligence
in
the
pursuit
of
the
trust,
and
when
he
acts
with
fraud
or
gross
negligence,
he
becomes
personally
liable
for
his
own
"8 Phil. 700 (1933).
320
NON-CORPORATE MEDIA OF DOING BUSINESS
separate properties, as to all persons who suffer damage by reason of such
fraud or negligence.
(8) Trustee is Entitled to Compensation for Management
of the Trust Estate
In Lorenzo v. Pasadas the Court held that as a matter of general
proposition, "A trustee, no doubt, is entitled to receive a fair compensation for
88
his services."
Under Section 7 of Rule 98 of the Rules of Court, if the compensation of
the trustee is not determined in the instrument creating the trust, his
compensation shall be fixed by the court that appointed him.
06
InAraneta v. Perez, the Court held that the reasonableness of fees of a
trustees should be determined in advance, but must be determined at the time
he files a claim for the same, since reasonableness depends upon variable
circumstances, such as the character and powers of the trusteeship, the risk and
responsibility assumed, the time and labor and skill required in the
administration of the trust, as well as the care and management of the estate.
The Court also held that the trustee may be indemnified out of the trust estate
for the expenses incurred in rendering and proving his accounts and for the
costs and counsel's fees in connection therewith.
(9) Removal or Resignation of Trustee
Under
Section
8
of
Rule
98
of
the
Rules
of
Court,
the
proper
RTC
may,
upon
petition
of
the
parties
beneficially
interested
and
after
due
notice
to
the
trustee
and
hearing,
remove
a
trustee
if
such
removal
appears
essential
in
the
interests
of
the
petitioners.
The
RTC
may
also,
after
due
notice
to
all
persons
interested,
remove
a
trustee
who
is
insane
or
otherwise
incapable
of
dis-
charging
his
trust
or
evidently
unsuitable
therefore.
"64 Phil. 353 (1937).
^Ibid, at p. 365, citing Barney v. Saunders, 16 How., 535, 14 Law. Ed., 1047.
"7 SCRA 258 (1962).
EXPRESS TRUSTS
321
The
section
also
recognizes
that
a
trustee,
whether
appointed
by
the
court
or
under
a
written
instrument,
may
resign
his
trust
if
it
appears
to
the
court
that
is
it
proper
to
allow
such
resignation.
3.
The
Beneficiary
a.
Beneficiary
Is
the
Passive
Recipient
of
Benefits
Flowing
from
the
Trust
Under
Article
1440
of
the
New
Civil
Code,
the
"beneficiary"
is
the
person
for
whose
benefit
the
trust
has
been
created.
As
a
general
rule,
the
designation
of
the
beneficiary,
is
a
gratuitous
act,
essentially
an
act
of
donation
by
which
beneficial
or
equitable
title
to
the
trust
property
is
given
to
the
beneficiary.
However,
when
the
trustor
creates
the
trust
by
designating
a
trustee
to
hold
the
trust
properties
for
the
benefit
of
the
trustor,
there
is
no
act
of
beneficence
in
this
case,
but
constitutes
more
as
a
sense
of
estate
planning.
Under
Article
1446
of
the
New
Civil
Code,
acceptance
by
the
beneficiary
of
the
express
trust
is
necessary.
Nevertheless,
if
the
trust
imposes
no
onerous
condition
upon
the
beneficiary,
his
acceptance
shall
be
presumed,
if
there
is
no
proof
to
the
contrary.
The
situation
does
not
cover
the
case
when
the
trustor
designates
himself
as
the
beneficiary.
Article
725
of
the
New
Civil
Code
defines
donation
as
"an
act
of
liberality
whereby
a
person
disposes
gratuitously
of
a
thing
or
right
in
favor
of
another,
who
accepts
it."
Since
a
person
cannot
be
compelled
to
accept
the
generosity
of
another,
it
is
provided
under
Article
1446
that
"Acceptance
by
the
beneficiary
is
necessary."
Although
the
Law
on
Donations
provides
for
solemnities
for
the
act
of
donation
and
its
acceptance,
it
has
been
held
in
Cristobal
v.
Gomez,
that
the
acceptance
by
the
beneficiary
of
gratuitous
express
trust
is
not
subject
to
the
rules
for
the
formalities
of
donations.
"50 Phil. 810 (1927).
322
NON-CORPORATE MEDIA OF DOING BUSINESS
Parenthetically,
under
Article
748
of
the
New
Civil
Code,
it
is
provided
that
"the
donation
of
a
movable
may
be
made
orally
or
in
writing.
An
oral
donation
requires
the
simultaneous
delivery
of
the
thing
or
the
document
representing
the
right
donated.
If
the
value
of
he
personal
property
donated
exceeds
five
thousand
pesos,
the
donation
and
the
acceptance
shall
be
made
in
writing.
Otherwise,
the
donation
shall
be
void."
Under
Article
749
of
the
New
Civil
Code,
"in
order
that
the
donation
of
an
immovable
may
be
valid,
it
must
be
made
in
a
public
document,
specifying
therein
the
property
donated
and
the
value
of
the
charges
which
the
donee
must
satisfy.
The
acceptance
may
be
made
in
the
same
deed
of
donation
or
in
a
separate
public
document,
but
it
shall
not
take
effect
unless
it
is
done
during
the
lifetime
of
the
donor.
If
the
acceptance
is
made
in
a
separate
instrument,
the
donor
shall
be
notified
thereof
in
an
authentic
form,
and
this
step
shall
be
noted
in
both
instruments."
91
De Leon v. Molo-Peckson, relying upon American jurisprudence, held
that "The fact that the beneficiaries [to a donation inter vivos] were not notified
of the existence of the trust or that the latter have not been given an
opportunity to accept it is of no importance, for it is not essential to the
existence of a valid trust and to the right of the beneficiaries to enforce the
same that they had knowledge thereof at the time of its creation. Neither is it
necessary that the beneficiary should consent to the creation of the trust. In fact
it has been held that in case of a voluntary trust the assent of the beneficiary is
not necessary to render it valid because as a general rule acceptance by the
02
beneficiary is presumed."
b. Beneficiary Need Not Have Legal Capacity
It is posited that the beneficiary of an express trust need not have legal
capacity to be constituted as such in a trust agreement, especially so when the
designation is an act of pure liberality.
91
6
SCRA978
(1962).
Ibid,
at
p.
985,
citing
Article
1446,
New
Civil
Code;
Cristobal
v.
Gomez,
50
Phil.
810.
92
EXPRESS TRUSTS
323
Under
Article
738
of
the
New
Civil
Code,
"All
those
who
are
not
specially
disqualified
by
law
therefore
may
accept
donations,"
which
means
that
all
persons
regardless
of
legal
capacity,
may
be
donees
except
only
in
those
specific
cases
where
the
donation
to
them
cannot
be
made.
Article
741
provides
that
minors
and
others
who
cannot
enter
into
a
contract
may
become
donees
but
acceptance
shall
be
done
through
their
parents
or
legal
representatives.
Under
Article
742,
donations
may
even
be
made
to
conceived
and
unborn
children
and
may
be
accepted
by
those
persons
who
would
legally
represent
them
if
they
were
already
born.
In
the
case
of
express
trust,
Article
1446
of
the
New
Civil
Code
provides
that
if
the
trust
imposes
no
onerous
condition
upon
the
beneficiary,
his
acceptance
shall
be
presumed,
if
there
is
no
proof
to
the
contrary.
How EXPRESS TRUST EXTINGUISHED OR TERMINATED
Like any other legal relationship, express trust relationships may be
terminated by reason provided for in the trust instrument itself, or upon grounds
provided for by law or equity.
1. Destruction of the Corpus
When the entire trust estate is loss or destroyed, the trust is extinguished
since the underlying proprietary basis no longer exists to warrant any legal
relationship between the trusted and the beneficiary.
2. Revocation by the Trustor
In a revocable express trust, the trustee may simply invoke the revocation
or termination clause found in the deed of trust thereby revoking the trust and
conveying notice thereof to the trustee. Unless there is reserved power to
revoke, the general rule is that an express trust is irrevocable.
324
NON-CORPORATE MEDIA OF DOING BUSINESS
In De Leon v. Molo-Peckson, the donee-daughters had tried to revoke
the Mutual Agreement they previously executed confirming the desires of the
mother who donated to them that the ten parcels of land donated would be
sold at nominal price to a designated cetui que trust. The Court held that
although "It is true, as appellants contend, that the alleged declaration of trust
was revoked, and having been revoked it cannot be accepted, but the
attempted revocation did not have any legal effect. The rule is that in the
absence of any reservation of the power to revoke a voluntary trust is
irrevocable without the consent of the beneficiary... It cannot be revoked by
the creator alone, nor by the trustee>
3. Achievement of the Objective, or Happening of the Condition, Provided for
in the Trust Instrument
When the trust instrument provides the objective or the condition upon
which the trust shall be extinguished, say when the trust instrument provides
that full ownership in the trust properties shall be consolidated in the person of
the beneficiary once he reaches the age of majority, the happening of the
condition shall terminate the trust.
4. Death or Legal Incapacity of the Trustee
Unless otherwise expressly stipulated in the trust instrument, the death,
civil interdiction, insanity or insolvency of the trustee does not necessarily
terminate the trust. Thus, Tolentino writes:
The principle that equity will no allow a trust to fail for want
of a trustee is clearly established. Where a trust has once been
created and the trustee dies, becomes insane or subject to some
other legal incapacity, or resigns or is
"6 SCRA 978 (1962).
**lbid, at p. 985, citing Allen v. Safe Depolsit and Trust Co., of Balitmore,
7 A.2d 180,177 Md. 26; Fricke v. Weber, C.A.A. Ohio, 145 F.2d 737; Hughes v.
C.I.R., C.C.A. 9,104 F.2d 144; Ewing v. Shannahan, 20 S.W. 1065,113 Mo. 188;
italics supplied.
EXPRESS TRUSTS
325
removed,
the
trust
does
not
fail,
but
a
new
trustee
will
be
appointed.
Such
an
appointment
will
be
made
by
the
property
court
unless
by
the
terms
of
the
trust
other
provision
is
made
for
the
appointment
of
a
successor
trustee.
The
reason
why
a
trust
does
not
fail
for
want
of
a
trustee
is
that
to
permit
it
to
fail
for
this
reason
would
be
contrary
to
the
intention
of
the
trustor
in
creating
the
trust.
The
trustor
is
primarily
interested
in
the
disposition
of
the
beneficial
interest
in
the
property,
and
the
matter
of
its
95
administration
is
a
subsidiary
consideration.
In
Canezo
v.
Rojas,
where
the
daughter
alleged
that
she
had
entrusted
possession
and
title
to
the
property
to
her
father
Crispulo
when
she
left
Mindanao
based
on
either
an
express
trust
or
a
resulting
trust,
the
Supreme
Court
laid
down
the
following
legal
effect
on
the
death
of
the
trustee:
Assuming
that
such
a
relation
existed,
it
terminated
upon
Crispulo's
death
in
1978.
A
trust
terminates
upon
the
death
of
the
trustee
where
the
trust
is
personal
to
the
trustee
in
the
sense
that
the
trustor
intended
no
other
person
to
administer
it.
If
Crispulo
was
indeed
appointed
as
trustee
of
the
property,
it
cannot
be
said
that
such
appointment
was
intedned
to
be
conveyed
to
the
respondents
or
any
of
Cripulo's
other
heirs.
Hence,
after
Crispulo's
death,
the
respondent
had
no
right
to
retain
possession
of
the
property.
At
such
point,
a
constructive
trust
would
be
created
over
the
property
by
operation
of
law.
Where
one
mistakenly
retains
property
which
rightfully
belongs
to
another,
a
constructive
trust
is
97
the
proper
remedial
device
to
correct
the
situation.
5.
Confusion
or
Merger
of
Legal
Title
and
Beneficial
Title
in
the
Same
Person
When
the
trustee
of
an
existing
trust
becomes
the
beneficiary
thereof,
or
vice
versa,
the
trust
relation
is
ipso
jure
extinguished,
95
TOLENTINO,
at
p.
676.
*
S
3
8
S
C
R
A
2
4
2
326
NON-CORPORATE MEDIA OF DOING BUSINESS
for it is difficult to see how a person can owe fiduciary duties to himself.
6.
Breach
of
Trust
When
a
trustee
breaches
his
duty
of
loyalty,
it
would
constitute
legal
basis
by
which
to
terminate
the
trust.
In
Martinez
v.
Granothe
Court
held
that
when
a
person
administering
the
property
in
the
character
of
a
trustee
inconsistently
assumes
to
be
holding
it
in
his
own
right,
this
operates
as
a
renunciation
of
the
trust
and
the
persons
interested
as
beneficiaries
in
the
property
are
entitled
to
maintain
an
action
to
declare
their
right
and
remove
the
unfaithful
trustee.
0O0
19)
"42 Phil. 35 (1921).
CHAPTER
3
IMPLIED
TRUSTS
NATURE AND TYPES OF IMPLIED TRUSTS
ART.
1441.
Trusts
are
either
express
or
implied.
Express
trusts
are
created
by
the
intention
of
the
trustor
or
of
the
parties.
Implied
trusts
come
into
being
by
operation
of
law.
ART.
1442.
The
principles
of
the
general
law
of
trusts,
insofar
as
they
are
not
in
conflict
with
this
[Civil]
Code,
the
Code
of
Commerce,
the
Rules
of
Court
and
special
laws
are
hereby
adopted.
According to the Report of the Code Commission, the underlying doctrine
of implied trusts is founded on equity, derived from American decisions under a
legal system where injustice would result in which the legal estate or title were
1
to prevail over the equitable right of the beneficiary. In essence, the system of
implied trusts applies in situations where the property that ought to be owned
and enjoyed by one party has ended up in the hands of or registered with
another party, and equity demands that the latter ought to reconvey such
property to the former, or at least acknowledge formally that he holds it for the
benefit of the former.
'Report of the Code Commission, p.
60.
327
328
NON-CORPORATE MEDIA OF DOING BUSINESS
Morales v. Court of Appeals, gave the rationale for resulting trusts as
being "based on the equitable doctrine that valuable consideration and not
legal title determines the equitable title or interest and are presumed to always
to have been contemplated by the parties. They arise from the nature or
circumstances of the consideration involved in a transaction whereby one
person thereby becomes invested with legal title but is obligation in equity to
3
hold his legal title for the benefit of another."
Under Article 1441 of the New Civil Code, as distinguished from express
trust which are "created by the intention of the trustor or of the parties,"
implied trusts "come into being by operation of law," i.e., that it is the law by
application of equity principles that mandates the application of the implied
trust principles. Morales defined implied trusts as those that "come into being
by operation of law, either through implication of an intention to create a trust
as a matter of law or through the imposition of the trust irrespective of, and
even contrary to, any such intention."*
All the foregoing may imply that implied trusts are essentially creatures
of the law, and do not arise from the intentions of the parties bound by the
trust relationship. Although such an implication may be true of constructive
trusts, it does not apply to resulting trusts, as explained hereunder.
1. The Two Types of Implied Trusts
There are two types of implied trusts recognized under the NeW Civil
Code, namely:
(a) Resulting Trusts; and
(b) Constructive Trusts.
2
7
*lbid,
at
p.
298.
4
S
C
R
A
2
8
2
(
IMPLIED TRUSTS
329
In Ramos v. Ramos,* the Supreme Court defined and characterized
implied trusts as "those which, without being expressed, are deducible from the
nature of the transactions as matters of intent, or which are superinduced on
the transaction by operation of law as matters of equity, independently of the
6
particular intention of the parties (89 C.J.S. 724)." Therefore, implied trusts
which are "deductible from the nature of the transactions as matters of intent,"
are referred to as resulting trusts; and those which are superinduced "by
operation of law as matters of equity" are constructive trusts.
7
On the other hand, Morales v. Court of Appeals, defined constructive
trusts as those which "are created by the construction of equity in order to
satisfy the demands of justice and prevent unjust enrichment. They arise
contrary to intention against one who, by fraud, duress or abuse of confidence,
obtains or holds the legal right to property which he ought not, in equity and
8
good conscience, to hold."
6
In
Philippine
National
Bank
v.
Court
of
Appeals,
the
Court
held
that
"the
framers
of
our
present
Civil
Code
incorporated
implied
trusts,
which
includes
constructive
trusts,
on
top
of
quasi-
contracts,
both
of
which
embody
the
10
principle
of
equity
above
strict
legalism."
2.
Implied
Trusts
Distinguished
from
Express
Trusts
Unlike
an
express
trust,
which
essentially
proceeds
from
a
clear
or
direct
contractual
intention
to
dispose
of
trust
property
to
a
trustee
for
the
benefit
of
the
beneficiary,
in
a
resulting
trust,
61 SCRA 284 (1974).
lbid, at p. 298; italics supplied. Reiterated in Salao v. Salao, 70 SCRA 65, 80
(1976).
7
274 SCRA 282 (1997).
*lbid, at p. 298, citing Huang v. Court of Appeals, 236 SCRA420 (1994); Vda.
De Esconde v. Court of Appeals, 253 SCRA 66 (1996). Reiterated in Cafiezo v.
Rojas, 538 SCRA 242 (2007); Perialberv. Ramos, 577 SCRA 509 (2009).
B
217 SCRA 347 (1993).
"Ibid, at p. 356, italics supplied.
6
330
NON-CORPORATE MEDIA OF DOING BUSINESS
no
such
intention
is
apparent,
but
merely
presumed
by
law
from
the
nature
of
the
transaction.
In
essence,
express
trusts
are
creatures
of
the
parties'
express
intent
usually
manifested
by
devolving
naked
or
legal
title
to
the
trustee
of
the
res
or
the
estate
property,
whereas
resulting
trusts
are
implied
by
law
from
the
implied
intentions
of
the
parties
as
derived
from
the
nature
of
their
transactions.
When
it
comes
to
constructive
trusts,
no
such
intention
at
all
is
drawn
from
the
nature
of
the
transaction,
and
the
purpose
of
the
law
in
imbuing
the
relationship
with
trust
characteristics
is
to
achieve
equity
demanded
by
the
situation.
In
fact,
Ramos
holds
that
constructive
trust
may
be
constituted
by
force
of
law
"independently
of
the
particular
intentions
of
the
parties."
Express
trusts
over
immovables
can
be
proved
by
parol
evidence;
whereas,
in
both
types
of
implied
trusts,
they
may
be
proved
and
enforced
by
parol
evidence.
In
constructive
trust,
since
the
trust
relationship
is
imposed
by
law,
there
is
really
no
fiduciary
relationship
existing
between
the
purported
trustee
and
the
purported
cestui
que
trust
in
constructive
trusts;
whereas,
in
both
express
trusts
and
resulting
trusts,
the
trustee
assumed
fiduciary
duties
to
the
cestui
que
trust.
Consequently,
while
express
trusts
(and
resulting
trusts)
may
be
subject
to
laches
or
defenses
of
prescription
only
when
there
has
been
a
previous
clear
repudiation
by
the
trustee
made
known
to
the
beneficiary;
in
constructive
trusts,
no
such
repudiation
need
be
made
for
prescription
to
begin
to
run.
NATURE OF EVIDENCE REQUIRED TO PROVE IMPLIED TRUSTS
ART. 1457. An implied trust may be proved by oral evidence.
IMPLIED TRUSTS
331
The
discussions
hereunder
are
based
on
the
legal
premise
that
trusts
relationships,
whether
express
or
implied,
are
built
on
existing
property
relations
and
that
at
the
center
of
the
legal
issue
involves
property
that
has
been
transferred
in
the
name
of,
or
in
ownership
to,
the
purported
trustee.
Issues
pertaining
to
the
enforceability
of
trusts
relations,
and
the
nature
of
the
evidence
that
is
legally
allowed
to
prove
such
trust
relations,
are
pursued
only
11
when
such
property
relations
are
in
place.
Morales
v.
Court
of
Appeals,
has
in
fact
considered
as
one
of
the
essential
characteristics
of
every
trust
that
"it
is
a
relationship
with
respect
to
property,
not
one
involving
merely
personal
12
duties."
Such
a
legal
premise
follows
the
principle
that
trusts
contracts
{i.e.,
express
and
resulting
trusts)
have
the
essential
characteristic
of
being
real,
as
distinguished
from
that
of
being
consensual
or
formal.
Under
the
old
Civil
Code,
the
syllabus
appearing
at
the
beginning
of
the
13
decision
in
Gamboa
v.
Gamboa,
affirmed
the
nature
of
the
proof
that
must
be
satisfied
in
order
to
prove
implied
trusts,
thus
1.
TRUSTS;
PROOF
INSUFFICIENT
TO
SHOW
TITLE
OF
LAND
TO
HAVE
BEEN
HELD
IN
TRUST.
U
person
who
has
held
legal
title
to
land,
coupled
with
possession
and
beneficial
use
of
the
property
for
more
than
ten
years,
will
not
be
declared
to
have
been
holding
such
title
as
trustee
for
himself
and
his
brothers
and
sisters
upon
doubtful
oral
proof
tending
to
show
a
recognition
by
such
owner
of
the
alleged
rights
of
his
brothers
and
sisters
to
share
in
the
produce
of
the
14
land.
Under
Article
1457
of
the
New
Civil
Code,
an
implied
trust,
whether
resulting
or
constructive,
may
be
proved
by
oral
evidence,
without
distinction
on
whether
it
involves
a
movable
or
an
immovable
property.
Article
1457
therefore
contains
the
rationale
for
implied
trusts
as
reported
by
the
Code
Commission
11
274 SCRA 282
(1997).
/b/'d, at p. 298.
,3
52 Phil. 503
"Ibid, at pp.
(1928).
503-504.
12
NON-CORPORATE MEDIA OF DOING BUSINESS
332
that "the underlying doctrine of implied trusts is founded on equity . . . under a
legal system where injustice would result in which the legal estate or title were
to prevail over the equitable right of the beneficiary." This is in contrast to
Article 1443 of the New Civil Code, which provides that an express trust over
immovables or any interest therein can only be constituted in writing, and
cannot be proved by parol evidence; and which embodies the public policy that
when it comes to registered land, generally parol evidence cannot derogate the
title of the registered owner.
In Salao v. Salao where the Court refused to enforce the claims of the
plaintiffs under a cause of action based on an express trust over immovable
property unsupported by a written instrument, next proceeded to address the
issue "Is plaintiffs' massive oral evidence sufficient to prove an implied trust,
6
resulting or constructive, regarding the two fishponds?"' The Court held that
indeed if the principles of express trust cannot be applied for lack of written
evidence to sustain a trust over immovables, then the oral evidence can be
accepted by the courts to support a claim of implied trusts.
However, Salao also held that although oral evidence may be adduced to
prove an implied trust over immovables, in order to be recognized such oral
evidence must measure up to the yardstick that a trust must be proven by clear,
satisfactory and convincing evidence, and cannot rest on vague and uncertain
17
evidence or on loose, equivocal or indefinite declarations. The Court quoted
the following authorities
Trusts; Trust and trustee; establishment of trust by parol
evidence; certainty of proof. - Where a trust is to be established by
oral proof, the testimony supporting it must be sufficiently strong
to prove the right of the alleged beneficiary with as much certainty
as if a document proving the trust were shown. A trust cannot be
established, contrary to the recitals of a Torrens title, upon vague
and inconclusive proof." (Syllabus, Suarez vs. Tirambulo, 59 Phil.
303).
15
70
SCRA
65
(1976).
"Ibid,
at
p.
81.
"Ibid,
at
p.
83,
citing
De
Leon
v.
Molo-Peckson,
116
Phil.
1267
(1962).
IMPLIED TRUSTS
333
j "Trust evidence needed to establish trust on parol ' testimony. - In
order to establish a trust in real property by parol evidence, the
proof should be as fully convincing as if the act giving rise to the
trust obligation were proven by an authentic document. Such a
trust cannot be established upon testimony consisting in large part
of insecure surmises based on ancient hearsay." (Syllabus, Santa
18
Juana vs. Del Rosario, 50 Phil. 110).
In Sa/ao, the Court noted its earlier decision in Yumul v. Rivera and
Dizon, where it held that when it comes to registered land, "A certificate of
title is conclusive evidence of the ownership of the land referred to therein (sec.
47, Act No. 496). x x x But a strong presumption exists that Torrens
certificates of title have been regularly issued and are valid and, in order to
maintain an action in personam for reconveyance... proof as to the fiduciary
20
relation of the parties and of the breach of trust must be clear and convincing."
21
It also referred to its decision in Legarda and Prieto v. Saleeby, where it held
that the purpose of the Torrens system is to quiet title to land: "Once a title is
registered, the owner may rest secure, without the necessity of waiting in the
portals of the court, or sitting in the mirador de su casa, to avoid the possibility
22
of losing his land."
The Court then concluded in Sa/ao that "There was no resulting trust in
this case because there never was any intention on the part of the parties
involved to create any trust. There was [also] no constructive trust because the
registration of the two fishponds ... was not vitiated by fraud or mistake. This is
not a case where to satisfy the demands of justice it is necessary to consider
23
t h e . . . fishponds as being held in trust."
The Sa/ao doctrines therefore show the close kinship between express
trusts and resulting trusts and that treatment
lbid, at pp. 83-84.
19
64 Phil. 13(1937).
*>lbid, at pp. 17-18.
21
31 Phil. 590,
a
64 Phil. 13, at pp.
593(1915).
23
83-
84. at p. 84.
lbid,
334
NON-CORPORATE MEDIA OF DOING BUSINESS
can
move
from
one
to
the
other
in
order
to
achieve
the
ends
of
equity.
2
In Municipality of Victorias v. Court of Appeals, * it was held that the
existence of public records other than the Torrens title indicating a proper
description of the land, and not the technical description thereof, and clearly
indicating the intention to create a trust, was considered sufficient proof to
support the claim of the cestui que trust.
25
In Ong Ching Po v. Court of Appeals, where the Court held that
although an implied trust may be proved orally, "the evidence to prove it must
be trustworthy and received by the courts with extreme caution, and should not
26
be made to rest on loose, equivocal and indefinite declarations."
Lately, in Booc v. Five Stars Marketing Co., Inc.," the Court reiterated the
26
doctrine it laid down in Morales v. Court of Appeals, and Tigno v. Court of
29
Appeals, that "As a rule, the burden of proving the existence of a trust is on
the party asserting its existence and such proof must be clear and satisfactorily
show the existence of the trust and its elements." Booc held that an affidavit of
the fact of resulting trust against contrary affidavits presented by other
witnesses, as well as the transfer certificates of title and tax declarations to the
contrary, do not support clearly the existence of trust.
The conclusion one gets from reading the foregoing decisions is that,
faced with a Torrens title that shows no trust relationship assumed by the
registered owner, and there is no other written evidence to show an intention
to create a trust, then generally oral evidence is unavailing to overcome the
registered title of the purported trustee who denies the existence of any trust.
The reliable evidence to indicate a resulting trust
24
149
SCRA
32
(1987).
239
SCRA
341
lbid,
at
p.
347.
(1994).
"538
SCRA
42
28
(2007).
274
SCRA
282
^280
SCRA
262
(1997).
(1997).
25
IMPLIED TRUSTS
335
relationship
against
a
clean
title
registered
in
the
name
of
the
purported
trustee
can
only
be
a
written
document
signed
by
said
purported
trustee
acknowledging
that
he
holds
title
for
the
benefit
of
another
party,
or
from
the
nature
of
the
transaction
duly
proven
indicating
how
title
was
acquired
by
the
registered
owner,
and
shows
that
there
was
a
clear
agreement
or
intention
to
hold
it
for
the
benefit
of
another
person.
Perhaps
the
best
way
to
end
this
section
is
to
invoke
the
decision
in
30
Cahezo
v.
Rojas,
which
held
that
While
implied
trust
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.
Trustworthy
evidence
is
required
because
oral
evidence
can
easily
be
fabricated.
In
order
to
establish
an
implied
trust
in
real
property
by
parol
evidence,
the
proof
should
be
as
fully
convincing
as
if
the
acts
giving
rise
to
the
trust
obligation
are
proven
by
an
authentic
document.
An
implied
trust,
in
fine,
cannot
be
established
upon
vague
and
inconclusive
proof.
In
the
present
case,
there
was
no
evidence
of
any
transaction
between
the
petitioner
and
her
father
form
which
it
31
can
be
inferred
that
a
resulting
trust
was
intended.
RESULTING
TRUSTS
32
In
Ramos
v.
Ramos,
the
Court
held
that
'"A
resulting
trust
is
broadly
defined
as
a
trust
which
is
raised
or
created
by
the
act
or
construction
of
law,
but
in
its
more
restricted
sense
it
is
a
trust
raised
by
implication
of
law
and
presumed
always
to
have
been
contemplated
by
the
parties,
the
intention
as
to
which
is
to
be
found
in
the
nature
of
their
transaction,
but
not
expressed
in
the
deed
or
33
instrument
of
conveyance.
Examples
of
resulting
trusts
are
found
in
article
1448,
[1449,
and]
1455
of
the
Civil
Code>
538 SCRA 242 (2007).
"Ibid, at p. 256. Reiterated Salao v. Salao, 70 SCRA 65, 80-81 (1976)
M
61 SCRA 284 (1974).
^Ibid, quoting from 89 C.J.S. 725; italics supplied.
34
Ibid,at p. 298.
336
NON-CORPORATE MEDIA OF DOING BUSINESS
1. Burden of Proof in Resulting Trusts
The essence of resulting trusts is the implication drawn out by law from
the nature of the transactions covered; and necessarily, the enumerated cases,
being merely implied trust from the law's perceived intentions of the parties,
constitute disputable presumptions of trust, and evidence may thus be
adduced to show that no trust was intended nor contemplated by the parties.
Correctly interpreted, since it is the law that imbues certain transactions
with the characteristics of resulting trusts, the cestui que trust need only prove
the facts that would constitute the covered transaction and the legal
presumption that there exists a resulting trust would arise from the very
nature of the transaction; thereafter, the burden of proof would be on the part
of the purported trustee to show that no such trust relationship was intended.
2. Blurring of the Distinctions Between Express Trusts and Resulting
Trusts
If we go by the jurisprudential definition of resulting trusts, the
presumed intention of the parties bounded by the trust relationship is drawn
from the nature of the transaction, and not from the words, acts or omissions
of the parties. Thus, when the intention is derived, not only from the nature of
the transactions, but from the verbal expressions of the parties, then the
relationship is one of express trust, not resulting trust, since under Article 1441
of the Civil Code, express trust are "created by the intention of the trustor or of
the parties." Only recently, in Canezo v. Rojas,the Court characterized express
trusts as "those which are created by the direct and positive acts of the parties,
by some writing or deed, or will, or by words evincing an intention to create a
36
trust," as distinguished from implied
35538 SCRA 242 (2007).
^Ibid, at pp. 251-252, italics supplied, citing Buan Vda. De Esconde v. Court
of Appeals, 253 SCRA 66, 73 (1996).
IMPLIED TRUSTS
337
trusts
(which
would
include
resulting
trusts)
"which,
without
being
expressed,
are
deducible
from
the
nature
of
the
transaction
as
matters
of
intent
or,
independently,
of
the
particular
intention
of
the
parties,
as
being
superinduced
37
on
the
transaction
by
operation
of
law
basically
by
reason
of
equity."
Yet,
as
shown
by
the
discussions
hereunder,
the
rules
on
implied
trusts
(particularly
resulting
trusts)
have
been
made
to
apply
to
situations
which
are
considered
as
express
trusts
because
the
intentions
of
the
parties
are
deducible
"by
the
direct
and
positive
acts
of
the
parties,
by
some
writing
or
deed,
or
will,
or
by
words
evincing
an
intention
to
create
a
trust"
Discussions
on
this
issue
will
start
with
the
decision
in
the
early
case
of
M
Martinez
v.
Grano,
were
the
facts
showed
that
previously
the
heirs
of
the
deceased
spouses
Martinez
had
sold
under
a
sale
a
retro
the
parcels
of
land
inherited
from
the
deceased
spouses
in
order
to
cover
the
debts
of
the
estates;
and
that
in
order
to
expedite
the
obtaining
of
a
large
loan
from
a
savings
association
and
to
prevent
the
consolidation
of
title
to
the
buyer
a
retro,
the
heirs
had
agreed
to
allow
one
of
their
own
to
effect
redemption
and
deal
directly
with
the
savings
association.
Martinez
decision
narrated
that
"The
person
chosen
as
the
repository
of
39
this
trust
was
Clemencia
Grano,"
who
executed
a
notarial
declaration
"in
which
she
states,
among
other
things,
that
she
had
intervened
in
the
aforementioned
40
transactions
in
behalf
of
all
the
Martinez
heirs."
But
"[i]n
consideration
of
the
responsibility
thus
to
be
assumed
by
Clemencia
Grano,
as
borrower,
all
of
the
adult
Martinez
heirs
personally
and
the
guardians
of
the
minor
heirs
executed
a
document
jointly
with
Clemencia
Grano
.
.
.
in
which
it
was
agreed
that
Clemencia
Grano
should
have
exclusive
possession
of
all
the
land
pertaining
to
the
Martinez
estate
and
administer
the
same
for
the
purpose
of
raising
the
37
Ibid,
at
p.
252.
42
Phil.
35
^Ibid,
at
p.
39.
(1921).
"Ibid,
at
p.
40.
M
338
NON-CORPORATE MEDIA OF DOING BUSINESS
41
necessary revenue to meet her obligations" to the lending savings association.
Years later, Clemencia Grano asserted that she was the absolute owner of all
the property obtained by her from the original buyer a retro and denied that
the other Martinez heirs had any interest whatsoever therein.
The Supreme Court held in Martinez that the properties redeemed from
the buyer a retro and mortgaged with the savings associations were "held in
trust by the said Clemencia Grano for the benefit of the said heirs . . . subject,
however, to the mortgage in favor" of the savings association. The Court did not
characterize what type of trust was created by the transaction since the decision
was rendered under the old Civil Code, but it held that the Martinez heirs were
entitled to accounting from the said Clemencia Grano of all the proceeds
obtained from her administration of the properties, that any amount
appropriated by her for her own benefit and not applied to the payment of the
mortgage loan would have to be reimbursed; and that "it being manifestly
improper that a person in the hostile attitude occupied by Clemencia Grano
towards the Martinez heirs should be allowed to administer the property in
question, it results that the receivership [previously ordered by the trial court]
42
should be reinstated."
Martinez is a prime example of the application of trusts principles under
the old Civil Code, purely based on equity principles and without statutory
support.
The principle was reiterated under the aegis of the New Civil Code in
Heirs of Candelaria v. Romerowhere the proven facts showed that one brother
(Emilio) had taken over the installment payments over a purchased subdivision
lot of another brother (Lucas) who had fallen ill, until the whole purchase price
had been fully satisfied under the arrangement "that although Lucas Candelaria
had no more interest over the lot, the subsequent payments made by Emilio
Candelaria until fully paid were
"ibid,
at
p.
40.
A
2
l
b
i
d
,
a
t
p
.
IMPLIED TRUSTS
339
made
in
the
name
of
Lucas
Candelaria,
with
the
understanding
that
the
necessary
documents
of
transfer
will
be
made
later,
the
reason
that
the
44
transaction
being
from
brother
to
brother." Years
later,
when
the
certificate
of
title
was
issued
in
the
name
of
Lucas,
his
heirs
refused
to
reconvey
the
property
to
the
heirs
of
Emilio.
In
an
action
for
reconveyance
filed
by
the
heirs
of
Emilio,
the
trial
court
dismissed
the
complaint
holding
"that
an
express
and
not
an
implied
trust
was
created
as
may
be
gleaned
from
the
facts
alleged
in
the
complaint,
which
in
unenforceable
without
any
writing,
and
that
since
[the
title]
covering
the
land
in
question
had
been
issued
to
Lucas
Cadelaria
way-back
in
1918
or
38
years
45
before
the
filing
of
the
complaint,
the
action
has
already
prescribed."
On
appeal,
the
Court
held
that
The
trust
alleged
to
have
been
created,
in
our
opinion,
is
an
implied
trust
As
held,
in
effect,
by
this
Court
in
the
case
of
Martinez
vs.
Grafio
(42
Phil.,
35),
where
real
property
is
taken
by
a
person
under
an
agreement
to
hold
it
for,
or
convey
it
to
another
or
the
grantor,
a
resulting
or
implied
trust
arises
in
favor
of
the
person
for
whose
benefit
the
property
was
intended.
Such
implied
trust
is
enforceable
even
when
the
agreement
is
not
in
writing,
and
is
not
an
express
trust
which
requires
that
it
be
in
writing
to
be
enforceable.
This
rule,
which
has
been
incorporated
in
the
new
Civil
Code
in
Art.
1453
thereof,
is
founded
upon
equity.
The
rule
is
the
same
in
the
United
States,
particularly
where,
on
the
faith
of
the
agreement
or
understanding,
the
grantee
is
enable
to
gain
an
advantage
in
the
purchase
of
the
property
or
where
,
the
consideration
or
part
thereof
has
been
furnished
by
or
for
such
o t h e r . . . .
It
is
also
the
rule
there
that
an
implied
trust
arises
where
a
person
purchases
land
with
his
own
money
and
takes
a
conveyance
thereof
in
the
name
of
another.
In
such
a
case,
the
property
is
held
on
a
resulting
trust
in
favor
of
the
one
furnishing
the
consideration
for
the
transfer,
unless
a
different
intention
or
understanding
appears.
The
trust
which
results
under
such
circumstances
does
not
arise
"Ibid,
at
p.
5
501.
* lbid,
at
p.
502.
340
NON-CORPORATE MEDIA OF DOING BUSINESS
from
contract
or
agreement
of
the
parties,
but
from
the
facts
and
circumstances,
that
is
to
say,
it
results
because
of
equity
and
arises
46
by
implication
or
operation
of
law.
Finding
that
a
resulting
trust
was
duly
constituted,
the
Court
applied
the
principle
that
"Continuous
recognition
of
a
resulting
trust,
however,
precludes
any
defense
of
laches
in
a
suit
to
declare
and
enforce
the
t r u s t . . . .
The
beneficiary
of
a
resulting
trust
may,
therefore,
without
prejudice
to
his
right
to
enforce
the
trust,
prefer
the
trust
to
persist
and
demand
a
conveyance
from
47
the
trustee."
The
Court
also
ruled
that
"It
bejng
alleged
in
the
complaint
that
Lucas
held
the
title
to
the
lot
in
question
merely
in
trust
for
Emilio
and
that
this
fact
was
acknowledged
not
only
by
him
but
also
by
his
heirs,
herein
defendants
which
allegation
is
hypothetical^
admitted
we
are
not
prepared
to
rule
that
plaintiffs
action
is
already
barred
by
lapse
of
time.
On
the
contrary,
we
think
the
interest
of
justice
would
be
better
served
if
she
and
her
alleged
co-heirs
were
to
be
given
an
opportunity
to
be
heard
and
allowed
to
present
proof
in
48
support
of
their
claim."
Although
Candelaria
refers
to
the
ruling
in
Martinez
to
have
recognized
the
constitution
of
a
"resulting
trust"
even
though
in
Martinez
the
agreement
was
covered
in
three
notarized
documents,
what
may
be
learned
from
Candelaria
is
that
when
the
arrangement
is
covered
merely
by
verbal
agreement,
the
trust
relationship
constituted
over
immovables
would
then
be
characterized
as
being
a
"resulting
trust"
in
order
to
achieve
equity
and
be
able
to
move
around
the
requirement
under
Article
1443
of
the
Civl
Code
that
"No
express
trusts
concerning
an
immovable
or
any
interest
therein
may
be
proved
by
parol
evidence."
Thus,
in
Candelaria,
having
resolved
that
what
was
constituted
was
a
resulting
trust,
the
Court
directed
the
case
to
be
remanded
to
the
trial
court
to
allow
the
heirs
of
the
cestui
que
trust
to
prove
their
allegations
which
would
include
parol
evidence.
"Ibid, at pp. 502-503; italics
7
supplied.
* lbid, at p. 504.
48
Ibid, at p. 504.
IMPLIED TRUSTS
341
In Padilla v. Court of Appeals* the Court held that "The concept of
implied trusts is that from the facts and circumstances of a given case the
existence of a trust relationship is inferred in order to effect the presumed (in
this case it is even express) intention of the parties or to satisfy the demands of
50
justice or to protect against fraud."
61
Only lately, in Cahezo v. Ro/as, the Court held that
A resulting trust is a species of implied trust that is presumed
always to have been contemplated by the parties, the intention as
to which can be found in the nature of their transaction although
not expressed in a deed or instrument of conveyance. A resulting
trust is based on the equitable doctrine that it is the more valuable
consideration than the legal title that determines the equitable
52
interests in property.
It seems therefore that when the intention of the parties bound by the
trust relationship is found expressed in a deed or instrument, it covers an
express trust; whereas, when the same intention is merely verbal or can be
proved by parol evidence, it may be considered as a resulting trust.
In the chapter on express trusts, the question has been asked whether for
express trust to exist, as distinguished from resulting trust, it is necessary that
naked title is formally registered in the name of the trustee who expressly
assumes fiduciary obligations to an identified beneficiary. The implication is that
a written undertaking by the title holder of a property, especially registered
land, holding the property for the benefit of another only creates a resulting
trust and not an express trust.
The latest decision on the matter, Heirs of Tranquilino Labiste v. Heirs of
53
Jose Labieste, is to the effect that a written
49
53
SCRA168
(1973).
*>lbid,
p.
179.
5
1
5
3
8
S
C
R
A
2
4
2
342
NON-CORPORATE MEDIA OF DOING BUSINESS
undertaking
by
the
registered
owner
to
hold
the
property
for
the
benefit
of
another
would
constitute
an
express
trust,
even
when
title
registered
in
the
name
of
the
purported
trustee
is
full
title.
In
Labiste,
Epifanio
Labiste,
representing
the
heirs
of
Jose
Labiste,
and
his
uncle,
Tranquilino
Labiste,
obtained
joint
registration
as
co-owners
of
a
large
tract
of
land
which
they
bought
from
the
Bureau
of
Lands.
Subsequently,
the
heirs
of
Tranquilino
also
bought
the
one-half
interest
of
the
Jose
heirs
and
took
over
full
possession
of
the
property.
After
the
war,
the
Jose
heirs
filed
a
petition
for
the
reconstitution
of
title
to
the
property
with
a
agreement
with
the
Tranquilino
heirs
that
the
latter's
claims
would
be
litigated
after
the
reconstitution
of
the
title.
The
reconstituted
title
was
issued
over
the
property
in
the
name
of
Epifanio
Labiste
as
representing
the
Jose
heirs,
who
thereafter
refused
to
honor
the
rights
of
the
Tranquilino
heirs.
When
suit
was
filed
seeking
reconveyance
of
the
title
to
the
property
to
the
Tranquilino
heirs,
it
was
ruled
by
the
trial
court
that
the
action
had
prescribed
having
been
filed
beyond
the
10-year
period
from
the
registration
of
title
as
mandated
for
a
resulting
trust.
The
Supreme
Court
ruled
that
the
situation
constituted
an
express
trust,
and
not
a
resulting
trust,
and
that
consequently
"prescription
and
laches
will
run
only
from
the
time
the
express
trust
is
repudiated,"
continuing
that
. . .
The
Court
has
held
that
for
acquisitive
prescription
to
bar
the
action
of
the
beneficiary
against
the
trustee
in
an
express
trust
1
!
for
the
recovery
of
the
property
held
in
trust
it
must
be
shown
that:
(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
known
to
the
cestui
que
trust,
and
(c)
the
evidence
thereon
is
clear
and
conclusive.
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.
The
rule
requires
a
clear
repudiation
of
the
trust
duly
communicated
to
the
beneficiary.
The
only
act
that
can
be
construed
as
repudiation
was
when
IMPLIED TRUSTS
343
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
54
to them.
The Court noted in Labiste that "Under Article 1444 of the Civil Code, 'No
particular words are required for the creation of an express trust, it being
55
sufficient that a trust is clearly intended.'" It therefore concluded, that what
was involved was not an implied trust, but rather an express trust since "The
Affidavit of Epifanio is in the nature of a trust agreement. Epifanio affirmed that
the lot brought in his name was co-owned by him, as one of the heirs of Jose,
and his uncle Tranquilino. And by agreement, each of them has been in
possession of half of the property. Their arrangement was corroborated by the
subdivision plan prepared by Engr. Bunagan and approved by Jose P. Dans,
56
Acting Director of Lands."
57
Compare
the
ruling
in
Labiste,
with
that
in
Cahezo
v.
Rojas, where
the
petitioning
daughter
sought
to
recover
a
parcel
of
land
from
her
stepmother
which
the
latter
inherited
from
the
deceased
husband,
we
find
that
the
Court
seems
undecided
on
what
constitutes
the
real
difference
between
an
express
trust
and
a
resulting
trust
when
it
comes
to
registered
land.
In
Cahezo,
the
daughter
alleged
that
she
was
the
one
who
purchased
the
unregistered
land
from
the
Bureau
of
Lands,
but
that
when
she
had
to
leave
Mindanao,
she
placed
it
in
the
care
of
her
father
who
verbally
agreed
to
hold
title
on
her
behalf.
The
father
eventually
obtained
a
tax
declaration
to
the
land
in
his
name
and
paid
the
real
property
taxes
thereon
also
in
his
name.
After
the
father
died,
when
the
stepmother
took
over
the
title
to
the
land,
the
daughter
sought
a
reconveyance
of
title
to
the
land
on
the
ground
of
a
trust
was
created
thereon
in
her
favor.
The
daughter
executed
a
sworn
statement
to
prove
the
existence
of
54
Ibid;
at
p.
426.
^Ibid,
at
pp.
x
425-
lbid,
4a26.
t
p.
426.
57
538
SCRA
242
(2007).
344
NON-CORPORATE MEDIA OF DOING BUSINESS
j
an
express
trust
or
a
resulting
trust
on
the
theory
that
prescription
or
laches
cannot
be
poised
against
her
claims
on
the
property.
The
Court
ruled
against
the
daughter
as
follows:
It
is
true
that
in
express
trusts
and
resulting
trusts,
a
trustee
cannot
acquire
by
prescription
a
property
entrusted
to
him
unless
58
he
repudiates
the
trust,
x x x .
As
a
rule,
however,
the
burden
of
proving
the
existence
of
a
trust
is
on
the
party
asserting
its
existence,
and
such
proof
must
be
clear
and
satisfactorily
show
the
existence
of
the
trust
and
its
elements _____ Accordingly,
it
was
incumbent
upon
petitioner
[daughter]
to
prove
the
existence
of
the
trust
relationship.
And
petitioner
sadly
failed
to
discharge
that
burden.
The
existence
of
express
trust
concerning
real
property
may
not
be
established
by
parol
evidence.
It
must
be
proven
by
some
writing
or
deed.
In
this
case,
the
only
evidence
to
support
the
claim
that
an
express
trust
existed
between
the
petitioner
and
her
f
father
was
the
self-serving
testimony
of
the
petitioner.
Bare
allegations
do
not
constitute
evidence
adequate
to
support
a
conclusion.
They
are
not
equivalent
to
proof
under
the
Rules
of
59
Court.
The
best
evidence
of
an
express
trust,
apart
from
registration
of
the
land
in
the
name
of
the
trustee,
would
be
a
Deed
of
Trust,
which
describes
the
trust
properties,
and
conveys
naked
or
legal
title
thereto
to
the
trustee
under
terms
and
conditions
that
indicate
the
powers,
duties
and
responsibilities
of
the
trustee
to
the
indicated
beneficiary.
A
deed
of
trusts
is
usually
acknowledged
and
subscribed
by
both
the
trustor
and
the
trustee.
In
Labiste,
where
there
was
no
such
deed
of
trust,
the
Court
allowed
sworn
statements
to
constitute
as
the
written
evidence
to
prove
the
existence
of
an
express
trust;
whereas,
in
Cahezo,
such
sworn
statement
was
deemed
to
be
insufficient
to
prove
either
an
express
or
a
resulting
trust.
The
lesson
learned
from
a
comparison
of
the
Labiste
and
the
Cahezo
rulings
is
that,
mid,
at
p.
252.
mid,
at
p.
253.
IMPLIED TRUSTS
345
outside of a formal deed of trust, written or sworn statements narrating the
purported trust, in order to support the conclusion that there is such a trust
relationship, must contain the signature of "the party sought to be bound" (a
term used for the requisite memorandum under the Statute of Frauds), i.e., the
signature of the trustee, who under any trust relationship, is really the party who
assumes obligations and fiduciary duties relative to the property held in trust.
a. Rules of Prescriptibility of Resulting Trusts
Since a resulting trust is much akin to an express trust under the
consideration that it arises from the presumed or sometimes merely orally
expressed intention of the parties, the Supreme Court has held in Ramos v.
m
Ramos, that the rule of imprescriptibility of an action to recover property held
in express trust, may possible apply to a resulting trust as long as the trustee has
not repudiated the trust.
Therefore, the rules on acquisitive prescription when it comes to resulting
trusts, would be the same rules pertaining to express trusts. The matter is dealt
more in detail in the last chapter of this section on Trusts.
CONSTRUCTIVE
TRUSTS
61
In Diaz v. Gorricho and Aguado, and Carantes v. Court of Appealsthe
Supreme Court characterized constructive trust as one "which is imposed by law
... [and] there is neither promise nor fiduciary relations; the so-called trustee
does not recognize any trust and has no intent to hold the property for the
beneficiary."
63
In Geronimo and Isidoro v. Nava and Aquino, a constructive trust was
held to have arisen upon a trial court's decision becoming final and executory
which held that defendants-
"61 SCRA 284 (1974).
103 Phil. 261, 266
276 SCRA 514, 524
(1958).
ra
(1977).
105 Phil. 145 (1959).
61
346
NON-CORPORATE MEDIA OF DOING BUSINESS
spouses' right to redeem the property in litigation and ordered the
plaintiffs-spouses to make the resale, in the sense that although the
plaintiffs-spouses were the registered owners of the property they possessed
only naked title thereto which they were to hold in trust for the
defendants-spouses to redeem, subject to the payment of the redemption
price. However, the Court held in that decision that "In the latter instance of
constructive trust, prescription may apply only where the trustee asserts a right
adverse to that of the cestui que trust, such as, asserting acts of ownership over
64
the property being held in trust," which is contrary to its ruling that in a
constructive trust, since there is really no fiduciary relationship, no act of
repudiation need to be made by the trustee for prescription to run.
Ramos v. Ramos, characterized constructive trust as
" . . . a trust raised by construction of law, or arising by
operation of law. In a more restricted sense and as
contradistinguished from a resulting trust, a constructive trust is a
trust not created by any words, either expressly or impliedly
evincing a direct intention to create a trust, but by the construction
of equity in order to satisfy the demands of justice. It does not arise
68
by agreement or intention, but by operation of law. If a person
obtains legal title to property by fraud or concealment, courts of
equity will impress upon the title a so-called constructive trust in
favor of the defrauded party. A constructive trust is not a trust in
87
the technical sense."
1
1. Distinguishing from Resulting Trusts
Unlike resulting trusts that draw their essence from the perceived
intention of the parties as taken from the structure of
"Ibid,
at
p.
153.
^I
SCRA
284
(1974).
"89
C
J.S.
726-727.
67
Ibid,
at
p.
298-299;
citing
Article
1456
of
the
Civil
Code;
and
Gayondato
v.
Treasurer
of
the
P.I.,
49
Phil.
244
(1926).
The
ruling
has
been
reiterated
in
Salao
v.
Salao,
70
SCRA
65,
81
(1976);
Guy
v.
Court
of
Appeals,
539
SCRA
584
(2007).
IMPLIED TRUSTS
347'
the
transactions
covered,
constructive
trusts
draw
their
essence
from
the
need
to
impose
a
fiduciary
duty
on
a
person
who
takes
title
to
a
property
to
achieve
justice
or
equity
on
behalf
of
another
person
who
would
otherwise
be
adversely
affected
by
the
fact
that
such
title
remains
with,
or
has
been
conveyed
to,
another
person.
In
Philippine
National
Bank
v.
Court
of
Appeals,the
Court
distinguished
an
express
trust
from
the
constructive
trust
in
the
following
manner,
thus
In
analyzing
the
law
on
trust,
it
would
be
instructive
to
refer
to
Anglo-American
jurisprudence
on
the
subject.
Under
American
Law,
a
court
of
equity
does
not
consider
a
constructive
trustee
for
all
purposes
as
though
he
were
in
reality
a
trustee;
although
it
will
force
him
to
return
the
property,
it
will
not
impose
upon
him
the
numerous
fiduciary
obligations
ordinarily
demanded
from
a
trustee
of
an
express
trust.
It
must
be
borne
in
mind
that
in
an
express
trust,
the
trustee
has
active
duties
of
management
while
in
69
a
constructive
trust,
the
duty
is
merely
to
surrender
the
property.
70
In Aznar Brothers Realty Company v. Aying, the Court distinguished a
resulting trust from a constructive trust, as follows
Resulting trusts are based on the equitable doctrine that
valuable consideration and not legal title determines the equitable
title or interest and are presumed always to have been
contemplated by the parties. They arise from the nature of
circumstances of the consideration involved in a transaction
whereby one person thereby becomes invested with legal title but
is obliged in equity to hold his legal title for the benefit of another.
On the other hand, constructive trusts are created by the
construction of equity in order to satisfy the demands of justice
and prevent unjust enrichment. They
2
170458
SCRA
496
7(2005).
S
C
R
A
3
4
7
(
348
NON-CORPORATE MEDIA OF DOING BUSINESS
arise contrary to intention against one who, by fraud, duress
or abuse of confidence, obtains or holds the legal right to
property which he ought not, in equity and good conscience,
71
to hold.
72
The principle was reiterated in Lopez v. Court of Appeals,
where the Court further held that
A resulting trust is presumed to have been contemplated
by the parties, the intention as to which is to be found in
the nature of their transaction but not expressed in the deed
itself. Specific examples of resulting trusts may be found in
the Civil Code, particularly Arts. 1448,1449,1451,1452 and
1453.
A constructive trust is created, not by any word evincing
a direct intention to create a trust, but by operation of law in
order to satisfy the demands of justice and to prevent unjust
enrichment. It is raised by equity in respect of property, which
has been acquired by fraud, or where although acquired
originally without fraud, it is against equity that it should be
retained by the person holding it. Constructive trusts are
73
illustrated in Arts. 1450,1454,1455 and 1456.
7
Lately, in CarHezo v. Rojas, * the Court held that
A constructive trust is one created not by any word
or phrase, either expressly or impliedly, evincing a direct
intention to create a trust, but one which arises in order to
satisfy the demands of justice. It does not come about by
agreement or intention but in the main by operation of law,
construed as against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which
75
he ought not, in equity and good conscience, to hold."
"Ibid,
at
pp.
508-5S09.
"574
CRA
26
n
lbid,
at
p.
27.
(2008).
74
538
SCRA
242
7S
lbid,
at
p.
258.
(2007).
IMPLIED TRUSTS
349'
2. Constructive Trusts Similar in Purpose to the Quasi-Contracts of
Solutio Indebiti
It is quite interesting to note that in Philippine National Bank v. Court of
16
Appeals, the Supreme Court discussed the similarity in the nature and equity
considerations of constructive trusts and the quasi-contract of solutio indebiti,
thus:
Rarely in this Court confronted with a case calling for the
delineation in broad strokes of the distinctions between such
closely allied concepts as the quasi-contract called "solutio indebiti"
under the venerable Spanish Civil Code and the species of implied
trust denominated "constructive trust," commonly regarded as of
Anglo-American origin. Such a case is the one presented to us now
which has highlighted more of the affinity and less of the
dissimilarity between the two concepts as to lead the legal scholar
into the error of interchanging the two. Presented below are the
factual circumstances that brought into juxtaposition the twin
institutions of the Civil Law quasi-contract and the Anglo- American
77
trust.
In PNB, the drawee-bank had mistakenly credited double payments into
the account of the payee Mata, which it discovered only six years later, at which
time it made a formal demand upon the payee to refund the overpayment.
When the payee did not comply with the demand, the petitioner drawee-bank
filed a collection case "based on a constructive trust under Article 1456 of the
Civil Code, it has a right to recover the said amount it erronenously credited to
78
respondent Mata."
The drawee-bank did not seek to recover based on solutio indebiti since
under Article 1145(2) of the Civil Code, since it has exceed the statute of
limitation of six (6) years. The trial court rendered judgment dismissing the
complaint ruling that "the instant case falls squarely under Article 2154 on
solutio indebiti
re
217 SCRA 347
(1993).
Ibid, at p. 350.
n
lbid, at p. 351.
77
NON-CORPORATE MEDIA OF DOING BUSINESS
350
and
not
under
Article
1456
on
constructive
trust.
In
affirming
the
lower
court,
the
appellate
court
added
in
its
opinion
that
under
Article
2154
on
solutio
indebiti,
the
person
who
makes
the
payment
is
one
who
commits
the
mistake
79
vis--vis
the
recipient
who
is
unaware
of
such
a
mistake."
The
Court
noted
that
"Petitioner
[drawee-bank]
naturally
opts
for
an
interpretation
under
constructive
trust
as
its
action
.
.
.
can
still
prosper
[i.e,
implied
trust],
as
it
is
well
within
the
prescriptive
period
often
(10)
years
as
80
provided
by
Article
1144,
paragraph
2
of
the
Civil
Code."
In
contrasting
an
express
trust
from
an
implied
trust,
the
Court
held
in
PNB
A
deeper
analysis
of
Article
1456
reveals
that
it
is
not
a
trust
in
the
technical
sense
for
in
a
typical
trust,
confidence
is
reposed
in
one
person
who
is
name
a
trustee
for
the
benefit
of
another
who
is
called
the
cestui
qui
trust,
respecting
property
which
is
held
by
the
trustee
for
the
benefit
of
the
cestui
qui
trust
A
constructive
trust,
unlike
an
express
trust,
does
not
emanate
from,
or
generate
a
fiduciary
relation.
While
in
an
express
trust,
a
beneficiary
and
a
trustee
are
linked
by
confidential
or
fiduciary
relations,
in
a
constructive
trust,
there
is
neither
a
promise
nor
any
fiduciary
relation
to
speak
of
and
the
so-called
trustee
neither
accepts
any
81
trust
nor
intends
holding
the
property
for
the
beneficiary.
x x x
In
analyzing
the
law
on
trust,
it
would
be
instructive
to
refer
to
Anglo-American
jurisprudence
on
the
subject.
Under
American
Law,
a
court
of
equity
does
not
consider
a
constructive
trustee
for
all
purposes
as
though
he
were
in
reality
a
trustee;
although
it
will
force
him
to
return
the
'
property,
it
will
not
impose
upon
him
the
numerous
fiduciary
obligations
ordinarily
demanded
from
a
trustee
of
an
express
trust.
It
must
be
borne
in
mind
that
in
an
express
trust,
the
trustee
has
active
duties
of
management
while
in
a
constructive
trust,
the
duty
is
merely
to
surrender
the
property.
lbid,
at
p.
351.
*lbid,
at
p.
352.
"Ibid,
at
pp.
353-354.
IMPLIED TRUSTS
351'
Still applying American case law, quasi-contractual obligations
give rise to a personal liability ordinarily enforceable by an action at
law, while constructive trusts are enforceable by a proceeding in
equity to compel the defendant to surrender specific property. To
82
be sure, the distinction is more procedural than substantive.
In drawing the parallelism between solutio indebitiand trusts, the Court
noted that "While the principle of undue enrichment or solutio indebiti, is not
new, having been incorporated in the subject on quasi-contracts in Title XVI of
Book IV of the Spa-nish Civil C o d e . . . the chapter on Trusts is fairly recent,
having been introduced by the Code Commission in 1949. Although the concept
of trusts is nowhere to be found in the Spanish Civil Code, the framers of our
present Civil Code incorporated implied trusts, which include constructive trusts,
on top of quasi-contracts, both of which embody the principle of equity above
strict legalism> In addition, the Court held
Further reflection on these concepts reveals that constructive
"trust" is as much a misnomer as a "quasi-contract", so far
removed are they from trusts and contracts proper, respectively. In
the case of a constructive trust, as in the case of quasi-contract, a
relationship is "forced" by operation of law upon the parties, not
because of any intention on their part but in order to prevent
unjust enrichment, thus giving rise to certain obligations not within
64
the contemplation of the parties.
In ruling that the drawee-bank had a right to invoke the principles of
constructive trust under Article 1456 of the Civil Code, the Court held that "We
agree with petitioner's stand that under Article 1456, the law does not make any
distinction since mutual mistake is a possibility on either side on the side of
either the grantor or the grantee. Thus, it was error to conclude that in a
constructive trust, only the person obtaining the property
v/bid,
at
p.
356.
^Ibid,
at
pp.
355-356,
italics
64
supplied.
Ibid;
at
p.
356.
352
NON-CORPORATE MEDIA OF DOING BUSINESS
commits
a
mistake.
This
is
because
it
is
also
possible
that
a
grantor,
like
PNB
in
85
the
case
at
hand,
may
commit
the
mistake." Nonetheless,
the
drawee-bank
lost
the
case
on
the
ground
of
laches.
IMPLIED TRUSTS PARTICULARLY CONSTITUTED BY LAW
ART. 1445. The enumeration of the following cases of implied
trust does not exclude others established by the general law of trust,
but the limitation laid down in Article 1442 shall be applicable.
Article
1447
of
the
Civil
Code
expressly
provides
that
the
enumeration
in
the
subsequent
articles
of
the
cases
of
implied
trust
does
not
exclude
others
established
by
the
general
law
of
trust,
but
that
the
limitation
laid
down
in
Article
1442
shall
be
applicable,
i.e.,
so
long
as
those
principles
do
not
conflict
with
the
Civil
Code,
the
Code
of
Commerce,
the
Rules
of
Court
and
special
laws.
The
discussions
in
this
section
would
ultimately
show
that
strictly
speaking
the
enumerated
implied
trusts
are
essentially
resulting
trusts
(Articles
1448
to
1455),
and
that
the
only
true
constructive
trusts
are
those
covered
by
Article
1456,
which
actually
embodies
the
general
principle
for
constructive
trusts.
1.
Purchase
of
Property
Where
Title
Placed
in
One
Person,
But
Price
Paid
by
Another
Person
ART. 1448. There is an implied trust when prop-
erty is sold, and the legal estate is granted to one
bid, at p. 357.
IMPLIED TRUSTS
353'
party but the price is paid by another for the pur-
pose of having the beneficial interest of the prop-
erty. The former is the trustee, while the latter is the
beneficiary.
However, if the person to whom the title is
conveyed is a child, legitimate or illegitimate, of the
one paying the price of the sale, no trust is implied
by law, it being disputably presumed that there is a
gift in favor of the child.
Under
Article
1448
of
the
New
Civil
Code,
there
is
an
implied
trust
when
property
is
bought,
and
the
legal
estate
is
granted
to
one
party
but
the
price
is
paid
by
another
for
the
purpose
of
having
the
beneficial
interest
of
the
property.
The
person
in
whose
name
the
property
is
registered
is
the
trustee,
while
the
person
who
paid
for
the
price
shall
be
the
beneficiary.
The
presumption
of
M
resulting
trust
arises
from
the
truism
expressed
in
Uy
Aloe
v.
Cho
Jan
Jing,
that
one
of
who
pays
for
something
usually
does
so
for
his
own
benefit.
Truly,
Article
1448
covers
a
resulting
trust
that
bases
itself
from
the
implied
intentions
of
the
trustor-beneficiary
and
the
acceptance
of
the
obligation
by
the
trustee
who
is
fully
aware
that
property
is
registered
in
his
87
name
for
which
he
never
paid
the
price.
66
In Morales v. Court of Appeals, the Court referred to the implied trust
covered under Article 1448 as "purchase money resulting trust\ thus:
The trust is created in order to effectuate what the law
presumes to have been the intention of the parties in
8619 Phil. 202 (1911).
67
See Ramos v. Ramos, 61 SCRA 284 (1974); Philippine National Bank v.
Court of Appeals, 217 SCRA 347 (1993); and Lopez v. Court of Appeals, 574
SCRA 26 (2008).
B8
274 SCRA 282 (1997).
354
NON-CORPORATE MEDIA OF DOING BUSINESS
the
circumstances
that
the
person
to
whom
the
land
was
conveyed
holds
it
as
trustee
for
the
person
who
supplied
the
purchase
89
money.
The
reason
why
the
situation
described
under
Article
1448
is
an
implied
trust
is
that
unlike
in
an
express
trust,
the
person
who
takes
title
to
the
purchased
property
does
not
expressly
bound
himself
to
hold
or
administer
the
same
for
the
benefit
of
any
person.
The
presumption
of
a
resulting
trust
arises
from
the
fact
of
a
sale
transaction
where
the
evidence
shows
that
title
is
placed
in
the
name
of
one
person,
while
the
purchase
price
was
paid
by
the
other.
The
other
reason
why
there
is
only
an
implied
or
resulting
trust
is
that
full
title,
not
just
naked
or
legal
title,
is
placed
in
the
name
of
a
person
who
is
not
referred
to
formally
as
"trustee"
nor
is
the
other
person
who
paid
for
the
purchase
price
referred
to
formally
as
a
"beneficiary."
This
is
to
emphasize
the
point
the
most
distinguishing
mark
between
an
express
trust
and
a
resulting
trust
is
that
in
the
former
the
parties
bound
by
the
trust
are
formally
constituted
with
naked
or
legal
title
placed
in
the
trustee
and
beneficial
title
pertains
to
the
beneficiary,
or
that
the
trustee
(whatever
he
may
be
called)
is
expressly
given
title
to
the
property
with
obligations
to
hold
it
for
the
benefit
of
another
party
(whatever
he
may
be
called).
The
situation
covered
under
Article
1448
is
meant
to
address
the
observation
made
in
the
early
decision
in
Martinez
v.
Martinez
where
the
facts
showed
that
it
was
the
father
who
expended
the
sums
for
the
purchase
of
two
vessels
which
were
registered
in
the
name
of
his
son,
who
was
then
of
legal
age,
where
the
Court
held:
It
may
be
true
that
the
laws
in
some
of
the
United
States
would
in
this
case
raise
a
resulting
trust
in
favor
of
the
plaintiff
[the
father].
But
such
laws
are
not
in
force
here;
and
whatever
other
right
the
plaintiff
may
have
against
the
ibid,
at
p.
299,
citing
76
AM.JUR.
2D
Trusts
179.
1
Phil.
647
(1903).
IMPLIED TRUSTS
355'
defendant
[son],
either
for
the
recovery
of
the
money
paid
or
for
damages,
it
is
clear
that
such
payment
gave
him
no
title
either
91
legal
or
equitable
to
these
vessels.
92
In Padilla v. Court of Appeals, the Court applied the provisions of Article
1448 to impute a resulting trust where pursuant to a special arrangement with
the GSIS which had foreclosed the mortgaged property and the right of
redemption had already expired, the mortgagors-spouses had effected the sale
thereof to the purported trustee with the undertaking that the latter would use
funds supplied by the spouses to buy-back the property on behalf of the
spouses. The Court observed that "The concept of implied trusts is that from the
facts and circumstances of a given case the existence of a trust relationship is
inferred in order to effect the presumed (in this case it is even expressed)
intention of the parties or to satisfy the demands of justice or to protect against
93
fraud."
One will notice from Padilla that, although there is an express agreement
on the part of the trustee to hold the property for the benefit of the spouses, it
would still constitute a resulting trust, when by definition under Article 1441, it
ought to be an express trust. Do we hold therefore that when it comes to
registered land, where full title (as contrasted from title registered "as trustee")
in placed in the name of the purported trustee, it cannot be express trust
because the Torrens title does not show naked or legal title in the registered
owner, much less does it indicate the beneficiary? And if the trust relationship
was expressed in an instrument not registered in the Torrens titles, would the
arrangement now be an express trust, rather than an implied trust?
a. When Title Is Placed in the Name of a Child
Article 1448 of the New Civil Code expressly provides that there is no
presumption of any form of implied trust, if the person to whom the title is
conveyed is a child, legitimate or illegitimate, of
Ibid,
at
p.
649.
53
SCRA
168
93
(1973).
lbid,
at
p.
179.
92
NON-CORPORATE MEDIA OF DOING BUSINESS
356
the
one
paying
the
price
of
the
sale,
it
being
disputably
presumed
that
there
is
a
gift
in
favor
of
the
child.
9
The principle found application in De los Santos v. Reyes, * where the
Court held that if the person to whom the title is conveyed is a child, legitimate
or illegitimate, of the one paying the price of the sale, no trust is implied by law,
it being disputably presumed that there is a gift in favor of the child.
As a general rule, it cannot be presumed that a parent placing property
he bought in the name of the child intended any form of trust, since it cannot be
normally expected that a child would administer property for the benefit of the
parents. Consequently, should Article 1448 be interpreted to mean that when it
uses the word "child" to cover a situation where title to the property is placed
by the parent in the name of a child who then was a minor? I believe that this is
a reasonable presumption, as bolstered by the cases discussed hereunder.
In Martinez v. Martinez,the Court alluded to the provision of then
Article 161 of the old Civil Code, relating to minors, that the ownership or
enjoyment of property acquired by a minor child with funds of his parents,
pertain to the latter [parents], which the Court observed was "the only
provision which the we have found anywhere in the laws now in force that
96
declares the property to belong to the person who paid the money." The
exception under Article 1448 is merely a disputable presumption, which means
that it can still be shown that indeed the parents had placed property bought by
them in the name of their child to impose an obligation on the part of the child
to administer the same for the benefit of the parents, especially when the child
reaches the age of majority.
In Morales v. Court of Appeals," the Court recognized three exceptions
to the establishment of an implied resulting trust under Article 1448, "The first is
stated in the last part of Article
2
0
97
5 274
SCRA
282
(1997).
S
C
R
A
4
3
7
(
IMPLIED TRUSTS
357'
1448
itself.
Thus,
where
A
pays
the
purchase
money
and
title
is
conveyed
by
absolute
deed
to
A's
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
98
that
a
gift
was
intended."
It
is
only
with
respect
to
a
minor
child
that
a
parent
stands
in
loco
parentis.
Only
lately
in
Ty
v.
Ty,*>
where
the
evidence
showed
that
the
father
had
paid
for
the
price
of
the
purchase
of
a
valuable
tract
of
land
along
EDSA,
but
where
the
title
was
placed
in
the
name
of
a
son,
it
was
held
by
the
Court
that
no
express
trust
could
be
deemed
constituted
because
there
was
no
writing
to
prove
the
same
as
required
under
Article
1443
of
the
Civil
Code
when
it
comes
to
trust
being
constituted
over
immovable
properties.
Although,
the
Court
conceded
that
it
was
still
possible
to
prove
the
existence
of
an
implied
trust,
nevertheless,
it
ruled
that
the
provisions
of
Article
1448
expressly
provide
that
no
implied
trust
is
deemed
to
have
been
established
if
the
person
to
whom
the
title
is
conveyed
is
the
child
of
the
one
paying
the
price
of
the
sale,
and
instead
a
donation
is
disputably
presumed
in
favor
of
the
child.
In
Ty,
the
successors
of
the
deceased
father
had
not
shown
that
no
such
donation
was
intended.
b.
When
It
Is
the
Child
that
Supplies
the
Purchase
Price
A
good
illustration
where
no
implied
trust
arises
can
be
found
in
the
100
decision
in
Trinidad
v.
Ricafort,
where
the
evidence
showed
that
the
father
had
repurchased
the
property
he
sold
to
a
third
party
using
the
money
of
his
son;
yet
the
implied
trust
arrangement
imbued
by
the
trial
court
to
justify
the
taking
over
of
title
by
the
son
after
the
death
of
the
father,
was
overturned
by
the
Supreme
Court
It
plainly
appears
from
all
of
the
evidence
in
the
case
that
at
the
time
of
the
death
of
[the
father]
he
was
still
the
^Ibid, at p. 299. "553
1
SCRA 306 (2008). 7
Phil. 449 (1907).
358
NON-CORPORATE MEDIA OF DOING BUSINESS
owner of whatever interest was acquired by the repurchase of this
property in 1894, and that if the 2,600 pesos furnished by [the son]
to his father for that purpose it was so furnished by way of a loan
101
and did not transfer to [the son] any interest in the property.
In other words, the equity principles under Article 1448 cannot apply in a
situation where property is bought by the father in his own name, using the
money of the child. Resulting trusts under Article 1448 comes from the
presumed intention of the trustor who supplied the money to have beneficial
on trust in the property. In Trinidad, the presumed intention was coming from
the father and could not be presumed to come from a child.
c. When a Contrary Intention Is Proved
m
Morales v. Court of Appeals, held that "Another exception [to the
establishment of an implied resulting trust under Article 1448] is, of course, that
103
in which an actual contrary intention is proved."
The ruling emphasizes the fact that the implied trusts superinduced by
law under the various provisions in the Title V in the New Civil Code constitute
merely disputable presumptions, and the burden of proof is on the party
alleging that there is no implied trust constituted on each of the transactions
specifically covered by law. Yet, in Morales, the immediate ruling of the Court
tended to apply the general rule that "the burden of proving the existence of a
trust is on the party asserting its existence," thus:
There are recognized exceptions to the establishment of an
implied resulting trust... Another exception is, of course, that in
1M
which an actual contrary intention is proved.. .
As a rule, the burden of proving the existence of a trust is on
the party asserting its existence, and such proof must
101
AWd,
at
p.
452.
274
SCRA
282
fbid,
at
p.
299.
(1997).
lbid,
at
p.
299.
102
IMPLIED TRUSTS
359'
be
clear
and
satisfactorily
show
the
existence
of
the
trust
and
its
elements.
While
implied
trust
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.
Trustworthy
evidence
is
105
required
because
oral
evidence
can
easily
be
fabricated.
d. When Purchase Price Extended as a Loan
If it is shown that the person who paid for the amount of the purchase
price did so as a loan or as an advance to the person in whose name the title to
the property is transferred, then no implied trust should also result because of
the lack of intention on the part of the person supplying the money to have
beneficial interest in the property bought.
Such situation is in contrast with the situation covered in Article 1450 of
the New Civil Code (discussed immediately hereunder), where the title to the
property is placed in the name of the person who advanced or loan the amount,
which is considered to be a form of implied trust, but may properly be treated as
an equitable mortgage.
e. When the Purchase Is Made in Violation of an Existing
Statute
06
Morales v. Court of Appeals,' held that another exception to the
establishment of an implied resulting trust under Article 1448 is "where the
purchase is made in violation of an existing statute and in evasion of its express
provision, [since] no trust can result in favor of the party who is guilty of
107
fraud."
This particular ruling in Morales reiterates the principle laid down in
108
Deluao v. Castee/, that since implied trusts are essentially founded on equity
principles, no trust can be held
105
/b/c/,
at
p.
300.
274
SCRA
282
(1997).
W7
lbid,
at
p.
299,
citing
4
TOLENTINO
10a
679-
22
6S80.
CRA
231
(1962).
106
360
NON-CORPORATE MEDIA OF DOING BUSINESS
valid and enforceable when it is violative of the law, morals or public policy.
2.
Purchase
of
Property
Where
Title
Is
Placed
in
the
Name
of
Person
Who
Loaned
the
Purchase
Price
ART. 1450. If the price of a sale of property is loaned or paid by
one person for the benefit of another and the conveyance is made
to the lender or payor to secure the payment of the debt, a trust
arises by operation of law in favor of the person to whom the
money is loaned or for whom it is paid. The latter may redeem the
property and compel a conveyance thereof to him.
Under
Article
1450
of
the
New
Civil
Code,
if
the
price
of
a
property
bought
is
loaned
or
paid
by
one
person
for
the
benefit
of
another
and
the
conveyance
is
made
to
the
lender
or
payor
"to
secure
the
payment
of
the
debt"
an
implied
trust
arises
by
operation
of
law
in
favor
of
the
person
to
whom
the
money
is
loaned
or
for
whom
it
is
paid.
The
beneficiary
is
expressly
empowered
to
redeem
the
property
and
compel
a
conveyance
thereof
to
him.
09
While, Philippine National Bank v. Court of Appeals,' enumerates the
arrangement under Article 1450 as a resulting trust, Lopez v. Court of
110
Appeals, holds the implied trust arrangement to be a constructive trust.
We agree with the PNB characterization, since it can be deduced from the
very essence of the described transaction that the buyer took title to the
property as security for the loan or advance given to the cestui que trust, and
such trustee therefore
109
217 SCRA 347
(1993).
574 SCRA 26
(2008).
110
IMPLIED TRUSTS
361'
holds
title
subject
to
the
intention
of
the
cestui
que
trust
to
pay
for
the
principal
as
a
means
to
secure
title
to
the
property
that
was
bought
in
his
behalf
in
the
first
placed.
a.
Akin
to
an
Equitable
Mortgage
Arrangement
The
implied
trust
situation
covered
under
Article
1450
of
the
New
Civil
Code
is
akin
to
an
equitable
mortgage
arrangement,
since
title
to
the
property
intended
for
the
borrower
is
placed
in
the
name
of
the
lender
to
secure
the
payment
of
the
debt.
In
Raymundo
v.
Bandong,
the
Supreme
Court
reiterated
the
long-standing
definition
of
equitable
mortgage
"as
one
which
although
lacking
in
some
formality
or
form
or
words,
or
other
requisites
demanded
by
a
statute,
nevertheless
reveals
the
intention
of
the
parties
to
charge
real
property
as
112
security
for
a
debt,
and
contains
nothing
impossible
or
contrary
to
law."
That
is
the
reason
why
Article
1450
expressly
provides
that
the
borrower
may
redeem
the
property
and
compel
the
lender
to
convey
the
property
to
him.
It
should
be
noted,
hpwever,
that
the
arrangement
provided
under
Article
1450
is
not
the
typical
equitable
mortgage
arrangement
found
in
the
Law
on
Sale,
since
under
such
arrangement,
the
equitable
mortgage
is
constituted
between
the
purported
seller
(borrower-mortgagor)
and
buyer
(lender-mortgagee)
in
the
contract
of
sale
with
a
right
of
repurchase,
where
the
purpose
of
the
sale
is
really
to
secure
a
principal
obligation,
usually
a
loan,
between
the
purported
seller
and
purported
buyer.
Under
Article
1450,
the
equitable
mortgage
is
constituted
by
the
sale
of
a
third
party
of
his
property
to
a
purported
buyer
(the
lender-mortgagee)
who
takes
titles
to
secure
his
loan
or
advance
made
to
the
cestui
que
trust,
who
is
a
stranger
to
the
contract
of
sale.
The
characterization
of
the
situation
as
an
implied
trust
would
impose
upon
the
lender-buyer
the
fiduciary
obligations
of
the
trustee.
When
the
borrower
fails
to
pay
the
loan
or
obligation,
it
would
be
anomalous
for
the
lender-buyer
to
bring
a
collection
111
526 SCRA 514
(2007).
lbid, at p. 525.
112
362
NON-CORPORATE MEDIA OF DOING BUSINESS
case,
for
indeed
he
has
already
in
his
name
the
property
bought
as
security
the
loan;
otherwise,
it
would
amount
to
unjust
enrichment.
But
if
the
lender
does
nothing
because
he
is
deemed
to
be
fully
paid
with
the
property
already
secured
in
his
name,
that
would
constitute
pactum
commissorium
prohibited
under
Article
2088
of
the
Civil
Code,
and
the
title
of
the
lender
would
be
void
ab
initio.
Without
the
right
to
redeem
granted
under
Article
1450
of
the
Civil
Code,
could
the
borrower,
who
is
a
stranger
to
the
contract
of
sale
effected
between
a
third-party
and
the
lender
seek
recovery
of
the
property
by
way
of
redemption?
Fortunately,
with
Article
1450
in
place,
there
is
no
doubt
that
the
borrower
has
the
ability
to
redeem
the
property
by
paying
his
loan
to,
or
advances
from,
the
lender-trustee.
But
even
without
Article
1450
in
the
statute
books,
it
is
our
position
that
indeed
the
borrower
may
seek
redemption
of
the
property
bought
by
and
placed
in
the
name
of
the
lender.
It
has
already
been
held
by
the
Supreme
Court
that
in
spite
of
the
best
evidence
rule,
a
written
contract
may
be
proved
by
parol
evidence
to
be
an
equitable
mortgage,
because
the
public
policy
against
pactum
113
commissorium
takes
precedence.
It
is
usual
in
such
arrangements
that
although
the
property
bought
is
placed
in
the
name
of
the
lender,
it
is
the
borrower
who
takes
possession
and
enjoys
the
property
bought,
and
pays
for
the
real
property
taxes
due
thereon.
Such
an
arrangement
would
constitute
badges
of
equitable
mortgage
under
Article
1602
of
the
Law
on
Sales
under
the
New
Civil
Code.
When
the
borrower-beneficiary
fails
or
refuses
to
redeem
the
property
(i.e.,
pay
the
principal
obligation),
and
the
lender
brings
an
action
for
collection,
can
the
trust
property
be
levied
upon
for
the
payment
of
the
judgment
debt,
contrary
to
his
duty
of
loyalty
as
a
implied
trustee?
The
answer
would
of
course
be
in
the
affirmative.
indeed,
in
an
equitable
mortgage
situation,
even
when
title
is
registered
in
the
name
of
the
lender,
it
is
considered
void
for
being
in
violation
of
the
public
policy
against
pactum
commissorium.
In
Cuyugan
v.
Santos,
34
Phil.
100
(1916);
Rosales
v.
Suba,
220
SCRA
716
(1993);
Mariano
v.
Court
of
Appeals,
408
SCRA
664
(2003).
IMPLIED TRUSTS
363'
a
situation
where
the
borrower
has
defaulted
on
his
loan,
the
remedy
of
the
lender
is
not
to
appropriate
title
to
the
property
but
rather
bring
an
action
for
114
115
foreclosure,
or
to
bring
a
simple
collection
suit.
It
should
be
emphasized,
though
that
when
the
principal
contract
has
been
extinguished
with
full
payment
thereof,
then
necessarily
the
accessory
contract
of
equitable
mortgage
is
also
extinguished,
which
then
allows
the
borrower
to
recover
any
and
v
all
properties
given
as
security
for
the
loan.
3.
When
Absolute
Conveyance
of
Property
Effected
as
a
Means
to
Secure
Performance
of
Obligation
ART. 1454. If an absolute conveyance of property is made in
order to secure the performance of an obligation of the grantor
1
toward the grantee, a trust by virtue of law is established. If the
fulfillment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to
him.
Under Article 1454 of the New Civil Code, if an absolute conveyance of
property is made in orderto secure the performance of an obligation of the
grantor toward the grantee, a trust by virtue of law is established. If the
fulfillment of the obligation is offered by the grantor when it becomes due, he
may demand the reconveyance of the property to him.
The principle embodied in Article 1454 of the New Civil Code were applied
6
under the old Civil Code in De Ocampo v. Zaporteza," where a deed of sale with
right of repurchase was
Briones-Vazquez v. Court of Appeals, 450 SCRA 644
11
(2005).
*Binga v. Bello, 471 SCRA 653 (2005).
116
53 Phil. 442 (1929).
364
NON-CORPORATE MEDIA OF DOING BUSINESS
really
intended
to
cover
a
loan
made
by
the
purported
seller
from
the
purported
buyer
and
title
to
the
subject
matter
was
placed
in
the
name
of
the
buyer.
The
Supreme
Court
held
that
the
"application
must
here
be
made
of
the
doctrines
7
upheld
in
the
cases
of
Uy
Aloe
vs.
Cho
Jan
Ling,"
Camacho
vs.
Municipality
of
9
Baliaug,
and
Severino
vs.
Severino,"
to
the
effect
that
the
defendants
[buyer]
only
hold
the
certificate
of
transfer
in
trust
for
the
plaintiffs
with
respect
to
the
portion
of
the
lot
planted
with
1,300
coconut
trees,
and
they
are
therefore
bound
to
execute
a
deed
in
favor
of
the
plaintiffs,
transferring
to
them
said
120
portion
planted
with
1,300
coconut
trees."
While
PNB
enumerates
the
arrangement
under
Article
1454
as
one
of
the
resulting
trusts,
Lopez
holds
the
implied
trust
arrangement
to
be
a
constructive
trust.
We
tend
to
agree
with
the
PNB
characterization.
The
situation
covered
under
Article
1454
really
constitutes
an
equitable
mortgage
arrangement
thoroughly
covered
under
Article
1602
to
1605
of
the
Law
on
Sales
in
the
Civil
Code.
Indeed,
the
"absolute
conveyance
of
property"
described
in
Article
1454
is
nothing
more
than
a
"deed
of
absolute
sale;"
and
Article
1604
embodies
a
doctrine
long-established
in
Philippine
jurisprudence
that
"The
provisions
of
article
1602
[on
badges
of
equitable
mortgage]
shall
also
121
apply
to
a
contract
purporting
to
be
an
absolute
sale."
If
one
would
wonder
why
the
matter
has
to
be
covered
by
the
principles
of
implied
trusts
under
Article
1454
of
the
New
Civil
Code,
the
plausible
answer
is
that
Articles
1604
and
1605
in
the
Law
on
Sales,
expressly
allows
the
purported
seller
to
ask
for
the
reformation
of
the
deed
of
absolute
sale
to
reflect
its
true
nature
as
a
mortgage
contract,
but
nowhere
expressly
grants
the
right
to
the
seller
to
redeem
the
property
sold.
The
power
of
the
purported
seller
in
an
equitable-mortgage-cwm-deed-of-
117
19
Phil.,
202.
28
Phil.,
46.
119
44
Phil.,
343.
120
to/d,
at
p.
445.
Zamora
v.
Court
of
Appeals,
260
SCRA
10
(1996);
Tuazon
v.
Court
of
Appeals,
341
SCRA
07
(2000).
118
IMPLIED TRUSTS
365'
absolute-sale to redeem the property in the absence of a right of redemption
clause is expressly provided for in Article 1454.
Frankly, it would have been better to transfer the right to redeem under
Article 1454 to be part of Article 1605 of the Civil Code, instead of treating the
matter under implied trusts. A good reason we give for this advocacy is that
since the contract or arrangement defined under Article 1454 is considered a
constructive trust, it would be susceptible under current jurisprudence to the
defense of prescription, especially when it comes to registered land. Under the
Law on Sales, the arrangement would clearly be an equitable mortgage since the
disposition contract is really a security arrangement for a principal obligation.
Since property given as security has in fact been placed in the name of the
obligee, this would be contrary to the public policy against pactum
commissorium under Article 2088 of the Civil Code which provides that the
creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them; that any stipulation to the contrary is null and void; and the
right of the borrower-seller to redeem the property purportedly sold in really
imprescriptible (i.e., for as long as the buyer can fully pay the principal
obligation, which brings about the extinguishment of the accessory equitable
mortgage arrangement), save when formal foreclosure proceedings have been
brought by the lender-buyer, or if the property has passed a third party buyer in
good faith and for value.
4. Two or More Persons Purchase Property Jointly, But Place Title in One of
Them
ART. 1452. If two or more persons agree to purchase property
and by common consent the legal title is taken in the name of one of
them for the benefit of all, a trust is created by force of law in favor
of the others in proportion to the interest of each.
366
NON-CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1452
of
the
New
Civil
Code,
if
two
or
more
persons
agree
to
purchase
property
and
by
common
consent
the
legal
title
is
taken
in
the
name
of
one
of
them
for
the
benefit
of
all,
a
trust
is
created
by
force
of
law
in
favor
of
the
others
in
proportion
to
the
interest
of
each.
Both
PNB
and
Lopez
classify
the
arrangement
under
Article
1452
as
a
resulting
trust,
to
which
characterization
we
agree
with.
An
application
of
the
principle
covered
in
Article
1452
under
the
old
Civil
122
Code
can
be
found
in
De
la
Cruz
v.
Nino, where
the
title
to
certain
parcels
of
land
appear
to
have
been
drawn
up
only
in
the
name
of
one
of
the
two
parties
who
formed
a
partnership
and
combined
their
capital
to
acquire
the
properties.
Nonetheless,
there
was
drawn
up
between
them
a
private
document
that
described
their
arrangements,
which
has
never
been
impugned
by
the
party
in
whose
names
the
titles
to
the
land
had
been
placed.
The
Court
held
that
the
parties
were
really
co-owners,
and
the
party
in
whose
names
appear
the
titles
to
the
land,
being
in
possession
of
only
half
of
the
parcels
of
land,
was
not
entitled
to
claim
possession
of
the
other
half
held
by
the
heirs
of
the
deceased
co-owner.
123
In Uy Aloe v. Cho Jan Jing, where a number of Chinese merchants
raised a fund by voluntary subscription with which they purchased a valuable
tract of land and erected a large building to be used as a sort of club house for
the mutual benefit of the subscribers to the fund; but since the association was
not registered as a juridical person, it was agreed to have the title to the
property placed in the name of one of their members, who accepted the trust,
and agreed to hold the property as agent and trustee of the members of the
association. When the title holder refused to account for the rentals earned
from the property, and in fact set up title in himself, the members brought suit
to have title conveyed to them. The Court held in Uy Aloe that there was an
implied trust constituted and the registered owner held it under an obligation,
both express and implied, to deal with it exclusively
122
18
Phil.
284(1911).
19
Phil.
202(1911).
123
IMPLIED TRUSTS
367'
for
the
benefit
of
the
members
of
the
association
and
subject
to
their
will.
One
has
to
wonder
why
the
arrangement
described
under
Article
1452
of
the
New
Civil
Code
should
even
be
considered
an
"implied
trust"
arrangement;
the
very
language
of
Article
1452
shows
that
it
covers
an
express
trust
arrangement,
since
it
says
that
is
covers
as
situation
where
"two
or
more
persons
agree
to
purchase
property"
and
that
"by
common
consent
the
legal
title
is
taken
in
the
one
of
one
of
them
for
the
benefit
of
all."
In
other
words,
a
trust
arrangement
is
created
not
"by
force
of
law",
but
by
the
intentions
clearly
expressed
by
the
parties
through
their
"agreement"
and
"common
consent",
and
therefore
falls
with
the
definition
under
Article
1441
that
"Express
trust
are
created
by
the
intention
of
the
trustor
or
of
the
parties."
The
only
reason
we
see
why
the
law
would
treat
the
arrangement
under
Article
1452
not
as
an
express
trust
is
because
full
title,
not
just
naked
or
legal
title
is
placed
in
the
name
of
the
trustee,
which
means
that
insofar
as
the
world
is
concerned
he
appears
to
be
the
full
owner,
rather
than
as
a
trustee.
This
is
especially
true
when
it
comes
to
registered
land
where
full
title
is
placed
in
the
name
of
the
trustee
(i.e.,
he
is
not
registered
as
"trustee"
in
the
certificate
of
title),
and
therefore,
the
trust
arrangement
can
only
be
"implied"
from
other
source.
5. Property Conveyed to a Person Merely as Holder Thereof
ART. 1453. When property is conveyed to a person in reliance
upon his declared intention to hold it for, or transfer it to another or
the grantor, there is an implied trust in favor of the person whose
benefit is contemplated.
368
NON-CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1453
of
the
New
Civil
Code,
when
property
is
conveyed
to
a
person
in
reliance
upon
his
declared
intention
to
hold
it
for,
or
transfer
it
to
another
or
the
grantor,
there
is
an
implied
trust
in
favor
of
the
person
whose
benefit
is
contemplated.
Both
PNB
and
Lopez
characterize
the
arrangement
under
Article
1453
as
resulting
trust.
As
in
the
case
of
Article
1452,
the
situation
covered
by
Article
1453
covers
really
an
express
trust,
because
title
to
property
is
taken
by
the
trustee
under
a
clear
agreement
to
hold
it
for
another
person.
The
only
difference
is
that
there
may
be
a
situation
where
the
person
sought
to
be
benefited
by
the
grantor
has
not
yet
given
formal
acceptance
of
the
benefit.
Even
such
a
situation
is
not
critical,
since
under
Article
1446,
if
the
trust
imposes
no
onerous
conditions
upon
the
beneficiary,
his
acceptance
is
presumed.
Jurisprudence
has
also
affirmed
the
validity
of
a
trust
established
for
a
person
who
is
not
yet
existing,
such
as
an
unborn
child.
The
points
raised
in
the
foregoing
paragraph
seemed
to
have
been
affirmed
by
the
Supreme
Court
in
Cuaycong
v.
Cuaycong,
but
with
opposite
results.
In
Cuaycong,
the
Court
denied
the
application
of
the
provisions
of
Article
1453
to
establish
an
implied
trust:
"Said
arguments
are
untenable,
even
considering
the
whole
complaint.
The
intention
of
the
trustor
to
establish
the
alleged
trust
may
be
seen
in
paragraphs
5
and
6.
Article
1453
would
apply
if
the
person
conveying
the
property
did
not
expressly
state
that
he
was
establishing
the
trust,
unlike
the
case
at
bar
where
he
was
alleged
to
have
expressed
such
125
intent.
Consequently,
the
lower
court
did
not
err
in
dismissing
the
complaint,"
on
the
ground
that
since
the
complaint
sought
to
recover
an
express
trust
over
immovables,
then
under
Article
1443
of
the
Civil
Code,
the
same
may
not
be
proved
by
parol
evidence.
An
example
of
the
situation
covered
by
Article
1453
may
be
found
in
the
126
decision
in
Pacheco
v.
Arro,
where
the
claims
124
21
SCRA
1192
(1967).
lbid,
at
p.
1198.
126
85
Phil.
505
(1950).
IMPLIED TRUSTS
369'
of respondents in cadastral case were withdrawn relying upon the assurance
and promise made in open court by petitioners' predecessor-in-interests that
upon obtaining title to the properties subject to the petition, he would convey
and assign the lots to the respondents in accordance with their respective
claims. In an action for specific performance filed to compel the petitioner to
assign and convey the lots covered, the Court held: "When the claim to the lots
in the cadastral case was withdrawn by the respondents relying upon the
assurance and promise made in open court b y . . . the predecessor-in-interests
of the petitioners, a trust or a fiduciary relation between them arose, or resulted
127
therefrom, or was created thereby." Consequently, the Court held that such
trustee cannot invoke the statute of limitations to bar the action and defeat the
right of the cestuis que trust.
128
Earlier,
in
Martinez
vs.
Grano,
the
Court
held
that
a
person
who,
before
consolidation
of
property
in
the
purchaser
under
a
contract
of
sale
with
pacto
de
retro,
agrees
with
the
vendors
to
buy
and
administer
the
property
until
all
debts
constituting
an
encumbrance
thereon
shall
be
paid,
after
which
the
property
shall
be
turned
back
to
the
original
owner,
is
bound
by
such
agreement,
and
becomes
in
effect
a
trustee
to
hold
and
administer
the
property
in
such
129
character.
The
principle
was
reiterated
in
Cristobal
v.
Gomez.
In
reiterating
the
Martinez
ruling,
the
Court
in
Heirs
of
Emilio
Candelaria
v.
Romero,
held
The
trust
alleged
to
have
been
created,
in
our
opinion,
is
an
implied
trust.
As
held,
in
effect,
by
this
Court
in
the
case
of
131
Martinez
vs.
Grano ,
where
property
is
taken
by
a
person
under
an
agreement
to
hold
it
for,
or
convey
it
to
another
or
the
grantor,
a
resulting
or
implied
trust
arises
in
favor
of
the
person
for
whose
benefit
the
property
was
intended.
This
lbid,
at
pp.
128
514-
42
5P15.
hil.
129
50
Phil.
810
35(1921).
130
(1927).
109
Phil.
131
500(1960).
42
Phil.,
35.
370
NON-CORPORATE MEDIA OF DOING BUSINESS
rule,
which
has
been
incorporated
in
the
new
Civil
Code
in
Art.
1453
thereof,
is
founded
upon
equity.
The
rule
is
the
same
in
the
United
States,
particularly
where,
on
the
faith
of
the
agreement
or
understanding,
the
grantee
is
enabled
to
gain
an
advantage
in
the
purchase
of
the
property
or
where
the
consideration
or
part
thereof
has
been
furnished
by
or
for
such
other.
Thus,
it
has
been
held
that
where
the
grantee
takes
the
property
under
an
agreement
to
convey
to
another
on
certain
conditions,
a
trust
results
for
the
benefit
of
such
other
or
his
heirs,
which
equity
will
132
enforce
according
to
the
agreement.
It
is
also
the
rule
there
that
an
implied
trust
arises
where
a
person
purchases
land
with
his
own
money
and
takes
a
conveyance
thereof
in
the
name
of
another.
In
such
a
case,
the
property
is
held
on
a
resulting
trust
in
favor
of
the
one
furnishing
the
consideration
for
the
transfer,
unless
a
different
intention
or
understanding
appears.
The
trust
which
results
under
such
circumstances
does
not
arise
from
contract
or
agreement
of
the
parties,
but
from
the
facts
and
circumstances,
that
is
to
say,
it
results
because
of
equity
and
arises
by
implication
or
operation
of
133
law.
6. Donation of Property to a Donee Who Shall Have No Beneficial
Title
ART. 1449. There is also an implied trust when a donation is
made to a person but it appears that although the legal estate is
transmitted to the donee, he nevertheless is either to have no
beneficial interest or only a part thereof.
Under
Article
1449
of
the
New
Civil
Code,
there
is
an
implied
trust
when
a
donation
is
made
to
a
person
but
it
appears
that
although
the
legal
estate
is
transmitted
to
the
donee,
he
132
189 C.J.S. 960.
lbid, at pp. 502-503, citing 89 C.J.S.
964-968.
m
IMPLIED TRUSTS
371'
nevertheless is either to have no beneficial interest or only a part thereof. In such
a situation, the donor is deemed to have become the beneficiary under an
implied trust arrangement. Lopez and PNB classify the arrangement under
Article 1449 as a resulting trust; for obvious reasons, we agree with such a
position.
In has been opined that the resulting trust covered under Article 1449 is
analogous to, but should not be confused with, the fideicommissary substitution
under Article 863 of the Civil Code, wherein the testator designates a person as
an heir charging him to deliver to another person the whole or part of the
134
inheritance. Yet, under the old Civil Code, it was observed by the Court in
135
Perez v. Garchitorena and Casimiro, that a fideicommissary substitution is not
equivalent to the English trust.
36
Under
the
New
Civil
Code,
in
Adaza
v.
Court
of
Appeals,' where
the
father
donated
a
piece
of
land
in
the
name
of
the
daughter
but
with
verbal
notice
that
the
other
half
would
be
held
by
her
for
the
benefit
of
a
younger
brother,
coupled
with
a
deed
of
waiver
later
on
executed
by
the
daughter
that
she
held
the
land
for
the
common
benefit
of
her
brother,
the
Court
held
that
the
arrangement
created
an
implied
trust
in
favor
of
the
brother
under
Article
1449.
Adaza
is
quite
a
curious
ruling
for
two
reasons.
Firstly,
if
the
donation
to
the
daughter
was
made
by
the
father
with
the
express
directive
that
the
daughter
would
take
title
for
her
benefit
and
that
of
her
younger
brother,
would
that
not
constitute
an
express
trust,
or
one
that
is
created
by
the
express
intention
of
the
father?
Secondly,
did
not
the
waiver
constitute
a
written
acknowledgment
on
the
part
of
the
trustee
that
the
took
title
for
the
benefit
of
the
brother
also,
and
thereby
constitute
competent
evidence
to
support
an
express
trust
arrangement?
134
Coquia, Jorge R., The Doctrine of Implied Trust, 310 SCRA
486,492. 13554 Phil. 431(1930). 138171 SCRA 369 (1989).
372
NON-CORPORATE MEDIA OF DOING BUSINESS
7. Land Passes By Succession But Heir Places Title into a Trustee
ART. 1451. When land passes by succession to any person and
he causes the legal title to be put in the name of another, a trust is
established by implication of law for the benefit of the true owner.
Under
Article
1451
of
the
New
Civil
Code,
when
land
passes
by
succession
to
any
person
and
he
causes
the
legal
title
to
be
placed
in
the
name
of
another,
a
trust
is
established
by
implication
of
law
for
the
benefit
of
the
true
owner.
Both
PNB
and
Lopez
characterize
the
implied
trust
arrangement
covered
under
Article
1451
as
resulting
trust.
We
agree
with
such
characterization.
The
language
of
Article
1451,
as
it
limits
its
application
to
land,
may
be
taken
to
mean
that
no
such
implied
trust
arises
when
it
comes
to
other
types
of
property,
especially
as
to
movable
properties,
when
the
prevailing
doctrine
is
that
he
who
possess
movable
is
presumed
to
be
the
rightful
owner.
That
would
perhaps
be
an
erroneous
conclusion
for
the
following
reasons:
Firstly,
Article
1451
limits
its
application
to
land
because
the
principal
of
implied
trust
it
embodies
is
most
appropriate
to
registered
land,
where
title
issued
in
the
name
of
the
trustee,
without
indication
that
he
holds
the
same
under
fiduciary
undertakings,
can
be
an
occasion
to
abuse.
Secondly,
the
enumeration
of
the
applicability
of
implied
trust
under
Article
1451
and
those
of
other
articles,
is
not
deemed
to
be
on
an
exclusive
basis
as
clearly
expressed
in
the
language
of
Article
1447:
"The
enumeration
of
the
following
cases
of
implied
trust
does
not
exclude
others
established
by
the
general
law
of
trust."
Article
1451
should
be
read
to
cover
the
situation
when
the
property
inherited
is
registered
in
another's
name
as
full
owner
IMPLIED TRUSTS
373'
rather
than
as
"trustee,"
for
in
the
latter
case
that
would
clearly
be
an
express
trust.
Article
1451
should
also
be
distinguished
from
the
situations
covered
by
Article
1456
where
property
is
acquired
through
fraud
or
mistake
(discussed
hereunder),
because
under
Article
1451,
the
placing
of
title
in
the
name
of
another
(the
trustee)
is
done
purportedly
with
the
knowledge
and
consent
of
the
cestui
que
trust
What
makes
the
arrangement
under
Article
1451
an
implied
trust
arrangement
is
the
lack
of
clear
purpose
or
intention
on
why
the
heir
caused
legal
title
to
be
put
in
another
person's
name.
Article
1451
does
not
cover
a
situation
where
the
person
takes
title
to
the
inherited
land
acknowledging
clearly
that
he
does
so
for
the
benefit
of
the
heir,
for
that
would
be
an
express
trust,
except
for
the
fact
that
title
in
registered
fully
in
the
name
of
such
person,
and
not
expressly
as
"trustee."
The
doctrine
covered
in
Article
1451
has
for
its
basis
the
decisions
of
the
Supreme
Court
under
the
old
Civil
Code
that
did
not
contain
provisions
on
trusts.
Thus,
in
Bargayo
v.
Camumot,
the
Court
held
that
that
the
co-owner
or
co-heir
who
is
in
possession
of
an
inheritance
pro
indiviso
for
himself
and
in
representation
of
his
co-owners
or
co-heirs,
if,
as
such
owner,
he
administers
or
takes
care
of
the
rest
thereof
with
the
obligation
of
delivery
it
to
his
co-owners
or
co-heirs,
is
under
the
same
situation
as
a
trustee.
Bargayo
however
recognized
the
principle
that
when
a
co-owner
or
co-heir
refutes
the
co-ownership
and
takes
adverse
possession
of
the
property
for
himself
alone,
then
acquisitive
prescription
may
arise
in
his
favor
to
the
detriment
of
the
other
co-heirs
or
co-owners.
Bargayo
distinguished
between
the
rule
of
imprescriptibility
of
the
action
for
partition
among
co-
owners,
from
the
doctrine
of
acquisitive
prescription
that
allows
a
person
to
obtain
title
to
property
by
open,
adverse
possession.
In
Castro
v.
Castro,
the
Court
held
that
one
who
acquires
a
Torrens
title
in
his
own
name
to
property
which
he
is
administering
137
40
Phil.
857
(1920).
57
Phil.
675
(1932).
138
374
NON-CORPORATE MEDIA OF DOING BUSINESS
for
himself
and
his
siblings
as
heirs
in
common
by
descent
from
a
common
ancestor
may
be
compelled
to
surrender
to
each
of
his
co-heirs
his
appropriate
share,
and
a
proceedings
for
partition
is
an
appropriate
remedy
by
which
to
enforce
such
right.
With
respect
to
the
legal
position
taken
by
the
brother
who
had
title
registered
in
his
name
that
he
had
repudiated
the
trust
more
than
ten
years
before
the
action
for
partition
had
been
filed
by
his
siblings,
and
thus
had
acquired
title
by
adverse
possession,
the
Court
did
not
dispute
the
theory
of
acquisitive
prescription
being
available
in
such
a
situation
but
held
that
it
could
not
be
applied
on
the
basis
that
this
supposed
repudiation
of
the
trust
first
took
place
before
[brother
cestui
que
trusf\
had
reached
his
majority.
The
Court
held
"we
are
unable
to
see
how
a
minor
with
whom
another
is
in
trust
relation
can
be
prejudiced
by
repudiation
of
the
trust
addressed
to
him
by
the
person
who
is
subject
to
the
trust
obligation.
The
defendant
in
our
opinion
is
not
entitled
to
139
the
benefit
of
prescription
from
his
supposed
repudiation
of
the
trust."
140
In Mabana v. Mendoza, where title to a homestead was obtained
pursuant to an agreement entered into between the applicant and his co-heirs
that should put the title in his name subject to the condition that he was merely
to act as a trustee of his co-heirs, and a partition of the property would later be
effected between him and his co-heirs, the Court held that there was created a
relationship of trust between the applicant and his co-heirs which gives to the
latter the right to recover their share in the property unimpaired by the defense
of prescription.
141
In Custodia v. Casiano, where the predecessor-in-interest had bought a
large tract of land on installments, which devolved to the heirs upon his death,
but upon full payment thereof, the only male heir had caused the title to be
issued in his name with the understanding with his co-heir that he would act as
trustee, the Court held that there being no evidence that the trust relation had
lbid,
at
p.
685.
105
Phil.
260
141
(1959).
9
SCRA
841
(1963).
140
IMPLIED TRUSTS
375'
even
been
repudiated
by
said
trustee,
then
the
relationship
of
co-
ownership
had
existed
between
such
trustee
and
his
sisters
and
the
right
of
the
successors
in
interest
of
the
said
sister
to
bring
an
action
for
the
recovery
of
their
shares
against
the
successor-
in-interest
of
the
said
trustee
cannot
be
barred
by
prescription,
despite
the
lapse
of
25
years
from
the
date
of
registration
of
the
land
in
the
trustee's
name.
U2
The decision in Mariano v. Judge De Vega, reminds us that the principles
of implied trust under Article 1451 do not apply when the real property is
unregistered land and no title has been issued in the name of one of the
co-owners, and the situation only shows that he has possession and enjoyment
of the property subject of the co-ownership. No implied trust could be ascribed
to the situation according to the Court in that: "The existence of the
co-ownership here argues against theory of implied trust, for then a co-owner
possesses co-owned property not in behalf of the other co-owners but in his
143
own behalf," in accordance with the truism that possession by a co-owner of
the property owned in common is not necessarily adverse possession against
the other co-owners for "[ajfter all, co-owners are entitled to be in possession of
the premises, and it would not also constitute a clear repudiation of the
144
co-ownership itself."
145
In
Ting
Ho,
Jr.
v.
Teng
Gt//,
where
a
Chinese
resident
had
caused
land
to
be
placed
in
the
name
of
the
trustee
who
was
bound
to
hold
the
same
for
the
benefit
of
the
trustor
and
his
family
in
the
event
of
death,
the
application
of
the
doctrine
of
a
resulting
trust
under
Article
1451
by
the
heirs
of
the
trustor
could
not
be
upheld
by
the
Court:
"This
contention
must
fail
because
the
prohibition
against
an
alien
from
owning
lands
of
the
public
domain
is
absolute
and
not
146
even
an
implied
trust
can
be
permitted
to
arise
on
equity
consideration."
142
148 SCRA 342
(1987).
lbid, at p. 346.
lbid, at p. 346.
145
558 SCRA 421
U6
lbid, at p. 434.
(2008).
u3
376
NON-CORPORATE MEDIA OF DOING BUSINESS
8. When Trust Fund Used to Purchase Property Which Is Registered in
Trustee's Name
ART. 1455. When any trustee, guardian or other person holding
a fiduciary relationship uses trust funds for the purchase of property
and causes the conveyance to be made to him or to a third person, a
trust is established by operation of law in favor of the person to
whom the funds belong.
Under
Article
1455
of
the
New
Civil
Code,
when
any
trustee,
guardian
or
other
person
holding
a
fiduciary
relationship
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
to
him
or
to
a
third
person,
a
trust
is
established
by
operation
of
law
in
favor
of
the
person
to
whom
the
funds
belong.
While
Ramos
and
PNB
characterize
the
arrangement
covered
under
Article
1455
as
constituting
a
resulting
trust,
Lopez
holds
that
it
is
a
form
of
constructive
trust.
We
believe
that
the
better
position
is
to
treat
such
a
situation
as
constituting
a
resulting
trust,
since
it
comes
about
in
breach
of
fiduciary
duty
of
loyalty
that
brought
about
that
a
pre-existing
contractual
relationship,
i.e.,
agency
or
express
trust.
Article
1455
of
the
New
Civil
Code
is
the
operative
provision
governing
the
duty
of
loyalty
of
the
agent
to
the
principal,
as
well
as
the
trustee
to
the
beneficiary.
A
trustee
is
duty-bound
to
handle
the
affairs
of
the
trust
and
to
apply
all
the
properties
in
the
trust
estate
for
the
sole
benefit
of
the
beneficiary.
In
a
situation
where
there
is
a
conflict
between
the
interests
of
the
trustee
and
the
beneficiary,
it
is
the
duty
of
the
trustee
to
prefer
that
of
the
beneficiary.
A
violation
of
the
duty
of
loyalty
makes
the
trustee
personally
liable
to
the
beneficiary
for
the
resulting
damages.
An
appropriation
of
any
business
or
interest
that
should
be
for
the
account
of
the
beneficiary
would
require
that
the
trustee
to
reimburse
the
profits
or
tum-over
the
benefits
to
the
estate
trust.
IMPLIED TRUSTS
377'
The
principle
laid
down
in
Article
1455
covering
the
fiduciary
duty
of
loyalty
of
the
trustee
is
applicable
to
express
trusts
and
implied
trusts.
7
In Camacho v. Municipality of Bali wag," where evidence showed that a
municipal officer received funds from the members of the community to bid on
behalf of the municipality at a public auction of the land that was taken over by
the national government, and who after many years claimed title in his own
name, the Court held:
There have been a number of cases before this court in which
a title to real property was acquired by a person in his own name
while acting in a fiduciary capacity, and who afterwards sought to
take advantage of the confidence reposed in him by claiming the
ownership of the property for himself. This court has invariably
held such evidence competent as between the fiduciary and the
148
cestui que trust.
The Court went further to summarize the development of the doctrine,
thus
In Uy Aloe vs. Cho Jan Ling, the members of a Chinese club
agreed to purchase some real property and for that purpose
subscribed a fund and placed it in the hands of the defendant, who
made the purchase in his own name. Subsequently, he refused to
account for the rents on the property and claimed it as his own.
This court held parol proof of the trust sufficient to overcome the
case in favor of the defendant by reason of his registered
documents of title, and decreed that a conveyance be made by the
defendant to the members of the association.
150
In Taguinot vs. Municipality of Tanay, the plaintiffs, as heirs
of their father, sought to recover possession of a parcel
147
28
Phil.
466
(1914).
at
pp.
lbid,
149
468-
69.
19
4P
hil.
202.
150
9
Phil.
396.
378
NON-CORPORATE MEDIA OF DOING BUSINESS
of land held by the municipality on the strength of a Spanish
patent issued to him. It was proved (largely by parol evidence) that
their father acted on behalf and at the expense of the municipality
in securing the patent. The patent was retained by the
goberrjadorcillo, a copy only being issued to the patentee. The
latter also drew up a private document engaging to execute a
conveyance to the municipality, the same being offered in
evidence. The municipality had continuously occupied the land
since the issuance of the title. The judgment of the court below
dismissing the complaint was affirmed.
In the following cases of a similar character, parol evidence
was held not sufficient to overcome the case made out by the
,S1
152
holder of the registered title: Belen vs. Belen,; Garen vs. Pilar,
isa
154
Balatian vs. Agra; Agonoy vs. Ruiz; and Madariaga vs. Castro,
were both cases wherein one person was delegated by a
community of property owners to secure in his own name a patent
from the Spanish Government covering all their lands, the object
being to save the expense of obtaining individual patents in the
name of each. After securing these patents, the therein grantees
ejected their neighbors from the land covered by the patents and
respectively claimed the land as their own. The evidence tending
to establish these facts was considered by the court in both cases
relief by reformation of the patent or a compulsory conveyance to
the injured persons was denied in each case, because the rights of
an innocent third purchaser intervened. But in the first case the
injured persons were held entitled to damages, provided they
were able to establish the same. In the second case, however, the
court presumed a waiver of their claims by reason of other
evidence of record. The fact that the parol evidence relied upon in
the cases cited in this paragraph to defeat the documents of title
was carefully considered by the court, impliedly admits its
competency. It failed in its purpose in
151
13
Phil.
202.
17
Phil.
132.
153
17
Phil.
501.
154
11
Phil.
204.
1S5
20
Phil.
563.
152
IMPLIED TRUSTS
379'
these cases merely because it was not sufficiently strong to
156
overcome the case in favor of the holders of the registered titles.
The Court concluded in Camacho that "We hold, therefore, that the parol
evidence introduced by the defendant municipality was competent to defeat the
terms of the plaintiff's deed. It need only be added that in all such cases as the
present we have required and shall continue to require that the proof
contradicting such documents must be clear and convincing. These qualities are
apparent in the proof offered by the defendant municipality in the case at
157
bar."
158
In Sing Joco v. Sunyantung, a trusted or confidential employee of the
company directly employed fraud to induce the company to forfeit its option to
purchase a valuable large tract of land, and thereafter caused his wife to
purchase the same. In affirming the decision of the trial court which decreed the
reconveyance of the property to the company, the Court then admitted that
from statutory law point of view only a recovery of damages against the
employee was allowed, thus: "This reparation provided for in the Civil Code and
applied to the case of bar seems to be limited to the indemnification of
damages, as we are not aware of any express provision in said Code which
imposes upon the person thus held liable, any obligation, such as that of
159
transferring to plaintiffs the estate in question." Nonetheless, the Court
affirmed that "This specific relief [of reconveyance], however, has already come
to be applied in this jurisdiction in similar cases, among which can be cited that
60
of Camacho v. Municipality of Baliuag: And in the North American law such
sanction is expressly recognized, and a transaction of this nature might be
regarded as an 'equitable trust' by virtue of which the thing acquired by an
employee is deemed not to have
156
/Jb/of,
at
pp.
469.
Ibid,
at
p.
470.
158
43
Phil.
589
1S9
(1922).
/b/d,
at
p.
593.
160
28
Phil.,
466.
157
380
NON-CORPORATE MEDIA OF DOING BUSINESS
been
acquired
for
his
own
benefit
or
that
of
any
other
person
but
for
his
181
principal,
and
held
in
trust
for
the
latter."
In
justifying
such
a
resolution,
the
Court
held
Such
an
act
of
infidelity
committed
by
a
trusted
employee
calculated
to
redound
to
his
own
benefit
and
to
the
detriment
of
his
employers
cannot
pass
without
legal
sanction.
Nemo
debet
aliena
jactura
locupletari;
nemo
ex
suo
delicto
meliorem
suam
conditionem
facera
potest.
It
is
an
illicit
act
committed
with
culpa
and
therefore,
its
agent
is
liable
(art.
1089,
Civil
Code),
for
the
damage
caused
(art.
1902,
ibidem).
Not
identical,
but
similar,
to
this
infidelity
is
the
abuse
of
confidence
sanctioned
in
our
Penal
Code
as
a
generic
circumstance,
nay
as
specific
aggravating
one,
and
even
as
an
essential
element
of
certain
crimes.
Such
principle,
however,
in
case
of
this
nature
is
generally
recognized
in
our
laws,
since
in
the
case
of
commercial
agents
(factores)
it
is
expressly
established.
Undoubtedly,
formerly
under
the
circumstances
then
prevailing
such
sanction
was
not
necessary
in
the
field
of
civil
law,
because
its
sphere
of
action
is
the
general
relations
of
society;
but
even
then
it
was
deemed
necessary
expressly
to
protect
with
such
sanction
the
commercial
relations
wherein
the
question
of
gain
was
involved,
which
is
sometimes
so
imperative
as
to
ignore
everything,
even
the
very
principles
of
182
loyalty,
honesty,
and
fidelity.
A
confidential
employee
who,
knowing
that
his
principal
was
negotiating
with
the
owner
of
some
land
for
the
purchase
thereof,
surreptitiously
succeeds
in
buying
it
in
the
name
of
his
wife,
commits
an
act
of
disloyalty
and
infidelity
to
his
principal,
and
is
liable
for
damage.
The
reparation
of
the
damage
must
consist
in
respecting
the
contract
which
was
about
to
be
concluded,
and
transferring
the
said
land
for
the
same
price
and
upon
the
same
terms
as
those
on
which
the
purchase
was
made
for
the
land
sold
to
the
wife
of
said
employee
passed
to
them
as
what
might
be
regarded
as
equitable
trust,
by
virtue
of
which
the
thing
thus
acquired
lbid, at p. 593, citing 21 R. C. L., 825; 2 CORPUS JURIS, 353.
162
/fw'd, at pp. 592-593.
IMPLIED TRUSTS 408'
by an employee is deemed to have been acquired not for his own
benefit or that of any other person but for his principal and held in
183
trust for the latter.
164
In Severino v. Sever/no, the Court held
The relations of an agent to his principal are fiduciary and it is
an elementary and very old rule that in regard to property forming
the subject-matter of the agency, he is estopped from acquiring or
asserting a title adverse to that of the principal. His position is
analogous to that of a trustee and he cannot consistently, with the
principles of good faith, be allowed to create in himself an interest
in opposition to that of his principal or cestui que trust Upon this
ground, and substantially in harmony with the principles of the Civil
Law (see sentence of the supreme court of Spain of May 1, 1900),
the English Chancellors held that in general whatever a trustee
does for the advantage of the trust estate inures to the benefit of
the cestui que trust (Greenlaw vs. King, 5 Jur., 18; Ex parte Burnell,
7 Jur., 116; Ex parte Hughes, 6 Ves., 617; Ex parte James, 8 Ves.,
337; Oliver vs. Court, 8 price, 127.) The same principle has been
consistently adhered to in so many American cases and is so well
established that exhaustive citations of authorities are superfluous
and we shall therefore limit ourselves to quoting a few of the
numerous judicial expressions upon the subject. The principle is
well stated in the case of Gilber vs. Hewetson (79 Minn., 326)
"A receiver, trustee, attorney, agent, or any other person
occupying fiduciary relations respecting property or persons, is
utterly disabled from acquiring for his own benefit the property
committed to his custody for management. This rule is entirely
independent of the fact whether any fraud has intervened. No
fraud in fact need be shown, and no excuse will be heard from the
trustee. It is to avoid the necessity of any such inquiry that the rule
takes so general a form. The rule stands on the moral obligation to
refrain from placing one's self in positions which ordinarily excite
conflicts
184
lbid,
at
p.
593.
44
Phil.
343
(1923).
NON-CORPORATE MEDIA OF DOING BUSINESS
382
between self-interest and integrity. It seeks to remove the
temptation that might arise out of such a relation to serve one's
self-interest at the expense of one's integrity and duty to another,
by making it impossible to profit by yielding to temptation. It
165
applies universally to all who come within its principle."
9. When Property Is Acquired Through Mistake or Fraud
ART. 1456. If property is acquired through mistake or fraud, the
person obtaining it is, by force of law, considered a trustee of an
implied trust for the benefit of the person from whom the property
comes.
Under
Article
1456
of
the
New
Civil
Code,
if
property
is
acquired
through
mistake
or
fraud,
the
person
obtaining
it
is,
by
force
of
law,
considered
a
trustee
under
an
implied
trust
arrangement
for
the
benefit
of
the
person
from
whom
the
property
comes.
Lopez
affirms
that
Article
1456
covers
a
form
of
constructive
trust.
66
Philippine
National
Bank
v.
Court
of
Appeals,'
also
confirms
the
arrangement
covered
under
Article
1456
as
a
constructive
trust,
thus
A
deeper
analysis
of
Article
1456
reveals
that
it
is
not
a
trust
in
the
technical
sense[,]
for
in
a
typical
trust,
confidence
is
reposed
in
one
person
who
is
named
a
trustee
for
the
benefit
of
another
who
is
called
the
cestui
que
trust,
respecting
property
which
is
held
by
the
trustee
for
the
benefit
of
the
cestui
que
trust
A
constructive
trust,
unlike
an
express
lbid, at pp. 350-351.
217 SCRA 347 (1993).
186
IMPLIED TRUSTS
383'
trust, does not emanate from, or general a fiduciary relation. While
in an express trust, a beneficiary and a trustee are linked by
confidential or fiduciary relations, in a constructive trust, there is
neither a promise nor any fiduciary relation to speak of and the
so-called trustee neither accepts any trust nor intends holding the
167
property for the beneficiary.
By its language Article 1456 covers all types of property, whether movable
or immovable. Yet the cases that have applied the principle in Article 1456 have
often involved immovables, specially registered parcels of land, where the public
policy is that the operative key to determine who has title to the property is
registration.
When it comes to movable property, the application of the principles of an
implied trust under Article 1456 must contend with the public policy covered in
Article 559 of the Civil Code that possession of movable property acquired in
good faith is equivalent to title, thus
ART. 559. The possession of movable property acquired in good
faith in equivalent to a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the
price paid therefore.
The second part of Article 559 offers the same principle of recovery on the
part of the true owner of a movable that is similar to the implied trust doctrine
under Article 1456: "Nevertheless, one who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the
same."
K7
lbid, at pp. 353-354.
NON-CORPORATE MEDIA OF DOING BUSINESS
384
a. Application of Principle under the Old Civil Code
The equity principle now expressed in Article 1456 first found expression
in Gayondato v. Insular Treasurer In Gayon- dato, where a mother and her
minor daughter inherited a large tract of land, and had it applied for cadastral
survey, but title was mistakenly issued only in the name of the mother, the
Court held that courts of equity will impress upon the title, a condition which is
generally in a broad sense termed "constructive trust" in favor of the defrauded
party, but the use of the word "trust" in this sense is not technically accurate
and is not the kind of trust.
In the application of the underlying equity principle now contained in
Article 1456, the Court has always emphasized that in spite of the proceedings
under the Torrens system of registration being in rem, and the title issued
thereto being considered imprescriptible and indefeasible, the Torrens system
does not prevent the cestui que trust under an implied trust to sue for the
recovery of the land in the action for reconveyance, whenever the property is
acquired through mistake or fraud, since the person obtaining the registered
title is, by force of law, considered a trustee of an implied trust for the benefit of
the person from whom the property comes.
169
In Severino v. Severino, where the uncle who was acting as agent or
administrator of the property belonging to a niece, had procured through fraud
a Torrens title over said property in his name, it was held that the uncle was
obliged to surrender the property to the niece and transfer title to her.
170
In Laureano v. Stevenson, a certificate of title under the Torrens system
was mistakenly issued in favor of petitioner Kilayko covering not only the parcel
of land he bought from Laureano, but including another adjacent land which
remained the property of his seller. When the creditors of Kilayko had levied
upon all the properties covered by the title to enforce a judgment debt obtained
against Kilayko, Laureano then learned
1
8
8170
45
Phil.
252
4(1923).
9
P
h
i
l
.
2
4
4
IMPLIED TRUSTS
385'
of the mistake committed during the registration proceedings which had
become final and executory. In determining whether Laureano could legally
prevent the public sale of properties registered under the Torrens system in the
name of Kilayko, the Court held
The fundamental principles governing the Torrens system are
well known. Ordinarily if one tasks no steps to protect his property
interests at the time of the cadastral survey, he is estopped to
dispute the title. He has one year from the issuance of the decree
to allege and prove fraud. But he may not wait longer than this
period to assert his rights. And were this an ordinary registration
case, we would reach a conclusion satisfactory to the appellants.
But we think that there is more to the case than this.
It must not be forgotten that Kilayco never laid claim to this
property; that the two lots Nos. 4267 and 4289 covered by the
certificate of title No. 830 were mistakenly registered in the name
of Eugenio Kilayco; that the court did not have jurisdiction to
confirm the title of said two lots either in favor of Eugenio Kilayco
or of anybody else, for the reason that no petition for title was
filed, no trial was held, no evidence was presented, and no
judgment was rendered regarding these two lots in the land
registration proceedings; that Kilayco never asserted any right of
ownership over the property; that the rent was paid to Laureano;
and that judgment was obtained in the courts in favor of Laureano
through the acquiescence and consent of Kilayco. Kilayco was, in
effect, merely holding the title of the property in trust for
Laureano. The creditors of Kilayco had in the property, which, in
171
this case, was nothing.
m
In De Ocampo v. Zaporteza, where it was determined that an
instrument, which did not express the true contract between the parties, but
which nevertheless became the basis upon which the defendants obtained the
amendment of the decree of adjudication by which they received a certificate of
transfer of title
171
/b/d,
at
pp.
254-
53
2P55.
hil.
442
(1929).
172
386
NON-CORPORATE MEDIA OF DOING BUSINESS
covering
more
than
the
number
of
lots
due
them,
the
Court
held
that
"application
must
here
be
made
of
the
doctrines
upheld
in
the
cases
of
Uy
Aloe
174
vs.
Cho
Jan
Ling,
Camacho
vs.
Municipality
of
Baliuag;
and
Severino
vs.
m
Severino,
to
the
effect
that
the
defendants
only
hold
the
certificate
of
transfer
in
trust
for
the
plaintiffs
with
respect
to
the
portion
of
the
lot
planted
with
1,300
coconut
trees;
and
they
are
therefore
bound
to
execute
a
deed
in
favor
of
the
plaintiff,
transferring
to
them
said
portion
planted
with
1,300
coconut
176
trees."
177
In Escobar v. Locsin, the designated agent, taking advantage of the
illiteracy of the principal, claimed for himself the property which he was
designated to claim for the principal and managed to have it registered in his
own name and became part of his estate when the agent died. The Court held
that the estate was in equity bound to execute the deed of conveyance of the
lot to the cestui que trust: "A trust such as that which was created between
the plaintiff and Domingo Sumangil is sacred and inviolable. The Courts have
therefore shielded fiduciary relations against every manner of chicanery or
detestable designed cloaked by legal technicalities. The Torrens system was
178
never calculated to foment betrayal in the performance of a trust."
In Pacheco v. Arro, the Court held that "When the claim to the lots in
the cadastral case was withdrawn by the respondents relying upon the
assurance and promise made in open court by . . . the predecessor-in-interest
of the petitioners, a trust or fiduciary relation between them arose, or resulted
therefrom, or was created thereby. The trustee cannot invoke the statute of
18
limitations to bar the action and defeat the right of the cestui que trustent."
173
19
Phil.,
202.
28
Phil.,
466.
175
44
Phil.,
343.
lbid,
at
p.
445.
177
74
Phil.
86
(1943).
lbid,
at
p.
87.
179
85
Phil.
505
m
(1950).
lbid,
at
pp.
514-515.
174
IMPLIED TRUSTS
387'
The
reason
why
Pacheco
is
covered
under
Article
1456,
rather
than
under
Article
1453
("When
property
is
conveyed
to
a
person
in
reliance
to
his
declared
intention
to
hold
it
for,
or
transfer
is
to
another
or
the
grantor")
is
because
the
action
for
reconveyance
was
being
filed
against
the
successors-in-interest
of
the
person
who
gave
such
a
declaration,
and
consequently,
the
property
held
in
trust
passed
to
the
heirs
by
way
mistake,
and
rightfully
covered
under
Article
1456.
This
state
of
things
was
acknowledged
years
later
by
the
Supreme
Court
181
in
Canezo
v.
Rojas,
where
it
held:
Assuming
that
such
a[n
express
trust]
relation
existed,
it
terminated
upon
Cripulo's
death
in
1978.
A
trust
terminates
upon
the
death
of
the
trustee
where
the
trust
is
personal
to
the
trustee
in
the
sense
that
the
trustor
intended
no
other
person
to
administer
it.
If
Crispulo
was
indeed
appointed
as
trustee
of
the
property,
it
cannot
be
said
that
such
appointment
was
intended
to
be
conveyed
to
the
respondents
or
any
of
Crispulo's
other
heirs.
Hence,
after
Crispulo's
death,
the
respondent
had
no
right
to
retain
possession
of
the
property.
At
such
point,
a
constructive
trust
would
be
created
over
the
property
by
operation
of
law.
Where
one
mistakenly
retains
property
which
rightfully
belongs
to
another,
a
constructive
trust
is
the
proper
remedial
device
to
correct
the
situation.
In
Sevilla
v.
De
los
Angeles,
one
of
the
heirs
of
decedent
Felix
Sevilla,
through
fraudulent
representation,
succeeded
in
having
the
original
certificate
of
title
issued
in
the
name
of
the
"heirs
of
Felix
Sevilla"
cancelled
and
a
new
one
issued
in
her
name
only
and
thereby
enabling
her
to
possess
the
land
and
appropriate
the
produce
therefor.
The
Court
held
that
"This
was
of
acquiring
title
creates
what
is
called
'constructive
trust'
in
favor
of
the
defrauded
party
and
grants
to
the
latter
a
right
to
vindicate
the
property
regardless
of
the
lapse
184
off/me."
181
538 SCRA 242 (2007).
/b/d, at p. 257; emphasis
183
supplied.
97 Phil. 875 (1955).
w
lbid, at p. 879; italics supplied.
182
388
NON-CORPORATE MEDIA OF DOING BUSINESS
b. Application under the New Civil Code
m
In Diaz v. Gorricho and Aguado, the Supreme Court recognized that
Article 1456 "merely expresses a rule already recognized by our courts [first
enunciated in Gayondato v. Insular Treasurer, 49 Phil. 244 (1926)] prior to the
188
[New Civil] Code's promulgation."
187
Shortly
thereafter,
in
Avecilla
v.
Yatco,
the
Court
held
that
the
implied
trust
arrangement
imposed
by
Article
1456
of
the
New
Civil
Code
allows
the
aggrieved
party
a
remedy
to
seek
reconveyance
against
the
party
who
has
employed
fraud,
thus
But
the
right
of
action
in
this
constructive
trust
should
be
exercised
against
the
trustee,
who
caused
the
fraud,
and
not
against
an
innocent
purchaser
for
value,
as
the
Susana
Realty,
Inc.
This
right
may
also
be
exercised
against
Santiago
Cruz
who
also
obtained
title
to
the
land
with
knowledge
of
the
fraud,
but
not
with
regard
to
Susana
Realty,
Inc.
which,
as
already
stated,
has
bought
the
property
in
good
faith.
The
remedy
in
this
case
of
the
defrauded
heirs
is
to
bring
an
action
for
damages
against
those
who
caused
the
fraud
or
were
instrumental
in
depriving
them
of
the
property.
Their
action
cannot
reach
an
innocent
purchaser
for
188
value
who
is
protected
by
law.
Likewise,
under
the
New
Civil
Code,
the
Court
reiterated
the
principle
that
public
policy
demands
that
a
person
guilty
of
fraud
or
at
least,
of
breach
of
trust,
should
not
be
allowed
to
use
a
Torrens
title
as
a
shield
against
the
consequences
189
of
his
own
wrongdoing.
In
Vda.
de
Jacinto
v.
Vda.
de
Jacinto,
the
Court
held
Even
in
the
absence
of
fraud
in
obtaining
registration
or
even
after
the
lease
of
one
year
after
the
issuance
of
a
185
103 Phil. 261
(1958).
lbid, at p. 264.
187
103 Phil. 666
m
lbid, at p. 670.
(1958).
189
5 SCRA 370
(1962).
m
IMPLIED TRUSTS
389'
decree of registration, a co-owner of land who applied for and
secured its adjudication and registration in his name knowing that
it had not been allotted to him in the partition, may be compelled
to convey the same to whoever received it in the apportionment,
so long as no innocent third party had acquired rights therein, in
the meantime for a valuable consideration. "Indeed, any rule to
the contrary would sanction one's enrichment at the expense of
another. Public . policy demands that a person guilty of fraud Or, at
least, of breach of trust, should not be allowed to use a Torrens
title as a shield against the consequences of his wrongdoing
(Cabanos vs. Register of Deeds, etc., 40 Phil. 620; Severino vs.
Severino, 41 Phil. 343.)
Lastly, the claim of the heirs of Pedro Jacinto that the latter
had acquired ownership of the property in litigation by
prescription, is likewise untenable. As we had recently held in Juan,
et al. vs. Zufiiga, G.R. No. L-17044, April 28,1962, an action to
enforce a trust is imprescriptible. Consequently, a co-heir who,
through fraud, succeeds in obtaining a certificate of title in his
name to the prejudice of his coheirs, is deemed to hold the land in
trust for the latter, and the action by them to recover the property
190
does not prescribe.
The Court has since then re-affirmed under the New Civil Code the
principle that registration of property by one person in his name, whether by
mistake or fraud, the real owner being another person, impresses upon the
title so acquired the character of a constructive trust for the real owner, which
would justify an action for reconveyance:
In Gonzales v. Jimenez, where unregistered land was sold by the
father to a buyer who took possession thereof, but
subsequently, the father managed to obtain a free patent
over the same property in the name of the son to whom an
original certificate of title was issued.
190
/b/d,
at
pp.
376-
13
3S77.
CRA
80
(1965).
191
417
NON-CORPORATE MEDIA OF DOING BUSINESS
192
In Fabian v. Fabian, where co-heirs entered into an
extrajudicial settlement of the estate of the decedent,
excluding therefrom some of the other forced heirs, and
subsequently obtaining original and transfer certificates of
title in their names, the co-heirs who obtained title through
fraud were considered trustees under an implied trust for the
benefit of the other co-heirs.
In Buena v. Reyes, where the husband of one of the co-heirs
was designated by all the heirs of the decedent to file an
answer in the cadastral proceedings and to obtain title to the
property left by the decedent in behalf of ail heirs, but instead
only obtained title in his name and his two brothers, the Court
ruled the creation of a constructive trust.
In Magallon v. Montejo, where conjugal property was
adjudicated entirely in the name of the surviving husband and
leaving out the children from their successional rights to
one-half of the property pertaining to their deceased mother,
the Court held that a constructive trust under Article 1456 had
been duly constituted with the surviving father "as the trustee
of a constructive trust, [with] an obligation to convey to the
private respondents that part of the land in question to which
she now claims an ostensible title, said portion rightfully
pertaining to the respondents' deceased mother as her share
195
in the conjugal partnership."
In Municipality of Victorias v. Court of Appeals, where
registered land previously sold to the municipal corporation,
but which failed to duly
192
193
194
22 SCRA 231 (1968).
27 SCRA 1179 (1969).
194
146 SCRA 282 (1986).
195
//>/d, at p. 290.
196
149 SCRA 32 (1987).
193
196
391'
IMPLIED TRUSTS
register the sale, was erroneously passed by intestate
succession to the heirs of the seller, it was held that
notwithstanding the irrevocability of the Torrens title the
trustee and his successors- in-interest were bound to execute
the deed of reconveyance: "As the land in dispute is held by
private respondents in trust for the Municipality of Victorias, it
is logical to conclude that the latter can neither be deprived of
its possession nor be made to pay rentals thereof. Private
respondent is in equity bound to reconvey the subject land to
the cestui que trust, the Municipality of Victorias. The Torrens
system was never calculated to foment betrayal in the
197
performance of a trust."
In Adille v. Court of Appeals, where one of the co-owners
exercised for himself alone the right to redeem the property
sold under a sale a retro and placed title solely in his name, he
was held to have taken title as trustee under an implied trust
governed under Article 1456.
Pajarillo v. Intermediate Appellate Court, where the mother
had previously validly donated the land to a daughter, and
latter sold it again to a son who knew of the donation, the
latter having received title thereto as a trustee of an implied
trust under Article 1456.
199
Yet,
the
Supreme
Court
has
not
been
consistent
in
its
position.
Let
us
first
take
the
decision
in
Heirs
of
Tanak
Pangaaran
Patiwayon
v.
Martinezwhere
the
decedent
during
his
lifetime
had
married
legitimately
three
successive
times,
but
without
197
/b/d,
at
p.
45.
157
SCRA
455
199176
SCRA
340
(1988).
200
(1989).
142
SCRA
252
(1986).
198
392
NON-CORPORATE MEDIA OF DOING BUSINESS
liquidation
of
the
conjugal
partnerships
formed
during
the
first
and
second
marriages.
The
only
male
issue
managed
to
convince
his
co-heirs
that
he
should
act
as
administrator
of
the
properties
left
by
the
decedent,
but
instead
obtained
a
certificate
of
title
in
his
own
name
to
the
valuable
piece
of
property
of
the
estate.
It
was
held
by
the
Court
that
where
the
son,
through
fraud
was
able
to
secure
a
title
in
his
own
name
to
the
exclusion
of
his
co-heirs
who
equally
have
the
right
to
a
share
of
the
land
covered
by
the
title,
an
implied
trust
was
created
in
favor
of
said
co-heirs,
and
that
said
son
was
deemed
to
merely
hold
the
property
for
their
and
his
benefit:
The
rules
are
well-settled
that
when
a
person
through
fraud
succeeds
in
registering
the
property
in
his
name,
the
law
creates
what
is
called
a
"constructive
or
implied
trust"
in
favor
of
the
defrauded
party
and
grants
the
latter
the
right
o
recover
the
201
property
fraudulently
registered
within
a
period
of
ten
years.
Just
a
few
months
later,
in
Mariano
v.
Judge
De
Vega
where
the
children
of
the
decedent
by
his
second
marriage
had
taken
over
properties
of
the
estate,
excluding
therefrom
grandchildren
of
the
decedent
by
his
first
marriage,
the
Court
held
that
the
situation
is
one
that
is
governed
by
the
rules
of
co-
ownership
under
Article
494
of
the
Civil
Code
which
provides
that
no
prescription
shall
run
in
favor
of
a
co-owner
or
co-heir
against
his
co-owners
or
co-heirs
so
long
as
he
expressly
or
impliedly
recognizes
the
co-ownership.
In
view
of
a
clear
repudiation
of
the
co-ownership
duly
communicated
to
the
co-heirs,
no
prescription
occurred
and
the
filing
of
the
action
for
partition
and
delivery
of
possession
covering
their
corresponding
shares
28
years
after
the
death
of
the
decedent
was
deemed
not
filed
out
of
time.
lbid,
at
p.
261,
citing
Gonzales
v.
Jimenez,
Sr.,
13
SCRA
80,
82
(1965);
and
pointing
to
Ruiz
v.
Court
of
Appeals,
79
SCRA
525,
537.
**148
SCRA
342
(1987).
IMPLIED TRUSTS
393'
203
In Tomas v. Court of Appeals, while a large tract of land was still
unregistered land, the owners sold portions thereof to the vendees covered by
tax declarations, and possession and control thereof was transferred to the
vendees. Yet when the owners had sought registration of the property under
the Torrens system, they included the portions already sold and obtained title
thereto in their names. Upon discovery thereof, the vendees filed an action for
reconveyance to which the registered owner pleaded finality of the decree of
registration. The Court held that an implied trust was constituted under Article
1456 thus: "In the present case, prescription will not lie in favor of the
petitioners [owners-sellers] who are not even in possession of the disputed
204
land."
205
In
Noel
v.
Court
of
Appeals,
where
the
surviving
wife
sold
the
entirety
of
a
parcel
of
land
bought
during
the
marriage,
without
the
authority
from
the
forced
heirs
of
the
deceased
husband,
the
Court
in
ruling
that
that
the
sale
of
the
other
half
constituted
the
buyer
as
trustee
under
an
implied
trust
under
Article
1456,
held
m
In Diaz v. Gorricho, the Court said that Article 1456 merely
expresses a rule recognized in Gayondato v. Insular Treasurer.
Applying said rule, the Gayondato court held that the buyer of a
parcel of land at a public auction to satisfy a judgment against a
widow acquired only one-half interest on the land corresponding
to the share of the widow and the other half belonging to the heirs
of her husband became impressed with a constructive trust in
208
behalf of said heirs.
^85 SCRA627 (1990).
lbid, at p. 633.
205
240 SCRA 78
(1995). Phil. 261
207
49 Phil.
(1958).
244
xxibid, at pp. 88-89.
(1926).
394
NON-CORPORATE MEDIA OF DOING BUSINESS
c. Recent Applications of Article 1456
Pedrano v. Heirs of Benedicto Pedrano, paid lip service to the principle
embodied in Article 1456 that if property is acquired through mistake or fraud,
the person obtaining it is, by force of law, considered a trustee of an implied
trust for the benefit of the person from whom the property comes.
In Heirs of Valeriano S. Concha, Sr. v. Lumocso, the Court held that "An
action for reconveyance respects the decree of registration as incontrovertible
but seeks the transfer of property, which has been wrongfully or erroneously
registered in other person's names, to its rightful and legal owners, or to those
who claim to have a better right. There is no special ground for an action for
reconveyance. It is enough that the aggrieved party has a legal claim on the
property superior to that of the registered owner and that the property has not
211
yet passed to the hands of an innocent purchaser for value."
Lumocso also held that cases brought under Article 1456 "may also be
considered as actions to remove cloud on one's title as they are intended to
procure the cancellation of an instrument constituting a claim on petitioners'
alleged title which was used to injure or vex them in the enjoyment of their
212
alleged title."
213
Pasino v. Monterroyo, held that "Under the principle of constructive
trust, registration of property by one person in his name, whether by mistake or
fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would
214
justify an action for reconveyance. In the action for reconveyance, the decree
of registration is respected as incontrovertible but what is sought instead is the
transfer of the property wrongfully or erroneously registered in another's name
to its rightful owner or to one with a
209
539 SCRA 401 (2007).
540 SCRA 1 (2007).
211
//)/d, at pp. 13-14.
lbid, at p. 15.
213
560 SCRA 739 (2008).
2u
lbid, citing Heirs ofTabia v. Court of Appeals, 516 SCRA 431
(2007).
210
IMPLIED TRUSTS
395'
better
right.
If
the
registration
of
the
land
is
fraudulent,
the
person
in
whose
name
the
land
is
registered
holds
it
as
a
mere
trustee,
and
the
real
owner
is
215
entitled
to
file
an
action
for
reconveyance
of
the
property."
In
Pasifio
the
respondents
were
able
to
establish
that
they
have
a
better
right
to
the
parcel
of
land
since
they
had
long
been
in
possession
of
the
property
in
the
concept
of
owners,
by
themselves
and
through
their
predecessors-in-interest.
Therefore,
despite
the
irrevocability
of
the
Torrens
titles
issued
in
the
names
of
the
petitioners
and
even
if
they
are
already
the
registered
owners
under
the
Torrens
system,
the
petitioners
may
still
be
compelled
under
the
law
to
reconvey
the
property
to
respondents.
6
In Lopez v. Court of Appeals," where in her notarial will the testator
"expressed that she wished to constitute a trust fund for her paraphernal
properties, denominated as Fideicomiso de Juliana Lopez Manzano
(Fideicomiso), to be administered by her h u s b a n d . . . Two-thirds (2/3) of the
income from rentals over theses properties were to answer for the education of
deserving but needy honor students, while one-third (1/3) was to shoulder the
expenses and fees of the administrator," but that eventually in the probate of
the will the properties were adjudicated to the husband as sole heir, the Court
ruled that "On the premise that the disputed properties are the paraphernal
properties of Juliana which should have been included in the Fideiocomiso, their
registration in the name of Jose would be erroneous and Jose's possession
would be that of a trustee in an implied trust... [which from] the factual milieu of
this case is provided in Article 1456 of the Civil Code. . . . The apparent mistake in
the adjudication of the disputed properties to Jose created mere implied trust of
the constructive variety in favor of the beneficiaries of the Fideicomiso"
lbid, at p. 751, citing Mendizabel v. Apao, 482 SCRA 587
216
(2006).
574 SCRA 26.
2
"lbid, at pp. 38.
396
NON-CORPORATE MEDIA OF DOING BUSINESS
Recently,
in
Luna,
Jr.
v.
Cabales,
the
Court
held
that
"The
registration
of
a
property
in
one's
name,
whether
by
mistake
or
fraud,
the
real
owner
being
another,
impresses
upon
the
title
so
acquired
the
character
of
a
constructive
trust
for
the
real
owner.
The
person
in
whose
name
the
land
is
registered
holds
it
as
a
mere
trustee,
and
the
real
owner
is
entitled
to
file
an
action
for
reconveyance
of
the
property.
The
Torrens
system
does
not
protect
a
usurper
219
from
the
true
owner."
0O0
218
608
SCRA
206.
at
p.
lbid,
206.
CHAPTER
4
PRESCRIPTION
RULES
FOR
TRUSTS
A separate and final chapter on the rules on prescription of trusts has
been set-out in order to provide a fitting comparison of the three types of trusts
recognized in the Philippine judicial system: express trusts, resulting trusts, and
constructive trusts.
A section on formal reclassification of trusts under the Philippine Legal
System is set at the end of this chapter, that draws from the doctrines that have
evolved from the decisions of the Supreme Court on Trusts.
RULES OF PRESCRIPTION FOR EXPRESS TRUSTS
1. General Rule: Express Trusts Not Susceptible to
Acquisitive Prescription
Following American doctrine, the Supreme Court declared in Diaz v.
Gorricho and Aguados that as a matter of public policy, when title and
possession of the property is held by a person as trustee under an express trust,
and for as long as he has not made a clear and express repudiation of the trust,
then the rights of the cestui qui trust are not subject to prescription to favor the
trustee, thus:
The American law on trusts has always maintained a
distinction between express trusts created by intention of
'103 Phil. 261 (1958).
397
398
NON-CORPORATE MEDIA OF DOING BUSINESS
the parties, and the implied or constructive trusts that are
exclusively created by law, the latter not being trusts in their
technical sense. The express trusts disable the trustee from
acquiring for his own benefit the property committed to his
management or custody, at least while he does not openly
repudiate the trust, and makes such repudiation known to the
beneficiary or cestui que trust. For this reason, the old Code of Civil
Procedure (Act 190) declared that the rules on adverse possession
do not apply to "continuing and subsisting" {i.e., unrepudiated)
2
trusts.
3
The
doctrine
was
reiterated
in
Geronimo
and
Isidro
v.
Nava
and
Aquino,
which
held
that
"Such
a
trust
is
an
express
one,
not
subject
to
prescription...
Of
course,
it
might
be
contended
that
in
the
latter
instance
of
a
constructive
trust,
prescription
may
apply
where
the
trustee
asserts
a
right
adverse
to
that
of
the
cestui
que
trust,
such
as,
asserting
and
exercising
acts
of
ownership
over
a
4
property
being
held
in
trust."
s
By the time of the issuance of the seminal decision in Ramos v. Ramos,
the Court was confident enough to summarize the prevailing rules against
prescription when it came to express trusts by citing the cases that have
enunciated the covered doctrines, thus:
(a)
There is a rule that a trustee cannot acquire by prescription
6
the ownership of property entrusted to him; or
(b)
An action to compel a trustee to convey property registered
in his name in trust for the benefit of the cestui qui trust does
7
not prescribe; or
lbid, at p. 264; italics supplied.
105 Phil. 145 (1959).
A
ibid, at p. 153). Reiterated in Gerona v. De Guzman, 11 SCRA 153 (1964),
and Julio v. Dalandan, 21 SCRA 543 (1967).
5
61 SCRA 284 (1974).
6
ibid, citing Palma v. Cristobal, 77 Phil. 712 (1946).
7
lbid, ciiting Manalang v. Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil.
810(1927).
3
PRESCRIPTION RULES FOR TRUSTS
(c)
The defense of prescription cannot be set up in an action to
recover property held by a person in trust for the benefit of
8
another; or
(d)
The property held in trust can be recovered by the beneficiary
9
regardless of the lapse of time.
399
Ramos
held
that
in
an
express
trust,
"The
basis
of
the
rule
is
that
the
possession
of
a
trustee
is
not
adverse.
Not
being
adverse,
he
does
not
acquire
by
prescription
the
property
held
in
trust.
Thus,
section
38
of
Act
190
provides
that
the
law
of
prescription
does
not
apply
"in
the
case
of
a
continuing
and
subsisting
10
trust."
2.
Exception:
When
Acquisitive
Prescription
May
Arise
in
Express
Trusts
11
As early as in Cortez v. 0//Va, the Supreme Court recognized the
principle that in an express trust, the trustee who is in adverse possession may
claim title by prescription where it appears that:
(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 known to
the cestui que trust, and
(c)
the evidence thereon is clear and conclusive.
By 1974, apart from affirming the general rule of imprescriptibility for
express trusts, Ramos recognized the principle that un
*lbid, citing Sevilla v. De los Angeles, 97 Phil. 875(1955).
9
lbid, citing Marabilles v. Quito, 100 Phil. 64 (1956); Bancairen v. Diones, 98
Phil. 122,126; Juan v. Zuniga, 4 SCRA 1221; Jacinto v. Jacinto, 5 SCRA 370 (1962);
and Tamayo v. Callejo, 147 Phil. 31, 37 (1972).
"Ibid, at p. 299, citing Diaz v. Gorricho and Aguado, 103 Phil. 261, 266
(1958); Laguna v. Levantino, 71 Phil. 566 (1941); Sumira v. Vistan, 74 Phil. 138
(1943); Golfeo v. Court of Appeals, 12 SCRA 199 (1964); Caladiao v. Santos, 10
SCRA 691 (1964).
11
33 Phil. 480 (1916).
400
NON-CORPORATE MEDIA OF DOING BUSINESS
der the strict conditions provided by Cortez, acquisitive prescrip-
tion over the res or trust property may validly accrue in favor of
the trustee, thus:
Acquisitive prescription may bar the action of the bene-
ficiary against the trustee in an express trust for the recov-
ery of the property held in trust where (a) the trustee has
performed unequivocal acts of repudiation amounting to an
ouster of the cestui qui trust, (b) such positive acts of repu-
diation have been made known to the cestui que trust and
12
(c) the evidence thereon is clear and conclusive. Compare
with the rule regarding co-owners found in the last paragraph
13
of article 494, Civil Code.
The essential elements for effective repudiation of an
express trust have been reiterated in recent times in Piiapil v.
14
15
Heirs of Maximino R. Briones, Cahezo v. Rojas, and Heirs of
16
Tranquiiino Labiste v. Heirs of Jose Labiste.
a. Valid "Repudiation" in Express Trusts
In Siumira v. Vista," the Court held that in an express trust,
an open disavowal of the trust must be made by positive acts
amounting to an ouster of, and made known to the cestui que
trust, in order that the latter may be affected; and that prescription*
or laches do not come into effect by the mere passage of time.
Thus, in the case of co-ownership, mere possession of one co-
owner does not constitute disavowal, for possession by any co-
owner is consistent with the co-ownership interest of other co-
owners.
"Ibid, at p. 300, citing Laguna v. Levantino, 71 Phil. 566 (1940-1941);
Salinas v. Tuason, 55 Phil. 729 (1931).
lbid, citing Casanas v. Roseilo, 50 Phil. 97 (1927); Gerona v. De
Guzman, 11 SCRA 153,157(1964).
"514 SCRA 197 (2007)
15
538 SCRA 242 (2007).
16
587 SCRA 417 (2009).
"74 Phil. 138 (1943).
401
PRESCRIPTION RULES FOR TRUSTS
18
Recently, in Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, the
Court held that the successors-in-interest of the trustee cannot rely on the fact
that the Torrens title was issued in the name of the trustee under an express
trust, since
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. The rule requires a clear
repudiation of the trust duly communicated to 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
19
to them.
Since there can be an express trust over registered and even when full title
to the property is registered in the name of the trustee, then such registration of
full ownership (as distinguished from registration of only naked or legal title)
does not amount to an act of repudiation. The other rules of prescription on
express trusts can be better appreciated by discussing them in comparison with
the rules pertaining to implied trusts, as was done hereunder.
RULES OF PRESCRIPTION FOR IMPLIED TRUSTS
Philippine legal history on Trusts has followed a tortuous path on the issue
of whether in a trust relationship, imbued with fiduciary and equitable
characters, there could be applied the principles of prescription and laches, and
if so, what periods would be appropriate and what commences the running of
any of such periods.
The doctrines on prescription as they covered implied trusts took a long
time to crystallize because the Supreme Court was trying to develop a single set
of doctrines for both resulting trusts
1fl
587 SCRA 417
(2009).
/6/d, at p. 426.
19
402
NON-CORPORATE MEDIA OF DOING BUSINESS
and
constructive
trusts.
Only
when
the
Court
began
to
categorize
and
treat
resulting
trusts
to
be
more
akin
to
the
express
trusts
based
on
the
realism
that
they
emanate
from
the
same
contractual
intent,
that
a
clear
doctrine
of
prescriptibility
began
to
make
sense
in
the
case
of
constructive
trusts.
1.
Old
Civil
Code
Jurisprudence
Since
title
to
the
purported
trust
property
is
in
the
name
of
the
trustee
in
implied
trust,
whether
resulting
and
constructive,
rules
of
prescription
began
to
evolve
primarily
in
actions
for
reconveyance
of
the
trust
property
filed
by
the
cestui
que
trust
Under
the
aegis
of
the
old
Civil
Code
which
did
not
have
provisions
on
trusts,
the
right
of
the
cestui
que
trust
against
the
trustee
in
implied
trusts
to
demand
a
reconveyance
of
the
property
had
its
roots
in
a
string
of
decisions
of
20
the
Supreme
Court
which
basically
upheld
the
doctrine
that
prescription
cannot
be
set
up
as
a
defense
in
an
action
that
seeks
to
recover
property
held
in
trust
for
the
benefit
of
another.
In
all
those
decisions,
the
Court
refused
to
sanction
a
purported
trustee's
claim
of
ownership
by
prescription
which
was
based
upon
his
own
breach
of
trust,
on
ground
of
generally
accepted
ethical
principles,
particularly
the
principles
of
good
faith
and
the
rule
on
the
moral
obligation
to
refrain
from
placing
one's
self
in
a
position
which
ordinarily
brings
about
conflicts
between
self-interest
and
integrity.
Even
then,
there
were
a
few
decisions
that
diverged
from
the
main
rule
of
imprescriptibility.
In
Claridad
v.
Benares,"
where
the
plaintiffs
were,
through
fraud,
made
to
sign
deeds
of
sale
of
the
lands
in
favor
of
Jose
*>Consunji
v.
Tison,
15
Phi.
81
(1910);
Uy
Aloe
v.
Cho
Jan
b'ng,
19
Phil.
202
(1911);
Camacho
v.
Municipality
of
Baliuag,
28
Phil.
466
(1914);
Severino
v.
Severino,
44
Phil.
343
(1923);
Cristobal
v.
Gomez,
50
Phil.
810
(1927);
Castro
v.
Castro,
57
Phil.
675
(1932);
Palma
v.
Cristobal,
77
Phil.
712
(1946);
Pacheco
v.
Arro,
85
Phil.
505
(1950);
Manalang
v.
Canlas,
94
Phil.
776
(1954);
Sevilla
v.
Angeles,
97
Phil.
875
(1955);
Bancairen
v.
Diones,
98
Phil.
122
(1955);
Mara-
biles
v.
Quito
,
100
Phil.
64
(1956);
and
Mabana
v.
Mendoza,
105
Phil.
260
(1959).
21
97
Phil.
973
(1955).
PRESCRIPTION RULES FOR TRUSTS
403
Benares,
believing
them
to
be
mere
lease
contracts,
the
fraud
was
discovered
in
1940
and
the
action
to
declare
the
sales
fictitious
and
illegal
were
brought
only
in
1945.
The
Court
held
that
such
action
was
barred,
since
being
based
on
fraud
it
could
only
be
brought
within
four
(4)
years
from
the
time
the
fraud
was
discovered.
The
use
of
the
four
(4)
year
prescriptive
period
based
on
fraud
was
incongruent
with
the
ten
(10)
year
period
provided
under
the
then
Code
of
Civil
Procedure
on
prescription
of
action.
It
is
said
that
it
was
in
Justice
JBL
Reyes'
dissenting
opinion
in
the
1956
22
decision
in
Marabiles
v.
Quito,
that
the
seeds
on
accepting
the
rule
of
prescriptibility
for
implied
trusts
began
to
take
roots,
where
he
wrote
I
concur
with
the
reasons
of
the
majority
decision,
but
consider
the
statement
to
the
effect
that
"property
held
under
constructive
trust
can
be
vindicated
regardless
of
the
lapse
of
time"
much
too
broad
for
unqualified
assent.
The
rule
of
imprescriptibility
is
logical
in
case
of
express
trusts,
since
a
party
who
agrees
to
hold
property
for
another,
and
upon
whose
promise
confidence
is
reposed,
will
naturally
be
held
to
his
agreement,
and
will
not
be
allowed
to
set
title
in
himself
without
first
repudiating
the
trust
expressly.
The
rule
can
be
extended
to
resulting
trusts,
since
the
intent
to
create
a
trust
exists
in
such
case,
even
if
all
requisites
of
express
trust
do
not
concur.
But
in
constructive
trusts,
based
on
fraud
or
tort,
the
ele-ment
of
trust
and
confidence
is
not
present,
and
the
authorities
are
[agreed]
that
no
repudiation
is
23
required
for
the
application
of
extinctive
prescription.
24
In
1958,
in
Diaz
v.
Gorricho
and
Aguado,
Justice
JBL
Reyes
wrote
the
majority
opinion
for
the
Court
which
held
that
"although
express
trusts
disable
the
trustee
from
acquiring
for
his
own
benefit
the
property
committed
to
his
management
or
custody,
at
least
while
he
does
not
openly
repudiate
the
trust,
^100 Phil. 64 (1956).
23
Ibid, at p. 68, citing 34 AM. JR. pp. 88, 143; AMERICAN LAW INST., RESTATEMENT
ON RESTITUTION, SEC. 179; RESTATEMENTS ON TRUSTS, Sec. 219.
"103 Phil. 261 (1958).
404
NON-CORPORATE MEDIA OF DOING BUSINESS
and
makes
such
repudiation
known
to
the
beneficiary
or
cestui
que
trust..
But
in
constructive
t r u s t s
. . .
the
rule
is
that
laches
constitutes
a
bar
to
actions
to
enforce
the
trust,
and
repudiation
is
not
required,
unless
there
is
concealment
25
of
the
facts
giving
rise
to
the
trust."
The
Court
explained
its
new
official
position
on
the
matter
as
follows
The
reason
for
the
difference
in
treatment
is
obvious.
In
express
trust,
the
delay
of
the
beneficiary
is
directly
attributable
to
the
trustee
who
undertakes
to
hold
the
property
for
the
former,
or
who
is
linked
to
the
beneficiary
by
confidential
or
fiduciary
relations.
The
trustee's
possession
is,
therefore,
not
adverse
to
the
beneficiary,
until
and
unless
the
latter
is
made
aware
that
the
trust
has
been
repudiated.
But
in
constructive
trusts
(that
are
imposed
by
law),
there
is
neither
promise
nor
fiduciary
relation;
the
so-called
trustee
does
not
recognize
any
trust,
and
has
no
intent
to
hold
for
the
beneficiary;
therefore,
the
latter
is
not
justified
in
delaying
action
to
recover
his
property.
It
is
his
fault
if
he
delays;
28
hence,
he
may
be
estopped
by
his
own
laches.
The
Diaz
doctrine
was
followed
in
Heirs
of
Candelaria
v.
Romero
and
26
J.M.
Tuaszon
&
Co.,
Inc.
v.
Magdangal,
which
were
all
decided
on
issues
arising
under
the
old
Civil
Code,
but
with
an
eye
on
the
provisions
of
the
New
Civil
Code
on
trusts.
But
even
during
that
period,
the
Court
was
not
quite
firm
in
its
position.
For
example,
just
a
year
after
Diaz,
in
Cuison
v.
Fernandez
and
Bengzon,
where
the
surviving
husband
sold
the
conjugal
partnership
property
without
the
formalities
established
for
the
sale
of
the
property
of
the
deceased
wife,
the
Court
held
that
the
^Ibid,
at
p.
264,
citing
54
AM.
JUR.,
sees.
580,581;
65
C.
J.,
sees.
956,957,
958;
AMER.
LAW
INSTITUTE,
RESTATEMENT
ON
TRUSTS,
sec.
219;
on
Restitution,
sec.
179;
Stianson
v.
Stianson,
6
ALR
287;
Claridad
v.
Benares,
97
Phil.
973
(1955).
*lbid,
at
p.
266.
"109
a
Phil.
500
(1960).
4
SCRA
84
(1962).
105
Phil.
135
(1959).
405
PRESCRIPTION RULES FOR TRUSTS
sale
by
the
surviving
husband
was
void
as
to
the
share
of
the
deceased
spouse
and
the
buyer
became
a
trustee
of
the
share
of
the
deceased
spouse
for
the
benefit
of
her
heirs,
the
cestuis
que
trustent.
The
Court
held
that
despite
the
lapse
of
twenty-five
(25)
years
from
the
time
of
the
purchase
of
the
property,
the
heirs
could
still
seek
reconveyance
from
the
buyer
since
"Prescription
cannot
be
set
up
as
a
defense
in
an
action
that
seeks
to
recover
the
property
held
in
trust
for
the
benefit
of
another.
Neither
could
laches
be
set
up
as
a
30
defense,
it
being
similar
to
prescription."
a.
Continuing
Relevant
Jurisprudence
under
the
Old
Civil
Code
Regime
There
are
some
doctrinal
rules
established
by
the
Supreme
Court
under
the
old
Civil
Code
which
we
posit
still
merit
acceptance
under
the
New
Civil
Code.
31
First,
is
the
ruling
in
the
early
decision
in
Castro
v.
Castro, where
the
Court
held
that
the
defense
of
prescription
or
laches
by
the
trustee
cannot
be
accepted
when
the
cestui
que
trust
is
a
minor,
since
the
latter
was
not
in
a
position
to
defend
himself,
thus:
In
an
implied
trust,
when
the
act
of
repudiation
of
the
trustee
was
effected
at
the
time
the
cestui
que
trust
was
still
a
minor,
then
such
act
does
not
prejudice
the
latter:
"We
note,
however,
that
this
supposed
repudiation
of
the
trust
first
took
place
before
Manuel
Castro
had
reached
his
majority,
and
we
are
unable
to
see
how
a
minor
with
whom
another
is
in
trust
relation
can
be
prejudiced
by
repudiation
of
the
trustee
addressed
to
him
by
the
person
who
is
subject
to
the
trust
obligation.
The
defendant
in
our
opinion
is
not
entitled
to
the
benefit
of
prescription
from
his
supposed
32
repudiation
of
the
trust.
^ibid,
at
p.
139.
31
57
Phil.
675
mid,
at
p.
685.
(1932).
NON-CORPORATE MEDIA OF DOING BUSINESS
406
Second,
is
the
ruling
in
Geronimo
and
Isidro
v.
Nava
and
Aquinowhere
the
Court
held
that
prescription
cannot
arise
in
favor
of
a
trustee
who
still
acknowledges
the
rights
of
the
cestui
que
trust.
In
Geronimo
and
Isidro,
a
decision
of
the
trial
court
declared
that
the
appellees
had
the
right
to
redeem
the
property
and
ordered
appellants
to
make
the
resale
of
the
property
in
favor
of
appellees.
After
the
decision
had
become
final
and
executory,
appellants
acknowledged
the
appellees
had
a
right
to
received
the
rentals
on
the
property
and
directed
tenants
to
pay
to
the
appellees
directly;
and
when
the
tenant
left
the
house,
appellees
took
possession
of,
and
exercised
acts
of
ownership
over,
with
seeming
conformity
of
the
appellants.
Later,
the
appellants
sought
to
retain
title
to
the
property
and
refused
to
convey
title
to
the
appelles
on
the
ground
that
they
had
in
their
favor
prescription;
or
that
the
appellees
where
guilty
of
laches
for
waiting
for
so
many
years
to
have
the
trial
court's
decision
enforced.
The
Court
ruled
that
when
the
trial
court
decision
became
final
and
executory,
there
was
created
a
constructive
trust,
in
the
sense
that
although
appellants
had
the
naked
title
issued
in
their
names,
and
which
they
retained,
nevertheless,
they
were
to
hold
said
property
in
trust
for
appellees
to
redeem,
subject
to
the
payment
of
the
redemption
price,
and
that
"Of
course,
it
might
be
contended
that
in
the
latter
instance
of
a
constructive
trust,
prescription
may
apply
only
where
the
trustee
asserts
a
right
adverse
to
that
of
the
cestui
que
trust,
such
as,
asserting
acts
of
ownership
over
the
property
being
held
in
trust.
34
But
even
under
this
theory,
such
a
claim
of
prescription
would
not
prosper,"
since
the
facts
showed
that
the
appellants
had
actually
began
to
recognize
the
rights
of
the
appellees
to
the
trust
property.
35
The principle was reiterated In Heirs of Candelaria v. Romero, which was
decided under the provisions of the old Civil Code, but recognizing the same
trust principles to have been
105 Phil. 145
(1959). "Ibid, at p.
153. ^109 Phil. 500
(1960).
PRESCRIPTION RULES FOR TRUSTS
407
expressed
under
the
provisions
of
the
New
Civil
Code,
the
Court
held
that:
Constructive
or
implied
trusts
may,
of
course,
be
barred
by
lapse
of
time.
The
rule
in
such
trusts
is
that
laches
constitutes
a
bar
to
actions
to
enforce
the
trust,
and
repudiation
is
not
required,
unless
there
is
concealment
of
the
facts
giving
rise
to
the
trust.
(Diaz,
et
al.
vs.
Gorricho,
et
al,
103
Phil.
261...)
Continuous
recognition
of
a
resulting
trust,
however,
precludes
any
defense
of
laches
in
a
suit
to
declare
and
enforce
the
trust.
.
.
.
The
beneficiary
of
a
resulting
trust
may,
therefore,
without
prejudice
to
his
right
to
enforce
the
trust,
prefer
the
trust
to
persist
and
demand
no
38
conveyance
from
the
trustee.
2.
Jurisprudence
under
the
New
Civil
Code
Under
the
New
Civil
Code,
the
Supreme
Court
for
a
time
continued
to
paddle
into
two
streams
of
decisions,
one
upholding
the
doctrine
of
imprescriptibility
for
implied
trusts,
and
the
other
acknowledging
that
a
clear
repudiation
of
the
trust
on
the
part
of
the
trustee
could
give
rise
to
the
defense
of
prescription.
In
one
case,
the
Court
held
that
it
should
be
noted
that
the
10-year
prescription
period
used
in
jurisprudence
under
the
Old
Civil
Code
was
based
on
the
provision
of
the
then
Code
of
Civil
Procedure.
Under
the
New
Civil
Code,
the
10-year
period
for
acquisitive
prescription
for
implied
trusts
is
based
on
the
37
second
paragraph
of
Article
1144.
M
In 1962, Alzona v. Capunitan, the Court declared that since
The case at bar involves an implied or constructive trust upon
the defendants-appellees. . .The prescriptibility of an action for
reconveyance based on implied or constructive
^Ibid,
at
p.
504.
37
Philippine
National
Bank
v.
Court
of
Appeals,
217
SCRA
347
M
4
SCRA
450
(1962).
(1993).
NON-CORPORATE MEDIA OF DOING BUSINESS
408
trust, is now a settled question in this jurisdiction. It prescribes in ten
30
(10)years"
0
Yet that same year, in Juan v. Zuhiga,* the Court held:
We need not reiterate those cases holding imprescriptible the
action to enforce a trust. A different view could encourage fraud
and permit one person unjustly to enrich himself at the expense of
41
another.
2
held:
This was followed-up in Jacinto v. Jacinto* where the Court
Lastly, the claim of the heirs of Pedro Jacinto that the latter
had acquired ownership of the property in litigation by
prescription, is likewise untenable. As we have recently held in
Juan, et al. vs. Zuhiga,..., an action to enforce a trust is
imprescriptible. Consequently, a coheir who, through fraud,
succeeds in obtaining a certificate of title in his name of the
prejudice of his coheirs, is deemed to hold the land in trust for the
latter, and the action by them to recover the property does not
43
prescribe"
In
1964,
the
Court
began
to
turn
away
from
the
notion
of
imprescriptibility
of
the
action
for
reconveyance
for
implied
trusts,
when
in
Gerona
v.
De
Guzman,**
it
reaffirmed
the
rule
of
prescriptibility
and
expressly
overruled
previous
decisions
to
the
contrary,
thus
39
/b/d,
at
p.
455;
Citing
Bofiaga
v.
Soler,
2
SCRA
755
(1961);
J.M.
Tuason
&
Co.
Inc.
v.
Magdangal,
4
SCRA
84
(1962),
with
special
attention
to
footnote
No.
1\
emphasis
supplied
*4
SCRA
1221
(1962).
41
Ibid,
at
p.
1226,
citing
Sevilla
v.
Angeles,
97
Phil.
875
(1955);
emphasis
supplied.
2
* 5
SCRA
370
(1962).
3
* lbid,
at
pp.
376-377;
emphasis
supplied.
"11
SCRA
153
(1964).
PRESCRIPTION RULES FOR TRUSTS
409
45
Although, there are some decisions to the contrary, it is
already settled in this jurisdiction that an action for reconveyance
of real property based upon a constructive or implied trust,
46
resulting from fraud, may be barred by the statute of limitations.
But Gerona returned to the four (4) year prescriptive period when the
underlying basis of the implied trust is fraud, as well as the rule that the
prescriptive period begins to run from the inscription of the title in the name of
the purported trustee, thus
Inasmuch as petitioners seek to annul the aforementioned
deed of "extra-judicial settlement" upon the ground of fraud in the
execution thereof, the action therefor may be filed within four (4)
years from the discovery of the fraud. Such discovery is deemed to
have taken place . . . when said instrument was filed with the
Register of Deeds and new certificates of title were issued in the
name of respondents exclusively, for the registration of the deed of
extra-judicial settlement constitutes constructive notice to whole
47
world.
Yet earlier that same year, in Caladiao v. Vda de Bias the Court held
that
Appellants also urge that the action for reconveyance has
prescribed because more than twenty years have elapsed since the
spouses Limpin obtained a certificate of title in their name over the
fishpond object of the present litigation. This contention is without
merit. As already pointed out, the application for registration was
in bad faith, with the
^Ibid,
citing
Jacinto
v.
Mendoza,
105
Phil.,
260;
Cuison
v.
Fernandez,
105
Phil.
135
(1959);
Marabiles
v.
Quito,
100
Phil.,
64
(1956);
and
Sevilla
v.
De
los
Angeles,
97
Phil.
875
(1955).
"Ibid,
at
p.
157,
Ibid,
citing
Candelaria
v.
Romero,
109
Phil.
500
(1960);
Alzona
v.
Capunita,
4
SCRA
450
(1962).
7
* lbid,
at
p.
157,
citing
Mauricio
v.
Villanueva,
L-11072,
September
24,
1959;
Diaz
v.
Gorricho,
103
Phil.,
261
(1958);
Avecilla
v.
Yatco,
L-11578,
May
14,
(1958);
J.M.
Tuason
&
Co.,
Inc.
v.
Magdangal,
4
SCRA
84
(1962);
Lopez
v.
Gonzaga,
10
SCRA
167
(1964).
^10
SCRA
691
(1964).
NON-CORPORATE MEDIA OF DOING BUSINESS
410
result that the certificate of title issued to the vendor Limpin in
1934 was in law issued to and held by him in behalf and in trust for
the benefit of the buyers, Simeon Bias and his wife, Maxima.
Under Act 190 (the old Code of Civil Procedure), section 38, which is
the governing statute, prescription does not apply to 'continuing
and subsisting trusts'; so that actions against a trustee to recover
trust property held by him are imprescriptible. Actions for the
reconveyance of property wrongfully registered are of this
9
category/
50
That same year, in Lopez v. Gonzaga, where the administrator of the
estate of the decedent had been duly instituted as the sole heir in the will of
the decedent which was duly probated, the Court held that even assuming that
the administrator had acted as trustee for the other heirs, the obtaining of the
transfer certificates of titles in the administrator's name of all registered land of
the estate "would constitute an open and clear repudiation of any trust, and
the lapse of more than twenty years' open and adverse possession as owner
51
would certainly suffice to vest title by prescription in said administrator."
52
Likewise that same year, in Castrillo v. Court of Appeals, the Court
affirmed that in constructive trusts among co-heirs or co-owners, the
prescriptive period begins on the date when the trustee registers the deed that
seeks to exclude the cestuis que trustant from title to the property and seeking
to have new title issued only in trustee's name.
53
The subsequent rulings in Gonzales v. Jimenez, Sr., Fabian v. Fabianand
De la Cerna v. De la Cerna, all upheld the 10-year prescriptive period for all
types of implied trusts. In particular, in De la Cerna, the Court held
AS
lbid, at p. 695; citing Manabang v. Canlas, 50 Off. Gaz., 1980; emphasis
supplied.
^lO SCRA 167 (1964).
"Ibid, at p. 179. *10
SCRA 549 (1964). "13
SCRA 80 (1965)
"22 SCRA 231 (1968).
72 SCRA 514 (1976).
PRESCRIPTION RULES FOR TRUSTS
411
...
His
Honor
committed
no
error
in
ruling
[that
the
action
has
already
prescribed].
It
is
idle
to
bother
as
to
whether
the
action
here
is
one
founded
exclusively
on
fraud
which
prescribes
in
four
(4)
years
or
one
based
on
constructive
trust
which
is
barred
after
ten
years,
there
being
no
question
that
the
appellees
secured
their
title
more
than
twenty
years
before
the
filing
of
the
complaint,
and
it
is
from
the
date
of
the
issuance
of
such
title
that
the
effective
assertion
of
adverse
title
for
purpose
of
the
statute
of
limitations
is
56
counted.
57
Thus, even by 1969, in Bueno v. Reyes where property belonging to an
predecessor-in-interest of whom plaintiffs parents were the intestate heirs was,
through mistake or in bad faith, registered in the cadastral proceedings in the
name of other parties who had no right thereto, the Court held that "While
there are some decisions which hold that an action upon a trust is
imprescriptible, without distinguishing between express and implied trusts, the
better rule, as laid down by this Court in other decisions, is that prescription
does supervene where the trust is merely an implied one>
a. When Prescription Is Allowed What Is the Period
Applicable?
In addition, the decision in Bueno provided a different formula on when
the prescriptive period begins to run, in that it would not be at the time of
registration, but upon discovery of the fraud or mistake, thus
Upon the general proposition that an action for reconveyance
such as the present is subject to prescription in ten years the
appellees and the court a quo are correct. The question here,
however, is: from what time should the
^Ibid, at p. 518, citing Gerona v. De Guzman, 11 SCRA 153.
57
27 SCRA 1179 (1969).
^Ibid, at p. 1183; citing Alzona v. Capunitan, 4 SCRA 450 (1962); Gerona v.
De Guzman, 11 SCRA 153 (1964); Gonzales v. Jimenez, 13 SCRA 80 (1965);
Cuaycong v. Cuaycong, 21 SCRA 1192 (1967); Fabian v. Fabian, 22 SCRA 231
(1968). Emphasis supplied.
412
NON-CORPORATE MEDIA OF DOING BUSINESS
prescriptive period be counted, in the light of the allegations in the
complaint? It should be remembered that the constructive trust
arose by reason of the bad faith or mistake of the deceased father
of the plaintiffs, compounded by the connivance of the appellees.
Consequently, the cause of action upon such trust must be deemed
to have accrued only upon the discovery of such bad faith or
mistake, or to put it more specifically, upon the discovery by the
appellants that their father, in violation of their property in his own
name and in the names of his brother. It would not do not say that
the cadastral proceeding itself, by virtue of its nature as a
proceeding in rem, was constructive notice to the appellants, for as
far as they were concerned the cadastral answer they had
authorized the father of the plaintiffs to file was not adverse to
them; and neither he nor the appellees may invoke the
constructive-notice rule on the basis of their own breach of the
authority thus, given. On top of all this, it was the appellants and
not the appellees who were in possession of the property as
owners, continuously up to 1962, when for the first time the latter
appeared upon the scene and tried to get such possession, thereby
revealing to them the fact of the mistaken or fraudulent
59
registration.
In other words, Bueno held that the cause of action, and the 10-year
prescriptive period begin to run from the discovery of bad faith or mistake.
60
Interestingly, in the same year as Bueno, in Miguel v. Court of Appeals,
the Court held that an action for the enforcement of a constructive trust is the
ultimate object of which is the reconveyance of a property lost through breach
of fiduciary relations and/or fraud, must be filed within four years from the
61
discovery of the fraud.
S9
lbid, at p. 1184; emphasis supplied.
29 SCRA 760 (1969).
61
Citing the decisions in Llanera v. Lopez, 106 Phil. 70 (1959); Gerona v.
De Guzman, 11 SCRA 154 (1964); and Fabian v. Fabian, 22 SCRA 232 (1968).
PRESCRIPTION RULES FOR TRUSTS
413
By 1974, the Supreme Court could summarize in its decision in Ramos v.
62
Ramos, the then settled rules of prescription and laches for came to implied
trusts, thus
(a)
The rule of imprescriptibility of the action to recover
property held in trust may possibly apply to resulting trusts
63
as long as the trustee has not repudiated the trust;
(b)
The rule of imprescriptibility was misapplied to constructive
64
trusts;
(c)
With respect to constructive trusts, the rule is different. The
prescriptibility of an action for reconveyance based on
65
constructive trust is now settled;
(d)
Prescription may supervene in an implied trust; and
(e)
Whether the trust is resulting or constructive, its
67
enforcement may be barred by laches.
66
61 SCRA 284,299-300 (1974).
mid, citing Heirs of Candeiaria v. Romero, 109 Phil. 500, 502-3 (1960);
Martinez v. Grano, 42 Phil. 35; Buencamino v. Matias, 63 O. G. 11033, 16
SCRA 849 (1966).
64
Ibid, citing Geronimo and Isidoro v. Nava and Aquino, 105 Phil. 145,153
(1959), and seeking comparison with Cuison v. Fernandez and Bengzon, 105
Phil. 135,139 (1959); De Pasion v. De Pasion, 112 Phil. 403,407 (1963).
mid, citing Alzona v. Capunitan, 4 SCRA 450 (1962); Gerona v. De Guz-
man, 11 SCRA 153 (1964); Claridad v. Henares, 97 Phil. 973; Gonzales v. Ji-
menez, 13 SCRA 80 (1965); Bonaga v. Soler, 112 Phil. 651 (1961); J. M. Tua-
son & Co., v. Magdangal, 4 SCRA 84 (1962).
mid, citing Bueno v. Reyes, 27 SCRA 1179 (1969); Fabian v. Fabian, 22
SCRA 231 (1968); Jacinto v. Jacinto, 5 SCRA 371 (1962).
67
Ibid, citing 90 C.J.S. 887-889; 54 AM JUR. 449-450; Diaz v. Gorricho and
Aguado, 103 Phil. 261 (1958); and seeking comparison with Mejia v. Gam-
ponia, 100 Phil. 277 (1956).
NON-CORPORATE MEDIA OF DOING BUSINESS
414
69
Escay v. Court of Appeals, reiterated the doctrines when it held that
The prescriptibility of an action for reconveyance based on
implied or constructive trust, is now a settled question in this
69
jurisdiction. It prescribes in ten years.
Express trusts prescribe 10 years from the repudiation of the
70
trust.
Since then, the 10-year prescriptive period rule for implied trusts has been
affirmed on a consistent basis
71
In Ruiz v. Court of Appeals, where it was held that "The rules
are well-settled that when a person through fraud succeeds in
registering the property in his name, the law creates what is
called a 'constructive or implied trust' in favor of the defrauded
party and grants the latter the right to recover the property
72
fraudulently registered within a period of ten years."
In Armamento v. Guerrero, where the plaintiff, the actual
occupant and original homestead applicant of a large tract of
land under his cultivation, was deprived thereof by the
defendant who obtained a free patent over said property
through fraudulent assertion, the Court applied the provisions
of Article 1456, covering a prescriptive period often years.
73
"61 SCRA 369 (1974).
mid, citing Boriaga v. Soler, 2 SCRA 755 (1961); J.M. Tuason & Co., Inc. v.
Magdangal, 4 SCRA 84 (1962); special attention to footnote No. 1; Alzona v.
Capunitan, 4 SCRA 450 (1962); Bueno v. Reyes, 27 SCRA 1179 (1969).
Emphasis supplied.
70
lbid, at pp. 387-388, citing Diaz v. Gorricho, 54 O.G. p. 8429, Sec. 40,
Code of Civil Procedure. Emphasis supplied.
71
79 SCRA 525 (1977).
"Ibid, at p. 537.
"96 SCRA 178 (1980).
PRESCRIPTION RULES FOR TRUSTS
415
In Heirs of Tanak Pangawaran Patiwayan v. Martinez,w
where It was held that "Therefore, it is clear that the
prescriptive period which is applicable in this case is ten (10)
years. Consequently, the action of petitioner was not yet barred
since it was filed on July 1,1976 while the last day for filing such
action was on July 19,1976, ten years after the issuance of the
75
original certificate of title."
I n Gonzales v. Intermediate Appellate Court, where property
was registered in the name of one Fausto Soy with the
understanding that he would hold it for and in behalf of other
co-owners, the Court characterized the situation not as an
express trust, but an implied trust covered under Article 1456 of
the Civil Code: "The trust alluded to in this case is a constructive
trust arising by operation of law. It is not a trust in the technical
77
sense."
In Varsity Hills v. Navarro, where the Court held that our
decisions make it abundantly clear that actions on implied and
constructive trusts (as distinguished from express ones) are
extinguished by laches or prescription often (10) years.
In Carantes v. Court of Appeals, which affirmed that
prescriptive period under a constructive trust, is ten years from
discovery of the fraud; and that when it comes to registered
land, the inscription of the title of the purported trust
commences the running of said period.
16
76
"142 SCRA 252 (1986).
75
lbid, at p. 261.
76
204 SCRA 106 (1991).
77
Ibid, at p. 114.
7B
43 SCRA 503 (1922).
79
76 SCRA 514 (1977).
NON-CORPORATE MEDIA OF DOING BUSINESS
416
81
In Amerol v. BagumbayanVda. de Buncio v. Estate of De Leon,
Pajarillo v. Intermediate Appellate Court,Tomas v. Court of
63
6
Appeals, and Noel v. Court of Appeals, * which all held that
the period of prescription to recover the property based on an
implied trust is ten (10) years from the time that Torrens title
were obtained over the property in the name of the trustee or
his successors-in- interest.
b. When Does the 10-Year Prescriptive Period Begin to
Run?
It seems well-settled that when it comes to implied trusts, whether
resulting or constructive, and even those where the underlying equity
consideration is based on fraud, that prescription and laches would apply to
bar recovery by the cestui que trust of the property held in the name of the
purported trustee, and the prescriptive period is ten (10) years. The only
lingering question is when exactly the 10-year prescriptive period begins.
While the majority of recent decisions of the Supreme Court point to the
registration of title for registered land with the appropriate Register of Deeds
as the reckoning time, there have been recent decisions that use the actual
date of discovery of fraud, as the reckoning time, when the implied trusts is
founded on fraud.
c. When Registration in the Name of Trustee Was Integral Part of
the Trust Arrangement
66
In Tongoy v. Court of Appeals, where the implied trust resulted from
the simulated sales which were made for the
154 SCRA 396
(1987).
156 SCRA 352
^MQ SCRA 340
(1987).
(1989).
SCRA627
M
240 S(1990).
CRA 78
(1995).
123 SCRA 99
(1983).
81
PRESCRIPTION RULES FOR TRUSTS
417
purpose
of
enabling
the
transferee
to
save
the
properties
from
foreclosure
for
the
benefit
of
the
co-owners,
the
Court
refused
to
apply
the
theory
of
constructive
notice
resulting
from
the
registration
in
the
trustee's
name,
on
the
ground
that
"during
that
period
the
subsisting
trust
was
unrepudiated
and
the
cestui
que
trustants
could
not
be
expected
to
demand
transfer
of
title
in
their
names,
but
[r]ather,
it
should
be
counted
from
the
date
of
recording
of
the
release
of
mortgage
in
the
Registry
of
Deeds
. . .
the
cestui
que
trust
were
charged
with
the
knowledge
of
the
settlement
of
the
mortgage
obligation,
the
88
attainment
of
the
purpose
for
which
the
trust
was
constituted."
d. When Cestui Que Trust is in Possession of the Res
In Caragay-Layno v. Court of Appeals," the Court held that if the
legitimate owner of a parcel of land has always been in possession thereof, but
which was fraudulently registered in the name of another person, then the
constructive notice and 10- year prescriptive period rules based on the issuance
of title in the name of the purported trustee will not be applicable on the ground
that the action brought by the cestui que trustant is really one for quieting of
title which under the established doctrine under the Civil Code is imprescriptible.
e. When Prevailing Circumstances Did Not Grant Cestui Que Trust
Sufficient Time to Discover the Fraud
198
In Adille v. Court ofAppeals, where the petitionerfraudulently
misrepresented in his unilateral affidavit of adjudication that he was the only
heir and child of the decedent, when in truth he had half brothers and sisters
whose names were not included in the transfer certificate of title issued on the
estate property.
mid,
at
p.
123.
87
133
SCRA
718
M
(1984).
157
SCRA
455
(1988).
418
NON-CORPORATE MEDIA OF DOING BUSINESS
Although
the
Court
held
that
a
constructive
trust
ensued
under
Article
1456,
and
the
facts
showed
that
the
title
was
issued
in
1955
while
the
action
for
reconveyance
was
filed
only
in
1974,
it
could
not
apply
strictly
the
10-year
prescriptive
period
thus
While
actions
to
enforce
a
constructive
trust
prescribes
in
ten
years,
reckoned
from
the
date
of
the
registration
of
the
property,
we,
as
we
said,
are
not
prepared
to
count
the
period
from
such
a
date
in
this
case.
We
note
the
petitioner's
sub
rosa
efforts
to
get
hold
of
the
property
exclusively
for
himself
beginning
with
his
fraudulent
misrepresentation
in
his
unilateral
affidavit
of
extrajudicial
settlement
that
he
is
an
only
heir
and
child
of
his
mother
Felisa
with
the
consequence
that
he
was
able
to
secure
title
in
his
name
also.
Accordingly,
we
hold
that
the
right
of
private
respondents
commenced
from
the
time
they
actually
discovered
the
petitioner's
act
of
defraudation.
According
to
the
respondent
Court
of
Appeals,
they
came
to
know
apparently
only
during
the
89
progress
of
the
litigation.
Hence,
prescription
is
not
a
bar.
The
issue
of
close-filial
relationship
was
critical
in
Adaza
v.
Court
of
60
Appeals,
where
the
Deed
of
Donation
executed
by
the
father
in
favor
of
his
daughter
Violeta
covering
a
parcel
of
land
had
the
following
provision
crossed-out"That
the
donee
shall
share
one-half
(1/2)
of
the
entire
property
with
one
of
her
brothers
or
sisters
after
the
death
of
the
donor;
and
title
to
the
property
was
issued
in
the
sole
name
of
the
daughter."
Many
years
later
after
the
death
of
the
father,
the
daughter
had
formally
executed
a
sworn
waiver
acknowledging
that
the
property
was
registered
in
her
name
but
with
the
intention
that
she
would
hold
one-half
of
it
in
favor
of
the
brother
Horacio.
The
Court
applied
Article
1449,
which
provides
that
there
is
also
an
implied
trust
when
a
donation
is
made
to
a
person
but
it
appears
that
although
the
legal
estate
is
transmitted
to
the
donee,
he
nevertheless
is
either
to
have
no
beneficial
interest
or
only
a
part
thereof.
In
ruling
upon
the
issue
^
I
b
i
d
,
a
t
p
.
PRESCRIPTION RULES FOR TRUSTS
419
of
whether
the
brother
was
guilty
of
laches
or
that
his
action
had
prescribed,
thus
Respondent
Violeta
and
her
husband
also
contended
that
the
long
delay
and
inaction
on
the
part
of
Horacio
in
taking
any
steps
for
reconveyance
of
the
one-half
(1/2)
share
claimed
by
him,
indicates
lack
of
any
color
of
right
over
the
said
one-half
(1/2)
share.
It
was
also
argued
by
the
two
(2)
that
considering
that
twelve
(12)
years
had
passed
since
OCT
No.
P-11111
was
issued
and
more
than
nineteen
(19)
years
since
the
Deed
of
Donation
was
executed,
the
counterclaim
for
partition
and
reconveyance
of
Horacio's
alleged
one-half
share
was
barred
by
laches,
if
not
by
prescription.
Again,
we
rule
for
the
petitioners.
In
determining
whether
delay
in
seeking
to
enforce
a
right
constitutes
laches,
the
existence
of
a
confidential
relationship
based
upon,
for
instance,
consanguinity,
is
an
important
circumstance
for
consideration.
Delay
in
a
situation
where
such
circumstance
exists,
should
not
be
as
strictly
construed
as
where
the
parties
are
complete
strangers
vis-a-vis
each
other.
The
doctrine
of
laches
is
not
to
be
applied
mechanically
as
between
near
relatives;
the
fact
that
the
parties
in
the
instant
case
are
brother
and
sister
tends
to
explain
and
excuse
what
would
otherwise
appears
as
long
delay.
Moreover,
continued
recognition
of
the
existence
of
the
trust
precludes
the
defense
of
laches.
The
two
(2)
letters
noted
above
sent
by
respondent
Violeta
to
petitioner
Horacio,
one
in
1969
and
the
other
in
1971,
show
that
Violeta
as
late
as
1971
had
recognized
the
trust
imposed
on
her
by
law.
Conversely,
Horacio's
reliance
upon
his
blood
relationship
with
his
sister
and
the
trust
and
confidence
normally
connoted
in
our
culture
by
that
relationship,
should
not
be
taken
against
him.
Petitioners'
counterclaim
in
the
trial
court
for
partition
and
reconveyance
cannot
he
regarded
as
barred
whether
by
laches
or
9
by
prescription. *
In
stark
contrast
to
Adaza
is
the
ruling
in
Gonzales
v.
Intermediate
Appellate
Court*
where
property
was
registered
9
,
l
b
i
d
,
a
t
p
.
420
NON-CORPORATE MEDIA OF DOING BUSINESS
in
the
name
of
one
Fausto
Soy
with
the
understanding
that
he
would
hold
it
for
and
in
behalf
of
other
co-owners,
and
the
Court
characterized
the
situation
not
as
an
express
trust,
but
an
implied
trust
covered
under
Article
1456
of
the
New
Civil
Code
which
states
that
if
property
is
acquired
through
mistake
or
fraud,
the
person
obtaining
it
is,
by
force
of
law,
considered
a
trustee
of
an
implied
trust
for
the
benefit
of
the
person
from
whom
the
property
comes.
It
ruled
that
"The
trust
alluded
to
in
this
case
is
a
constructive
trust
arising
by
operation
93
of
law.
It
is
not
a
trust
in
the
technical
sense,
and
therefore
subject
to
prescription."
The
Court
further
ruled
We
hold
that
after
Fausto
Soy,
the
predecessor-in-
interest
of
herein
petitioners,
had
appeared
to
be
the
registered
owner
of
the
lot
for
more
than
thirty
years,
his
title
had
become
indefeasible
and
his
dominical
rights
over
it
could
no
longer
be
challenged.
Any
insinuation
as
to
the
existence
of
an
implied
or
constructive
trust
should
not
be
allowed ------ Even
assuming
that
there
was
an
implied
trust,
private
respondents'
attempt
at
reconveyance
(functionally,
an
action
for
partition
is
both
an
action
for
declaration
of
co-ownership,
and
for
segregation
and
conveyance
of
a
determinate
portion
of
the
subject
property.
See
Roque
vs.
IAC,
G.R.
No.
75886,
August
30,1988,165
SCRA
118)
was
clearly
barred
by
prescription.
x x x
It
is
well-settled
that
an
action
for
reconveyance
of
real
property
to
enforce
an
implied
trust
prescribes
in
ten
years,
the
period
reckoned
from
the
issuance
of
the
adverse
title
to
the
property
which
operates
as
a
constructive
notice.
In
the
case
at
bar,
that
assertion
of
adverse
title,
which
was
in
explicit
indication
of
repudiation
of
the
trust
for
the
purpose
of
the
statute
of
limitations,
took
place
when
OCT
No.
49661
was
issued
in
the
name
of
Fausto
Soy
in
1932,
to
the
exclusion
of
his
three
sisters.
"tfwd, at p. 114, citing Gayondato v. Treasurer of the P.I., 49 Phil. 244
(1926).
PRESCRIPTION RULES FOR TRUSTS
421
But even if there were no repudiation as private respondent
Rosita Lopez would have us believe when she testified in court that
while Fausto Soy might have succeeded in securing title in his sole
name, he nonetheless recognized the co-ownership between him
and his sisters the rule in this jurisdiction is that an action to
enforce an implied trust may be circumscribed not only by
prescription but also by laches, in which case repudiation is not
even required.
From 1932 to 1965, or a period of thirty-three years, private
respondents had literally slept on their rights, presuming they had
any. They can no longer dispute the conclusive and incontrovertible
character of Fausto Soy's title as they are deemed, by their
unreasonably long inaction, to have acquiesced therein. Moreover,
the law protects those who are vigilant of their rights.
Undue delay in the enforcement of a right is strongly indicative
of a lack of merit in the claim, since it is human nature for persons
to assert their rights most vigorously when threatened or
94
invaded.
3. For Land, Without Registration the 10-Year Period Does Not Even
Begin to Run
In Pedrano v. Heirs of Benedicto Pedranothe Court emphasized the
importance of registration of title to determining the running of the 10-year
prescriptive period, thus: "An action for the reconveyance of a parcel of land
based on implied or constructive trust prescribes in 10 years, the point of
reference being the date of registration of the deed or the date of the issuance
of the certificate of title of the property... Without an OCT, the date from
whence the prescriptive period could be reckoned is unknown and it could not
96
be determined if indeed the period had already lapsed or not."
w/b/d,
at
pp.
9S
113-
114.
539
SCRA
401
mid.,
at
p.
412.
(2007).
422
NON-CORPORATE MEDIA OF DOING BUSINESS
In
Lopez
v.
Court
of
Appeals,"
the
Court
held
that
"The
right
to
seek
reconveyance
based
on
an
implied
or
constructive
trust
is
not
absolute.
It
is
subject
to
extinctive
prescription.
An
action
for
recoveyance
based
on
implied
or
constructive
trust
prescribes
in
10
years.
This
period
is
reckoned
from
the
date
of
the
issuance
of
the
original
certificate
of
title
or
transfer
certificate
of
title.
Since
such
issuance
operates
as
a
constructive
notice
to
the
whole
world,
98
the
discovery
of
the
fraud
is
deemed
to
have
taken
place
at
that
time."
4.
When
Registration
Covers
a
Void
Title
w
In Macababbad, Jr. V. Masirag, an Extrajudicial Settlement with
Simultaneous Sale of Portion of Registered Land was executed were the
signature of some of the forced heirs were forged, and which allowed the
transfer of a registered land to Macababbab who had titled transferred in his
name in 1967. It was only in 1999 that the forced heirs allegedly learned of the
death of the parents and forging of their signature, and after verifying the facts,
filed a complaint against Macabbad for quieting of title, nullity of titles, and
reconveyance.
On the issue of whether even under an implied trusts scenario, the action
for reconveyance has prescribed with the passage of ten years from the time of
issuance of a title in the name of Macababbad, the Court held
We believe and so hold that the respondents' amended
complaint sufficiently pleaded a cause to declare the nullity of the
extrajudicial settlement of estate and sale, as they claimed in their
amended complaint. Without prejudging the issue of the merits of
the respondents' claim and on the assumption that the petitioners
already hypothetical admitted the allegations of the complaint
when they filed a motion to dismiss based on prescription, the
transfer may be null and void if indeed it is established that
respondent
OT
574
SCRA
26
w
(2008).
lbid,
at
p.
39.
"576
SCRA
70
(2009).
423
PRESCRIPTION RULES FOR TRUSTS
had not given their consent and that the deed is a forgery or is
absolutely fictitious. As the nullity of the extrajudicial settlement of
estate and sale has been raised and is the primary issue, the action
to security this result will not prescribe pursuant to Article 1410 of
100
the Civil Code.
101
Macababbad applies the principle first held in Ferrer v. Bautista, that
implied trust doctrines apply only when title of the purported trustee is valid. In
Ferrer, where a free patent and eventually an original certificate of title was
issued in favor of the occupant of a strip of land that had accumulated by way
of accretion and which should have been awarded to the adjacent land owner
who had registered title to the adjacent property, the Court refused to apply
the doctrines that an action for reconveyance prescribes after ten (10) years
from the issuance of the title, on the ground that no constructive trust under
Article 1456 of the Civil Code had arisen, thus
Private respondents contend that an action for reconveyance
prescribes in ten years. The ten-year prescriptive period is
applicable to an action for reconveyance if, indeed, it is based on an
implied or constructive trust. Article 1456 of the Civil Code, upon
which a constructive trust can be predicated, cannot be invoked,
however, since the public grant and the title correspondingly issued
to private respondents that can create that juridical relationship is
a patent nullity. Even assuming, nonetheless, that a constructive
trust did arise, the running of the prescriptive period is to be
deemed interrupted when an action is filed in court (Art. 1155, Civil
102
Code) or, obviously, when one is already there pending.
5. Rules on Prescription on Resulting Trusts Follow Those of Express
Trusts
103
In
O'Laco
v.
Co
Cho
CM,
the
Court
applied
the
rule
that
when
it
comes
to
resulting
trusts,
prescription
does
not
begin
to
run
100
/6/d,
at
p.
85.
231
SCRA
257
102
(1994).
/)/d,
at
p.
262.
103
220
SCRA
656
(1993).
101
424
NON-CORPORATE MEDIA OF DOING BUSINESS
until
there
is
an
express
repudiation
of
the
trust
by
the
purported
trustee,
and
held
that
the
following
requisites
must
be
present
for
repudiation
to
be
effective:
(a)
the
trustee
has
performed
unequivocal
acts
of
repudiation
amounting
to
an
ouster
of
the
cestui
quie
trust;
(b)
such
positive
acts
of
repudiation
have
been
made
known
to
the
cestui
que
trust;
and
(c)
the
evidence
thereon
is
clear
and
convincing.
In
effect,
O'Laco
equates
a
resulting
trust
to
an
express
trust.
1M
This
was
the
same
ruling
in
Valdez
v.
Olorga,
although
it
did
not
fully
acknowledge
that
the
relationship
existing
among
the
co-owners
with
one
of
them
who
acquired
titled
in
his
name
alone,
was
an
implied
trust.
In
Cahezo
v.
Rojas
affirmed
the
distinctions
between
express
and
resulting
trusts
on
one
hand,
and
constructive
trusts,
on
the
other
hand,
when
it
came
to
specific
acts
of
repudication,
thus
As
previously
stated,
the
rule
that
a
trustee
cannot,
by
prescription,
acquire
ownership
over
property
entrusted
to
him
until
and
unless
he
repudiates
the
trust,
applies
to
express
trust
and
resulting
implied
trusts,
However,
in
constructive
trusts,
prescription
may
supervene
even
if
the
trustee
does
not
repudiate
the
relationship.
Necessarily,
repudiation
of
the
said
trust
is
not
a
condition
precedent
to
the
running
of
the
prescriptive
period.
A
constructive
trust,
unlike
an
express
trust,
does
not
emanate
from,
or
generate
a
fiduciary
relation.
While
in
an
express
trust,
a
bene-ficiary
and
a
trustee
are
linked
by
confidential
or
fiduciary
relations,
in
a
constructive
trust,
there
is
neither
a
promise
nor
any
fiduciary
relation
to
speak
of
and
the
so-called
trustee
neither
accepts
any
trust
nor
intends
holding
the
property
for
the
beneficiary.
The
relation
of
trustee
and
cestui
que
trust
does
not
in
fact
exist,
and
the
holding
of
a
constructive
trust
is
for
the
trustee
106
himself,
and
therefore,
at
all
times
adverse.
104
51
SCRA
71
(1973).
538
SCRA
242
lbid,
(2007).
at
p.
258.
10S
PRESCRIPTION RULES FOR TRUSTS
425
6.
When
Res
Has
Passed-on
to
a
Buyer
in
Good
Faith
and
for
Value
107
In Khemani v. Heirs of Anastacio Trinidad, the Court reiterated the
doctrine that although an aggrieved party may file an action for reconveyance
based on implied or constructive trust, which prescribes in ten years from the
date of issuance of the certificate of title over the property, yet such action
cannot prosper when the property has not been acquired by an innocent
purchaser for value.
In Caviie v. Litania-Hong the Court held that when the registered owner,
whether he be the patentee or his successor- in-interest to whom the free
patent was transferred, knew that the parcel of land described in the patent
and in the Torrens title belonged to another, who together with his
predecessors-in- interest had been in possession thereof, and if the patentee
and his successor-in-interest were never in possession thereof, the true owner
may bring an action to have the ownership of or title to the land judicially
settled. Such aggrieved party may still file an action for reconveyance based on
implied or constructive trust, which prescribes in 10 year from the date of the
issuance of the certificate of title over the property, provided that the property
has not been acquired by an innocent purchaser for value. In Caviie, the action
for reconveyance was filed more than 12 years after the Torrens titles were
issued, and the Court held that "The remedy is, therefore, already
109
time-barred."
RECLASSIFICATION OF TRUSTS
The foregoing discussions, as they sought to establish the differing rules
on prescription, have drawn out the truism that although resulting trusts and
constructive trusts are lumped together by law under the aegis of "implied
trusts", it seems more fitting to put together express trusts and resulting trusts
(and to properly call the latter as the only "implied trusts") under
107
540
SCRA
83
108
(2007).
581
SCRA
408
lbid,
at
p.
429.
(2009).
426
NON-CORPORATE MEDIA OF DOING BUSINESS
the classification of "conventional trusts;" whereas, constructive trusts should
no longer be referred to as "implied trusts." trusts" but actually set apart as
"legal trust."
In other words, there ought to be two types of trusts classified under the
Civil Code: (a) conventional trusts; and (b) legal or constructive trusts; and that
for conventional trusts, they would be divided into "express trusts" and
"implied trusts".
The reason why the term "conventional trusts" is a more appropriate
term to use for both express and resulting trusts, is that they are united
together under the nexus of "contractual intent", as distinguished from "legal
trusts" which come about without contractual intent but by force of law. They
would be the same words to distinguish "conventional redemption" (the rights
to redeem property constituted at the time the contract of sale is perfected)
from "legal redemption" (or the right granted by law to a person to redeem
property sold).
The reason why "resulting trusts" should be formally called and referred
to as the only form of "implied trusts" {i.e., we ought to remove constructive
trusts from the coverage of "implied trusts") is that the terms "express" and
"implied" are technically used together in various other areas in the Law on
Obligations and Contracts, such as "express or implied consent," "express or
implied ratification," etc. The result would be a set of rules and doctrines that
apply equally to two sets of trusts that are more akin to one another: express
trusts and resulting trusts under classification of "conventional trusts".
Both express and implied [resulting] trusts, under the category
"conventional trusts," shall then have a unified set of rules, such as:
ART. [1441]. Trusts are either conventional trusts or legal trusts.
Conventional trusts can either be express or implied [resulting].
ART. [1440]. In conventional trusts the person who establishes a
trust is called the 'trustor'; one in whom confidence is reposed as
regards property for the benefit of another person, is called the
PRESCRIPTION RULES FOR TRUSTS
427
'trustee';
and
the
person
for
whose
benefit
the
trust
has
been
created
is
referred
to
as
the
'beneficiary".
ART.
[****].
No
particular
words
are
required
for
the
creation
of
a
conventional
trust,
it
being
sufficient
that
a
trust
is
clearly
intended.
ART.
[****].
There
are
two
forms
of
conventional
trusts,
express
and
implied.
When
the
trustor
in
a
conventional
trust
executes
a
formal
deed
of
trust
or
by
some
instrument,
conveys
naked
or
legal
title
in
the
trust
properties
to
the
trustee
for
the
benefit
of
the
beneficiary
who
is
deemed
to
have
equitable
or
beneficial
title
thereto,
then
it
is
an
express
trust.
When
from
the
conveyance
of
the
trust
properties,
no
express
trust
is
provided,
but
an
intention
to
create
a
trust
can
clearly
be
implied
either
from
the
nature
of
the
transaction
conveying
the
prop-
erty
or
from
the
acts
of
the
parties,
then
an
implied
[resulting]
trust
is
deemed
constituted
with
the
party
holding
title
to
the
property
being
considered
the
trustee.
The
current
Articles
1448
to
1455
of
the
New
Civil
Code
should
be
brought
under
a
single
paragraph
that
reads:
ART.
[****].
In
the
following
cases,
and
all
other
cases
similar
thereto,
an
implied
[resulting]
trust
is
disputably
presumed
to
have
been
constituted
from
the
very
nature
of
the
transaction
covered:
(1447a)
1.
When
property
is
sold,
and
the
legal
estate
is
granted
to
one
party
but
the
price
is
paid
by
another
for
the
purpose
of
having
the
beneficial
interest
of
the
property,
the
former
is
the
trustee,
while
the
latter
is
the
beneficiary;
however,
if
the
person
to
whom
the
title
is
conveyed
is
a
minor
child,
legitimate
or
illegitimate,
of
the
one
paying
the
price
of
the
sale,
no
trust
is
implied,
it
being
455
NON-CORPORATE MEDIA OF DOING BUSINESS
disputably presumed that there is a gift in favor of the child; (1448a)
2. When a donation is made to a person but it appears that
although the legal estate is transmitted to the donee, he
nevertheless is either to have no beneficial interest or only a part
thereof; (1449a)
3. If the price of a sale of property is loaned or paid by one
person for the benefit of another and the conveyance is made to the
lender or payor to secure the payment of the debt, an implied trust
arises in favor of the person to whom the money is loaned or for
whom it is paid; the person in whose favor the property is acquired
may redeem the property and compel a conveyance thereof to him;
(1450a)
4. When land passes by succession to any person and he
causes the legal title to be put in the name of another, an implied
trust is established for the benefit of the true owner; (1451a)
5. If two or more persons agree to purchase property and by
common consent the legal title is taken in the name of one of them
for the benefit of all, an implied trust is created in favor of the others
in proportion to the interest of each; (1452a)
6. When property is conveyed to a person in reliance upon his
declared intention to hold it for, or transfer it to another or the
grantor, there is an implied trust in favor of the person whose
benefit is contemplated; (1453)
7. If an absolute conveyance of property is made in order to
secure the performance of an obligation of the grantor toward the
grantee, a trust by virtue of law is established. If the fulfillment of
the obligation is offered by the grantor when it becomes due, he
may demand the reconveyance of the property to him; (1454)
PRESCRIPTION RULES FOR TRUSTS
429
8. When any trustee, guardian or other person holding a
fiduciary relationship uses trust funds for the purchase of property
and causes the conveyance to be made to him or to a third person, a
trust is established by operation of law in favor of the person to
whom the funds belong; (1455)
The enumeration of the foregoing cases of implied [resulting]
trusts does not exclude others established by the general law of
trusts, provided they are not in conflict with this Code, and the Rules
of Court and special laws as will be adopted on the matter. (1447a)
The whole gamut of constructive trusts are really covered under Article
1456 of the New Civil Code, and ought to be reworded to read as follows:
ART. [1456]. In all instances where property is acquired through
mistake, abuse of confidence or fraud, the person obtaining it is, by
force of law, considered a trustee under a legal [constructive] trust
for the benefit of the person from whom the property comes or for
whom the property was intended.
Since
under
current
public
policy
on
registered
land,
the
operative
act
binding
on
the
world
is
registration
of
title
or
any
dealings
therein,
then
the
more
appropriate
wordings
on
enforceability
on
trusts,
currently
found
in
Article
1457,
should
be
as
follows:
ART. [1457]. Trusts may be proved by oral evi-
dence, except that no conventional trust concern-
ing land or any interest therein shall be proved by
parol evidence. (1457a)
oOo
PHILIPPINE LAW AND PRACTICE ON:
PARTNERSHIPS
CHAPTER 1
HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW
SOURCES OF PHILIPPINE LAW ON PARTNERSHIP
1. Notion of Partnership Is of Ancient Origins
Prof. Esteban B. Bautista wrote that as a business device, the
partnership "was well known among the ancients and apparently occupied such
an important place in their social and economic life that they made provision for
it in their laws among the Babylonians from the time of Hammurabi, among
the Babylonian Jews as early as the fourth century, and among the Romans
almost from the time they laid the foundation of their monumental legal
1
system." He also wrote that "in medieval times, the device was prominent
among the merchant princes in the Italian cities; it
BAUTISTA,
ESTEBAN
B.,
TREATISE
ON
PHILIPPINE
PARTNERSHIP
LAW,
Rex
Book
Store,
1995
Ed.,
at
p.
1
{hereinafter
referred
to
as
"BAUTISTA"),
citing
12
ENCYCLOPEDIA
OF
SOCIAL
SCIENCE
3
(1948).
430
HISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAW
431
also thrived in thirteenth century England where it was regulated by guilds
2
merchant."
Professors Hector S. de Leon and Hector M. de Leon, Jr. write that "As
early as 2300 B.C., Hammurabi, the famous king of Babylon, in his compilation
of the system of laws of that time, provided for the regulation of the relation
called partnership. Commercial partnerships of that time were generally for
3
single transactions or undertakings." They also write that "Following the
Babylonian period, we find clear-cut references to partnerships in Jewish law ...
however, it must be remembered that the ancient Jews were a pastoral people,
and, therefore, the partnership as a business organization under Jewish law
4
was concerned with the holding of title to land by two or more persons."
2. Civil and Common Law Bases of Partnership Laws
The De Leons trace the origins of the modern-day partnership through
the English commercials courts which eventually was integrated by then Chief
Justice Lord Mansfield into the common law system and that it "was not until
the latter years of the 18th century that the law of partnership as we know it
3
today began to assume both form and substance."
They write that eventually in the United States, in 1914 the Uniform
Partnerships Act was endorsed by the National Conference of Commissioners
on Uniform State Laws, which had many points of similarity with the English
Partnership Act of 1890, and that "For this reason, the practical operation of the
Uniform Partnership Act has a background of application in the workings of the
6
English Act."
BAUTISTA, at p. 1, citing 4 COLLIERS ENCYCLOPEDIA 257 (1952) and 12 ENCY-
CLOPEDIA OF SOCIAL SCIENCE 4 (1948).
3
DE
LEON,
HECTOR
S.
AND
DE
LEON,
HECTOR
M.,
JR.,
COMMENTS
AND
CASES
ON
PARTNERSHIP,
AGENCY
AND
TRUST,
Rex
Book
Store,
Inc.,
Manila,
Philippines,
2005
ed.,
at
p.
2
(hereinafter
referred
to
as
"DE
LEONS").
4
DE
LEONS,
at
p.
2.
5
DE
LEONS,
at
p.
3.
6
DE
LEONS,
at
p.
5.
432
NON-CORPORATE MEDIA OF DOING BUSINESS
Bautista suggested that "the modem world provisions on partnership of
every legal system providing for and regulating this type of business
organization are based upon the Roman law, of course with several important
modifications;" . . . and that "civil law countries or jurisdiction regard the
7
partnership as a legal entity, while the common law ones generally do not."
The De Leons observe that "In fine, modern partnership law may be said to
contain combination of principles and concepts developed from three sources:
the Roman Law, the law [on] merchant and equity, and the common law
8
courts."
3. Particular Bases of the Philippine Law on
Partnerships
Before the promulgation of the New Civil Code, the Philippine partnership
laws distinguished between civil partnerships from commercial partnerships.
Civil partnerships were governed in Title VIII of Book IV of the old Civil
Code of 1889 (Articles 1665 to 1708); while commercial or mercantile
partnership were governed by Title I of Book II of the Code of Commerce
(Articles 116 to 238). According to Bautista, both sets of laws "had their origin in
9
the Roman Law."
The present Philippine Law on Partnerships is provided under Title IX,
10
Book V of the New Civil Code which took effect on 30 August 1950,
superseding the old Civil Code and repealed in toto the provisions of the Code of
Commerce on partnerships, which "has resulted in the abolition of the
11
distinction between civil and commercial partnerships." In particular, Article
45 of the New Civil Code expressly provides that "Partnerships and associations
for private interest or purpose are governed by the provisions of this Code
concerning partnerships."
BAUTISTA, at p. 1, citing 17 ENCYCLOPEDIA BRITANNICA 420
(1969).
DE LEONS, at p. 5.
9
BAUTISTA, at p. 2.
"Republic Act No. 386.
"BAUTISTA, at p. 2.
8
HISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAW
433
While
the
bulk
of
the
present
provisions
in
New
Civil
Code
were
taken
from
the
old
Civil
Code
provisions,
the
Code
Commission
reported
that
"some
provisions
were
taken
from
the
Code
of
Commerce,"
and
other
rules
were
adopted
from
the
Uniform
Partnership
Act
and
the
Uniform
Limited
Partnership
Act
of
the
United
States.
Bautista
assessed
that
"On
the
whole,
it
may
be
stated
that
the
bulk
of
the
provisions
of
the
New
Civil
Code
on
this
subject
are
of
American
origin,
i.e.,
based
on
the
United
States'
'Uniform
Partnership
Act
and
12
Uniform
Limited
Partnership
Act.'"
4.
Significance
of
Knowing
the
Historical
Background
of
Philippine
Partnership
Law
The
historical
background
of
the
Philippine
Law
on
Partnerships,
finding
its
source
from
ancient
times,
indicate
to
us
the
relative
efficiency
of
the
medium
as
it
is
able
to
survive
up
to
the
modern
times.
The
reasons
that
may
be
drawn
for
the
longevity
of
the
partnership
as
a
medium
of
doing
business
can
be
drawn
from
the
following
characteristics:
Firstly,
that
society
considers
it
important
enough
to
provide
a
legal
framework
by
which
entrepreneurs,
merchants
and
businessmen
may
draw
upon
a
set
of
rules
to
govern
the
medium
by
which
to
pursue
a
venture,
without
having
to
enter
into
costly
and
time-consuming
negotiations
and
contract
drafting.
The
essential
characteristics
of
partnership
as
governed
by
law
(under
modern
settings,
they
would
be:
juridical
personality,
mutual
agency,
delectus
personae
and
unlimited
liability
of
partners),
allow
would-be
partners
the
ability
to
rely
upon
the
default
legal
rules,
with
the
assurance
of
the
backings
of
the
State
by
which
to
enforce
such
default
rules.
This
is
what
may
be
termed
as
the
"nominate
and
principaf'
characteristics
of
the
contract
of
partnership.
Secondly,
that
the
partnership
relationship
being
"essentially
contractual
in
nature,"
assures
would-be
partners
of
the
expedience
of
contractual
stipulation,
or"party
autonomy,"
for
the
"BAUTISTA, at p. 2.
434
NON-CORPORATE MEDIA OF DOING BUSINESS
co-partners to be able to tailor-fit their commercial arrangement in a way that
would best address their individual needs and the working relationships among
themselves, as well as the demands of the business enterprise they have
decided to embark upon.
Partnership Law would allow a stable platform by which AN
AGGRUPATION of individuals may provide for their group an active means by
which to pursue jointly a business enterprise.
The other significant feature of Philippine Law on Partnerships coming
from its historical background, is that it draws it strength and its weakness from
the fact that it is really an amalgam between two sets of legal traditions: the
Civil Law system upon which most of the provisions of the New Civil Code had
been drawn, and from the Common Law tradition, particularly from the
Uniform Partnership Act of the United States. Properly appreciated, that means
that the Philippine Law on Partnerships can truly be molded into a framework
that provides a stability from the set of rules and principles that are laid out in
the provisions of the New Civil Code, and yet be dynamic and progressive in
characteristic to allow Filipino businessmen and the legal profession the ability
to be able to evolve them effectively through application in the business world
of innovative changes and advances, confirmed and made "precedential" in
decisions of our courts resolving the acceptability of such cutting-edge
innovations.
OLD BRANCHES OF PHILIPPINE PARTNERSHIP LAW
1. Distinguishing Between Civil and Commercial
Partnerships
Before the New Civil Code, resolution of partnership issues depended on
whether it covered a civil partnership for which the provisions of the old Civil
Code were made to apply, or commercial partnership, and therefore covered by
the Code of Commerce. There was even a third type of partnerships, the
industrial partnerships, which may have the characteristics of commercial or
civil partnerships, according to whether they have been estab
HISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAW
435
lished in accordance with the requirements of the Code of Commerce or
13
without regard to the latter.
The essence of a commercial partnership was that it was undertaken by
merchants, and essentially possessed of the characteristic of"habitualness," or
more properly referred to as "pursued as a going concern," to be governed
under the provisions of the Code of Commerce. Article 1 of the Code of Com-
merce provided that "For purposes of this Code, the following are merchants: 1.
Those who, having legal capacity to engage in commerce, habitually devote
themselves thereto."
14
To illustrate, Evangelista v. Commissioner of Internal Revenue, held
that there existed the elements of common fund and intention to divide the
profits among the members of the family who borrowed money as a group,
when the facts showed that the
1. Said common fund was not something they found
already in existence. It was not a property inherited by them pro
indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish said
common fund.
2. They invested the same, not merely in one transaction,
but in a series of transactions, x x x The number of lots (24)
acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is
strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired ...
In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential
purposes, or to other personal uses, of petitioners herein. The
properties were leased separately to several persons who, from
1945 to 1948 inclusive, paid the total sum of P70.068.30 by way of
rentals. Seemingly, the lots are still
"Prautch, etc. v. Hernandez, 1 Phil. 705
(1903).
"102 Phil. 140 (1957).
NON-CORPORATE MEDIA OF DOING BUSINESS
436
being so let, for petitioners do not even suggest that there
15
has been any change in the utilization thereof.
Prior to the New Civil Code, the significant distinctions between civil
partnerships from commercial partnerships were as follows:
(a)
Registration was essential for the coming into existence of
commercial partnerships and their acquisition of juridical
18
personalities; whereas, it was the mere meeting of the
minds (i.e., perfection of a contract of partnership) which
under the old Civil Code brought about the separate juridical
personality of a civil partnership;
(b)
Commercial partners were solidarily liable for partnership
debts, albeit in a subsidiary manner, and therefore had the
17
benefit of excussion; while civil partners were primarily but
18
only jointly (pro-rata) liable for partnership debts; and
(c)
Commercial partnerships were deemed to be, and subject to
Code of Commerce provisions for, merchants.
At the onset of Philippine jurisprudential development, it was recognized
19
in Prautch v. Hernandez, that a commercial or mercantile partnership had for
its object the pursuit of industry or commerce, and was then treated like a
merchant that must necessarily be governed by the Code of Commerce and had
to comply with the registration requirements thereof to lawfully come into
existence.
lbid,
at
p.
145.
Arts.
118-119,
Code
of
Commerce;
Hung-Man-Yoc
v.
Kieng-Chiong
Seng,
6
Phil.
498
(1906).
17
Viuda
de
Chan
Diaco
v.
Peng,
53
Phil.
906
(1928).
i6
Co-Pitco
v.
Yulo,
8
Phil.
544
(1907).
19
1
Phil.
705
(1903).
16
HISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAW
437
20
In Dietrich v. Freedman, where the civil partnership was engaged in
the laundry business and governed by the provisions of old Civil Code, the
Supreme Court held that the partnership existed as a separate juridical person
even when no formal partnership agreement was entered into and registered,
and thereby the obligations of the partners for partnership debts were held to
be pro-rata.
In a commercial partnership, both the partnership and the separate
partners thereof may be joined in one action, but the private property of the
partners could be taken in payment of the partnership debts only after the
21
common property of the partnership had been exhausted.
The commercial partnership under the Code of Commerce tended to be
a more solemn affair, and when it failed to register its articles of partnership in
the mercantile registry, it did not become a juridical person nor did it have any
22
personality distinct from the personality of the individuals who composed it;
23
and therefore could not also maintain an action in its name.
24
In Kwong-Wo-Sing v. Kieng-Chiong-Seng, which involved a commercial
partnership but the requirements of the Code of Commerce for the execution
25
of public document and registration in the mercantile registry were not
complied with, the Supreme Court held that the "alleged partnership never had
any legal existence nor has it acquired any juridical personality in the acts and
26
contracted executed and made by it." What was applied was Article 119 of
the Code of Commerce which made liable for the debts incurred by such
"partnership de facto" the "persons in charge of the management of the
association . . . together with persons not members of the association with
whom they
218 Phil. 341 (1911).
21
La Compania Maritima v. Munoz, 9 Phil. 326 (1907).
a
Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 (1906); Bourns v. Carman,
7 Phil. 117 (1906); Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907).
Smutch, etc. v. Hernandez ,1 Phil. 705 (1903).
24
6 Phil. 498 (1906).
25
Art. 119, Code of Commerce.
*lbid, at pp. 500-501.
438
NON-CORPORATE MEDIA OF DOING BUSINESS
27
may
have
transaction
business
in
the
name
of
the
same."
Thus,
the
legal
consequence
of
failing
to
comply
with
the
registration
requirements
under
the
Code
of
Commerce
was
to
make
the
acting
partners
personally
and
primarily
liable
for
all
partnership
debts.
The
doctrine
is
similar
to
the
Agency
doctrine
that
an
agent
who
enters
into
a
transaction
on
behalf
of
a
non-existing
principal
becomes
personally
liable
for
the
obligations
incurred
thereby.
Nonetheless,
the
registration
requirements
under
the
Code
of
Commerce
were
never
interpreted
to
undermine
the
obligatory
force
of
contracts
entered
into
in
the
name
of
the
commercial
partners.
Thus,
it
was
held
2
29
in
Prautch,
etc.
v.
Jones, *
and
affirmed
in
Ang
Seng
Quen
v.
Te
Chico,
that
while
an
unregistered
commercial
partnership
and
association
has
no
juridical
personality,
and
as
such
cannot
maintain
an
action
in
the
partnership
name,
nevertheless,
the
individual
members
may
sue
jointly
as
individuals,
and
persons
dealing
with
them
in
their
joint
capacity
will
not
be
permitted
to
deny
their
right
to
do
so.
30
It was held in De los Reyes v. Lukban, and affirmed in Philippine
31
National Bank v. Lo, that under the Code of Commerce, where the partners'
liability for a partnership debt was only secondary or subsidiary, their right of
excussion was deemed already satisfied where at the time the judgment was
executed against the partnership they were unable to show that there were still
partnership assets, or when a writ of execution against the partnership had
been returned not fully satisfied.
There was under the old set-up the debate of whether a partnership can
choose which set of laws should govern it; or whether a group of co-venturers
can choose by the expediency of registration under the old Civil Code or under
the Code of Commerce, on whether to organize a civil or a commercial
32
partnership. In Prautch, etc. v. Hernandez, it was held -
"Ibid,
at
p.
500.
*8
Phil.
1
(1907).
"12
Phil.
547
M
(1909).
35
Phil.
757
31
50
Phil.
802
(1916).
32
(1927).
1
Phil.
705
(1903).
HISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAW
439
. . . Is a commercial partnership distinguished from a civil one
by the object to which it is devoted or by the machinery with which
it is organized? We think that the former distinction is the true one.
The Code of Commerce of 1829 distinctly provided that those
partnerships were mercantile which had for their object an
operation of commerce. (Art. 264.). x x x . The Code of Commerce
declares the manner in which commercial partnerships can be
organized. Such organization can be effected only in certain
well-defined ways. The provisions of this Code were well known
when the Civil Code was adopted. The author of that Code when
writing article 1667, having in mind the provisions of the Code of
Commerce, did not say that a partnership may be organized in any
form, which would have repealed the said provisions of the Code of
Commerce, but did say instead that a civil partnership may be
organized in any form.
If that section includes commercial partnerships then such a
partnership can be organized under it selecting from the Code of
Commerce such of its provisions as are favorable to the partners
and rejecting such as are not, and even including in its articles of
agreement the right to do things which by that Code are expressly
prohibited. Such a construction would allow a commercial
partnership to use or dispense with the Code of Commerce as best
33
suited its own ends.
3
Subsequently, in CompaniaAgricola de Ultramar v. Reyes, * what the
Supreme Court held critical was proper application of Article 1670 of the old
Civil Code which provided that civil partnerships, on account of the objects to
which they are devoted, may adopt all the forms recognized by the Commercial
Code, and thereby held that
It will be seen from this provision that whether or not
partnerships shall adopt the forms provided for by the Civil or
Commercial Codes is left entirely to their discretion. And
furthermore, that such civil partnerships shall only be gov
lbid,
at
pp.
M
707-708.
4
Phil.
2
(1904).
440
NON-CORPORATE MEDIA OF DOING BUSINESS
erned by the forms and provisions of the Commercial Code when
they expressly adopt them, and then only in so far as they (rules of
the Commercial Code) do not conflict with the provisions of the
Civil Code. In this provision the legislature expressly indicates that
there may exist two classes of commercial associations, depending
not upon the business in which they are engaged but upon the
particular form adopted in their organization... We are inclined to
the belief that the respective codes, Civil and Commercial, have
adopted a complete system for the organization, control,
continuance, liabilities, dissolutions, and juristic personalities of
associations organized under each... It is our opinion that associa-
tions organized under the different codes are governed by the
35
provisions of the respective code.
36
As was aptly observed in Compania Agricola de Ultramar v. Reyes, the
distinction between civil and commercial partnerships was critical under the old
set-up because it determined the applicable rules for registration, liability for
the members, and the rights and manner of dissolution.
2. Significance of Knowing the Historical Distinctions Between Civil and
Commercial Partnerships
What may be considered as a good development in our present Law on
Partnerships is the removal of the distinctions between civil and commercial
partnerships, since all partnerships in the Philippines are now governed by a
common set of laws, i.e., the relevant provisions of the New Civil Code.
The main drawback of such a development is that even commercial
partnerships (and admittedly there may not be quite a number operating due to
the availability of the corporate medium), would find themselves governed by
non-commercial doctrines, such as the non-central role of the institution of
registration. In fact, many issues have arisen under our current Law on
Partnerships arising from having adopted in the New
^Ibid,
at
pp.
M
10-
11.
4
P
hil.
2
(1904).
HISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAW
441
Civil Code provisions from the Code of Commerce on registration requirements.
In addition, the "civil-coding" of some of the provisions of the Code of
Commerce which were copied into the New Civil Code, should provide a better
understanding of the legal consequences of current provisions of the Philippine
Law on Partnerships, and a better construction of the effects they have on the
commercial field, by providing a comparison with the old jurisprudential rulings
for commercial partnerships under the provisions of the Code of Commerce.
0O0
CHAPTER
2
TRI-LEVEL
EXISTENCE
OF
THE
PARTNERSHIP
The
Law
on
Partnerships
under
the
New
Civil
Code
treats
of
the
partnership
in
three"Levels
of
Existencenamely:
(a)
Primarily as a CONTRACTUAL RELATIONSHIP between and among
the partners;
(b)
A MEANS OR MEDIUM OF DOING BUSINESS, through the structure
of Separate Juridical Personality, or as the basis of creating
multi-leveled con-tractual relations among various parties;
and
(c)
A BUSINESS ENTERPRISE, or a business venture, or what is
termed in other disciplines as "a going concern."
Knowing
the
three
levels
at
which
the
Philippine
Partnership
Law
treats
the
partnership
arrangement
is
important
in
determining
the
legal
significance
of
the
various
provisions
of
the
New
Civil
Code
regulating
partnerships,
and
of
appreciating
the
doctrinal
value
of
such
provisions.
INTERPLAY OF THE TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
It would be important to illustrate the legal interplay between the three
(3) levels of partnership existence, and the
442
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
443
legal
doctrines
that
result
from
such
interplay.
For
this
purpose
we
will
use
the
1
decision
of
the
Supreme
Court
in
Yu
v.
A/LRC.
In
that
decision,
the
facts
indicated
that
a
limited
partnership
was
duly
registered
with
the
firm
name
of
"Jade
Mountain
Products
Company
Limited"
("Jade
Mountain"),
with
the
partnership
business
consisting
of
exploiting
a
marble
deposit
found
on
land
situated
in
Bulacan,
but
with
the
partnership
having
its
main
office
in
Makati.
Benjamin
Yu
was
for
many
years
the
Assistant
General
Manager
of
the
partnership
business,
but
only
half
of
his
contracted
salary
was
paid
under
the
agreement
that
the
rest
would
be
paid
when
the
partnership
is
able
to
source
more
funding.
Majority
of
the
partners
eventually
sold
their
equity
interests
in
the
business
(about
82%)
to
a
new
set
of
investors
who
retained
the
business
enterprise
under
the
original
name
of
Jade
Mountain,
but
moved
the
head
office
to
Mandaluyong.
When
Mr.
Yu
learned
later
of
the
new
address
he
proceeded
to
Mandaluyong
but
was
told
that
the
new
partnership
did
not
wish
to
retain
his
services.
Mr.
Yu
filed
a
complaint
for
illegal
dismissal
and
recovery
of
unpaid
accrued
salaries,
moral
and
exemplary
damages
and
attorney's
fees,
against
Jade
Mountain
under
the
new
partnership
arrangement.
The
new
partners
contended
that
Mr.
Yu
was
never
hired
as
an
employee
by
the
present
or
new
partnership.
One
of
the
issues
raised
was
whether
the
new
partnership
could
be
held
liable
for
the
claims
of
Mr.
Yu
pertaining
to
the
old
partnership
which
had
been
dissolved
due
to
the
withdrawal
of
the
leading
partners.
The
basic
contention
of
Mr.
Yu
was
the
principle
that
a
partnership
has
a
juridical
personality
separate
and
distinct
from
that
of
each
of
its
members,
which
subsisted
notwithstanding
changes
in
the
identities
of
the
partners;
and
that
consequently,
the
employment
contract
between
Mr.
Yu
and
the
partnership
Jade
Mountain
could
not
have
been
affected
by
changes
in
the
latter's
membership.
The
Supreme
Court
defined
the
inextricable
link
of
the
contract
of
partnership
between
the
original
partners
and
the
224 SCRA 75 (1993).
444
NON-CORPORATE MEDIA OF DOING BUSINESS
juridical
personality
that
arose
from
the
nexus
of
that
contract,
and
that
when
the
contract
was
rescinded
with
the
withdrawal
of
the
majority
of
the
partners,
then
the
partnership
was
dissolved
and
its
separate
juridical
personality
ceased
to
exist
to
cover
the
new
set
of
partners,
thus:
Two
(2)
main
issues
are
thus
posed
for
our
consideration
in
the
case
at
bar:
(1) whether
the
partnership
which
had
hired
petitioner
Yu
as
Assistant
General
Manager
had
been
extinguished
and
replaced
by
a
new
partnership
composed
of
Willy
Co
and
Emmanuel
Zapanta;
and
(2) if
indeed
a
new
partnership
had
come
into
existence,
whether
petitioner
Yu
could
nonetheless
assert
his
rights
under
his
employment
contract
as
against
the
new
partnership.
In respect of the first issue, we agree with the result reached
by the NLRC, that is, that the legal effect of the changes in the
membership of the partnership was the dissolution of the old
partnership which had hired petitioner in 1984 and the emergence
of a new firm composed of Willy Co and Emmanuel Zapanta in
2
1987.
The Court held that the applicable rule would be Article 1828 of New Civil
Code which defines "dissolution of a partnership [as] the change in the relation
of the partners caused by any partner ceasing to be associated in the carrying
on as distinguished from the winding up of the business." Nonetheless, the
determination of the right of Mr. Yu to recover from the new partnership
which constituted its own separate juridical personality was based on the fact
that it continued the old business enterprise of the dissolved partnership, thus:
In the ordinary course of events, the legal per-sonality of the
expiring partnership persists for the limited purpose of winding up
and closing of the affairs of the partnership.
lbid, at p. 80.
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
445
In the case at bar, It is important to underscore the fact that the
business of the old partnership was simply continued by the new
partners, without the old partnership undergoing the procedures
relating to dissolution and winding up of its business affairs. In
other words, the new partnership simply took over the business
enterprise owned by the preceding partnership, and continued
using the old name of Jade Mountain Products Company Limited,
without winding up the business affairs of the old partnership,
paying off its debts, liquidating and distributing its net assets, and
then reassembling the said assets or most of them and opening a
new business enterprise. There were, no doubt, powerful tax
considerations which underlay such an informal approach to
business on the part of the retiring and the incoming partners. It is
not, however, necessary to inquire into such matters.
What is important for present purposes is that, under the
above described situation, not only the retiring partners (Rhodora
Bendal, et al.) but also the new partnership itself which continued
thebusiness of the old, dissolved, one, are liable for the debts of
the preceding partnership. In Singson, et al. v. Isabels Saw Mill, et
al., the Court held that under facts very similar to those in the case
at bar, a withdrawing partner remains liable to a third party
creditor of the old partnership. The liability of the new partnership,
upon the other hand, in the set of circumstances obtaining in the
3
case at bar, is established in Article 1840 of the Civil Code.. .
The essence of the afore-quoted ruling is that Mr. Yu could not recover his
claims through the medium of the separate juridical personality of the company
which the Court held had been extinguished with the withdrawal of the original
partners who were his employers; but could recover his claims against the new
company on the basis that it was handling exactly the same business enterprise
that remained unchanged with the transfer of its ownership from the old
partners to the new investors. The Court in Yu therefore recognized the
applicability
lbid, at pp. 81-82.
446
NON-CORPORATE MEDIA OF DOING BUSINESS
4
of
the
"successor
liability
rule"
arising
from
business
enterprise
transfer
(i.e.,
that
the
creditors
of
the
business
enterprise
have
a
right
to
recover
payment
of
their
claims
against
the
transferee
of
the
business
enterprise),
and
recognized
that
the
business
enterprise
transfer
doctrine
is
governed
in
details
under
Article
1840
of
the
New
Civil
Code.
Yu
also
recognized
one
of
the
principles
in
business
enterprise
transfers,
that
the
new
owners
of
the
business
enterprise
do
have
a
right
to
choose
who
would
be
employed
in
their
newly
acquired
business,
and
they
cannot
be
compelled
to
maintain
the
employment
contracts
of
the
managers
and
employees
existing
with
the
transferor,
thus:
It
is
at
the
same
time
also
evident
to
the
Court
that
the
new
partnership
was
entitled
to
appoint
and
hire
a
new
general
or
assistant
general
manager
to
run
the
affairs
of
the
business
enterprise
taken
over.
An
assistant
general
manager
belongs
to
the
most
senior
ranks
of
management
and
a
new
partnership
is
entitled
to
appoint
a
top
manager
of
its
own
choice
and
confidence.
The
non-retention
of
Benjamin
Yu
as
Assistant
General
Manager
did
not
therefore
constitute
unlawful
termination,
or
termination
without
just
or
authorized
cause.
We
think
that
the
precise
authorized
cause
for
termination
in
the
case
at
bar
was
redundancy.
The
new
partnership
had
its
own
new
General
Manager,
apparently
Mr.
Willy
Co,
the
principal
new
owner
himself,
who
personally
ran
the
business
of
Jade
Mountain.
Benjamin
Yu's
old
position
as
Assistant
General
Manager
thus
became
superfluous
or
redundant.
It
follows
that
petitioner
Benjamin
Yu
is
entitled
to
separation
pay
at
the
rate
of
one
month's
pay
for
each
year
of
service
that
he
had
rendered
to
the
old
partnership,
a
fraction
of
at
least
six
(6)
months
being
5
considered
as
a
whole
year.
*For more in-depth discussions of the business enterprise doctrine, you
may wish to refer to the chapter on Acquisitions, Transfers, Mergers and Con-
solidations in the author's work PHILIPPINE CORPORATE LAW, Rex Book Store, 2009
ed.
5
lbid, at p. 83-84.
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
447
Another illustrative case is the decision in United States v. Clarin,* where
a partner filed estafa charges against his copartners for the latter's failure to
deliver to him his half of the profits from the partnership venture. In denying
the applicability of the charges of estafa the Court held
The P172 having been received by the partnership, the
business commenced and profits accrued, the action that lies with
the partner who furnished the capital for the recovery of his
money is not a criminal action for estafa, but a civil one arising
from the partnership contract for a liquidation of the partnership
and a levy on its assets if there should be any. xxx [Estafa] does not
include money received for a partnership; otherwise the result
would be that, if the partnership, instead of obtaining profits,
suffered losses, as it could not be held liable civilly for the share of
the capitalist partner who reserved the ownership of the money
brought in by him, it would have to answer to the charge of estafa,
for which would be sufficient to argue that the partnership had
received money under the obligation to return it. The complaint for
estafa is dismissed without prejudice to the institution of a civil
7
action.
The ruling in Clarin should be distinguished from that in People v. de la
Cruz, where the industrial partner was held liable for estafa for appropriating
money that has been given to him by the capitalist partner for a particular
9
transaction. De la Cruz was reiterated in Liwanag v. Court of Appeals, where
the Court held: "Thus, even assuming that a contract of partnership was indeed
entered into by and between the parties, we have ruled that when money or
property have been received by a partner for a specific
6
17
Phil.
84
(1910).
7
Ibid,
at
p.
86.
See
also
People
v.
Alegre,
(CA)
48
O.G.
5341
(1952).
8
G.R.
No.
21732
(1957),
3
September
1924,
cited
in
People
v.
Campos,
(CA)
54
O.G.
681
(1957).
9
281
SCRA
225
(1997).
448
NON-CORPORATE MEDIA OF DOING BUSINESS
purpose (such as that obtaining in the instant case) and he later
10
misappropriated it, such partner is guilty of estafa."
Perhaps the interplay of the various levels of existence of the partnership
arrangement is best exemplified by the decision of the Supreme Court in Rojas
v. Maglana."
In that case, a partnership was constituted between Rojas and Maglana to
operate timber forest products concession, and articles of co-partnership were
duly executed and registered with the SEC using the firm name "Eastcoast
Development Enterprises." Later, the partners took in an industrial partner,
whereby they executed an "Additional Agreement" which essentially adopted
the registered articles but covering the acceptance of an industrial partner,
which agreement was not duly registered with the SEC, and the partnership
operated under the original registered firm name. Shortly thereafter, the
original partners bought out the interest, share and participation of the
industrial partner in the firm, and the partnership was continued without the
benefit of any written agreement or reconstitution of their written articles of
co-partnership.
When Rojas entered into a separate management contract with another
logging enterprise and withdrew his equipment from the partnership, Maglana
made a formal demand against Rojas for the payment of his promised
contribution to the partnership and compliance with his obligation to perform
the duties of logging superintendent as provided expressly in the registered
articles of co-partnership. When Rojas responded that he would not be able to
comply with his promised contribution and will not work as logging
superintendent for the partnership, Maglana gave notice of the dissolution of
the partnership. In the suit that ensued between the partners, one of the issues
that had to be resolved by the Court was the nature of the partnership and the
legal relationship of Rojas and Maglana after the retirement of the industrial
partner from the second partnership.
"
I
b
i
d
,
a
t
p
.
2
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
449
On
this
issue,
the
trial
court
ruled
that
the
second
partnership
superseded
the
first
partnership,
so
that
when
the
second
partnership
was
dissolved
by
the
withdrawal
of
the
industrial
partner,
there
being
no
written
contract
of
co-partnership
when
it
was
continued
by
the
two
original
partners,
there
was
no
reconstitution
of
the
original
partnership,
and
consequently
the
partnership
that
was
continued
between
Rojas
and
Maglana
was
a
de
facto
partnership
at
will.
In
overruling
the
court
a
quo,
the
Court
held
. . . [I]t appears evident that it was not the intention of the
partners to dissolve the first partnership, upon the constitution of
the second one, which they unmistakable called an "Additional
Agreement"... Except for the fact that they took in one industrial
partner, gave him an equal share in the profits and fixed the term
of the second partnership to thirty (30) years, everything else was
the same. Thus, they adopted the same name, . . . they pursued the
same purposes and the capital contributions of Rojas and Maglana
as stipulated in both partnership call for the same amounts. Just as
important is the fact that all subsequent renewal of Timber License
No. 35-36 were secured in favor of the First Partnership, the
original licensee... To all intents and purpose therefore, the First
Articles of Partnership were only amended, in the form of
Supplementary Articles of Copartnership ... which was never
registered ... Otherwise stated, even during the existence of the
second partnership, all business transactions were carried out
12
under the duly registered articles.
After recognizing that one of the "essence" of a partnership arrangement
is the underlying business enterprise, the Court then proceeded to hold that the
business enterprise should be treated differently from the personal contractual
relationship between and among the partners, thus
"Ibid, at pp. 117-118.
450
NON-CORPORATE MEDIA OF DOING BUSINESS
On the other hand, there is no dispute that the second
partnership was dissolved by common consent. Said dissolution
did not affect the first partnership which continued to exist "as
shown by the subsequent acts of the original partners carrying one
with the original partnership business and confirming the
obligations constituted under the original articles of partnership.
The conclusion of the Court was thus: "Under the circumstances,
the relationship of Rojas and Maglana after the withdrawal of [the
industrial partner] can neither be considered as a de facto
partnership, nor a partnership at will, for as stressed, there is an
13
existing partnership, duly registered."
Rojas therefore affirms two important aspects in Partnership Law: Firstly,
that registration of the contract of partnership with the SEC has the legal effect
of binding the partners, as to the contractual obligations, the rights and duties of
the partners, and which has effective force even as the partnership undergoes
changes within its constitution by the acceptance into and withdrawal of
partners into the venture. Secondly, the underlying business enterprise, the
manner of its operation, is the more durable aspect of the partnership, and has
much legal influence on determining the contractual intents of the partners in
the determination of inter-partnership rights and obligations.
We now proceed to discuss separately each of the three levels of
existence of partnerships.
PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP
ART. 1767. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry to a
common fund,
"Ibid, at p. 118.
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
451
with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the
exercise of a profession. (1665a)
ART. 1770. A partnership must have a lawful object or purpose,
and must be established for the common benefit or interest of the
partners, x x x . (1666a)
ART. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary. (1667a)
ART. 1784. A partnership begins from the moment of the
execution of the contract, unless it is otherwise stipulated. (1679)
Article 1767 of New Civil Code defines a "contract of partnership" as one
where "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," and includes in its coverage the joint exercise of a profession. The
fact that a partnership is first and foremost a contractual relationship, means
that it is subject to the rules, principles and doctrines pertaining to contracts in
general, but modified in the sense that a partnership is at the same time a
"medium of doing business" or a device for undertaking a venture.
The implication of this doctrine is that the Law on Partnerships must
balance between the principles governing the relationship of partners among
themselves as contractual parties, and also their rights and obligations with
respect to the business venture or undertaking that brought them together in
the first place. In other words, parties to a partnership do not come together for
the sake of coming together, but in order to pursue as a group, a business
venture or undertaking which will enter
452
NON-CORPORATE MEDIA OF DOING BUSINESS
into
various
transactions
with
the
public.
The
various
provisions
of
the
Law
on
Partnerships
embodied
in
the
New
Civil
Code
address
either
separately
or
coordinately
these
"levels
of
existence"
of
a
partnership:
as
contractual
relationship,
and
as
a
means
of
doing
business,
and
the
underlying
business
enterprises
that
is
operated.
An
example
showing
the
essence
of
a
partnership
as
a
contract
is
provided
under
Article
1771
which
bears
the
doctrine
of
"consensualit/
governing
contracts
in
general:
"A
partnership
may
be
constituted
in
any
form,
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary."
Article
1770
also
embodies
the
principle
that
the
provisions
of
law
are
deemed
incorporated
into
every
contract,
even
a
contract
of
partnership
as
it
provides
that
"A
partnership
must
have
a
lawful
object
or
purpose."
The
primary
doctrine
that
first
and
foremost
the
partnership
must
find
its
nexus
in
a
contractual
relationship
is
exemplified
in
the
decision
in
Lyons
v.
Rosentock."
In
that
case,
Lyons
and
Elser
were
already
partners
in
particular
real
estate
undertakings.
Subsequently,
Lyons
became
interested
in
purchasing
for
the
venture
the
San
Juan
estate,
and
moved
forward
towards
negotiating
its
acquisition
and
communicating
to
Elser
in
the
United
States
to
join
him
in
the
venture.
Elser
wrote
back
unequivocably
indicating
that
he
was
not
joining
Lyons
in
the
venture.
The
Court
held
that
the
fact
that
Lyons
had
used
as
security
for
the
acquisition
of
the
San
Juan
estate
one
of
the
partnership
properties
in
anticipation
that
Elser
would
accept
the
partnership
arrangement,
but
which
Elser
definitively
refused
and
the
partnership
property
was
substituted
by
Lyons
separate
property
to
secure
the
venture,
did
not
make
Lyons
a
partner
in
the
San
Juan
estate
venture,
since
there
was
never
any
meeting
of
minds
to
constitute
such
partnership.
Lyons
demonstrate
that
before
there
can
be
a
partnership
enterprise,
it
is
necessary
that
there
must
have
been
a
meeting
of
minds
to
constitute
a
contract
of
partnership.
14
56 Phil. 632 (1932).
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
453
This partnership level of existence is better discussed in Chapter 4 on
Contract of Partnership.
PARTNERSHIP AS A MEANS OF DOING BUSINESS, THROUGH THE PARTNERSHIP JURIDICAL PERSON
ART. 1768. The partnership has a juridical
personality separate and distinct from that of
each of the partners, even in case of failure to
comply with the requirements of Article 1772, first
paragraph, (n)
ART. 44. The following are juridical persons:
x x x .
(3) Corporations, partnerships and associations
for private interest or purpose to which the law
grants a juridical personality, separate and distinct
from that of each shareholder, partner or member.
(35a)
ART. 45. x x x .
Partnerships and associations for private
interest or purpose are governed by the provisions
of this Code concerning partnerships. (36 and 37a)
ART. 46. Juridical persons may acquire and
possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in
conformity with the laws and regulations of their
organization. (38a)
ART. 1774. Any immovable property or an
interest therein may be acquired in the partnership
name. Title so acquired can be conveyed only in
the partnership name, (n)
454
NON-CORPORATE MEDIA OF DOING BUSINESS
1. Legal Bases of the Partnership Juridical
Personality
After defining partnership as a contract under Article 1767 of New Civil
Code, the Law on Partnerships immediately provides under Article 1768 that the
"partnership has a juridical personality separate and distinct from that of each
of the partners, even in case of failure to comply with the [registration]
requirements of Article 1772." The clear implication of the juxtaposition of the
two articles is that the perfection of the contract of partnership immediately
brings about the constitution by law of a separate juridical person.
Article 44 of New Civil Code expressly recognizes "partnerships" as being
"juridical persons," and provides that "partnerships and associations for private
interest or purpose to which the law grants a juridical personality, separate and
distinct from that of each ... partner or member."
Article 45 of New Civil Code provides that "Partnerships and associations
for private interests or purpose are governed by the provisions of this Code
concerning partnerships." In turn, Article 46 provides that juridical persons such
as partnerships "may acquire and possess properties of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organizations."
The "juridical personality" of the partnership has been characterized as
being "weak" (when compared with that of the corporation) in the sense that it
can easily be dissolved. The reason for that is because a partnership's juridical
personality is inextricably linked with the perfection of the underlying contract
of partnership, and rises and fall with the privity of contract existing between
and among the partners.
2.
Underlying Business Ends of the Partnership Juridical
Person
The importance of the grant of separate juridical personality to the
partnership is to make it an efficient means by which
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
455
several
persons
can
collectively
pursue
business.
Under
Article
46
of
the
New
Civil
Code
it
is
provided
that
"Juridical
persons
may
acquire
and
possess
property
of
all
kinds,
as
well
as
incur
obligations
and
bring
civil
or
criminal
actions,
in
conformity
with
the
laws
and
regulations
of
their
organization."
In
the
Law
on
Partnerships,
the
business
purpose
of
the
partnership
juridical
person
is
best
exemplified
by
Article
1774
of
New
Civil
Code
which
provides
that
"Any
immovable
property
or
an
interest
therein
may
be
acquired
in
the
partnership
name,"
to
avoid
the
cumbersome
need
of
having
all
the
names
of
the
partners
listed
in
the
title
to
the
property.
Consequently,
the
article
provides
that
title
to
real
property
acquired
in
the
partnership
name
may
be
conveyed
only
in
the
partnership
name.
Although
a
partnership
is
treated
as
a
"person"
before
the
law,
such
juridical
personality
does
not
occupy
the
same
hierarchical
level
as
the
"person"
of
an
individual.
The
"person"
of
an
individual
is
considered
sacrosanct
under
modern
societal
doctrines;
the
State
and
civil
society
is
organized
towards
protecting
that
person
and
engendering
its
safety
and
well-being.
On
the
other
hand,
the
"person"
of
a
partnership
is
a
legislative
grant
by
the
State
or
a
fiction
created
by
the
law,
not
for
the
benefit
of
the
juridical
person,
but
precisely
as
a
means
or
medium
by
which
individuals
in
society
may
achieve
certain
business
or
commercial
ends.
a.
The
Case
for
"Secret
Associations"
That
a
partnership
is
granted
by
law
a
separate
juridical
personality
as
a
means
by
which
society
may
pursue
certain
business
or
commercial
ends
means
therefore
that
it
is
regulated
under
the
Law
on
Partnerships
for
the
benefit
of
those
who
employ
it
as
their
medium
(the
partners)
and
those
who
are
authorized
to
deal
with
said
medium
(the
creditors,
the
clients
and
customers).
This
philosophical
understanding
of
the
essence
and
purpose
of
the
partnership's
"juridical
person"
is
best
exemplified
by
the
provisions
of
Article
1775
of
New
Civil
Code
which
denies
juridical
personality
to
"Associations
and
societies,
whose
articles
are
kept
secret
among
the
members,
and
wherein
any
one
of
the
members
may
contract
in
his
own
name
with
third
persons,"
thus:
NON-CORPORATE MEDIA OF DOING BUSINESS
456
ART. 1775. Associations and societies, whose articles are kept
secret among the members, and wherein any one of the members
may contract in his own name with third persons, shall have no
juridical personality, and shall be governed by the provisions relating
to co-ownership. (1669)
To the author, the commercial principle of Article 1775 is that if an
aggregation of individuals is not meant to undertake a business or commercial
venture that is supposed to deal with the public at large, then it is not intended
to be a medium of doing business, and there is no purpose of granting it a
separate juridical personality.
On the other hand, Bautista discussed the rationale and effects of Article
1775 as being "intended to preserve the equality which must exist among the
partners and to prevent any of them from defrauding the partnership or the
other members. This being the case it does not prohibit secret stipulations
which are not designed to produce this result. It would not, for instance, have
the effect of rendering invalid a separate agreement between two members of
a partnership pursuant to which one guarantees the other against loss of his
capital contribution or assures him of profit. Neither can the rule be invoked as
against third persons by the partners entering into the secret stipulations, in
consonance with the general principle that a party should not be allowed to
15
take advantage of a nullity which he himself has caused."
b. Jurisprudential Application of the Doctrine of Separate Juridical
Personality of the Partnership
In Vargas & Co. v. Chan," in denying the contention that since the
defendant sued was a partnership that summons must be served upon each of
the partners, the Court held
[l]t has been the universal practice in the Phil-ippine Islands since
American occupation, and was the practice
15
BAUTISTA, at pp. 58-59, citing 11 Manresa 289 to
16
291.
29 Phil. 446 (1915).
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
457
prior to that time, to treat companies of the class to which the
plaintiff belongs as legal or juridical entities and to permit them to
sue and be sued in the name of the company, the summons being
served solely on the managing agent or other official of the
17
company by the section of the Code of Civil Procedure.
18
In
one
case,
the
Court
held
that
the
death
of
either
of
the
two
partners
is
not
a
ground
for
the
dismissal
of
a
pending
suit
against
the
partnership,
as
a
partnership
possesses
a
personality
distinct
from
any
of
the
partners.
In
another
19
case,
the
Court
held
that
a
partnership
may
sue
and
be
sued
in
its
name
or
by
its
duly
authorized
representative,
and
when
it
has
a
designated
managing
partner,
he
may
execute
all
acts
of
administration
including
the
right
to
sue
debtors
of
the
partnership.
20
Campos
Rueda
&
Co.
v.
Pacific
Commercial
Co., demonstrates
how
the
separate
juridical
personality
accorded
to
a
partnership
arrangement
makes
certain
rules
on
insolvency
work
differently
as
compared
to
American
jurisprudence
on
the
same
matter.
In
Campos
Rueda
a
petition
for
involuntary
insolvency
was
filed
by
the
creditors
of
the
limited
partnership
for
an
act
of
insolvency
provided
under
the
Insolvency
Act
(i.e.,
having
failed
to
pay
its
obligations
with
three
creditors
for
more
than
thirty
days).
The
trial
court
denied
the
petition
on
the
ground
that
it
was
not
proven,
nor
alleged,
that
the
partners
of
the
firm
were
insolvent
at
the
time
the
application
was
filed;
and
that
as
said
partners
are
personally
and
solidary
liable
for
the
consequences
of
the
transactions
of
the
partnership,
it
cannot
be
adjudged
insolvent
so
long
as
the
partners
are
not
alleged
and
proven
to
be
insolvent.
In
ruling
that
the
denial
of
the
petition
for
insolvency
was
in
error,
the
Court
held
"Ibid,
at
p.
448.
18
A/go
Tian
Tek
v.
Phil.
Education
Co.,
78
Phil.
275
(1947).
19
Ta/
Tong
Chuache
&
Co.
v.
Insurance
Commission,
158
SCRA366
20
(1988).
44
Phil.
916
(1923).
458
NON-CORPORATE MEDIA OF DOING BUSINESS
Unlike the common law, the Philippine statutes consider a
limited partnership as a juridical entity for all intents and purposes,
which personality is recognized in all its acts and contracts (Art.
116, Code of Commerce). This being so and the juridical personality
of a limited partnership being different from that of its members, it
must, on general principle, answer for, and suffer, the
consequence of its acts as such an entity capable of being the
subject of rights and obligations. If, as in the instant case, the
limited partnership of Campos Rueda & Co. failed to pay its
obligations with three creditors for a period of more than thirty
days, which failure constitutes, under our Insolvency Law, one of
the acts of bankruptcy upon which an adjudication of involuntary
insolvency can be predicted, this partnership must suffer the
consequences of such failure, and must be adjudged insolvent. We
are not unmindful of the fact that some courts of the United States
have held that a partnership may not be adjudged insolvent in an
involuntary insolvency proceeding unless all of its members are
insolvent, while others have maintained a contrary view. But it
must be borne in mind that under the American common law,
partnerships have no juridical personality independent from that
of its members; and if now they have such personality for the
21
purposes of the insolvency law.
3. Applicability of the Doctrine of Piercing the Veil of Separate
Juridical Fiction
The "doctrine of piercing the veil of corporate fiction" finds relevance in
Corporate Law because it is the means by which to by-pass the effects of the
doctrine of "limited liability," and through piercing the acting stockholders
and/or officers may be held personally liable for corporate debts.
In spite of the partnership being accorded also a separate juridical
partnership, the piercing doctrine has less application in Partnership Law
because the partners are unlimitedly liable (i.e., personally liable with their
separate properties) for partnership
"Ibid, at pp. 918-919.
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
459
debts. Yet, the doctrine found application to partnerships in Commissioner of
22
Internal Revenue v. Suter, where the Court addressed the legal position of the
Tax Commissioner seeking to make the individual partners liable for income tax
for the income earned by the limited partnership, thus:
It being a basic tenet of the Spanish and Philippine law that the
partnership has a juridical personality of its own, distinct and
separate from that of its partners (unlike American and English law
that does not recognize such separate juridical personality). The
bypassing of the existence of the limited partnership as a taxpayer
can only be done by ignoring or disregarding clear statutory
mandates and basic principles of our law. The limited partnership's
separate individuality makes it impossible to equate its income
23
with that of the component members...
x x x
. . . In the cited cases, the corporations were already subject
to tax when the fiction of their corporate personality was pierced;
in the present case, to do so would exempt the limited partnership
from income taxation but would throw the tax burden upon the
partners-spouses in their individual capacities. The corporations, in
the cases cited, merely served as business conduits or alter egos of
the stockholders, a factor that justified a disregard of their
corporate personalities for tax purposes. This is not true in the
present case. Here, the limited partnership is not a mere business
conduit of the partner-spouses; it was organized for legitimate
business purposes; it conducted its own dealings with its customers
prior to appellee's marriage; and had been filing its own income tax
returns as such independent entity. ... As far as the records show,
the partners did not enter into matrimony and thereafter buy the
interests of the remaining partner with the premeditated scheme
or design to use the partnership as a business conduit to dodge the
24
tax laws. Regularity, not otherwise, is presumed.
*27 SCRA 152
23
(1969).
lbid, at pp.
24
at p1. 57.
159.
158-
460
NON-CORPORATE MEDIA OF DOING BUSINESS
In
other
words,
Suter
holds
that
when
the
facts
show
that
the
juridical
personality
of
the
partnership
is
but
a
means
to
evade
the
law
or
a
sham,
then
the
courts
will
pierce
the
veil
of
its
separate
juridical
personality
to
treat
the
partners
as
directly
liable
or
accountable
for
the
consequences
of
the
acts
or
contracts
done
in
the
partnership
name.
The
piercing
doctrine
also
found
recognition,
albeit
by
way
of
obiter,
in
25
Aguila,
Jr.
v.
Court
of
Appeals,
but
only
in
the
limited
area
of
determining
standing
in
a
suit
brought
against
claims
pertaining
to
the
partnership.
In
Aguila,
Jr.
the
complaint
was
filed
against
the
partners
and
officers
to
enforce
essentially
a
partnership
obligation.
In
ruling
that
the
judgment
rendered
by
the
trial
court
(affirmed
by
the
Court
of
Appeals)
against
the
individual
defendants
was
void,
the
Court
held
Under
Art.
1768
of
the
Civil
Code,
a
partnership
"has
a
juridical
personality
separate
and
distinct
from
that
of
each
of
the
partners."
The
partners
cannot
be
held
liable
for
the
obligations
of
the
partnership
unless
it
is
shown
that
the
legal
fiction
of
a
different
juridical
personality
is
being
used
for
fraudulent,
unfair,
or
illegal
purposes.
In
this
case,
private
respondent
has
not
shown
that
A.C.
Aguila
&
Sons,
Co.,
as
a
separate
juridical
entity,
is
being
used
for
fraudulent,
unfair
or
illegal
purposes.
Moreover,
the
title
to
the
subject
property
is
in
the
name
of
A.C.
Aguila
&
Sons,
Co.
and
the
Memorandum
of
Agreement
was
executed
between
private
respondent
with
the
consent
of
her
late
husband,
and
A.C.
Aguila
&
Sons,
Co.,
represented
by
petitioner.
Hence,
it
is
the
partnership,
not
its
officers,
or
agents,
which
should
be
impleaded
in
any
litigation
involving
property
registered
in
its
name.
A
violation
of
this
rule
will
result
to
dismissal
of
the
complaint.
We
cannot
understand
why
both
the
Regional
Trial
Court
and
the
Court
of
Appeals
sidestepped
this
issue
when
it
was
squarely
26
raised
before
them
by
petitioner.
25
319
SCRA246
(1999).
"Ibid,
at
p.
254.
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
461
4. Entitlement to Constitutional Rights and Guarantees
The more interesting topic under the "juridical personality doctrine" is
whether partnerships are entitled to the constitutional rights of due process,
equal protection, unreasonable searches and seizures and the right against
self-incrimination.
It is well established in Philippine Corporate Law, that corporations as
"persons before the law" are entitled to the constitutional guarantee to due
27
process and equal protection, the rights against unreasonable searches and
28
29
seizure; but not to the right against self-incrimination.
30
Smith,
Bell
&
Co.
v.
Natividad,
discusses
the
rationale
why
corporations
would
be
entitled
to
constitutional
guarantees
accorded
to
individuals,
thus:
The
guarantees
of
the
Fourteenth
Amendment
and
so
of
the
first
paragraph
of
the
Philippine
Bill
of
Rights,
are
universal
in
their
application
to
all
persons
within
the
territorial
jurisdiction,
without
regard
to
any
differences
of
race,
color,
or
nationality.
The
word
'person'
includes
aliens
...
Private
corporations,
likewise,
are
'persons'
within
the
scope
of
the
guaranties
in
so
far
as
their
31
property
is
concerned..
.
The
Smith,
Bell
&
Co.
rationale
has
equal
application
to
partnerships
which
are
accorded
a
separate
persons
under
the
Partnership
Law.
The
better
rationale
applicable
to
partnership
would
be
the
ruling
in
Bache
&
Co.
(Phil.),
32
Inc.
v.
Ruiz,
where
the
Court
held
that
a
corporation
is
entitled
to
immunity
against
unreasonable
searches
and
seizures
because
"A
corporation
is,
after
all,
but
an
association
of
individuals
under
an
assumed
name
27
Smith,
Bell
&
Co.
v.
Natividad,
40
Phil.
136
(1919);
Bache
&
Co.
(Phil.),
Inc.
v.
Ruiz,
37
SCRA
823
(1971).
2B
Stonehili
v.
Diokno,
20
SCRA
383
(1967).
29
Bataan
Shipyard
and
Engineering
Co.,
Inc.
v.
PCGG,
150
SCRA
181
(1987).
OT
40 Phil. 136 (1919).
"Ibid, at p. 144.
W SCRA 823 (1971).
462
NON-CORPORATE MEDIA OF DOING BUSINESS
and
with
a
distinct
legal
entity.
In
organizing
itself
as
a
collective
body
it
waives
no
constitutional
immunities
appropriate
for
such
body.
Its
property
cannot
be
taken
without
compensation.
It
can
only
be
proceeded
against
by
due
process
of
law,
and
is
protected,
under
the
14th
Amendment,
against
unlawful
33
discrimination."
In
fact,
in
the
partnership
setting
there
is
closer
identity
between
the
partners
and
the
partnership
in
the
sense
that
the
partners
not
only
own
the
partnership,
co-own
partnership
assets,
and
directly
manage
the
affairs
of
the
partnership,
but
more
so
that
the
separate
juridical
personality
is
closely
identified
with
the
personality
of
the
partners
under
delectus
personae
considerations.
On
the
other
hand,
the
Court's
ruling
on
why
corporations
are
not
entitled
to
the
rights
against
self-incrimination,
has
less
vigor
to
the
partnership
setting.
Consider
the
decision
in
Bataan
Shipyard
&
Engineering
34
Co.,
Inc.
v.
PCGG,
where
the
Court
held
that
the
right
against
self-incrimination
has
no
application
to
corporations,
thus:
*
*
*
The
corporation
is
a
creature
of
the
state.
It
is
presumed
to
be
incorporated
for
the
benefit
of
the
public.
It
receives
certain
special
privileges
and
franchises,
and
holds
them
subject
to
the
laws
of
the
state
and
the
limitations
of
its
charter.
Its
power
are
limited
by
law.
It
can
make
no
contract
not
authorized
by
its
charter.
Its
right
to
act
as
a
corporation
are
only
preserved
to
it
so
long
as
it
obeys
the
laws
of
its
creation.
There
is
a
reserve
right
in
the
legislature
to
investigate
its
contracts
and
find
out
whether
it
has
exceeded
its
powers.
It
would
be
a
strange
anomaly
to
hold
that
a
state,
having
chartered
a
corporation
to
make
use
of
certain
franchises,
could
not,
in
the
exercise
of
sovereignty,
inquire
how
these
franchises
had
been
employed,
and
whether
they
had
been
abused,
and
demand
the
production
of
the
corporate
books
and
papers
for
that
purpose.
The
defense
amounts
to
this,
that
an
officer
of
the
corporation
which
is
^Ibid,
at
p.
837,
quoting
from
Hale
v.
Henkel,
201
U.S.
43,
50
L.Ed.
652.
"150
SCRA
181
(1987).
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
463
charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To
state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless protected
by an immunity statute, it does not follow that a corporation,
vested with special privileges, and franchise may refuse to show its
35
hand when charged with an abuse of such privileges.
Every corporation is a direct creature of the law and receives an
individual franchise from the State. But a partnership, although is deemed to be
a juridical person by state grant under Article 1768 of the New Civil Code,
becomes a juridical person through a private contract of partnership between
and among the partners, without needing to register its existence with the
State or any of its organs. More importantly, the partnership "person" is a
fiction of law given more for the convenience of the partners, and thus can be
dissolved by the will of the partners or by the happening of an event that would
constitute the termination of the contractual relationship, whereas, no
corporation can be dissolved without the consent of the State, and only after
due notice and hearing. Likewise, the other features of the partnership, mainly
mutual agency, delectus personae and unlimited liability on the part of the
partners, all place a closer identification between the persons of the partners
and that of the partnership.
This is unlike in corporate setting, where the stockholders do not own
corporate properties, have no participation in management of corporate
affairs, and enjoy personal immunity from the debts and liabilities of the
corporation, and where basically the corporation "is its own person," and acts
through a professional group of managers and agents called the board of
directors. While therefore it is understandable that a corporation, that has no
heart, feels no pain, and has no soul that can be damned, cannot be expected
to be entitled to the constitutional right against self-incrimination, it is quite
different in the case of the partnership, since its person is merely an extension
of the
^Ibid,
at
pp.
234-235,
quoting
from
Wilson
v.
United
States,
55
Law
Ed.
771,
780.
464
NON-CORPORATE MEDIA OF DOING BUSINESS
group
of
partners,
who
having
come
together
in
business,
and
acting
still
for
such
business
enterprise,
could
not
be
presumed
to
have
waived
their
individual
rights
against
self-incrimination.
As
the
author
has
observed
in
his
writing
on
Philippine
Corporate
Law,
when
it
comes
to
the
constitutional
right
against
self-incrimination,
the
Court
would
rely
upon
old
American
doctrine
which
views
the
corporation
as
a
mere
creature
of
the
law
and
with
separate
juridical
personality
apart
from
its
stockholders
or
members.
In
the
partnership
setting,
the
difference
in
the
Court's
stance
may
lie
in
the
fact
that
the
right
against
self-incrimination
does
not
really
result
in
physical
intrusion
into
the
premises
of
the
partnership,
because
it
would
require
only
that
the
partnership,
through
its
agents,
produce
records
and
books
before
the
courts.
The
denial
of
the
right
against
self-incrimination
from
corporations
and
partnerships
does
not
really
invite
state
authorities
into
the
premises
or
physical
privacy
of
the
stockholders,
members
or
partners
who
compose
the
juridical
entity;
but
would
deny
acting
individuals
the
right
to
abuse
the
medium
of
separate
juridical
personality
as
a
means
to
do
folly.
On
the
other
hand,
to
deny
the
due
process
rights
or
right
against
unreasonable
searches
and
seizures
to
corporations
and
partnerships
would
actually
be
to
invite
state
authorities
to
physically
intrude
into
business
premises,
and
therefore
also
intrude
into
the
personal
and
business
privacy
of
the
stockholders,
members
or
partners
who
compose
the
juridical
person.
Perhaps
that
is
the
basis
for
the
difference
in
stance
by
the
Court
between
two
sets
of
constitutional
rights
with
respect
to
corporations,
and
also
in
the
case
of
partnerships.
Another
view
is
that
the
constitutional
guarantees
of
due
process,
equal
protection
clause
and
against
unreasonable
searches
and
seizures
are
all
meant
to
curb
the
abuse
that
the
State
and
its
representatives
may
employ
upon
the
citizenry,
including
the
modes
upon
which
they
conduct
their
lives
and
businesses.
On
the
other
hand,
the
constitutional
protection
against
self-incrimination
is
not
meant
to
prevent
an
actual
State
abuse
but
to
avoid
pressuring
the
individual
from
having
to
tell
a
lie:
"The
main
purpose
of
the
provision
...
is
to
prohibit
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
465
compulsory
oral
examination
of
prisoners
before
the
trial,
or
upon
trial,
for
the
purpose
of
extorting
unwilling
confessions
or
declarations
implicating
them
in
38
the
commission
of
a
crime."
A
corporation
owes
full
allegiance
and
subject
to
the
unrestricted
jurisdiction
of
the
courts
of
the
State
under
which
it
has
been
37
organized.
PARTNERSHIP AS A BUSINESS ENTERPRISE
Although not explicitly stated in the provisions of New Civil Code, the
partnership may constitute also a "business enterprise" or what is known in the
disciplines of Economics and Accounting, as "a going concern" that is
separately valued and accounted for from the individual value of the assets and
properties constituting it and from the medium or means by which it is operated
(in the case of partnership, the juridical person created by express provision of
law). Recognition of the existence and operation of the partnership's business
enterprise, as distinguished from the legal effects and consequences of the
contract of partnership among the partners and the partnership juridical person,
gives rise to legal relationships, rights and obligations, and doctrines, that can
only be accounted for from that level.
For example, the right of the partners to specific partnership property and
to share in the profits and losses, as well as the right to manage, are legal
matters that necessarily refer to the partnership business enterprise.
This understanding of the business enterprise of a partnership is applicable
even to a professional partnership. Our Supreme Court has defined the term
"profession" as "a group of men pursuing a learned art as a common calling in
the spirit of public service no less a public service because it may incidentally
38
be a means of livelihood."
"U.S. v. Tan Teng, 23 Phil. 145,152 (1912).
37
M
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242,248 (1968). ln the
Matter of the Petition for Authority to Continue Use of Firm Name Sycip,
Salazar, etal. v. Ozaeta, Romulo, etc., 92 SCRA 1 (1979).
NON-CORPORATE MEDIA OF DOING BUSINESS
466
The recognition of the inherent relationship between and among the
partners to be bound by the results of operations from the business enterprise
has been well-explained by the Court in Villareal v. Ramirez,thus:
First, it seems that the appellate court was under the
misapprehension that the total capital contribution was
equivalent to the gross assets to be distributed to the partners
at the time of the dissolution of the partnership. We cannot
sustain the underlying idea that the capital contribution at
the beginning of the partnership remains intact, unimpaired
and available for distribution or return to the partners. Such
idea is speculative, conjectural and totally without factual or
legal support.
Generally, in the pursuit of a partnership business, its
capital is either increased by profits earned or decreased
by losses sustained. It does not remain static and unaffect-
ed by the changing fortunes of the business. In the pres-
ent case, the financial statements presented before the trial
court showed that the business had made meager profits.
However, notable therefrom is the omission of any provision
for the depreciation of the furniture and the equipment. The
amortization of the goodwill (initially valued at P500,000) is
not reflected either. Properly taking these non-cash items
into account will show that the partnership was actually sus-
taining substantial losses, which consequently decreased
the capital of the partnership. Both the trial and the appellate
courts in fact recognized the decrease of the partnership as-
sets to almost nil, but the latter failed to recognize the conse-
40
quent corresponding decrease of the capital.
x x x
Because of the above-mentioned transactions, the
partnership capital was actually reduced. When petitioners
and respondents ventured into business together, they
should have prepared for the fact that their investment would
either grow or shrink. In the present case, the investment
of respondents substantially dwindled. The original amount
^
o
e
S
C
R
A
1
4
5
TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
467
of P250,000 which they had invested could no longer be returned
to them, because one third of the partnership properties at the
time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve
parties from the effects of unwise, foolish or disastrous contracts
they have entered into with all the required formalities and with
full awareness of what they were doing. Courts have no power to
relieve them from obligations they have voluntarily assumed,
simply because their contracts turn out to be disastrous deals or
41
unwise investments.
It is only from the "partnership business enterprise" level that we can
fully appreciate the concept that essentially the partners are "owners" of the
business, or that they take the position of "equity" holders, as distinguished
from creditors who advance money to the partnership as "debt" holders.
It is an essential element to the existence of the partnership under Article
1767 of the New Civil Code, that the obligations assumed by the partners "to
contribute money, property or industry to a common fund," which essentially
represents the "business enterprise" to be pursued, to thereby assume the
position of being "owners" or "equity holders," and to be entitled to the profits
made from the pursuit of the business enterprise, and logically to assume the
risks connected with it, including absorbing the losses sustained.
The critical position of partners as "equity holders" is confirmed under
Article 1770 New Civil Code which requires that a partnership "must be
established for the common benefit or interest of the partners," which aptly
describes their positions as owners of the partnership business enterprise.
2
Only
recently,
in
Heirs
of
Jose
Lim
v.
Lim*
the
Supreme
Court
defined
the
partnership
in
terms
of
being
essentially
a
contract
to
pursue
a
business
enterprise,
thus:
4
1
A
b
/
d
,
a
t
p
.
468
NON-CORPORATE MEDIA OF DOING BUSINESS
A partnership exists when two or more persons agree to place
their money, effects, labor, and skill in lawful commerce or
business, with the understanding that there shall be a
proportionate sharing of the profits and losses among them. A
contract of partnership is defined by the Civil Code as one where
two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of
43
dividing the profits among themselves.
The importance of being aware that the partnership would eventually
constitute a business enterprise lies in the application of certain doctrines of
succession of liability that apply peculiarly to business enterprises. Likewise,
the rules on dissolution and liquidation clearly appreciate the difference
between the contract relationship and juridical person constituting the
partnership, from the underlying business enterprise that may remain
operating even when the first two levels are legally dissolved or extinguished.
These matters are better discussed in succeeding chapters of the book.
0O0
"Ibid, at p. 148.
CHAPTER
3
ATTRIBUTES
OF
THE
PARTNERSHIP
ART. 1767. 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. (1665a)
ART. 1768. The partnership has a juridical personality separate
and distinct from that of each of the partners, even in case of failure
to comply with the requirements of Article 1722, first paragraph, (n)
Every partnership existing under the Law on Partnerships
of New Civil Code is endowed with the following essential
attributes:
(a) INFORMAL/CONSENSUAL AND WEAK JURIDICAL PER-
SONALITY;
(b) MUTUAL AGENCY;
(c) DELECTUS PERSONAE;
469
470
NON-CORPORATE MEDIA OF DOING BUSINESS
(D) PARTNERS BURDENED WITH UNLIMITED LIABILITY (except for
Limited Partners in a Limited Partnership).
An understanding of each of the partnership attributes provides a better
appreciation of the multifarious functions of the partnership in the Philippine
commercial setting.
NON-SOLEMN OR CONSENSUAL JURIDICAL PERSONALITY
ART. 1771. A partnership may be constituted in any form except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary. (1667a)
ART. 1785. 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, (n)
In
contrast
to
the
corporate
juridical
personality
which
can
only
arise
and
can
only
be
terminated
by
complying
with
the
formal
processes
and
procedures
mandated
by
the
State,
the
juridical
personality
accorded
to
every
partnership
under
Article
1768
of
New
Civil
Code
is
best
described
to
be
"informal,"
or
better
yet
merely
"consensual,"
as
distinguished
from
being
"formal"
or
"solemn"
in
character.
ATTRIBUTES OF THE PARTNERSHIP
471
It
is
very
well
implied
from
the
substance
and
sequence
of
Articles
1767
and
1768
of
the
New
Civil
Code
that
the
existence
of
a
separate
juridical
personality
for
a
partnership
is
conditioned
on
the
perfection
and
validity
of
a
contract
of
partnership;
and
that
the
separate
juridical
personality
arises
as
a
mandatory
consequence
under
the
law
from
the
perfection
of
a
contract
of
partnership.
Consequently,
as
the
contract
of
partnership
is
best
described
as
a
consensual
contract,
it
follows
necessarily
that
the
constitution
of
a
partnership
juridical
personality
would
also
be
consensual.
The
general
rule
under
Article
1771
of
the
New
Civil
Code
is
that
"a
partnership
may
be
constituted
in
any
form."
To
illustrate,
the
partnership's
separate
juridical
personality
arises
in
the
privacy
of
the
perfection
of
the
contract
of
partnership:
Article
1768
provides
that
the
"partnership
has
a
juridical
personality
separate
and
distinct
from
that
of
each
of
the
partners,"
which
under
Article
1784
"begins
from
the
moment
of
the
execution
of
the
contract,
unless
it
is
otherwise
stipulated."
So
informal
or
casual
is
the
attitude
of
the
law
on
the
partnership's
juridical
personality
that
under
Article
1785,
such
juridical
personality
can
be
extended
beyond
the
original
fixed
term
or
particular
undertaking
by
the
mere
"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."
What
is
the
reason
for
the
legal
attitude
of
being
rather
"informal"
on
the
juridical
personality
of
the
partnership?
It
seems
from
the
provisions
of
the
Law
on
Partnerships
of
New
Civil
Code
that
the
"separate
juridical
personality"
granted
to
the
partnership
contractual
relationship
between
and
among
the
partners,
and
the
underlying
partnership
business
enterprise,
is
not
the
centerpiece
of
the
Partnership
Law,
but
merely
an
"add
on"
to
allow
the
business
venture
to
be
run
more
efficiently
by
the
owners
thereof
(the
partners),
and
to
make
its
dealings
with
the
public
easier
and
pursued
with
more
efficiency.
After
all,
in
common
law
traditions
the
partnership
has
survived
and
thrived
in
a
setting
that
does
not
accord
it
a
juridical
personality.
In
other
words,
the
civil
law
tradition
of
providing
a
partnership
472
NON-CORPORATE MEDIA OF DOING BUSINESS
with a juridical personality separate and distinct from the partners or
properly speaking, to clothe the business enterprise with a juridical person by
which it can better deal with the public is meant to add to the commercial
efficiency of the partnership both as a medium of association and as a medium
of doing business.
The default rule of according by operation of law a juridical personality
to a partnership arrangement, makes it a cheaper medium of doing business.
Therefore, if the manner by which to achieve juridical personality be made
more rigorous and formal, then it makes the partnership medium a more
expensive proposition, and therefore commercially unattractive, especially for
businessmen and merchants who embark on modest ventures.
1. Exceptions to Informal or Consensual Nature of Juridical
Personality
ART. 1772. Every contract of partnership having a capital of
three thousand pesos or more, in money or property, shall appear in
a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.
Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of the partnership and the
members thereof to third person, (n)
ART. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the
public instrument. (1668a)
ART. 1843. A limited partnership is one formed by two or more
persons under the provisions of the following article, having as
members one or more general partners and one or more limited
partners.
ATTRIBUTES OF THE PARTNERSHIP
473
The limited partners as such shall not be bound by the obligations of
the partnership.
The
only
time
in
New
Civil
Code
when
the
contract
of
partnership
(and
therefore
likewise
with
the
partnership
juridical
person)
must
assume
a
"solemn"
or
"formal"
character
covers
three
express
instances:
(a)
Under Article 1772, that every contract of partnership having
a capital of f*3,000 or more shall appear in a public
instrument, which must be recorded with the Securities and
Exchange Commission (SEC);
(b)
Under Articles 1771 and 1773, where immovable property or
real rights are contributed to the partnership:
(c)
(i)
in which case a public instrument shall be necessary;
and
(ii)
the contract of partnership is void, if an inventory of
said property is not made, signed by the parties and
attached to the public instrument; and
Under Articles 1843 and 1844, which require particular
provisions describing limited partners in the articles of limited
partnership, and which must be formally registered with the
SEC.
When
the
capital
contributions
not
involving
real
property
are
in
excess
of
^3,000,
and
there
is
failure
to
comply
with
the
requirement
for
public
instrument
and
recording
with
the
SEC,
Article
1772
of
the
New
Civil
Code
does
not
expressly
state
what
happens
to
the
legal
status
of
the
contract
of
partnership.
In
fact,
Article
1772
provides
that
"Failure
to
comply
with
the
requirements
of
the
preceding
paragraph
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
persons."
474
NON-CORPORATE MEDIA OF DOING BUSINESS
On
the
other
hand,
the
law
is
clear
that
when
what
is
contributed
to
the
partnership
is
immovable
property,
and
there
is
failure
to
provide
for
an
inventory
thereof
to
be
attached
to
the
public
instrument
to
be
registered
with
the
SEC,
the
resulting
partnership
is
"void."
The
exception
when
it
comes
to
real
property
contributions
is
the
public
policy
contained
in
the
New
Civil
Code
and
in
other
special
laws,
that
considers
real
property
as
constituting
a
cornerstone
in
our
economic
life,
and
that
dealings
therewith
must
be
formal
and
public,
which
would
afford
to
the
public
a
reliable
means
to
determine
the
status
of
ownership
and
the
existing
liens
of
real
property.
The
only
other
exception
to
the
informal
or
consensual
nature
of
the
partnership
juridical
personality
would
be
the
mandatory
registration
requirements
for
the
valid
constitution
of
the
limited
partnership.
Again,
this
is
in
line
with
the
principle
that
limited
liability
to
the
owners
of
a
business
enterprise
is
unusual,
and
if
it
is
to
exist
to
bind
the
public,
it
must
be
pursued
and
reflected
in
a
formal
manner.
As
shown
in
the
decision
in
MacDonald
v.
National
City
Bank
of
New
York,'
even
under
the
Code
of
Commerce
where
registration
was
essential
for
the
coming
into
existence
of
a
commercial
partnership,
nonetheless
in
a
proper
case
of
estoppel,
the
courts
treated
such
unregistered
commercial
partnership
as
a
de
facto
partnership
with
a
personality
of
its
own
in
order
to
protect
the
rights
of
third
persons.
2. Weak Juridical Personality
On the other hand, the juridical personality of the partnership is "weak"
because it can be put as under without need of formal dissolution process, and
by the will of any of the partners or all of them, or even by chance.
To illustrate, under Article 1830 of New Civil Code, the partnership may
be dissolved by:
'99 Phil. 156(1956).
ATTRIBUTES OF THE PARTNERSHIP
(a)
Express will of any partner, either acting in good faith or even
when not in good faith and in contravention of the
agreement;
(b)
Express will of all the partners;
(c)
Expulsion of any partner;
(d)
Any event which makes the partnership business unlawful;
(e)
Loss before delivery of the property promised to be
contributed by the partner;
(f)
Death, insolvency, or civil interdiction of any partner;
(g)
By court decree, when a partner has been declared insane or
incapacitated, or guilty of conduct prejudicial to the
partnership business or in breach of the agreement, or when
the partnership business can only be carried at a loss.
475
The
complaint
has
often
been
heard
in
business
and
legal
circles
that
one
of
the
disadvantages
of
the
partnership
medium
is
that
it
have
a
weak
juridical
personality.
The
author
believes
that
such
an
observation
is
misplaced
and
fails
to
appreciate
the
fact
that
it
makes
no
sense
in
the
Law
on
Partnerships
to
infuse
a
medium
that
it
seeks
to
invite
businessmen
and
the
public
to
use
and
endow
it
with
a
flaw
or
disadvantage.
In
other
words,
there
is
a
purpose
why
the
law
infuses
the
partnership
juridical
personality
with
the
characteristic
of
"weakness."
Understood
properly
the
weakness
of
the
partnership
juridical
personality
is
a
clear
advantage
for
the
partnership
as
a
medium
of
association
and
as
a
medium
of
doing
business.
The
separate
juridical
personality
is
employed
only
to
allow
the
partners
and
the
partnership
venture
to
attain
their
objectives,
and
it
is
either
brushed
aside
or
set
aside
when
it
begins
to
obstruct
such
objectives.
The
value
of
the
separate
juridical
personality
of
the
partnership
cannot
override
a
value
of
greater
importance
in
the
Law
of
Partnerships
best
exemplified
476
NON-CORPORATE MEDIA OF DOING BUSINESS
by
the
aphorism,
that
above
all,
the
partnership
is
a
contractual
and
personal
relationship
among
the
partners
who
associate
together
to
be
able
to
pursue
a
business
venture
collectively.
In
other
words,
everything
is
personal
in
a
partnership
set-up,
and
this
is
best
exemplified
by
the
attributes
of
"mutual
agency"
and
"delectus
personae."
MUTUAL AGENCY
ART. 1803. When the manner of management
has not been agreed upon, the following rules shall
be observed:
(1) All the partners shall be considered agents
and whatever any one of them may do alone shall
bind the partnership, without prejudice to the
provisions of Article 1801.
xxx. (1695a)
ART. 1818. Every partner is an agent of the
partnership for the purpose of its business, and the
act of every partner, including the execution in the
partnership name of any instrument, for apparently
carrying on in the usual way the business of the
partnership of which he is a member binds the
partnership, unless the partner so acting has in
fact no authority to act for the partnership in the
particular matter, and the person with whom he is
dealing has knowledge of the fact that he has no
such authority.
An act of a partner which is not apparently for
the carrying on of business of the partnership in
the usual way does not bind the partnership unless
authorized by the other partners.
Except when authorized by the other partners
or unless they have abandoned the business, one
ATTRIBUTES OF THE PARTNERSHIP
477
or more but less than all the partners have no
authority to:
(1) Assign the partnership property in trust for
creditors or on the assignee's promise to pay the
debts of the partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it
impossible to carry on the ordinary business of a
partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a part-
nership claim or liability;
(6) Submit a partnership claim or liability to
arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restric-
tion on authority shall bind the partnership to per-
sons having knowledge of the restriction, (n)
The
default
rule
under
Article
1803(1)
of
New
Civil
Code
is
that
each
of
the
partners
is
an
agent
of
the
partnership
and
of
all
of
the
other
partners
in
the
pursuit
of
partnership
affairs,
thus:
"When
the
manner
of
management
has
not
been
agreed
upon
. . .
All
the
partners
shall
be
considered
agents
and
whatever
any
one
of
them
may
do
alone
shall
bind
the
partnership."
Article
1818
of
New
Civil
Code
provides
that
"Every
partner
is
an
agent
of
the
partnership
for
the
purpose
of
its
business,
and
the
act
of
every
partner,
including
the
execution
in
the
partnership
name
of
any
instrument,
for
apparently
carrying
on
in
the
usual
way
the
business
of
the
partnership
of
which
he
is
a
member
binds
the
partnership."
The
principle
of
mutual
agency
lies
at
the
heart
of
the
partnership
arrangement
because
it
defines
the
prerogative
of
NON-CORPORATE MEDIA OF DOING BUSINESS
478
every partner to participate in the management of the partnership business. It is
one of the more important manifestation of the position of the partners as
"owners" or "equity holders" of the partnership business enterprise. It also
brings into focus the reality that the partnership arrangement is of the most
personal nature, and that the parties are not only investors but exercise the
prerogatives of ownership and control into the partnership business.
Properly appreciated, a partnership is simply a conglomeration of two or
more sole proprietorships, where the original sole proprietor continue to
manage their business and also the business of the other proprietors in the
association. Consequently, as a sole proprietor is liable with his other assets for
the liabilities incurred by his business, then in the same manner, the partners
will also be liable personally and with their other non-contributed assets for the
liabilities incurred by their combined business enterprises.
DELECTUS
PERSONAE
Bautista
referred
to
delectus
personae
as
follows:
"For,
in
accordance
with
the
principle
of
delectus
personae
(selection
of
persons),
one
selects
his
partners
on
the
basis
of
their
personal
qualifications
and
qualities,
such
as
solvency,
ability,
honesty,
and
trustworthiness,
among
others.
It
is
for
this
reason
that
there
is
mutual
representation
among
the
partners
so
that
the
act
2
of
one
is
considered
the
act
and
responsibility
of
the
others
as
well."
The
best
way
to
define
the
concept
of
delectus
personae
is
that
the
contract
of
partnership
creates
the
most
personal
relationship
between
and
among
the
partners
which
when
broken,
also
breaks
the
bond
of
the
partnership.
The
doctrine
emphasizes
the
personal-contractual
relationship
between
and
among
the
partners
as
being
more
important
than
the
property
rights
and
the
business
enterprise
created
in
the
partnership.
BAUTISTA, at p. 95.
ATTRIBUTES OF THE PARTNERSHIP
479
Thus,
Article
1770
of
New
Civil
Code
provides
that
"A
partnership
. . .
must
be
established
for
the
common
benefit
or
interest
of
the
partners."
The
doctrine
of
delectus
personae
can
be
viewed
in
two
ways:
Firstly,
it
is
the
embodiment
of
the
principle
of
relativity
or
privity
in
contracts:
a
partnership
arrangement
being
primarily
a
contractual
relationship,
then
the
privity
that
is
created
by
its
perfection
is
between
and
among
the
partners
thereto
at
the
point
of
perfection;
and
that
such
privity
cannot
be
extended
beyond
the
original
partners
without
the
consent
of
all
the
other
parties
to
the
contract
of
partnership.
To
illustrate
the
point,
although
Article
1810
of
New
Civil
Code
recognizes
that
"interest
in
the
partnership"
is
a
property
right
of
a
partner,
nevertheless
under
Article
1804,
although
a
partner
may
associate
another
person
with
him
in
his
share,
"the
associate
shall
not
be
admitted
into
the
partnership
without
the
consent
of
all
the
other
partners,
even
if
the
partner
having
an
associate
should
be
a
manager."
The
privity
created
by
the
contract
of
partnership
is
of
the
group
of
partners
who
consent
that
the
moment
one
partner
is
gone
the
privity
is
broken
and
the
partnership
contract
is
terminated.
In
other
words,
if
five
individuals
come
together
into
a
partnership
agreement,
the
privity
retains
its
integrity
among
the
five,
and
not
just
between
two
or
three
or
four
of
the
members.
Thus,
under
Article
1830
of
the
New
Civil
Code,
the
partnership
is
dissolved
by
the
expulsion,
death,
insolvency,
civil
interdiction
of
any
of
the
partners.
Secondly,
that
the
relationship
established
in
a
contract
of
partnership
is
of
the
most
fiduciary
character,
or
of
the
most
confidential
manner,
that
once
that
trust
or
confidence
is
lost,
the
contract
is
deemed
breached
or
at
least
at
an
end.
This
is
fortified
by
the
fact
that
the
partners
are
mutual
agents
to
one
another,
and
essentially
the
relationship
between
and
among
them
is
of
fiduciary
character,
and
the
character
of
every
agency
relation
is
that
it
is
essentially
revocable.
Consequently,
even
when
the
articles
of
partnership
provide
for
a
definite
term
of
existence,
NON-CORPORATE MEDIA OF DOING BUSINESS
480
under
Article
1830
of
the
New
Civil
Code,
a
partnership
can
be
dissolved
in
midstream
"By
the
express
will
of
any
partner,
who
must
act
in
good
faith."
Even
the
separate
juridical
personality
of
the
partnership
enterprise
cannot
save
the
partnership
from
being
dissolved
under
the
rule
that
the
termination
of
the
contract
of
partnership
terminates
the
separate
juridical
personality
as
well.
The
features
of
mutual
agency
and
delectus
personae
define
the
rights
and
liabilities
of
the
partners
in
a
partnership
arrangement,
and
constitute
the
underlying
reason
why
partners
are
personally
liable
for
partnership
debts
beyond
their
contributions
and
to
the
extent
of
their
separate
properties.
3
In
Ortega
v.
Court
of
Appeals,
Justice
Vitug
wrote
one
of
the
best
pieces
of
doctrinal
description
of
the
nature
and
essence
of
the
doctrine
of
delectus
personae
in
every
partnership,
thus
The birth and life of a partnership at will is predicated on the
mutual desire and consent of the partners. The right to choose
with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued
existence is, in turn, dependent on the constancy of that mutual
resolve, along with each partner's capability to give it, and the
absence of a cause for dissolution provided by the law itself. Verily,
any one of the partners may, at his sole pleasure, dictate a
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
4
damages.
5
In Tocao v. Court of Appeals, the Court held "An unjustified dissolution
by a partner can subject him to action for damages because by the mutual
agency that arises in a partnership, the doctrine of delectus personae allows
the partners to have
3
245 SCRA 529
(1995).
*lbid, at pp.
5
535-
342 5S36.
CRA 20
(2000).
ATTRIBUTES OF THE PARTNERSHIP
481
6
the power, although not necessarily the right to dissolve the partnership."
PARTNERS BOUND TO UNLIMITED LIABILITY
ART. 1816. All partners, including industrial ones, shall be liable
pro rata with all their property and after all the partnership assets
have been exhausted, for the contracts which may be entered into
in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership.
However, any partner may enter into a separate obligation to
perform a partnership contract, (n)
ART. 1817. Any stipulation against the liability laid down in the
preceding article shall be void, except as among the partners, (n)
Both
Articles
44
and
1768
of
New
Civil
Code
recognize
that
a
partnership
is
granted
with
"a
juridical
personality,
separate
and
distinct
from
that
of
each
...
partner
or
member,"
and
that
Article
46
recognizes
the
legal
capacity
of
the
partnership
therefore
to
enter
into
contracts,
own
and
possess
properties,
thus:
"Juridical
persons
may
acquire
and
possess
property
of
all
kinds,
as
well
as
incur
obligations
and
bring
civil
or
criminal
actions,
in
conformity
with
the
laws
and
regulations
of
their
organizations."
The
ordinary
principle
of
"relativity
under
the
Law
on
Contracts
that
7
"Contracts
take
effect
only
between
the
parties,
their
assigns
and
heirs,"
should
mean
that
when
a
juridical
person
enters
into
a
contract
and
assumes
an
obligation
by
lbid,
at
p.
37.
Article
1311,
New
Civil
Code.
7
482
NON-CORPORATE MEDIA OF DOING BUSINESS
reason
thereof,
its
members
or
constituents,
and
its
agents,
do
not
ordinarily
become
liable
for
the
obligations
assumed
by
their
principal.
Yet,
in
defiance
of
the
very
essence
of
separate
juridical
personality
of
the
partnership,
the
general
rule
is
that
every
partner
is
liable
personally
for
his
other
property
not
contributed
to
the
partnership
for
partnership
debts
and
obligations.
Articles
1816
and
1817
of
New
Civil
Code
thus
provide
that
"All
partners,
including
industrial
ones,
shall
be
liable
pro
rata
with
all
their
property
and
after
all
the
partnership
assets
have
been
exhausted
.
.
.
[and
that]
Any
stipulation
against
[such]
liability
shall
be
void,
except
as
among
the
partners."
Why
does
the
law
make
partners
personally
liable
for
partnership
debts
contracted
as
a
separate
juridical
person?
Would
such
unlimited
liability
still
apply
without
express
provision
of
law?
Even
without
any
express
provision
of
law
and
despite
the
separate
juridical
personality
of
the
partnership,
unlimited
liability
would
be
the
rule
for
partners
in
a
partnership
setting
for
the
basic
reason
that
partners
essentially
occupy
the
position
of
sole
proprietors,
albeit
associated
with
other
sole
proprietors.
The
basic
rule
is
that
sole
proprietors
are
always
unlimitedly
liable
for
business
debts
and
obligations
even
as
to
their
properties
not
used
nor
devoted
for
the
business
enterprise.
The
reason
why
a
sole
proprietor
is
liable
with
his
non-business
assets
for
debts
and
liabilities
arising
from
a
business
venture
is
because
he
controls
the
business
enterprise,
and
all
profits
go
to
him
which
he
can
devote
into
non-business
matters,
and
thereby
he
must
also
absorb
the
losses
from
the
business.
Therefore,
if
his
business
goes
bankrupt,
he
cannot
insist
that
his
business
creditors
are
limited
only
to
the
business
assets
for
the
satisfaction
of
their
claims,
and
as
all
benefits
and
profits
can
be
channeled
to
his
personal
non-business
affairs,
then
his
non-business
properties
must
also
be
held
liable
for
the
satisfaction
of
those
claims;
to
rule
otherwise
would
mean
that
the
owner
benefits
fully
on
the
profits,
but
lets
his
creditors
absorb
the
losses
from
the
business.
It
is
a
commercial
law
truism
that
it
is
the
owner
or
equity
holders
of
the
business
enterprise,
and
not
the
creditors,
who
must
stand
ready
to
absorb
the
losses
of
the
business
enterprise.
ATTRIBUTES OF THE PARTNERSHIP
483
In a partnership setting, the partners are still collective owners of the
business enterprise, as by the principle of mutual agency they all have the power
of management of the partnership affairs, and all profits and gains are to their
entire benefit and account. Thus, Article 1770 of New Civil Code provides that
every "partnership must be established for the common benefit or interest of
the partners," and in turn Article 1799 provides that "Any stipulation which
excludes one or more partners from any share in the profits or losses is void."
Therefore, despite the separate juridical personality of the partnership
enterprise, the partnership is still wholly owned, managed and controlled by the
partners as collective proprietors of the business enterprise, and consequently,
they must bear the full brunt of the reverses of the business. Since the partners
benefit fully and personally from the partnership's profitable operations, they
must thereby stand liable personally for the debts and obligations contracted
even in the partnership name. Otherwise (i.e., to provide for limited liability as
to allow creditors recourse only to the partnership assets), would be tantamount
to letting the partnership creditors take the risks and consequences of the losses
of the partnership enterprise when they draw no benefit from its profits.
oOo
CHAPTER
4
THE
CONTRACT
OF
PARTNERSHIP
ESSENTIAL ELEMENTS OF THE CONTRACT
OF PARTNERSHIP
ART. 1767. 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. (1665a).
ART. 1770. A partnership must have a lawful object or purpose,
and must be established for the common benefit or interest of the
partners.
When an unlawful partnership is dissolved by a judicial decree,
the profits shall be confiscated in favor of the State, without
prejudice to the provisions of the Penal Code governing the
confiscation of the instruments and effects of a crime. (1666a)
ART. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary. (1667a)
484
THE CONTRACT OF PARTNERSHIP
ART. 1784. A partnership begins from the moment of the
execution of the contract, unless it is otherwise stipulated. (1679)
The Law on Partnerships under the New Civil Code
begins with its definition under Article 1776 as a "contract of
partnership" emphasizing that first and foremost the nexus of the
legal relationship between and among the partners is contractual
in nature. As in any other contract, the essential elements for a
contract of partnership to be valid would be as follows:
(a) CONSENT: The meeting of minds between two or
more persons to form a partnership (i.e.,
to pursue jointly a business enterprise,
or to jointly exercise a profession);
(b) SUBJECT MATTER: The "creation of a common fund"
or more specifically, to undertake a
business venture with the "intention of
dividing the profits among themselves,"
or in the case of a professional partner-
ship, to exercise together a common
profession; and
(c) CONSIDERATION: The contribution of cash, property
or service to the business venture.
1. Element of CONSENT
ART. 1769. In determining whether a partnership exists, these
rules shall apply:
(1) Except as provided by Article 1825, persons who are not
partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish
a partnership, whether such co-
485
486
NON-CORPORATE MEDIA OF DOING BUSINESS
owners or co-possessors do or do not share any
profits made by the use of the property;
(3) The sharing of gross returns does not of
itself establish 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;
(4) The receipt by a person of a share of the
profits of a business is prima facie evidence that he
is a partner in the business, but no such inference
shall be drawn if such profits were received in
payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a
landlord;
(c) As an annuity to a widow or representative
of a deceased partner;
(d) As interest on a loan, though the amount
of payment vary with the profits of the business;
(e) As the consideration for the sale of a
goodwill of a business or other property by in-
stallments or otherwise, (n)
a. Consent to Pursue a Business Jointly Is the Nexus of the Partnership
Relationship
The agreement of two or more persons to "bind themselves" to jointly
pursue a business venture constitutes the very nexus by which the contract of
partnership arises under Article 1767 of New Civil Code. Under Article 1769 of
New Civil Code, "in determining whether a partnership exists," the first and
foremost rule is that "persons who are not partners as to each other are not
partners as to third persons." In other words, no person can find himself a
partner in a partnership unless he previously consented to be in such
contractual relationship.
THE CONTRACT OF PARTNERSHIP
487
Agroup of individuals do not become partners to one another, nor is a
partnership constituted, by the fact alone that they are associated together in
situation where there is co-ownership or profits earned therefrom. Thus, under
Article 1769(2) of the New Civil Code, "Co-ownership or co-possession does not
of itself establish a partnership, whether such co-owners or co- possessors do or
do not share any profits made by the use of the property."
In Ortega v. Court of Appeals,' the Supreme Court held that "The birth and
life of a partnership at will is predicated on the mutual desire and consent of the
2
partners." Thus, the essence of every partnership arrangement is the consent of
each of the partners to be associated in a business venture.
b. Legal Capacity to Contract
Parties to a contract of partnership must have legal capacity to contract.
Under Article 1782 of the New Civil Code, persons who are prohibited from
giving each other any donation or advantage cannot enter into a universal
partnership.
On the other hand, under Article 87 of the Family Code, a married woman
may enter into a contract of partnership even without her husband's consent,
but the latter may object under certain conditions.
c. Admission of New Partner into an Existing Partnership
Since consent is the nexus of all partnership relationships, the principle is
exemplified under Article 1804 of New Civil Code which provides that even in an
already existing partnership, no person shall be admitted into a partnership, or
become a party to the partnership arrangement, without the consent of all the
partners.
'245 SCRA 529
(1995).
lbid, at p. 535.
488
NON-CORPORATE MEDIA OF DOING BUSINESS
2. SUBJECT MATTER: Pursuit of a Business Enterprise
1
Essentially, the consent or meeting of the minds of the par- ties in a
contract of partnership must be upon a particular type of "subject matter,"
which essentially is the pursuit of a "business enterprise." This is embodied in
the elements provided in Article 1767 of the New Civil Code as it defines a
partnership, thus:
(a)
An agreement to contribute to a common fund; and
(b)
With joint interest in the profits and losses thereof.
The
agreement
to
share
profits
and
losses
from
the
business
venture
is
the
hallmark
of
a
partnership
arrangement.
It
is
also
the
essence
of
the
"equity"
position
of
the
partners
vis-avis
the
business
enterprise,
as
differentiated
from
partnership
suppliers
and
creditors,
and
company
employees,
who
bear
no
proprietary
interest
with
the
business
enterprise
they
deal
with.
Article
1769
of
New
Civil
Code,
in
providing
for
the
rules
"In
determining
whether
a
partnership
exists,"
states
under
paragraph
(4)
that
"The
receipt
by
a
person
of
a
share
of
the
profits
in
the
business
is
prima
facie
evidence
that
he
is
a
partner
in
the
business."
In
contrast,
the
same
article
provides
that,
"The
sharing
of
gross
returns
does
not
of
itself
establish
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."
It
is
implied
under
Article
1767
of
the
New
Civil
Code,
as
it
defines
a
contract
of
partnership,
that
the
essence
of
the
agreement
among
the
partners
is
to
become
equity-holders
in
a
business
enterprise,
because
their
consent
must
be
the
creation
of
a
common
fund
"with
the
intention
of
dividing
the
profits
among
themselves."
The
essence
of
the
position
of
an
equity
holder
is
to
participate
in
the
profits
of
the
business,
and
consequently,
he
ought
to
be
ready
to
absorb
the
losses
that
may
be
sustained
thereby.
When
a
person
is
entitled
to
share
in
the
"gross
returns"
of
the
business
venture,
he
is
not
necessarily
an
equity
holder,
THE CONTRACT OF PARTNERSHIP
489
and if it is operated under the medium of a partnership, such person is not a
partner in the venture.
3
In Santos v. Reyes, the fact that in their "Articles of Agreement," the
parties agreed to divide the profits of a lending business "in a 70-15-15 manner,
with the petitioner getting the lion's share... proved the establishment of a
4
partnership," even when the other parties to the agreement were given
separate compensations as bookkeeper and credit investigator.
5
In Tocao v. Court of Appeals, the Court held that a creditor of a business
enterprise cannot seek recovery of his claim against the partnership from a
person who is without any right to participate in the profits and who cannot be
deemed as a partner in the business enterprise, since the essence of
partnership is that the partners share in the profits and losses.
6
In Moran, Jr. v. Court of Appeals, the Court held that
Being a contract of partnership, each partner must share in the
profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the
partners that they would earn a huge amount of profits, in the
absence of fraud, the other partners cannot claim a right to recover
the highly speculative profits. It is a rare business venture
7
guaranteed to give 100% profits.
The Court also held in Moran, Jr. that any stipulation on the payment of a
high commission to one of the partners must be understood to have been
based on an anticipation of large profits being made from the venture; and
since the venture sustained losses, then there is no basis to demand for the
payment of the commissions.
Nonetheless, even when a person is entitled to share in the "profits" of
the business venture, when the reason upon such right
368 SCRA 261
(2001).
*lbid, at p. 269.
5
365 SCRA 463
6
(2001).
133 SCRA 88
7
(1984).
lbid, at p. 95.
490
NON-CORPORATE MEDIA OF DOING BUSINESS
is based on some other contractual relationship not borne out of equity or
proprietary interests, such as payment of the principal and/or interest on a
loan or a debt, wages of an employee, rents to a landlord, annuity to a widow
or representative of a deceased partner, or as consideration for the sale of the
goodwill of a business or other property by installments, then he is not deem to
be a partner as indicated in Article 1769(4) of the New Civil Code. In other
words, the contractual agreement to share in the profits and losses of a
business venture must always be based upon the assumption of equity interest
in the business enterprise upon which the contract of partnership shall arise.
a. Co-ownership or Co-Possession Does Not Necessarily
Constitute a Partnership
6
In Navarro v. Court of Appeals, the Court held that mere co-ownership
or co-possession of property does not necessarily constitute the co-owners or
co-possessors partners, regardless of whether or not they share any profits
derived from the use of the property, when no indication is shown that the
parties had intended to enter into a partnership.
9
In Obillos, Jr. v. Commissioner of Internal Revenue, four brothers and
sisters acquired lots with the original purpose to divide the lots among
themselves for residential purposes; when later they found it not feasible to
build their residences thereon because of the high cost of construction, they
decided to resell the properties to dissolve the co-ownership. The Court ruled
that no partnership was constituted among the siblings, since the original
intention was merely to collectively purchase the lots and eventually to
partition them among themselves to build their residences; and that in fact
they had no choice but to resell the same to dissolve the co-ownership. Obillos
found that the division of the profits was merely incidental to the dissolution of
the co-ownership which was in the nature of a temporary state; and that there
could not have been any partnership, but merely
222 SCRA 675
9
(1993).
139 SCRA 436
(1985).
THE CONTRACT OF PARTNERSHIP
491
a co-ownership, since there was utter lack of intent to form a partnership or
joint venture.
In contrast, in Reyes v. Commissioner of Internal Revenue, the Court
found that where father and son purchased a lot and building and had it
administered by an administrator, and divided equally the net income, there
was a partnership formed because profit was the original intention for the
common fund.
Likewise in Evangelista v. Collector of Internal Revenue, where three
sisters bought four pieces of real property with every intention to lease them
out, and which they in fact leased to various tenants and derived rentals
therefrom, it was ruled that a partnership was formed.
b. Receipt By a Person of a Share of the Net Profit
Under Article 1769(4), the receipt by a person of a share of the net
profits of a business is prima facie evidence that he is a partner in the business.
However, in the following cases, where there is legal and contractual basis for
the receipt of the profits other than as equity holder, there is no partnership
constituted, thus:
As installment payments of debt and/or interests thereof;
(a)
As
wages
of
an
employee;
As
rentals
paid
to
a
landlord;
(b)
(c)
(d)
As annuity to a widow or representative of deceased
partner;
(e)
As consideration of sale of goodwill or other property.
In Pastor v. Gaspar,the Court held that there was no new partnership
formed when a loan was obtained to purchase lor-
10
24
SCRA
198
(1968).
"102
Phil.
140
12
2
Phil.
592
(1957).
(1903).
492
NON-CORPORATE MEDIA OF DOING BUSINESS
chas needed to expand the shipping business of an existing shipping
partnership venture under the condition that the lender would receive part of
the profits of the business in lieu of interests.
13
In Fortis v. Gutierrez Hermanos, where the terms of the contract
provided for the salary of the bookkeeper to be 5% of net profits of the
business, the same did not make the bookkeeper a partner in the business,
since it was merely a measure of his salary as an employee of the company. To
the same effect is the ruling in Sardane v. Court of Appeals.'*
15
In
Bastida
v.
Menzi
&
Co.,
the
Court
held
that
despite
the
agreement
that
Bastida
was
to
receive
35%
of
the
profit
from
the
business
of
mixing
and
distributing
fertilizer
registered
in
the
name
of
Menzi
&
Co.,
there
was
never
any
contract
of
partnership
constituted
between
them
based
on
the
following
key
elements:
(a)
there
was
no
common
fund
created
between
the
parties,
since
the
entire
business
as
well
as
the
expenses
and
disbursements
for
operating
it
were
entirely
for
the
account
of
Menzi
&
Co.;
(b)
there
was
no
provision
in
the
agreement
for
reimbursing
Menzi
&
Co.
in
case
there
should
be
no
profits
at
the
end
of
the
year;
and
(c)
the
fertilizer
business
was
just
one
of
the
many
lines
of
business
of
Menzi
&
Co.,
and
there
were
no
separate
books
and
no
separate
bank
accounts
kept
for
that
particular
line
of
business.
The
arrangement
was
deemed
to
be
one
of
employment,
with
Bastida
contributing
his
services
to
manage
the
particular
line
of
business
of
Menzi
&
Co.
0
In Heirs of Tang Eng Kee v. Court of Appeals,' it was held that in a
situation where the payroll of the company indicated that the brother was
listed as an employee and receiving only wages from the company, there was
no basis to rule that he was a partner in the business enterprise of his elder
brother.
13
6 Phil. 100 (1906).
"167 SCRA 524
15
(1988).
58 Phil. 188
16
(1933).
341 SCRA 740
(2000).
THE CONTRACT OF PARTNERSHIP
493
Tocao
v.
Court
of
Appeals,"
held
that
"while
it
is
true
that
the
receipt
of
a
percentage
of
net
profits
constitutes
only
prima
facie
evidence
that
the
recipient
is
a
partner
in
the
business,
the
evidence
in
the
case
at
bar
controverts
an
employer-employee
relationship
between
the
parties.
In
the
first
place,
private
respondent
had
a
voice
in
the
management
of
the
affairs
of
the
cookware
distributorship,
including
selection
of
people
who
would
constitute
the
18
administrative
staff
and
the
sales
force."
c.
Meeting
of
Minds
on
the
Establishing
a
Common
Fund
Is
the
Essence
of
a
Partnership
Contract
All
the
foregoing
examples
indicate
that
what
brings
about
a
contract
of
partnership
is
essentially
an
agreement
to
constitute
a
common
fund
with
the
intention
of
dividing
the
profits
and
losses;
outside
of
these
essential
elements,
a
contract
of
partnership
cannot
subsist.
This
doctrine
is
best
illustrated
in
Yulo
v.
Yang
Chiao
Seng,
where
in
fact
the
parties
had
executed
formal
articles
of
partnership,
and
yet
the
Supreme
Court
found
that
the
real
intention
of
the
parties
was
really
to
constitute
a
relation
of
sublease
between
the
parties
over
a
commercial
land
where
one
party
(the
lessee)
was
prohibited
under
her
main
contract
of
lease
from
subleasing
the
property,
and
the
other
party
(the
sublessee)
wanted
to
operate
a
theater
in
said
premises.
The
Court
held
The
most
important
issue
raised
in
the
appeal
is
that
contained
in
the
fourth
assignment
of
error,
to
the
effect
that
the
lower
court
erred
in
holding
that
the
written
contracts,
Exhs.
"A,"
"B,"
and
"C,"
between
plaintiff
and
defendant,
are
one
of
lease
and
not
one
of
partnership.
We
have
gone
over
the
evidence
and
we
fully
agree
with
the
conclusion
of
the
trial
court
that
the
agreement
was
a
sublease,
not
a
partnership.
The
following
are
the
requisites
of
partnership:
(1)
two
or
more
persons
who
bind
themselves
to
contribute
money,
"342
SCRA
20
(2001).
lbid,
at
19
pp.
33-1311
4.
106
Phil.
(1959).
494
NON-CORPORATE MEDIA OF DOING BUSINESS
property, or industry to a common fund; (2) intention on the part
20
of the partners to divide the profits among themselves.
In the first place, plaintiff did not furnish the supposed
P20.000 capital. In the second place, she did not furnish any help
or intervention in the management of the theatre. In the third
place, it does not appear that she has ever demanded from
defendant any accounting of the expenses and earnings of the
business. Were she really a partner, her first concern should have
been to find out how the business was progressing, whether the
expenses were legitimate, whether the earnings were correct, etc.
She was absolutely silent with respect to any of the acts that a
partner should have done; all that she did was to receive her share
of P3.000 a month, which can not be interpreted in any manner
than a payment for the use of the premises which she had leased
from the owners. Clearly, plaintiff had always acted in accordance
with the original letter of defendant of June 17, 1945 (Exh. "A"),
which shows that both parties considered this offer as the real
21
contract between them.
In the more contemporary decision in Estanislao, Jr. v. Court of
22
Appeals, the Court affirmed the decision of the trial court "Ordering the
defendant to execute a public instrument embodying all the provisions of the
partnership agreement entered into between plaintiffs and defendant as
provided for in Article 1771, Civil Code of the Philippines." In that case, the
siblings leased out to SHELL a family commercial lot for the establishment of a
gasoline station, and they invested the advanced rentals they received from
SHELL to allow one their brother to be the registered dealer of SHELL under the
latter's policy of "one station, one dealer," and that in fact the registered
dealer had accounted for the operations to the other members of the family.
When later on he stopped accounting for the operations, and refused to
acknowledge the existence of a partnership over the gasoline station, the Court
held
"Art. 1767, New Civil
21
Code.
/b/d, at pp. 116-117.
^160 SCRA 830 (1988).
THE CONTRACT OF PARTNERSHIP
495
Moreover other evidence in the record shows that there was
in fact such partnership agreement between the parties. . .
Petitioner submitted to private respondents periodic accounting of
the business. . . gave a written authority to private respondent. ...
his sister, to examine and audit the books of their "common
business" (aming negosyo). . . . There is no doubt that the parties
hereto formed a partnership when they bound themselves to
contribute money to a common fund with the intention of dividing
the profits among themselves. The sole dealership by the
petitioner and the issuance of all government permits and licenses
in the name of petitioner was in compliance with the afore-stated
policy of SHELL and the understanding of the parties of having only
23
one dealer of the SHELL products.
The other important aspect in determining whether a partnership has
been constituted among several persons, is that under our tax laws, a
partnership is treated like a corporate taxpayer and liable separately for income
tax for its operations apart from the individual income tax liabilities of each of
the partners.
24
Thus, in Evangelista v. Collector of Internal Revenue, three sisters
borrowed a huge amount of money from their father, and with their personal
funds, purchased under several transactions real estate properties, and
subsequently appointed their brother as manager thereof who leased them out
to various lessees. Eventually, the Collector of Internal Revenue assessed them
for the payment of corporate income tax they have been operating the real
estate venture. In arguing that they have never formed a partnership, and that
they merely constituted themselves a co- owners of the properties bought pro
indiviso, the Court held:
Pursuant to this article, the essential elements of a
partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to
divide the profits among the contracting parties. The first element
is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute
mid,
at
p.
837.
24
102
Phil.
140
(1957).
523
NON-CORPORATE MEDIA OF DOING BUSINESS
money and property to a common fund. Hence, the issue narrows
down to their intent in acting as they did. Upon consideration of ail
the facts and circumstances surrounding the case, we are fully
satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among
themselves, because:
1. Said common fund was not something they found already
in existence. It was not a property inherited by them pro indiviso.
They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common
fund.
2. They invested the same, not merely in one transaction, but
in a series of transactions.... The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of
a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common
fund or even of the property acquired by petitioners in February,
1943. In other words, one cannot but perceive a character of
habituality peculiar to business transactions engaged in for
purposes of gain.
3. The aforesaid lots were not devoted to residential pur-
poses, or to other personal uses, of petitioners herein. The
properties were leased separately to several persons, who, from
1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of
rentals. Seemingly, the lots are still being so let, for petitioners do
not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the
management of one person, namely, Simeon Evangelista, with full
power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten
(10) years, or, to be exact, over fifteen (15) years, since the first
property was acquired, and over twelve (12) years, since Simeon
Evangelista became the manager.
THE CONTRACT OF PARTNERSHIP
497
6. Petitioners have not testified or introduced any evidence,
either on their purpose in creating the set up already adverted to,
or on the causes for its continued existence. They did not even try
25
to offer an explanation therefore.
The essence of the contract of partnership is that the partners "contract
or bind themselves under a contractual arrangement" to be joint owners and
managers of a business enterprise, which is highlighted by the right to receive
the net profits and share the losses therein. Article 1770 of New Civil Code
provides that for a partnership contract to be valid it "must be established for
the common benefit or interest of the partners," which clearly indicates the
equity or proprietorship position of the partners. Consequently, if there is no
clear meeting of the minds to form a partnership venture, the fact that a
person participates in the "gross receipts" of a business enterprise or from a
property arrangement does not make him a partner because he is not made to
bear the burdens of ownership, i.e., to be liable for expenses and losses of the
business enterprise.
26
The decision in Ona v. Commissioner of Internal Revenue, is illustrative
of this principle. In Ona, in the project partition the heirs the agreed to keep the
properties of the estate together and to divide the profits in proportion to their
stipulated interests therein. In holding that there was thereupon constituted
among the co-heirs an unregistered partnership subject to corporate income
tax under the Tax Code, the Court held
It is thus incontrovertible that petitioners did not, contrary to
their contention, merely limited themselves to holding the
properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were
sold at considerable profit and that with said profit, petitioners
engaged, thru Lorenzo T. Ona, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from
these ventures were divided among petitioners proportionately in
accordance
25
lbid,
at
pp.
144-
45
1S46.
CRA
74
(1972).
26
498
NON-CORPORATE MEDIA OF DOING BUSINESS
with their respective shares in the inheritance. . . the moment
petitioners allowed not only the incomes from their respective
shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Ona as a common fund in
undertaking several transactions or in business, with the intention
of deriving profits to be shared by them proportionally, such act
was tantamount to actually contributing such incomes to a
common fund and, in effect, they thereby formed an unregistered
27
partnership.
28
In Gatchalian v. Collector of Internal Revenue, where fifteen people
contributed money to buy a sweepstakes ticket with the intention to divide the
prize which they may win, and in fact the ticket won third prize, the Court ruled
that they had formed a partnership which was subject to tax as a corporate
taxpayer.
25
Likewise, in Gallemet v. Tabilaran, the Court held that when land is
purchased with equal funds to be contributed by the parties, and it was the
clear intention to divide the property between the two of them after
acquisition, there was formed a partnership.
We can end this section by looking at the decision in Heirs of Tan Eng Kee
30
v. Court of Appeals, where the main issue was whether there was constituted
between two brothers a partnership involving a lumber and hardware business
registered as a sole proprietorship in the name of the older brother in the
absence of a formal articles of partnership having been executed between
them. The Court considered the fact that during the entire period of the alleged
partnership, the brother seeking the declaration of such partnership never
exercised any of the rights and prerogatives of a partner, thus:
Besides, it is indeed odd, if not unnatural, that despite the
forty years the partnership was allegedly in existence, Tan Eng Kee
never asked for an accounting. The essence
27
Ibid,
at
p.
81.
67
Phil.
666
29
(1939).
20
Phil.
241
M
(1911).
341
SCRA
740
(2000).
28
THE CONTRACT OF PARTNERSHIP
499
of a partnership is that the partners share in the profits and losses.
Each has the right to demand an accounting as long as the
partnership exists. We have allowed a scenario wherein "[i]f
excellent relations exists among the partners at the start of the
business and all the partners are more interested in seeing the firm
grow rather than get immediate returns, a deferment of sharing in
31
the profits is perfectly plausible." But in the situation in the case
at bar, the deferment, if any, had gone on too long to be plausible.
A person is presumed to take ordinary care of his concerns, x x x
A demand for periodic accounting is evidence of a partnership.
During his lifetime, Tan Eng Kee appeared never to have made any
32
such demand for accounting from his brother, Tan Eng Lay.
d. Proof of the Existence of the Business Enterprise May Support the Existence of
a Partnership
There have been cases where the existence of the business enterprise
became the basis by which the courts concluded that indeed a contract of
partnership had been entered into by the parties.
33
In Idos v. Court of Appeals, in determining whether the partnership
enterprise continued to exist and has not been terminated, the Court ruled that
"The best evidence of the existence of the partnership, which was not yet
terminated (though in the winding up stage), were the unsold goods and
uncollected receivables, which were presented to the trial court. Since the
partnership has not been terminated, the petitioner and private complainant
34
remained as co-partners."
35
In
Tocao
v.
Court
of
Appeals,
citing
the
ruling
in
Idos,
the
Court
held
that
the
fact
that
the
claiming
party
"had
been
"citing
Fue
Lung
v.
Intermediate
Appellate
Court,
169
SCRA
746,
754
(1989).
*at
pp.
755-756.
^296
SCRA
194
(1998).
^Ibid,
at
p.
206.
35
342
SCRA
20
(2000).
500
NON-CORPORATE MEDIA OF DOING BUSINESS
unceremoniously booted out of the partnership... she still received her
36
overriding commission . . . The winding up of partnership affairs has not yet
been undertaken by the partnership. This is manifest in petitioners' claim for
stocks that had been entrusted to private respondent in the pursuit of the
37
partnership business."
e. Doctrine of "Attributes of Proprietorship" as a Means to Prove the Existence of
a Partnership
There are a number of decisions that use the hazy doctrine of "attributes
of proprietorship" as one of the indications of the existence of a contract of
partnership or a partnership venture.
36
We
take
the
decision
in
Tocao
v.
Court
of
Appeals,
where
the
main
issue
was
whether
there
existed
a
contract
of
partnership
between
three
parties,
namely
Tocao,
Bello
and
Anay,
in
the
face
of
the
assertions
of
both
Tocao
and
Bello
that
there
was
no
partnership
agreement
entered
into
considering
that:
(a)
there
was
no
written
agreement
embodying
the
alleged
partnership
agreement,
and
that
in
fact
the
business
was
registered
with
the
government
authorities
as
a
single
proprietorship
in
the
style
of
"Geminesse
Enterprise"
in
the
name
of
Tocao;
(b)
Bello
asserts
that
he
never
gave
any
contribution
to
the
venture,
but
merely
guaranteed
its
credit
standing;
and
(c)
Anay
never
contributed
anything
to
the
business,
and
she
was
receiving
overriding
commission
and
participation
in
profits
directly
as
a
result
of
her
handling
the
marketing
of
the
products,
and
not
as
a
partner
to
the
venture.
In
brushing
aside
the
assertions
that
there
was
no
contract
of
partnership,
the
Court,
apart
from
holding
that
a
contract
of
partnership
need
not
be
in
writing
to
be
valid
and
enforceable,
held
that
all
three
parties
had
by
the
evidence
adduced
exercised
rights
of
proprietorship
on
the
business
venture
as
to
show
without
doubt
the
existence
of
a
partnership,
thus:
mid,
at
p.
36.
mid,
at
p.
38.
M
342
SCRA
20
(2000).
THE CONTRACT OF PARTNERSHIP
Petitioners [Tocao and Belo] admit that private respondent
[Anay] had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed such
expertise to the partnership and hence, under the law, she was the
industrial or managing partner. It was through her reputation with
the West Bend Company that the partnership was able to pen the
business of distributorship of that company's cookware products; it
was through the same efforts that the business was propelled to
financial success. Petitioner Tocao herself admitted private
respondent [Anay] held the positions of marketing manager and
39
vice-president for sales ...xxx.
By the set-up of the business, third persons were made to
believe that a partnership had indeed been forged between
petitioners [Tacao and Belo] and private respondent [Anay]...
On the other hand, petitioner Belo's denial that he financed
the partnership rings hollow in the face of the established fact that
he presided over meeting regarding matters affecting the
operation of the business. Moreover, his having authorized in
writing . .. that private respondent should receive thirty-seven
percent (37%) of the proceeds of her personal sales, could not be
interpreted otherwise than that he had a proprietary interest in
the business. His claim that he was merely a guarantor is belied by
40
that personal act of proprietorship in the business ...
The business venture operated under Geminesse Enterprise
did not result in an employer-employee relationship between
petitioners and private respondent. While it is true that the receipt
of a percentage of net profits constitutes only prima facie evidence
that the recipient is a partners in the business, the evidence in the
case at bar controverts an employer-employee relationship
between the parties. In the first place, private respondent had a
void in the management of the affairs of the cookware
distributorship, including selection of people who would constitute
41
the administrative staff and the sales force...
^Ibid, at p. 31; underscoring supplied.
*lbid, at p. 32; underscoring supplied.
41
Ibid, at pp. 33-34; underscoring supplied.
501
502
NON-CORPORATE MEDIA OF DOING BUSINESS
The doctrine of "exercise of the prerogatives of a proprietor" should be
viewed as merely collaborative evidence of the partnership relationship
between the parties in a business venture; in the end the existence of the
contract of partnership must be located in the actual meeting of minds to
constitute a common fund and to divide the profits thereof among themselves.
The reason why exercising the prerogatives of proprietorship or participating in
the management of the business enterprise cannot on their own be weighty
evidence to prove the existence of a partnership agreement is because, it is
logical for a business enterprise, whether it is operated as a partnership or a
single proprietorship, to actually appoint a manager or other agents, authorized
to exercise acts of management, without being owners or partners of the
business venture.
In any event, the application of the suppletory doctrine of "attributes of
proprietorship" in jurisprudence is a recognition that a partnership arrangement
is in essence a contractual aggregation of sole proprietors, who come together
to form a common venture, each acting very much a proprietor of the business
venture, while at the same time as agents to one another.
42
The decision in Sy v. Court of Appeals, succinctly summarizes the badges
that would normally accompany a partnership relationship, thus:
Article 1767 of the Civil Code states that in a 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. Not one of these
circumstances is present in this case [which sought to make the
truck driver of the company of many years to be characterized as
an industrial partner]. No written agreement exists to prove the
partnership between the parties. Private respondent did not
contribute money, property or industry for the purpose of
engaging in the supposed business. There is no proof that he was
receiving a share in the profits as a matter of course, curing the
period
42
398 SCRA 301 (2003).
THE CONTRACT OF PARTNERSHIP
503
when the trucking business was under operation. Neither is there
any proof that he had actively participated in the management,
43
administration and adoption of policies of the business.
In contrast, we should consider the decision in Heirs of Tan Eng Kee v.
44
Court of Appeals, where a partnership was insisted to have been constituted
from a proven set of circumstances where the brother claiming to be a partner in
the business enterprise is proven to exercise managerial and important roles in
the day-to-day operations. The Court found such legal position "to be
well-taken" in that "Where circumstances taken singly may be inadequate to
prove the intent to form a partnership, nevertheless, the collective effect of
these circumstances may be such as to support a finding of the existence of the
45
parties' intent." Nonetheless, in that decision the Court ruled against the
existence of the partnership since
. . . Yet, in the case at bench, even the aforesaid circumstances
when taken together are not persuasive indicia of a partnership.
They only tend to show that Tan Eng Kee was involved in the
operations of Benguet Lumber, but in what capacity is unclear. We
cannot discount the likelihood that as a member of the family, he
occupied a niche above the rank-and-file employees. He would
have enjoyed liberties otherwise unavailable were he not kin, such
as his residence in the Benguet Lumber Company compound. He
would have moral, if not actual, superiority over his fellow
employees, thereby entitling him to exercise powers of
supervision. It may even be that among his duties is to place orders
with suppliers. Again, the circumstances proffered by petitioners
do not provide a logical nexus to the conclusion desired; these are
not inconsistent with the powers and duties of a manager, even in
a business organized and run as informally as Benguet Lumber
Company.
"Ibid,
at
p.
308.
"341
SCRA
740
45
(2000).
At
pp.
758-768.
504
NON-CORPORATE MEDIA OF DOING BUSINESS
There being no partnership, it follows that there is no
dissolution, winding up or liquidation to speak of. Hence, the
46
petition must fail.
The same principle was applied in the recent case of Heirs of Jose Lim v.
47
Lim, where the issue evolved was whether it was the father [Jose] who gave
the investment money to a son [Efledo], or it was the son, who actually entered
into a partnership arrangement with two other individuals. It confirming that
the weight of evidence showed the indications provided under Article 1769 of
the New Civil Code were in favor the son being the partner in the partnership
business enterprise, the Court noted that the son [Elfledo] was the person who
exercised the prerogatives of a partner and not the father, thus:
Applying the legal provision to the facts of this case, the
following circumstances tend to prove that Elfledo was himself the
partner of Jimmy and Norberto: (1) Cresencia testified that Jose
gave Elfledo P50,000.00, as share in the partnership; (2) Elfledo ran
the affairs of the partnerships, wielding control, power and
authority, without any intervention or opposition whatsoever
from any of petitioners herein; (3) all of the properties, particularly
the nine trucks of the partnership, were registered in the name of
Elfledo; (4) Jimmy testified that Elfledo did no receive wages or
salaries from the partnership, indicating that what he actually
received were shares of the profits of the business, and (5) none of
the petitioners, as heirs of Jose, the alleged partner, demanded
periodic accounting from Elfledo during his lifetime. As repeatedly
stressed in Heirs of Tan Eng Kee, a demand for periodic accounting
48
is evidence of a partnership.
f. When Subject Matter (the Business Venture) Is Unlawful or
Against Public Policy
When the subject matter of a contract of partnership is unlawful, Article
1770 of New Civil Code provides that the
"Ibid, at pp. 759.
47
614 SCRA 141
"Ibid, at pp.
(2010).
150-151.
THE CONTRACT OF PARTNERSHIP
505
contract
is
void;
and
being
void
the
purported
partners
have
no
right
to
participate
in
any
profits
that
may
have
been
earned
by
the
partnership
enterprise.
Thus,
the
article
provides
that
"the
profits
shall
be
confiscated
in
favor
of
the
State."
49
In Arbes v. Polistico, a partnership organized to engage in illegal
gambling was declared void by judicial order, and pursuant to the provisions of
Article 1770, all the profits earned were deemed confiscated in favor of the
state. However, it decreed that the partners had a right to recover their
contributions, thus:
Our Code does not state whether, upon the dissolution of the
unlawful partnership, the amounts contributed are to be returned
to the partners, because it only deals with the disposition of the
profits; but the fact that said contributions are not included in the
disposal prescribed for said profits, shows that in consequence of
said exclusion, the general rules of law must be followed, and
hence, the partners must be reimbursed the amount of their
respective contributions. Any other solution would be immoral,
and the law will not consent to the latter remaining in the
possession of the manager or administrator who has refused to
return them, by denying to the partners the action to demand
50
them.
51
In Deluao v. Casteel, the Court held that a contract of partnership that
sought to divide between the two partners-applicants the fishpond in
contravention of the prohibitory provisions of law was deemed dissolved when
the Government did finally issue a fishpond permit to one of the partners.
3. CAUSE OR CONSIDERATION: PROMISED CONTRIBUTIONS
In a contract of partnership, it is held that the cause or consideration for
each partner is the undertaking of the other or
49
53 Phil. 489 (1929).
lbid, at p. 495, quoting from MANRESA, COMMENTARIES ON THE SPANISH CIVIL
CODE, Vol. XI, pp. 262-264.
51
26 SCRA 475 (1968).
x
NON-CORPORATE MEDIA OF DOING BUSINESS
506
others to contribute money, property or industry to a common fund (i.e., to the
business venture). Being essentially consensual is characteristic, a contract of
partnership is perfected by the agreement by the partners to make such
contribution (i.e., by the assumption of the obligation to contribute or to render
service. The essence of the element of cause or consideration in every contract
of partnership is emphasized in the following provisions of the New Civil Code,
thus:
(a)
Article 1786, which declares that every partner to be a debtor
of the partnership for whatever he may have promised to
contribute;
(b)
Article 1787, which makes a partner Tiable for interest and
damages for failing to contribute the sum of money he was
bound to pay under the articles of partnership;
(c)
Article 1789, which prohibits an industrial partner from
engaging in business for himself, since he bound himself to
contribute service to the partnership;
(d)
Article 1790, which p;esumes an obligation to contribute
equal shares among the partners when there is no stipulation
as to manner and amount of contribution; and
(e)
Article 1830(4), which decrees the dissolution of a partnership
when the specific thing, which a partner had promised to
contribute to the partnership, perishes before the delivery.
52
City of Manila v. Cumbe, held that "credit," such as a promissory note or
other evidence of obligation, or even goodwill, may validly be contributed into
the partnership. In other words, if service is a valid contribution to the common
fund, then more so when it comes to intangible things, rights and chooses in
action.
52
13 Phil. 677 (1909).
THE CONTRACT OF PARTNERSHIP
507
4. OTHER ESSENTIAL ELEMENTS OF PARTNERSHIP
Although American jurisprudence would consider two other elements to
be essential for the contract of partnership to exist, namely:
(a)
the purpose of a partnership must be to engage in some
business enterprise; and
(b)
the element of joint control;
53
the same are also present in Philippine Partnership Law.
As discussed above, the subject matter of every contract of partnership
must be the agreement to jointly pursue a business enterprise. The element of
"joint control" is embodied in the provisions of law that provides for mutual
agency in a partnership arrangement. Thus, Article 1810(3) of the New Civil Code
provides that one of the property rights of a partner is "His right to participate in
the management." Article 1818 of the New Civil Code in turn provides that
"Every partner is an agent of the partnership for the purpose of its business, and
the act of every partner, including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way the business of the
partnership of which he is a member binds the partnership."
In Fernandez v. De la Rosa* the Court held that "a joint interest in the
profits" would constitute one of the "essential points upon which the minds of
55
the parties must meet in a contract of partnership."
56
In Council of Red Men v. Veterans Army, the constitution of the Veteran
Army of the Philippines provided "for the following
"BAUTISTA,
at
p.
4.
"1
Phil.
671
^Ibid,
at
pp.
(1903).
675-P6hil.
76,
685
7
(1907).
NON-CORPORATE MEDIA OF DOING BUSINESS
508
purpose: The object of this association shall be to perpetuate the spirit of
patriotism and fraternity those men who upheld the Stars and Stripes in the
Philippine Islands during the Spanish war and the Philippine insurrection, and to
promote the welfare of its members in every just and honorable way; to assist
the sick and afflicted and to bury the dead, to maintain among its members in
time of peace the same union and harmony with which they served their
57
country in times of war and insurrection.'" The Court had raised the point that:
"It seems to be the opinion of the commentators that where the society is not
constituted for the purpose of gain, it does not fall within this article of New Civil
Code. Such an organization is fully covered by the Law of Associations of 1887,
58
but that law was never extended to the Philippine Islands." Nonetheless,
Council of Red Men applied the old Civil Code rule on civil partnership.
The only form of partnership where "business consideration" or the
"gaining of profits" is not the primary consideration for the common fund would
be the authorized professional partnerships; but even in such cases the Court
has considered that a profession is pursued as part of the livelihood undertaking
58
of the partners.
The element of "joint control" is actually specified as the property rights
of a partner under Article 1810 "to participate in the management," as well as
the confirmation of the attribute of "mutual agency" under Article 1818
confirming that "Every partner is an agent of the partnership for the purposes of
its business, and the act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual way
the business of the partnership of which he is a member binds the partnership."
57
Ibid,
at
p.
686.
^Ibid,
at
p.
687.
59
/n
the
Matter
of
the
Petition
for
Authority
to
Continue
Use
of
Firm
Name
"Sycip,
Salazar,
etal.
v.
Ozaeta,
Romulo,
etc.,"
92
SCRA
1
(1979).
THE CONTRACT OF PARTNERSHIP
509
ESSENTIAL CHARACTERISTICS OF THE PARTNERSHIP CONTRACT
1. Nominate and Principal
The contract of partnership is a nominate contract, not only because it
has been given a specific name under the New Civil Code, but it is a principal
contract and can exist on its own upon the essential elements coming together
at perfection; and that once created there is a set of rules (Law on Partnerships
of the New Civil Code) that govern such contract, and the parties to such
contract cannot refuse generally to be governed by such provisions. Thus,
Article 45 of New Civil Code provides that "Partnerships and associations for
private interest or purpose are governed by the provisions of this Code
concerning partnerships."
To illustrate the "nominate and principaf' nature of the contract of
partnership, Fernandez v. Dela Rosa held that "The essential points upon
which the minds of the parties must meet in a contract of partnership are,
therefore, (1) mutual contribution to a common stock, and (2) a joint interest in
the profits. If the contract contains these two elements the partnership relation
results, and the law itself fixes the incidents of this relation if the parties fail to
61
do so."
In resolving the motion for reconsideration on its original decision, the
Court even held that "It is of no importance that the parties have failed to reach
an agreement with respect to the minor details of contract. These details
62
pertain to the accidental and not to the essential part of the contract."
2. Consensual
A
contract
of
partnership
is
essentially
consensual,
it
is
perfected
upon
meeting
of
the
minds
of
the
parties
of
the
subject
1 Phil. 671 (1903).
61
/b/d, at pp. 675-676.
mid, at p. 680. Also Fue Leung v. IAC, 169 SCRA 746 (1989}.
510
NON-CORPORATE MEDIA OF DOING BUSINESS
matter to undertake a business venture, and the consideration, which is the
obligation to contribute of money, property or service to a common fund.
Whether the business enterprise is actually constituted or set-up, or whether or
not the contributions have been made into the partnership coffers, do not
detract from the coming into existence of a valid partnership contract. The
failure to comply with the undertaking to deliver the promised contribution
does not make a contract of partnership void, but merely gives a ground for its
dissolution.
63
Thus, in the early decision in Fernandez v. De la Rosa, the Court held
that "The execution of a written agreement was not necessary in order to give
efficacy to the verbal contract of partnership as a civil contract, the contributions
of the partners not having been in the form of immovables or rights in
64
immovables."
This feature of consensuality of a contract of partnership is now
embodied in Article 1772 of the New Civil Code which provides that "A
partnership may be constituted in any form except where immovable property
or real rights are contributed thereto, in which case a public instrument shall be
necessary."
Although Articles 1772 and 1773 of the New Civil Code provide for public
instrument and registration when the capital contribution is more than
P3.000.00, and that of an inventory attached to the public instrument whenever
immovable property is contributed, nonetheless jurisprudence even discount
the nullity of the resulting contract of partnership, as will be discussed
hereunder.
65
In
Estanlslao,
Jr.
v.
Court
of
Appeals,
the
Court
held
that
when
members
of
the
family
leased
out
a
parcel
of
land
to
SHELL,
and
used
the
advance
rentals
paid
them
to
allow
one
of
their
members
to
capitalize
the
dealership
with
SHELL,
then
a
partnership
has
been
constituted
among
them,
thus:
There
is
no
doubt
that
the
parties
hereto
formed
a
partnership
when
they
bound
themselves
to
contribute
1 Phil. 671 (1903).
"Ibid, at p. 677.
k^O SCRA 830
(1988).
THE CONTRACT OF PARTNERSHIP
511
money to a common fund with the intention of dividing the profits
among themselves. The sole dealership by the petitioner and the
issuance of all government permits and licenses in the name of
petitioner was in compliance with the [policy] of SHELL that a
dealership can only be granted to one person and the
understanding of the parties of having only one dealer of the SHELL
66
products.
In essence, Estanislao demonstrates that it is the true meeting of the
minds of the parties (in this case, to pursue a common venture as a family group)
that shall govern the rights and obligations of the contracting parties, and not
the evidence of a purported agreement (in this case the dealership agreement
being registered only in the name of a brother).
67
In contrast, in Yulo v. Yang Chiao Seng, the parties executed a
"partnership agreement," to conduct and carry on the business of operating a
theatre for the exhibition of motion and talking pictures; nonetheless, the Court
held that the real intention of the parties was to effect a sub-lease of the
property and the partnership agreement was resorted to in order to avoid the
provision in the main lease agreement prohibiting a sublease of the premises.
The Court took into consideration the following actuations of the supposed Yulo
partner to show that there was never a real agreement to form a partnership,
thus:
In the first place, plaintiff did not furnish the supposed
P20.000 capital. In the second place, she did not furnish any help or
intervention in the management of the theatre. In the third place,
it does not appear that she has ever demanded from defendant
any accounting of the expenses and earnings of the business. Were
she really a partner, her first concern should have been to find out
how the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was
absolutely silent with respect to any of the acts that a partner
should
mid,
at
p.
837.
oMOS
Phil.
111
(1959).
512
NON-CORPORATE MEDIA OF DOING BUSINESS
have
done;
all
that
she
did
was
to
receive
her
share
of
P3.000
a
month,
which
can
not
be
interpreted
in
any
manner
than
a
payment
for
the
use
of
the
premises
which
she
had
leased
from
the
owners.
Clearly,
plaintiff
had
always
acted
in
accordance
with
the
original
letter
of
defendant
of
June
17,
1945
(Exh.
"A"),
which
shows
that
both
parties
considered
this
offer
as
the
real
contract
68
between
them.
Yulo
demonstrates
the
principle
that
a
contract
of
partnership
is
consensual
in
nature
and
is
constituted
by
the
actual
meeting
of
the
minds;
such
that
even
when
formal
articles
of
partnership
are
drawn-up
between
the
parties,
when
it
fact
the
evidence
shows
that
they
never
intended
to
enter
into
a
partnership,
where
there
has
never
been
a
meeting
of
minds
to
constitute
one.
In
contrast,
we
view
the
decision
in
Woodhouse
v.
Halili
as
a
little
dubious
when
it
distinguished
between
the
obligation
to
enter
into
a
contract
of
partnership,
from
that
of
executing
the
certificate
of
partnership
itself.
In
Woodhouse,
the
plaintiff
and
the
defendant
had
come
to
an
agreement
to
enter
into
a
partnership
business
to
bottle
and
distribute
an
American
brand
softdrinks
in
the
Philippines;
and
that
defendant,
who
would
primarily
finance
the
business,
agreed
to
grant
plaintiff
the
right
to
receive
30%
of
the
profits
under
his
obligation
to
secure
the
bottling
franchise
for
the
venture.
When
the
venture
was
eventually
set-up,
the
defendant
had
refused
to
finalize
the
articles
of
partnership
when
he
learned
during
the
negotiations
in
the
United
States
that
plaintiff
did
not
have
for
himself
the
bottling
franchise
he
promised
he
had
secured.
The
plaintiff
brought
action
to
have
the
articles
of
partnership
executed
and
to
receive
his
30%
share
in
the
earnings.
Prescinding
from
the
language
of
the
original
agreement
executed
between
the
parties
that
the
very
language
of
the
agreement
that
the
parties
intended
that
the
execution
of
the
agreement
to
form
a
partnership
was
to
be
carried
out
at
a
later
<*lbid,
at
p.
117.
93
Phil.
526
(1953).
THE CONTRACT OF PARTNERSHIP
513
70
date.
They
expressly
agreed
that
they
shall
form
a
partnership," the
Court
held
As
the
trial
court
correctly
concluded,
the
defendant
may
not
be
compelled
against
his
will
to
carry
out
the
agreement
nor
execute
the
partnership
papers.
Under
the
Spanish
Civil
Code,
the
defendant
has
an
obligation
to
do,
not
to
give.
The
law
recognizes
the
individual's
freedom
or
liberty
to
do
an
act
he
has
promised
to
do,
or
not
to
do
it,
as
he
pleases.
It
falls
within
what
Spanish
commentators
call
a
very
personal
act
(acta
personalisimo),
of
which
courts
may
not
compel
compliance,
as
it
is
considered
an
act
71
of
violence,
to
do
so.
We
disagree
with
the
afore-quoted
ruling
of
the
Court
in
that
it
fails
to
appreciate
the
consensual
nature
of
a
contract
of
partnership,
and
that
the
moment
the
parties
come
to
an
agreement
which
basically
embodies
the
formation
of
a
common
fund
with
the
intention
of
dividing
the
profits,
as
was
the
case
between
the
parties
in
Woodhouse,
a
contract
of
partnership
arises,
and
the
incidents
thereof
governed
by
Partnership
Law,
even
in
the
absence
of
a
formal
certificate
or
articles
of
copartnership.
In
any
event,
we
now
have
the
provisions
under
Article
1358
of
the
New
Civil
Code
providing
that
acts
and
contracts
which
have
"for
their
object
the
creation,
transmission,
modification
or
extinguishment
of
real
rights
over
immovable
property,
sale
or
real
property
or
of
an
interest
therein
...
power
to
administer
property,
or
any
other
power
which
has
for
its
object
an
act
appearing
or
which
should
appear
in
a
public
document,
or
should
prejudice
third
person;"
and
which
has
been
interpreted
by
the
Supreme
Court
as
granting
a
cause
of
action
to
one
party
to
seek
the
72
execution
of
such
public
instrument
as
against
the
other
party
to
the
contract.
10
Ibid,
at
p.
539.
to/of,
at
p.
539.
72
Fule
v.
Court
of
Appeals,
286
SCRA
698
(1998);
Dalion
v.
Court
of
Appeals,
182
SCRA
872
(1990);
Limketkai
Sons
Milling,
Inc.
v.
CA,
250
SCRA
523
(1995);
Agasen
v.
CA,
325
SCRA
504
(2000).
71
514
NON-CORPORATE MEDIA OF DOING BUSINESS
n
Only recently, Tocao v. Court of Appeals, summarized the prevailing
doctrine on the nature of the contract of partners, thus
To be considered a juridical personality, a partnership must
fulfill these requisites: (1) two or more persons bind themselves to
contribute money, property or industry to a common fund; and (2)
intention on the part of the partners to divide the profits among
themselves. It may be constituted in any form; a public instrument
is necessary only where immovable property or real rights are
contributed thereto. This implies that since a contract of
partnership is consensual, an oral contract of partnership is as
good as a written one. Where no immovable property or real rights
are involved, what mattersls that the parties have complied with
the requisites of a partnership. The fact that there appears to be
no record in the Securities and Exchange Commission of a public
instrument embodying the partnership agreement pursuant to
Article 1772 of the Civil Code did not cause the nullification of the
74
partnership...
Tocao also held that so long as the two essential elements of a
partnership are present, then the fact that the business was operated under
the name of a registered sole proprietorship was of no moment, especially
when the registration of the business name with the Bureau of Domestic Trade
75
was only for purpose of protecting the business name of the company.
3. Onerous and Bilateral
The onerous and bilateral characteristics of the contract of partnership
are demonstrated by the fact that the existence of a partnership requires an
agreement for the creation of a common fund from the contributions of the
partners, which may either be in money, property or industry. Under Article
1786 of the New Civil
"342
SCRA
20
7
(2000).
*lbid,
at
pp.
15
lbid,
30-
31.
at
p.
36.
THE CONTRACT OF PARTNERSHIP
515
Code,
a
partner
becomes
by
its
very
constitution,
"a
debtor
of
the
partnership
for
whatever
he
may
have
promised
to
contribute
thereto."
All
partners
are
bound
to
contribute
to
the
common
fund,
or
to
the
partnership,
including
even
the
industrial
partner
who
is
bound
to
contribute
his
service.
4.
Preparatory
and
Progressive
A
contract
of
partnership
is
not
entered
into
merely
for
the
sake
of
creating
a
contractual
relationship
between
and
among
the
partners,
but
primarily
to
pursue
a
business
enterprise
(i.e.,
creation
of
a
common
fund
with
intent
to
share
profits
and
losses).
Consequently,
falling
within
the
contractual
meeting
of
the
minds
of
the
parties
is
that
the
inter-partnership
relationship
continues
to
evolve
as
the
underlying
business
enterprise
itself
evolves
and
progresses.
In
other
words,
the
contract
of
partnership
is
simply
the
base
upon
which
other
contracts
and
various
other
transactions
are
to
be
pursued
with
the
public,
and
for
which
the
partners
shall
continually
adjust
their
working
relationships.
The
operation
of
the
underlying
business
enterprise
also
determines
the
nature
and
value
of
the
equity
of
the
partners.
Thus,
when
the
nexus
of
the
contract
of
partnership
(the
common
fund
and
intention
to
divide
the
profits
and
losses)
have
been
constituted,
other
contractual
relationships
are
expected
to
flow
therefrom
as
a
matter
of
course.
An
early
illustration
of
the
"preparatory
and
progressive"
nature
of
the
76
contract
of
partnership
can
be
found
in
the
decision
in
Fernandez
v.
De
la
Rosa,
where
once
the
elements
of
contribution
to
a
common
fund
and
understanding
of
sharing
of
profits
had
been
clearly
established
between
the
parties,
a
contract
of
partnership
arose
and
all
the
incidents
arising
therefrom
automatically
engendered
even
if
the
parties
have
not
yet
decided
upon
the
details
of
their
relationship,
thus
. . .
We
have
already
stated
in
the
opinion
what
are
the
essential
requisites
of
a
contract
of
partnership
.
.
.
76
1 Phil. 671 (1903).
516
NON-CORPORATE MEDIA OF DOING BUSINESS
Considering as a whole the probatory facts which appears from the
record, we have reached the conclusion that plaintiff and the
defendant agreed to the essential parts of that contract, and did in
fact constitute a partnership, with the funds of which were
purchased the cascoes with which this litigation deals, although it
is true that they did not take precaution to precisely establish and
determine from the beginning the conditions with respect to the
participation of each partner in the profits or losses of the
partnership. The disagreements subsequently arising between
them, when endeavoring to fix these conditions, should not and
cannot produce the effect of destroying that which has been done,
to the prejudice of one of the partners, nor could it divest his rights
under the partnership which had accrued by the actual
contribution of capital which followed the agreement to enter into
a partnership, together with the transactions effected with
partnership funds. The law has foreseen the possibility of the
constitution of a partnership without an express stipulation by the
partners upon those conditions, and has established rules which
may serve as a basis for the distribution of profits and losses
among the partners... We consider that the partnership entered
into by the plaintiff and the defendant falls within the provision of
77
this article.
77
Ibid, at pp. 680-681.
CHAPTER 5
FORMAL REQUIREMENTS FOR PARTNERSHIPS
We cover separately in this chapter the exceptional circumstances when
the law, which generally treats of partnerships as consensual contractual
arrangements, imposes specific solemnities and registration requirements
under certain conditions, and discuss their impact on the partnership itself, the
rights and obligations between and among partners, and dealings with the
public.
PARTNERSHIP ESSENTIALLY CONSENSUAL IN CHARACTER
ART. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary. (1667a)
ART. 1784. A partnership begins from the moment of the
execution of the contract, unless it is otherwise stipulated. (1679)
Since the contract of partnership is essentially consensual in character,
there is generally no form required, much less a need for the actual delivery of
the promised contributions, to perfect it, and thereby lead to the arising of a
separate juridical personality.
517
518
NON-CORPORATE MEDIA OF DOING BUSINESS
Article
1771
of
the
New
Civil
Code
provides
that
"A
partnership
may
be
constituted
in
any
form,
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary."
The
other
exception
is
provided
in
Article
1772
of
the
New
Civil
Code
which
provides
that
"Every
contract
of
partnership
having
a
capital
of
Three
thousand
pesos
or
more,
in
money
or
property,
shall
appear
in
a
public
instrument,
which
must
be
recorded
in
the
Office
of
the
Securities
and
Exchange
Commission."
Public
documents
and
other
forms
of
registration
are
features
of
every
commercial
law
system,
for
indeed
the
public
must
deal
on
the
basis
of
systems,
infrastructures
and
institutions
that
are
manifest
and
made
known
to
them,
in
line
with
the
characteristic
of
uniformity
of
commercial
transactions.
But
as
will
be
shown
hereunder,
the
forms
and
registration
requirements
for
partnerships
under
New
Civil
Code
are
meant
more
to
regulate
the
relationship
of
the
partners
among
themselves
and
with
the
partnership,
but
do
not
really
bear
into
the
rights
of
creditors
who
deal
with
the
business
enterprise.
Indeed,
Article
1772
of
New
Civil
Code
provides
that
"Failure
to
comply
with
the
[formal]
requirements
[of
public
instrument
and
SEC
registration]
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
persons."
REQUIREMENTS TIED TO CAPITAL CONTRIBUTIONS 1. When Capital Contributions Total
F3,000.00 or More
ART. 1772. Every contract of partnership having a capital of
Three thousand pesos or more, in money or property, shall appear in
a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.
Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of
FORMAL REQUIREMENTS FOR PARTNERSHIPS
519
the partnership and the members thereof to third persons, (n)
Under modern day settings, most partnerships would be formed or
constituted having contributed capital of more than 1^3,000.00, for it is doubtful
whether two or more persons would come together in pursuit of business with a
capital of less than f*3,000.00. Therefore, the twin requirements under Article
1772 of New Civil Code of having the contract of partnership in a public
document and registered with the SEC apply almost universally to all
modern-day partnerships. Even then, the twin requirements may have no legal
or commercial significance based on the following grounds:
(a)
The
law
does
not
declare
the
partnership
void
when
the
twin
requirements
are
not
met,
nor
is
non-compliance
meted
any
adverse
legal
consequence;
and
(b)
The law expressly provides that "Failure to comply with the
requirements ... shall not affect the liability of the partnership
and the members thereof to third persons."
a. Rationale for Article 1772 of the New Civil Code
According to the Code Commission, the business purpose of the
requirements under Articles 1771 and 1772 is to prevent evasion of tax liabilities
by big partnership and to safeguard the public by enabling it to determine more
accurately the membership and capital of partnerships before dealing with
1
them.
Under current tax rules, which essentially taxes the partnership separately
as corporate taxpayer, formal registration requirements with the BIR on matters
as getting a taxpayer identification number (TIN), to be registered as withholding
agent, etc.,
Memorandum of Code Commission, LAWYERS' JOURNAL, October 1955, p.
518, cited in BAUTISTA, at pp. 71-72.
NON-CORPORATE MEDIA OF DOING BUSINESS
520
would require submission of the registered articles of partnership. But then if
the motivation is to go below the government radar, and to operate within the
underground eco-nomy as a means of avoiding tax and administrative burdens,
then non-registration with the SEC and other government agencies would be
the likely scheme to be followed. If there are no deleterious consequences
imposed by the Law on Partnerships in not complying why the formalities
under Article 1771, why should they be complied with?
2
In
Angeles
v.
Secretary
of
Justice,
the
Supreme
Court
held
that
the
"mere
failure
to
register
the
contract
of
partnership
with
the
SEC
does
not
invalidate
a
contract
that
has
the
essential
requisites
of
a
partnership.
The
purpose
of
registration
of
the
contract
of
partnership
is
to
give
notice
to
third
parties.
Failure
to
register
the
contract
of
partnership
does
not
affect
the
liability
of
the
partnership
and
of
the
partners
to
third
persons.
Neither
does
such
failure
to
register
affect
the
partnership's
juridical
personality.
A
partnership
may
exist
3
even
if
the
partners
do
not
use
the
words
'partner'or
'partnership."
In
any
event,
since
Articles
1771
and
1772
of
the
New
Civil
Code
do
not
expressly
declare
that
failure
to
comply
with
the
public
document
requirement
renders
the
contract
of
partnership
void,
then
the
general
rule
is
that
such
failure
does
not
render
the
contract
void,
but
only
affects
the
manner
of
its
registration
and
affords
to
the
parties
affected
the
remedy
of
demanding
that
it
4
be
executed
in
a
public
instrument.
b.
Registered
Partnership
Deemed
Conclusive
as
to
the
Partnership
Set-up
Among
the
Partners
The
decision
in
Rojas
v.
Maglana,seems
to
point
to
a
"legal
usefulness"
of
complying
with
the
twin
requirements
mandated
under
Articles
1771
and
1772
of
New
Civil
Code.
2465 SCRA 106 (2005).
3
Ibid, at p. 115; emphasis supplied.
*Dauden-Hernaez v. De los Angeles, 27 SCRA 1276 (1969); Dalion v. Court
of Appeals, 182 SCRA 872 (1990); Fule v. Court of Appeals, 286 SCRA 698 (1998).
5
192 SCRA 110 (1990).
FORMAL REQUIREMENTS FOR PARTNERSHIPS
521
In that case, Maglana and Rojas executed their Articles of Copartnership,
calling their company the "Eastcoast Development Enterprises (EDE)," with the
purpose to "apply or secure timber and/or minor forests products licenses and
concessions over public and/or private forest lands and to operate, develop and
promote such forests rights and concessions." The articles were duly registered
with the the SEC, indicating therein an indefinite period for the venture, and
providing that the profits would be divided "share and share alike."
When the venture was not getting off the ground, they invited
Pahamatong as industrial partner, and they executed a "Supplemental Articles
of Co-partnership" maintaining the original name of the company, but this time
providing for a period of thirty (30) years for the life of the venture, and
providing for equal distribution of profits among the three partners. The new
articles were not registered with the SEC. Although the firm began operations
with profits, eventually Pahamatong withdrew from the arrangement and his
equity was bought back by Maglana and Rojas, who then proceeded to operate
the firm under the original name, and with the verbal agreements that the
profits would be distributed 80%-20% in favor of Maglana.
When Rojas abandoned the enterprise to set-up a competing venture in
another logging concession, he withdrew some of his equipment contributed to
EDE to be used in his new venture. Maglana notified Rojas of his (Maglana's)
withdrawal from the partnership arrangement, and for Rojas to account fully for
the amounts withdrawn from the partnership treasury, which when totaled up
would necessitated for Rojas to pay the promised contributions under the
original articles of co-partnership.
The case reached the Supreme Court on the following issues: (a) on the
nature of the partnership that existed between Maglana and Rojas after the
withdrawal of the industrial partner; (b) whether it became a partnership at will
as provided under the original articles of partnership as to have justified
Maglana's termination thereof when the second articles of partnership provided
for a period of 30 years; and (c) the basis of the distribution of profits and losses
from the EDE venture, whether it would be the "share and share alike" under
the first articles of
522
NON-CORPORATE MEDIA OF DOING BUSINESS
partnership, on the basis of capital contributions based on the second articles
of partnership, or on the verbal agreement of 80%-20% in favor of Magalana.
The Court placed much weight on the original articles of incorporation
executed by Maglana and Rojas, which was duly registered with the SEC, and
held that when the second articles of co-partnership was executed (but not
registered), there was every intention to abide by the original partnership
arrangement existing under the registered articles, since it covered the same
venture and used the same firm name, thus
After a careful study of the records as against the conflicting
claims of Rojas and Maglana, it appears evident that it was not the
intention of the partners to dissolve the first partnership, upon the
constitution of the second one, which they unmistakably called an
"Additional Agreement".. . Except for the fact that they took in one
industrial partner; gave him an equal share in the profits and fixed
the term of the second partnership to thirty (30) years, everything
else was the same.
Thus, they adopted the same name, EASTCOAST
DEVELOPMENT ENTERPRISES, they pursued the same purposes
and the capital contributions of Rojas and Maglana as stipulated in
both partnerships call for the same amounts. Just as important is
the fact that all subsequent renewals of Timber License No. 35-36
were secured in favor of the First Partnership, the original licensee.
To all intents and purposes therefore, the First Articles of
Partnership were only amended, in the form of Supplementary
Articles of Co-Partnership . . . which was never r e g i s t e r e d . . . .
Otherwise stated, even during the existence of the second
partnership, all business transactions were carried out under the
duly registered articles. As found by the trial court, it is an admitted
fact that even up to now, there are still subsisting obligations and
contracts of the l a t t e r . . . . No rights and obligations accrued in
the name of the second partnership except in favor of Pahamotang
6
which was fully paid by the duly registered partnership
*lbid, at pp. 117-118; emphasis supplied.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
523
The
Court
declared
the
partnership
to
be
one
at
will,
under
the
terms
of
the
registered
articles
of
co-partnership,
and
ruled
that
the
sharing
scheme
between
Maglana
and
Rojas
on
the
profits
and
loses
of
the
venture
would
have
to
comply
with
that
stipulated
in
the
registered
articles
of
co-partnership:
And
in
whatever
way
he
may
view
the
situation,
the
conclusion
is
inevitable
that
Rojas
and
Maglana
shall
be
guided
in
the
liquidation
of
the
partnership
by
the
provisions
of
its
duly
registered
Articles
of
Co-Partnership',
that
is,
all
profits
and
losses
of
the
partnership
shall
be
divided
"share
and
share
alike"
between
the
partners,
x x x
Consequently,
except
as
to
the
legal
relationship
of
the
partners
after
the
withdrawal
of
Pahamatong
which
is
unquestionably
a
continuation
of
the
duly
registered
partnership
and
the
sharing
of
profits
and
losses
which
should
be
on
the
basis
of
share
and
share
alike
as
provided
for
in
the
duly
registered
Articles
of
Co-Partnership,
no
plausible
reason
could
be
7
found
to
disturb
the
findings
and
conclusions
of
the
trial
court.
In
Rojas,
the
Court
refers
to
a
partnership
arrangement
that
is
not
covered
by
duly
registered
articles
of
co-partnership
as
a
"de
facto
partnership;"
the
implication
is
that
when
a
partnership
has
complied
with
the
formalities
and
registration
required
under
Articles
1771
and
1772,
it
would
properly
be
termed
as
a
"de
jure
partnership."
The
lesson
that
can
be
drawn
from
Rojas
is
that
compliance
with
the
formal
requirements
mandated
under
the
Law
on
Partnerships
indeed
has
a
very
useful
legal
purpose:
the
duly
registered
articles
of
co-partnership
shall
serve
to
bind
the
partners
as
to
their
contractual
intent,
and
the
default
rules
provided
for
under
the
Law
on
Partnerships
in
New
Civil
Code
cannot
apply
to
overcome
the
provisions
of
the
articles
of
co-partnership
that
is
duly
registered
with
the
SEC,
except
by
another
instrument
that
seeks
to
amend
or
modify
the
same
and
duly
registered
also
with
the
SEC.
Ibid, at p. 119; emphasis supplied.
NON-CORPORATE MEDIA OF DOING BUSINESS
524
2. When Immovable Property Contributed
ART. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary. (1667a)
ART. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the
public instrument. (1668a)
a. Historical Background of Article 1773
Ruling under the provisions of the Code of Commerce and the old Civil
Code which prescribed formalities for the formation of a partnership where real
8
property is contributed, the Court held in Borja v. Addison, that "knowledge of
the existence of the new partnership or community of property must, at least,
be brought home to third persons dealing with the surviving husband in regard
to community real property in order to bind them by the community
9
agreement." Consequently under the old setting, third parties without
knowledge of the existence of the partnership who deal with the property still
registered in the name of one of the partners have a right to expect full
effectivity of such transaction on the property, in spite of the protestation of the
other partners and perhaps even the partnership creditors.
b. Importance of Immovable Property in the Partnership
Scheme
The importance that the law places upon immovable properties which
constitute part of the assets of the partnership is
44
Phil.
895
(1922).
lbid,
at
p.
907.
9
FORMAL REQUIREMENTS FOR PARTNERSHIPS
525
not
only
shown
by
the
formal
requirements
mandated
under
Article
1773
of
New
Civil
Code,
which
requires
the
execution
of
the
inventory
covering
such
properties
to
be
attached
to
the
public
instrument
(i.e.,
the
articles
of
incorporation)
that
should
be
registered
with
the
SEC,
but
also
by
what
seems
to
be
a
superfluous
Article
1774
of
New
Civil
Code
which
reiterates
the
obvious
legal
capacity
of
a
partnership
to
own
properties
as
a
juridical
person,
where
it
provides
that
"Any
immovable
property
or
an
interest
therein
may
be
acquired
in
the
partnership
name.
Title
so
acquired
can
be
conveyed
only
in
the
partnership
name."
Then
also,
we
have
the
long
provisions
of
Article
1819
of
New
Civil
Code,
which
detail
how
real
property
owned
by
the
partnership
may
be
legally
dealt
with,
under
various
circumstances
where
title
is
not
registered
in
the
name
of
the
partnership.
c.
When
Immovable
Property
Deemed
Contributed
Agad
v.
Mabato,
reminds
us
that
it
is
not
the
purpose
clause
of
the
articles
of
partnership
or
the
designated
business
to
be
engaged
in,
that
determine
whether
there
should
be
deemed
contributed
immovable
properties
to
the
venture
to
trigger
the
application
of
Article
1773
of
New
Civil
Code.
The
Court
held
in
Agad
that
since
the
articles
of
partnership
indicated
that
the
partners
were
going
to
contribute
cash
into
the
venture,
then
the
fact
that
the
partnership
was
expressly
organized
"to
operate
fishpond,"
did
not
necessarily
mean
that
either
a
fishpond
or
a
real
right
to
any
fishpond
was
contributed
into
the
venture.
The
ruling
would
also
support
the
position
that
just
because
the
partnership
venture
owns
or
operates
immovables
does
not
mean
it
comes
into
the
operation
of
Article
1773,
as
when
such
immovables
were
not
contributed
by
the
partners
but
were
purchased
during
the
operations
of
the
partnership
business.
10
23 SCRA 1223 (1968).
526
NON-CORPORATE MEDIA OF DOING BUSINESS
d. Rationale Behind the Formal Requirements under Article 1773
It Is when immovable property is contributed into the capital of the
partnership that the twin requirements of public document and SEC
registration come into play together with the requirement of an inventory to
be prepared, since Article 1773 provides that "A contract of partnership is void,
whenever immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the public
instrument."
Does the declaration of nullity of the partnership under Article 1773 of
the New Civil Code for failure to comply with the formalities therein refer to the
intra-partnership relations of the partners among themselves and the
partnership, or to the extra-partnership relationship with the creditors, or to
both? The decision in Torres v. Court of Appeals," should be instructive in
addressing these issues.
In Torres, a "Joint Venture Agreement" was executed among the
co-venturers covering the terms for the development of a subdivision project,
the contributions of the co-venturers and the manner of distribution of the
profits. Specifically, the agreement required from the capitalist partners to
contribute the parcels of land upon which the project was to be developed. No
articles of partnership was registered with the SEC, much less was the requisite
inventory mandated under Article 1773 of New Civil Code executed and
attached to the public document. In ruling against the contention of the
capitalist partners that the partnership was void, the Court held
.. . First, Article 1773 was intended primarily to protect third
persons. Thus, the eminent Arturo M. Tolentino states that under
the aforecited provision which is a complement of Article 1771,
"the execution of a public instrument would be useless if there is
no inventory of the property contributed, because without its
designation and description in the Registry of Property, and their
contribution cannot prejudice
"320 SCRA 428 (1999).
FORMAL REQUIREMENTS FOR PARTNERSHIPS
527
third
persons.
This
will
result
in
fraud
to
those
who
contract
with
the
partnership
in
the
belief
[in]
the
efficacy
of
the
guaranty
in
which
the
immovables
may
consist.
Thus,
the
contract
is
declared
void
by
law
when
such
inventory
is
made.
The
case
at
bar
does
not
involve
third
parties
who
may
be
prejudiced.
Second,
petitioners
themselves
invoke
the
allegedly
void
contract
as
basis
for
their
claim
that
respondent
should
pay
them
60
percent
of
the
value
of
the
property.
They
cannot
in
one
breath
deny
the
contract
and
in
another
recognize
it,
depending
on
what
momentarily
suits
their
purpose.
Parties
cannot
adopt
inconsistent
positions
in
regard
to
a
contract
and
courts
not
tolerate,
much
less
approve,
such
practice.
In
short,
the
alleged
nullity
of
the
partnership
will
not
prevent
courts
from
considering
the
Joint
Venture
Agreement
an
ordinary
contract
from
which
the
parties'
rights
and
obligations
to
each
12
other
may
be
inferred
and
enforced.
It
is
clear
from
Torres
that
the
formalities
mandated
under
Article
1773
are
meant
to
be
for
the
protection
of
the
partnership
creditors,
and
that
the
declaration
that
the
"partnership
is
void"
does
not
affect
the
intra-partnership
relationship
between
and
among
the
partners
and
between
the
partners
and
the
partnership
itself.
Thus,
Torres
held
that
the
"alleged
nullity
of
the
partnership
will
not
prevent
courts
from
considering
the
Joint
Venture
Agreement
[or
any
contract
of
partnership]
an
ordinary
contract
from
which
the
parties'
rights
and
obligations
may
be
inferred
and
enforced."
Therefore,
from
the
intra-partnership
point
of
view,
there
are
no
dire
consequences
that
befall
the
partners
and
the
partnership
for
failing
to
comply
with
the
formalities
man-
dated
under
Article
1773
of
New
Civil
Code.
If
we
follow
therefore
the
Torres
reasoning
that
the
formalities
mandated
under
Article
1773
are
meant
to
protect
partnership
creditors,
we
do
not
see
how
the
imposition
of
the
rule
"partnership
is
void,"
could
be
beneficial
or
protective
of
the
rights
of
partnership
creditors,
for
the
following
reasons:
"Ibid, at p. 438.
528
NON-CORPORATE MEDIA OF DOING BUSINESS
Firstly, the declaration of nullity of the partnership cannot be ascribed to
the extra-partnership relationship between the partners and partnership on one
hand, and the partnership creditors on the other hand, for to do so would
adversely affect the contractual rights and standing of the creditors vis-a-vis the
partners on their unlimited liability rule and the partnership, which must be
deemed to exist to protect the integrity of the contracts entered in its name.
Secondly, declaring the partnership void means that all contributed and
earned assets of the partnership pertain to the partners directly as co-owners,
since no contract of partnership exist between them (it is void and inexistent),
and no partnership person has arisen with a juridical personality separate and
distinct from each of the partners. Not only does this scenario affect the
integrity of the contracts entered into directly with the partnership, but it also
means that the contributed and earned partnership assets pertain directly to
the persons of the partners and priority as to them pertains to their separate
creditors and not to the partnership creditors.
Neither of the afore-described scenarios seem to promote the interests or
protect the rights of the creditors of the partnership.
e. Suggested Adverse Effect of Failure to Comply Registration
Requirements of Article 1773
The Torres ruling has therefore removed any "force" or "teeth" on the
declaration of nullity of the partnership under Article 1773: it cannot hurt but
must protect the partnership creditors, and yet it has no bearing or application
to the partners and the partnership in their intra-partnership relationship.
The author's position, as a result of resolving this issue in class discussions,
is that contrary to the Torres ruling, the formalities under Article 1773 should be
understood as to create adverse consequences for the partners who refuse to
comply with the requirements vis-6-vis their relationship with partnership
creditors.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
529
When
the
partners
fall
to
comply
with
the
formalities
under
Article
1773,
it
ought
to
mean
that
they
cannot
avail
of
any
advantage
that
the
partnership
medium
affords
them.
The
primary
advantage
that
the
partners
have
under
a
de
jure
partnership
setting
is
that
their
personal
liability
to
partnership
creditors
for
assets
that
have
not
been
contributed
to
the
firm
is
only
joint
and
subsidiary,
since
they
have
the
benefit
of
excussion.
Consequently,
when
partners
do
not
comply
with
the
formalities
under
Article
1773,
the
"partnership
is
void"
in
the
sense
that
the
partners
are
deemed
to
be
acting
for
themselves
when
they
entered
into
partnership
contracts
and
transactions;
and
that,
similar
to
the
principle
in
Agency
Law
that
makes
the
agent
primarily
liable
for
contracts
entered
into
in
behalf
of
an
inexistent
principal,
then
partners
can
be
held
directly
liable
by
partnership
creditors
for
all
contracts
entered
into,
and
all
obligations
assumed,
in
the
name
of
a
partnership
which
is
declared
void.
The
landscape
has
become
more
complicated
with
the
recent
ruling
in
13
Litonjua,
Jr.
v.
Litonjua,
Sr.,
where
presented
in
evidence
was
a
typewritten
note
(referred
to
as
Annex
"A-1")
whereby
the
elder
brother
purportedly
promised
to
the
younger
brother
that
"I
will
make
sure
that
you
get
ONE
MILLION
PESOS
(P1,000,000.00)
or
ten
percent
(10%)
equity,
whichever
is
great-
er,"
of
the
business
that
the
younger
brother
would
help
manage,
consisting
of
theatre
business
and
other
real
estate
properties.
The
typewritten
note
was
not
signed
by
the
elder
brother,
who
denied
its
authenticity
during
trial.
The
main
issue
resolved
in
Litonjua
was
whether
a
contract
of
partnership
or
joint
venture
arrangement
existed
between
the
siblings,
a
purely
intra-partnership
issue
that
essentially
did
not
involve
the
rights
of
third
parties
dealing
with
the
business
enterprise.
Yet,
the
Supreme
Court
did
not
at
all
allude
to
its
decisions
in
Torres
or
in
Angeles,
where
it
held
that
the
provisions
of
Articles
1771
to
1773
of
New
Civil
Code,
as
to
the
formal
requirements
for
partnerships,
applied
only
for
the
protection
of
13
477 SCRA 576 (2005).
NON-CORPORATE MEDIA OF DOING BUSINESS
530
third
parties
dealing
with
the
partnership.
In
resolving
that
there
was
constituted
no
partnership
or
joint
venture
between
the
siblings,
or
that
the
same
is
void,
the
Court,
after
quoting
Articles
1771
to
1773,
held
in
Litonjua
that
Annex
"A-1,"
on
its
face,
contains
typewritten
entries,
personal
in
tone,
but
is
unsigned
and
undated.
As
an
unsigned
document,
there
can
be
no
quibbling
that
Annex
"A-1"
does
not
meet
the
public
instrumentation
requirements
exacted
under
Article
1771
of
the
Civil
Code.
Moreover,
being
unsigned
and
doubtless
referring
to
a
partnership
involving
more
than
P3,000.00
in
money
or
property,
Annex
"A-1"
cannot
be
presented
for
notarization,
let
alone
registered
with
the
Securities
and
Exchange
Commission
(SEC),
as
called
for
under
the
Article
1172
of
the
Code.
And
inasmuch
as
the
inventory
requirement
under
the
succeeding
Article
1773
goes
into
the
matter
of
validity
when
immovable
property
is
contributed
to
the
partnership,
the
next
logical
point
of
inquiry
turns
on
the
nature
of
petitioner's
contribution,
if
any,
to
14
the
supposed
partnership.
It
is
clear
from
the
afore-quoted
passage
that
Litonjua
considered
as
binding
and
effective
to
purely
intra-partnership
issues
the
mandatory
provisions
of
Articles
1771
and
1773
of
New
Civil
Code
that
require
that
even
when
there
is
no
issue
that
the
meeting
of
the
minds
involves
the
formation
of
a
partnership
{i.e.,
the
typewritten
note
"doubtless
referring
to
a
partnership
involving
more
than
P3,000.00
in
money
or
property")
then
the
requirement
that
the
contract
be
cast
in
a
public
instrument
and
registered
with
the
SEC
were
deemed
to
be
essential
to
sustain
a
claim
thai
a
contract
of
partnership
exist
between
the
parties,
otherwise
the
purported
contract
is
deemed
to
be
unenforceable.
The
doctrine
that
failure
to
comply
with
the
public
instrument
and
SEC-registration
requirements
under
Article
1772
of
New
Civil
Code
renders
the
contract
of
partnership
as
unenforceable
can
be
deduced
from
the
following
portion
of
the
Litonjua
decision
which
relied
on
provision
of
the
Statute
of
Frauds,
thus:
lbid, at p. 585; emphasis supplied.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
531
It is at once apparent that what respondent Eduardo imposed
upon himself under the above passage, if he indeed wrote Annex
"A-1," is a promise which is not to be performed within one year
from "contract" execution on June 22,1973. Accordingly, the
tt
agreement embodied in Annex A-1" is covered by the Statute of
Frauds and ergo unenforceable for non-compliance therewith. By
force of the statute of frauds, an agreement that by its terms is not
to be performed within a year from the making thereof shall be
unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribed by the party
charged. Corollarily, no action can be proved unless the
15
requirement exacted by the statute of frauds is complied with.
Unfortunately, the Court failed to consider the fact that even under the
Statute of Frauds, the "unenforceability" of covered contracts is lifted the
moment there is partial or full execution of the terms of the contract. Thus, in
the future it can be anticipated that the rule of partial execution, (i.e., the actual
contribution made to the partnership, the pursuit of the business enterprise,
etc.), would mitigate against the deleterious effect of non-compliance with the
public instrument and SEC-registration requirement under Articles 1771 and
1772 of New Civil Code.
In any event, what rendered the purported contract of partnership void in
Litonjua was that since the note indicated that there would be contributed real
property to the partnership, then there was failure to comply with the
requirements laid.down in Article 1773 of New Civil Code, for the rendering of
the proper inventory and attaching it to the public instrument registered with
the SEC, thus:
Lest it be overlooked, the contract-validating inventory
requirement under Article 1773 of the Civil Code applies as long
[as] real property or real rights are initially brought into the
partnership. In short, it is really of no moment which of the
partners, or, in this case, who between petitioner and his brother
Eduardo, contributed immovables. In context,
lbid, at p. 590.
NON-CORPORATE MEDIA OF DOING BUSINESS
532
the more Important consideration is that real property was
contributed, in which case an inventory of the contributed property
duly signed by the parties should be attached to the public
18
instrument, else there is legally no partnership to speak of.
Litonjua therefore gives the "dire consequences" faced by partners who
do not comply with the formal requirements mandated under Articles 1771 to
1773 of New Civil Code. It would have been better if Litonjua had expressly set
aside its rulings in Torres and Angeles, so that its doctrine would have been the
clear guide to legal practitioners.
The author posits that the Torres and Angeles rulings which have their
basis jurisprudence under the old Civil Code and the Code of Commerce, will
continue to prevail; and that the Litonjua doctrine of rendering the contract of
partnership void for failure to comply with the requirements under Article 1773
of New Civil Code, applicable only to situations where the claimant that a
contract of partnership has been duly constituted relies only upon a note or
instrument, and does not have other evidence to prove that indeed a contract
of partnership has been constituted, such as his exercise with the tolerance of
the other partners, of acts of ownership, demanding for an accounting,
participation in the profit, etc. Indeed, in Litonjua the best evidence presented
by the younger brother to prove a contract of partnership had been constituted
was the unsigned typewritten note, and he failed to prove the essential
elements of the contract of partnership, as observed by the Court, thus:
Lest it be overlooked, petitioner is the intended beneficiary of the
P1 Million or 10% equity of the family businesses supposedly
promised by Eduardo to give in the near future. Any suggestion that
the stated amount or the equity component of the promise was
intended to go to a common fund would be to read something not
written in Annex "A-1" Thus, even this angle alone argues against
the very idea of a partnership, the creation of which
16
Ibid, at p. 586.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
533
requires two or more contracting minds mutually agreeing to
contribute money, property or industry to a common fund with the
intention of dividing the profits between or among themselves
Perhaps the afore-quoted passage is the best way to appreciate the
decision in Litonjua, that in the end no contract of partnership arose between
the Litonjua siblings even on the basis of the arrangement purported, since it
lacked the essential element of "contributing to a common fund." Thus, the
rulings on the failure to comply with the provisions of Article 1771 to 1773 of
New Civil Code ought to be considered as obiter dictum.
f. Article 1773 Should Be Considered with Priority Rules for Claims of
Partnership Creditors and Separate Debtors of the Partners
The proper registration of real property contributed into the partnership
would have much to do with the priority rules set under the Law on
Partnerships between claims of partnership creditors and those of the
separate creditors of the each of the partners.
Failure to comply with the inventory and public documents
requirements may adversely affect the rights of the partners, the partnership
and the partnership creditors, when it comes to the binding effect of
transactions relating to real estate and other immovables where the
controlling doctrine is that such transactions do not bind the public unless they
are found in a public document, and duly registered.
18
Thus,
in
Secuya
v.
Vda.
de
Se/ma,
the
Court
held
that
while
the
sale
of
land
appearing
in
a
private
deed
is
binding
between
the
parties,
it
cannot
be
considered
binding
on
third
persons
if
it
is
not
embodied
in
a
public
instrument
and
recorded
in
the
Registry
of
Deeds.
When
it
comes
to
contributions
of
real
estate
to
a
partnership,
especially
when
it
covers
registered
land,
then
17
Ibid, at pp. 590-591; emphasis
supplied.
326 SCRA 244 (2000).
18
534
NON-CORPORATE MEDIA OF DOING BUSINESS
the peremptory provisions of the Property Registration Decree (Pres. Decree
No. 1459) will prevail as to who has a better claim, right or lien on the property,
since "registration in good faith and for value," is the operative rule under the
Torrens system.
Under Article 1839(8) of the New Civil Code, "When partnership property
and the individual properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on partnership property
and separate creditors on individual property, saving the rights of lien or
secured creditors."
Again, under Article 1839(9) of the New Civil Code, "Where a partner has
become insolvent or his estate is insolvent, the claims against his separate
property shall rank in the following order:
"(a) Those owing to separate creditors;
"(b) Those owing to partnership creditors;
"(c) Those owing to partners by way of contribution..."
Since Torres specifically held that the rules of inventory, public instrument
and SEC registration under Articles 1772 and 1773 of New Civil Code are meant
to protect partnership creditors, and as to them the partnership shall be
considered void if it is necessary to protect their interests, what happens then
to real property contributions that have not complied with the statutory
formalities? Would first priority over them pertain to the separate creditors of
the contributing partner?
We can only speculate on the answers to these issues.
REQUIREMENTS TIED TO PARTNERSHIP NAME
ART. 1815. Every partnership shall operate under a firm name,
which may or may not include the name of one or more of the
partners.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
535
Those who, not being members of the partnership, include their
names in the firm name, shall be subject to the liability of a partner,
(n)
Article
1815
of
the
New
Civil
Code
provides
that
"Every
partnership
shall
operate
under
a
firm
name,
which
may
or
may
not
include
the
name
of
one
or
more
of
the
partners.
Those
who,
not
being
members
of
the
partnership,
include
their
names
in
the
firm,
shall
be
subject
to
the
liability
of
a
partner."
The
language
of
Article
1815
shows
unmistakably
that
its
not
an
obligation
of
the
partners
to
include
their
names
in
the
partnership
name;
but
that
if
an
individual
includes
his
name
in
the
firm
name,
then
he
becomes
bound
to
third
parties
who
rely
thereon
to
the
same
liabilities
as
the
partners
in
the
partnership.
Article
1815
is
the
first
article
under
the
section
which
is
captioned
as
"Obligations
of
the
Partners
with
Regard
to
Third
Persons,"
which
indicates
clearly
the
essence
of
having
a
firm
name:
that
since
a
partnership
is
given
a
separate
juridical
personality
which
gives
it
legal
capacity
to
deal,
and
enter
into
contracts,
with
the
public,
then
it
must
adopt
a
firm
name
by
which
it
can
be
identified
as
the
party
to
a
contract.
It
must
be
noted
that
under
Article
1815,
the
mere
inclusion
by
a
non-partner
of
his
name
in
the
partnership
name
would
make
him
liable
to
partnership
debts,
even
when
under
the
terms
of
the
articles
of
partnership
he
is
not
listed
formally
as
one
of
the
partners
of
the
partnership.
This
would
imply
that
the
public
is
not
bound
by
the
terms
of
the
articles
of
incorporation,
even
when
they
are
formally
registered
with
the
SEC.
1.
Historical
Basis
of
Article
1815
Although
the
codal
provision
indicates
that
Article
1815
is
a
new
["(n)"]
provision
in
New
Civil
Code,
according
to
Tolentino
it
was
taken
from
Article
126
19
of
the
Code
of
Commerce.
Yet
the
principle
on
partnership
name
under
Article
126
was
quite
19
TOLENTINO, at p. 353.
536
NON-CORPORATE MEDIA OF DOING BUSINESS
different, for it actually required that the partnership name should be
20
registered containing all the names of the partners.
21
In
Jo
Chung
Cang
v.
Pacific
Commercial
Co.,
the
Court
held
that
the
object
of
Article
126
in
requiring
a
general
partnership
to
transact
business
under
the
name
of
all
its
members,
of
several
of
them,
or
of
one
only,
was
to
protect
the
public
from
imposition
and
fraud;
and
that
Article
126
was
for
the
protection
of
the
creditors
rather
than
of
the
partners
themselves.
Jo
Chung
Cang
held
that
the
legal
requirement
as
to
firm
name
must
be
construed
as
rendering
contracts
made
in
violation
thereof
unlawful
and
unenforceable
only
as
between
the
partners
and
at
the
instance
of
the
violating
party,
but
not
in
the
sense
of
depriving
innocent
parties
of
their
rights
who
may
have
dealt
with
the
offenders
in
ignorance
of
the
latter
having
violated
the
law;
and
that
contracts
entered
into
by
commercial
associations
defectively
organized
are
valid
when
voluntarily
executed
by
the
parties,
and
the
only
question
was
whether
or
not
they
complied
with
the
agreement.
In
essence
Jo
Chung
Cang
ruled
that
partners
cannot
avoid
the
consequences
of
a
partnership
contract
entered
into
by
invoking
in
their
defense
the
anomaly
in
the
firm
name
which
they
themselves
adopted.
The
22
ruling
was
reiterated
in
Philippine
National
Bank
v.
Lo.
23
The earlier decision iii Hung-Man-Yoc v. Kieng-Chiong- Seng, held that
failure to register a commercial partnership would mean that there is no
partnership constituted and that the rule applicable to protect parties who have
dealt in good faith with the enterprise was the application of Article 120 of the
Code of Commerce, that the right of action would be against the person in
charge of the management of the association.
Jo Chung Cang refused to apply the ruling in Hung-Man- Yoc because
there was actual registration of the partnership, and consequently decreed that
a general partnership had been constituted as to make the partners thereof
solidarily liable for
^Article 126, Code of Commerce.
21
45 Phil. 142 (1923).
^50 Phil. 802(1927).
6 Phil. 498 (1906).
FORMAL REQUIREMENTS FOR PARTNERSHIPS
537
partnership debt in the event the partnership itself becomes insolvent.
Although failure to comply with the mandatory regis-tration provisions of
the Code of Commerce did not affect the cause of action of creditors to enforce
their contracts against the partnership, did it mean then that as a consequence,
if it were the partners and partnership seeking to enforce such contracts, would
they be barred from doing so as a consequence of their failure to comply with
the registration requirements under the law? No categorical ruling was made on
this issue in Jo Chung Cang although it did quote a ruling from the Supreme
Court of Michigan on the common law rule, thus:
As this acts involves purely business transactions, and affects
only money interests, we think it should be construed as rendering
contracts made in violation of it unlawful and unenforceable at
the instance of the offending party only, but not as designed to
take away the rights of innocent parties who may have dealt with
24
the offenders in ignorance of their having violated the statute.
To prevent such members of a commercial partnership from recovering on
the contracts entered into on the ground that there was no valid registration or
that it did not comply with the rule on firm name would constitute unjust
enrichment. Eventually, the Court applied in Compahia Agricola de Ultramar v.
35
26
Reyes, the principles of corporation by estoppel doctrine, even as to
unregistered partnerships, thus:
24
Ibid,
at
pp.
154-155,
citing
Cashing
v.
Pliter,
168
Mich
386;
Ann.
Cas.
(1913-C),
67
(1912);
underscoring
supplied.
25
4
Phil.
2
(1904).
26
Sec.
21,
Corporation
Code:
"SEC.
21.
Corporation
by
estoppel.
-
All
persons
who
assume
to
act
as
a
corporation
knowing
it
to
be
without
authority
to
do
so
shall
be
liable
as
general
partners
for
all
debts
liabilities
and
damages
incurred
or
arising
as
a
result
thereof:
Provided,
however,
That
when
any
such
ostensible
corporation
is
sued
on
any
tort
committed
by
it
as
such,
it
shall
not
be
allowed
to
use
as
a
defense
its
lack
of
corporate
personality.
"One
who
assumes
an
obligation
to
an
ostensible
corporation
as
such,
cannot
resist
performance
thereof
on
the
ground
that
they
was
in
fact
no
cor-
poration.
(n)"
NON-CORPORATE MEDIA OF DOING BUSINESS
538
Persons who assume to form a corporation or business
association, and exercise corporate functions, and enter into
business relations with third persons, are estopped from denying
that they constitute a corporation. So also are the third persons
who deal with such a de facto association or corporation,
recognizing it as such and thereby incurring liabilities, estopped,
when an action is brought on such obligations, from denying the
27
juristic personality of such corporations or associations. xxx.
Where a shareholder of an association is called upon to
respond to a liability as such, and where a party has contracted
with a corporation and is sued upon the contract, neither is
permitted to deny the existence or the legal validity of such
corporation. To hold otherwise would be contrary to the plainest
principles of reason and good faith. Parties must take the
28
consequences of the position they assume.
The question that arises from the Jo Chung Cang, PNB and Compania
Agricola rulings was that if the provisions of Article 126 of the Code of
Commerce were mandatory in the sense that they were addressed to the
partners and partnership more for the protection of partnership creditors, and
non-compliance therewith could not prejudice creditors, then what would be
their usefulness if no adverse consequence visits the partners and the
partnership?
There is no doubt that there were serious difficulties with enforcing the
mandatory provisions on registration and firm name for commercial
partnerships under the Code of Commerce. The present rule under Article
1815 of New Civil Code which essentially allows the partners and the
partnership to adopt any firm name they fancy is a more market-friendly rule
since:
(a) One who opts to have his name included in the firm name runs
the risk of being made liable for partnership debts;
27
Ibid,
at
p.
12.
at
p.
mid,
13.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
(b)
The articles of partnership, when registered
provides anyway for the listing of the partners of
the partnership enterprise; and
(c)
More importantly, the arising of the separate
juridical personality of the partnership comes with
the perfection of the contract of partnership, and
not with registration thereof.
2. SEC Rules on Partnership Name
SEC Memorandum Circular No. 5, s. 2008, provides for the
following rules when it comes to partnership names:
(a)
The partnership name shall bear the word "Com-
pany" or "Co." and if it is a limited partnership, the
word "Limited" or "Ltd."
(b)
A professional partnership name may bear the
word "Company," "Associates," or "Partners," or
other similar descriptions.
(c)
The name to be adopted by a partnership should
not be identical, misleading or confusingly similar
to a corporate or partnership name registered with
the SEC, or with the Department of Trade and
Industry, in the case of sole prorprietorships.
(d)
If the name applied for is similar to that of a reg-
istered corporation or partnership, the applicant
shall add one or more distinctive words to the pro-
posed name to remove the similarity or differenti-
ate it from the registered name.
However, punctuation marks, spaces, signs,
symbols and other similar characters, regardless
of their form or arrangement, shall not be
acceptable as distinguishing words for purposes of
differentiating a proposed name from a registered
name;
539
540
NON-CORPORATE MEDIA OF DOING BUSINESS
(e)
Business or trade name which is different from the
partnership name shall be indicated in the articles of
partnership; and a company may have more than one
29
business or trade name.
(f)
A tradename or trademark registered with the Intellectual
Property Office may be used as part of the partnership name
of a party other that its owner if the latter gives its consent to
such use.
(g)
The full name or surname of a person may be used in a
partnership name if he or she is a partner of the said entity
and has consented to such use; if the person is already
deceased, the consent shall be given by his or her estate,
under the following terms:
(i) The SEC may require a registrant to explain to its
satisfaction the reason for the use of a person's name;
(ii) The meaning of initials in a name shall be stated by the
registrant in the Articles of Partnership or in a separate
document signed by a partner.
(h)
The name of a local geographical unit, site or location cannot
be used as a partnership name unless it is accompanied by a
descriptive word or phrase, e.g., Pasay Food Store, Inc.;
(i)
Pursuant to existing laws, the following words and phrases
can be used a partnership name only in the manner
enumerated below:
"Finance Company," "Financing Company," Finance and
Leasing Company" and "Leasing Company" investment
Company," "Investment House" - by entities engaged in
the financing or investment house business (R.A. 8556
and Pres. Decree 129);
"Amended under SEC Memorandum dated 23 December 2008.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 568
"Lending Company" and "Lending Investor" - by lending
companies (R.A. 9474), or "Pawnshop" - by entities
authorized to operate pawnshops (P.D. 114);
"Bank," "Banking," "Banker," "Savings and Loan
Association," (R.A. 8367) "Trust Corporation," "Trust
Company" or words of similar meaning - by entities
engaged in the banking or trust business (R.A. 8791);
"United Nations," "UN," in full or abbreviated form -
exclusively by the United Nations and its attached
agencies (R.A. 247);
"Bonded" - by entities with licensed warehouses (R.A.
247);
"SPV-AMC" - by corporations authorized to act as
special purpose vehicle (R.A. 9182);
The practice of a profession regulated by a special law which
among others provides for the permissible use of the
profession's name in a firm, partnership or association shall
govern the use of the name, e.g., "Engineer" or "Engineering"
(R.A. 1582), "Architect" (R.A. 9266), or Geodetic Engineer"
(R.A. 8560);
Notwithstanding the limitations mentioned above, any
association registered by entitled engaged in the listed
activities may use the professional's name, e.g., Association of
Engineers of the Philippines, Inc.;
Unless otherwise authorized by the SEC, the words and
phrases enumerated blow can be used only by the entities
mentioned:
"Investment(s)" or "Capital" - by entities organized as
investment house, investment company or holding
company;
"Asset/Investment/Fund/Financial
Management,"
or
"Asset/Investment/Fund/Financial
Adviser,"
or
NON-CORPORATE MEDIA OF DOING BUSINESS
542
any similar words or phrases by entities organized as
investment company adviser or holders of investment
management activities (IMA) license from the Bangko
Sentral ng Pilipinas;
"National," "Bureau," "Commission," "State," and other
words, acronyms, abbreviations that have gained wide
acceptance in the Philippines by entities that perform
governmental functions;
"Association" and "Organization" or similar words
which pertain to non-stock corporations - by entities
primarily engaged in non-profit activities;
"Stock
Exchange/Futures
Exchange/Derivatives
Exchange," "Stock Broker/Securities Broker/Derivatives
Broker," "Commodity/Financial Futures Mer-
chant/Broker," "Securities Clearing Agency/Stock
Clearing Agency," "Plans" or any similar words or
phrases - by entities organized as an exchange, broker
dealer, commodity futures broker, clearing agency, or
pre-need company under the Securities Regulation
Code (R.A. 8799).
(I)
Notwithstanding
the
foregoing,
the
SEC
shall,
for
the
protection
of
the
public
interest
and
other
justifiable
causes,
disallow
the
use
of
names,
that,
in
its
judgment,
are
misleading,
deceptive,
confusingly
similar
to
a
registered
name,
or
contrary
to
public
morals,
good
customs
or
public
policy;
(m)
The
name
of
a
partnership
that
has
been
dissolved
or
whose
registration
has
been
revoked
shall
not
be
used
by
another
partnership
within
three
years
from
the
approval
of
the
dissolution
or
six
years
from
the
date
or
revocation,
unless
its
use
has
been
allowed
at
the
time
of
the
dissolution
or
re-
vocation
by
the
partners
who
represent
a
majority
of
the
membership
of
the
dissolved
partnership;
(n)
At
the
time
of
its
registration,
a
partnership
shall
submit
an
affidavit,
signed
by
at
least
two
partners
in
the
form
prescribed
by
the
SEC,
containing
an
unqualified
undertaking
to
change
its
name
FORMAL REQUIREMENTS FOR PARTNERSHIPS
543
immediately upon receipt of notice or directive from the SEC
that another corporation or partnership or person has
acquired a prior right to the use of that name or that the
name has been declared as misleading, deceptive,
confusingly similar to a registered name, or contrary to
public morals, good customs or public policy.
30
In
a
1984
opinion,
the
SEC
ruled
that
partners
cannot
opt
to
use
the
work
"Unlimited"
in
place
of
"Company"
for
a
partnership
name:
"It
is
reiterated
that
the
only
instance
when
a
domestic
partnership
name
may
be
recorded
in
this
Commission
without
the
use
of
the
word
'Company'
is
when
the
primary
purpose
for
which
the
partnership
is
organized
is
to
engage
in
the
practice
of
professional
of
a
particular
discipline."
REGISTRATION OF LITTLE USEFULNESS IN PARTNERSHIP LAW: A
SUMMATION
The essence of what constitutes a partnership contract is split into two
doctrinal levels in Philippine Partnership Law, namely:
(a)
As between and among the partners, it is the point of
perfection of the contract of partnership, when two or more
parties have come to a meeting of minds to constitute a
common fund and the distribution of profits and losses
among themselves; and
(b)
In relation to third parties who deal with a business
enterprise, when a contract or transaction is entered into
with a third party under the representation that such third
party is contracting with a partnership, or is dealing with a
partner to of partnership enterprise.
^SEC ruling addressed to Atty. Reriato J. Santiago, dated 19 October 1984.
544
NON-CORPORATE MEDIA OF DOING BUSINESS
1.
Intra-Partnership
Relationship
Within
the
intra-partnership
relationship,
the
main
doctrine
that
applies
is
that
unless
there
is
a
meeting
of
minds
as
to
the
elements
of
common
fund
and
distribution
of
profits,
then
there
can
be
no
contract
of
partnership
between
the
parties
involved.
On
the
other
hand,
once
there
is
such
a
meeting
of
minds,
the
partnership
contract
arises,
and
needs
no
particular
form
in
order
to
be
valid,
binding
and
enforceable.
Thus,
Article
1784
of
the
New
Civil
Code
provides
that
"A
partnership
begins
from
the
moment
of
the
execution
of
the
contract,
unless
it
is
otherwise
stipulated."
The
partnership
agreement
may
be
proved
by
competent
evidence,
whether
written
or
oral,
or
from
the
acts
and
actuations
of
the
parties.
So
strong
is
the
"consensual"
nature
of
the
contract
of
partnership
that
the
failure
to
comply
with
the
formal
requirement
of
inventory
of
immovable
contributed,
public
instrument
and
registration
with
the
SEC,
brings
no
deleterious
effect
on
the
partnership
itself,
and
between
and
among
the
partners.
Under
Article
1771
of
New
Civil
Code,
although
it
recognizes
the
general
principal
that
"A
partnership
may
be
constituted
in
any
form,"
yet
it
provides
expressly
that
"where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary."
This
is
followed
up
in
Article
1773
which
provides
that
"A
contract
of
partnership
is
void,
whenever
immovable
property
is
contributed
thereto,
if
an
inventory
of
said
property
is
not
made,
signed
by
the
parties,
and
attached
to
the
public
instrument."
In
spite
of
the
clear
injunction
of
the
statutory
provisions
and
the
laying
down
of
the
consequences
of
failure
to
comply
with
the
requisites
forms
of
public
document
and
inventory
of
the
contributed
immovable,
the
Supreme
Court
has
always
ruled
that
such
requirements
are
meant
for
the
protection
of
third
parties
who
deal
with
the
partnership,
and
consequently,
when
no
third
party
interests
are
involved
in
a
suit,
neither
the
partnership
nor
any
of
the
partners
can
invoke
failure
to
comply
with
such
requirements,
to
gain
any
advantage
or
to
avoid
the
liability
consequences
of
being
a
partner
in
a
partnership.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
545
In
the
same
manner,
under
Article
1772
of
New
Civil
Code,
"Every
contract
of
partnership
having
a
capital
of
three
thousand
pesos
or
more,
in
money
or
property,
shall
appear
in
a
public
instrument,
which
must
be
recorded
in
the
Office
of
the
Securities
and
Exchange
Commission."
Not
only
does
Article
1772
declare
the
clearly
non-lethal
consequence
of
failure
to
comply
with
the
public
instrument
and
SEC
registration
requirements:
"Failure
to
comply
with
the
requirements
of
the
preceding
paragraph
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
persons,"
but
the
Supreme
Court
has
consistently
declared
that
the
purpose
of
Article
1772
is
merely
to
allow
a
partner
in
an
oral
partnership
to
have
a
cause
of
action
to
have
the
partnership
constituted
in
a
manner
that
allows
its
terms
and
conditions
be
made
known
to
the
public
through
a
public
instrument
and
registration
with
the
SEC.
Failure
to
comply
with
the
requirements
under
Article
1772
may
also
be
basis
for
the
SEC
to
refuse
to
give
supportive
aid
to
partners
who
have
not
registered
their
agreement
with
the
SEC.
2.
Dealings
with
Third
Parties
There
are
basically
two
areas
that
are
important
to
consider
when
it
comes
to
partnership
dealings
with
third
parties,
namely:
(a)
The validity and enforceability of contracts entered into with
a purported partner of an existing partnership or with
purported partnership that has not been legally constituted;
and
(b)
The standing of partnership creditors to enforce partnership
liability personally against the partners.
The general principle in Philippine Partnership Law is that a member of
the public who deals in good faith with a purported partner or purported
partnership in the ordinary course of business of such partnership, has a right to
expect that his contract can be enforced; and that intra-partnership and
technical issues
546
NON-CORPORATE MEDIA OF DOING BUSINESS
pertaining to the partnership or on the distribution of power and authority
between the partners cannot generally be raised against such third party to
undermine the enforceability of his contractual dealings with the corporation.
Various statutory provisions in the New Civil Code support this doctrine
o f " reliance by third parties dealing in good faith with the purported partner or
purported partnership," thus:
(a)
Under Article 1815, "Those who, not being members of the
partnership, include their names in the firm name, shall be
subject to the liability of partner;"
(b)
Under Article 1818, "Every partner is an agent of the
partnership for the purpose of its business, and the act of
every partner, including the execution in the partnership
name of any instrument, for apparently carrying on in the
usual way the business of the partnership . . . binds the part-
nership, unless the partner so acting has in fact no authority
to act for the partnership in the particular manner, and the
person with whom he is dealing with has knowledge of the
fact that he has no such authority;"
(c)
Under Article 1834, partnership creditors who extend credit
to the partnership even after there has been dissolution can
can claim payment thereof against all the partners, when
such creditors have "no knowledge or notice of the
dissolution."
In
fact,
even
when
a
partnership
has
been
duly
registered
with
the
SEC,
the
established
doctrine
is
that
third
parties
who
deal
with
the
partnership
are
not
bound
by
the
terms
of
the
registered
articles
of
partnership,
and
unless
they
have
actual
knowledge
thereof,
they
have
a
right
to
rely
upon
what
is
the
normal
right
and
authority
of
every
partner
to
generally
bind
the
partnership
and
the
other
partners.
FORMAL REQUIREMENTS FOR PARTNERSHIPS
547
Thus,
Litton
v.
Hill
&
Ceron,"
laid
down
the
rule
that
-
Third
persons...
are
not
bound
in
entering
into
a
contract
with
any
of
the
two
partners,
to
ascertain
whether
or
not
this
partner
with
whom
the
transaction
is
made
has
the
consent
of
the
other
partner.
The
public
need
not
make
inquiries
as
to
the
agreements
had
between
the
partners.
Its
knowledge
is
enough
that
it
is
contracting
with
the
partnership
which
is
represented
by
one
of
32
the
managing
partners.
This
ruling
was
reiterated
in
Goquiolay
v.
Sycipwhich
held
that
the
statutory
rule
on
how
management
power
is
distributed
or
exercised
within
the
partnership,
and
the
consequences
of
failure
to
comply
with
such
statutory
rule
is
"an
obligation
that
is
imposed
by
law
on
the
partners
among
themselves,
that
does
not
necessarily
affect
the
validity
of
the
acts
of
a
partner,
while
acting
within
the
scope
of
the
ordinary
course
of
business
of
the
partnership,
as
regards
third
persons
without
notice.
The
latter
may
rightfully
assume
that
the
contracting
partner
was
duly
authorized
to
contract
for
and
in
behalf
of
the
firm
and
that,
furthermore,
he
would
not
ordinarily
act
to
the
prejudice
of
his
co-partners.
The
regular
course
of
business
procedure
does
not
require
that
each
time
a
third
person
contracts
with
one
of
the
managing
partners,
he
should
inquire
as
to
the
latter's
authority
to
do
so,
or
that
he
should
first
ascertain
34
whether
or
not
the
other
partners
ha[ve]
given
their
consent
thereto."
The
reason
why
the
general
rule
in
Agency
Law
that
a
person
dealing
with
an
agent
must
ascertain
the
extent
of
the
power
of
the
agent
does
not
normally
apply
with
the
same
effect
in
Partnership
Law
was
also
explained
in
Goquiolay
in
the
following
manner:
It
is
argued
that
the
authority
given
by
Goquiolay
to
the
widow
Kong
Chai
Pin
was
only
to
manage
the
property,
31
67
Phil.
509
(1939).
mid,
at
p.
513.
M
108
Phil.
947
(1960).
mid,
at
p.
957.
548
NON-CORPORATE MEDIA OF DOING BUSINESS
and
that
it
did
not
include
the
power
to
alienate
.
.
.
What
this
argument
overlooks
is
that
the
widow
was
not
a
mere
agent,
because
she
had
become
a
partner
upon
her
husband's
death,
as
35
expressly
provided
by
the
articles
of
co-partnership."
Being
therefore
a
partner,
the
general
rule
of
Partnership
Law,
every
partner
had
the
power
to
dispose
of
partnership
property
even
of
its
real
estate,
which
is
in
the
normal
course
of
the
partnership
business
of
dealing
with
real
property:
"where
the
avowed
purpose
of
the
partnership
is
to
buy
and
sell
real
estate
(as
in
the
present
case),
the
immovables
thus
acquired
by
the
firm
form
part
of
the
its
stock-in-trade,
and
the
sale
thereof
is
in
pursuance
of
partnership
purposes,
hence
within
the
ordinary
powers
of
the
38
partner.
In
other
words,
since
mutual
agency
is
an
integral
facet
of
every
partnership
setting,
then
the
dealing
public
is
no
longer
mandated
to
ascertain
whether
a
partner
is
authorized
to
bind
the
partners,
and
in
fact
in
the
absence
of
clear
indications
to
the
contrary,
every
partner,
being
a
co-owner
of
the
assets
of
the
partnership,
is
deemed
to
have
full
authority
to
act
on
behalf
of
the
partnership
and
to
bind
the
other
partners
in
transactions
that
are
within
the
regular
course
of
business.
3.
Value
of
the
Statutory
Requirements
on
Form
and
Registration
If
non-compliance
with
the
formal
and
registration
requirements
under
the
New
Civil
Code
does
not
render
the
partnership
void,
nor
does
it
undermine
the
enforceability
of
contracts
entered
into
in
the
partnership
name,
and
does
not
generally
impose
legal
consequences
on
the
partners
for
non-compliance,
then
what
is
the
usefulness
of
such
statutory
provisions?
The
answer
had
been
addressed
early
in
our
jurisdiction
in
Thunga
Chui
v.
Que
Bentecwhich
applied
Article
1279
of
the
mid,
at
p.
965.
mid,
at
p.
969.
37
2
Phil.
561
(1903).
FORMAL REQUIREMENTS FOR PARTNERSHIPS
549
old
Civil
Code,
now
found
as
Article
1357
of
the
new
Civil
Code,
which
reads:
If
the
law
requires
a
document
or
other
special
form,
as
in
the
acts
and
contracts
enumerated
in
the
following
articles,
the
contracting
parties
may
compel
each
other
to
observe
that
form,
once
the
contract
has
been
perfected.
This
right
may
be
exercised
simultaneously
with
the
action
upon
the
contract.
In
Thunga
Chui,
the
Court
further
held
Article
1279
[now
Article
1356
of
the
New
Civil
Code]
does
not
impose
an
obligation,
but
confers
a
privilege
upon
both
contracting
parties,
and
the
fact
that
plaintiff
has
not
made
use
of
same
does
not
bar
his
action,
x x x .
Article
1279
[now
Article
1356],
far
from
making
the
enforceability
of
the
contract
dependent
upon
any
special
extrinsic
form,
recognizes
its
enforceability
by
the
mere
act
of
granting
to
the
contracting
parties
an
adequate
remedy
whereby
to
compel
the
execution
of
a
public
writing,
or
any
other
special
form,
whenever
such
form
is
necessary
in
order
that
the
contract
may
produce
the
effect
which
38
is
desired,
according
to
whatever
may
be
its
object.
Not
only
is
the
general
rule
under
Philippine
Partnership
Law
that
partnership
creditors
do
not
have
an
obligation
to
verify
the
authority
of
a
purported
partner
acting
in
the
ordinary
course
of
partnership
business,
nor
to
review
the
registration
papers
of
the
partnership,
the
rule
is
that
any
important
changes
in
partnership
relationship
must
be
brought
to
the
knowledge
of
the
partnership
creditors
in
order
to
be
binding
on
the
latter.
Thus,
in
Singson
v.
Isabela
Sawmill,
the
Court
held
that
the
failure
of
a
partner
to
have
published
her
withdrawal
from
the
partnership,
and
her
agreeing
to
have
the
remaining
partners
proceed
with
running
the
partnership
business
instead
of
insisting
on
the
liquidation
of
the
partnership,
will
not
relieve
such
^Ibid,
at
pp.
563-S5CRA
64.
623
"88
(1979).
550
NON-CORPORATE MEDIA OF DOING BUSINESS
withdrawing
partner
from
her
liability
to
the
partnership
creditors.
The
Court
held
that
even
if
the
withdrawing
partner
acted
in
good
faith,
this
cannot
overcome
the
position
of
partnership
creditors
who
also
acted
in
good
faith,
without
knowledge
of
her
withdrawal
from
the
partnership.
In
particular,
Singson
ruled
that
when
the
partnership
executes
a
chattel
mortgage
over
its
properties
in
favor
of
a
withdrawing
partner,
and
the
withdrawal
was
not
published
to
bind
the
partnership
creditors,
and
in
fact
the
partnership
itself
was
not
dissolved
but
allowed
to
be
operated
as
a
going
concern
by
the
remaining
partners,
the
partnership
creditors
have
standing
to
seek
the
annulment
of
the
chattel
mortgage
for
having
been
entered
into
adverse
to
their
interests.
Perhaps
the
best
argument
to
support
the
commercial
value
of
complying
with
the
formal
requirements
under
Articles
1771
to
1773
of
New
Civil
Code
would
be
in
citing
the
observation
of
the
Supreme
Court
in
Heirs
of
0
Tan
Eng
Kee
v.
Court
of
Appeals,* where
the
main
issue
to
be
resolved
was
whether
a
partnership
had
been
constituted
between
two
brothers,
thus:
Undoubtedly,
the
best
evidence
would
have
been
the
contract
of
partnership
itself,
or
the
articles
of
partnership,
but
there
is
none.
The
alleged
partnership,
though,
was
never
formally
organized.
In
addition,
petitioners
point
out
that
the
New
Civil
Code
was
not
yet
in
effect
when
the
partnership
was
allegedly
formed
sometime
in
1945,
although
the
contrary
may
well
be
argued
that
nothing
prevented
the
parties
from
complying
with
the
provisions
of
the
New
Civil
Code
when
it
took
effect
on
August
30,
1950.
But
all
that
is
in
the
past.
The
net
effect,
however,
is
that
we
are
asked
to
determine
whether
a
41
partnership
existed
based
purely
on
circumstantial
evidence.
On
recently,
in
Heirs
of
Jose
Lim
v.
Urn;the
Supreme
Court
reiterated
the
principle
that
"Undoubtedly,
the
best
evidence
[to
support
the
existence
of
a
partnership]
would
have
been
the
40
341 SCRA 740
(2000).
At p. 754.
"614 SCRA 141
(2010).
41
FORMAL REQUIREMENTS FOR PARTNERSHIPS
43
551
contract of partnership or the articles of partnership." The Court held that
generally testimonial evidence to prove the existence of a partnership that is
denied by the other alleged partners is weak evidence since "In civil cases, the
party having the burden of proof must establish his case by a preponderance
44
of evidence."
at
p.
"Ibid.
148.
CHAPTER
6
CLASSES
OF
PARTNERS
AND
PARTNERSHIPS
In
order
to
have
a
better
understanding
of
the
various
legal
relationships
created
within
the
partnership
arrangement,
and
the
consequent
rights
and
obligations
arising
from
such
varied
relationships,
it
may
be
helpful
to
determine
the
classes
of
partners
and
partnerships
defined
under
the
New
Civil
Code.
KINDS OF PARTNERSHIPS
ART. 1776. As to its object, a partnership is either universal or
particular.
As regards the liability of the partners, a partnership may be
general or limited. (1671a)
ART. 1777. A universal partnership may refer to all the present
property or to all the profits. (1672)
ART. 1778. A partnership of all present property is that in which
the partners contribute all the property which actually belongs 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. (1673)
ART. 1779. In a universal partnership of all present property, the
property which belonged to each
552
CLASSES OF PARTNERS AND PARTNERSHIPS
553
of the partners at the time of the constitution of the partnership,
becomes the common property of all the partners, as well as all the
profits which they may acquire therewith.
A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may acquire
subsequently by inheritance, legacy, or donation cannot be included
in such stipulation, except the fruits thereof (1674a)
ART. 1780. A universal partnership of profits comprises all that
the partners may acquire by their industry or work during the
existence of the partnership.
Movable or immovable property which each of the partners
may posses at the time of the celebration of the contract shall
continue to pertain exclusively to each, only the usufruct passing to
the partnership. (1675)
ART. 1781. Articles of universal partnership, entered into
without specification of its nature, only constitute a universal
partnership of profits. (1676)
ART. 1782. Persons who are prohibited from giving each other
any donation or advantage cannot enter into universal partnership.
(1677)
ART. 1783. A particular partnership has for its object
determinate things, their use or fruits, or specific undertaking, orthe
exercise of a profession or vocation. (1678)
1. As to Object: Universal Partnership versus Particular Partnership
When it comes to the object or purpose, or the nature of the business
enterprise to be pursued, under Article 1776 of the New Civil Code, a partnership
is either:
554
NON-CORPORATE MEDIA OF DOING BUSINESS
(a)
Universal Partnership; or
(b)
Particular Partnership.
A universal partnership is one where the contract of partnership
encompasses either all the present properties of the partners or to all of the
1
profits.
A universal partnership of all present property is one where "the
partners contribute all the property which actually belongs (sic) to them to a
common fund, with the intention of dividing the same among themselves, as
2
well as all the profits they may acquire therewith." This means that "the
property which belonged to each of the partners at the time of the
constitution of the partnership, becomes the common property of all the
3
partners, as well as all the profits which they may acquire therewith." The
New Civil Code further clarifies that "A stipulation for the common enjoyment
of any other profits may also be made; but the property which the partners
may acquire subsequently by inheritance, legacy, or donation cannot be
4
included in such stipulations, except the fruits thereof."
In a universal partnership of profits "all that the partners may acquire
by their industry or work during the existence of the partnership," as well as
the usufruct of all "[mjovable or immovable property which each of the
partner may possess at the time of the celebration of the contract" of
5
partnership, shall all pertain to the partnership.
The default rule under Article 1781 of New Civil Code is that when the
"Articles of universal partnership [are] entered into without specification of its
nature, [it will] only constitute a universal partnership of profits."
The essential question that must be asked is: When is a partnership
agreement deemed to be even a "universal partner
Art. 1777, New Civil
Code.
Art. 1778, New Civil
3
Art. 1779, New Civil
Code.
4
Code.
Art. 1779, New Civil
5
Code.
Art. 1780, New Civil
Code.
2
CLASSES OF PARTNERS AND PARTNERSHIPS
555
ship"
for
the
default
rule
under
Article
1781
to
apply?
The
issue
is
relevant
because
under
Article
1782,
"Persons
who
are
prohibited
from
giving
each
other
any
donation
or
advantage
cannot
enter
into
universal
partnership."
On
the
other
hand,
Article
1783
of
New
Civil
Code
defines
a
particular
partnership
to
be
one
that
"has
for
its
object
determinate
things,
their
use
or
fruits,
or
a
specific
undertaking,
or
the
exercise
of
a
profession
or
vocation."
There
is
no
doubt
then
that
every
professional
partnership
and
joint
venture
arrangement
would
constitute
a
particular
partnership.
The
next
question
would
then
be:
What
is
the
practical
and
legal
importance
of
distinguishing
between
universal
and
particular
partnerships?
Two
points
must
be
considered
in
answering
the
question:
Firstly,
statutorily,
the
only
critical
usefulness
of
the
distinction
is
that
persons
who
are
disqualified
from
donating
to
one
another
(like
spouses
under
Article
187
of
the
Family
Code),
cannot
enter
into
a
universal
partnership
of
any
sort.
Is
it
therefore
fair
to
conclude
that
spouses
can
validly
enter
into
a
particular
partnership
between
each
other,
when
actually
their
property
relations
are
governed
already
by
a
legal
property
regime?
In
Commissioner
of
Internal
Revenue
v.
Suter*
the
Court
held
that
the
prohibition
under
now
Article
1782
of
the
New
Civil
Code
does
not
apply
when
the
partners
entered
into
a
limited
partnership,
the
man
being
the
general
partner
and
two
women
being
the
limited
partners,
and
a
year
later
the
man
married
one
of
the
limited
partners,
and
the
spouse
bought
out
the
interest
of
the
limited
partner.
Secondly,
the
rights
and
obligations
that
may
arise
from
subsequent
ventures
pursued
by
the
partners
would
be
determined
on
whether
they
are
bound
under
a
universal
or
particular
type
of
partnership.
The
resolution
of
the
7
issue
is
best
exemplified
in
the
decision
in
Lyons
v.
Rosentock.
27
SCRA
152
(1969).
56
Phil.
632(1932).
7
556
NON-CORPORATE MEDIA OF DOING BUSINESS
In
Lyons,
the
two
partners
had
been
together
in
two
previous
real
estate
projects.
While
one
partner
was
abroad,
the
other
partner
seized
upon
a
potentially
lucrative
piece
of
property
(the
San
Juan
estate)
and
although
he
had
tried
his
best
to
convince
his
partner
abroad
to
commit
to
be
part
of
the
new
venture,
the
latter
declined.
In
any
event,
when
the
property
was
purchased
by
the
local
partner
he
had
temporarily
used
a
partnership
property
in
the
previous
venture
to
secure
the
loan
drawn
by
the
local
partner
in
his
own
name,
but
later
released
it
and
had
his
own
property
mortgaged
when
it
was
clear
that
the
partner
abroad
did
not
change
his
mind
about
not
joining
the
venture.
In
any
event,
the
San
Juan
estate
project
proved
very
successful,
and
after
the
local
partner
died,
the
partner
abroad
sought
to
recover
one-half
of
the
profits
of
the
venture
on
the
ground
that
he
was
a
partner
therein,
in
spite
of
his
previous
refusal
to
be
part
of
it,
and
mainly
because
partnership
property
was
used
as
security
for
the
loan
obtained
by
the
local
partner
to
finance
his
acquisition
of
the
estate.
In
resolving
that
the
partner
abroad
was
not
entitled
to
any
profits
derived
from
the
San
Juan
estate
project
because
he
was
never
a
partner
thereto,
Lyons
resolution
revolved
around
the
principle
that
the
two
partners
never
were
part
of
a
universal
partnership,
but
that
they
were
at
best
partners
in
particular
partnerships
for
the
previous
projects
entered
into
before
the
San
Juan
estate
project,
thus
In
the
purely
legal
aspect
of
the
case,
the
position
of
the
appellant
is,
in
our
opinion,
untenable....
Of
course,
if
an
actual
relation
of
partnership
had
existed
in
the
money
used,
the
case
might
be
different;
and
much
emphasis
is
laid
in
the
appellant's
brief
upon
the
relation
of
partnership
which,
it
is
claimed,
existed.
But
there
was
clearly
no
general
relation
of
partnership
between
the
parties;
and
the
most
that
can
be
said
is
that
Elser
and
Lyons
had
been
coparticipants
in
various
transactions
in
real
estate.
No
objection
can
be
made
to
the
use
of
the
word
partnership
as
a
term
descriptive
of
the
relation
in
those
particular
transactions,
but
it
must
be
remembered
that
it
was
in
each
case
a
particular
partnership,
under
Article
1678
of
the
Civil
Code.
It
is
clear
CLASSES OF PARTNERS AND PARTNERSHIPS
557
that
Elser,
in
buying
the
San
Juan
Estate,
was
not
acting
for
any
partnership
composed
into
a
proposition
which
would
make
Lyons
a
participant
in
this
deal
contrary
to
his
express
8
determination.
The
other
conclusion
we
can
draw
from
Lyons
is
that
a
universal
partnership
is
never
presumed,
not
even
from
various
transactions
or
ventures
concluded
between
the
partners.
The
default
rule
therefore
should
be
that
unless
the
parties
so
stipulate
in
their
articles
of
partnership
that
they
are
entering
into
a
universal
partnership,
it
would
be
presumed
that
they
have
existing
between
them
merely
a
particular
partnership.
Apart
from
the
foregoing,
the
concept
and
medium
of
universal
partnership
serves
no
reasonable
commercial
purpose,
for
legally
it
can
only
come
about
when
it
is
so
expressly
stipulated
in
contract
of
partnership,
and
practically,
it
is
difficult
to
see
how
two
or
more
persons
not
bounded
by
marriage,
faith
or
vocation
(which
makes
the
partnership
a
particular
one),
would
commit
to
one
another
all
that
they
have
and
all
the
fruits
of
what
they
do.
The
other
important
question
that
may
be
asked
would
be:
By
definition
under
Article
1776
that
there
can
be
a
valid
partnership
for
the
practice
of
a
profession,
why
would
Article
1783,
in
defining
a
particular
partnership,
include
the
'exercise
of
a
vocation'which
may
not
include
one
that
seeks
to
provide
a
livelihood
for
the
so-called
partners,
such
as
religious
or
civic
vocation?
2.
As
to
Duration
When
it
comes
to
the
partnership
term
or
life,
the
law
distinguishes
between:
(a) Partnership
with
Fixed
Term;
(b) Partnership
for
a
Particular
Undertaking;
and
(c) Partnership
at
Will.
*lbid, at pp. 641-642.
558
NON-CORPORATE MEDIA OF DOING BUSINESS
Both
partnerships
with
fixed
term
and
for
a
particular
undertaking
are
automatically
dissolved
upon
the
expiration
of
the
stipulated
term
or
the
achievement
of
the
particular
undertaking
stipulated
in
the
contract
of
partnership;
whereas,
in
a
partnership
at
will,
the
partnership
has
an
indefinite
term
and
it
would
be
dissolved
only
when
an
act
or
cause
of
dissolution
happens
or
arises.
Nonetheless,
under
Article
1785
of
New
Civil
Code,
when
a
partnership
for
a
fix
term
or
particular
undertaking
is
continued
after
it
has
terminated
without
any
express
agreement,
partnership
then
become
one
at
will
and
"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."
The
article
also
provides
that
"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."
6
In Ortega v. Court of Appeals, the Court described the characteristics of
a partnership at will in the following manner, thus:
The birth and life of a partnership at will is predicated on the
mutual desire and consent of the partners. The right to choose
with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued
existence is, in turn, dependent on the constancy of that mutual
resolve, along with each partner's capability to give it, and the
absence of a cause for dissolution provided by law itself. Verily,
any one of the partners may, at his sole pleasure, dictate a
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
10
damages.
Nonetheless, by way of obiter, Ortega also described the ability of every
partner even in a partnership with fixed term or for a particular undertaking,
to be able to dissolve the partnership
245 SCRA 529
(1995).
mid,
at pp.
535-536.
CLASSES OF PARTNERS AND PARTNERSHIPS
559
upon
the
application
of
the
principles
of
mutual
agency
and
delectus
personae,
thus
In
passing,
neither
would
the
presence
of
a
period
for
its
specific
duration
or
the
statement
of
a
particular
purpose
for
its
creation
prevent
the
dissolution
of
any
partnership
by
an
act
or
will
of
a
partner.
Among
partners,
mutual
agency
arises
and
the
doctrine
of
delectus
personae
allows
them
to
have
the
power,
although
not
necessarily
the
right,
to
dissolve
the
partnership.
An
unjustified
dissolution
by
the
partner
can
subject
him
to
a
possible
11
action
for
damages.
Ortega
also
clarified
that
the
designation
of
the
purpose
in
the
articles
does
not
prevent
it
from
being
a
partnership
at
will,
thus:
The
"purpose"
of
the
partnership
is
not
the
specific
undertaking
referred
to
in
the
law.
Otherwise,
all
partnerships,
which
necessarily
must
have
a
purpose,
would
all
be
considered
as
partnerships
for
a
definite
undertaking.
There
would
therefore
be
no
need
to
provide
for
articles
on
partnership
at
will
as
none
would
so
exist.
Apparently
what
the
law
contemplates,
is
a
specific
undertaking
or
"project"
which
has
a
definite
or
definable
period
of
completion.
12
In
Rojas
v.
Maglana,
the
Court
held
that
where
there
has
been
duly
registered
articles
of
partnership,
and
subsequently
the
original
partners
accept
an
industrial
partner
but
do
not
register
a
new
partnership,
and
thereafter
the
industrial
partner
retires
from
the
business,
and
the
original
partners
continue
under
the
same
set-up
as
the
original
partnership,
then
although
the
second
partnership
was
dissolved
with
the
withdrawal
of
the
industrial
partner,
there
resulted
a
reversion
back
into
the
original
partnership
under
the
terms
of
the
registered
articles
of
partnership.
In
effect,
the
Court
in
Rojas
held
that
there
is
no
new
partnership
at
will
constituted.
"Ibid,
at
p.
536.
12
192
SCRA
110
(1990).
560
NON-CORPORATE MEDIA OF DOING BUSINESS
3. As to Extent of Partners' Liabilities
When it comes to the kinds of liabilities that the partners may be
exposed to for partnership debts and obligations, the New Civil Code
distinguishes between:
(a)
General Partnership, where all the partners are unlimitedly
liable; and
(b)
Limited Partnership, where there is one or more general
partners who are unlimitedly liable, with one or more
limited partners, who are liable for partnership debts only to
the extent of their stipulated contributions under the
articles of partnership.
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., Justice Vitug summarized the nature of the liabilities of
general partners, thus:
. . . The liability of general partners (in a general partnership
as so opposed to a limited partnership) is laid down in Article 1816
which posits that all partners shall be liable pro rata beyond the
partnership assets for all the contracts which may have been
entered into in its name, under its signature, and by a person
authorized to act for the partnership. This rule is to be construed
along with other provisions of the Civil Code which postulate that
the partners can be held soidarily liable with the partnership
specifically in these instances (1) where, by any wrongful act or
omission of any partner acting in the ordinary course of the
business of the partnership or with the authority of his
co-partners, loss or injury is caused to any person, not being a
partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so
acting or omitting to act; (2) where one partner acting within the
scope of his apparent authority receives money or property of a
third person and the money or property so received is
13
317 SCRA 728 (1999).
CLASSES OF PARTNERS AND PARTNERSHIPS
561
misapplied by any partner while it is in the custody of the
partnership consistently with the rules on the nature of civil
14
liability in delicts and quasi-delicts.
KINDS
OF
PARTNERS
Other
than
the
general
and
limited
partners
that
have
been
previously
discussed,
there
are
two
kinds
of
partners
when
it
comes
to
the
nature
of
their
contributions:
(a)
Capitatist Partner, and
(b)
Industrial Partner.
A capitalist partner contributes money and/or property to the
partnership, while an industrial partner contributes only his industry or his
service. The law does not specify the kind of industry a partner may contribute
15
into the partnership.
The importance of such distinction is essentially on the nature of the
obligations and liabilities that they must assume, in that:
(a)
The capitalist partner is liable for the losses sustained by the
18
business and any stipulation to the contrary would be void;
whereas, the industrial partner is not liable for losses of the
17
partnership venture;
(b)
The capitalist partner may not engage in business or
commercial undertaking which is competing with that of the
18
partnership business; whereas, the industrial partner cannot
engage in any other
"Ibid, at pp. 746-747.
K
Evangeiista & Co. v. Abad Santos, 51 SCRA 416
18
(1973).
Arts. 1791,1797, and 1799, New Civil Code.
"Art. 1797, New Civil Code.
18
Art. 1808, New Civil Code.
NON-CORPORATE MEDIA OF DOING BUSINESS
562
form of business or commercial undertaking at all during his
19
tenure as industrial partner; and
(c) Whereas a capitalist partner is bound to make additional
contributions to the partnership in case of an imminent loss of
the business of the partnership, the industrial partner has no
20
such obligation.
Philippine Partnership Law also distinguishes between the liabilities
assumed by an:
(a) Original Partner who is with the partnership at the time of its
constitution;
(b) Subsequent
or
Incoming
Partners,
who
come
in
during
the
life
of
a
pre-existing
partnership.
In
the
case
of
an
incoming
partner,
his
liability
with
respect
to
the
partnership
obligations
which
were
incurred
prior
to
his
admission
into
the
partnership
shall
be
satisfied
only
out
of
partnership
property,
unless
it
is
21
otherwise
stipulated.
4
Partnership
Law
also
refers
to
the
following
types
of
partners:
Managing Partner who has been given the management
22
of the partnership enterprise;
Liquidating Partner, who takes charge of the liquidation
23
and winding-up of partnership affairs;
Retiring Partner, who ceases to be part of the partnership
which is continued after dissolution, as compared with the
partners who remain with the venture as Continuing
2
Partners, * and
19
Art. 1789, New Civil Code.
^Art. 1791, New Civil Code.
21
Arts. 1826 and 1840, New Civil Code.
"Arts. 1800 and 1801, New Civil Code.
"Art. 1836, New Civil Code.
24
Arts. 1837,1839,1840 and 1841, New Civil
Code.
CLASSES OF PARTNERS AND PARTNERSHIPS
563
Partner by Estoppel, who is not a formal partner in an existing
partnership, but by his act he has led third-parties dealing with
the partnership to believe he is a partner, and thereby
becomes liable as a regular partner as to such relying
25
creditors.
SPECIAL ISSUES OF WHO MAY VALIDLY BECOME PARTNERS
1. May Spouses Validly Enter into a Partnership Relation?
a. Spouses Cannot Enter into a Universal
Partnership
The main statutory provision invoked when it comes to the issue of
whether spouses can enter between themselves into a partnership agreement is
Article 1782 of New Civil Code which provides that "Persons who are prohibited
from giving each other any donation or advantage cannot enter into universal
partnership."
It has thus been opined that since under Article 133 of New Civil Code
"Every donation between the spouses during the marriage shall be void," then
spouses are prohibited from entering into a universal partnership, but not
necessarily a particular or limited partnership. Article 133 of New Civil Code has
now been replaced by Article 87 of the Family Code, which reads:
Art. 87. Every donation or grant of gratuitous advantage,
direct or indirect, between the spouses, during the marriage
should be void, except moderate gifts which the spouse may give
each other on the occasion of any family rejoicing. The prohibition
shall also apply to persons living together as husband and wife
without a valid marriage.
^Art. 1815, New Civil Code.
564
NON-CORPORATE MEDIA OF DOING BUSINESS
Bautista discussed the rationale of the prohibition under Article 1782 as
to be "founded on the theory that a contract of universal partnership is for all
purposes a donation. Its purpose, therefore, is to prevent persons disqualified
from making donations to each other from doing indirectly what the law
prohibits them from doing directly."
From the placement of Article 1782 (coming after the two articles
covering the definition, nature and effects of universal partnerships, and
immediately before the article defining particular partnerships), it seems well
implied that spouses, whatever the regime of property relations prevails in their
marriage, are disqualified from entering into any sort of universal partnership;
and consequently, spouses may validly become partners to one another in a
particular partnership, which would include a professional partnership, and
both general and limited partnerships.
The critical question which must be asked: Can spouses just between
themselves or with third parties validly enter into a contract of partnership for
gain provided the resulting partnership is not a universal partnership? If one
refers only to the provision of Article 1782, the answer would be in the
affirmative.
In Commissioner of Internal Revenue v. Suter; which currently is the
only decision to deal with the issue, the Supreme Court affirmed this particular
view, relying only on the provisions of Article 1677 of the old Civil Code (now
Article 1782 of the New Civil Code), that since the prohibition for spouses covers
expressly only universal partnerships, then they can validly be partners in a
limited partnership, with the husband being the general partner and the wife
being the limited partner.
On this particular issue, Bautista limited his comment to the effect that
the provisions of Article 1782 disqualifies "spouses, with respect to any contract
of universal partnership made between them during the marriage," and other
than reporting the relevant portions of the decision in Suter, he did not
comment on whether spouses can validly enter into other forms of partnership
27 SCRA 152 (1969).
CLASSES OF PARTNERS AND PARTNERSHIPS
565
for
gains.
Toientino
does
not
comment
on
the
provisions
of
Article
1782,
although
his
discussion
on
the
matter
under
his
old
work
under
the
Code
of
Commerce
was
quoted
in
Suter.
It
seems
to
the
writer
that
in
addressing
the
issue
raised,
it
would
be
error
to
base
the
resolution
only
on
Article
1782
of
the
New
Civil
Code.
Certainly
Article
1782
constitutes
an
important
statutory
provision
to
resolve
that
issue,
but
there
are
other
statutory
provisions
more
primordial
in
addressing
the
issue.
Suter,
which
was
decided
under
the
terms
of
the
old
Civil
Code
and
the
Code
of
Commerce,
is
quite
peculiar
in
its
facts
because
the
contract
of
partnership
started
out
where
there
was
no
legal
obstacle
with
the
parties
entering
into
a
duly
registered
limited
partnership:
Suter
as
the
general
partner,
with
Spirig
and
Carlson,
as
limited
partners.
Eventually,
Suter
and
Spirig
were
married,
and
bought
out
the
interest
of
Carlson.
Under
the
provisions
of
the
Tax
Code,
the
Commissioner
of
Internal
Revenue
then
sought
to
recover
income
taxes
individually
against
Suter
for
partnership
income
under
the
theory
that
the
separate
juridical
personality
of
the
partnership
by
which
it
was
taxed
separately
as
a
corporate
taxpayer,
was
extinguished
with
the
marriage
of
Suter
and
Spirig,
who
ended
up
as
the
only
partners
in
the
venture.
The
Court
held:
"The
theory
of
the
petitioner,
Commissioner
of
Internal
Revenue,
is
that
the
marriage
of
Suter
and
Spirig
and
their
subsequent
acquisition
of
the
interests
of
remaining
partner
Carlson
in
the
partnership
dissolved
the
limited
partnership,
and
if
they
did
not,
the
fiction
of
juridical
personality
of
the
partnership
should
be
disregarded
for
income
tax
purposes
because
the
spouses
have
exclusive
27
ownership
and
control
of
the
business."
The
Court
found
no
merit
in
the
position
of
the
Commissioner,
and
quoted
from
the
commentaries
of
Toientino,
thus:
A
husband
and
a
wife
may
not
enter
into
a
contract
of
general
copartnership,
because
under
the
Civil
Code,
which
applies
in
the
absence
of
express
provision
in
the
Code
of
Commerce,
persons
prohibited
from
making
donations
to
27
Ibid, at p. 156.
566
NON-CORPORATE MEDIA OF DOING BUSINESS
each other are prohibited from entering into universal part-
28
nerships. It follows that the marriage of partners necessarily
29
brings about the dissolution of a pre-existing partnership.
Thus, the Court held that the partnership at issue "was not a universal
partnership, but a particular one . . . since the contributions of the partners were
fixed sums of money, . . . and neither one of them was an industrial partner. It
follows that [ i t ] . . . was not a partnership that [the] spouses were forbidden to
enter under Article 1677 of New Civil Code of 1889 [now Article 1782]." In
essence, Suter holds that spouses are not disqualified from becoming partners
in a limited partnership, provided both of them are limited partners, or at least
both of them is a limited partner.
b. Spouses Are Not Qualified to Enter into Other Forms of
Partnership for Gain
It is the writer's position that apart from a professional partnership,
spouses cannot enter into any form of partnership, be it universal or particular,
general or limited partnership, as a separate property arrangement apart from
the property regime prevailing in their marriage, for the reasons discussed
below.
Firstly, apart from a universal partnership, every form of partnership,
including a limited partnership, effectively makes partners "donors" to one
another of their contributions in the partnership. Although a partnership would
have a personality separate and distinct from each of the partners, so that it can
hold contributed property in its name, nonetheless, partners are expressly
granted by Partnership Law co-ownership interest in the partnership property as
30
to then have a direct co-ownership interest therein. Effectively, even in a
limited partnership (such as the Suter situation), the contribution of the limited
partner
2B
Citing 2 Echaverri 196.
27 SCRA 152, 157, quoted from TOLENTINO, COMMENTARIES AND JURISPRUDENCE
ON COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, 4th ed., at p. 58, citing 1 Guy de
Montella 58.
M
Arts. 1810 and 1811, New Civil Code.
29
CLASSES OF PARTNERS AND PARTNERSHIPS
567
wife
belonged
to
the
partnership
which
would
then
be
under
the
control
and
management
of
the
general
partner
husband.
A
partnership
arrangement
between
spouses
would
thereby
be
an
indirect
violation
of
the
provisions
of
Article
87
of
the
Family
Code
which
provides
that
"Every
donation
or
grant
of
gratuitous
advantage,
direct
or
indirect,
between
the
spouses
during
the
marriage
shall
be
void."
Although
it
can
be
argued
that
contributions
to
a
partnership
are
not
in
the
nature
of
"donations"
or
"gratuitous
advantage,"
because
a
contract
of
partnership
is
essentially
an
onerous
and
commutative
contract,
whereby
the
contributions
comes
with
a
cost
(e.g.,
becoming
unlimitedly
liable
for
partnership
obligations),
nevertheless,
such
contributions
would
then
violate
the
provisions
of
Article
1490
of
New
Civil
Code,
which
prohibits
sales
or
any
other
form
of
onerous
dispositions,
between
spouses
not
governed
by
the
complete
separation
of
property
regime.
Secondly,
there
is
clear
implication
under
the
Family
Code,
that
the
property
regime
that
must
govern
spouses
must
be
in
accordance
with
the
provisions
of
said
Code,
and
cannot
be
the
subject
of
regular
partnership
rules
under
the
Partnership
Law
of
the
New
Civil
Code.
(1)
Spouses
Governed
by
the
Absolute
Community
of
Property
Regime
To
begin
with,
the
Family
Code
sets
the
absolute
community
of
property
regime
as
the
default
rule
for
marriages,
and
consequently,
it
cannot
exist
consistently
with
another
set
of
rules
governing
partnerships
for
gains
under
the
Partnership
Law
of
New
Civil
Code.
Although
Article
1782
provides
that
"Persons
who
are
prohibited
from
giving
each
other
any
donation
or
advantage
cannot
enter
into
a
universal
partnership,"
which
beyond
doubt
should
include
spouses,
yet
under
Article
75
of
the
Family
Code,
"In
the
absence
of
marriage
settlements,
or
when
the
regime
agreed
upon
is
void,
the
system
of
absolute
community
of
property
as
established
in
this
Code
shall
govern,"
and
which
under
Article
88
of
the
Family
Code,
"shall
commence
at
the
precise
moment
that
the
marriage
is
celebrated
[and
that
568
NON-CORPORATE MEDIA OF DOING BUSINESS
any] stipulation, express or implied, for the commencement of the community
regime at any other time shall be void."
The absolute community of property regime actually establishes a sort of
"universal partnership" between the spouses, in that it includes "all property
owned by the spouses at the time of the celebration of the marriage or acquired
31
thereafter."
Can spouses governed by the absolute community of property regime,
vary the effects between them on certain community property, by contributing
them into a particular partnership for gain? The answer ought to be in the
negative, and such a partnership agreement would be void, since under Article
89 of the Family Code "No waiver of rights, interest, shares and effects of the
absolute community of property during the marriage can be made except in
case of judicial separation of property." In other words, Article 1782 of the New
Civil Code is not the main rule on regulating property rights between spouses,
but merely supple- tory to the primary rules set out by the Family Code.
(2) Spouses Governed by the Conjugal Partnership of Gains
Take then the case of spouses governed by the conjugal partnership of
gains, which under Article 105 of the Family Code, can come into play between
spouses only when it has been so stipulated in the marriage settlements.
May spouses therefore enter into a contract of particular partnership for
gain by contributing thereto either conjugal property, or their separate
properties? When it comes to conjugal property, the answer ought to be in the
negative, since the effect is that spouses would be donating to one another, as
discussed below, contrary to the provisions of Article 87 of the Family Code. In
addition, by entering into a contract of particular partnership and thereby
invoking the provisions of the Partnership Law of New Civil Code on the conjugal
property contributed, that would
31
Art. 91, Family Code.
CLASSES OF PARTNERS AND PARTNERSHIPS
569
in effect be amending, or perhaps even contravening, the provisions of the
marriage settlements invoking the Family Code rules covering conjugal
partnership of gains. Article 108 of the Family Code provides that "The conjugal
partnership shall be governed by the rules on the contract of partnership in all
that is not in conflict with what is expressly determined in this Chapter or by the
spouses in their marriage settlements." This shows the primacy of the Family
Code provisions on governing the conjugal partnership between the spouses,
and any attempt to govern conjugal properties under a contract of particular
partnership would undermine such primacy and therefore void.
For the same reasons, spouses governed by the conjugal partnership of
gains cannot also validly enter into a contract of particular partnership for gain,
even when they contribute thereto their separate properties, because that
would in effect constitute donations to one another as discussed below, and
would undermine the rules of the Family Code on how such separate properties
should answer for the charges on family affairs.
(3) Spouses Governed by the Complete Separation of Property Regime
May spouses governed by the complete separation of property regime
validly enter into a contract of particular partnership? The answer ought to be in
the negative, for the contribution of any of their separate properties into the
partnership for gain would amount to donation, and under Article 87 of the
Family Code, which prohibits any form of donation or gratuitous advantage
between spouses during marriage, makes no distinction, much less an exception,
for spouses governed by the complete separation of property regime.
c. Contract of Partnership May Offend Against the Provisions of
the Family Code
A contract of partnership between spouses entered into during marriage
would be void because it would contravene the rules under Articles 76 and 77 of
the Family Code that prohibit "any
570
NON-CORPORATE MEDIA OF DOING BUSINESS
modification in the marriage settlements" after the "celebration of the
marriage," and which provide that "The marriage settlement and any
modification thereof shall be in writing, signed by the parties and executed
before the celebration of the marriage."
In essence, the Partnership Law under the New Civil Code, which should
be considered general provisions, cannot overcome the more specific provisions
on the Law on Marriages under the Family Code, which govern specifically the
property regime that should prevail between spouses. The provisions of
Partnership Law are geared towards providing for the a contractual relationship
that seeks to undertake a business venture; whereas, the Family Code
provisions governing the property regime prevailing between spouses have
considerations that transcend profit motives, and seek to strengthen the
institutions of marriage and the family. Consequently, a contract of partnership
between spouses should be held void in that it seeks to overcome or undermine
the mandatory provisions of the Family Code.
There are several areas where there arises real conflict between
doctrines under Partnership Law and those under the Family Code.
(1) Issue on Control and Binding Effects of Acts of Partners
We take the area of control and binding effect of the acts of partners
against other partners and the partnership itself. Under Partnership Law, every
partner is an agent of the partnership and for the other partners when it comes
to transactions that pertain to partnership affairs; thus, the act of one partner
32
binds the other partners and the partnership property. On the other, the
general rule under the Family Code, when it comes to absolute community of
property regime (Article 96, Family Code) and conjugal partnership of gains
(Article 124, Family Code), is that both spouses are co-administrators of the
conjugal properties; and any contract, especially an act of disposition or encum-
brance of the community or the conjugal property, done by one
^Arts. 1803(1) and 1818, New Civil Code.
CLASSES OF PARTNERS AND PARTNERSHIPS
571
33
without
the
consent
of
the
other
partner,
would
be
void.
Take
the
case
of
allowing
the
spouses
to
enter
into
a
particular
partnership,
and
they
both
contribute
community
or
conjugal
properties
thereto,
would
the
rules
under
Partnership
Law
therefore
allow
one
spouse,
without
the
consent
of
the
other
spouse,
to
dispose
of
such
property
pursuant
to
partnership
affairs?
Article
145,
Family
Code
provides
that
"Each
spouse
shall
own,
dispose
of,
possess,
administer
and
enjoy
his
or
her
own
separate
estate,
without
need
of
the
consent
of
the
other.
To
each
spouse
shall
belong
all
earnings
from
his
or
her
profession,
business
or
industry
and
all
fruits,
natural,
industrial
or
civil,
due
or
received
during
the
marriage
from
his
or
her
separate
property."
Under
a
complete
separation
of
property
regime,
spouses
separately
manage
and
control
their
separate
properties.
Can
spouses
who
are
governed
by
the
regime
of
separation
of
property,
thereby
partially
overcome
the
governing
provisions
of
the
Family
Code,
by
being
allowed
to
validly
enter
into
a
particular
partnership
agreement?
(2)
Charges
to
Partnership
Properties
We
should
look
also
into
the
areas
of
charges
against
the
partnership
properties
and
the
effects
of
dissolution.
Under
Partnership
Law,
partnership
properties
would
be
chargeable
against
any
claim
or
contract
entered
into
pursuant
to
partnership
affairs.
On
the
other
hand,
under
both
the
absolute
community
of
property
regime
and
the
conjugal
partnership
of
gains,
there
are
specific
listings
of
what
should
first
be
chargeable
against
the
community
34
35
property,
or
the
conjugal
property,
like
support
and
debts
contracted
for
the
benefit
of
the
marriage.
Under
a
regime
of
separate
property,
both
spouses
shall
bear
the
family
expenses
in
proportion
to
their
income,
or,
in
case
of
insufficiency
33
Guiang v. Court of Appeals, 291 SCRA 372 (1998); Cirelos v. Hernandez,
490 SCRA 625 (2006); Bautista v. Silva, 502 SCRA 334 (2006).
M
Arts. 94 and 95, Family Code.
^Arts. 121 to 123, Family Code.
572
NON-CORPORATE MEDIA OF DOING BUSINESS
36
or default thereof, to the current market value of their separate properties.
When community, conjugal or separate property is allowed to be
contributed into the partnership for gain, the rules of first preference of
partnership creditors to partnership property would undermine the claims of
personal creditors of spouses, as well as the ability of marriage properties to
properly provide for the family support and upkeep. In addition, contributions
by spouses of marriage property into a partnership for gain would certainly
allow a means by which spouses may defraud their marriage creditors, by
making certain marriage properties subject to greater claims outside of
marriage affairs.
d. Professional Partnerships
May spouses by themselves, or together with other professionals, enter
validly into a contract of professional partnership, which by definition of Article
1783 of New Civil Code is always a particular partnership? The answer seems
to be in the affirmative. The reason is that a professional partnership
essentially covering the contribution of service by the spouses, does not pri-
marily bind actual community or conjugal properties, and therefore does not
operate in violation of the property rules governing marriage property
regimes.
More importantly, professional partnership are not really pursued for
profit, but more for civic or vocational ends and therefore do not address
proprietary ends; but rather, the exercise of a profession, even in the
partnership medium, has more to do with the expression of ideals held by an
individual or towards achieving a fruitful life in the mundane world. This fact
is recognized even under the Family Code, where Article 73 provides that "Ei-
ther spouse may exercise any legitimate profession, occupation, business or
activity without the consent of the other."
"Art. 146, Family Code.
CLASSES OF PARTNERS AND PARTNERSHIPS
573
2. May Corporations Validly Qualify to Become Partners?
The prevailing rule in the United States is that
Unless it is expressly authorized by statute or charter, a
corporation cannot ordinarily enter into partnerships with other
corporations or with individuals, for, in entering into a
partnership, the identity of the corporation is lost or merged with
that of another and the direction of the affairs is placed in other
hands than those provided by law of its creation... A corporation
can act only through its duly authorized officers and agents and is
not bound by the acts of anyone else, while in a partnership each
member binds the firm when acting within the scope of the
37
partnership.
The doctrine is grounded on the theory that the stockholders of a
corporation are entitled, in the absence of any notice to the contrary in the
articles of incorporation, to assume that their directors will conduct the
38
corporate business without sharing that duty and responsibility with others.
a. Jurisprudential Rule
M
Tuason v. Bolanos, recognized at that time in Philippine jurisdiction the
doctrine in Anglo-American jurisprudence that "a corporation has no power to
40
enter into a partnership." Nevertheless, Tuason ruled that a corporation may
validly enter into a joint venture agreement, "where the nature of that venture
41
is in line with the business authorized by its charter."
A joint venture is essentially a partnership arrangement, although of a
42
special type, since it pertains to a particular project or undertaking.
37
FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520.
^BAUTISTA, at p. 9.
"95 Phil. 106 (1954).
40
Ibid, at p. 109.
"Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R.,
1043, citing FLETCHER CYC. OF CORP., Sec. 1082.
42
BAUTISTA, supra, at p. 50.
NON-CORPORATE MEDIA OF DOING BUSINESS
574
43
In Torres v. Court of Appeals, the Supreme Court held unequivocally
that a joint venture agreement for the development and sale of a subdivision
project would constitute a partnership pursuant to the elements thereof
under Article 1767 of New Civil Code that defines when a partnership exists.
Although Tuason does not elaborate on why a corporation may become
a co-venturer or partner in a joint venture arrangement, it would seem that
the policy behind the prohibition on why a corporation cannot be made a
partner do not apply in a joint venture arrangement. Being for a particular
project or undertaking, when the board of directors of a corporation evaluate
the risks and responsibilities involved, they can more or less exercise their
own business judgment is determining the extent by which the corporation
would be involved in the project and the likely liabilities to be incurred. Unlike
in an ordinarily partnership arrangement which may expose the corporation
to any and various liabilities and risks which cannot be evaluated and
anticipated by the board of directors, the situation therefore in a joint venture
arrangement, allows the board of directors to fully bind the corporation to
matters essentially within the board's business appreciation and anticipation.
It is clear therefore that what makes a project or undertaking a "joint
venture" to authorize a corporation to be a co-venturer therein is not the
name or nomenclature given to the undertaking, but the very nature and
essence of the undertaking that limits it to a particular project which allows
the board of directors of the participating corporation to properly evaluate all
the consequences and likely liabilities to which the corporation would be held
liable for.
b. SEC Rules
44
In
a
number
of
opinions,
the
SEC
has
recognized
the
general
rule
that
a
corporation
cannot
enter
into
a
contract
of
partnership
with
an
individual
or
another
corporation
on
the
43
278 SCRA 793.
"SEC OPINION, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 13
AM. JUR. Sec. 823 (1938); 6 FLETCHER CYC. CORP., PERM. ED. REV. REPL. 1950, at p.
2520.
CLASSES OF PARTNERS AND PARTNERSHIPS
575
premise
that
it
would
be
bound
by
the
acts
of
the
persons
who
are
not
its
duly
appointed
and
authorized
agents
and
officers,
which
is
inconsistent
with
the
policy
of
the
law
that
the
corporation
shall
manage
its
own
affairs
separately
and
exclusively.
However,
the
SEC
has
on
special
occasions
allowed
exceptions
to
the
general
rule
when
the
following
conditions
are
complied
with:
(a)
The authority to enter into a partnership relation is
expressly conferred by the charter or the articles of
incorporation of the corporation, and the nature of the
business venture to be undertaken by the partnership is in
line with the business authorized by the charter or articles of
45
incorporation of the corporation involved;
(b)
The agreement on the articles of partnership must provide
that all the partners shall manage the partnership, and the
articles of partnership must stipulate that all the partners
shall be jointly and severally liable for all the obligations of
46
the partnership.
The
second
condition
set
by
the
SEC
would
have
the
effect
of
allowing
a
corporation
to
enter
as
a
general
partner
in
general
partnership,
which
would
still
have
contravened
the
doctrine
of
making
the
corporation
unlimitedly
liable
for
the
acts
of
the
other
partners
who
are
not
its
authorized
officers
or
agents.
This
interpretation
of
the
second
condition
was
confirmed
by
the
SEC
in
1994,
to
mean
that
a
partnership
of
corporations
should
be
organized
as
a
"general
partnership"
wherein
all
the
partners
are
"general
partners
so
that
all
corporate
partners
shall
take
part
in
the
management
and
thus
be
jointly
and
47
severally
liable
with
the
other
partners."
^SEC Opinion, 29 February 1980.
mid.
47
SEC Opinion, dated 23 February 1994, XXVII SEC QUARTERLY BULLETIN 18
(No. 3, Sept. 1994).
576
NON-CORPORATE MEDIA OF DOING BUSINESS
The
rationale
given
by
the
SEC
for
the
second
condition
was
that
if
the
corporation
is
allowed
to
be
a
limited
partner
only,
there
is
no
assurance
that
the
corporate
partner
shall
participate
in
management
of
the
partnership
which
may
create
a
situation
wherein
the
corporation
may
not
be
bound
by
the
acts
of
the
partnership
in
the
event
that,
as
a
limited
partner,
the
48
corporation
chooses
not
to
participate
in
the
management.
However,
in
1995,
the
SEC
reversed
such
interpretation
and
practically
dropped
the
second
requirement,
when
it
admitted
the
following
reasoning
for
allowing
a
corporation
to
invest
in
a
limited
partnership,
thus:
1. Just as a corporate investor has the power to make
passive investments in other corporations by purchasing stock, a
corporate investor should also be allowed to make passive
investments in partnerships as a limited partner, who would then
not be bound beyond the amount of its investment by the acts of
the other partners who are not its duly appointed and authorized
agents and officers. Hence, the very reason why as a general rule,
a corporation cannot enter into a contract of partnership, as
stated in the 1966 SEC opinion, would no longer be present, as the
corporation, which is merely a limited partner, will now be
protected from the unlimited liability of the other partners who
are not agents or officers of the corporation;
2. Section 42 of the Corporation Code which permits a
corporation to invest its funds in another corporation or business,
does not require that the investing corporation be involved in the
management of the investee corporation with a view to protect
its investment therein. By entering into a contract of limited
partnership, a corporation would continue to manage its own
corporate affairs while validly abstaining from participation in the
management of the entity in which it has invested. Accordingly,
as there is generally no threat that a corporate limited partner
would be solidarity liable with the partnership, there would be no
reason for requiring a corporate partner to actually manage the
partnership, if it makes the business decision not to do so and
opts to become a limited partner; and
48
Ibid.
CLASSES OF PARTNERS AND PARTNERSHIPS
577
3. The SEC policy that a corporation cannot enter into a
limited partnership, is an offshoot of the outdated view in the
U.S., that, as a general rule, corporations could not form a
partnership; that corporations cannot become limited partners, is
based on an assumption which is no longer current. Jurisprudence
and common commercial practice in the U.S., indicate that
corporations are not barred from acting as limited partners.
Current American laws support the position that a corporation can
enter into a contract of limited partnership. For example, the
Revised Uniform Limited Partnership Act of 1976 (as amended in
1985), specifically confirms, that corporations may act as limited
partners. Almost all states in the U.S. have adopted limited
partnership laws which provide, in the same manner as the
Revised Uniform Limited Partnership Act, that corporations may
act as limited partners. This indicates that many other jurisdictions
simply follow the broad language of the Revised Model Business
Corporations Act which suggests that corporations may act as
limited partners and in no event prohibits that activity. These
statutes reaffirm what is indicated by the commercial practice in
the U.S., that corporations can act as limited partners. The
proliferation of statutes reversing the doctrine forbidding
corporations to become partners is proof of the unsoundness of
49
and dissatisfaction with such doctrine.
In that opinion, the SEC conceded on the points raised by confirming that
"inasmuch as there is no existing Philippine law that expressly prohibits a
corporation from becoming a limited partner in a partnership, the Commission is
50
inclined to adopt your view on the matter," provided that the power to enter
into a partnership is provided for in the corporation's charter. The SEC went on
to rule:
"We agree with your statements that a reconsideration of the
present policy of the Commission on the matter is timely in order
to permit the Philippine commercial environ
49
SEC
OPINION,
17
August
1995,
XXX
SEC
QUARTERLY
BULLETIN
8-9
(No.
1,
June
1996);
SEC
OPINION,
17
August
1995,
XXX
SEC
QUARTERLY
BULLETIN
8-9
(No.
1,
June
1996).
mid.
578
NON-CORPORATE MEDIA OF DOING BUSINESS
ment to maintain its pace in terms of legal infrastructure with
similar developments in the international arena with a view to
encouraging and facilitating greater domestic and foreign
51
investments in Philippine business enterprise.
PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA
1. Distinguished from "Joint Venture"
Bautista, although confirming that a joint venture "is an association of
two or more persons to carry out a single business enterprise for profit. . .
[and] embodies several of the essential elements or characteristics of a
partnership and bears such a close resemblance to it that the rights and
liabilities of joint adventures are largely governed by rules applied to
52
partnership," nevertheless would distinguish a partnership and a joint
venture in the following manner:
(a)
"[A] joint venture is ordinarily limited to a single transaction
[and] not intended to pursue a continuous business;"
whereas a partnership, "though it may exist for a single
transaction, usually contemplates the undertaking of a
general and continuous business of a particular kind which
53
necessarily involves a series of transactions;"
(b)
In a joint venture, "the property used remains the undivided
property of its contributor, whereas in a partnership the
same, as a rule, becomes the property of the business entity
54
and hence of all the partners;"
mid.
"BAUTISTA,
at
pp.
41-42.
mid,
at
p.
42.
mid.
CLASSES OF PARTNERS AND PARTNERSHIPS
(c)
In a joint venture, none of the co-venturers "can bind the joint
adventure or his co-adventurers, while a partner, when acting
in pursuance of the firm business, binds not only himself as a
principal but, as their agent as well, also the partnership and
55
his co-partners;" and
(d)
A "joint adventure has no firm name, while a partnership is
56
required to operate under a firm name."
579
To
the
writer,
the
foregoing
distinctions
only
affirm
the
fact
that
a
joint
venture
is
a
species
of
the
genus
partnership
as
defined
under
Article
1767
of
New
Civil
Code,
since
it
contains
the
two
essential
elements
of
the
creation
of
a
common
fund
and
undertaking
to
divide
profits;
that
in
fact
it
is
a
particular
partnership
for
a
specific
undertaking
fully
recognized
under
Article
1783
covering
"a
specific
undertaking,"
and
Article
1830
that
recognizes
the
dissolution
of
a
partnership
"By
the
termination
of
the
.
.
.
particular
undertaking
specified
in
the
agreement."
The
position
that
in
a
joint
venture
the
co-venturers
do
not
become
mutual
agents
is
a
conclusion
that
can
only
be
drawn
if
we
premise
that
a
co-venture
is
not
a
species
of
partnerships.
Finally,
that
a
7
partnership
adopts
no
firm
name
does
not
make
it
void
as
a
contract
or a
partnership,
so
also
with
a
joint
venture.
In
any
event.
the
distinction
between
a
joint
venture
as
a
business
medifjm
not
falling
within
the
ambit
of
Partnership
Law,
onas-nofconstituting
a
species
of
partnerships,
has
really
become
moot
since
in
Kilosbayan,
Inc.
v.
57
Guingona,
Jr.,
it
was
held:
Joint
venture
is
defined
as
an
association
of
persons
or
companies
jointly
undertaking
some
commercial
enterprise;
generally
all
contribute
assets
and
share
risks.
It
requires
a
community
of
interest
in
the
performance
of
the
subject
matter,
a
right
to
direct
and
govern
the
policy
in
connection
55
lbid.
lbid.
S7
232
SCRA
110,143(1994).
x
580
NON-CORPORATE MEDIA OF DOING BUSINESS
therewith, and duty, which may be altered by agreement to share
both in profit and losses. The acts of working together in a joint
88
project.
59
In Torres v. Court of Appeals, the Court took no exception to defining
the terms, rights and obligations of the parties to a "Joint Venture
Agreement" covering the development of a subdivision project under
provisions of New Civil Code governing partnerships. The section on Philippine
Joint Ventures provides for a more thorough discussion of the joint venture as
a medium of doing business under Philippine setting.
2. Distinguished from Co-Ownership
Although the Law on Partnerships recognizes that partners have
60
co-ownership interest in the partnership properties, nonetheless a
co-ownership constitutes merely a property relation whereby two or more
persons own pro-indiviso a property, but the relationship does not seek the
business or mercantile pursuit of the property relationship. In other words, a
co-ownership situation comes about other than by a contractual intent to
pursue a business venture in common, and consequently, no separate juridical
personality arises from a purely co-ownership relationship.
Without the contractual intent to pursue a business venture through a
common fund, the fact that co-owners happen to share in the profits that may
be produced by the property owned in common, there is still no partnership
arrangement. Thus, Article 1769 of New Civil Code provides that "In
determing whether a partnership e x i s t s . . . Co-ownership or co-possession
does not of itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property."
^Ibid, citing BLACK'S LAW DICTIONARY, Sixth ed., at p.
59
839.
320 SCRA 428 (1999).
"Art. 1811, New Civil Code.
CLASSES OF PARTNERS AND PARTNERSHIPS
581
3. Distinguished from Joint Account (Sociedad de Cuentas en
Participation)
A joint account is governed under Article 239 of the Code of Commerce,
and still referred to as a corporate taxpayer under the National Internal
Revenue Code. But its use is a rarity in our jurisdiction because it does not lend
itself to commercial or business efficiency, as shown by the discussion of its
features in Bourns v. Carman," thus
. . . Apartnership constituted in such manner, the existence of
which was only known to those who had an interest in the same,
there being no mutual agreement between the partners, and
without a corporate name indicating to the public in some way
that there were other people beside the one who ostensibly
managed and conducted the business, is exactly the accidental
partnership of cuentas en participation defined in Article 239 of
the Code of Commerce.
Those who contract with the person under whose name the
business of such partnership of cuentas en participation is
conducted, shall have only a right of action against such person
and not against the other persons interested, and the latter, on
the other hand, shall have no right of action against the third
person who contracted with the manager unless such manager
formally transfers his right to them. (Art. 242 of the Code of
62
Commerce).
4. Distinguished from Agency
In a pure agency agreement, the agent is merely a legal extension of the
personality of the principal and thereby under the complete control of the
principal.
The partnership relationship among the partners make them mutual
agents of one another, and thereby the control that a principal has over his
agent does not pertain between and among the partners. Likewise, unlike in a
pure agency relationship where
61
7
Phil.
2
117(1906).
lbid,
at
pp.
119-120.
582
NON-CORPORATE MEDIA OF DOING BUSINESS
the
agent
who
acts
within
the
scope
of
his
authority
does
not
bind
himself
to
the
contract
or
transaction
he
enters
into,
in
a
partnership
situation,
the
partner
binds
not
only
the
other
partners
and
the
partnership,
but
also
himself
in
the
pursuit
of
the
partnership
enterprise.
63
In Binglangawa v. Constantino, the Court held that just because a duly
appointed agent has made personal advances for the expenses of the business
venture that he had been designated to administer, does not make him a
partner of his principal.
64
In
United
States
v.
Muhn
it
was
held
that
the
agent
cannot
escape
the
criminal
liabilities
of
the
crime
of
estafa
for
conversion
of
the
funds
given
to
him
by
his
principal
by
claiming
that
he
had
become
a
partner
when
the
books
of
accounts
kept
for
the
business
showed
that
the
amount
was
charged
to
him
since
the
same
was
"merely
a
method
of
keeping
an
account
of
the
business,
so
that
the
parties
would
know
how
much
money
had
been
invested
and
65
what
the
condition
thereof
was
at
any
particular
time."
a.
Distinguishing
Agency
Principles
from
the
Doctrine
of
Mutual
Agency
in
the
Partnership
Setting
Since
the
attribute
of
mutual
agency
is
always
an
integral
feature
in
every
partnership
arrangement,
can
we
therefore
presume
that
the
contribution
of
service
is
an
implicit
obligation
of
every
partner
in
a
partnership
setting?
The
answer
would
be
in
the
negative.
Under
the
Law
on
Partnerships,
particularly
Article
1797
of
the
New
Civil
Code,
all
partners
are
entitled
to
share
in
the
profits
of
the
partnership
business
based
not
on
their
rendering
of
service
to
the
partnership
business,
but
primarily
on
the
basis
of
their
contributions,
thus:
"In
the
absence
of
stipulation,
the
share
"l 09 Phil. 168
w
(1960).
6 Phil. 164
^Ibid, at p. 166.
(1906).
CLASSES OF PARTNERS AND PARTNERSHIPS
of each partner in the profits and losses shall be in proportion to
what he may have contributed."
It is only the industrial partner whose service to the
partnership becomes the basis by which he can participate in
the profits, since Article 1797 provides: "As for the profits, the
industrial partner shall receive such share as may be just and
equitable under the circumstances. If besides his services, he
has contributed capital, he shall also receive a share in the profits
in proportion to his capital."
In essence, the difference between the principles of repre-
sentation in Agency Law and those pertaining to the doctrine of
mutual agency in a partnership arrangement are as follows:
(a)
Since in agency the subject matter of the con-
tractual relationship is the service of the agent,
then essentially the agent earns the commission
or remuneration agreed upon only when he is able
to render for the benefit of the principle the service
that he contracted to give;
Whereas, in a partnership, partners, other
than industrial partners, are entitled to participate
in the profits of the venture, not by reason of the
service they give or render, but by reason of their
equity standing in the venture;
(b)
In an agency relationship, the agent must enter
into contracts and transactions in the name of
the principal for the latter to be bound thereby;
whereas, in a partnership arrangement, even
when a partner enters into a contract in his own
name but in the pursuit of partnership business,
the other partners and the partnership itself would
still be bound thereby.
5. Distinguished from the Business Trust
As compared to a partnership, a business trust is constituted
by deed of trust which is easier and less expensive to constitute
583
584
NON-CORPORATE MEDIA OF DOING BUSINESS
for it is not bounded by any legal requirements like the registration
requirements for partnerships where the real property or more than P3.000
worth of property is contributed to the partnership.
The creation of a business trust does not give rise to a separate juridical
personality, and is mainly governed by contractual doctrines and the common
law principles on trust. There is no element of mutual agency or co-ownership
in a business trust relationship, and in fact the trust relationship is centered
upon the splitting in the properties contributed (the corpus) of the legal or
naked title in the trustee who then manages and control the properties, and
beneficial or equitable title in the beneficiary and for whose benefit the
trustee shall manage and control the properties of the corpus.
6. Distinguished from the Corporation
The most important distinction between the corporation and the
partnership are their legal capacities. With the right of succession, a
corporation has a stronger legal personality, enabling it to continue despite
the death, incapacity, withdrawal or insolvency of any of its stockholders or
members. In a partnership, the withdrawal, death, incapacity or insolvency of
any partner would automatically bring about the dissolution of the
66
partnership.
Limited liability is a main feature in a corporate setting, whereas
partners are liable personally for partnership debts not only to what they
67
have invested in the partnership but even as to their other properties.
68
Generally, every partner is an agent of the partnership, and by his sole
69
act, he can bind the partnership whereas in a corporation, only the Board of
Directors or its duly authorized agents can bind the corporation.
^Arts. 1828 and 1830, New Civil Code.
^Arts. 1816,1817,1824, and 1839, New Civil
^Arts. 1803(1), 1818, and 1819, New Civil Code.
Code.
^Arts. 1822 and 1823, New Civil Code.
CLASSES OF PARTNERS AND PARTNERSHIPS
585
In a partnership setting, although a partner has the power to sell or
dispose of his capital interest or proprietary interest, the buyer or transferee
does not assume transferor's position as partner, but merely has a right to
70
demand for accounting or distribution of the profits pertaining thereto. In a
corporate setting, every stockholder has the right to transfer his shares in the
corporation, and the buyer or transferee assumes the role of stockholder of
said shares when the transfer has been duly registered in the corporate books
Section 63, Corporation Code. In other words, the position of being partner is
inherently not transferable, whereas, shares are freely transferable in the
corporate setting.
a. Does a Defective Incorporation Process Result into a
Partnership?
The clear distinctions between the corporation and partnership can best
be illustrated by discussing the issue of whether a defective incorporation
process that does not result into a corporate entity, would at least result into a
partnership.
It is a legal principle that when parties come together and all the
elements of a particular contract are present, although the parties may have
nominated it otherwise, the law will impose such contractual relationship
upon them. In other words, the contract or relationship is what the law says it
is, not how the parties wish to call it. Therefore, it may agreed when five or
more persons come together to contribute money or property to a common
venture or fund, with the intention of dividing the profits among themselves,
the parties may wish to call it otherwise, however, under the definition of the
Article 1767 of New Civil Code, it would still be a partnership, even if the
parties had intended a corporation but did not materialize because of certain
registration deficiencies.
If the parties have in fact pursued the incorporation process, by
executing and filing with the SEC the articles of incorporation, then there
should be no resulting partnership in the event that
70
Arts. 1804 and 1813, New Civil Code.
586
NON-CORPORATE MEDIA OF DOING BUSINESS
the
incorporation
process
does
not
bear
fruition,
based
on
the
following
grounds:
Firstly,
both
corporate
and
partnership
relationships
are
fundamentally
contractual
relationship
created
by
the
co-
venturers
who
consent
to
come
together
under
said
relationships.
If
the
parties
had
intended
to
create
an
association
in
the
form
of
a
corporation,
a
partnership
cannot
be
created
in
its
stead
since
such
is
not
within
their
intent,
and
therefore
does
not
constitute
a
part
of
their
consent
to
the
contractual
relationship.
More
importantly,
while
partnership
lies
essentially
within
the
norms
of
Contract
Law,
the
corporation
gets
it
essence
from
a
particular
state-grant
of
separate
juridical
personality.
In
other
words,
parties
to
a
corporate
venture
are
fully
aware
that
it
is
the
process
of
incorporation
and
the
issuance
of
the
certificate
of
incorporation
by
which
the
corporate
entity
comes
into
being.
There
is
therefore
no
doubt
in
the
minds
of
incorporators
that
they
could
effect
a
venture
under
a
juridical
being,
and
thereby
achieve
both
the
advantages
and
suffer
the
burdens
associated
with
such
corporate
medium,
by
the
mere
meeting
of
minds.
Secondly,
the
important
differences
between
the
corporation
and
the
partnership
cannot
lead
one
to
the
conclusion
that
in
the
absence
of
the
first,
the
contracting
parties
would
have
gone
along
with
the
latter.
Limited
liability,
centralized
management
and
easy
transferability
of
the
units
of
ownership
in
a
corporation
are
by
themselves
strong
factors
for
parties'
intention
to
be
bound
in
the
corporate
relationship,
and
one
cannot
presume
that
if
these
features
are
not
met
that
they
would
in
the
alternative
wish
to
be
covered
by
a
partnership
relationship,
which
has
generally
would
involve
unlimited
liability,
mutual
agency
among
the
partners,
and
the
delectus
personae
feature.
The
essence
of
what
constitutes
the
contractual
relationship
of
partnership
under
Article
1767
is
the
coming
"together"
or
what
is
known
in
Partnership
Law
a s " delectus
personae"
and
not
just
the
joint
venture.
The
essence
of
partnership
is
the
personal
relationship,
i.e.,
that
each
would-be
partner
goes
into
the
venture
precisely
because
he
wants
the
other
co-venturers,
and
no
other
person,
to
be
with
him
in
the
venture.
A
venturer
who
CLASSES OF PARTNERS AND PARTNERSHIPS
587
seeks
to
enter
into
a
corporate
relationship
perhaps
does
not
even
care
about
the
personality
of
the
other
co-venturers,
and
fully
aware
that
he
himself
and
others
have
the
ability
to
transfer
their
investments
to
outsiders.
Nonetheless,
there
are
indications
of
a
contrary
view
to
the
above.
Under
Section
21
of
the
Corporation
Code,
when
parties
act
and
pretend
to
be
a
corporation,
when
in
fact
none
exist,
the
law
would
impute
to
them
a
juridical
personality
to
validate
the
contract
under
the
corporation
by
estoppel
doctrine;
however,
it
would
treat
the
parties
as
partners
since
it
expressly
makes
them
liable
as
"general
partners."
Under
such
contrary
view,
the
main
issue
would
be
the
priority
between
the
personal
creditors
of
the
"partners"
in
a
corporation
by
estoppel
doctrine,
and
the
"corporate"
creditors
of
the
corporation
by
estoppel,
as
to
the
assets
invested
into
the
venture.
The
author
would
presume
that
it
would
have
to
be
the
corporate
creditors
that
would
have
priority
over
the
"corporate"
assets
as
this
seems
to
be
the
moving
spirit
of
the
corporation
by
estoppel
doctrine.
This
position
of
the
author
has
been
partially
justified
by
the
discussions
7
of
in
Pioneer
Insurance
&
Surety
Corp.
v.
Court
of
Appeals, '
when
it
resolved
the
particular
issue
raised:
"What
legal
rules
govern
the
relationship
among
co-investors
whose
agreements
was
to
do
business
through
the
corporate
vehicle
but
who
failed
to
incorporate
the
entity
in
which
they
had
chosen
to
72
invest?"
Quoting
from
American
jurisprudence,
the
Supreme
Court
in
Pioneer
Insurance
held
that
"there
has
been
the
position
that
as
among
themselves
the
rights
of
the
stockholders
in
a
defectively
incorporated
association
should
be
governed
by
the
supposed
charter
and
the
laws
of
the
state
relating
thereto
73
and
not
by
the
rules
governing
partners,
nevertheless
it
has
been
held
that
71
175 SCRA 668 (1989).
lbid, at p. 681.
73
Quoting from CORPUS JURIS SECUNDUM citing Cannon v. Brush Electric Co.,
54 A. 121, 96 Md. 446, 94 Am. S.R. 584.
72
588
NON-CORPORATE MEDIA OF DOING BUSINESS
"ordinarily
persons
who
attempt,
but
fail,
to
form
a
corporation
and
who
carry
74
on
business
under
the
corporate
name
occupy
the
position
of
partners
inter
se
and
their
rights
as
members
of
the
company
to
the
property
acquired
by
the
75
company
will
be
recognized."
Notwithstanding
the
foregoing,
the
Court
took
the
position
that
such
partnership
relationship
does
not
exist,
"for
ordinarily
persons
cannot
be
made
to
assume
the
relation
of
partners,
as
between
themselves,
when
their
purpose
is
that
no
partnership
shall
exist
.
.
.
and
it
should
be
implied
only
when
necessary
to
do
justice
between
the
parties;
thus,
one
who
takes
no
part
except
to
subscribe
for
stock
in
a
proposed
corporation
which
is
never
legally
formed
does
not
become
a
partner
with
other
subscribers
who
engage
in
business
under
the
name
of
the
pretended
corporation,
so
as
to
be
liable
as
such
in
an
action
for
settlement
of
the
alleged
partnership
and
contributions.
.
.
A
partnership
relation
between
certain
stockholders
and
other
stockholders,
who
were
also
directors,
will
not
be
implied
in
the
absence
of
an
agreement,
so
as
to
make
the
former
liable
to
contribute
for
payment
of
debts
illegally
contracted
76
by
the
latter. Nor
will
it
make
the
investor
to
a
would-be
corporation
liable
for
77
losses
sustained
from
its
operations
under
a
partnership
inter
se
theory."
The
key
elements
in
resolving
the
issue
seem
to
have
been
in
Pioneer
Insurance
those
of
intent
and
participation
in
business
activities.
The
doctrinal
pronouncement
in
Pioneer
Insurance
can
be
summarized
as
follows:
When
parties
come
together
intending
to
form
a
corporation,
but
no
corporation
is
formed
due
to
some
legal
cause,
then:
(a)
Parties
who
had
intended
to
participate
or
actually
participated
in
the
business
affairs
of
the
proposed
7A
lbid,
citing
Lynch
v.
Perryman,
119
P.
229,
29
Okl.
615,
Ann.
Cas.
1913
A.
1065.
75
lbid,
citing
Smith
v.
Schoodoc
Pond
Packing
Co.,
84
A,
268m
109
Me.
555;
Whipple
v.
Parker,
29
Mich
369.
n
lbid,
at
p.683,
quoting
from
CORPUS
JURIS
SECUNDUM,
Vol.
68,
p.
464.
77
Ibid,
at
p.
685.
CLASSES OF PARTNERS AND PARTNERSHIPS
589
corporation would be considered as partners under a de facto
partnership, and would be liable as such in an action for
settlement of partnership obligations;
- Whereas -
(b) Parties who took no part except to subscribe to shares of stock in
a proposed corporation, do not become partners with other
subscribers who engaged in business under the name of the
pretended corporation, and are not liable for action for
settlement of the alleged partnership contribution.
The doctrinal pronouncements in Pioneer Insurance are consistent with
the distinctions between an investor in partnership venture, where there is a
clear intent to participate in the management of the partnership business and
for which limited liability is not afforded by law; and an investor in a corporation,
where under the principal of centralized management, there is no intent to
participate in the corporate operations, and for which limited liability is afforded
by law.
On the other hand, where the parties to a venture merely use a business
name that pretends there is a corporation, when in fact there was no intention
among the co-venturers to formally incorporate a juridical entity, then there can
be no doubt that what was really the meeting of minds among them was a
partnership, for in essence they agreed to set up a common fund {i.e., pursue a
business venture), with clear indication to divide the profits among themselves.
This is exactly the situation covered in the decision in Lim Tong Lim v.
76
Philippine Fishing Gear Industries, Inc., where the liabilities of the parties were
adjudged under the corporation by estoppel doctrine.
In Lim Tong Lim, the Court found that three co-venturers agreed "to
engage in a fishing business, which they started
"317 SCRA 728 (1999).
NON-CORPORATE MEDIA OF DOING BUSINESS
590
by buying boats worth P3.35 million, financed by a l o a n . . . I n their
Compromise Agreement, they subsequently revealed their intention to pay the
loan with the proceeds of the sale of the boats, and to divide equally among
themselves the excess or l o s s . . . These boats, the purchase and the repair of
which were financed with borrowed money, fell under the term 'common fund'
under Article 1767. The contribution to such fund need not be cash or fixed
assets; it could be an intangible like credit or industry. That the parties agreed
that any loss or profit from the sale and operation of the boats would be divided
79
equally among them also shows that they had indeed formed a partnership."
The only complication in Lim Tong Lim was that the transaction upon
which the personal liabilities of the co-venturers was being pursued, was
entered into on behalf of "Ocean Quest Fishing Corporation," although no such
corporation existed nor was there any attempt to incorporate such entity.
Consequently, both the unlimited liability principle under Partnership Law and
the corporation by estoppel doctrine in Corporate Law were applied to
determine the personal liability of each of the partners in the business venture,
which resulted in legal incongruence
In a partnership, as a legal consequence of the application of the doctrine
of mutual agency, every partner shall be personally liable for partnership debts
and liabilities, even when the underlying transaction was effected by another
partner, or even when a partner does not participate at all in the affairs of the
partnership. On the other hand, under the corporation by estoppel doctrine
now embodied in Section 21 of the Corporation Code, it is only the active or
managing officers who assume the liability of a general partner, thus: "All
persons who assume to act as a corporation knowing it to be without authority
to do so shall be liable as general partners, for all debts, liabilities and damages
incurred or arising as a result thereof;" and that consequently, passive
stockholders are not deemed to be personally liable for debts incurred on behalf
of the ostensible corporation.
lbid, at p. 739.
CLASSES OF PARTNERS AND PARTNERSHIPS
591
This
was
In
fact
the
defense
raised
by
the
petitioner
in
Lim
Tong
Lim,
where
he
held
that
since
he
did
not
participate
actively
in
the
business
venture,
then
under
the
principles
of
corporation
by
estoppel
doctrine,
he
cannot
be
made
personally
liable
for
the
debts
incurred
in
pursuing
the
business
venture.
Instead
of
holding
that
the
primary
doctrine
to
apply
would
be
the
rules
of
unlimited
liability
since
there
was
duly
constituted
a
valid
partnership,
the
Court
instead
humored
the
argument
and
went
on
to
also
apply
the
corporation
by
estoppel
doctrine
with
a
jurisprudential
twist
when
it
held
The
doctrine
of
corporation
by
estoppel
may
apply
to
the
alleged
corporation
and
to
a
third
p a r t y .
. . .
a
third
party
who,
knowing
an
association
to
be
unincorporated,
nonetheless
treated
it
as
a
corporation
and
received
benefits
from
it,
may
be
barred
from
denying
its
corporate
existence
in
a
suit
brought
against
the
alleged
corporation.
In
such
case,
all
those
who
benefited
from
the
transaction
made
by
the
ostensible
corporation,
despite
knowledge
of
its
legal
defects,
may
be
held
liable
for
contracts
80
they
impliedly
assented
to
or
took
advantage
of.
The
result
is
that
by
mixing
principles
in
Partnership
Law
and
Corporate
Law
in
Lim
Tong
Lim,
the
corporation
by
estoppel
doctrine
has
grown
out
of
the
confines
of
Section
21
of
the
Corporation
Code,
as
to
make
liable
as
general
partners,
not
only
those
parties
to
acted
for
the
ostensible
corporation,
but
also
all
passive
parties
who
knowing
there
is
no
such
corporation
sat
back
and
benefited
from
the
venture.
7.
Distinguished
from
Cooperatives
A
cooperative
is
a
duly
registered
association
of
persons,
with
a
common
bond
of
interest,
who
have
voluntarily
joined
together
to
achieve
lawful
common
social
or
economic
end,
making
equitable
contributions
to
the
capital
required
and
accepting
mid, at p. 743.
592
NON-CORPORATE MEDIA OF DOING BUSINESS
a
fair
share
of
the
risks
and
benefits
of
the
undertaking
in
accordance
with
81
universally
accepted
cooperative
principles.
A
cooperative,
like
an
ordinary
corporation
and
a
partnership,
has
a
juridical
personality
separate
and
distinct
from
its
members,
and
has
limited
82
liability
feature.
The
Tax
Code
defines
a
cooperative
as
an
association
conducted
by
the
members
thereof
with
the
money
collected
from
among
themselves
and
solely
83
for
their
own
protection
and
not
for
profit.
Unlike
ordinary
corporations,
cooperatives
are
governed
by
principles
of
democratic
control
where
the
members
in
primary
cooperatives
shall
have
84
equal
voting
rights
on
a
one-member-
one-vote
principle;
where
the
Board
of
Directors
manages
the
affairs
of
the
cooperative,
but
it
is
the
general
assembly
of
full
membership
that
exercises
all
the
rights
and
performs
all
of
the
85
obligations
of
the
cooperative;
and
are
under
the
supervision
and
control
of
the
Cooperative
Development
of
Authority,
and
not
the
SEC.
Unlike
a
partnership
which
should
be
organized
for
profit,
and
a
non-stock
corporation
which
can
be
organized
for
any
eleemosynary
purpose
and
no
part
of
the
net
income
is
to
be
distributed
to
the
officers
and
members
thereof,
the
primary
objective
of
every
cooperative
is
self-help:
"to
provide
goods
and
services
to
its
members
and
thus
enable
them
to
attain
increased
income
and
savings,
investments,
productivity,
and
purchasing
power
and
promote
among
them
equitable
distribution
of
net
surplus
through
maximum
utilization
of
economies
of
scale,
cost-
sharing
and
risk-sharing
without
conducting
the
affairs
of
the
cooperative
for
eleemosynary
or
charitable
88
purposes."
81
Art. 3, Cooperative Development Authority Act (R.A. 6938).
^Arts. 12 and 30, R.A. 6938.
83
Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129
(2005).
"Art. 4(2), R.A. 6938.
"Arts. 5(3) and 34, R.A. 6938.
"'Art. 7, R.A. 6938.
593
The Law on Cooperatives declares it a policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for promoting
self-reliance and harnessing people power towards the attainment of economic
87
development and social justice. In one case, the Court held that cooperatives
are established to provide a strong social and economic organization to ensure
that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian
88
reforms.
0O0
""Art. 2, R.A. 6938.
<*Corpuz v. Grospe, 333 SCRA 425 (2000).
CHAPTER
7
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
PROPERTY
RIGHTS
OF
EVERY
PARTNER
ART. 1810. The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management, (n)
Article
1810
of
the
New
Civil
Code
provides
that
the
property
rights
of
every
partner
in
the
partnership
set-up
to
be
as
follows:
(a)
MANAGEMENT
POWER,
or
the
Right
to
Participate
in
the
Management
of
the
Partnership;
(b
CO-OWNERSHIP
POWER,
or
the
Right
in
Specific
Partnership
Property;
and
(c)
EQUITY
INTEREST
in
the
Partnership
Business
Enterprise.
The
enumeration
under
Article
1810
of
the
New
Civil
Code
of
the
"property
rights"
of
a
partner
defines
the
three-fold
role
that
every
partner
assumes
under
a
contract
of
partnership:
as
an
equity
holder
(investor),
a
manager
of
the
business
enterprise
(a
co-proprietor
of
the
business
enterprise),
and
as
an
agent
of
594
RIGHTS, POWER AND AUTHORITY OF PARTNERS
595
the
partnership
juridical
person
and
of
the
other
partners.
The
multi-level
positions
assumed
by
partners
under
a
partnership
arrangement
are
potentially
wrought
with
conflict-of-interest
situations.
Consequently,
two
important
doctrinal
approaches
animate
the
Law
on
Partnerships
as
a
consequence
of
such
multi-level
positions
of
partners.
Firstly,
the
Law
on
Partnerships
characterizes
the
contract
of
partnership
and
the
contractual
relationships
between
and
among
the
partners
as
of
the
highest
fiduciary
and
personal
level
(delectus
personae),
which
therefore
ensures
that
partners
share
the
partnership
bed
only
with
parties
with
whom
they
contracted
and
there
is
no
occasion
in
the
future
for
a
stranger
to
be
allowed
to
join
the
group
without
their
unanimous
consent;
and
that
every
partner
is
afforded
the
ability
to
withdraw
from
the
contractual
relationship
whenever
he
becomes
uncomfortable
with
any
or
all
of
the
other
partners.
Secondly,
it
separately
treats
each
of
the
"property
rights"
of
partners
as
enumerated
under
Article
1810,
to
ensure
that
those
rights
that
pertain
to
agency
and
personal
relations
are
not
affected
by
dealings
on
those
which
are
strictly
proprietary
in
nature.
In
other
words,
the
bundle
of
"property
rights"
of
a
partner
is
not
indivisible,
and
in
fact
the
philosophy
under
Philippine
Partnership
Law
is
to
consider
them
divisible,
and
capable
of
being
treated
and
transacted
separately.
The
foregoing
doctrinal
approaches
shall
animate
the
discussions
hereunder
on
the
rights
and
obligations
of
partners
in
the
partnership
arrangement.
PARTNER'S
RIGHT
TO
MANAGE
THE
PARTNERSHIP
1.
General
Rule
on
Partnership
Management
ART. 1803. When the manner of management has not been
agreed upon, the following rules shall be observed:
623
NON-CORPORATE MEDIA OF DOING BUSINESS
(1) All the partners shall be considered agents and whatever
any one of them may do alone shall bind the partnership, without
prejudice to the provisions of Article 1801.
xxx. (1695a)
ART. 1818. Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of which
he is a member binds the partnership, unless the partner so acting
has in fact no authority to act for the partnership in the particular
matter, and the person with whom he is dealing has knowledge of
the fact that he has no such authority.
An act of a partner which is not apparently for the carrying on
of business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they
have abandoned the business, one or more but less than all the
partners have no authority to:
(1) Assign the partnership property in trust for creditors or on
the assignee's promise to pay the debts of the partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it impossible to carry
on the ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim
or liability;
RIGHTS, POWER AND AUTHORITY OF PARTNERS
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority
shall bind the partnership to persons having knowledge of the
restriction, (n)
ART. 1820. An admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
accordance with this Title is evidence against the partnership, (n)
ART. 1821. Notice to any partner of any matter relating to
partnership affairs, and the knowledge of the partner acting in the
particular matter, acquired while a partner or then present to his
mind, and the knowledge of any other partner who reasonably could
and should have communicated it to the acting partner, operate as
notice to or knowledge of the partnership, except in the case of fraud
on the partnership, committed by or with the consent of that
partner, (n)
ART. 1822. Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of the
partnership or with the authority of co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act. (n)
ART. 1823. The partnership is bound to make good the loss:
(1) Where
one
partner
acting
within
the
scope
of
his
apparent
authority
receives
money
or
property
of
a
third
person
and
misapplies
it;
and
(2) Where
the
partnership
in
the
course
of
its
business
receives
money
or
property
of
a
third
597
598
NON-CORPORATE MEDIA OF DOING BUSINESS
person and the money or property so received is misapplied by any
partner while it is in the custody of the partnership, (n)
ART. 1824. All partners are liable solidarily with the partnership
for everything chargeable to the partnership under Articles 1822 and
1823. (n)
a. Default Rule: Every Partner Has a Right to Manage
Article 1818 of the New Civil Code provides that "Every partner is an
agent of the partnership for the purpose of its business, and the act of every
partner, including the execution in the partnership name of any instrument, for
apparently carrying on in the usual way the business of the partnership of which
he is a member binds the partnership." This principle is supported by Article
1803 which provides "When the manner of management has not been agreed
upon... All the partners shall be considered agents and whatever any one of
them may do alone shall bind the partnership." Article 1818 goes on to provide
that "An act of a partner which is not apparently for the carrying on of the
business of the partnership in the usual way does not bind the partnership
unless authorized by the other partners."
Embodied clearly with the language of Article 1818 is the "doctrine of
apparent authority" which allows a third party dealing with a juridical entity to
rely upon the validity and enforceability of contracts entered into with an officer
or representative who has been by practice endowed with apparent authority to
act for the juridical person. In every partnership, there is a presumption of
apparent authority for every partner to act for and thereby bind the partnership
in all that is "apparently for the carrying on of the business of the partnership in
the usual way." Thus, the Court held in Muriasque v. Court of Appeals,* that a
presumption exists that each partner is an authorized agent for the firm and that
he has authority to bind it in carrying on the partnership transaction.
'139 SCRA 533 (1985).
RIGHTS, POWER AND AUTHORITY OF PARTNERS
599
The right of a partner to manage the affairs of the partnership or to act as
an agent of the partnership is expressly affirmed by the following statutory
provisions:
(a) On Admissions and Representations Made by
Partners: Article 1820 provides that an admission or
representation made by any partner concerning partnership
affairs within the scope of his authority is evidence against the
partnership;
(b)
On Notice Received by Partners: Article 1821 provides that
notice to any partner of any matter relating to partnership
affairs, and the knowledge of partner acting in the particular
matter, acquired while a partner or then present to his mind,
and the knowledge of any other partner who reasonably
could and should have communicated it to the acting partner,
operate as notice or knowledge of the partnership (except in
case of a fraud on the partnership);
(c)
On Tort Committed by Partners: Article 1822 provides that
any loss or injury caused to any third person or any penalty
incurred by reason of any wrongful act or omission of a
partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, shall
make the partnership liable therefore; and
(d)
On the Fraudulent Acts of Partners: Article 1823 provides
that the partnership is bound to make good the loss caused
by the misapplication by a partner acting within the scope of
his apparent authority of money or property belonging to, or
received by the partnership from, a third person.
In the cases of the tortuous or fraudulent acts committed by partners in
the pursuit of partnership affairs, Article 1824 of New Civil Code provides
expressly that "All partners are liable
NON-CORPORATE MEDIA OF DOING BUSINESS
600
solidary with the partnership for everything chargeable to the partnership."
b. Overturning of the Ruling in Council of Red Men
We should therefore consider the old ruling in Council of
2
Red Men v. Veterans Army, where the Court interpreted the
original provision of Article 1803 of New Civil Code (then Article
1695 of the old Civil Code), that allowed one partner to act to bind
the partnership, to apply only when there has been no provision
at all in the articles of partnership on the exercise of power or
management, thus:
One partner, therefore, is empowered to contract in the
name of the partnership only when the articles of partnership
make no provision for the management of the partnership
business. In the case at bar we think that the articles of the
Veteran Army of the Philippines do so provide. It is true that
an express disposition to that effect is not found therein, but
we think one may be fairly deduced from the contents of
those articles. They declare what the duties of the several
officers are. In these various provisions there is nothing said
about the power of making contracts, and that faculty is not
expressly given to any officer. We think that it was, therefore,
reserved to the department as a whole; that is, that in any
case not covered expressly by the rules prescribing the
duties of the officers, the department were present. It is hardly
conceivable that the members who formed this organization
should have had the intention of giving to any one of the
sixteen or more persons who composed the department the
power to make any contract relating to the society which that
particular officer saw fit to make, or that a contract when so
made without consultation with, or knowledge of the other
members of the department should bind it. We therefore, hold
that no contract, such as the one in question, is binding on
the Veteran Army of the Philippines unless it was authorized
at a meeting of the department. No evidence was offered to
show that the department had never taken any such action.
In fact, the proof shows that the transaction in question
2
7 Phil. 685 (1907).
RIGHTS, POWER AND AUTHORITY OF PARTNERS
601
was
entirely
between
Apache
Tribe,
No.
1,
and
the
Lawton
Post,
and
there
is
nothing
to
show
that
any
member
of
the
department
ever
knew
anything
about
it,
or
had
anything
to
do
with
it.
The
3
liability
of
the
Lawton
Post
is
not
presented
in
this
appeal.
We
are
of
the
strong
position
that
the
doctrine
in
Council
of
Red
Men,
rendered
at
a
time
when
our
legal
jurisdiction
was
still
deciding
the
proper
formulation
of
the
doctrines
in
Philippine
Partnership
Law,
no
longer
applies.
Firstly,
the
prevailing
doctrine
now
embodied
in
Articles
1803[1]
and
1818
of
New
Civil
Code
is
that
every
partner
has
the
apparent
authority
to
act
for
and
in
behalf
of
the
partnership
in
carrying
on
the
ordinary
or
usual
business
of
the
partnership.
Secondly,
the
ruling
in
Council
of
Red
Men
was
based
on
the
principle
that
the
special
rules
of
management
of
partnership
affairs
provided
for
in
the
articles
of
partnership
is
binding
on
the
public,
or
at
least
on
every
person
dealing
with
the
partnership.
This
is
not
the
rule
under
Philippine
Partnership
Law
which
characterizes
the
contract
of
partnership
and
the
arising
of
the
partnership
juridical
person,
as
being
merely
consensual
with
no
specific
formalities
being
required
in
general.
Thus,
even
when
the
articles
of
partnership
has
been
formally
executed
and
registered
with
the
SEC,
the
same
is
not
considered
to
be
a
public
document
binding
on
the
public.
Therefore,
notwithstanding
what
specific
provisions
may
be
found
in
the
articles
of
partnership
on
the
management
of
the
partnership
business,
the
same
is
binding
inter
se
among
the
partners,
but
does
not
prejudice
the
rights
of
a
third
party
who
deals
in
good
faith
with
the
partners
without
actual
knowledge
of
the
content
of
the
articles
of
partnership.
c.
Effect
of
Internal
and
Non-Public
Arrangement
of
Partnership
Management
Although
special
management
arrangements
may
be
made
among
partners,
and
even
when
so
formalized
within
the
terms
of
lbid, at pp. 688-689; emphasis supplied.
602
NON-CORPORATE MEDIA OF DOING BUSINESS
the articles of partnership, generally such special arrangements do not bind or
prejudice third parties who deal with the partnership business without
knowledge of such special arrangement, and who are not mandated to seek
formal authority and that in fact are deemed to have a right to expect, unless
otherwise indicated, that their dealings with the managing partner should bind
the partnership.
This situation is best exemplified in the decision in Litton v. Hili & Ceron,*
where an obligation in a sum of money was sought to be recovered from the
partnership Hill & Ceron in whose name it was entered into by one of the
managing partners, when in fact the articles of partnership provided expressly
that: "Sixth. That the management of the business affairs of the co-partnership
shall be entrusted to both copartners who shall jointly administer the business
affairs, transactions and activities of the co-partnership." In ruling that the act of
just one of the managing partners should properly make the partnership liable
for the payment of the debt, the Court held
It follows from the sixth paragraph of the articles partnership
of Hill & Ceron above quoted that the management of the business
of the partnership has been entrusted to both partners thereof, but
we dissent from the view of the Court of Appeals that for one of the
partners to bind the partnership the consent of the other is
necessary. Third persons, like the plaintiff, are not bound in
entering into a contract with any of the two partners, to ascertain
Whether or not this partner with whom the transaction is made
has the consent of the other partner. The public need not make
inquiries as to the agreements had between the partners. Its
knowledge is enough that it is contracting with the partnership
5
which is represented by one of the managing partners.
Litton held that there is a general presumption that each individual
partner is an authorized agent for the firm and that
<67 Phil. 509(1935).
s
lbid, at p. 513; emphasis
supplied.
RIGHTS, POWER AND AUTHORITY OF PARTNERS
603
he
has
authority
to
bind
the
firm
in
carrying
on
the
partnership
transaction,
and
that
the
presumption
is
sufficient
to
permit
third
persons
to
hold
the
firm
liable
on
transactions
entered
into
by
one
of
the
members
of
the
firm
acting
apparently
in
its
behalf
and
within
the
scope
of
his
authority.
This
was
especially
true
under
the
circumstances
in
Litton
where
the
transaction
which
gave
rise
to
the
partnership
obligation
was
in
the
ordinary
course
of
the
partnership's
business.
Litton
also
supports
the
legal
position
that
even
with
the
registrations
of
the
article
of
partnership
with
the
SEC,
the
same
does
not
constitute
a
public
document
that
binds
those
who
deal
with
the
partnership
enterprise.
In
other
words,
even
a
registered
articles
of
partnership
constitutes
first
and
foremost
a
intra-partnership
document
that
is
binding
upon
the
partners,
and
a
third
party
acting
in
good
faith
without
actual
knowledge
of
the
contents
thereof
is
not
bound
by
the
terms
of
the
articles
of
partnerships.
6
In
Smith,
Bell
&
Co.
v.
Aznar,
the
Court
held
that
in
a
transaction
covering
the
purchase
and
delivery
of
merchandise
within
the
ordinary
course
of
the
partnership
business
effected
by
the
industrial
partner
without
the
consent
of
the
capitalist
partner,
the
provisions
in
the
articles
of
partnership
that
the
industrial
partner
"shall
manage,
operate
and
direct
the
affairs,
businesses
and
activities
of
the
partnership,"
constitute
sufficient
authority
to
make
such
transaction
binding
against
the
partnership,
as
against
another
provision
of
the
articles
by
which
the
industrial
partner
is
authorized
"To
make,
sign,
seal,
execute
and
deliver
contracts
.
.
.
upon
terms
and
conditions
acceptable
to
him
duly
approved
in
writing
by
the
capitalist
partner,"
which
must
cover
only
the
execution
of
formal
contracts
in
writing
and
not
necessarily
to
routine
transactions
such
as
ordinary
purchases
and
sale
of
merchandise.
In
addition,
AznarappWed
the
"doctrine
of
apparent
authority"
and
the
"estoppel
doctrine"
when
it
held
that
"The
evidence
also
shows
that
previous
purchases
made
by
[the
industrial
partner]
in
the
name
of
the
Aznar
&
Company
from
the
same
plaintiff
40 O.G. 1881 (1941).
604
NON-CORPORATE MEDIA OF DOING BUSINESS
were
honored
and
paid
for
by
the
said
firm,
and
we
may
well
also
assume
that
the
goods
herein
in
question
which
were
delivered
to
defendant
firm
were
made
use
of
by
the
latter.
It
is,
therefore,
but
just
that
the
firm
answer
for
their
7
value."
In
Goquiolayv.
Sycip*
the
Court
even
took
into
consideration
the
provisions
of
Article
129
of
the
Code
of
Commerce
to
the
effect
that
"If
the
management
of
the
general
partnership
has
not
been
limited
by
special
agreement
to
any
of
the
members,
all
shall
have
the
power
to
take
part
in
the
direction
and
management
of
the
common
business,
and
the
members
present
shall
come
to
an
agreement
for
all
contracts
or
obligations
which
may
concern
the
association."
It
laid
down
the
rule
that
is
relevant
under
the
current
provisions
of
the
New
Civil
Code
that
defines
the
necessity
of
concurrence
of
partners'
vote
on
any
partnership
act
or
contract,
thus:
. . .
but
this
obligation
is
one
imposed
by
law
on
the
partners
among
themselves,
that
does
not
necessarily
affect
the
validity
of
the
acts
of
a
partner,
while
acting
within
the
scope
of
the
ordinary
course
of
business
of
the
partnership,
as
regards
third
persons
without
notice.
The
latter
may
rightfully
assume
that
the
contracting
partner
was
duly
authorized
to
contract
for
and
in
behalf
of
the
firm
and
that,
furthermore,
he
would
not
ordinarily
act
to
the
prejudice
of
his
co-partners.
The
regular
course
of
business
procedure
does
not
require
that
each
time
a
third
person
contracts
with
one
of
the
managing
partners,
he
should
inquire
as
to
the
latter's
authority
to
do
so,
or
that
he
should
first
ascertain
whether
or
not
the
other
partners
had
given
their
consent
thereto.
In
fact,
Article
130
of
the
same
Code
of
Commerce
provides
that
even
if
a
new
obligation
was
contracted
against
the
express
will
of
one
of
the
managing
partners,
"it
shall
not
be
annulled
for
such
reason,
and
it
shall
produce
its
effects
without
prejudice
to
the
responsibility
of
the
member
or
members
who
contracted
it,
for
the
9
damages
they
may
have
caused
to
the
common
fund."
lbid.
108
Phil.
947
(1960).
lbid,
at
p.
957.
RIGHTS, POWER AND AUTHORITY OF PARTNERS
605
2. Transactions Not in the Ordinary Course of Partnership Business
Article 1818 of the New Civil Code enumerates what are certainly not
"apparently for the carrying on of the business of the partnership in the usual
way," and will not therefore be valid transactions of the partnership, unless
done by or approved by all the partners, thus:
(a)
Assigning of partnership property in trust for creditors or on
the assignee's promise to pay the debts of the partnership;
(b)
Disposition of the goodwill of the business;
(c)
Confession of a judgment;
(d)
Entering into a compromise concerning a partnership claim or
liability;
(e)
Submitting a partnership claim or liability to arbitration; or
(f)
Renouncing a partnership claim.
The
foregoing
cases
are
not
merely
acts
of
administration,
but
rather
acts
of
ownership
which
can
only
be
effected
by
the
concurrence
of
all
the
partners
who
are
collectively
deemed
to
be
the
"owners"
of
the
partnership
and
its
business
enterprise.
In
addition,
in
any
of
the
above
indicated
partnership
acts,
by
reason
of
their
serious
character,
they
would
not
be
considered
to
be
covered
by
the
doctrine
of
apparent
authority.
One
would
consider
therefore
that
when
the
transaction
involves
the
sale,
transfer
or
encumbrance
of
the
entire
partnership
business
enterprise,
it
would
constitute
an
act
of
strict
ownership
or
an
act
of
alteration,
which
cannot
be
considered
as
within
the
ordinary
course
of
business
that
would
come
within
the
apparent
authority
of
one
partner.
And
yet
in
the
early
case
of
Goquiolay
v.
10
Sycip,
the
Court
held
that
the
sale
of
the
partnership's
business
10
108 Phil. 947 (1960).
606
NON-CORPORATE MEDIA OF DOING BUSINESS
enterprise can be considered to be within the power of the managing partner,
thus:
Appellants also question the validity of the sale covering the
entire firm realty, on the ground that it, in effect, threw the
partnership into dissolution, which requires consent of all the
partners. This view is untenable. That the partnership was left
without the real property it originally had will not work its
dissolution, since the firm was not organized to exploit these
precise lots but to engage in buying and selling real estate, and "in
general real estate agency and brokerage business." Incidentally, it
is to be noted that the payment of the solidary obligation of both
the partnership and the late Tan Sin An, leaves open the question of
accounting and contribution between the co-debtors, that should
11
be ventilated separately.
Perhaps Goquiolay was decided at an earlier time in our jurisdiction when
the concept and doctrines pertaining to "business enterprise transfers" were
not yet developed, much less appreciated. On ruling on the motion for
12
reconsideration, the resolution of Goquiolay v. Sycip, returned on this point
and clarified the applicable doctrine as follows:
It is next urged that the widow, even as a partner, had no
authority to sell the real estate of the firm. This argument is
lamentably superficial because it fails to differentiate between real
estate acquired and held as stock-in-trade and . real estate held
merely as business site (Vivante's "taller o banco social") for the
partnership. Where the partnership business is to deal in
merchandise and goods, i.e., movable property, the sale of its real
property (immovables) is not within the ordinary powers of a
partner, because it is not in line with the normal business of the
firm. But where the express and avowed purpose of the partnership
is to buy and sell real estate (as in the present case), the
immovables thus acquired by the firm from part of its
stock-in-trade, and
"Ibid,
at
p.
960.
12
9
SCRA
663
(1969).
RIGHTS, POWER AND AUTHORITY OF PARTNERS
607
the sale thereof is in pursuance of partnership purposes, hence
13
within the ordinary powers of the partner.. ,
The foregoing discussions in Goquiolay certainly began to appreciate an
act or transaction in the ordinary course of business, which basically may involve
only a sale of assets, from an extraordinary act or contract, which either disposes
of the business enterprise or has the effect of preventing the pursuit of the
business enterprise.
3. Specific Modifications on the Power of Management
ART.
1800.
The
partner
who
has
been
appointed
manager
in
the
articles
of
partnership
may
execute
all
acts
of
administration
despite
the
opposition
of
his
partners,
unless
he
should
act
in
bad
faith;
and
his
power
is
irrevocable
without
just
or
lawful
cause.
The
vote
of
the
partners
representing
the
controlling
interest
shall
be
necessary
for
such
revocation
of
power.
A
power
granted
after
the
partnership
has
been
constituted
may
be
revoked
at
any
time.
(1692a)
ART.
1801.
If
two
or
more
partners
have
been
intrusted
with
the
management
of
the
partnership
without
specification
of
their
respective
duties,
or
without
a
stipulation
that
one
of
them
shall
not
act
without
the
consent
of
all
the
others,
each
one
may
separately
execute
all
acts
of
administration,
but
if
any
of
them
should
oppose
the
acts
of
the
others,
the
decision
of
the
majority
shall
prevail.
In
case
of
?
tie,
the
matter
shall
be
decided
by
the
partners
owning
the
controlling
interest.
(1693a)
mid, at pp. 671-672.
608
NON-CORPORATE MEDIA OF DOING BUSINESS
ART. 1802. In case it should have been stipulated that none of
the managing partners shall act without the consent of the others,
the concurrence of all shall be necessary for the validity of the acts,
and the absence or disability of any one of them cannot be alleged,
unless there is imminent danger of grave or irreparable injury to the
partnership. (1694)
It is a policy under Philippine Partnership Law for the partners to be
allowed to expressly contract around the default principle of "mutual agency"
(i.e., that the partners are all managers of the partnership enterprise). Thus,
under Article 1800 of New Civil Code it is possible to appoint only one managing
partner in the articles of partnership, in which case the managing partner "may
execute all acts of administration despite the opposition of his partners," and his
powers are irrevocable without just or lawful cause. The same rule would apply
when a partner is designated as managing partner outside of the articles of
incorporation, but in such case his designation as managing partner is essentially
revocable.
Thus, the Supreme Court has held that a manager of a partnership can
execute acts of administration without need of consent of the partners,
14
including the power to purchase goods in the ordinary course of business; to
15
18
hire employees, as well to dismiss employees; to secure a loan to finish the
17
construction of the boat of the partnership; to employ a bookkeeper by his
18
sole authority; and to commence a suit in the name of the partnership against
19
partnership debtors. Curiously though, the
"Smith, Bell & Co. v. Aznar, 40 O.G. 1882 (1941).
15
Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 (1908).
18
Martinez v. Cordoba & Conde, 5 Phil. 545 (1906).
17
Agustia v. Mocencio, 9 Phil. 135 (1907).
Fortis v. Gutierrez Hermanos, 6 Phil. 100 (1906).
18
7a/' Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366
(1988).
RIGHTS, POWER AND AUTHORITY OF PARTNERS
609
Court
has
also
held
that
the
managing
partner
has
no
power
to
purchase
"barge,
a
truck
and
an
adding
machine"
in
the
name
of
the
partnership
inasmuch
as
none
of
the
properties
were
considered
to
be
"supplies
for
partnership
20
business."
The
old
ruling
is
contrary
to
the
doctrine
of
apparent
authority
in
the
usual
or
normal
pursuit
of
the
business
of
the
partnership
embodied
in
Article
1818
of
New
Civil
Code,
especially
when
it
comes
to
the
adding
machine.
Under
Article
1801
of
New
Civil
Code,
if
two
or
more
partners
have
bee
entrusted
with
the
management
of
the
partnership
affairs
without
specification
of
their
respective
duties,
or
without
stipulation
that
one
of
them
shall
not
act
without
the
consent
of
all
the
others,
each
one
may
separately
execute
all
acts
of
administration,
but
if
any
of
them
should
oppose
the
acts
of
the
others,
the
decision
of
the
majority
shall
prevail;
and
in
case
of
a
tie,
the
matter
shall
be
decided
by
the
partner
owning
the
controlling
interest.
On
the
other
hand,
under
Article
1802
of
the
New
Civil
Code,
if
it
has
been
stipulated
that
none
of
the
managing
partners
shall
act
without
the
consent
of
the
others,
the
concurrence
of
all
shall
be
necessary
for
the
validity
of
the
acts,
and
the
absence
or
disability
of
any
one
of
them
cannot
be
alleged,
unless
there
is
imminent
danger
of
grave
or
irreparable
injury
to
the
partnership.
It
should
be
emphasized
that
the
provisions
of
Articles
1800
to
1802
should
be
considered
to
be
intramural
rules
that
govern
the
relationship
between
and
among
the
partners,
and
the
breach
of
which
can
bring
about
a
cause
of
action
against
the
breaching
partners.
The
rules
provided
therein
do
not
bind
nor
apply
to
invalidate
the
contract
and
transactions
had
with
third
parties
acting
in
good
faith
and
under
the
doctrine
of
apparent
authority
provided
under
Article
1818.
20
Teague v. Martin, 53 Phil. 504 (1929).
637
NON-CORPORATE MEDIA OF DOING BUSINESS
Specific Rules on Dealings with Immovable Properties of the
Partnership
ART. 1774. Any immovable property or an interest therein may
be acquired in the partnership name. Title so acquired can be
conveyed only in the partnership name, (n)
ART. 1803. When the manner of management has not been
agreed upon, the following rules shall be observed:
(1) All the partners shall be considered agents and whatever
any one of them may do alone shall bind the partnership, without
prejudice to the provisions of Article 1801.
(2) None of the partners may, withoutthe consent of the
others, make any important alteration in the immovable property of
the partnership, even if it may be useful to the partnership. But if the
refusal of consent by the other partners is manifestly prejudicial to
the interest of the partnership, the court's intervention may be
sought. (1695a)
ART. 1819. Where title to real property is in the partnership
name, any partner may convey title to such property by a
conveyance executed in the partnership name; but the partnership
may recover such property unless the partner's act binds the
partnership under the provisions of the first paragraph of Article
1818, or unless such property has been conveyed by the grantee or a
person claiming through such grantee to a holder for value without
knowledge that the partner, in making the conveyance, has
exceeded his authority.
Where title to real property is in the name of the partnership, a
conveyance executed by a partner, in his own name, passes the
equitable interest of
RIGHTS, POWER AND AUTHORITY OF PARTNERS
611
the
partnership,
provided
the
act
is
one
within
the
authority
of
the
partner
under
the
provisions
of
the
first
paragraph
of
Article
1818.
Where
title
to
real
property
is
in
the
name
of
one
or
more
but
not
all
the
partners,
and
the
record
does
not
disclose
the
right
of
the
partnership,
the
partners
in
whose
name
the
title
stands
may
convey
title
to
such
property,
but
the
partnership
may
recover
such
property
if
the
partners'
act
does
not
bind
the
partnership
under
the
provisions
of
the
first
paragraph
of
Article
1818,
unless
the
purchaser
or
his
assignee,
is
a
holder
for
value,
without
knowledge.
Where
the
title
to
real
property
is
in
the
name
of
one
or
more
or
all
the
partners,
or
in
a
third
person
in
trust
for
the
partnership,
a
conveyance
executed
by
a
partner
in
the
partnership
name,
or
in
his
own
name,
passes
the
equitable
interest
of
the
partnership,
provided
the
act
is
one
within
the
authority
of
the
partner
under
the
provisions
of
the
first
paragraph
of
Article
1818.
Where
the
title
to
real
property
is
in
the
name
of
all
the
partners
a
conveyance
executed
by
all
the
partners
passes
all
their
rights
in
such
property,
(n)
Although
Article
1774
of
the
New
Civil
Code
provides
that
immovable
property
or
an
interest
therein
may
be
acquired
in
the
partnership
name,
the
partnership
title
is
not
rendered
void
if
the
registration
thereof
is
not
in
the
name
of
the
partnership
but
in
one
or
more,
or
all,
of
the
partners'
names
(or
for
that
matter
in
the
name
of
a
third-party
who
holds
it
in
trust
for
the
partnership).
The
treatment
of
partnership
immovables
is
so
set
apart
from
other
management
areas,
that
Article
1803
of
the
New
Civil
Code
provides
for
different
set
of
management
prerogatives
for
immovable
properties
of
the
partnership:
Whereas,
in
the
absence
of
specific
agreement
on
the
matter
"All
the
partners
shall
be
612
NON-CORPORATE MEDIA OF DOING BUSINESS
considered
agents
and
whatever
any
one
of
them
may
do
alone
shall
bind
the
partnership,"
yet
when
it
comes
to
immovable
properties
of
the
partnership,
"None
of
the
partners
may,
without
the
consent
of
the
others,
make
any
important
alteration
in
the
immovable
property
of
the
partnership,
even
if
it
may
be
useful
to
the
partnership."
If
the
refusal
of
consent
by
the
other
partners
is
manifestly
prejudicial
to
the
interest
of
the
partnership,
the
courts'
intervention
may
be
sought.
Article
1819
of
the
New
Civil
Code
sets
specific
rules
on
how
partners
may
bind
real
properties
pertaining
to
the
partnership,
depending
on
the
manner
by
which
such
title
was
registered,
thus:
(a) Where Title Is in the Partnership Name:
(i) Any partner may convey title to such property by a
conveyance executed in the partnership name; the
partnership may recover such property only when the
partner so conveying has no such power to so convey, but
not against a transferee in good faith and for value;
(ii) A partner who conveys the property but in his own name
passes the equitable interest of the partnership only when
the partner so conveying acted with authority; otherwise,
no title at all to the immovable property passes to the
transferee.
The immediately preceding rule is consistent with the
provision of Article 1774 of the New Civil Code which
states that title to immovable property acquired in the
partnership name can be conveyed only in the
partnership name.
(b) Where
Title
Is
Not
in
Partnership
Name
(i.e.,
Title
in
the
Name
of
One
or
More,
or
All
the
Partners,
or
a
Third
Person
in
Trust
for
the
Partnership):
(i)
A
conveyance
executed
by
a
partner
in
the
name
of
the
partnership
or
in
his
own
name
RIGHTS, POWER AND AUTHORITY OF PARTNERS
only passes equitable interest of the partner-
ship, only when the partner conveying acted
with authority;
(ii) A conveyance executed by a partner in the
name of the partnership or in his own name
does not even pass anything (not even
equitable interest of the partnership) when the
partner so conveying acted without authority;
(c) Where Title Is in the Name of One or More But
Not All the Partners:
(i)
When the records disclose partnership in-
terests, the partners in whose name the title
stands may convey title to such property; and
the partnership may recover only when the
partners so conveying acted without authority,
but not against a purchaser in good faith and
for value;
(ii)
When the records do not disclose the right of
the partnership, the partners in whose name
the title stands may convey title to such prop-
erty, and the partnership may recover against
any transferee when the partners so conveying
acted without authority;
(d) Where Title Is in the Name of All of the Partners:
(i) Conveyance executed by all the partners (in
whose ever name so conveyed) passes all
their rights in such property. In this case the will
of all the partners is the will of the partnership.
PARTNER'S RIGHT TO SPECIFIC PARTNERSHIP PROPERTY
ART. 1811. A partner is co-owner with his part-
ners of specific partnership property. The incidents
of this co-ownership are such that:
613
614
NON-CORPORATE MEDIA OF DOING BUSINESS
(1) A partner, subject to the provisions of this Title and to any
agreement between the partners, has an equal right with his
partners to possess specific partnership property for partnership
purposes; but he has no right to possess such property for any other
purpose without the consent of his partners;
(2) A partner's right in specific partnership property is not
assignable except in connection with the assignment of rights of all
the partners in the same property;
(3) A partner's right in specific partnership property is not
subject to attachment or execution, except on a claim against the
partnership. When partnership property is attached for a
partnership debt the partners, or any of them, or the representatives
of a deceased partner, cannot claim any right under the homestead
or exemption laws;
(4) A partner's right in specific partnership property is not
subject to legal support under Article 291. (n)
1. Partners' Specific Right to Partnership Property Limited to Pursuing the
Partnership Business
Although Article 1811 of New Civil Code defines or explains a partner's
"right in specific partnership property" to mean that "A partner is [merely a]
co-owner with his partners of specific partnership property," and the
enumeration of the "incidents of this co-ownership" would show that what is
being defined is merely an implementation of the principle of mutual agency,
thus:
(a) "A partner... has an equal right with his partners to possess
specific partnership property for partnership purposes;"
RIGHTS, POWER AND AUTHORITY OF PARTNERS
(b)
"A partner's right in specific partnership property is not
assignable except in connection with the assignment of rights
of all the partners in the same property;"
(c)
"A partner's right in specific partnership property is not
subject to attachment or execution, except on a claim against
the partnership;" and
(d)
"A partner's right in specific partnership property is not
subject to legal support."
615
Unlike the proprietary right of an ordinary co-owner to "use the thing
owned in common, provided he does so in accordance with the purpose for
which it is intended and in such a way as not to injure the interest of the
co-ownership or prevent the other co- owners from using it according to their
21
rights," the right of every partner in specific partnership property is merely an
extension of his right to participate in the management of the partnership
affairs, and bears no proprietary title to himself personally apart from pursuing
the partnership affairs.
It may also be observed that the recognition by the Law on Partnerships of
the partners' purported co-ownership interests in specific partnership property
would be in defiance of the grant of a separate juridical personality to every
partnership organized under New Civil Code. Nonetheless, the purported co-
ownership interest of partners is essentially for the furtherance of the
partnership affairs, and emphasizes the fact that in the partnership setting
equity ownership is merged with management prerogatives, equivalent to the
recognition of the full-ownership by the partners, as collective sole-proprietors
so-to-speak, of the partnership enterprise and its assets.
Another way of looking at the purported co-ownership rights of partners
to specific partnership property is to consider that the law constitute the
partners as trustees of the corporate properties, whereby they hold naked title
to the partnership properties, with
21
Art. 1486, New Civil Code.
616
NON-CORPORATE MEDIA OF DOING BUSINESS
full
power
to
manage
and
control
the
same
for
the
benefit
of
the
partnership
venture,
thus,
"A
partner...
has
equal
right
with
his
partners
to
possess
specific
partnership
property
for
partnership
purposes."
Thus,
in
Catlan
v.
Gatchaliart*
it
was
held
that
when
partnership
real
property
had
been
mortgaged
and
foreclosed,
the
redemption
by
any
of
the
partners,
even
when
using
his
separate
funds,
does
not
allow
such
redemption
to
be
in
his
sole
favor:
"Under
the
general
principle
of
law,
a
partners
is
an
agent
23
of
the
partnership.
Furthermore,
every
partner
becomes
a
trustee
for
his
copartner
with
regard
to
any
benefits
or
profits
derived
from
his
act
as
a
partner
(Article
1807,
new
Civil
Code).
Consequently,
when
Catalan
redeemed
the
properties
in
question
he
became
a
trustee
and
held
the
same
in
trust
for
his
copartner
Gatchalian,
subject
of
course
to
his
right
to
demand
from
the
latter
24
his
contribution
to
the
amount
of
redemption."
This
is
also
the
reason
why
Article
1811(2)
of
the
New
Civil
Code
provides
expressly
that
"A
partner's
right
in
specific
partnership
property
is
not
assignable
except
in
connection
with
the
assignment
of
rights
of
all
the
partners
in
the
same
property."
Bautista
had
written
that
the
reasons
why
a
partner's
right
in
partnership
property
is
non-assignable
are
as
follows:
(a)
it would effectively allow a third party (the assignee) to
participate in the affairs of the partnership, and would
basically have a stranger become a partner without the
consent of all the other partners; and
(b)
it would interfere with the rights of the other partners and
the partnership creditors to have all partnership properties
applied directly to the payment of partnership debts; and
^105 Phil. 1270 (1959).
^Art. 1818, New Civil
24
105 Phil. Code.
1270,1271.
RIGHTS, POWER AND AUTHORITY OF PARTNERS
617
(c) it would indirectly go against the principle that partner's right in
specific partnership property cannot be attached or levied
25
upon," as provided in paragraph (3) of Article 1811. In line
with the same rationale, paragraph numbered (4) of Article
1811 also provides that a partner's right in specific partnership
property is also not subject to support.
Bautista reminded us in his treatise that the whole of Article 1811 of the
New Civil Code was taken from the Uniform Partnership Act which, based on
common law, adheres to the "aggregate theory of partnership under which,
because it is not considered an entity or a legal person, a partnership cannot
hold title and hence partnership property is deemed held or owned in common
28
by the partners for the benefit of the partnership," as opposed to New Civil law
doctrine that affords the partnership a separate juridical personality.
2. Partners' Contributed Property to the Partnership Can Be Dealt With Only for
Partnership Purposes
Even when a specific property can be identified as having been
contributed by a partner to the partnership, once contributed, it no longer is
subject to the sole will and discretion of the contributing partner who ceases to
be the sole owner thereof.
As early as in Clemente v. Galvan, the Supreme Court has held that when
properties are contributed to the partnership, they would belong to the
partnership as a separate juridical personality; and that as properties of the
partnership, they could no longer be disposed of by the party contributing the
same without the consent or approval of the partnership or of the other
27
partners. In Clemente, the Court held as void the mortgage executed by a
partner on the properties he had contributed to the
25
BAUTISTA,
at
p.
162
BAUTISTA,
at
pp.
147-148.
27
Doctrinal
language
of
Clemente
as
summarized
in
Lozana
v.
Depakakibo,
107
Phil.
728,
732
(1960).
26
NON-CORPORATE MEDIA OF DOING BUSINESS
618
partnership after the partnership had ceased to do business but before
liquidation, thus: "The evidence of record shows that the machines in
contention originally belonged to the defendant and from him were
transferred to the partnership Galvan Y Compania. This being the case, said
machines belong to the partnership and not to him, and shall belong to it until
28
partition is effected according to the result thereof after the liquidation."
In Lozana v. Depakakibo, the Court held that properties contributed by
a partner to the partnership cannot be validly disposed by the contributing
partner through a deed of disposition even when the partnership itself has
ceased to be operational: "Since the court below had found that the plaintiff
had actually contributed one engine and 70 posts to the partnership, it
necessarily follows that the Buda diesel engine contributed by the plaintiff had
become the property of the partnership. As properties of the partnership, the
same could not be disposed of by the party contributing the same without the
30
consent or approval of the partnership or of the other partner."
EQUITY RIGHTS OF PARTNERS
ART. 1812. A partner's interest in the partnership is his share of
the profits and surplus, (n)
ART. 1813. A conveyance by a partner of his whole interest in
the partnership does not of itself dissolve the partnership, or, as
against the other partners in the absence of agreement, entitle the
assignee, during the continuance of the partnership, to interfere in
the management or administration of the partnership business or
affairs, or to
28
67 Phil. 565, 569.
107 Phil. 728 (1960).
^Ibid, at p. 732.
RIGHTS, POWER AND AUTHORITY OF PARTNERS
require any information or account of partnership transactions, or to
inspect the partnership books; but it merely entitles the assignee to
receive in accordance with his contract the profits to which the
assigning partner would otherwise be entitled. However, in case of
fraud in the management of the partnership, the assignee may avail
himself of the usual remedies.
In case of a dissolution of the partnership, the assignee is
entitled to receive his assignor's interest and may require an account
from the date only of the last account agreed to by all the partners,
(n)
ART. 1814. Without prejudice to the preferred rights of
partnership creditors under Article 1827, on due application to a
competent court by any judgment creditor of a partner, the court
which entered the judgment, or dny other court, may charge the
interest of the debtor partner with payment of the unsatisfied
amount of such judgment debt with interest thereon; and may then
or later appoint a receiver of his share of the profits, and of any other
money due or to fall due to him in respect of the partnership, and
make all other orders, directions, accounts and inquiries which the
debtor partner might have made, or which the circumstances of the
case may require.
The interest charged may be redeemed at any time before
foreclosure, or in case of a sale being directed by the court, may be
purchased without thereby causing a dissolution:
(1) With separate property, by any one or more of the
partners; or
(2) With partnership property, by any one or more of the
partners with the consent of all the partners whose interests are not
so charged or sold.
619
NON-CORPORATE MEDIA OF DOING BUSINESS
620
Nothing in this Title shall be held to deprive a partner of his
right, if any, under the exemption laws, as regards his interest in the
partnership, (n)
Article 1812 of New Civil Code defines a "partner's interest in the
partnership" essentially as his equity interest, thus: "his share of the profits and
surplus." A partner's interest in the partnership defines his equity position as a
co-proprietor of the partnership enterprise, which entitles him ipso facto to
share in the profits and to share in the losses of the venture.
"Profits" represent the excess of receipts over expenses or the excess of
31
the value of returns over the value of advances; whereas; "surplus" has been
32
defined as the excess of assets over liabilities.
Bautista wrote that "The interest of the partner in the partnership has
thus been otherwise described as the net balance remaining to him; after all
partnership debts or claims against it have been paid and the equities and
33
accounts between such partner and his co-partners have been adjusted."
1. Assignment of a Partner's Equity Right
A partner's equity interest in the partnership truly represents a
proprietary interest for his exclusive benefit as an owner of such intangible
right. Like any other property right, a partner's equity is generally transferable or
assignable. Nonetheless under Article 1813 of New Civil Code, the transfer or
assignment of a partner's equity does not make the transferee or assignee step
31
Citizens
National
Bank
v.
Corf.
33
S.E.2d
613,
616
(1945);
Fairchild
v.
Gray,
242
N.Y.S.
192
(1930);
Crawford
v.
Surety
Insurance
Co.,
139
P.
481,
484
(1970).
32
Tupperv,:
Kroc,
492
P.
2d
1275
(1972);
Anderson
v.
U.S.,
131
F.Supp.
501
(1955);
Balaban
v.
Bank
of
Nevada,
477
P.2d
860
(1970).
"BAUTISTA,
at
p.
176,
citing
Claude
v.
Claude,
228
P.2d
776
(1951);
Preton
v.
State
Industrial
Accident
Commission,
149
P.2d
275
(1944);
Swirsky
v.
Hor-
wich,
47
N.E.2d
452
(1943);
Cunningham
v.
Cunningham,
135
N.E.
21
(1922).
RIGHTS, POWER AND AUTHORITY OF PARTNERS
621
into
the
shoes
of
the
partner
in
his
personal
capacity
as
such
in
relation
to
the
other
partners,
thus:
A
conveyance
by
a
partner
of
his
whole
interest
in
the
partnership
does
not
of
itself
dissolve
the
partnership,
or,
as
against
the
other
partners
in
the
absence
of
agreement,
entitle
the
assignee,
during
the
continuance
of
the
partnership,
to
interfere
in
the
management
or
administration
of
the
partnership
business
or
affairs,
or
to
require
any
information
or
account
of
partnership
transactions,
or
to
inspect
the
partnership
books.
In
other
words,
under
Article
1813
of
the
New
Civil
Code,
the
only
thing
that
can
be
conveyed
by
a
partner
as
an
equity
holder,
is
the
sole
right
to
receive
profits
and
surplus
assets
upon
the
dissolution
of
the
partnership,
thus:
"it
merely
entitles
the
assignee
to
receive
in
accordance
with
his
contract
the
profits
to
which
the
assigning
partners
would
otherwise
be
entitled."
The
only
instance
under
said
provision
that
the
transferee
or
assignee
may
avail
himself
of
the
usual
remedies
afforded
to
a
partner
is
"in
case
of
fraud
in
the
management
of
the
partnership."
Unlike
in
Corporate
Law
where
the
rule
is
that
equity
interest
(i.e.,
shares
of
stock)
is
that
they
are
essentially
transferable,
in
Partnership
Law,
equity
interests
of
partners
are
not
essentially
transferable.
This
statement
is
not
even
accurate
because
if
one
looks
at
the
language
of
Article
1813
the
proper
rule
would
be,
every
partner
shall
have
an
absolute
right
to
transfer
or
assign
his
equity
interest,
but
such
transaction
will
not
transfer
his
other
rights
as
a
partner.
The
article
also
recognizes
that
just
because
a
partner
"cashes
in"
on
his
equity
rights
in
the
partnership,
which
he
has
every
right
to
do,
the
same
does
not
mean
that
he
ceases
to
be
a
party
to
the
partnership
contract
nor
does
it
trigger
the
dissolution
of
the
partnership,
which
means
that
with
respect
to
his
other
right
to
management
the
partnership
affairs
and
act
as
agent
of
the
other
partners,
these
remain
in
tact
in
the
person
of
the
transferring
partner.
So
separate
and
divisible
is
a
partner's
equity
rights
from
his
other
rights
as
a
partner
that
Article
1814
of
New
Civil
Code
622
NON-CORPORATE MEDIA OF DOING BUSINESS
allows the personal judgment creditors of a partner to "charge the interest of
the debtor partner with payment of the unsatisfied amount of such judgment
debt with interest thereon; and may then or later appoint a receiver of his share
of the profits, and of any other money due or to fall due to him in respect of the
partnership." The article allows of the partners or the partnership itself to either
to redeem or to purchase the equity executed "without thereby causing a
dissolution" of the partnership.
Bautista wrote that Article 1814 was taken from the Uniform Partnership
Act, and patterned after the English Partnership Act of 1890, and it was adopted
formally to a decided purpose of providing a means by which the separate
creditors of a partner may seize upon his property rights without having to
disrupt the operations of the partnership enterprise or effectively force the
34
dissolution of the partnership. Thus, Article 1814, which allows the attachment
or execution of a partner's equity rights in a partnership is the remedy given to a
partner's separate creditors in lieu of the express prohibition of seeking an
attachment or levy upon the partnership assets and properties themselves to
cover the partner's right to specific partnership property.
Under Article 1827 of the New Civil Code, the separate creditors of each
partner may ask for the attachment and public sale of the share of the partner in
the partnership assets, which must be upon dissolution and only after the
partnership creditors have been fully satisfied. To construe the provision of
Article 1827 literally would mean that it would run counter to the provision
under Article 1811(3) which provides that "A partner's right in specific
partnership property is not subject to attachment or execution."
Under American jurisprudence, since an equity right in partnership is a
present, existing, and not a mere contingent, right, it can be assigned,
nevertheless, the partners may agree that one of them cannot sell or assign his
interest without the consent of
"BAUTISTA, at pp. 184-185.
RIGHTS, POWER AND AUTHORITY OF PARTNERS
623
35
the
other
or
others,
or
they
may
enter
into
an
agreement
prohibiting
such
36
assignment
altogether.
A
good
illustration
of
the
sheer
divisibility
between
the
property
rights
of
a
37
partner
is
shown
in
the
decision
in
Goquiolay
v.
Sycip,
where
the
particular
provision
on
succession
in
the
articles
of
partnership
specifically
provided
as
follows:
"In
the
event
of
the
death
of
any
of
the
partners
at
any
time
before
the
expiration
of
said
term,
the
copartnership
shall
not
be
dissolved
but
will
have
to
be
continued
and
the
deceased
partner
shall
be
represented
by
his
heirs
or
38
assigns
in
said
copartnership." When
the
duly
designated
sole
managing
partner
under
the
articles
died
and
was
succeeded
by
his
widow,
it
was
contended
that
under
the
terms
of
the
articles
she
also
succeeded
to
the
sole
management
of
the
partnership.
In
ruling
against
such
a
conclusion,
the
Court
held
. . . While, as we previously stated in our narration of facts, the
Articles of Copartnership and the power of a ttorney... conferred
upon the [the sole managing partner] the exclusive management of
the business, such power, premised as it is upon trust and
confidence, was a mere personal right that terminated upon [the
sole managing partner's] demise. The provision in the articles
stating that "in the event of death of any one of the partners within
the 10-year term of the partnership, the deceased partner shall be
represented by his heirs," could not have referred to the managerial
right given to [the deceased husband]; more appropriately, it
related to the succession in the proprietary interest of each
39
partner.
^Pokrzywnicki v. Kozak, 47 A.2d 144 (1946).
Chaiken v. Employment Security Commission, 274 A.2d 707
37
(1971).
108 Phil. 947 (1960).
mid, at p. 950.
mid, at pp. 954-955.
624
NON-CORPORATE MEDIA OF DOING BUSINESS
2. Right to Participate in Profits; Obligation to Participate in Losses
ART. 1797. The losses and profits shall be distributed in
conformity with the agreement. If only the share of each partner in
the profits has been agreed upon, the share of each in the losses
shall be in the same proportion.
In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his services he has contributed capital, he shall also receive a
share in the profits in proportion to his capital. (1689a)
ART. 1798. If the partners have agreed to intrust to a third
person the designation of the share of each one in the profits and
losses, such designation may be impugned only when it is manifestly
inequitable. In no case may a partner who has begun to execute the
decision of the third person, or who has not impugned the same
within a period of three months from the time he had knowledge
thereof, complain of such decision.
The designation of losses and profits cannot be intrusted to one
of the partners. (1690)
ART. 1799. A stipulation which excludes one or more partners
from any share in the profits or losses is void. (1691)
The rights of an equity holder are essentially linked to the operations of
the business enterprise, and as he takes the risk
RIGHTS, POWER AND AUTHORITY OF PARTNERS
625
connected
with
business
down-turn,
then
to
him
would
also
accrue
the
profits
of
the
enterprise.
One
who
merely
participates
in
the
sharing
of
gross
returns
of
an
enterprise,
as
indicated
in
Article
1769(3)
of
New
Civil
Code,
does
not
necessarily
mean
that
he
is
an
equity
holder,
for
he
does
not
expose
him
to
the
expenses
and
losses
of
the
business,
in
contrast
to
one
who
shares
in
the
net
profits,
who
under
Article
1769(4)
is
prima
facie
evidence
that
he
is
a
partner
in
the
business,
if
such
participation
is
not
linked
to
some
other
clear
contractual
arrangement.
Under
Article
1767
of
New
Civil
Code,
the
essence
of
a
partnership
arrangement
is
the
existence
of
a
common
fund
or
a
business
enterprise,
and
which
under
Article
1770
must
be
"established
for
the
common
benefit
or
interest
of
the
partners;"
and
which
is
the
reason
why
under
Article
1799,
a
stipulation
in
the
contract
of
partnership
which
excludes
one
or
more
of
the
partners
from
any
share
in
the
profits
or
losses
is
void,
but
the
partnership
arrangement
remains
subsisting.
Article
1797
of
the
New
Civil
Code
provides
for
the
rules
governing
the
distribution
of
profits
and
losses
in
the
partnership
business,
thus:
(a)
Profits and losses shall be distributed in conformity with the
agreement between the partners;
(b)
If only the share of each partner in the profits has been
agreed upon, the share of each in the losses shall be in the
same proportion;
(c)
In the absence of any such agreement, the share of each
partner in the profits and losses shall be in proportion to what
he may have contributed;
(d)
Except that the industrial partner:
(i)
shall not be liable for the losses;
(ii) as to the profits, he shall receive such share as may be
just and equitable under the circumstances; and
(iii)
if he contributed also capital, he shall also receive a
share in the profits in proportion to his capital.
626
NON-CORPORATE MEDIA OF DOING BUSINESS
Article
1798
of
the
New
Civil
Code
provides
that
if
the
partners
have
entrusted
to
a
third
person
the
designation
of
profits
and
losses,
such
designation
may
be
impugned
only
when
it
is
manifestly
inequitable;
and
in
no
case
may
a
partnership
who
has
begun
to
execute
the
decision
of
third
person,
or
who
has
not
impugned
the
same
within
three
(3)
months
from
the
time
he
had
knowledge
thereof,
complain
of
such
decision.
Article
1798
also
provides
that
the
designation
of
losses
and
profits
cannot
be
entrusted
to
one
of
the
partners.
What
happens
when
one
or
more
of
the
partners
are
designated
to
distribute
profits
and
losses?
It
would
have
to
mean
that
the
designation
and
the
exercise
thereof
would
both
be
void.
It
should
be
noted
that
under
Article
1797
of
the
New
Civil
Code
in
the
case
of
an
industrial
partner,
his
share
in
the
profits
would
be
in
accordance
with
what
the
he
and
capitalist
partners
view
as
being
"just
and
equitable
under
the
circumstances."
a.
No
Guarantee
as
to
Profits
0
In Moran, Jr. v. Court of Appeals,* even as the Supreme Court affirmed
the doctrine that in "a contract of partnership, each partner must share in the
41
profits and losses of the venture. That is the essence of a partnership;"
nonetheless, it held that any stipulation guaranteeing to a partner the receipt of
profits would be against public policy, since it would exempt such partner from
participating in losses, thus: "And even with an assurance made by one of the
partners that they would earn a huge amount of profits, in the absence of fraud,
the other partner cannot claim a right to recover the highly speculative profits. It
42
is a rare business venture guaranteed to give 100% profits."
Moran, Jr. also held that with respect to the provision in the articles of
partnership to give private respondent a monthly commission, the same could
not be enforced if they were guaranteed beyond the point of profitability thus:
"The partnership agreement stipulated that the petitioner would give the
private
40
133 SCRA 88 (1984).
42
to/d, at p. 95. lbid,
at p. 95.
41
RIGHTS, POWER AND AUTHORITY OF PARTNERS
627
respondent a monthly commission of P1,000.00 from April 15, 1971 to
December 15, 1971 for a total of eight (8) monthly commissions. The agreement
does not state the basis of the commission. The payment of the commission
could only have been predicated on relatively extravagant profits. The parties
could not have intended the giving of a commission inspite (sic) of loss or failure
of the venture. Since the venture was a failure, the private respondent is not
43
entitled to the P8,000.00 commission."
b. When the Right to Profits Accrues
Outside of dissolution and liquidation proceedings and in the absence of a
stipulation on periodic distribution of profits under the articles of partnership,
the right to share in the profits of the partnership business pertains only to "net
profits," which means only when there has been a proper accounting of the
income and expenses pertaining to the business.
Thus, in Sison v. McQuaid a complaint brought by a partner against the
other partner to recover his one-half share in the proceeds of a transaction with
the government, was held to be without any cause of action, thus:
. . . Plaintiff seeks to recover from defendant one-half of the
purchase price of lumber sold by the partnership to the United
States Army. But his complaint does not show why he should be
entitled to the sum he claims. It does not allege that there has been
a liquidation of the partnership business and the said sum has been
found to be due him as his share of the profits. The proceeds from
the sale of a certain amount of lumber cannot be considered profit
until costs and expenses have been deducted. Moreover, the profits
of a business cannot be determined by taking into account the
result of one particular transaction instead of all the transactions
had. Hence, the need for a general liquidation before a member of a
45
partnership may claim a specific sum as his share of the profits.
43
/b/'d,
at
p.
96.
"94
Phil.
201
(1953).
"Ibid,
at
p.
204.
628
NON-CORPORATE MEDIA OF DOING BUSINESS
The receipt by a partner of his contribution to the partnership, there being
no indication that there was a termination of the partnership or a withdrawal
therefrom, does not extinguish the right of such receiving partner to the profits
earned by the partnership business or his right to an accounting, and that indeed
his remaining interest in the partnership can only be determined upon final
46
liquidation.
On the other hand, when there has been an accounting and liquidation
made of the operations of the partnership, and the partners have received such
accounting without objections thereto including the receipt of their share of the
profits, is no longer entitled to demand a further liquidation unless he is able to
prove that there has been fraud, deceit, error or mistake in giving such
47
approval.
Finally, when the books of account of the partnership are kept by a
partner in his custody, such partner is bound by the entries in such books of
account which constitute an admission of the facts stated therein, especially on
48
the claims and interests of the partners in the partnership.
OTHER RIGHTS OF A PARTNER
1. Right to Be Reimbursed for Expenses Incurred on Behalf of the
Partnership
ART. 1796. The partnership shall be responsible to every partner
for the amounts he may have disbursed on behalf of the partnership
and for the corresponding interest, from the time the expense are
made; it shall also answer to each partner for
^Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
47
Ornum v. Lasala, 74 Phil. 242 (1943).
46
Behn, Meyer & Co. v. Rosatzin, 5 Phil. 660 (1906); Garrido v. Asencio, 10
Phil. 691 (1908).
RIGHTS, POWER AND AUTHORITY OF PARTNERS
629
the obligations he may have contracted in good faith in the interest
of the partnership business, and for risks in consequence of its
management. (1688a)
Article
1796
of
New
Civil
Code
provides
that
the
partnership
shall
be
responsible
to
every
partner
for
the
amounts
he
may
have
disbursed
on
behalf
of
the
partnership
and
for
the
corresponding
interest,
from
the
time
the
expenses
are
made.
The
provision
is
meant
to
grant
to
every
partner
the
right
to
demand
from
the
partnership
reimbursement
of
advances
made
on
behalf
of
the
partnership
business.
Article
1796
as
it
treats
every
partner
to
be
an
agent
of
the
partnership
under
the
attribute
of
mutual
agency,
parallels
the
same
right
granted
to
every
agent
in
the
Law
on
Agency,
particularly
Article
1912,
which
provides
that
"Should
the
agent
have
advanced
[sums
necessary
for
the
execution
of
the
agency],
the
principal
must
reimburse
him
therefore,
even
if
the
business
or
undertaking
was
not
successful,
provided
the
agent
is
free
from
all
fault."
2.
Right
to
Inspect
ART. 1805. The partnership books shall be kept, subject to any
agreement between the partners, at the principal place of business
of the partnership, and every partner shall at any reasonable hour
have access to and may inspect and copy any of them, (n)
Under
Article
1805
of
New
Civil
Code,
the
partnership
books
shall
be
kept,
subject
to
any
agreement
between
the
partners,
at
the
principal
place
of
business
of
the
partnerships,
and
every
partner
shall
at
any
reasonable
hour
have
access
to
and
may
inspect
and
copy
any
of
them.
630
NON-CORPORATE MEDIA OF DOING BUSINESS
In Corporate Law, the right of a stockholder or member to inspect and
copy corporate records is considered to be a common law right, and a right of
such importance that its enforcement can be by an action mandamus. The right
to inspect is critical to safeguarding all other rights of stockholders or members
in the corporation.
The same principles are applicable to a partner's right to inspect and to
demand true and full information on partnership matters.
3. Right to Demand True and Full Information
ART. 1806. 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 or of any partner
under legal disability, (n)
Article
1806
of
New
Civil
Code
provides
that
every
partner
or
his
legal
representative
may
demand
true
and
full
information
from
other
partners
of
all
things
affecting
the
partnership.
Consequently,
in
consonance
with
the
fiduciary
relationship
existing
between
and
among
partners,
every
partner
has
the
obligations
to
render
true
and
full
information
to
other
partners
of
all
things
affecting
the
partnership.
4.
Right
to
Demand
Accounting
ART.
1809.
Any
partner
shall
have
the
right
to
a
formal
account
as
to
partnership
affairs:
(1)
If
he
is
wrongfully
excluded
from
the
partnership
business
or
possession
of
its
property
by
his
co-partners;
RIGHTS, POWER AND AUTHORITY OF PARTNERS
631
(2) If the right exists under the terms of any
agreement;
(3) As provided by Article 1807;
(4) Whenever other circumstances render it
just and reasonable, (n)
Under
Article
1807
of
the
New
Civil
Code,
every
partner
may
demand
from
every
other
partner
an
accounting
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,
or
liquidation
of
the
partnership
or
from
any
use
by
him
of
its
property.
Under
Article
1809
of
the
New
Civil
Code,
any
partner
shall
have
the
right
to
a
formal
account
as
to
partnership
affairs,
when
he
is
wrongfully
excluded
from
the
partnership
business
or
possession
of
its
property,
if
the
right
exists
under
the
terms
of
the
partnership
agreement,
whenever
circumstances
render
it
just
and
reasonable.
9
In Fue Leung v. Intermediate Appellate Court,* the Supreme Court held
that a partner's right to accounting exists as long as the partnership exists, and
that prescription begins to run only upon the dissolution of the partnership and
final accounting is done.
On the other hand, in Hanlon v. Haussermann and Beam the Court
ruled that former partners in a joint undertaking to rehabilitate a mining plant
have no right to demand accounting for the profits of such undertaking when
the partnership arrangement had been terminated with the failure of the
claiming partners to raise the promised investments into the enterprise, and that
the other two partners pursued the venture on their own account and only after
the partnership arrangement had terminated.
"
1
6
9
S
C
R
A
7
4
6
NON-CORPORATE MEDIA OF DOING BUSINESS
632
51
In Lim Tanhu v. Ramolete, the Court held that a partner's right to
accounting for properties of the partnership that are within the custody or
control of the other partners shall apply only when there is proof that such
properties, registered in the individual names of the other partners, have been
acquired from the use of partnership funds, thus: "Accordingly, the defendants
have no obligation to account to anyone for such acquisitions in the absence of
clear proof that they had violated the trust of [one of the partners] during the
52
existence of the partnership."
5. Right to Dissolve the Partnership
The near-absolute legal power of any partner to demand the dissolution
of the partnership is in consonance with the doctrine of delectus personae that
establishes a fiduciary relationship between and among the partners.
In Rojas v. Maglanathe Court confirmed the right of a partner to
"unilaterally dissolve the partnership," by a notice of dissolution, which in effect
is a notice of withdrawal from the partnership, thus: "Under Article 1830(2) of
the New Civil Code, even if there is a specified term, one partner can cause its
dissolution by expressly withdrawing even before the expiration of the period,
with or without justifiable cause. Of course, if the cause is not justified or no
cause was given, the withdrawing partner is liable for damages but in no case
can he be compelled to remain in the firm. With his withdrawal, the number of
54
members is decreased, hence, the dissolution."
The right of a partner to dissolve the partnership is discussed in more
details in Chapter 9 on Dissolution, Winding-up and Termination.
51
66
SCRA
425
(1975).
"Ibid,
at
p.
477.
53
192
SCRA
110
54
(1990).
Ibid,
at
pp.
118-119.
RIGHTS, POWER AND AUTHORITY OF PARTNERS
OBLIGATIONS OF THE PARTNERSHIP TO THIRD PARTIES
ART. 1768. The partnership has a juridical personality separate
and distinct from that of each of the partners, even in case of failure
to comply with the requirements of Article 1772, first paragraph. (n)
ART. 1815. Every partnership shall operate under a firm name,
which may or may not include the name of one or more of the
partners.
Those who, not being members of the partnership, include their
names in the firm name, shall be subject to the liability of a partner,
(n)
ART. 1818. Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of which
he is a member binds the partnership, unless the partner so acting
has in fact no authority to act for the partnership in the particular
matter, and the person with whom he is dealing has knowledge of
the fact that he has no such authority.
An act of a partner which is not apparently for the carrying on of
business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they
have abandoned the business, one or more but less than all the
partners have no authority to:
(1) Assign the partnership property in trust for creditors or on
the assignee's promise to pay the debts of the partnership;
633
634
NON-CORPORATE MEDIA OF DOING BUSINESS
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it
impossible to carry on the ordinary business of a
partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a part-
nership claim or liability;
(6) Submit a partnership claim or liability to
arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restric-
tion on authority shall bind the partnership to per-
sons having knowledge of the restriction, (n)
ART. 1796. The partnership shall be responsible
to every partner for the amounts he may have
disbursed on behalf of the partnership and for the
corresponding interest, from the time the expenses
are made; it shall also answer to each partner for
the obligations he may have contracted in good
faith in the interest of the partnership business,
and for risks in consequence of its management.
(1688a)
Philippine Partnership Law, particularly under Article 1768, accords to the
partnership venture a separate juridical personality, primarily to allow a more
feasible and efficient manner by which to deal with the public and to organize
the venture into a enterprise that provides for a clear delineation of liability and
a hierarchy of claims against its assets.
Article 1796 of New Civil Code provides that the partnership "shall also
answer to each partner for the obligations such partner may have contracted in
good faith in the interest of the partnership business, and for the risks and
consequence of its management."
RIGHTS, POWER AND AUTHORITY OF PARTNERS
635
1. Liability Arising from the Firm Name
The name of a partnership venture becomes essential in its commercial
dealings because it identifies the person of the partnership which is deemed to
be party bound in each of the contracts entered into. Thus, under Article 1815 of
New Civil Code, "Every partnership shall operate under a firm name, which may
or may not include the name of one or more of the partners." The inclusion of
the name of a person in the partnership name becomes a conclusive
presumption to the public who deals in good faith with the firm that he is a
partner thereto. Consequently, under said article, "Those who, not being
members of the partnership, include their names in the firm name, shall be
subject to the liability of a partner."
/
2. Liability Arising from the Acts of the Agent
Since the partnership venture is accorded a separate juridical personality,
under Article 1818 of the New Civil Code the liability that it incurs with the public
that it deals with can only arise from the acts of the partnership's authorized
agent or agents, which by default rule would be every partner.
The liability that the partnership must bear from the acts of the partners
pursuant to partnership business applies only to a third person who deals in
good faith with the partnership; Thus, a third person who knows of the lack of
authority of the partner acting in a partnership transactions generally cannot
/claim against the partnership, thus:
(a) When "the partner so acting has in fact no authority to act for the
partnership in the particular matter, and the person with
whom he is dealing has knowledge of the fact that he has no
55
such authority;" and
Art. 1818, New Civil Code.
636
NON-CORPORATE MEDIA OF DOING BUSINESS
(b) "An act of a partner which is not apparently for the
carrying on of the business of the partnership in the usual
way does not bind the partnership unless authorized by the
66
other partners;" and
(c) "No act of a partner in contravention of a restriction
on authority shall bind the partnership to persons having
57
knowledge of the restriction."
0O0
"
A
r
t
.
1
8
1
8
,
N
e
CHAPTER
8
DUTIES
AND
OBLIGATIONS
OF
PARTNERS
OBLIGATION TO CONTRIBUTE TO THE COMMON FUND
ART. 1786. Every partner is a debtor of the
partnership for whatever he may have promised to
contribute thereto.
xxx. (1681a)
ART. 1790. Unless there is a stipulation to the
contrary, the partners shall contribute equal shares
to the capital of the partnership, (n)
Since the agreement to contribute to a common fund is an essential
element for a valid contract of partnership to arise, Philippine Partnership Law
provides for clear statutory provisions governing such obligations.
In Corporate Law, equity obligations (i.e., the obligation to pay
subscriptions to capital stock) are not treated as debt obligations, and the
receivables arising therefrom are not considered as forming part of the ordinary
assets of the corporation. The rule takes it rationale from the "trust fund
doctrine," that the assets of the corporation corresponding to its capital stock
are treated as a trust fund preserved for the protection of the claims of the
corporate creditors who can, are under the corporate "limited liability" rule,
637
638
NON-CORPORATE MEDIA OF DOING BUSINESS
recover
on
their
liabilities
to
the
assets
of
the
corporation
and
the
investments
1
and
promised
investments
of
the
stockholders. Consequently,
capital
contributions
and
obligations
to
contribute
capital
(i.e.,
subscription
contracts
and
subscription
receivables)
cannot
be
treated
like
ordinary
contracts
and
debts,
and
are
not
subject
to
rescission,
set-off,
or
condonation,
in
order
to
ensure
their
collectibility
for
the
benefit
of
the
corporate
creditors.
On
this
matter,
the
rule
under
Philippine
Partnership
Law
is
quite
different
in
that
Article
1786
of
the
New
Civil
Code
provides
that
"Every
partner
is
a
debtor
of
the
partnership
for
whatever
he
may
have
promised
to
contribute
thereto."
The
reason
for
this
rule
is
that
in
Philippine
Partnership
Law
the
prevailing
doctrine
is
"unlimited
liability"
on
the
part
of
the
partners,
and
there
is
no
need
to
consider
their
capital
accounts
and
promised
contribution
as
a
"trust
fund"
for
the
protection
of
the
partnership
creditors,
who
have
the
legal
right
to
seek
satisfaction
of
their
claims
even
against
the
separate
properties
of
each
of
the
partners
not
contributed
or
promised
to
the
partnership.
This
is
not
to
say
that
some
of
the
elements
of
the
trust
fund
doctrme
do
not
apply
to
the
partnership
setting,
for
they
do,
such
as
tne
rule
that
creditors
have
preference
over
partners
against
ihp
partnership
properties.
Thus,
Article
1826
of
the
New
Civil
Code
provides
that
"The
creditors
of
the
partnership
shall
be
preferred
to
those
of
each
partner
as
regards
the
partnership
property."
Why
is
it
then
necessary
for
Philippine
Partnership
Law
to
declare\expressly
that
a
partner
is
a
debtor
of
the
partnership
for
whatever
he
may
have
promised
to
contribute
thereto?
The
answer
lies
in
the
primary
principle
which
Partnership
Law
seeks
to
promote:
That
the
promise
or
obligation
to
contribute
to
the
common
fund
is
of
the
essence
of
the
contract
of
partnership
and
binds
the
partners
to
one
another
as
the
very
privity
of
their
relationship,
and
the
breach
of
which
would
break
the
contractual
Boman Environmental Dev. Corp. v. Court of Appeals, 167 SCRA 540
(1988); Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152
(1999); Ong Yong v. 77u, 401 SCRA 1 (2003); NTC v. Court of Appeals, SCRA 508
(1999).
DUTIES AND OBLIGATIONS OF PARTNERS
639
bond
(delectus
personae).
The
point
is
best
illustrated
by
the
following
doctrines
found
in
provisions,
of
and
jurisprudence
under
the
New
Civil
Code,
thus:
(a)
Under Article 1788 when a partner fails to deliver his
promised contribution to the partnership, he becomes liable
for interests and damages from the time he should have
complied with his obligation;
(b)
Under Article 1790 "Unless there is a stipulation to the
contrary, the partners shall contribute equal shares to the
capital of the partnership;"
(c)
Under Article 1830(4), the partnership is automatically
dissolved "When a specific thing, which a partner had
promised to contribute to the partnership, perishes before
the delivery;"
(d)
The remedies available to the partnership and the other
partners with respect to the failure or refusal to comply with
contribution obligation takes the normal remedies of interest
and damages, including compensatory damages constituting
his shares of the profits that were not realized but which
2
clearly could have been earned for the company;
(e)
When a partner fails to comply with his obligation to deliver
what he promised to contribute to the partnership, and there
is no desire to dissolve the partnership, the remedy that is
available to the other partners cannot be rescission, but
3
rather one for specific performance; and
(f)
The property contributed by a partner becomes the property
of the partnership and cannot be
Uy v. Puzon, 79 SCRA 598 (1977); Moran, Jr. v. Court of Appeals, 133
SCRA
88 (1986).
3
Sancho v. Uzarraga, 55 Phil. 60 (1930); Uyv. Puzon, 79 SCRA598 (1977).
640
NON-CORPORATE MEDIA OF DOING BUSINESS
disposed of without the consent of the other
4
partners.
1. When Promised Contribution Is a Sum of Money
ART. 1788. A partner who has undertaken to contribute a sum
of money and fails to do so becomes a debtor for the interest and
damages from the time he should have complied with his obligation.
The same rule applies to any amount he may have taken from
the partnership coffers, and his liability shall begin from the time he
converted the amount to his own use. (1682)
Article
1788
of
the
New
Civil
Code
provides
that
"A
partner
who
has
undertaken
to
contribute
a
sum
of
money
to
the
partnership
venture
[and
fails
to
do
so,]
becomes
a
debtor
for
the
interest
and
damages
from
the
time
he
should
have
complied
with
his
obligation."
The
article
allows
the
partners
and
the
partnership
to
recover
from
the
defaulting
partner
not
only
interest
due
(at
the
rate
stipulated
or
in
default
thereof,
the
legal
interest),
but
damages,
including
loss
opportunity,
shown
to
have
been
sustained
by
the
partnership
by
reason
of
the
failure
of
the
partner
to
pay
in
his
contribution.
s
In Uy v. Puzon, the Supreme Court affirmed the trial court's award of a
partner's share in the profits which the partnership failed to earn from its
constructions contracts brought about by the refusal of the primary partner to
remit his promised
*Lozana v. Depakakibo, 107 Phil. 728
5
(1960).
79 SCRA 598 (1977).
DUTIES AND OBLIGATIONS OF PARTNERS
contributions to the partnership and his diversion of the receipts
from the projects away from the partnership coffers, thus
Had the appellant not been remiss in his obligation as
partner and as prime contractor of the construction projects
in question as he was bound to perform pursuant to the part-
nership and subcontract agreements, and considering the
fact that the total contract amount of these two projects is
P2,327,335.76, it is reasonable to expect that the partner-
ship would have earned much more than the P334,255.61
We have hereinabove indicated. The award, therefore,
made by the trial court of the amount of P200,000.00, as
compensatory damages, is not speculative, but based on
6
reasonable estimate.
7
in contrast, in Moran, Jr. v. Court of Appeals, the Supreme
Court refused to sustain the trial court's grant of compensatory
damages against the partner who had not complied with his
obligation to contribute, when it was clear that "In the instant
case, there is no evidence whatsoever that the partnership
between the petitioner and the private respondent would have
been a profitable venture. In fact, it was a failure doomed from
the start. There is therefore no basis for the award of speculative
8
damages in favor of the private respondent."
2. When Promised Contribution Is PropertyIn General
ART. 1786. Every partner is a debtor of the partnership for
whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with
regard to specific and determinate things which he may have
contributed to the partnership, in the same cases and in the same
manner
*lbid,
at
p.
615.
7
133
SCRA
88
e
(1984).
lbid,
at
p.
95.
641
NON-CORPORATE MEDIA OF DOING BUSINESS
642
as the vendor is bound with respect to the vendee. He shall also be
liable for the fruits thereof from the time they should have been
delivered, without the need of any demand. (1681a)
ART. 1795. The risk of specific and determinate things, which
are not fungible, contributed to the partnership so that only their use
and fruits may be for the common benefit, shall be borne by the
partner who owns them.
If the things contributed are fungible, or cannot be kept
without deteriorating, or if they were contributed to be sold, the risk
shall be borne by the partnership. In the absence of stipulation, the
risk of the things brought and appraised in the inventory, shall also
be borne by the partnership, and in such case the claim shall be
limited to the value at which they were appraised. (1687)
Under
Article
1786
of
the
New
Civil
Code,
whenever
a
partner
has
bound
himself
to
contribute
a
specific
or
determinate
thing
to
the
partnership,
he
thereby
assumes
the
position
of
being
a
seller
of
determinate
property
contributed
into
the
partnership
in
that
he
is
liable
for:
(a)
A breach of the warranty against eviction;
(b)
The fruits thereof from the time he obliged himself to deliver
the determinate thing, and without need of demand.
In
addition,
Article
1795
of
the
New
Civil
Code
establishes
the
rules
on
who
assumes
[t]he
risk
of
specific
and
determinate
t hings
...
contributed
to
the
partnership,"
thus:
(a)
"If
they
are
not
fungible,
so
that
only
their
use
and
fruits
may
be
for
the
common
benefit,
the
risk
shall
be
borne
by
the
partner
who
owns
them;
DUTIES AND OBLIGATIONS OF PARTNERS
643
If the things contributed:
(b)
(i)
are fungible;
(ii) cannot be kept without deteriorating; or
(iii) if they were contributed to be sold; the risk
shall be borne by the partnership.
"In the absence of stipulation, the risk of things brought and
appraised in the inventory, shall also be borne by the
partnership, and in such case the claim shall be limited to the
value at which they were appraised."
(c)
As to who bears the risk of loss of determinate things promised to be
contributed but prior to actual delivery to the partnership, the prevailing view
seems to be that it would be the partner who before actual delivery retains
9
u
ownership thereof. In such case, under Article 1829(4), [w]hen a specific thing
which a partner had promised to contribute to the partnership, perishes before
the delivery," it dissolves the partnership.
3. When Contribution in Goods
ART. 1787. When the capital or a part thereof which a partner is
bound to contribute consists of goods, their appraisal must be made
in the manner prescribed in the contract of partnership, and in the
absence of stipulation, it shall be made by experts chosen by the
partners, and according to current prices, the subsequent changes
thereof being for account of the partnership, (n)
BAUTISTA, at p. 91, citing FRANCISCO, PARTNERSHIPS, at p. 150 (1958).
644
NON-CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1787
of
the
New
Civil
Code,
"When
the
capital
or
a
part
thereof
which
a
partner
is
bound
to
contribute
consists
of
goods,
their
appraisal
must
be
made
in
the
manner
prescribed
in
the
contract
of
partnership,
and
in
the
absence
of
stipulation,
it
shall
be
made
by
experts
chosen
by
the
partners,
and
according
to
the
current
prices,
the
subsequent
changes
thereof
being
for
the
account
of
the
partnership."
The
requirements
of
the
provision
are
made
to
ensure
that
the
capital
account
of
a
partner
is
properly
credited
with
the
correct
value
of
a
property
contributed.
4.
When
Contribution
in
Real
Property
ART. 1771. A partnership may be constituted in any form except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary (1667a)
ART. 1772. Every contract of partnership having a capital of
three thousand pesos or more, in money or property, shall appear in
a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.
Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of the partnership and the
members thereof to third person, (n)
ART. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the
public instrument. (1668a)
Under
Artjcle
1773
of
the
New
Civil
Code,
a
contract
of
partnership
would
be
void,
whenever
immovable
property
is
DUTIES AND OBLIGATIONS OF PARTNERS
645
contributed, if an inventory of said property is not made, signed by the parties,
and attached to the public instrument mandated under Article 1771 of the New
Civil Code, which requires in such case that the contract of partnership must be
in a public instrument, and which under Article 1772 of the New Civil Code
would have to be filed with the SEC because it would almost always mean a
capital of more than P3,000.00.
A more detailed discussion of the effects on the nonfulfillment with the
requirements mandated by law can be found on the Chapter 5 on Formal
Requirements for Partnerships.
5. Contribution of Service or Industry; the Industrial Partner
ART. 1789. An industrial partner cannot engage in business for
himself, unless the partnership expressly permits him to do so; and if
he should do so, the capitalist partners may either exclude him from
the firm or avail themselves of the benefits which he may have
obtained in violation of this provision, with a right to damages in
either case, (n)
ART. 1797. The losses and profits shall be distributed in
conformity with the agreement. If only the share of each partner in
the profits has been agreed upon, the share of each in the losses shall
be in the same proportion.
In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his services he has con
646
NON-CORPORATE MEDIA OF DOING BUSINESS
tributed capital, he shall also receive a share in the
profits in proportion to his capital. (1689a)
There can be no doubt that once the contract of partnership is
constituted, the industrial partner is from then bound to devote his time
towards fulfilling the nature of the service he has contracted himself to
contribute.
The difficulty arises from the fact that the obligation essentially involves
the personal obligation "to do," and generally an industrial partner who does
not contribute the services promised cannot be compelled to do so; otherwise,
specific performance on the matter would violate the public policy against
involuntary servitude.
The other difficulty that arises is that even non-industrial partners, being
mutual agents with one another and generally empowered to jointly manage
the partnership affairs, also contribute their services to the partnership for
which they do not obtain a compensation therefor, unless otherwise stipulated.
0
The American case of Marsh's'Appeal,' discusses these points as
follows:
... The only question in this case is whether a partner who
neglects and refuses, without reasonable cause, to perform the
personal services which he has stipulated to render the partnership,
is liable to account to the firm for the value of the services in the
settlement of the partnership accounts. . . . It is undoubtedly true,
as a general rule, that partners are not entitled to charge each
other, or the firm of which they are members for their services in
the copartnership business, unless there is a special agreement to
that effect, or such agreement can be implied from the course of
dealing between them. By the well-settled law of partnership, every
partner is bound to work to the extent of his ability for the
10
69 Pa. St. 30.
DUTIES AND OBLIGATIONS OF PARTNERS
647
benefit of the whole, without regard to the services of his
copartners, and without comparison of value; for services to the
firm cannot, from their very nature, be estimated and equalized by
compensation of differences..
. . . The plaintiffs are not seeking compensation for the
services they rendered the partnership. They are simply seeking to
charge the defendant with the loss occasioned the partnership by
this refusal to render the services which he agreed to perform. If the
partnership has suffered loss by his breach of the agreement, why
should he nojt make good the loss, and put the firm in the same
condition it would have been if he had not broken the agreement? ..
. If, says Mr. Justice Story, the partnership suffers any loss from the
gross negligence, unskillfulness, fraud, or wanton misconduct of any
partner in the court of partnership business, he will ordinarily be
responsible over to the other partners\for all the losses and injuries,
and damages sustained thereby, whether directly or through their
own liability to third persons':.. If this be the law, why should not
the defendant be answerable to the partnership for breach of the
11
agreement to perform the services stipulated?
It is clear therefore, that when an industrial partner has failed to render
the proper service he is obliged to render to the business of the firm, he can be
made liable for the damages sustained by the firm for such failure. In addition,
the breach by an industrial partner of his primary obligation to render service to
the partnership would have repercussion on his share in the net profits of the
company. Under Article 1797 of the New Civil Code, "As for profits, the
industrial partner shall receive such share as may be just and equitable under
the circumstances."
The fiduciary duties of an industrial partner are discussed more in detail
hereunder.
"Quoted in BAUTISTA, at pp. 92-94.
648
NON-CORPORATE MEDIA OF DOING BUSINESS
6. Obligation for "Additional Contribution"
ART. 1791. If there is no agreement to the contrary, in case of an
imminent loss of the business of the partnership, any partner who
refuses to contribute an additional share to the capital, except an
industrial partner, to save the venture, shall be obliged to sell his
interest to the other partners, (n)
Since
the
nexus
of
the
obligation
of
a
partner
arises
from
the
contract
of
partnership,
there
is
generally
no
obligation
for
any
partner
to
contribute
beyond
what
was
originally
stipulated
in
the
articles
of
partnership,
unless
there
is
a
stipulation
providing
for
additional
contributions.
Even
in
the
case
where
additional
contribution
to
capital
becomes
necessary
"in
case
of
an
imminent
loss
of
the
business
of
the
partnership,"
no
partner
can
be
compelled
to
give
additional
contribution;
but
the
legal
consequence
under
Article
1791
of
the
New
Civil
Code,
is
that
"any
partner
who
refuses
to
contribute
an
additibnal
share
to
the
capital,
except
an
industrial
partner,
to
save
th
venture,
shall
be
obliged
to
sell
his
interest
to
the
other
partners."
Even
such
a
penalty
cannot
be
applied
according
to
Article
1791
"if
there
is
an
agreement
to
the
contrary,"
that
is
a
stipulation
in
the
contract
of
partnership
that
even
in
case
of
necessity
to
the
save
the
venture,
partners
cannot
be
compelled
to
make
additional
contribution,
in
which
case
the
forfeiture
of
their
interest
cannot
even
be
enforced.
7. Remedies When There Is Default in Obligation to Contribute
Normally, the contract of partnership being one constituted of bilateral
obligations, the remedy to the other partners when one of them fails to comply
with his obligation to contribute, would either be specific performance or
rescission. Under the provisions
DUTIES AND OBLIGATIONS OF PARTNERS
649
12
of
the
old
Civil
Code,
the
Court
held
in
Sancho
v.
Lizarraga, that
the
remedy
of
rescission
of
the
contract
of
partnership
which
would
mean
the
return
of
the
contribution
of
the
complaining
partner
with
interest
and
damages
proven,
is
not
available
because
then
Articles
1681
and
1682
[now
Articles
1786
and
1788
of
the
New
Civil
Code]
provided
for
specific
remedies
to
the
contract
of
partnership,
thus:
Owing to the defendant's failure to pay to the partnership the
whole amount which he bound himself to pay, he became indebted
to itfor the remainder, with interest and any damages occasioned
thereby, but the plaintiff did not thereby acquire the right to
demand rescission of the partnership contract according to Article
1124 of the Code. This article cannot be applied to the case in
question, because it refers to the resolution of obligations in
general, whereas Articles 1681 and 1682 specifically refer to the
contract of partnership in particular. And it is a well known principle
13
that special provisions prevail over general provisions.
In Sancho, the Court affirmed the decision of the lower court which
effectively denied the prayer for rescission, and instead directed the dissolution
of the partnership, the accounting and liquidation of its affairs. In other words,
the remedy of rescission, which seeks to extinguish the contractual relationship
and effect mutual restitution, is not allowed under the contract of partnership.
The proper remedies would be to seek a collection of the promised contribution,
with recovery of interests and damages as provided for in Articles 1786 and
1788, or seek the dissolution of the partnership under Article 1831 of the New
Civil Code.
It may be said that dissolution is a form of rescission unique to
partnerships (also for corporations, especially close corporations), which only
has a prospective effect of terminating the contractual relationship, and thus not
produce the retroactive effect of extinguishing the contract as though it never
existed and providing for mutual restitution.
12
55
Phil.
601
(1931).
"Ibid,
at
pp.
603-604.
650
NON-CORPORATE MEDIA OF DOING BUSINESS
This special type of remedy is indicative of the essential nature of the
contract of partnership as a preparatory and progressive contract, in that it is
entered into to pursue a transaction or series of transactions (i.e., to operate a
business enterprise) that changes the nature and content of the things that have
been contributed thereto, such that it becomes nearly impossible to return the
parties back to their original position.
The ruling is also consistent with the rule that once a partner gives a
contribution to the partnership, he loses direct ownership over said property
which is now owned by the partnership as a separate juridical person, and that
it is integrated into the partnership business enterprise, which upon application
of the trust fund doctrine, means that it shall be the partnership creditors who
shall first have priority over the partnership assets before any partner can be
entitled to recover from the net assets.
PERSONAL OBLIGATIONS FOR PARTNERSHIP DEBTS; DOCTRINE OF UNLIMITED LIABILITY
1. Unlimited Liability of Existing Partners
ART. 1816. All partners, including industrial ones, shall be liable
pro rata with all their property and after all the partnership assets
have been exhausted, for the contracts which may be entered into
in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership.
However, any partner may enter into a separate obligation to
perform a partnership contract, (n)
ART. 1817. Any stipulation against the liability laid down in the
preceding article shall be void, except as among the partners, (n)
DUTIES AND OBLIGATIONS OF PARTNERS
651
The "unlimited liability" feature in the partnership setting makes
partners personally liable for partnership debts, notwithstanding the separate
juridical entity of the partnership. However, such liabilities of partners are
better covered in the Chapter 9 on Dissolution, Winding Up and Termination,
because the triggering mechanism would in effect be only if the partnership
becomes insolvent. But this is not to mean that the insolvency of the
partnership necessarily would trigger its dissolution, for it may happen that the
partners continue to pursue the business venture in the hope that there may
still be a turn-around.
Article 1816 of the New Civil Code provides that "All partners, including
industrial ones, shall be liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts which may be
entered into in the name and for the account of the partnership." Article 1817
of the New Civil Code provides that "Any stipulation against the liability laid
down in [Article 1816] shall be void, except as among the partners." Rightly
stated, it is the exhaustion of partnership assets to answer for partnership
liabilities that triggers the enforcement of unlimited liability mechanism as
against partners and their separate assets. And the pro rata obligation of the
partners does not mean that they become personally liable proportionately in
relation to their contributions in the partnership, but actually means they are
liable jointly.
The subsidiary and pro rata liability feature under the old Civil Code was
retained under the new Civil Code, which does not adopt the primary and
solidary liability feature for commercial partners under the Code of Commerce.
2. Obligation of Subsequently Admitted Partners
Under Article 1826 of the New Civil Code, a person admitted as a partner
into an existing partnership is liable for all the obligations of the partnership
arising before his admission as though he had been a partner when such
obligations were incurred, except that this liability shall be satisfied only out of
the partnership property, unless there is a stipulation to the contrary.
NON-CORPORATE MEDIA OF DOING BUSINESS
652
This is the only aspect of "limited liability" in a general part-
nership setting.
3. Obligations of Non-Partners
Under the New Civil Code, the only time when non-partners
become liable for the partner debts and obligation is when there
is estoppel, or when the public is made to believe that one per-
son is a partner of the partnership when in fact he is not, thus:
(a)
Under Article 1815, those who, not being mem-
bers of the partnership, include their names in the
firm name, shall be subject to the liability of a part-
ner;
(b)
Under Article 1825, when a person by word or
conduct, represents himself, or consents to an-
other representing him to anyone, as a partner
in an existing partnership or with one or more
persons not actual partners, he is liable to any
such persons to whom such representation has
been made, who has, on the faith of such repre-
sentation, given credit to the actual or apparent
partnership;
(c)
Under Article 1825, when such a person has
made such representation or consent to its
being made in a public manner he is liable to
such person, whether the representation has
or has not been made or communicated to such
person so giving credit by or with the knowledge of
the apparent partner making the representation
or consenting to its being made;
(d)
Under Article 1825, when a person has been
thus represented to be a partner in an existing
partnership, or with one or more persons not actual
partners, he is an agent of the persons consenting
to such representation to bind them to the same
extent and in the same manner as though he were
a partner in fact; and
DUTIES AND OBLIGATIONS OF PARTNERS
653
(e)
Under
Article
1825,
when
all
the
members
of
the
existing
partnership
consent
to
the
representation,
a
partnership
act
or
obligation
results;
but
in
all
other
cases
it
is
the
joint
act
or
obligation
of
the
person
acting
and
persons
consenting
to
the
representation.
FIDUCIARY DUTIES OF PARTNERS
The general rule is that partners have the duty to act for the common
benefit of all the partners in a partnership setting. This has been set out clearly
in in Pang Lim and Galvez v. Lo Seng," where the Supreme Court held
Above all other persons in business relations, partners are
required to exhibit towards each other the highest degree of good
faith. In fact the relation between partners is essentially fiduciary,
each being considered in law, as he is in fact, the confidential agent
of the other. It is therefore accepted as fundamental in equity
jurisprudence that one partner cannot, to the detriment of another,
apply exclusively to his own benefit the results of the knowledge
15
and information gained in the character of partner.
The fiduciary duties of the partners among one another and to the
partnership subsist only while the partnership subsists; consequently the
termination of the partnership relation (as distinguished from mere dissolution)
also terminates the fiduciary obligations of the partners to one another and to
the partnership.
16
in Hanlon v. Haussermann, four contracting parties agreed to a joint
enterprise to rehabilitate a mining plant, where the engagement of the three of
them was limited to raising money within a stated period by subscribing to or
selling shares of the mining company. One of the parties defaulted, and under
the
"42 Phil. 282
K
(1921). lbid, at
16
288.
40 Pp.
hil.
796
(1920).
654
NON-CORPORATE MEDIA OF DOING BUSINESS
express
resolutory
conditions
of
the
contract
the
two
other
parties
were
discharged.
Subsequently,
the
two
parties
thus
discharged,
who
were
at
the
same
time
stockholders
and
officials
of
the
mining
company,
procured
a
contract
from
the
mining
company
by
which
they
proceeded
to
restore
the
mining
plant
upon
their
own
account.
The
other
two
members
of
the
original
enterprise
sued
to
recover
shares
in
the
mining
company
and
dividends
declared
upon
such
shares
on
the
ground
that
they
were
earned
pursuant
to
the
joint
enterprise
to
which
they
were
entitled
to
receive
their
shares.
In
denying
the
claims,
the
Court
held
After
the
termination
of
an
agency,
partnership,
or
joint
adventure,
each
of
the
parties
is
free
to
act
in
his
own
interest,
provided
he
has
done
nothing
during
the
continuance
of
the
relation
to
lay
a
foundation
for
an
undue
advantage
to
himself.
To
act
as
agent
for
another
does
not
necessarily
imply
the
creation
of
a
permanent
disability
in
the
agent
to
act
for
himself
in
regard
to
the
same
subject-matter;
and
certainly
no
case
has
been
called
to
our
attention
in
which
the
equitable
doctrine
above
referred
to
has
been
so
applied
as
to
prevent
an
owner
of
property
from
doing
what
he
pleased
with
his
own
after
such
a
contract
[of
partnership]
17
between
the
parties
to
this
lawsuit
had
lapsed.
18
Likewise,
in
Lim
Tanhu
v.
Remo/ete,
the
Court
held
that
former
partners
have
no
obligation
to
account
for
how
they
acquired
properties
in
their
names,
when
such
acquisition
were
effected
"long
after
the
partnership
had
been
automatically
dissolved
as
a
result
of
the
death
of
Po
Chuan
[the
primary
managing
partner].
Accordingly,
defendants
have
no
obligation
to
account
to
anyone
for
such
acquisitions
in
the
absence
of
clear
proof
that
they
had
violated
19
the
trust
of
Po
Chuan
during
the
existence
of
the
partnership."
"Ibid,
at
p.
818.
18
66
SCRA
425
lbid,
at
p.
476.
(1975).
DUTIES AND OBLIGATIONS OF PARTNERS
655
1. Duty of Diligence
ART. 1794. Every partner is responsible to the partnership for
damages suffered by it through his fault, and 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 partner's extraordinary
efforts in other activities of the partnership, unusual profits have
been realized. (1686a)
ART. 1800. The partner who has been appointed manager in the
articles of partnership may execute all acts of administration despite
the opposition of his partners, unless he should act in bad faith; and
his power is irrevocable without just or lawful cause. The vote of the
partners representing the controlling interest shall be necessary for
such revocation of power.
A power granted after the partnership has been constituted
may be revoked at any time. (1692a)
Article
1794
of
the
New
Civil
Code
covers
a
partner's
duty
of
diligence
to
the
partnership
affairs
as
it
provides
that
"Every
partner
is
responsible
to
the
partnership
for
damages
suffered
by
it
through
his
fault,
and
he
cannot
compensate
them
with
the
profits
and
benefits
which
he
may
have
earned
for
the
partnership
by
his
industry.
However,
the
courts
may
equitable
lessen
this
responsibility
if
through
the
partner's
extraordinary
efforts
in
other
activities
of
the
partnership,
unusual
profits
have
been
realized."
Under
Article
1800
of
the
New
Civil
Code,
a
duly
designated
managing
partner
who
acts
in
bad
faith,
his
particular
exercise
of
power
administration
may
effectively
be
opposed
by
the
other
partners.
When
he
acts
without
just
or
lawful
cause,
then
his
656
NON-CORPORATE MEDIA OF DOING BUSINESS
power may be revoked, except of course when he has been
appointed the managing partner under the terms of the articles
of partnership.
2. Duty of Loyalty
ART. 1792. If a partner authorized to manage collects a
demandable sum which was owed to him in his own name, from a
person who owed the partnership another sum also demandable,
the sum thus collected shall be applied to the two credits in
proportion to their amounts, even though he may have given a
receipt for his own credit only; but should he have given it for the
account of the partnership credit, the amount shall be fully applied
to the latter.
The provisions of this article are understood to be without
prejudice to the right granted to the other debtor by Article 1252,
but only if the personal credit of the partner should be more
onerous to him. (1684)
In
the
event
a
partner
takes
any
amount
from
the
partnership
funds
for
himself,
he
becomes
a
debtor
of
the
partnership,
as
well
for
the
interests
and
damages,
which
liability
under
Article
1789
of
the
New
Civil
Code
"shall
begin
from
the
time
he
converted
the
amount
to
his
own
use."
An
aspect
of
a
partner's
duty
of
loyalty
is
manifested
in
Article
1792
of
the
New
Civil
Code,
which
provides
that
when
a
partner
authorized
to
manage
collects
a
demandable
sum
which
was
owed
to
him
in
his
own
name,
but
from
a
person
who
owned
the
partnership
another
sum
also
demandable,
the
sum
thus
collected
shall
be
applied
to
the
two
credits
in
proportion
to
their
amounts,
even
though
he
may
have
given
a
receipt
for
his
own
DUTIES AND OBLIGATIONS OF PARTNERS
657
credit
only;
but
should
the
partner
have
given
it
for
the
account
of
the
partnership
credit,
the
amount
shall
be
fully
applied
for
the
account
of
the
partnership.
The
article
provides
for
an
exception
to
its
application:
"The
provisions
of
this
article
are
understood
to
be
without
prejudice
to
the
right
granted
to
the
debtor
by
Article
1252
[on
right
of
debtor
to
stipulate
the
application
of
payment],
but
only
if
the
personal
credit
of
the
partner
should
be
more
onerous
to
him."
Another
aspect
of
a
partner's
duty
of
loyalty
is
shown
in
Article
1793
of
the
New
Civil
Code,
which
provides
that
a
partner
who
has
received
in
whole
or
in
part,
his
share
of
a
partnership
credit,
when
the
other
partners
have
not
collected
theirs,
shall
be
obliged,
if
the
debtor
should
thereafter
become
insolvent,
to
bring
to
the
partnership
capital
what
he
received
even
though
he
may
have
given
a
receipt
for
his
share
only.
In
Catalan
v.
Gatchalian,
the
Court
ruled
that
when
partnership
real
property
had
been
mortgaged
and
foreclosed,
the
redemption
by
any
of
the
partners,
even
when
using
his
separate
funds,
does
not
allow
such
redemption
to
be
in
his
sole
favor.
The
summary
report
reads
in
part
as
follows:
.
.
.
Under
the
general
principle
of
law,
a
partner
is
an
agent
of
21
the
partnership.
Furthermore,
every
partner
becomes
a
trustee
for
his
copartner
with
regard
to
any
benefits
or
profits
derived
from
his
22
act
as
a
partner. Consequently,
when
Catalan
redeemed
the
properties
in
question
he
became
a
trustee
and
held
the
same
in
trust
for
his
copartner
Gatchalian,
subject
of
course
to
his
right
to
demand
from
the
latter
his
contribution
to
the
amount
of
23
redemption.
105 Phil. 1270(1959).
Art. 1818, New Civil
a
Code.
Art. 1807, New Civil
mid, at p. 1271.
Code.
21
658
NON-CORPORATE MEDIA OF DOING BUSINESS
3.
Duty
to
Account
ART.
1806.
Partners
shall
render
on
demand
true
and
full
information
of
all
things
affecting
the
part-
nership
to
any
partner
or
the
legal
representative
of
any
deceased
partner
or
of
any
partner
under
legal
disability,
(n)
ART.
1807.
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
con-
nected
with
the
formation,
conduct,
or
liquidation
of
the
partnership
or
from
any
use
by
him
of
its
property,
(n)
Since
the
partners
are
mutual
agents
to
one
another
and
to
the
partnership,
then
necessarily
they
are
obliged
by
such
fiduciary
relationship
to
render
a
full
accounting
on
matters
they
undertake
for
the
partnership
affairs,
and
are
prohibited
from
obtaining
secret
benefits
for
themselves
therefrom.
The
duty
is
closely
linked
to
the
duty
of
loyalty.
Under
Article
1806
of
the
New
Civil
Code,
partners
shall
render
on
demand
true
and
full
information
of
all
things
affecting
the
partnerships
to
any
partner
or
the
legal
representative
of
any
deceased
partner
or
of
any
partner
under
disability.
Under
Article
1807
of
the
New
Civil
Code,
"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,
or
liquidation
of
the
partnership
or
from
any
use
by
him
of
its
property."
Aside
from
the
remedy
of
recovering
the
profits
derived
by
a
partner
from
partnership
affairs,
the
same
may
be
a
ground
to
seek
judicial
dissolution
of
the
,J
partnership
under
Article
1831
of
the
New
Civil
Code.
DUTIES AND OBLIGATIONS OF PARTNERS
659
4. Specific Fiduciary Duties of Industrial Partner
ART. 1789. An industrial partner cannot engage in business for
himself, unless the partnership expressly permits him to do so; and if
he should do so, the capitalist partners may either exclude him from
the firm or avail themselves of the benefits which he may have
obtained in violation of this provision, with a right to damages in
either case, (n)
Under Article 1789 of the New Civil Code, an industrial partner is
prohibited from engaging in business for himself, unless the partnership
expressly permits him to do so. Since even capitalist partners are expected
(although not obliged) to contribute service to the partnership enterprise, when
they do so they are not entitled to separate compensation (unless otherwise
stipulated). In order to make the contribution of service an industrial partner
more meaningful and truly an obligation, it must mean that is saddled with
more burdens or prohibitions. The coverage of Article 1789 should mean also
that:
(a)
Since his main contribution to the partnership is his industry,
then an industrial partner owes to the venture and his fellow
partners the obligation to devote his industry towards the
partnership business.
(b)
Even if the partnership is engaged in a particular form of
business, an industrial partner cannot devote his industry to
another type of undertaking for profit even when it is in a
different line of business not in competition with that of the
partnership.
If
an
industrial
partner
breaches
this
duty,
Article
1789
provides
that
the
capitalist
partners
may
either:
660
NON-CORPORATE MEDIA OF DOING BUSINESS
(a)
exclude him from the firm; or
(b)
avail themselves of the benefits which the industrial partner
may have obtained in violation of such duty, with a right to
damages in either case.
It seems clear from jurisprudence that in order for an industrial to be held
liable for breach of duty under Article 1789, he must have engaged during the
term of the partnership into another business or an activity that is essentially for
profit.
2
In Evangelista & Co. v. Abad Santos, * an article of copartnership was
executed between three capitalist partners on one hand, and Judge Abad
Santos, as an industrial partner on the other hand, with the capitalist partners
being entitled to 70% of the profits, while the industrial partner was entitled to
30% thereof. Several years into the partnership term, Judge Abad Santos sought
to have an accounting of the partnership affairs and to be given her share of the
profits of the company which had been distributed only among the capitalist
partners. The capitalist partners sought to have the relationship declared as not
a true partnership on the ground that the articles were drawn-up merely to
cover the special arrangement entitlement by which Judge Abad Santos had
arranged for a loan financing for the company to be paid only after the loan has
been fully paid; and that in fact being an incumbent judge she rendered to
service to the company, thus:
It is an admitted fact that since before the exe-cution of the
amended articles of partnership... the appellee Estrella Abad Santos
has been, and up to the present time still is, one of the judges of the
City Court of Manila, devoting all her time to the performance of
the duties of her public office. This fact proves beyond
peradventure that it was never contemplated between the parties,
for she could not lawfully contribute her full time and industry
which is the obligation of an industrial partner pursuant to Art.
1789 of the Civil Code.
24
51 SCRA 416 (1973).
DUTIES AND OBLIGATIONS OF PARTNERS
688
The Court ruled as follows:
. One cannot read appellee's testimony just quoted without
gaining the very definite impression that, even as she was and still is
a Judge of the City Court of Manila, she has rendered services for
appellants without which they would not have had the wherewithal
to operate the business for which appellant company was
organized... x xx.
It is not disputed that the prohibition against an industrial
partner engaging in business for himself seeks to prevent any
conflict of interest between the industrial partner and the
partnership, and to insure faithful compliance by said partner with
his prestation. There is no pretense, however, even on the part of
appellants that appellee is engaged in any business antagonistic to
that of appellant company, since being a Judge of one of the
branches of the City Court of Manila can hardly be characterized as a
business. That appellee has faithfully complied with her prestation
with respect to appellants is clearly shown by the fact that it was
only after the filing of the complaint in this case and the answer
thereto that appellants exercised their right of exclusion under
[Article 1 789]... after around nine (9) y ears ...
That subsequent to the filing of defendants' answer to the
complaint, the defendants reached an agreement whereby the
herein plaintiff has been excluded from, and deprived of, her alleged
share, interest or participation, as an alleged industrial partner, in
the defendant partnership and/or in its net profits or income, on the
ground that plaintiff has never contributed her industry to the
partnership, and instead she has been and still is a judge of the City
Court (formerly Municipal Court) of the City of Manila, devoting her
time to the performance of her duties as such judge and enjoying
the privileges and emoluments appertaining to the said office, aside
from teaching in law school in Manila, without the express consent
of the herein defendants'... Having always known appellee as a
City Judge even before she joined appellant company as
an
industrial partner, why did it take
appellants so many years before excluding her from said company
as per aforequoted allegations? And 'how can they reconcile such
exclusion with their main theory that appellee has never been such
a partner because The real agreement
662
NON-CORPORATE MEDIA OF DOING BUSINESS
evidenced by Exhibit 'A' was to grant the appellee a share of 30% of
the net profits which the appellant partnership may
realize _____until the mortgage loan of P30.000.00 obtained
from the Rehabilitation Finance Corporation shall have been fully
paid.
The language of the decision in Evangelista & Co. leads to several
observations on the nature of the obligation of an industrial partner.
Firstly, unless otherwise stipulated, an industrial partner need not devote
his entire working hours to the partnership affairs, and he is in fact not
prohibited from engaging in other activities which must be non-business in
character.
Secondly, it is possible that the personal circumstances that a would-be
industrial partner as known to the capitalist partners at the time they entered
into the contract of partnership, would prevent the industrial partner from
devoting full-time to the partnership affairs, would constitute an integral part
of the manner and nature of what type of service or industry he should devote
to partnership affairs.
Finally, even when an industrial partner fails to live-up to the
commitment of service he obliged himself, the matter must be raised within a
reasonable period by the other partners as the basis for the remedies of
exclusion or forfeiture of benefits as provided in Article 1789; otherwise, such
grounds are deemed waived by reason by estoppel by laches.
5. Specific Duty of Loyalty of Capitalist Partners
ART.
1808.
The
capitalist
partners
cannot
engage
for
their
own
account
in
any
operation
which
is
of
the
kind
of
business
in
which
the
partnership
is
engaged,
unless
there
is
a
stipulation
to
the
contrary.
DUTIES AND OBLIGATIONS OF PARTNERS
663
Any capitalist partner violating this prohibition shall bring to the
common funds any profits accruing to him from his transactions, and
shall personally bear all the losses, (n)
Under
Article
1808
of
the
New
Civil
Code,
"The
capitalist
partners
cannot
engage
for
their
own
account
in
any
operation
which
is
of
the
kind
of
business
in
which
the
partnership
is
engaged,
unless
there
is
a
stipulation
to
the
contrary."
If
a
capitalist
partner
breaches
this
duty
of
loyalty,
then
"he
shall
bring
to
the
common
funds
any
profits
accruing
to
him
from
his
transactions,
and
shall
personally
bear
all
the
losses."
0O0
CHAPTER
9
DISSOLUTION,
WINDING-UP
AND
TERMINATION
INTRODUCTION AND DEFINITION OF TERMS
ART. 1828. The dissolution of a partnership is the change in the
relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the binding up of
the business, (n)
ART. 1829. On dissolution the partnership is not terminated, but
continues until the winding up of partnership affairs is completed, (n)
A proper understanding under Philippine Partnership Law of the terms
"dissolution,""winding-up" and "termination" would help clarify the
multi-faceted legal relationships that exist in the partnership setting.
Article 1829 of New Civil Code implicitly distinguishes the three terms
when it provides that "On dissolution the partnership is not terminated, but
continues until the winding up of the partnership affairs is completed."
"Dissolution" is the term that pertains primarily to the contract of partnership,
the breaking of the vinculum juris, so to speak,
664
DISSOLUTION, WINDING-UP AND TERMINATION
665
between
and
among
the
partners
in
the
partnership
arrangement.
Article
1828
of
New
Civil
Code,
defines
"dissolution"
as
"the
change
in
the
relation
of
the
partners
caused
by
any
partner
ceasing
to
be
associated
in
the
carrying
on
as
distinguished
from
the
winding
up
of
the
business."
It
is
equivalent
to
the
terms
"rescission"
and
"extinguishment"
of
contract
of
partnership
in
the
Law
on
Contracts.
"Termination"
pertains
essentially
to
the
partnership
as
a
business
enterprise,
and
defines
the
time
when
all
matters
pertaining
to
the
business
enterprise
(i.e.,
the
completion
of
pending
contracts,
the
payment
of
all
obligations
and
the
distribution,
if
any,
of
the
net
assets
of
the
partnership
to
the
partners)
have
been
completed.
The
Court
has
defined
"termination"
of
a
partnership
as
the
"point
in
time
after
all
the
partnership
affairs
have
been
1
wound
up."
"Winding-up"
is
therefore
the
process
which
is
commenced
by
the
dissolution
of
the
contract
of
partnership
between
and
among
the
partners,
and
is
concluded
upon
the
termination
or
complete
liquidation
of
the
partnership
business
enterprise.
The
Court
has
defined
"winding-up"
as
"the
process
of
2
settling
business
affairs
after
dissolution,"
and
it
cites
as
examples
the
following:
"the
paying
of
previous
obligations;
the
collecting
of
assets
previously
demandable;
even
new
business
if
needed
to
wind
up,
as
the
contracting
with
a
demolition
company
for
the
demolition
of
the
garage
used
in
a
'used
car'
3
partnership."
Dissolution
which
breaks
the
contractual
privity
between
and
among
the
partners,
does
not
necessarily
give
rise
to
winding-up
or
termination
of
partnership
business
enterprise,
as
the
dissolution
of
an
existing
partnership
contract
may
actually
lead
to
the
constitution
of
a
new
partnership
contract
among
the
parthers
who
choose
to
proceed
with
the
partnership
business.
1dos
v.
Court
of
Appeals,
296
SCRA
194,206
(1998),
quoting
from
PARAS,
CIVIL
CODE
OF
THE
PHILIPPINES,
Vol.
V,
7th
ed.,
p.
516.
2
ldos
v.
Court
of
Appeals,
296
SCRA
194,
205
(1998),
quoting
from
PARAS,
CIVIL
COOE
OF
THE
PHILIPPINES,
Vol.
V,
7th
ed.,
p.
516.
3
lbid.
NON-CORPORATE MEDIA OF DOING BUSINESS
666
DISSOLUTION
ART. 1830. Dissolution is caused:
(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular
undertaking specified in the agreement;
(b) By the express will of any partner, who must act in
good faith, when no definite term or particular undertaking is
specified;
(c) 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;
(d) By the expulsion of any partner from the business
bona fide in accordance with such a power conferred by the
agreement between the partners;
(2) 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;
(3) By any event which makes it unlawful for the business of
the partnership to be carried on for the members to carry it on in
partnership;
(4) 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
DISSOLUTION, WINDING-UP AND TERMINATION
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;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership;
(7) By the civil interdiction of any partner;
(8)
1701a)
By decree of court under the following article. (1700a and
ART. 1831. On application by or for a partner the court shall
decree a dissolution whenever:
(1) A partner has been declared insane in any judicial
proceedings or is shown to be of unsound mind;
(2) A partner becomes in any other way incapable of
performing his part of the partnership contract;
(3) A partner has been guilty of such conduct as tends to
affect prejudicially the carrying on of the business;
(4) A partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that it is not reasonably practi-
cable to carry on the business in partnership with him;
(5) The business of the partnership can only be carried on at a
loss;
(6) Other circumstances render a dissolution equitable.
667
668
NON-CORPORATE MEDIA OF DOING BUSINESS
On the application of the purchaser of a partner's interest
under Article 1813 or 1814;
(1) After the termination of the specified term or particular
undertaking;
(2) At any time if the partnership was a partnership at will
when the interest was assigned or when the charging order was
issued, (n)
Philippine Partnership Law classifies the causes of dissolu-
tion of partnerships into the following categories:
(I) DISSOLUTION IPSO JURE WITHOUT NEED OF COURT DECREE:
(a) Dissolution Effected Without Violation of
the Partnership Agreement:
Termination of the term of the partnership;
Termination of the specific undertaking for
which the partnership was constituted;
In a partnership at will, dissolution effected
by the will of any partner exercised in good
faith;
- Mutual withdrawal by all the partners;
- Expulsion of a partner bona fide under
powers granted in the partnership agree-
ment.
(b) Dissolution Effected in Contravention of
the Partnership Agreement, Effected by
the Will of Any Partner:
When the partnership term has not expired;
- When the particular undertaking for which
the partnership has been constituted has
not yet terminated;
DISSOLUTION, WINDING-UP AND TERMINATION
At any time, in a partnership at will.
(c) Dissolution Caused by Force Majeure or Outside the
Will of the Partners:
Loss of the specific thing promised to be
contributed;
Partnership
business
becoming
unlawful;
Death,
insolvency
or
civil
Interdiction
of
any
partner;
Insolvency
of
the
partnership.
(II) DISSOLUTION EFFECTED THROUGH A COURT DECREE:
(a) When a partner has been declared insane in any
judicial proceeding or is shown to be of unsound mind;
(b) When a partner becomes incapacitated in performing
the partnership contract;
(c) When a partner is guilty of such conduct as tends to
affect prejudicially the carrying on of the partnership
business;
(d) When a partner willfully or persistently commits a
breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership
business that it is not reasonably practicable to carry
on the business in the partnership with him;
(e) When the partnership business can only be carried on
at
a
loss;
(f)
Other circumstances that render dissolution equitable;
(g) On the application of the purchaser of a partner's
interest in the partnership:
After termination of specified term of the
partnership;
669
670
NON-CORPORATE MEDIA OF DOING BUSINESS
After termination of the particular undertaking for
which the partnership was constituted;
At any time, in a partnership at will.
1. Dissolution in the Light of the Partnership Being Primarily a Contractual
Relationship
It should be noted that Articles 1830 and 1831 of the New Civil Code
clearly separate the causes of partnership dissolution between those which may
be effected extrajudicially, and those which require a court decree in order to be
effective.
Partnership being primarily a contractual relationship between and
among the partners, the various modes of dissolution are akin to the general
principles covering the extinguishment of contracts.
When it comes to the first category of causes of partnership dissolution,
namely, those that are effected ipso jure or without need of any court decree,
perhaps a good way of understanding the dynamics behind those causes of
dissolution is to think of dissolution in relation to terms very closely linked to
principles of "obligatory force" and "relativity pertaining to contracts, namely,
the remedy of "rescissionthe legal concepts of "breach of contract and the
"happening of resolutory condition or term," as well as the other modes of
extinguishment of contracts.
Take the first two causes for dissolution, namely, the termination of the
term or fulfillment of the particular undertaking for which the partnership has
been constituted, which basically take the character of either full performance
or fulfillment of the resolutory condition or term. Whether it be full
performance or the happening of the resolutory condition or term, a contract is
deemed extinguished ipso jure, and there need not be any particular act by
which the legal effect comes about. The same legal effect would be the act of
any partner declaring the termination of a partnership in a partnership at will.
When all the partners in a partnership come to a unanimous agreement
to terminate the partnership, this is the same legal
DISSOLUTION, WINDING-UP AND TERMINATION
671
effect as in another other contract which is extinguished by mutual withdrawal.
Finally, when a partner is expelled bona fide from the partnership pursuant to
the provisions granting such power in the contract of partnership, then this is in
accordance with exercising an extrajudicial right to rescind or cancel a contract,
which conforms to the spirit of, and is not in breach, of the contractual
commitment.
On the other hand, when a partner, without any legal or contractual basis,
seeks the dissolution of the partnership, the same would indeed constitute a
"breach of contract" for which he becomes personally liable for damages, and
for which he loses the right to wind-up its affairs, but nevertheless the
dissolution would take legal effect, in the same manner as in all contracts that
embody personal obligations to do (like agency), i.e., that they are essentially
revocable in spite of contractual stipulations to the contrary. In this case, there is
the application of the doctrine of delectus personae in the partnership setting.
As has been discussed previously, the principle of delectus personae,
which treat of the contractual relationship between and among the partners of
the most extreme personal nature {i.e., the principle of "relativity" in Contract
Law applied at its most extreme norm), would override the principle of
"obligatory force" of contractual provisions. Thus, even when the contracting
parties agree that their partnership contract would be irrevocable for say ten
years, under the principle of delectus personae, any partner even without cause
may seek to terminate his relationship by withdrawing from the partnership and
thereby causing its dissolution. There is no legal remedy allowed to the other
partners to compel the withdrawing partner to remain with the partnership
arrangement within the remaining term of the partnership provided in its
articles of partnership. Nevertheless, in this case the withdrawal from the
partnership would be in breach of a contractual agreement, and would subject
the withdrawing partnership to liability for damages.
When it comes to dissolutions caused by force majeure or outside the will
of the partners, their importance lie in the spirit of the Contract Law principle
which provides that force majeure excuses a contracting party from his
obligations, and would not
NON-CORPORATE MEDIA OF DOING BUSINESS
672
make
him
liable
for
damages
for
the
occasion
does
not
constitute
a
breach
of
contract.
Finally,
the
causes
of
dissolution
which
require
a
court
decree
for
their
effectivity,
usually
cover
causes
of
action
which
either
go
into
"breach
of
contract"
or
"radical
change
in
the
conditions
or
circumstances
upon
which
the
contract
was
entered
into"
(i.e.,
the
principle
of
rebus
sic
stantibus).
In
either
case,
the
intervention
of
the
courts
is
required
to
establish
the
factual
basis
of
the
breach
of
contract,
or
the
radical
change
of
the
circumstances
binding
the
partners
together
into
the
contract
of
partnership.
In
essence,
Philippine
Partnership
Law
is
careful
to
classify
the
various
causes
of
dissolution
because
of
the
varying
legal
consequences
of
dissolution
as
an
act
of
rescission
or
cancellation
of
the
partnership
agreement.
a.
Dissolution
Effected
with
No
Violation
of
the
Partnership
Contract
Article
1830
of
New
Civil
Code,
in
enumerating
the
causes
for
partnership
dissolution,
distinguishes
first
between
causes
"without
violation
of
the
agreement,"
and
those
causes
that
are
"[i]n
contravention
of
the
agreement."
Those
classified
as
causes
"without
violation
of
the
agreement,"
are
consistent
with
the
agreed
and
in
compliance
with,
the
terms
of
the
contract
of
partnership,
thus:
(a)
Termination of the term or particular undertaking specified in
the partnership agreement;
(b)
By the exercise in good faith by any partner of the power to
withdraw in a partnership at will (no definite term or
particular undertaking specified in the agreement);
(c)
By the mutual withdrawal by all the partners from the
partnership; and
(d)
By the bona fide expulsion of any partner in accordance with
the power provided for in the partnership agreement.
DISSOLUTION, WINDING-UP AND TERMINATION
673
In any of the foregoing enumerated causes, there is no breach or
contravention of the partnership agreement, and the dissolution of the
partnership does not give rise to a liability for damages for breach of contract.
When it comes to the first three causes, there being no "partner at fault" means
that none of the partners would be disqualified from participating in the
winding- up of the affairs of the partnership. Whereas, in the case of expulsion
of a partner in accordance with the power provided in the partnership
agreement, since it can only be exercised bona fide, it could only mean that the
partner was expelled "for cause" and consequently, he would be disqualified
from participating in the winding-up of the affairs of the partnership business,
and electing to continue to pursue the partnership business.
b. Dissolution Effected in Violation of the
Partnership Contract
In contrast, although any partner is recognized to have the power to
withdraw from the partnership at any time, it would be "in contravention of the
agreement between the partners, where the circumstances do not permit a
dissolution under the provisions" of Article 1830 of the New Civil Code. In that
case, the partner seeking the dissolution would be liable for damages, and he is
without right to continue to pursue the partnership business.
An example of the consequences of an expulsion of a partner effected in
4
bad faith is demonstrated in Tocao v. Court of Appeals, where in an oral
partnership, the capitalist partner Tocao had excluded the industrial partner
Anay from entrance into any of the business premises of the company or and
severed any further dealings she may have with the business venture. In ruling
that the excluded partner had a right to recover damages, to have a formal
accounting of the business, and to receive her shares in the net profits, the Court
ruled:
Undoubtedly, the petitioner Tocao unilaterally excluded
private respondent [Anay] from the partnership to reap for
342 SCRA 20 (2000).
674
NON-CORPORATE MEDIA OF DOING BUSINESS
herself and/or for petitioner Belo financial gains resulting from
private respondent's efforts to make the business venture a success
. . . Her instruction ... not to allow private respondent to hold office
in both the Makati and Cubao sales offices concretely spoke of her
perception that private respondent was no longer necessary in the
business operation, and resulted in a falling out between the two.
However, a mere falling out or misunderstanding between partners
does not convert the partnership into a sham organization. The
partnership exists until dissolved under the law. The partnership ...
has no fixed term and is therefore a partnership at will predicated
on their mutual desire and consent, it may be dissolved by the will
of a p artner... An unjustified dissolution by a partner can subject
him to action for damages because by the mutual agency that arises
in a partnership, the doctrine of delectus personae allows the
partners to have the power, although not necessarily the right to
dissolve the partnership.
In this case, petitioner Tocao's unilateral exclusion of private
respondent from the partnership... effected her own withdrawal
from the partnership and considered herself as having ceased to be
associated with the partnership in the carrying on of the business.
Nevertheless, the partnership was not terminated thereby; it
5
continued until the winding up of the business.
Essentially, the Court in Tocao agreed with the decision of the trial court
that "a partner who is excluded wrongfully from a partnership is an innocent
partner. Hence, the guilty partner must give him his due upon the dissolution of
the partnership as well as damages or share in the profits 'realized from the
appropriation of the partnership business and goodwill.' An innocent partner
thus possesses 'pecuniary interest in every existing contract that was incomplete
and in the trade name of the co-partnership and assets at the time he was
6
wrongfully expelled."'
lbid,
at
pp.
36-38.
*lbid,
at
p.
29.
DISSOLUTION, WINDING-UP AND TERMINATION
675
c. Force Majeure and Other Similar Causes
A third general category for causes of dissolution recognized under Article
1830 of the New Civil Code are those which occur by reason of force majeure or
events that are outside of the will of the partners:
(a)
Events which makes unlawful the partnership business;
(b)
Loss of the specific thing promised to be contributed to the
partnership; and
(c)
Death, insolvency or civil interdiction of any partner.
None of such causes of dissolution constitute a type of breach of the
partnership agreement.
An interesting issue would be: If the loss of the specific thing promised to
be contributed to the partnership would cause the dissolution of the
partnership, then would the return to a partner of his contribution be deemed
to have dissolved the partnership?
The decision in Fernandez v. Dela Rosa/ covered the issue of whether the
receiving back by a partner of his contribution to the partnership amount to
withdrawal from the partnership to have effected a dissolution thereof. The
resolution of this issue was essential in Fernandez because it determined
whether the partner so receiving his contribution had a right to participate in the
profits of the venture earned after he had allegedly withdrawn. Thus, the Court
asked specifically in Fernandez: "Did the defendant waive his right to such
interest as remained to him in the partnership property by receiving the money?
Did he by so doing waive his right to an accounting of the profits already realized,
if any, and a participation in them in proportion to the amount he had originally
contributed to the common fund? Was the partnership dissolved by the will or
withdrawal of one of the
1 Phil. 671 (1902).
676
NON-CORPORATE MEDIA OF DOING BUSINESS
8
partners'
under
Article
1705
of
New
Civil
Code?"
The
Court
held
. . .
We
think
these
questions
must
be
answered
in
the
negative.
There
was
no
intention
on
the
part
of
the
plaintiff
in
accepting
the
money
to
relinquish
his
rights
as
a
partner,
nor
is
there
any
evidence
that
by
anything
that
he
said
or
by
anything
that
he
omitted
to
say
he
gave
the
defendant
any
ground
whatever
to
believe
that
he
intended
to
relinquish
them.
On
the
contrary
he
notified
the
defendant
that
he
waived
none
of
his
rights
in
the
partnership.
Nor
was
the
acceptance
of
the
money
an
act
which
was
in
itself
inconsistent
with
the
continuance
of
the
partnership
relation,
as
would
have
been
the
case
had
the
plaintiff
withdrawn
his
entire
interest
in
the
partnership.
There
is,
therefore,
nothing
upon
which
a
waiver,
either
express
or
implied,
can
be
predicated.
The
defendant
might
have
himself
terminated
the
partnership
relation
at
any
time,
if
he
had
chosen
to
do
so,
by
recognizing
the
plaintiffs
right
in
the
partnership
property
and
in
the
profits.
Having
failed
to
do
this
he
cannot
be
permitted
to
force
a
dissolution
upon
his
copartner
upon
terms
which
the
latter
is
unwilling
to
accept.
We
see
nothing
in
the
case
which
can
give
the
transaction
in
question
any
other
aspect
than
that
of
the
withdrawal
by
one
partner
with
9
the
consent
of
the
other
of
a
portion
of
the
common
capital."
d.
Causes
Equivalent
to
Rescission
of
the
Contract
of
Partnership
The
fourth
general
category
covers
the
grounds
whereby
a
partner
may
seek
court
order
for
the
dissolution
of
the
partners
under
Article
1831
of
New
Civil
Code,
thus:
(a)
When
a
partner
has
been
declared
insane
in
any
judicial
proceeding
or
is
shown
to
be
of
unsound
mind;
lbid, at pp. 677-678.
*lbid, at p. 678.
DISSOLUTION, WINDING-UP AND TERMINATION
(b)
When a partner becomes in any other way incapable of
performing his part of the partnership contract;
(c)
When a partner has been guilty of conduct as tends to affect
prejudicially the carrying on of the business;
(d)
When a partner willfully or persistently commits a breach of
the partnership agreement, or otherwise so conducts himself
in matters relating to the partnership business that is not
reasonably practicable to carry on the business in partnership
with him;
(e)
When the business of the partnership can only be carried on
at a loss;
(f)
Other circumstances that render dissolution equitable.
677
In
addition,
Article
1831
of
New
Civil
Code
recognizes
the
standing
of
the
assignee
of
a
partner's
interest
to
seek
judicial
dissolution
of
the
partnership
when:
(a)
Termination of the period upon which the partnership is
expressly constituted;
(b)
Termination of the particular undertaking upon which the
partnership is expressly constituted; or
(c)
At any time, in a partnership at will.
The
foregoing
grounds
enumerated
in
Article
1831
of
the
New
Civil
Code,
for
which
a
court
order
of
dissolution
may
be
sought
need
to
be
considered
carefully,
each
represents
a
public
policy
which
takes
into
consideration
that
the
business
purpose
and
future
of
a
partnership
which
cannot
be
placed
in
a
relatively
clear
vision
at
the
time
the
contract
of
partnership
is
entered
into.
The
article
recognizes
the
inherent
risk
that
business
undertakings
are
exposed
to,
many
of
which
cannot
be
anticipated
at
the
time
the
partnership
agreement
is
entered
into.
Therefore,
it
sets-up
a
678
NON-CORPORATE MEDIA OF DOING BUSINESS
mechanism (i.e., an appropriate court proceeding for dissolution) by which the
parties may ask a tribunal to determine that the circumstances have rendered
the rationale of the partnership agreement inutile.
Take the case of the ground "when the business of the partnership can
only be carried on at a loss," the Supreme Court observed in Moran, Jr. v. Court
0
of Appeals,' that even with the assurance by one of the partners to the others
that they would earn a huge amount of profits, "in the absence of fraud, the
other partner cannot claim a right to recover the highly speculative profits. It is a
11
rare business venture guaranteed to give 100% profit." Moran, Jr. considered
it lawful for the managing partner to close down a partnership venture when
the prospects were that it would only sustain losses. The Court further held: "As
already mentioned, there are risks in any business venture and the failure of the
undertaking cannot entirely be blamed on the managing partner alone, specially
if the latter exercised his best business judgment, which seems to be true in this
12
case."
Likewise, each of the grounds provided under Article 1831 would
constitute "substantial breach" of the obligations assumed by the partners, as
the basis by which an action for rescission may be pursued; consequently, the
factual basis upon which the substantial breach may arise must be determined
to exist by the courts, and cannot be left to the sole determination of any of the
partners.
One would think that when a partner has been judicially declared insane,
it would thereby ipso jure cause the dissolution of the partnership, as in the
case of death, insolvency or civil interdiction of a partner. Yet under Article 1831
it would require a formal petition in court to have the partnership dissolved. The
legal implication is that the partnership remains unaffected by the judicial
declaration of insanity of a partner, and the discretion is given to the other
partners to seek its dissolution. Judicial declaration of insanity, like civil
interdiction, would render the
10
133
SCRA
88
(1984).
"Ibid,
at
p.
95.
"Ibid,
at
p.
101.
DISSOLUTION, WINDING-UP AND TERMINATION
679
partner
without
legal
capacity
to
contract,
and
yet
the
former
does
not
result
in
automatic
dissolution
of
the
partnership.
Perhaps
it
is
because
judicial
declaration
of
insanity
does
not
proceed
from
a
criminal
conviction
as
in
the
case
of
civil
interdiction,
and
that
the
law
recognizes
that
the
insane
partner
still
has
an
estate
that
has
a
right
to
benefit
from
the
properties
and
rights
to
which
a
partner
is
entitled
to,
and
the
other
partners
are
given
the
option
to
remain
in
partnership
with
him
to
allow
his
estate
to
continue
to
benefit
from
the
partnership
business.
After
all,
a
partner
who
turns
out
to
be
insane,
may
be
a
better
partner
to
remain
with,
rather
than
another
partner
who
is
sane
but
turns
out
to
be
insuperable.
This
is
the
same
rationale
under
the
second
group
for
judicial
dissolution:
when
a
partner
becomes
in
any
other
way
incapable
of
performing
his
part
of
the
partnership
contract.
The
last
four
grounds
to
seek
judicial
dissolution
(when
a
partner
has
been
guilty
of
conduct
as
tends
to
affect
prejudicially
the
carrying
on
of
the
business;
when
a
partner
willfully
or
persistently
commits
a
breach
of
the
partnership
agreement,
or
otherwise
so
conducts
himself
in
matters
relating
to
the
partnership
business
that
is
not
reasonably
practicable
to
carry
on
the
business
in
partnership
with
him;
when
the
business
of
the
partnership
can
only
be
carried
on
at
a
loss;
and
other
circumstances
that
render
a
dissolution
equitable),
look
at
the
primary
rationale
for
the
partnership
agreement:
to
operate
a
business
venture
for
the
benefit
of
all
the
partners.
When
there
are
circumstances
prevailing
in
the
partnership
setting
that
endanger
or
undermine
the
viability
of
the
partnership
enterprise,
any
of
the
partners
is
given
standing
to
seek
for
court
determination
of
the
existence
of
such
situation
and
decree
the
dissolution
of
the
partnership.
For
example,
in
Rojas
v.
Maglana*
the
Court
held
that
when
a
partner
engages
in
a
separate
business
enterprise
that
is
competitive
with
that
of
the
partnership
and
even
withdraws
equipment
contributed
into
the
partnership
enterprise,
the
other
13
192 SCRA 110 (1990).
680
NON-CORPORATE MEDIA OF DOING BUSINESS
partner's
withdrawal
from
the
partnership
becomes
thereby
justified
and
for
which
the
latter
cannot
be
held
liable
for
damages.
In
such
an
instance,
a
partner
has
violated
his
duty
of
loyalty,
which
under
the
principle
of
delectus
personae
should
allow
the
other
partners
to
break
any
further
ties
with
him.
2. Legal Effects of Dissolution - In General
ART. 1832. Except so far as may be necessary to
wind up partnership affairs or to complete transac-
tions begun but not then finished, dissolution ter-
minates all authority of any partner to act for the
partnership:
(1) With respect to the partners:
(a) When the dissolution is not by the act,
insolvency or death of a partner; or
(b) When the dissolution is by such act,
insolvency or death of a partner, in cases where
Article 1833 so requires;
(2) With respect to persons not partners, as
declared in Article 1834.
ART. 1833. Where the dissolution is caused
by the act, death or insolvency of a partner, 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 had not been dis-
solved unless:
(1) The dissolution being by act of any partner,
the partner acting for the partnership had knowl-
edge of the dissolution; or
(2) The dissolution being the death or insolvency
of a partner, the partner acting for the partnership
had knowledge or notice of the death or insolvency.
DISSOLUTION, WINDING-UP AND TERMINATION
ART. 1834. After dissolution, a partner can bind the partnership
except as provided in the third paragraph of this article:
(1) By any act appropriate for winding up partnership affairs
or completing transactions unfinished at dissolution;
(2) By any transaction which would bind the partnership if
dissolution had not taken place, provided the other party to the
transaction:
(a) Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the dissolution;
or
(b) Though he had not so extended credit, had
nevertheless known of the partnership prior to dissolution, and,
having no knowledge or notice of dissolution, the fact of
dissolution had not been advertised in a newspaper of general
circulation in the place (or in each place if more than one) at
which the partnership business was regularly carried on.
The liability of a partner under the first paragraph, No. 2, shall be
satisfied out of partnership assets alone when such partner had been
prior to dissolution:
(1) Unknown as a partner to the person with whom the
contract is made; and
(2) So far unknown and inactive in partnership affairs that the
business reputation of the partnership could not be said to have
been in any degree due to his connection with it.
The partnership is in no case bound by any act of a partner after
dissolution:
(1) Where the partnership is dissolved because it is unlawful to
carry on the business, unless
681
709
NON-CORPORATE MEDIA OF DOING BUSINESS
the act is appropriate for winding up partnership affairs; or
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind up partnership
affairs, except by a transaction with one who
(a) Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of his want of
authority; or
(b) Had not extended creditto the partnership prior to
dissolution, and, having no knowledge or notice of his want of
authority, the fact of his want of authority has not been
advertised in the manner provided for advertising the fact of
dissolution in the first paragraph, No. 2(b).
Nothing in this article shall affect the liability under Article 1825
of any person who after dissolution represents himself or consents
to another representing him as a partner in a partnership engaged in
carrying on business, (n)
ART. 1835. The dissolution of the partnership does not of itself
discharge the existing liability of any partner.
A partner is discharged from any existing liability upon
dissolution of the partnership by an agreement to that effect
between himself, the partnership creditor and the person or
partnership continuing the business; and such agreement may be
inferred from the course of dealing between the creditor having
knowledge of the dissolution and the person or partnership
continuing the business.
The individual property of a deceased partner shall be liable for
all obligations of the partnership incurred while he was a partner,
but subject to the prior payment of his separate debts, (n)
DISSOLUTION, WINDING-UP AND TERMINATION
ART.
1836.
Unless
otherwise
agreed,
the
partners
who
have
not
wrongfully
dissolved
the
partnership
or
the
legal
representative
of
the
last
surviving
partner,
not
insolvent,
has
the
right
to
wind
up
the
partnership
affairs,
provided,
however,
that
any
partner,
his
legal
representative
or
his
assignee,
upon
cause
shown,
may
obtain
winding
up
by
the
court,
(n)
ART.
1837.
When
dissolution
is
caused
in
any
way,
except
in
contravention
of
the
partnership
agreement,
each
partner,
as
against
his
co-part-
ners
and
all
persons
claiming
through
them
in
respect
of
their
interests
in
the
partnership,
unless
otherwise
agreed,
may
have
the
partnership
property
applied
to
discharge
its
liabilities,
and
the
surplus
applied
to
pay
in
cash
the
net
amount
owing
to
the
respective
partners.
But
if
dissolution
is
caused
by
expulsion
of
a
partner,
bona
fide
under
the
partnership
agreement
and
if
the
expelled
partner
is
discharged
from
all
partnership
liabilities,
either
by
payment
or
agreement
under
the
second
paragraph
of
Article
1835,
he
shall
receive
in
cash
only
the
net
amount
due
him
from
the
partnership.
When
dissolution
is
caused
in
contravention
of
the
partnership
agreement
the
rights
of
the
partners
shall
be
as
follows:
(1) Each partner who has not caused dissolution wrongfully
shall have:
(a) All the rights specified in the first paragraph of this
article; and
(b) The right, as against each partner who has caused the
dissolution wrongfully, to damages for breach of the agreement.
(2) The partners who have not cause the dissolution
wrongfully, if they all desire to continue the business in the same
name either by themselves
683
711
NON-CORPORATE MEDIA OF DOING BUSINESS
or
jointly
with
others,
may
do
so,
during
the
agreed
term
for
the
partnership
and
for
that
purpose
may
possess
the
partnership
property,
provided,
they
secure
the
payment
by
bond
approved
by
the
court,
or
pay
to
any
partner
who
has
cause
the
dissolution
wrongfully,
the
value
of
his
interest
in
the
partnership
atthe
dissolution,
loss
any
damages
recoverable
under
the
second
paragraph,
No.
1(b)
of
this
article,
and
in
like
manner
indemnify
him
against
all
present
or
future
partnership
liabilities.
(3)
A
partner
who
has
caused
the
dissolution
wrongfully
shall
have:
(a) If the business is not continued under the provisions of
the second paragraph, No. 2, all the rights of a partner under
the first paragraph, subject to liability for damages in the
second paragraph, No. 1(b) of this article.
(b) If the business is continued under the second
paragraph, No. 2, of this article, the right as against his
co-partners and all claiming through them in respect of their
interests in the partnership, to have the value of his interest in
the partnership, less any damage caused to his co-partners by
the dissolution, ascertained and paid to him in cash, or the
payment secured by a bond approved by the court, and to be
released from all existing liabilities of the partnership; but in
ascertaining the value of the partner's interest the value of the
goodwill of the business shall not be considered, (n)
ART. 1838. Where a partnership contract is rescinded on the
ground of the fraud or misrepresentation of one of the parties
thereto, the party entitled to rescind is, without prejudice to any
other right, entitled:
(1) To a lien on, or right of retention of, the surplus of the
partnership property after satisfying
DISSOLUTION, WINDING-UP AND TERMINATION
685
the
partnership
liabilities
to
third
persons
for
any
sum
of
money
paid
by
him
for
the
purchase
of
an
interest
in
the
partnership
and
for
any
capital
or
advances
contributed
by
him;
(2) To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership for any
payment made by him in respect of the partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud or
making the representation against all debts and liabilities of the
partnership, (n)
a. Effect of Dissolution on the Partnership Contract and Juridical
Personality
In Corporate Law, "dissolution" is the termination of the juridical
personality of the corporation which was originally constituted to pursue new
business, and that in fact and in law, the corporate juridical personality
continues to exist for three years with only the capacity to wind-down the
14
corporate affairs. The dissolution of a corporation affects directly the
underlying corporate business enterprise in that it ceases to pursue business as a
going concern, and any contract entered into as "new business" would be
considered void as having been entered into with a non-existing corporate
15
party.
In contrast, the concept of "dissolution" in Partnership Law focuses in the
change of the contractual relationship between and among the partners (the
rescission of the partnership contract), as the termination of their association in
carrying the business venture as a going concern. The contract of partnership
remains but only in the concept of an association to pursue liquidation process.
"Republic v. Tancinco, 394 SCRA 386 (2002).
K
Alhambra Cigar v. SEC, 24 SCRA 269 (1968); Philippine National Bank v.
Court of First Instance of Rizai, Pasig, Br. XXI, 209 SCRA 294(1992).
686
NON-CORPORATE MEDIA OF DOING BUSINESS
A direct effect of the dissolution of the partnership is provided in Article
1832 of New Civil Code, which extinguishes the right and power of the partners
to represent one another to pursue the partnership as a going concern: "Except
so far as may be necessary to wind up partnership affairs or to complete
transactions begun but not then finished, terminates all authority of any partner
to act for the partnership." Dissolution of a partnership does not therefore
undermine existing contracts, nor modify or extinguish then existing obligations
of the partnership and the partners, and that the completion or performance of
existing contracts and the settlement of partnership obligations are in fact
integral parts in the winding-up process.
Since the juridical personality of a partnership is inextricably linked to the
underlying contract of partnership, it should mean that the dissolution of the
partnership would bring about the impairment of the partnership juridical
person in whose name the business is pursued remains hovering.
b. Effect on the Partnership Business Enterprise
Likewise, in a partnership setting the underlying partnership business
enterprise should cease to exist as "as a going concern," but only if the
remaining partners do not wish to continue the partnership business, whenever
they are entitled under the law the option to so continue.
Dissolution focuses mainly on the breaking-up of the contractual
relationship of the partners among one another. Thus, when Article 1832 of the
New Civil Code provides that "Except so far as may be necessary to wind up
partnership affairs or to complete transactions begun but not then finished,
dissolution terminates all authority of any partner to act for the partnership," it
means that the force of the original contract of partnership between them as to
being mutual agents, as well as the enforceability of the doctrine of delectus
personae, are terminated, without prejudice to a new partnership arrangement
being constituted among the remaining partners.
DISSOLUTION, WINDING-UP AND TERMINATION
687
c. Effects on Contracts Entered into With Third
Parties
In Corporate Law, after dissolution, all contracts entered into that pursue
new business for the corporate venture are void even as to persons who deal
with the corporation in good faith. The reason for this is that the public policy
behind the capacity of the corporate juridical personality pre-empts the
consideration of protecting the public that deal in good faith with a purportedly
validly existing corporation. Is this the same policy when it comes to contracts
on new business entered into for and in behalf partnership after dissolution
has occurred?
In covering the general legal effects of the dissolution of a partnership,
Bautista cited American decisions, showing that upon dissolution the
partnership continues to exist only for a limited purpose of winding it affairs,
16
and that no new business can be pursued. We feel that under Philippine
Partnership Law, which expressly recognizes that the non-defaulting partners
can choose to continue the business enterprise, the answer to the question
raised should be in the negative, because there is no over-arching public policy
of State supervision and control over the juridical personalities of partnerships.
Under Philippine Partnership Law, the partnership juridical personality is merely
an "added feature" to the partnership arrangement to improve the efficiency of
partnership transactions, and cannot overcome the more important public
policy considerations, such as the imperative need to protect the contractual
expectations of the members of the public who deal in good faith with the
partnership venture.
17
We see the demonstration of this principle in Singson v. Isabels Sawmill,
where the Court held
It is true that the dissolution of a partnership is caused by any
partner ceasing to be associated in the carrying on of the business.
However, on dissolution, the partnership
16
BAUTISTA,
at
p.
319.
88
SCRA
623
(1979).
17
688
NON-CORPORATE MEDIA OF DOING BUSINESS
is not terminated but continuous until the winding up of the
business.
The remaining partners did not terminate the business
of the partnership 'Isabela Sawmill.' Instead of winding up
the business of the partnership, they continued the business
still in the name of said partnership. It is expressly stipulated
in the memorandum-agreement that the remaining partners
had constituted themselves as the partnership entity, the
"Isabela Sawmill."
There was no liquidation of the assets of the partnership.
The remaining partners . . . used the properties of said
partnership.
x x x
It does not appear that the withdrawal of [a partner] from
the partnership was published in the newspapers. . . the
public in general had a right to expect that whatever credit
they extended to [the remaining partners] doing the business
in the name of the partnership "Isabela Sawmill" could be
18
enforced against the properties of said partnership.. ,"
In
Tocao
v.
Court
of
Appeals,"
the
Court
held
that
the
fact
that
the
managing
partner
excludes
the
industrial
partner
from
participation
in
the
partnership
business
did
not
mean
that
the
partnership
was
extinguished
automatically:
However,
a
mere
falling
out
or
misunderstanding
between
partners
does
not
convert
the
partnership
into
a
sham
organization.
The
partnership
exists
until
dissolved
under
the
law.
Since
the
partnership
created
by
petitioners
and
private
respondent
has
no
fixed
term
and
is
therefore
a
partnership
at
will
predicated
on
their
mutual
desire
and
consent,
it
may
be
dissolved
by
the
will
of
a
partner.
x
x
x
In
this
case,
petitioner
Tocao's
unilateral
exclusion
of
private
respondent
from
the
partnership
effected
her
own
withdrawal
from
the
partnership
and
considered
herself
as
having
ceased
to
be
associated
with
the
partnership
in
the
"Ibid,
at
p.
642.
19
342
SCRA
20
(2000).
DISSOLUTION, WINDING-UP AND TERMINATION
689
carrying on of the business. Nevertheless, the partnership is not
terminated thereby; it continues until the winding up of the
20
business.
d. Effects on Determining Liability of Partners for Damages to
One Another
21
In Soncuya v. De Luna, it was held that for purposes of determining
whether a partner is entitled to damages allegedly suffered by reason of the
supposed fraudulent management of the partnership by the managing partner,
it is first necessary that a liquidation of the partnership business must be made
"to the end that the profit and losses may be known and the causes of the latter
and the responsibility of the defendant as well as the damages which each
22
partner may have suffered, may be determined."
3. Effects of Dissolution Among the Partners Inter Se
We will now discuss the legal consequences of, and the rights and
obligations that would govern the relationship of the partners under, the
various causes of partnership dissolution.
a. When Dissolution Is Caused Not in Contravention of the
Partnership Agreement
Under Article 1837 of New Civil Code, unless otherwise agreed, each
partner, as against his co-partners and all persons claiming through them in
respect of their interests in the partnership, may have the partnership property
applied to discharge its liability, and the surplus applied to pay in cash the net
amount owing to the respective partners. In other words, when there has been
no breach of the partnership agreement upon the dissolution of a partnership,
every partner has a right to insist upon the winding-down of partnership affairs.
mid, at pp. 37-38.
21
67 Phil. 646 (1939).
*At p. 647; citing Po Yeng Cheo v. Lim Ka Yam, 44 Phil. 172
(1922).
690
NON-CORPORATE MEDIA OF DOING BUSINESS
When dissolution of the partnership is caused without breach of the
contract of partnership, the "remaining partners" have no option to continue
the partnership business enterprise when the "withdrawing partner" insists on
winding-up the partnership affairs. Consequently, the only way by which the
remaining partners can hope to continue the partnership business is to come
into a settlement of the liquidation of the withdrawing partner's equity interests
in the partnership. The tendency therefore is that the withdrawing partner may
receive a premium or a higher price than the actual liquidation value of his share
in the net assets of the partnership in exchange for not demanding the formal
winding-up and termination of the partnership business.
b. When Dissolution Is Caused by the Bona Fide
Expulsion of a Partner
Under Article 1837 of New Civil Code, when dissolution is caused by the
bona fide expulsion of a partner pursuant to the terms of the partnership
agreement, and if the expelled partner is discharged from all partnership
liabilities, either by payment or by express agreement to that effect between
himself, the creditor and the remaining partners, as provided under the second
paragraph of Article 1835 of New Civil Code, then such expelled partner shall
receive in cash only the net amount due him from the partnership.
In other words, the expelled partner is without power or authority to
insist upon the formal winding-up and liquidation of the partnership business
enterprise; and that the choice whether to continue with the business
enterprise or to formally wind-up and terminate the partnership is with the
remaining partners.
c. When Dissolution Is Caused in Contravention of the Partnership
Agreement
In the event the dissolution of the partnership is in contravention of the
partnership agreement, there exists legally a formal "breach of contract," and
the rights and/or liabilities of the partners shall be as follows:
DISSOLUTION, WINDING-UP AND TERMINATION
(a)
Each partner who has not caused the dissolution wrongfully
shall have the right:
(i)
to participate in the net assets of the partnership after
discharge of all partnership liabilities;
(ii)
to damages for breach of the agreement, as against
each partner who caused the dissolution wrongfully;
(b) The partners who have not caused the dissolution wrongfully,
may, if they so desire:
(c)
(i)
continue the business in the same name either by
themselves or jointly with others, during the rest of the
agreed term for the partnership;
(ii)
and for that purpose may possess the partnership
property, provided they secure the payment by bond
approved by the court, or pay to any partner who has
caused the dissolution wrongfully, the value of his
interest in the partnership at the dissolution, less any
damages for breach of the agreement and in like
manner indemnify him against all present or future
partnership liabilities;
A partner who has caused the dissolution wrongfully shall
only have:
(i)
If the business is not continued, all the
rights of a partner for share in the net assets of the
partnership after payment of all its liabilities, subject to
liability for damages incurred due to such wrongful
dissolution;
(ii)
If the business is continued, the right as against his
co-partners and all claiming through them in respect of
their interests in the partnership, to have the value of
his
691
NON-CORPORATE MEDIA OF DOING BUSINESS
692
interest in the partnership, less any damage caused to
his co-partners by the dissolution, ascertained and paid
to him in cash, or the payment secured by a bond
approved by the court, and to be released from all
existing liabilities of the partnership;
But in ascertaining the value of the partner's interest,
the value of the goodwill of the business shall not be
considered.
d. When Dissolution Caused by Rescission of the Partnership
Agreement Due to Fraud or Misrepresentation (i.e., By Judicial
Decree)
Under Article 1838 of New Civil Code, without prejudice to any other
right, the party entitled to rescind or seek the dissolution of the partnership
shall be entitled:
(a)
To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership liabilities
to third persons, for any sum of money paid by him for the
purchase of an interest in the partnership and for any capital
or advances contributed by him;
(b)
To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership for
any payment made by him in respect of the partnership
liabilities; and
(c)
To be indemnified by the person guilty of the fraud or making
the representation against all debts and liabilities of the
partnership.
4. Effects of Dissolution on Partnership Liabilities Existing or Accrued at the
That Time
Discussions on partnership dissolutions ought to center around the fourth
attribute of partnership of "unlimited liability," i.e., that a partner shall be liable
jointly with the other partners, for
DISSOLUTION, WINDING-UP AND TERMINATION
693
partnership
debts
which
cannot
be
settled
from
the
partnership
assets.
In
fact,
it
is
the
point
of
dissolution,
that
application
of
the
attribute
of
unlimited
liability
becomes
most
critical.
a.
General
Rule
on
Existing
Partnership
Liabilities
Under
Article
1835
of
New
Civil
Code,
the
general
rule
is
that
the
dissolution
of
the
partnership
does
not
of
itself
discharge
the
existing
liability
of
any
of
the
partners.
When
it
comes
to
a
deceased
partner,
Article
1835
provides
that
"The
individual
property
of
a
deceased
partner
shall
be
liable
for
all
obligations
of
the
partnership
incurred
while
he
was
a
partner,
but
subject
to
the
prior
payment
of
his
separate
debts."
b.
Discharge
of
a
Partner
from
Existing
Partnership
Liabilities
Article
1835
of
the
New
Civil
Code
provides
that
the
only
manner
by
which
a
partner
may
be
discharged
from
any
existing
liability
upon
dissolution
of
the
partnership,
is
by
an
agreement
to
that
effect
between
himself,
the
partnership
creditor
and
the
person
or
partnership
continuing
the
business.
Such
an
agreement
may
be
inferred
from
the
course
of
dealing
between
the
creditor
having
knowledge
of
the
dissolution
and
the
person
or
partnership
continuing
the
business.
5.
Effects
of
Dissolution
on
Partnership
Liabilities
Contracted
or
Incurred
After
Dissolution
The
rules
when
it
comes
to
liabilities
contracted
or
incurred
on
behalf
of
the
partnership
after
dissolution
should
be
divided
into
the
following
categories:
(a)
Those that were incurred pursuant to winding-up proceedings;
(b)
Those that were incurred in the nature of "new business" in
spite of the fact that the partnership is in winding-up process;
and
694
NON-CORPORATE MEDIA OF DOING BUSINESS
(c)
Those
that
were
incurred
when
the
partnership
enterprise
has
been
continued
and
no
winding-up
process
have
been
pursued.
a.
Liabilities
Incurred
Pursuant
to
Winding-up
Proceedings
Article
1832
of
New
Civil
Code
clearly
implies
that
even
with
the
dissolution
of
the
partnership,
the
partners
not
at
fault
have
full
authority
to
act
for
the
partnership
in
all
matters
that
"may
be
necessary
to
wind
up
partnership
affairs
or
to
complete
transactions
begun
but
not
then
finished."
Therefore,
despite
the
dissolution
of
the
partnership,
it
is
clear
under
Article
1829
that
the
partnership
is
not
terminated
on
dissolution,
and
that
the
partnership
continues
to
exist
"until
the
winding
up
of
the
partnership
affairs
is
completed."
During
winding-up
stage,
every
partner
authorized
to
wind-up
partnership
affairs
has
full
authority
to
enter
into
any
contract
or
transaction
that
is
consistent
with
the
winding-up
of
partnership
affairs,
and
such
contracts
and
transactions
shall
be
valid
and
binding
upon
the
partnership
and
those
of
the
partners.
Whether
considered
from
the
inter-partnership
relationship,
or
viewed
in
relationship
with
third
parties,
all
contracts
and
transactions
entered
into
after
dissolution
of
the
partnership,
which
are
in
pursuit
of
the
winding-up
of
partnership
affairs,
are
valid
and
binding.
Thus,
Article
1834
provides
that
"After
dissolution,
a
partner
can
bind
the
partnership
x
x
x
(1)
By
any
transaction
appropriate
for
winding
up
partnership
affairs
or
completing
transactions
unfinished
at
dissolution."
(1)
Where
Partnership
Not
Bound
Even
for
Winding-Up
Liabilities
Under
Article
1834
of
the
New
Civil
Code,
even
when
the
liability
incurred
in
behalf
of
the
partnership
is
incurred
for
winding-up
purpose,
nonetheless
"The
partnership
is
in
no
case
bound
by
any
act
of
a
partner
after
dissolution
x x x ( 3 )
Where
the
DISSOLUTION, WINDING-UP AND TERMINATION
695
partner has no authority to wind up partnership affairs; except by a transaction
with one who"
(a)
Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of the acting partner's want
of authority; or
(b)
Had not extended credit to the partnership prior to
dissolution, and, having no knowledge or notice of his want of
authority, the fact of his want of authority has not been
advertised in a newspaper of general circulation in the place
(or in each place if more than one) at which the partnership
business was regularly carried on.
b. Liabilities Incurred Constituting "New Business" During the
Winding-Up Process
Article 1832 of New Civil Code is also clear that after dissolution, and
winding-up stage has been reached, and there is no intention to continue the
partnership enterprise, then it terminates all authority of any partner to act for
and in behalf of the partnership and/or the other partners involving "new
business" or that which is not in pursuit of the winding-up of partnership affairs.
The general rule applicable in Partnership Law would then be equivalent
to the Agency Law principle that an agent who acts without or outside the scope
of his authority, which renders the contract entered into unenforceable against
the principal, but valid against the agent in his personal capacity. From the
inter-partnership relationship, every contract entered into or every liability
incurred in the name of the partnership as "new business," is done without
lawful authority, and is non-binding on the partnership and the other partners.
As and between the partners, the liability incurred by the acting partner shall
then be for his sole account.
But the foregoing general rule applies only when the acting partner acts
with knowledge of the fact of dissolution of the
696
NON-CORPORATE MEDIA OF DOING BUSINESS
partnership;
for
a
partner
acting
for
and
in
behalf
of
the
partnership
after
dissolution,
but
acting
in
good
faith,
binds
the
partnership.
Therefore,
in
determining
whether
the
acting
partner
acted
in
good
faith
or
not,
distinguish
among
the
causes
of
dissolution.
(1) When
Dissolution
Is
By
the
Act,
Insolvency
or
Death
of
a
Partner
Under
Article
1833
of
New
Civil
Code,
where
the
dissolution
is
caused
by
the
act,
death
or
insolvency
of
a
partner,
the
acting
partner
who
acts
without
knowledge
of
the
act,
death
or
insolvency
of
another
partner
(i.e.,
without
knowledge
that
dissolution
has
come
about),
will
legally
bind
the
partners
to
any
liability
created
"for
the
partnership
as
if
the
partnership
had
not
been
dissolved."
On
the
other
hand,
only
the
acting
partner
shall
be
liable
for
the
liability
entered
into
in
behalf
of
the
partnership,
when
he
knew
at
that
time
of
the
fact
of
dissolution
of
the
partnership.
(2) When
Dissolution
Is
NOT
By
the
Act,
Insolvency
or
Death
of
a
Partner
Under
Articles
1832
and
1833
of
New
Civil
Code,
when
the
dissolution
of
the
partnership
is
other
than
"by
the
act,
insolvency
or
death
of
a
partner,"
then
knowledge
of
the
fact
of
dissolution
is
presumed
to
have
reached
every
partner
and
therefore,
as
between
and
among
them,
a
partner
who
incurs
a
liability
in
the
name
of
the
partnership,
is
deemed
to
be
acting
without
authority
or
in
bad
faith,
and
only
such
acting
partner
shall
be
liable
for
the
liability
incurred.
(3) As
To
Third
Party
Creditors
Whatever
may
have
been
the
cause
of
the
dissolution
of
the
partnership,
third
parties
who
in
good
faith
(i.e.,
unaware
of
the
dissolution
of
the
partnership)
enter
into
any
contract
or
transaction
with
the
partnership
through
any
of
the
partners,
are
protected
in
their
contractual
expectations
that
the
contract
is
valid
and
binding
against
the
partnership.
DISSOLUTION, WINDING-UP AND TERMINATION
697
The
central
principle
in
Partnership
Law
is
that
any
third
party
who
enters
into
a
contract
with
the
purported
partnership
in
good
faith,
shall
have
the
validity
and
enforceability
of
such
contract
protected.
Thus,
Article
1834
of
New
Civil
Code
provides
that
"After
dissolution,
a
partner
can
bind
the
partnership
xxx
(2)
By
any
transaction
which
would
bind
the
partnership
if
dissolution
had
not
taken
place,
provided
the
other
party
to
the
transaction:
(a)
Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of the dissolution; or
(b)
Though had not so extended credit, had nevertheless known
of the partnership prior to dissolution, and, having no
knowledge or notice of dissolution, the fact of dissolution had
not been advertised in a newspaper of general circulation in
the place (or in each place if more than one) at which the
partnership business was regularly carried on.
Notice
how
the
law
treats
differently
third
parties
who
have
previously
extended
credit
to
the
partnership
prior
to
dissolution,
and
those
who
have
only
known
of
the
partnership
before
dissolution:
in
the
former
it
is
only
actual
knowledge
or
notice
of
the
dissolution
that
would
place
him
in
bad
faith;
whereas,
in
the
latter
mere
notice
of
dissolution
published
in
the
newspapers
would
transform
him
into
a
third
party
acting
in
bad
faith.
When
it
comes
to
the
effects
of
dissolution,
especially
on
the
power
of
any
partner
to
bind
the
partnership
and
other
partners
in
"new
business"
contracts
and
transactions,
jurisprudence
has
ruled
that
unless
otherwise
published
or
made
known
personally,
third
parties
dealing
with
a
partnership
in
good
faith
have
a
right
to
expect
that
the
partnership
relation
exists
and
that
the
partners
are
authorized
to
pursue
partnership
business
as
a
going
concern.
Thus,
in
Singson
v.
Isabelsthe
Supreme
Court
held
that
since
it
did
not
appear
that
the
withdrawal
of
a
partner
from
the
88 SCRA 623 (1979).
NON-CORPORATE MEDIA OF DOING BUSINESS
698
partnership
was
published
in
the
newspapers,
then
"the
public
in
general
had
a
right
to
expect
that
whatever,
credit
they
extended
to
[the
remaining
partners]
doing
the
business
in
the
[original]
name
of
the
partnership
'Isabela
Sawmill'
24
could
be
enforced
against
the
properties
of
said
partnership,"
as
well
as
against
the
properties
of
the
withdrawing
partner.
(i)
Particular
Rule
of"Limited
Liability"
Although
a
partner
may
be
bound
personally
to
the
liabilities
incurred
with
third
parties
who
act
in
good
faith,
nonetheless,
Article
1834
of
the
New
Civil
Code
makes
it
clear
that
such
liability
is
"limited
liability,"
in
that
"The
liability
of
a
partner
x x x
shall
be
satisfied
out
of
partnership
assets
alone
when
such
partner
had
been
prior
to
dissolution:"
(a)
Unknown as a partner to the person with whom the contract
is made; and
(b)
So far unknown and inactive in partnership affairs that the
business reputation of the partnership could not be said to
have been in any degree due to his connection with it.
(ii) When Creditors Not Deemed to Be In Good Faith
It should be noted that Article 1834 of the New Civil Code provides that
even when third parties enter into a "new business" contract or transaction
with the partnership without actual knowledge or notice of the fact of its
dissolution, nonetheless, they will not be considered to be ihird parties acting in
good faith, and that "[t]he partnership is in no case bound by any act of a
partner after dissolution," in the following cases:
Where the partnership is dissolved because it is unlawful to
carry on the business, unless the act is appropriate for winding
up partnership affairs; or
Where the acting partner has become insolvent.
"Ibid, at p. 642.
DISSOLUTION, WINDING-UP AND TERMINATION
699
(iii) Particular Rule on Partner by Estoppel
Notwithstanding any of the foregoing rules, Article 1834 provides that the
liability of any person who after dissolution represents himself or consents to
another representing him as a partner in a partnership engaged in carrying on
business, shall be the same as that provided under Article 1825 on partnership
by estoppel.
WINDING-UP OF PARTNERSHIP AFFAIRS
1. Who Has Authority to Wind-up?
Under Article 1836 of New Civil Code, the person or persons who have the
power and authority to wind up the partnership affairs as a consequence of its
formal dissolution, is determined by the following rules:
(a)
If there is an agreement on this matter, it is the partner or
partners so provided to have such authority, shall wind-up
partnership affairs;
(b) In the absence of any such agreement:
(i) The partners who have not wrongfully dissolved the
partnership or the legal representative of the last surviving
partner, not insolvent, has the right to wind up the
partnership affairs;
(ii) However, any partner or his legal representative or
assignee, upon cause shown, may obtain winding-up by
the courts.
2.
Rules and Procedures for Winding-up and Liquidation of
Partnership Affairs
ART. 1839. In settling accounts between the partners after
dissolution, the following rules shall be observed, subject to any
agreement to the contrary:
700
NON-CORPORATE MEDIA OF DOING BUSINESS
(1) The assets of the partnership are:
(a) The partnership property;
(b) The contributions of the partners necessary for the
payment of all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in order of
payment, as follows:
(a) Those owing to creditors other than partners;
(b) Those owing to partners other than for capital and
profits;
(c) Those owing to the partners in respect to capital;
(d) Those owing to partners in respect to profits.
(3) The assets shall be applied in the order of their declaration
in No. 1 of this article to the satisfaction of the liabilities.
(4) The partners shall contribute, as provided by Article 1797,
the amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any person
appointed by the court shall have the right to enforce the
contributions specified in the preceding number.
(6) Any partner or his legal representative shall have the right
to enforce the contributions specified in No. 4, to the extent of the
amount which he has paid in excess of his share of the liability.
(7) The individual property of a deceased partner shall be
liable for the contributions specified in No. 4.
(8) When partnership property and the individual properties of
the partners are in possession of a
DISSOLUTION, WINDING-UP AND TERMINATION
701
court for distribution, partnership creditors shall
have priority on partnership property and separate
creditors on individual property, saving the right of
lien of secured creditors.
(9) Where a partner has become insolvent or his
estate is insolvent, the claims against his separate
property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of
contributions, (n)
Since
winding-up
and
liquidation
of
the
partnership
affairs
must
apply
the
rules
and
principles
relating
to
the
partnership
doctrine
of
"unlimited
liability,"
the
partners'
right
to
the
benefit
of
excussion,
and
the
priority
rules
among
conflicting
claims,
the
Law
on
Partnership
under
Article
1839
of
New
Civil
Code
lays
down
the
following
tenets,
subject
to
any
agreement
to
the
contrary:
(a) What
Constitutes
Partnership
Property?
The assets of the partnership which shall be applied to pay
partnership liabilities are:
(i) The partnership property;
(ii) The contributions of the partners necessary for the
payment of all the liabilities of the partnership.
(b) What Are the Priority Rules Against Partnership Property?
The liabilities of the partnership shall rank in order of
payment as follows:
(i) Those owing to creditors other than partners;
702
NON-CORPORATE MEDIA OF DOING BUSINESS
(ii) Those owning to partners other than for capital and
profits;
(iii) Those
owning
to
partners
in
respect
of
capital;
and
(iv) Those
owing
to
partners
in
respect
of
profits.
a. Enforcing Contributions from Partners to Cover Partnership
Debts
Article 1839 of the New Civil Code specifically provides that the partners
shall contribute "as provided by Article 1797, the amount necessary to satisfy
the liabilities," and that the individual property of a deceased partner shall be
liable for such contribution.
It also provides that an assignee for the benefit of the creditors or any
person duly appointed by the court shall have the right to enforce the
contribution specified.
In addition, any partner or his legal representative shall have the right to
enforce the contributions to the extent of the amount which he has paid in
excess of his share of the liability.
b. Priority Rules Between Partners' Creditors and Partnership
Creditors
Under Article 1829(8) of the New Civil Code, when partnership property
and the individual properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on partnership property
and separate creditors on individual property, saving the right of lien of secured
creditors.
c. Priority Rules When Partner Is Insolvent
Where a partner has become insolvent or his estate is insolvent, the
claims against his separate property shall rank in the following order:
(a) Those owing to separate creditors;
DISSOLUTION, WINDING-UP AND TERMINATION
703
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
d. Partner May Demand Share in Net Assets Only After Liquidation
and Settlement of Claims of Partnership Creditors
25
In Villareal v. Ramirez, the Supreme Court ruled that "A share in a
partnership can be returned only after the completion of the latter's dissolution,
liquidation and winding up of the business." But even upon dissolution of the
partnership, a partner has no right to demand from the other partners for them
to be personally liable for the return of his contribution, especially when the
partnership operations have been at a loss, thus:
We hold that respondents have no right to demand from
petitioners the return of their equity share. Except as managers of
the partnership, petitioners did not personally hold its equity or
assets. The partnership has a juridical personality separate and
distinct from that of each of the partners." Since the capital was
contributed to the partnership, not to petitioners, it is the
partnership that must refund the equity of the retiring partners.
x x x
Since it is the partnership, as a separate and distinct entity,
that must refund the shares of the partners, the amount to be
refunded is necessarily limited to its total resources. In other words,
it can only pay out what it has in its coffers, which consists of all its
assets. However, before the partners can be paid their shares, the
creditors of the partnership must first be compensated. After all the
creditors have been paid, whatever is left of the partnership assets
28
becomes available for the payment of the partners' shares.
27
The Villareal ruling reiterates the decision in Magdusa v. Albaran. It
should be noted, however, that in Magdusa the Court
25
406 SCRA 145
(2003).
nibid, at pp.
151-
152. 511 (1962).
"5
SCRA
704
NON-CORPORATE MEDIA OF DOING BUSINESS
did
not
accept
the
theory
of
the
Court
of
Appeals
that
partners
have
a
personal
cause
of
action
against
the
managing
partner
for
the
latter
to
return
their
capital
on
the
basis
that
"Plaintiffs'
action
was
based
on
the
allegation,
substantiated
in
evidence,
that
Gregorion
Magdusa,
having
taken
delivery
of
their
shares,
failed
and
refused
and
still
fails
and
refuses
to
pay
them
their
claims.
The
liability,
therefore,
is
personal
to
Gregorio
Magdusa,
and
the
judgment
should
be
against
28
his
sole
interest,
not
against
the
partnership's."
This
shows
that
even
when
the
cause
for
dissolution
is
fraud,
the
action
to
recover
must
still
be
by
way
of
dissolution
and
liquidation
of
the
partnership
affairs,
and
cannot
be
in
the
form
of
a
personal
action
against
the
allegedly
defaulting
partner.
29
Note
must
be
taken
of
the
decision
in
Martinez
v.
Ong
Pong
Co.,
where
two
persons
received
from
a
capitalist
partner
the
latter's
contribution
for
the
establishment
of
a
business
with
clear
agreement
on
the
sharing
of
profits
and
losses
from
such
venture.
When
the
managing
partners
refused
to
render
an
accounting
of
the
operations
of
the
venture
although
they
admitted
there
were
small
profits
made,
the
trial
court
rendered
judgment
directing
the
managing
partners
to
return
the
investment
of
the
capitalist
partner.
The
Court,
in
affirming
the
return
of
contribution,
rather
than
directing
the
dissolution
and
liquidation
of
the
partnership
and
determining
the
share
of
the
partners
in
the
net
assets,
held
Inasmuch
as
in
this
case
nothing
appears
other
than
the
failure
to
fulfill
an
obligation
on
the
part
of
a
partner
who
acted
as
agent
in
receiving
money
for
a
given
purpose,
for
which
he
has
rendered
no
accounting,
such
agent
is
responsible
only
for
the
losses
which,
by
a
violation
of
the
provisions
of
the
law,
he
incurred.
This
being
an
obligation
to
pay
in
cash,
there
are
no
other
losses
than
the
legal
interest,
which
interest
is
not
due
except
from
the
time
of
the
judicial
demand,
or,
in
the
present
case
from
the
filing
of
the
complaint...
We
do
not
consider
that
article
1688
is
applicable
in
this
case,
in
so
far
as
it
proves
"that
the
partnership
is
liable
to
every
partner
for
the
amounts
he
may
have
disbursed
on
account
mid,
at
p.
513.
^I4
Phil.
726
(1910).
DISSOLUTION, WINDING-UP AND TERMINATION
705
of
the
same
and
for
the
proper
interests,"
for
the
reason
that
no
30
other
money
that
the
contributed
as
capital
is
involved.
The
author
believe
that
the
decision
in
Martinez
is
wrong,
for
as
contemporaneously
held
in
Villareal,
a
partner
cannot
seek
recovery
of
his
contribution,
much
less
share
in
the
net
assets
of
the
partnership,
unless
it
be
part
of
the
dissolution
and
liquidation
of
the
partnership,
whereby
the
claims
of
partnership
creditors
have
priority
payment
rights.
31
Yet
the
Supreme
Court
in
Uy
v.
Puzon,
also
ordered
the
primary
partner
to
reimburse
his
co-partner
the
latter's
investment
and
unrealized
profits.
In
Uy,
the
Court
found
that
the
primary
partner
in
a
construction
venture
did
not
comply
with
his
obligation
to
devote
the
project
for
the
benefit
of
the
partnership:
Had
the
appellant
not
been
remiss
in
his
obligations
as
partner
and
as
prime
contractor
of
the
construction
projects
in
question
as
he
was
bound
to
perform
pursuant
to
the
partnership
and
sub-contract
agreements
...
it
is
reasonable
to
expect
that
the
partnership
would
have
earned
much
more
than
the
P334,255.61...
The
award,
therefore,
made
by
the
trial
court
of
the
amount
of
P200,000.00,
as
compensatory
damages,
is
not
speculative,
but
32
based
on
reasonable
estimate.
CONTINUANCE
OF
PARTNERSHIP
BUSINESS
INSTEAD
OF
WINDING-UP
ART. 1840. In the following cases, creditors of the dissolved
partnership are also creditors of the person or partnership
continuing the business:
(1) When any new partner is admitted into an existing
partnership, or when any partner retires
/bid,
at
p.
729.
31
79
SCRA
598
^Ibid,
at
p.
615.
(1977).
706
NON-CORPORATE MEDIA OF DOING BUSINESS
and assigns (or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the partners, or
to one or more of the partners and one or more third persons, if the
business is continued without liquidation of the partnership affairs;
(2) When
all
but
one
partner
retire
and
assign
(or
the
representative
of
a
deceased
partner
assigns)
their
rights
in
partnership
property
to
the
remaining
partner,
who
continues
the
business
without
liquidation
of
partnership
affairs,
either
alone
or
with
others;
(3) When
any
partner
retires
or
dies
and
the
business
of
the
dissolved
partnership
is
continued
as
set
forth
in
Nos.
1
and
2
of
this
article,
with
the
consent
of
the
retired
partners
or
the
representative
of
the
deceased
partner,
but
without
any
assignment
of
his
right
in
partnership
property;
(4) When
all
the
partners
or
their
representatives
assign
their
rights
in
partnership
property
to
one
or
more
third
persons
who
promise
to
pay
the
debts
and
who
continue
the
business
of
the
dissolved
partnership;
(5) When
any
partner
wrongfully
causes
a
dissolution
and
the
remaining
partners
continue
the
business
under
the
provisions
of
Article
1873,
second
paragraph,
No.
2,
either
alone
or
with
others,
and
without
liquidation
of
the
partnership
affairs.
(6) When
a
partner
is
expelled
and
the
remaining
partners
continue
the
business
either
alone
or
with
others
without
liquidation
of
the
partnership
affairs.
The
liability
of
a
third
person
becoming
a
partner
in
the
partnership
continuing
the
business,
under
this
article,
to
the
creditors
of
the
dissolved
partnership
shall
be
satisfied
out
of
the
partnership
DISSOLUTION, WINDING-UP AND TERMINATION
707
property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is
continued under any conditions set forth in this article the creditors
of the dissolved partnership, as against the separate creditors of the
retiring or deceased partner or the representative of the deceased
partner, have a prior right to any claim of the retired partner or the
representative of the deceased partner against the person or
partnership continuing the business, on account of the retired or
deceased partner's interest in the dissolved partnership or on
account of any consideration promised for such interest or for his
right in partnership property.
Nothing in this article shall be held to modify any right of
creditors to set aside any assignment on the ground of fraud.
The use by the person or partnership continuing the business of
the partnership name, or the name of a deceased partner as part
thereof, shall not of itself make the individual property of the
deceased partner liable for any debts contracted by such person or
partnership, (n)
Article
1840
of
the
New
Civil
Code
recognizes
that
a
partnership
may
be
dissolved,
but
the
underlying
partnership
business
enterprise
would
not
be
wound-up,
and
in
fact
may
be
continued
as
a
going
concern.
1. Who May Continue Partnership Business and Obligations
Assumed?
Article 1837 of the New Civil Code recognizes the right of the "partners
who have not caused the dissolution wrongfully," if they so desire, to continue
the business in the same name either
708
NON-CORPORATE MEDIA OF DOING BUSINESS
by
themselves
or
jointly
with
others
during
the
agreed
term
for
the
partnership.
If
such
right
to
continue
the
partnership
business
is
so
exercised,
then
such
exercising
partners
must
secure
the
payment
by
bond
approved
by
the
court,
or
pay
to
any
partner
who
has
caused
the
dissolution
wrongfully,
the
value
of
his
interest
in
the
partnership
at
the
point
of
dissolution,
less
any
damages
recoverable
from
said
defaulting
partner,
as
well
as
indemnify
him
against
all
present
or
future
partnership
liabilities.
2.
Disposition
of
Liabilities
When
Partnership
Business
Continued
Article
1840
of
the
New
Civil
Code
provides
that
if
the
dissolved
partnership
is
not
wounded-up
and
instead
the
partners
so
qualified
have
chosen
to
continue
the
partnership
enterprise
as
a
going
concern,
then
the
creditors
of
the
dissolved
partnership
shall
also
be
creditors
of
the
person
or
partnership
continuing
the
business:
(a)
When any new partner is admitted into an existing
partnership, or when any partner retires and assigns (or the
representative of the deceased partner assigns) his rights in
partnership property to two or more of the partners and one
or more third persons, if the business is continued without
liquidation of the partnership affairs;
(b)
When
all
but
one
partner
retires
and
assigns
(or
the
representative
of
a
deceased
partner
assigns)
their
rights
in
partnership
property
to
the
remaining
partner,
who
continues
the
business
without
liquidation
of
partnership
affairs,
either
alone
or
with
others;
(c)
When any partner retires or dies and the business of the
dissolved partnership is continued, with the consent of the
retired partners or the representa
DISSOLUTION, WINDING-UP AND TERMINATION
709
tive of the deceased partner, without any assignment of his
right in partnership property;
(d)
When all the partners or their representatives assigns their
rights in partnership property to one or more third persons
who promise to pay the debts and who continue the business
of the dissolved partnership;
(e)
When any partner wrongfully causes a dissolution and the
remaining partners continue the business, either alone or
with others, and without liquidation of the partnership
affairs;
(f)
When a partner is expelled and the remaining partners
continue the business either alone or with others without
liquidation of the partnership affairs.
Article
1840
likewise
provides
that
the
liability
of
a
third
person
becoming
a
partner
in
the
partnership
continuing
the
business,
to
the
creditors
of
the
dissolved
partnership
shall
be
satisfied
out
of
the
partnership
property
only,
unless
there
is
a
stipulation
to
the
contrary.
This
is
a
form
of
"limited
liability"
on
the
part
of
a
new
partner
coming
into
an
existing
partnership.
The
article
also
provides
that
when
the
business
of
a
partnership
after
dissolution
is
continued
under
any
conditions
set
forth
therein,
the
creditors
of
the
dissolved
partnership,
as
against
the
separate
creditors
of
the
retiring
or
deceased
partner
or
the
representative
of
the
deceased
partner,
have
a
prior
right
to
any
claim
of
the
retired
partner
or
the
representative
of
the
deceased
partner
against
the
person
or
partnership
continuing
the
business,
on
account
of
the
retired
or
deceased
partner's
interest
in
the
dissolved
partnership
or
on
account
of
any
consideration
promised
for
such
interest
or
for
his
right
in
partnership
property.
Nothing
in
the
article
shall
be
held
to
modify
any
right
of
creditors
to
set
aside
any
assignment
on
the
ground
of
fraud.
Finally,
the
article
provides
that
the
use
by
the
person
or
partnership
continuing
the
business
of
the
partnership
name,
or
710
NON-CORPORATE MEDIA OF DOING BUSINESS
the
name
of
a
deceased
partner
as
part
thereof,
shall
not
of
itself
make
the
individual
property
of
the
deceased
partner
liable
for
any
debts
contracted
by
such
person
or
partnership.
The
foregoing
rules
of
liabilities
must
always
be
construed
in
consonance
with
the
primary
doctrine
of
protecting
creditors
who
deal
in
good
faith
with
the
partnership
business
and
who
cannot
be
expected
to
be
aware
of
the
inner
workings
of
the
partnership
and
the
intramural
dealings
of
the
partners.
33
Thus, in Singson v. Isabels Sawmill, where the partnership executed a
chattel mortgage over its properties in favor of a withdrawing partner, and the
withdrawal was not published to bind the partnership creditors, the Court ruled
that the failure of a partner to have published her withdrawal from the
partnership, and her agreeing to have the remaining partners proceed with
running the partnership business instead of insisting on the liquidation of the
partnership, did not relieve such withdrawing partner from her liability to the
partnership creditors. Even if the withdrawing partner acted in good faith, it
could not overcome the position of partnership creditors who also acted in good
faith, without knowledge of her withdrawal from the partnership. Thus, the
Court affirmed the standing of the partnership creditors to seek the annulment
of the chattel mortgage for having been entered into adverse to their interests.
3. Disposition of Liabilities When Dissolution Is Caused by the Retirement
or Death of a Partner
ART.
1841.
When
any
partner
retires
or
dies,
and
the
business
is
continued
under
any
of
the
conditions
set
forth
in
the
preceding
article,
or
in
Article
1837,
second
paragraph,
No.
2,
without
any
settlement
of
accounts
as
between
him
or
his
estate
and
the
person
or
partnership
continuing
88 SCRA 623 (1979).
DISSOLUTION, WINDING-UP AND TERMINATION
711
the business, unless otherwise agreed, he or his legal representative
as against such person or partnership may have the value of his
interest at the date of dissolution ascertained, and shall receive as an
ordinary creditor an amount equal to the value of his interest in the
dissolved partnership with interest, or at his option at the option of
his legal representative, in lieu of interest, the profits attributable to
the use of his right in the property of the dissolved partnership;
Provided, That the creditors of the dissolved partnership as against
the separate creditors, or the representative of the retired or
deceased partners, shall have priority on any claim arising under this
article, as provided by Article 1840, third paragraph, (n)
Under
Article
1841
of
the
New
Civil
Code,
when
any
partner
retires
or
dies,
and
the
business
is
continued
under
any
of
the
conditions
set
forth
in
Article
1840,
or
in
Article
1837(2),
without
any
settlement
of
accounts
as
between
him
or
his
estate
and
the
person
or
partnership
continuing
the
business,
unless
otherwise
agreed,
then
the
following
rules
shall
apply:
(a)
The partner or his legal representative as against such person
or partnership may have the value of his interest at the date
of dissolution ascertained; and
(b)
The partner or his legal representative shall receive as an
ordinary creditor an amount equal to the value of his interest
in the dissolved partnership, with option:
(i)
to receive interest; or
(ii) in lieu of interest, the profits attributable to the use of
his right in the property of the dissolved partnership.
712
NON-CORPORATE MEDIA OF DOING BUSINESS
Nonetheless, the article expressly provides that the creditors of the
dissolved partnership as against the separate creditors, or the representative of
the retired or deceased partner, shall have priority on any claim arising under
said article, as provided by Article 1840, third paragraph.
4. Partner's Right to Demand an Accounting
ART. 1842. The right to an account of his interest shall accrue to
any partner, or his legal representative as against the winding up
partners or the surviving partners or the person or partnership
continuing the business, at the date of dissolution, in the absence of
any agreement to the contrary. (n)
Under
Article
1842
of
New
Civil
Code,
in
the
absence
of
any
agreement
to
the
contrary,
the
right
to
receive
an
accounting
of
his
interest
shall
accrue
to
any
partner,
or
his
legal
representative,
as
against
the
winding-up
partners,
or
the
surviving
partners,
or
the
person
or
partnership
continuing
the
business,
at
the
date
of
dissolution.
3
In
Fue
Leung
v.
Intermediate
Appellate
Court, *
the
Court
held
that
the
right
to
accounting
does
not
prescribe
during
the
life
of
the
partnership,
and
that
prescription
begins
to
run
only
upon
the
dissolution
of
the
partnership
and
final
accounting
is
done,
under
the
rationale
that:
. . .
As
stated
by
the
respondent,
a
partner
shares
not
only
in
profits
but
also
in
the
losses
of
the
firm.
If
excellent
relations
exist
among
the
partners
at
the
start
of
business
and
169 SCRA 746 (1989).
DISSOLUTION, WINDING-UP AND TERMINATION
all
the
partners
are
more
interested
in
seeing
the
firm
grow
rather
than
get
immediate
returns,
a
deferment
of
sharing
in
the
profits
is
perfectly
plausible.
It
would
be
incorrect
to
state
that
if
a
partner
does
not
assert
his
rights
anytime
within
ten
years
from
the
start
of
operations,
such
rights
are
irretrievably
lost.
The
private
respondent's
cause
of
action
is
premised
upon
the
failure
of
the
petitioner
to
give
him
the
agreed
profits
in
the
operation
of
Sun
Wah
Panciteria.
In
effect
the
private
respondent
was
asking
for
an
35
accounting
of
his
interests
in
the
partnership.
oOo
mid, at p. 754.
713
CHAPTER 10
LIMITED PARTNERSHIPS
NATURE, FORMATION AND REGISTRATION
ART. 1843. A limited partnership is one formed by two or more
persons under the provisions of the following article, having as
members one or more general partners and one or more limited
partners. The limited partners as such shall not be bound by the
obligations of the partnership.
According to Tolentino, the provisions of the New Civil Code on limited
partnerships were taken from the Uniform Limited Partnership Act of the
1
United States of America. In essence, American decisions relating to explaining
the effects of the provisions of the Uniform Limited Partnership Act should be
taken as quite instructive in considering the provisions of the New Civil Code on
limited partnerships.
The De Leons give a more descriptive historical background of the limited
partnership as "an outgrowth of the Roman Law, which provided that one or
more persons might turn over property to a slave and avoid personal liability by
2
trading through him." They describe how the institution of limited partnership
'See
annotations
in
TOLENTINO,
CIVIL
CODE
OF
THE
PHILIPPINES,
Vol.
V,
pp.
382395
(1992
ed.);
See
also
Report
of
the
Code
Commission,
p.
149.
2
DE
LEONS,
p.
295.
714
LIMITED PARTNERSHIPS
715
"grew
up
in
the
civil
law,
rules
governing
this
form
of
business,
substituting,
of
course,
for
the
slaves,
free
persons
who
become
general
partners
with
unlimited
liability,"
and
its
development
into
the
United
States,
thus:
"Louisiana,
which
uses
the
civil
instead
of
the
common
law,
recognized
this
form
of
organization.
In
1822,
the
principal
rules
on
limited
partnership
which
grew
up
in
the
civil
law
were
codified
and
enacted
into
a
statute
by
the
State
of
New
York.
New
York's
lead
has
been
followed
by
most
common
law
jurisdictions
though
England
did
3
not
fall
into
line
until
1907."
4
Bautista quoted from the New York decision in Ames v. Downing, to
describe the origin and development of limited partnerships, as having been
introduced by statute in New York, but essentially having been borrowed from
the French Code, which in turn had its origins from "the middle ages it was one
of the most frequent combinations of trade, and was the basis of the active and
widely extended commerce of the opulent maritime cities of Italy. It contributed
largely to the support of the great and prosperous trade carried on along the
shores of the Mediterranean," explaining further:
At a period when capital was in the hands of nobles and clergy,
who, from pride of caste, or cannonical regulations, could not
engage directly in trade, it afforded the means of secretly
embarking in commercial enterprises, and reaping the profits of
such lucrative pursuits, without personal risk; and thus the vast
wealth, which otherwise could have lain dormant in the coffers of
the rich, became the foundation, by means of this ingenious idea, of
the great commerce which made princes of the merchants,
elevated to the trading class, and brought the Commons into
position as an influential estate in the Commonwealth.
Independent of the interest naturally attaching to the history of a
mercantile contract, of such ancient origin, but so recently
introduced where the general partnership, known to the common
law has hitherto
lbid, citing Charles W. Gertenberg,"Organization and Control," 3 MODERN
BUSINESS (1919), p. 50.
4
1 Brad. (N.Y. SUIT. Cit.) 321, pp. 399-400. Bautista acknowledges that the
American decision is "reproduced in CRANE AND MCGRUDER, CASES ON
PARTNERSHIP, 674-675."
716
NON-CORPORATE MEDIA OF DOING BUSINESS
existed
alone,
I
have
been
led
to
refer
to
the
facts
just
stated,
for
the
purpose
of
showing
that
the
special
partnership
is,
in
fact,
no
novelty,
but
an
institution
of
considerable
antiquity,
well
known,
understood
and
regulated.
*
*
*
The
partnership
remains
under
the
dominion
of
the
common
law.
It
has
created
between
the
special
and
general
partner
a
tie,
which
is
not
subjected
to
the
caprice
of
unforeseen
changes;
it
has
produced
mutual
relations
of
confidence,
which
the
general
partner
cannot
be
forced
to
extend
5
to
strangers.
It
should
be
recognized
that
prior
to
the
New
Civil
Code,
limited
partnerships
were
covered
by
the
Spanish
Code
of
Commerce.
In
Jo
Chung
Cang
6
v.
Pacific
Commercial
Co.,
our
Supreme
Court
recognized
that
there
existed
provisions
in
the
Code
of
Commerce
governing
limited
partners:
"To
establish
a
limited
partnership
there
must
be,
at
least
one
general
partner
and
the
name
of
7
at
least
one
of
the
general
partners
must
appear
in
the
firm
name."
What
seems
clear
from
all
the
foregoing
is
that
the
institution
of
limited
partnership
had
its
origin
from
civil
law,
was
adopted
into
the
American
common
law
system,
from
whence
it
found
its
current
adoption
into
the
Philippine
legal
system
through
the
provisions
of
the
New
Civil
Code
of
the
Philippines.
Limited
partnerships
therefore
originated
and
grew
primarily
from
commercial
partnership
practices.
Their
origin
in
"antiquity"
may
be
the
basis
to
say
that
under
modern
setting,
the
limited
partnership
may
be
an
inadequate
medium
of
doing
business,
for
its
main
features
and
objectives
could
be
achieved
by
the
modern
corporation,
especially
the
close
corporation
vehicle.
1.
Essence
of
the
Medium
of
Limited
Partnership
Article
1843
of
the
New
Civil
Code
defines
a
limited
partnership
as
"one
formed
by
two
or
more
persons
under
the
provisions
of
the
following
article,
having
as
members
one
or
BAUTISTA, at pp. 336-337.
45 Phil. 142 (1923).
7
Ibid, at pp. 150-151; Code of Commerce, Arts. 122(2),
146,148.
6
LIMITED PARTNERSHIPS
717
more
general
partner
and
one
or
more
limited
partners.
The
limited
partners
as
such
shall
not
be
bound
by
the
obligations
of
the
partnership."
6
The American decision in Hoefer v. Hall, describes the purpose and
essence of the limited partnership under the Uniform Limited Partnership Act, as
follows:
X X X . A limited partnership is strictly a creature of statute, its
object being to enable persons not desiring to engage in a particular
business, to invest capital in it and to share in the profits which
might be expected to result from its use, without becoming liable as
general partners for all partnership debts. In other words, it is a
form of partnership in which the liability to third persons of one or
9
more of its members is limited to a fixed amount.. .
As a species of contract, a limited partnership may be characterized as a
formal or solemn contract, in that no limited partnership is formed unless the
formalities provided for under Article 1844 of New Civil Code are complied with;
and failure to so comply with the formalities only brings about the creation of a
general partnership.
On the other hand, having complied with the formalities mandated by
Partnership Law to form such a medium of doing business, the distinguishing
feature of a limited partnership is that it has through the limited partners been
able to institute a form of "limited liability," in that the limited partner as such
shall not be bound by the obligations of the partnership.
The language used in the last sentence of Article 1843 of New Civil Code
("The limited partners as such shall not be bound by the obligations of the
partnership.") carries more the doctrine of "no liability" for limited partners, and
perhaps more
8411 P.2d 230 (1966).
s
Citing Vol 2, ROWLEY ON PARTNERSHIP, 2d Ed., Sec. 53.0, pp. 549-552; Vol.
8, U.L.A., p. 2; Lanier v. Bowdoin, 282 N.Y. 32, 24 N.E. 2d 732; Ruzicka v.
Rager, 305 N.Y. 191,111 N.E. 2d 878, 39 A.L.R. 2d 288.
718
NON-CORPORATE MEDIA OF DOING BUSINESS
accurately
reflects
that
in
civil
law,
the
debts
and
obligations
of
the
partnership
pertain
to
it
as
a
separate
juridical
person,
and
that
generally
non-contracting
parties,
such
as
the
limited
partners,
are
not
bound
by
said
contractual
debts
and
obligations
under
the
principle
of
"privity"
or
"relativity"
under
general
contract
law.
But
frankly,
the
use
of
the
term
"limited
liability"
for
limited
partners
is
more
appropriate
since,
as
will
be
discussed
hereunder,
limited
partners
do
assume
limited
liability
pertaining
to
their
contributions
and
partnership
assets
held
them
under
Article
1858.
Likewise,
as
will
also
be
shown
in
the
discussions
hereunder,
the
limited
liability
feature
of
the
limited
partnership
is
achieved
by
taking
away
from
the
limited
partners
most
of
the
key
features
of
partnerships
in
general,
namely,
mutual
agency,
delectus
personae,
and
the
right
to
manage
partnership
affairs.
2. Requirements for the Formation of a Limited Partnership
ART. 1844. Two or more persons desiring to
form a limited partnership shall:
(1) Sign and swear to a certificate, which shall
state
(a) The name of the partnership, adding
thereto the word "Limited;"
(b) The character of the business;
(c) The location of the principal place of
business;
(d) The name and place of residence of each
member, general and limited partners being
respectively designated;
(e) The term for which the partnership is to
exist;
LIMITED PARTNERSHIPS
(f) The amount of cash and a description of and the
agreed value of the other property contributed by each limited
partner;
(g) The additional contributions, if any, to be made by
each limited partner and the times at which or events on the
happening of which they shall be made;
(h) The time, if agreed upon, when the contribution of
each limited partner is to be returned;
(i) The share of the profits or the other compensation by
way of income which each limited partner shall receive by
reason of his contribution;
(j) The right, if given, of a limited partner to substitute an
assignee as contributor in his place, and the terms and
conditions of the substitution;
(k) The right, if given, of the partners to admit additional
limited partners;
(I) The right, if given, of one or more of the limited partners
to priority over other limited partners, as to contributions or as
to compensation by way of income, and the nature of such
priority;
(m) The right, if given, of the remaining general partner or
partners to continue the business on the death, retirement, civil
interdiction, insanity or insolvency of a general partner; and
(n) The right, if given, of a limited partner to demand and
receive property other than cash in return for his contribution.
(2) File for record the certificate in the Office of the Securities
and Exchange Commission.
719
NON-CORPORATE MEDIA OF DOING BUSINESS
720
A limited partnership is formed if there has been substantial
compliance in good faith with the foregoing requirements.
Article
1844
of
the
New
Civil
Code
lays
down
the
rules
which
two
or
more
persons
desiring
to
form
a
limited
partnership
need
to
comply
with,
thus:
(a)
Sign
and
swear
to
a
Certificate
of
Limited
Partnership,
which
shall
contain
the
following
provisions
describing
or
designating
the:
partnership name, adding thereto "Limited;"
character of the business;
principal place of business;
term
of
existence;
name
and
residence
of
each
of
the
partners,
with
clear
designation
of
who
are
the
general
and
limited
partners;
and
the
right,
if
given,
of
partners
to
admit
additional
limited
partners;
contributions to the partnership, and the terms
under which additional contributions are to be
made by the limited partners;
right, if given, of a limited partner to substitute
an assignee in his place;
time, if agreed upon, when the contributions of
limited partners shall be returned; and the right,
if given, to demand and receive property other
than cash in return for such contributions;
share of the profits or the other compensation
by way of income which each limited partner
shall receive by reason of his contribution; and
the right, if given, of one or more of the limited
partners to priority over other limited partners;
LIMITED PARTNERSHIPS
721
right, if given, of the remaining general partner or partners to
continue the business on the death, retirement, civil
interdiction, insanity or insolvency of a general partner;
-and -
(b) File such Certificate with the SEC.
The indicated provisions under Article 1846 which would provide for a
right "if given" must yield to the legal conclusion that in effect the right alluded
to does not exist if not expressly provided for in the Certificate of Limited
Partnership or by another provision in the New Civil Code.
10
Hoefer v. Hail, explains the rationale in American jurisdiction, on the
formalities required of limited partnership under the Uniform Limited
Partnership Act, thus
x x x . The main purpose of the statutory regulation is to ensure
the limitation on the liability of limited partners. It naturally follows
that in order to obtain the privilege of limited liability, one must
conform to the statutory requirements.. Obviously, the purpose of
the requirement that the certificate shall be recorded is to acquaint
third persons dealing with the partnership with the essential
features of the partnership arrangement. . . Under the
circumstances of this case, where neither the rights of third parties
nor a partner's claim of limited liability is involved, we cannot see
how the failure to record the certificate could affect the existence of
a limited partnership insofar as the parties, inter se, are concern-
e d . . .
With respect to the contents, swearing and SEC-filing of the Certificate of
Limited Partnership, Article 1846 of the New
10
411 P.2d 230 (1966).
Citing Gilman Pain & Varnish Co., v. Legum, 197 Md. 665, 80 A.2d 906;
R.S. Ogiesby Co. v. Lindsay, 112 Va. 767, 72 S.E. 672; Mud Control Laboratories v.
Covey, 2 Utah 2d 85,269 P. 2d 854; Bisno v. Hyde, 290 F. 2d 560 (9th Cir.
1961); 68 C.J.S., PARTNERSHIP, Sec. 450, p. 1006; and 40 AM.JUR., PARTNERSHIP, Sec.
506, p. 475.
11
NON-CORPORATE MEDIA OF DOING BUSINESS
722
Civil
Code
recognizes
the
doctrine
o f " substantial
compliance:"
"A
limited
partnership
is
formed
if
there
has
been
substantial
compliance
in
good
faith
with
the
foregoing
requirements."
While
there
is
no
doubt
that
the
execution
of
a
sworn
Certificate
and
its
registration
with
the
SEC
are
essential
elements
to
establish
a
limited
partnership,
the
question
would
be:
Which
of
the
enumerated
contents
of
the
Certificate
under
Article
1844
are
a
"must"
to
reach
the
level
of
"substantial
compliance?"
To
compare,
under
the
Code
of
Commerce
then
in
place,
Jo
Chung
Cang
v.
12
Pacific
Commercial
Co.,
held:
To
establish
a
limited
partnership
there
must
be,
at
least
one
general
partner
and
the
name
of
at
least
one
of
the
general
13
partners
must
appear
in
the
firm
name.
But
neither
of
these
requirements
have
been
fulfilled.
The
general
rule
is,
that
those
who
seek
to
avail
themselves
of
the
protection
of
laws
permitting
the
creation
of
limited
partnerships
must
show
a
substantially
full
compliance
with
such
laws.
A
limited
partnership
that
has
not
complied
with
the
law
of
its
creation
is
not
considered
a
limited
partnership
at
all,
but
a
general
partnership
in
which
all
the
14
members
are
liable.
It
can
thus
be
concluded,
that
the
institution
of
who
is
or
are
the
general
partners,
and
who
is
or
are
the
limited
partners,
including
the
amount
or
nature
of
their
contributions,
are
essential
contents
of
the
Certificate
of
Limited
Partnership.
In
other
words,
limited
partners
cannot
claim
the
benefits
of
limited
liability
unless
they
find
themselves
expressly
classified
as
such
in
the
duly
filed
15
and
registered
Certificate
of
Limited
Partnership.
Nonetheless,
the
formal
requirements
to
establish
a
limited
partnership
are
relevant
only
insofar
as
establishing
the
limited
liability
rights
against
third
parties.
*45 Phil. 142 (1923).
u
"Ibid, at pp. 146,148, citing Code of Commerce, Arts. 122(2). lbid, at pp.
150-151, citing MECHEM, ELEMENTS OF PARTNERSHIP, p. 412; GILM- ORE, PARTNERSHIP, pp.
499, 595; 20 R.C.L., 1064.
15
Same ruling in Lowe v. Arizona Power & Light Co., 427 P.2d 366 (1967).
LIMITED PARTNERSHIPS
723
Under American jurisprudence, particularly under the Hoefer decision, the
issue as to "substantial compliance" has no relevance in resolving issues inter se
among the partners, and general partners are bound by the contractual
commitment under the partnership agreement to hold the limited partners
liable for partnership debts and obligations only to the extent of their
contributions.
To the same effect is the ruling in Jo Chung Cang v. Pacific Commercial
Co., under the terms of the Code of Commerce which also required execution
of public document and formal registration of the certificate of limited
partnership, thus
16
The supreme court of Spain has repeatedly held that
notwithstanding the obligation of the members to register the
articles of association in the commercial registry, agreements
containing all the essential requisites are valid as between the
contracting parties, whatever the form adopted, and that, while the
failure to register in the commercial registry necessarily precludes
the members from enforcing rights acquired by them against third
persons, such failure cannot prejudice the rights of third persons..
The mandatory requirement of the filing of the Certificate with the SEC
constitutes the registration or notice that binds the public to the essential nature
of the partnership as one constituting a limited liability on the part of the limited
partners. This is consistent with the commercial law practice that a diminution of
rights or the limitation of remedies brought about by a commercial medium shall
come about only when there has been registration that can bind the dealing
public.
American jurisprudence requires that the filing of the Certificate of Limited
Partnership with the proper government agency (the SEC in our case), must be
18
done within a reasonable time.
16
45 Phil. 142 (1923).
Ibid, at p. 153.
18
Stowe v. Marrilees, 44 P.2d 368; Solomont v. Polk Development Co., 54
Cal. Rptr. 22, 27 (1966).
17
724
NON-CORPORATE MEDIA OF DOING BUSINESS
In our jurisdiction, the fact of non-filing of the Certificate of Limited Partnership
does not bring about a limited partnership, and what is deemed constituted is a
general partnership.
3. False Statement in the SEC Certificate
ART. 1847. If the certificate contains a false
statement, one who suffers loss by reliance on
such statement may hold liable any party to the
certificate who knew the statement to be false:
(1) At the time he signed the certificate, or
(2) Subsequently, but within a sufficient time
before the statement was relied upon to enable
him to cancel or amend the certificate, or to file
a petition for its cancellation or amendment as
provided in Article 1865.
Under
Article
1847
of
the
New
Civil
Code,
if
the
Certificate
contains
a
false
statement,
one
who
suffers
loss
by
reliance
on
such
statement
may
hold
liable
"any
party
to
the
certificate
who
knew
the
statement
to
be
false"
at
the
time
he
signed
the
certificate
or
subsequently
learning
of
such
false
statement,
failed
to
cancel
or
amend
the
certificate
or
to
file
a
petition
for
such
cancellation
or
amendment!
The
language
covering
liability
under
Article
1847
indicates
that
a
limited
partner
who
signs
the
Certificate
knowing
provisions
therein
to
be
false,
may
be
held
unlimitedly
liable
to
a
person
who
suffers
loss
by
reason
of
such
false
statement.
But
it
does
not
create
general
unlimited
liability,
because
only
third
parties
who
relied
upon
such
false
statements,
and
have
suffered
loss
thereby,
can
hold
the
limited
partner
liable
beyond
his
contribution.
LIMITED PARTNERSHIPS
725
Thus, in the American decision in Gilman Paint & Varnish
is
Co. v. Legum, it was held that falsely indicating in the articles of
limited partnership the contribution of the limited partner at lower
amount than what was actually contributed cannot be a basis to
hold such limited partner liable beyond his contribution, since it
would be inconceivable that a creditor could suffer loss by relying
on an investment stated in the certificate of partnership which
was smaller than the amount actually contributed; and that it is
when the actual contribution is less than amount stated in the
certificate that reliance upon it may cause loss to a creditor.
4. Name of Limited Partnership
ART. 1846. The surname of a limited partner
shall not appear in the partnership name unless:
(1) It is also the surname of a general partner,
or
(2) Prior to the time when the limited partner
became such, the business has been carried on
under a name in which his surname appeared.
A limited partner whose surname appears in
a partnership name contrary to the provisions of
the first paragraph is liable as a general partner
to partnership creditors who extend credit to the
partnership without actual knowledge that he is
not a general partner.
Under
Article
1844
of
the
New
Civil
Code,
among
the
contents
of
the
Certificate
of
Limited
Partnership
should
be
"The
name
of
the
partnership,
adding
thereto
the
word
'Limited.'"
In
contrast,
under
Articles
122(2),
146
and
148
of
the
Code
of
Commerce,
as
described
in
Jo
Chung
Cang
v.
Pacific
Commercial
19
80 A.2d 906, 29 A.L.R. 2d 286 (1951).
726
NON-CORPORATE MEDIA OF DOING BUSINESS
20
Co.:
"To
establish
a
limited
partnership,
there
must
be,
at
least,
one
general
partner
and
the
name
of
at
least
one
of
the
general
partners
must
appear
in
the
firm
name."
At
present
time,
it
is
not
critical
under
the
terms
of
Article
1844
that
the
firm
name
should
contain
the
names
of
the
general
partners,
or
any
of
them,
and
what
is
imposed
is
to
add
the
word
"Limited."
In
fact,
under
Article
1815
(which
is
the
first
article
under
the
section
denominated
as
"Obligations
of
the
Partners
with
Regard
to
Third
Persons'),
"Every
partner
shall
operate
under
a
firm
name,
which
may
or
may
not
include
the
name
of
one
or
more
of
the
partners."
This
can
only
lead
to
the
conclusion
that
under
our
present
Law
on
Partnerships,
it
is
not
required
as
an
essential
element
to
establish
a
limited
partnership,
that
the
firm
name
should
contain
the
names
of
the
general
partners,
or
any
of
them.
a.
Surname
of
Limited
Partner
Under
Philippine
Partnership
Law,
one
of
the
key
elements
by
which
limited
partners
are
to
be
accorded
their
limited
liability
rights,
is
that
they
practically
must
become
invisible
to
the
public
when
it
comes
to
partnership
dealings:
they
are
mere
passive
investors
in
the
partnership
business,
and
they
do
not
participate
in
its
management
nor
are
they
agents
of
the
partners
and
of
the
partnership.
And
every
indication
that
would
lead
the
dealing
public
to
believe
or
presume
that
a
limited
partner
participates
in
management
or
control
of
the
firm
becomes
a
basis
by
which
such
limited
partners
shall
be
stripped
of
their
limited
liability
right.
Thus,
Article
1846
of
the
New
Civil
Code
provides
that
the
"surname
of
a
limited
partner
shall
not
appear
in
the
partnership
name,
unless
it
happens
to
be
the
surname
of
a
general
partner
or
that
prior
to
the
time
when
the
limited
partner
became
such,
the
business
had
been
carried
or
under
a
name
in
which
such
surname
appeared.
As
a
consequence,
"A
limited
partner
whose
surname
appears
in
a
partnership
n a m e
. . .
shall
be
liable
as
a
"45 Phil. 142 (1923).
LIMITED PARTNERSHIPS
727
general partner to partnership creditors who extend credit to the partnership
without actual knowledge that he is not a general partner." Estoppel is therefore
the legal basis upon which a limited partner becomes liable to a creditor who
acted on the belief that by the inclusion of his surname, the partner was a
general partner.
The problem with this rule of estoppel is that it would be difficult to
imagine how such a partnership creditor could claim good faith, since with the
filing the SEC of the Certificate of Limited Partnership indicating therein a partner
as a limited partner, would amount to constructive knowledge of such fact
binding on the whole world. Does Partnership Law not intend that compiiance
with the mandatory requirements of execution, swearing and SEC-filing of the
Certificate of Limited Partnership shall amount to registration binding on the
whole world? In any event, Article 1846 relies upon the principal of "without
actual knowledge," to the exclusion of the principle of constructive knowledge.
It would seem therefore that the default rule in Philippine Partnership
Law is that articles of partnership and certificates of limited partnership, even
when formally registered with the SEC, do not constitute a form of constructive
notice to the public dealing with such partnerships, and there is no obligation on
the part of the dealing public to determine the legal status of the partnership,
and the intramural arrangements between and among the partners, much less
to determine the extent of the sharing and division of powers among the
partners.
b. The Inclusion of the Term "Limited"
What happens if the firm name adopted by limited partnership formally
in the Certificate of Limited Partnership does not contain the word "Limited,"
does it qualify the firm to be a limited partnership?
We believe this is only a formal and not a substantial requirement, which
cannot strip the limited partners of their right to claim limited liability, for a
member of the dealing public cannot claim to have sustained loss by reason of
the non-inclusion of
728
NON-CORPORATE MEDIA OF DOING BUSINESS
the
word
"Limited"
in
the
firm
name,
since
the
Certificate
clearly
indicates
who
are
the
limited
partners.
Again,
the
drawback
of
this
position
is
that
it
places
the
burden
on
the
dealing
public
to
know
the
contents
of
the
Certificate
filed
with
the
SEC.
c.
No
Firm
Name
Provided
in
the
Certificate
What
happens
if
the
sworn
Certificate
on
file
with
the
SEC
does
not
provide
at
all
for
a
firm
name,
would
it
break
the
limited
liability
rights
of
the
expressly
designated
limited
partners
therein?
We
believe
that
in
such
a
case,
there
is
no
"substantial
compliance"
with
the
requirements
under
Article
1846.
The
firm
name
of
every
partnership
is
the
very
means
by
which
its
existence
as
a
juridical
person,
separate
and
distinct
from
its
members,
and
distinguishable
from
other
firms
and
juridical
persons,
constitutes
the
essence
of
the
"person"
of
the
partnership
and
thereby
the
nexus
upon
which
the
obligatory
force
of
its
contracts
and
transactions
are
fastened.
The
firm
name
of
a
partnership
is
the
essence
by
which
to
enforce
its
standing
in
its
contractual
relationship,
and
the
legal
basis
upon
which
its
creditors
can
enforce
its
obligations
and
other
contractual
commitments.
As
the
firm
name
is
critical
to
partnerships
in
general,
then
it
becomes
more
so
in
the
case
of
a
limited
partnership,
where
the
limited
partners
can
fasten
their
limited
liability
within
the
four
comers
of
the
partnership
business
enterprise
duly
constituted
within
the
person
of
the
created
limited
partnership.
Without
the
firm
name,
it
is
nearly
impossible
to
determine
where
those
four
comers
lie,
and
may
be
a
basis
by
which
partnership
creditors
may
be
defrauded.
5.
Contributions
to
the
Limited
Partnership
ART. 1845. The contributions of a limited partner may be cash or
property, but not services.
LIMITED PARTNERSHIPS
729
a.
Contribution
of
Service
Article
1845
of
New
Civil
Code
expressly
provides
that
the
contributions
of
a
limited
partner
may
be
cash
or
other
property,
but
not
service.
To
allow
otherwise
would
be
to
place
a
limited
partner
into
the
management
of
the
firm,
and
thereby
constitute
a
breach
of
the
fundamental
reason
for
being
accorded
limited
liability
privileges.
When
the
contribution
of
a
limited
partner
is
service
or
industry,
then
he
does
not
only
become
unlimitedly
liable,
but
really
becomes
a
general
partner.
The
contribution
of
service
by
a
limited
partner
should
be
distinguished
from
being
allowed
under
Article
1855
of
New
Civil
Code
to
receive
"compensation
by
way
of
income
stipulated
for
in
the
certificate,"
which
should
be
interpreted
to
mean
that
by
the
very
position
of
being
a
limited
partner,
and
not
because
of
any
service
or
industry
he
will
perform,
he
will
be
accorded
under
the
terms
of
the
Certificate,
periodic
payments
whether
or
not
the
firm
is
making
profits.
Nevertheless,
in
maintaining
the
preference
of
creditors
to
partnership
assets,
such
payments
shall
be
considered
as
part
of
profit
distribution.
b.
Indication
of
the
Amount
Contributed
The
language
of
Article
1844(1
)(f)
of
the
New
Civil
Code
requires
that
the
Certificate
should
indicate
"The
amount
of
cash
and
a
description
of
and
the
agreed
value
of
the
other
property
contributed
by
each
limited
partnerhas
been
taken
to
mean
that
it
is
imperative
that
the
contributions
of
limited
partners
must
be
given
prior
to
or
at
the
time
of
the
execution
of
the
Certificate
and
that
the
indication
of
the
obligation
to
give
the
contribution
is
not
sufficient,
and
would
at
least
constitute
a
false
statement
in
the
Certificate
which
would
give
rise
to
an
obligation
to
pay
the
loss
suffered
by
any
person
who
relied
upon
such
21
statement
as
provided
under
Article
1847.
21
DE LEONS, at p. 308.
730
NON-CORPORATE MEDIA OF DOING BUSINESS
This
position
is
not
supported
by
the
language
of
Article
1858
of
the
New
Civil
Code
which
makes
the
limited
partner
liable
to
the
partnership
for
the
difference
between
his
contribution
"as
having
been
made"
and
"[fjor
any
unpaid
contribution
which
he
agreed
in
the
certificate
to
make
in
the
future
at
the
time
and
on
the
conditions
stated
in
the
certificate."
The
unmistakable
language
of
Article
1858
shows
that
it
is
valid
for
the
partners
to
agree
under
the
terms
of
the
Certificate
for
the
limited
partner
or
partners
to
pay
their
contributions
at
some
future
time.
Does
the
failure
of
a
limited
partner
to
give
his
contribution
to
the
limited
partnership
at
the
time
of
the
execution
and
registration
of
the
Certificate
of
Limited
Partnership,
when
it
is
indicated
therein
that
it
has
in
fact
been
given,
make
him
assume
the
liability
of
a
general
partner?
We
do
not
think
so,
for
the
penalty
for
such
false
statement
is
a
special
one
provided
under
Article
1847
which
does
not
convert
him
into
a
general
partner,
but
merely
makes
him
personally
liable
(beyond
his
promised
contribution),
and
only
to
a
person
who
suffers
loss
by
reliance
on
such
false
statement.
6. When Certificate Cancelled or Amended
ART. 1864. The certificate shall be cancelled
when the partnership is dissolved or all limited
partners cease to be such.
A certificate shall be amended when:
(1) There is a change in the name of the partner-
ship or in the amount or character of the contribu-
tion of any limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
LIMITED PARTNERSHIPS
(5) A general partner retires, dies, becomes insolvent or insane,
or is sentenced to civil interdiction and the business is continued
under Article 1860;
(6) There is a change in the character of the business of the
partnership;
(7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the certificate for
the dissolution of the partnership or for the return of a contribution;
(9) A time is fixed for the dissolution of the partnership, or the
return of a contribution, no time having been specified in the
certificate, or
(10) The members desire to make a change in any other
statement in the certificate in order that it shall accurately represent
the agreement among them.
ART. 1865. The writing to amend a certificate shall:
(1) Conform to the requirements of Article 1844 as far as
necessary to set forth clearly the change in the certificate which it is
desired to make; and
(2) Be signed and sworn to by all members, and an
amendment substituting a limited partner or adding a limited or
general partner shall be signed also by the member to be substituted
or added, and when a limited partner is to be substituted, the
amendment shall also be signed by the assigning limited partner.
The writing to cancel a certificate shall be signed by all
members.
A person desiring the cancellation or amendment of a
certificate, if any person designated in
732
NON-CORPORATE MEDIA OF DOING BUSINESS
the
first
and
second
paragraphs
as
a
person
who
must
execute
the
writing
refuses
to
do
so,
may
petition
the
court
to
order
a
cancellation
or
amendment
thereof.
If
the
court
finds
that
the
petitioner
has
a
right
to
have
the
writing
executed
by
a
person
who
refuses
to
do
so,
it
shall
order
the
Office
of
the
Securities
and
Exchange
Commission
where
the
certificate
is
recorded,
to
record
the
cancellation
or
amendment
of
the
certificate;
and
when
the
certificate
is
to
be
amended,
the
court
shall
also
cause
to
be
filed
for
record
in
said
office
a
certified
copy
of
its
decree
setting
forth
the
amendment.
A
certificate
is
amended
or
cancelled
when
there
is
filed
for
record
in
the
Office
of
the
Securities
and
Exchange
Commission,
where
the
certificate
is
recorded:
(1) A writing in accordance with the provisions of the first or
second paragraph, or
(2) A certified copy of the order of the court in accordance with
the provisions of the fourth paragraph;
(3) After the certificate is duly amended in accordance with
this article, the amended certified shall thereafter be for all purposes
the certificate provided for in this Chapter.
a. When Certificate Must Be Cancelled
Under Article 1864 of the New Civil Code, the Certificate shall be
cancelled when the partnership is dissolved or all limited partners cease to be
such. In these two cases, the partnership has ceased to be a limited partnership,
and may proceed but only as a general partnership. In all other cases covered
below, the Certificate need only be amended.
LIMITED PARTNERSHIPS
733
Article
1865
of
New
Civil
Code
provides
that
the
writing
to
cancel
the
Certificate
shall
be
signed
by
all
members
in
order
to
be
effective.
b.
When
Certificate
Must
Be
Amended
Under
Article
1864
of
the
New
Civil
Code,
the
Certificate
must
be
amended
when:
(a)
There is a change in the partnership name or in the amount or
character of the contribution of any limited partner;
(b)
A person is substituted as a limited partner;
(c)
An additional limited partner is admitted;
(d)
A person is admitted as a general partner;
A general partner retires, dies, becomes insolvent or insane,
or is sentenced to civil interdiction and the business is
continued;
(e)
(f)
There is a change in the character of the partnership business;
(g)
There is a false or erroneous statement;
(h)
There is a change in the time for the dissolution of the
partnership or for the return of a contribution;
(i)
A time is fixed for the dissolution of the partnership, or for the
return of contribution, where no time having been specified
in the certificate; or
(j) The members desire to make a change in any other statement in
the certificate in order that it shall accurately represent the
agreement among them.
Except for the return of contributions of limited partners, the foregoing
provisions must be interpreted to mean that if the certificate is not amended to
cover the instances enumerated,
734
NON-CORPORATE MEDIA OF DOING BUSINESS
then such changes cannot be given legal affect as between and
among the partners and the public.
c. Procedure to Amend Certificate
Article 1865 of the New Civil Code provides that the writing
to amend a certificate shall:
(a)
Conform to the requirements of Article 1844 as far
as necessary to set forth clearly the change in the
certificate which it is desired to make; and
(b)
Be signed and sworn to by all members, and
an amendment substituting a limited partner or
adding a limited or general partner shall be signed
also by the member to be substituted or added,
and when a limited partner is to be substituted, the
amendment shall also be signed by the assigning
limited partner.
The article also provides that when a person desiring the
cancellation or amendment of a certificate may petition the
courts to order such cancellation or amendment whenever any
person designated to execute the writing refuses to do so.
A certificate is amended or cancelled when there is filed for
record with the SEC:
(a)
In writing accomplished in accordance with the
provisions for cancellation or amendment of the
certificate;
(b)
A certified copy of the order of court ordering such
cancellation or amendment; and
(c)
After the certificate is duly amended, the amend-
ed certificate shall thereafter be for all purposes
the certificate provided in the provisions of the
Law on Partnership.
LIMITED PARTNERSHIPS
GENERAL AND LIMITED PARTNERS
ART. 1848. A limited partner shall not become liable as a general
partner unless, in addition to the exercise of his rights and powers as
a limited partner, he takes part in the control of the business.
ART. 1849. After the formation of a limited partnership,
additional limited partners may be admitted upon filing an
amendment to the original certificate in accordance with the
requirements of Article 1865.
ART. 1850. A general partner shall have all the rights and powers
and be subject to all the restrictions and liabilities of a partner in a
partnership without limited partners. However, without the written
consent or ratification of the specific act by all the limited partners, a
general partner or all of the general partners have no authority to:
(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 againstthe 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 so to
do is given in the certificate;
(7) Continue the business with partnership property on the
death, retirement, insanity, civil interdiction or insolvency of a
general partner, unless the right so to do is given in the certificate.
735
736
NON-CORPORATE MEDIA OF DOING BUSINESS
ART. 1851. A limited partner shall have the same rights as a
general partner to:
(1) Have the partnership books kept at the principal place of
business of the partnership, and at a reasonable hour to inspect and
copy any of them;
(2) Have on demand true and full information of all things
affecting the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable; and
(3) Have dissolution and winding up by decree of court.
A limited partner shall have the right to receive a share of the
profits or other compensation by way of income, and to the return
of his contribution as provided in Articles 1856 and 1857.
1. The General Partners
a. Who Is a General Partner in a Limited Partnership?
When a limited partnership is duly constituted, then every partner who
does not qualify as a limited partner by compliance with the formal
requirements mandated under Article 1844 of the New Civil Code, is deemed to
be a general partner and subject to the unlimited liability rule for partnership
obligations.
b. Rights and Powers of General Partners
Under Article 1850 of the New Civil Code, a general partner shall have the
rights and powers and be subject to all the restrictions and liabilities of a partner
in a partnership without limited partners, except that such general partner or all
of the general partners in a limited partnership have no power nor authority to
do any of the
LIMITED PARTNERSHIPS
737
following
acts,
without
the
written
consent
or
ratification
of
the
specific
act
by
all
the
limited
partners,
thus:
(b)
Do any act in contravention of the Certificate;
Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(c)
Confess a judgment against the partnership;
(d)
Possess partnership property, or assign their rights in specific
partnership property, for other than a partnership purpose;
(e)
Admit a person as a general partner;
(f)
Admit a person as a limited partner, unless the right so to do is
given in the certificate.
(a)
Article
1850
therefore
enumerates
six
(6)
instances
when
the
acts
of
the
general
partners
on
behalf
of
the
partnership
would
not
be
valid
without
the
written
consent
of,
or
ratification
by
all
the
limited
partners.
In
other
words,
outside
of
the
enumerated
instances
under
Article
1850,
limited
partners
have
no
voice
in
partnership
affairs.
Notice
that
the
nature
of
the
instances
enumerated
under
Article
1850
would
require
unanimous
written
consent
or
ratification
by
all
the
limited
partners
because
they
would
Contravene
the
contractual
stipulations
with
the
limited
partners
("Limited
partners
must
be
protected
in
their
contractual
rights");
Affect
the
very
commercial
reason
by
which
they
agreed
to
become
passive
investors
("There
should
be
no
undermining
of
the
partnership
business
venture');
or
Undermine
the
fiduciary
duties
of
the
general
partners
to
manage
the
partnership
enterprise
themselves
for
the
limited
partners.
738
NON-CORPORATE MEDIA OF DOING BUSINESS
Any
act,
contract
or
transaction
that
affects
the
terms
of
the
solemn
contract
(which
the
Certificate
of
Limited
Partnership
is)
would
require
limited
partnership
approval
because
it
would
amount
to
a
novation
of
contract.
Easily
the
following
fall
into
that
category:
do
any
act
in
contravention
of
the
Certificate;
admit
a
general
partner,
admit
an
additional
limited
partner.
The
rest
of
the
enumerated
instances
under
Article
1850
affect
substantially
the
partnership
business
enterprise,
and
therefore
would
require
unanimous
consent
or
ratification
by
the
limited
partners.
Three
things
must
be
noted
carefully
from
the
provisions
of
Article
1850
of
the
New
Civil
Code:
Firstly,
although
Article
1850
provides
that
the
written
consent
or
ratification
of
all
the
limited
partners
is
required
for
the
admission
of
a
new
limited
partner,
"unless
the
right
to
do
so
is
given
in
the
certificate,"
the
same
cannot
be
interpreted
to
mean
that
when
the
right
to
do
so
is
given
in
the
Certificate,
the
admission
of
a
new
limited
partner
no
longer
requires
the
consent
of
all
the
limited
partners.
For
even
when
such
right
is
granted,
the
provisions
of
Article
1865
in
laying
down
the
procedure
for
the
amendment
of
the
Certificate
requires
the
written
consent
of
all
the
partners.
Otherwise,
if
the
Certificate
is
not
amended
to
include
formally
the
additional
limited
partner,
he
or
she
does
not
become
a
limited
partner,
and
would
be
exposed
to
the
unlimited
liability
of
a
general
partner.
The
real
advantage
granted
by
having
a
specific
provision
in
the
Certificate
allowing
the
admission
or
substitution
of
limited
partners
is
that
the
same
can
be
done
even
against
the
wishes
of
the
limited
and
general
partners,
and
if
their
signature
to
the
amendment
of
the
Certificate
cannot
be
obtained,
then
there
is
basis
to
go
to
court
to
obtain
an
order
granting
such
amendment
of
the
Certificate.
Secondly,
although
the
act
of
the
general
partners
in
relation
to
any
of
the
six
instances
covered
by
Article
1850
would
be
void
without
the
written
consent
or
ratification
of
all
the
limited
partners,
the
declaration
refers
to
intra-partnership
issues,
because
insofar
as
third
persons
dealing
in
good
faith
with
the
partnership,
the
lack
of
consent
or
ratification
by
the
limited
partners,
cannot
LIMITED PARTNERSHIPS
739
be
a
basis
by
which
they
cannot
treat
their
contracts
with
the
partnership
as
valid,
binding
and
enforceable.
Thirdly,
the
enumeration
of
the
instances
under
Article
1850
which
would
require
written
consent
or
ratification
of
all
the
limited
partners,
stand
apart
from
the
enumerated
"act
of
ownership"
or
"acts
of
strict
dominion"
under
Article
1818
which
cannot
be
effected
by
"less
than
all
partners,"
thus
(a)
Assign a partnership property in trust for creditors or on the
assignee's promise to pay the debts of the partnership;
(b)
Dispose of the goodwill of the business;
(c)
Confess a judgment;
(d)
Enter into a compromise concerning a partnership claim or
liability;
(e)
Submit a partnership claim or liability to arbitration; and
(f)
Renounce a claim of the partnership.
Only
two
(2)
instances
are
common
to
both
Articles
1818
and
1850,
namely:
(a)
To do any other act which would make it impossible to carry
on the ordinary business of a partnership; and
(b)
To confess a judgment against the partnership.
Do we take it to mean that in a limited partnership, by expressly
enumerating the six (6) instances under Article 1850 where the written consent
or ratification of all the limited partners is required, that all the other instances
granted under Article 1818 would only need the consent of"all the general
partners" and do not require the consent of the limited partners, to be valid and
binding? The difference in the matters pertaining to Article 1818 is that without
the requisite unanimous consent, the acts done would be void, not only against
the partnership and the
740
NON-CORPORATE MEDIA OF DOING BUSINESS
other
partners
who
did
not
consent,
but
even
as
to
third
parties
who
dealt
on
the
other
side
of
the
transactions,
because
such
acts
or
transactions
are
not
deemed
to
be
in
the
ordinary
course
of
partnership
business,
and
third
parties
have
no
right
to
expect
that
the
same
is
within
the
power
of
any
one
or
more,
but
not
all
of
the
partners,
to
enter
into.
c.
Duties
and
Obligations
of
the
General
Partner
Article
1850
of
the
New
Civil
Code
provides
that
"A
general
partner
s h a l l . . .
be
subject
to
all
the
restrictions
and
liabilities
of
a
partnership
without
limited
partners."
Is
every
general
partner
in
a
limited
partnership
saddled
with
the
same
obligations,
and
has
the
same
fiduciary
obligations
to
the
partnership
and
to
all
the
partners,
whether
general
or
limited,
as
those
prevailing
in
a
non-limited
partnership
arrangement?
A
general
partner
is
saddled
with
the
same
fiduciary
duty
of
loyalty,
in
that
he
cannot
engage
in
any
business
that
conflicts
with
that
of
the
limited
22
partnership.
A
general
partner
who
is
such
as
an
industrial
partner
is
also
saddled
with
the
same
fiduciary
duty
of
loyalty,
of
being
disqualified
from
23
engaging
in
any
business
venture.
While
there
is
no
doubt
that
the
general
partners,
individually
and
collectively,
owe
fiduciary
duties
to
the
limited
partners
in
a
partnership
setting,
is
the
legal
basis
of
such
fiduciary
relationship
that
of
principal
and
agency?
There
seems
to
be
little
doubt
that
the
limited
partners
do
not
have
any
rights
of
management,
and
consequently
do
not
act
as
agents
to
one
another,
of
the
partnership
itself,
and
of
the
general
partners.
On
the
other
hand,
although
the
general
partners
are
mutual
agents
to
one
another,
as
well
as
being
agents
of
the
partnership,
can
we
consider
them
agents
of
the
limited
partners?
On
this
matter
we
posit
that
theoretically
there
is
legal
problem
with
treating
general
partners
as
agents
of
the
limited
partners,
for
that
legal
relationship
would
violate
the
rule
under
Article
1848
that
limited
partners
cannot
^Art. 1789, New Civil
Code.
^Art. 1789, New Civil
Code.
LIMITED PARTNERSHIPS
741
involve
themselves
in
the
management
of
the
partnership
affairs,
since
the
act
of
the
agents
(the
general
partners)
would
be
equivalent
to
the
act
of
the
principal
(the
limited
partners).
It
is
our
proposition
that
the
fiduciary
relationship
that
arises
between
the
limited
partners
on
one
hand,
and
the
general
partner
or
partners
on
the
other
hand,
rather
than
being
borne
out
by
an
agency
relationship,
should
be
based
on
business
trust:
that
the
general
partners
become
in
effect
the
trustees
for
the
limited
partners,
who
assume
the
role
of
being
beneficiaries
to
the
corpus,
which
can
be
considered
to
be
the
properties
and
the
business
enterprise
of
the
partnership
itself.
Not
only
does
the
trustee-beneficiary
not
only
support
the
existence
of
a
fiduciary
relationship
between
the
general
partners
and
the
limited
partners,
but
validates
the
structure
of
management
and
limited
liability
existing
in
the
limited
partnership
setting:
that
as
trustees,
the
management
over
the
corpus
(the
properties
and
business
enterprise
of
the
partnership)
are
placed
in
the
hands
of
the
general
partners,
with
an
obligation
to
run
the
partnership
affairs
to
serve
the
beneficial
interests
of
the
limited
partners
(to
receive
their
share
in
the
profits
as
stipulated
under
the
Certificate
of
Limited
Partnership),
and
thereby
make
the
limited
partners,
as
mere
passive
beneficiaries
in
a
trust
arrangement,
thereby
not
personally
liable
for
the
resulting
debts
and
liabilities
of
the
partnership
venture.
The
foregoing
thesis
would
explain
the
reason
why,
being
merely
a
beneficiary
in
the
partnership
trust,
limited
partners
ought
not
thereby
owe
any
fiduciary
obligations
to
one
another,
much
less
to
the
general
partners,
and
thereby
can
engage
in
a
business
that
may
even
compete
with
that
of
the
limited
partnership's
business.
Likewise,
the
thesis
would
explain
why
in
areas
covered
under
Article
1818
which
do
not
fall
within
the
enumerations
under
Article
1850,
which
are
acts
of
ownership,
it
may
be
presumed
that
in
a
limited
partnership
setting,
the
requirement
that
they
may
be
done
validly
only
with
the
agreement
of
"all
the
partners"
would
only
cover
the
general
partners
since
they
are
deemed
to
be
endowed
with
the
power
to
do
acts
of
ownership
as
trustees
having
naked
title
to
the
partnership
assets
and
business
enterprise.
NON-CORPORATE MEDIA OF DOING BUSINESS
742
2. The Limited Partners
a. Who Is a Limited Partner?
Under Article 1844 of the New Civil Code, no member of a partnership
shall be considered a limited partner, unless he is so designated in the Certificate
duly filed with the SEC; under Article 1846, his surname cannot be part of the
firm name; and under Article 1845, he does not have the right or option to
contribute service to the partnership.
b. Erroneous But in Good Faith Limited Partner
ART. 1852. Without prejudice to the provisions of Article 1848, a
person who has contributed to the capital of a business conducted
by a person or partnership erroneously believing that he has become
a limited partner in a limited partnership, is not, by reason of his
exercise of the rights of a limited partner, a general partner with the
person or in the partnership carrying on the business, or bound by
the obligations of such person or partnership, provided that on
ascertaining the mistake he promptly renounces his interest in the
profits of the business, or other compensation by way of income.
Under
Article
1852
of
the
New
Civil
Code,
a
person
who
has
contributed
to
the
capital
of
a
business
conducted
by
a
person
or
partnership
erroneously
believing
that
he
has
become
a
limited
partner,
does
not
by
his
exercise
of
the
rights
of
a
limited
partner:
(a) become
a
general
partner
with
the
person
or
in
the
partnership carrying on the business; nor
(b)
be bound by the obligations of such person or partnership;
LIMITED PARTNERSHIPS
743
provided that on ascertaining the mistake he promptly renounces his interest in
the profits of the business or other compensation by way of income.
Article 1852 must cover a situation where although there exists a
partnership business, it is conducted not within the medium of a limited
partnership. Therefore, if one becomes a member of the partnership with the
intention that he becomes a limited partner, and sticks only to exercising the
rights of a limited partner, he does not incur liability of a general partner even as
to the partnership creditors, provided he undertakes the "acts of good faith"
mandated by law. It is only when he takes part in the control of the business (as
provided in Article 1848), that he then becomes liable as a general partner, or
when having realized the mistake in affiliating with the partnership he does not
renounce his interests in the partnership profits, and severe his relationship with
the partnership venture.
Why is it an essential feature of the "acts of good faith" of such limited
partner that he must renounce "his interest in the profits of the business or
other compensation by way of income?" The answer may lie in the fact that the
contract of limited partnership is considered to be a solemn contract, and
thereby void if the solemnities mandated by law have not been complied.
Therefore, in a situation where the party acts in good faith believing himself to
be a limited partner, when he learns that he has not been duly instituted as
such, then it can be considered to be a situation where there is a void contract
resulting, and if he is not to be bound by the unlimited liability obligations of an
ordinary partner in general, then he must not also partake of any benefits or
advantage arising from the purported contractual relationship.
c. When Limited and General Partner at the Same
Time
ART. 1853. A person 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.
744
NON-CORPORATE MEDIA OF DOING BUSINESS
A person who is a general, and also at the same time a limited
partner, shall have all the rights and powers and be subject to all the
restrictions of a general partner; except that, in respect to his
contribution, he shall have the rights against the other members
which he would have had if he were not also a general partner.
Article
1853
of
the
New
Civil
Code
provides
that
a
person
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
of
Limited
Partnership.
Why
would
a
general
partner
want
to
be
a
limited
partner
at
the
same
time,
and
vice
versa?
It
pertains
to
availing
of
the
rights
of
a
limited
partner
with
respect
to
his
contribution
as
such.
Under
Article
1853,
even
when
a
limited
partner
is
at
the
same
time
a
general
partner,
nonetheless
"in
respect
to
his
contribution,
he
shall
have
the
rights
against
the
other
members
which
he
would
have
had
if
he
were
not
also
a
general
partner."
What
would
those
rights
be
peculiar
to
him
as
a
limited
partner,
which
are
not
available
to
him
as
a
general
partner?
Certainly
it
cannot
be
"limited
liability"
rights,
for
being
a
general
partner
at
the
same
time,
he
cannot
have
any
claim
for
limited
liability
against
partnership
debts
and
claims.
The
only
viable
rights
of
a
limited
partner
which
are
not
undermined
by
the
fact
that
he
is
also
a
general
partner
at
the
same
time,
may
pertain
only
to
the
priority
right
to
the
return
of
his
contributions,
share
in
the
profits
as
it
pertains
to
him
as
a
limited
partner.
3. The Rights and Powers of the Limited Partner
The New Civil Code provides the following rights to every limited partner
in a duly constituted limited partnership, thus:
(a) Right to limited liability (Arts. 1843 and 1848);
LIMITED PARTNERSHIPS
(b)
Right to the return of his contribution (Art. 1851);
(c)
Right to receive his share in the profits and compensation by
way of income (Art. 1851);
(d)
Right to assign his equity interest (Art. 1851);
(e)
Right to have the partnership books kept at the principal place
of business of the partnership, and at a reasonable hour to
inspect and copy any of them (Art. 1851[1]);
(f)
Right to have on demand true and full information of all
things affecting the partnership, and a formal account of
partnership affairs whenever circumstances render is just and
reasonable (Art. 1851 [2]);
(g)
Right to have the dissolution and winding-up by decree of
court (Arts. 1851 [3] and 1857).
745
Perhaps
the
best
way
to
describe
the
rights
of
limited
partners,
even
to
those
granted
expressly
by
law,
is
the
way
Bautista
had
summarized
the
ruling
in
2
the
American
case
of
Millard
v.
Newmark
&
Co., *
thus:
"In
broad
terms,
it
may
be
stated
that
a
limited
partner
has
such
rights
and
only
such
rights
as
the
law
26
and
his
contract
afford."
a.
Right
to
Limited
Liability
Article
1843
of
the
New
Civil
Code
provides
that
the
essence
of
the
doctrine
of
"limited
liability"
is
that
limited
partners
who
are
entitled
thereto
"shall
not
be
bound
by
the
obligations
of
the
partnership"
beyond
what
they
contributed
or
legally
bound
to
contribute
to
the
partnership's
common
fund.
The
essence
of
the
medium
of
limited
partnership
is
to
allow
a
group
of
investors
-
the
limited
partners
-
to
participate
in
the
profits
and
losses
of
the
partnership
venture
without
having
to
be
24
266 N.Y.S.2d 254
(1966).
^B
AUTISTA, at p. 425.
NON-CORPORATE MEDIA OF DOING BUSINESS
746
liable to partnership creditors for the separate properties, or more properly
speaking, beyond the value of their contributions in the partnership venture.
The grant of the limited liability status to limited partners comes with a
price, in that:
(a)
They cannot have their surnames form part of the partnership
name (Art. 1846);
(b)
They cannot participate in the control of the partnership
business (Art. 1848); and
(c)
Therefore they are prohibited from contributing service or
industry into the partnership (Art. 1845).
If a limited partner violates any of these restrictions, he becomes
unlimitedly liable as in the case of general partners.
The feature of limited liability is poised primarily in relationship to the
creditors of the partnership in that they have a right to expect that all partners
are unlimitedly liable for partnership debts, unless they are so indicated in the
Certificate as being limited partners who assume the role of mere passive
investors. In addition, that partnership creditors have a right to expect that a
partner who participates in partnership affair is a general partner, and cannot
claim the rights to limited liability. Since it is a limitation on the cause of action
that partnership creditors would ordinarily have against the partners, then
matters relating to the application or non-application of the principle of "limited
liability" can be raised only by partnership creditors.
The operative norm of this doctrine is best exemplified in two American
decisions: limited partners by definition of law and by the terms of the
certificate of limited partnership have no right to participate or interfere in the
affairs of the partnership business enterprise, and if they do so, Donroy, Ltd. v.
United States holds that general partners can seek dissolution of the
196 F. Supp. 54, 57 (1961).
LIMITED PARTNERSHIPS
747
partnership (since the actuations of the limited partners would be tantamount
to a breach of the contract of partnership). Although the partnership creditors
can then hold the limited partners who interfere in partnership affairs as
unlimited liable, nonetheless, Weil v. Diversified Properties, holds that the
general partners cannot, on account of such interference, seek to enlarge the
liability of the limited partners by having them declared as general partners with
obligations to account.
b. Right to Return of Contributions
ART. 1855. Where there are several limited partners the
members may agree that one or more of the limited partners shall
have a priority over other limited partners as to the return of their
contributions, as to their compensation by way of income, or as to
any other matter. If such an agreement is made it shall be stated in
the certificate, and in the absence of such a statement all the limited
partners shall stand upon equal footing.
ART. 1857. A limited partner shall not receive from a general
partner or out of partnership property any part of his contributions
until:
(1) All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their contributions,
have been paid or there remains property of the partnership
sufficient to pay them;
(2) The consent of all members is had, unless the return of the
contribution may be rightfully demanded under the provisions of the
second paragraph; and
"319 Supp. 778 (1970).
748
NON-CORPORATE MEDIA OF DOING BUSINESS
(3) The certificate is cancelled or so amended
as to set forth the withdrawal or reduction.
Subject to the provisions of the first paragraph,
a limited partner may rightfully demand the return
of his contribution:
(1) On the dissolution of a partnership; or
(2) When the date specified in the certificate for
its return has arrived, or
(3) After he has six months' notice in writing
to all other members, if no time is specified in the
certificate, either for the return of the contribution
or for the dissolution of the partnership.
In the absence of any statement in the certificate
to the contrary or the consent of all members, a
limited partner, irrespective of the nature of his
contribution, has only the right to demand and
receive cash in return for his contribution.
A limited partner may have the partnership
dissolved and its affairs wound up when:
(1) He rightfully but unsuccessfully demands
the return of his contribution, or
(2) The other liabilities of the partnership have
not been paid, or the partnership property is insuf-
ficient for their payment as required by the first
paragraph, No. 1, and the limited partner would
otherwise be entitled to the return of his contribu-
tion.
Article
1844(1
)(h)
of
the
New
Civil
Code
provides
that
one
of
the
provisions
that
may
be
found
in
the
Certificate
of
Limited
Partnership
is
"[t]he
time,
if
agreed
upon,
when
the
contribution
of
each
limited
partner
is
to
be
returned."
Does
that
mean
that
when
there
is
no
agreement
or
provision
in
the
Certificate
on
this
matter,
limited
partners,
like
LIMITED PARTNERSHIPS
749
general partners, do not have a right to demand return of contributions during
the life of the partnership? The answer is in the negative. Since the nexus of a
limited partner's relationship in the partnership arrangement is his contribution
and the profits that he is entitled by reason of such contribution, then the ability
of the limited partner, as really a mere passive investor, must commercially be
linked to his ability to be able to liquidate his investment within a reasonable
time that cannot be linked to the entire "going concern" life of the partnership
business venture.
Article 1855 of the New Civil Code provides that where there are several
limited partners the entire members may agree that one or more of the limited
partners shall have a priority over other limited partners as to the return of their
contributions, as to their compensation by way of income, or as to any other
matter, but that "If such an agreement is made it shall be stated in the certificate
of limited partnership, and in the absence of such a statement all the limited
partners shall stand upon equal footing."
Priority in return of contributions or share in income to the limited
partners must not only be agreed upon by all the partners, but must find itself
expressed in the Certificate either as originally indicated or by way of
amendment thereto. In the absence of such provision in the Certificate, there is
no priority between and among the limited partners, and they shall be treated to
be at equal footing. Return of contributions of the limited partners, therefore, is
not necessarily associated with the dissolution of the partnership.
Under Article 1857 of the New Civil Code, a limited partner shall not
receive from a general partner or out of partnership property any part of his
contribution until:
(a)
All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their
contributions, have been paid, or there remains property of
the partnership sufficient to pay them;
(b)
The consent of all members is had, unless the return of the
contribution may be rightfully demanded under the law;
750
NON-CORPORATE MEDIA OF DOING BUSINESS
(c) The certificate is cancelled or so amended as to set forth the
withdrawal or reduction.
On the other hand, when all liabilities to third party creditors have been
paid or there will remain enough assets to cover them, a limited partner may
rightfully demand the return of his contribution:
(a)
On the dissolution of the partnership; or
(b)
When
the
date
specified
in
the
certificate
for
its
return
has
arrived;
or
(c)
After he has given six months notice in writing to all other
members, if no time is specified in the certificate, either for
the return of the contribution or for the dissolution of the
partnership.
Article
1857
also
provides
that
"In
the
absence
of
any
statement
in
the
certificate
to
the
contrary
or
the
consent
of
all
members,
a
limited
partner,
irrespective
of
the
nature
of
his
contribution,
has
only
the
right
to
demand
and
receive
cash
in
return
for
his
contributions."
When
the
partnership
creditors'
preference
is
respected
(either
because
they
will
first
be
all
paid,
or
assets
would
be
provided,
or
set-aside
for
their
settlement),
do
limited
partners
have
the
right
to
demand
for
the
return
of
their
contributions
even
when
it
is
only
in
cash,
even
when
no
such
right
is
provided
for
in
the
Certificate
or
outside
of
dissolution
scenario?
The
answers
seems
to
be
in
the
affirmative
because
of
the
separate
ground
for
return
provided
under
Article
1857
states
that
"After
he
has
given
six
months
notice
in
writing
to
all
other
members,
if
no
time
is
specified
in
the
certificate,...
for
the
return
of
the
contribution,"
and
this
may
seem
true
even
when
the
demand
for
return
does
not
obtain
the
unanimous
vote
of
the
other
partners.
One
of
the
conditions
for
the
valid
return
of
a
limited
partner's
contribution
is
that
there
has
to
be
the
proper
amendment
of
the
Certificate
which
under
the
specific
provisions
governing
LIMITED PARTNERSHIPS
751
the
same
can
only
be
done
with
the
written
consent
of
all
the
partners.
Nonetheless,
the
acknowledgment
of
the
right
of
limited
partners
to
have
the
return
of
their
contribution
upon
compliance
with
the
6-month
notice
rule,
would
mean
that
in
the
event
the
other
partners
oppose
such
a
return
and
they
refuse
to
sign
on
the
amendment
to
the
Certificate
nonetheless,
it
would
authorize
the
withdrawing
limited
partner
to
seek
court
order
for
the
proper
amendment
thereof.
What
needs
to
be
emphasized
is
that
the
law
recognizes
that
limited
partners
are
mere
passive
investors
in
the
partnership
venture,
and
in
the
end
they
must
have
a
way
of
offing-out
of
the
venture
either
by
the
ability
to
assign
their
equity
interests
or
to
demand
properly
the
return
thereof.
c.
Right
to
Profit
or
Compensation
by
Way
of
Income
ART. 1856. A limited partner may receive from the partnership
the share of the profits or the compensation by way of income
stipulated for in the certificate; provided that after such payment is
made, whether from property of the partnership or that of a general
partner, the partnership assets are in excess of all liabilities of the
partnership except liabilities to limited partners on account of their
contributions and to general partners.
Under
Article
1856
of
the
New
Civil
Code,
a
limited
partner
may
receive
from
the
partnership
the
share
of
the
profits
or
the
compensation
by
way
of
income
stipulated
for
in
the
certificate,
provided
that
after
such
payment,
whether
from
the
partner
property
or
property
of
a
general
partner,
the
partnership
assets
are
in
excess
of
all
liabilities
of
the
partnership,
except
liabilities
to
limited
partners
on
account
of
their
contributions
and
to
general
partners.
Even
in
a
limited
partnership,
the
law
recognizes
the
priority
standing
of
partnership
creditors
to
those
of
the
limited
752
NON-CORPORATE MEDIA OF DOING BUSINESS
and general partners in terms of payment from the partnership property.
It must be understood that the meaning of "compensation by way of
income," should not mean that the limited partner is entitled to be employed or
to participate in the management of or in the operations of the partnership, for
which he can be paid "compensation." For even when a limited partner is hired
as an employee of the firm, this may be treated as participating in the
partnership affairs as to make them unlimitedly liable for partnership debts and
obligations.
The term "compensation by way of income," means any arrangement by
which the distribution of profits is termed "compensation" or "salary" done on a
regular or periodic basis as may be agreed upon in the Certificate of Limited
Partnership, and paid to the partner by reason of his simply being a partner, and
not by virtue of the services or industry he renders to the firm.
d. Right to Assign Limited Partner's Interest
ART. 1859. A limited partner's interest is assignable.
A substituted limited partner is a person admitted to all the
rights of a limited partner who has died or has assigned his interest
in a partnership.
An assignee, who does not become a substituted limited
partner, has no right to require any information or account of the
partnership transactions or to inspect the partnership books; he is
only entitled to receive the share of the profits or other
compensation by way of income, or the return of his contribution, to
which his assignor would otherwise be entitled.
An assignee shall have the right to become a substituted limited
partner if all the members consent thereto or if the assignor, being
thereunto
LIMITED PARTNERSHIPS
753
empowered by the certificate, gives the assignee that right.
An assignee becomes a substituted limited partner when the
certificate is appropriately amended in accordance with Article 1865.
The substituted limited partner has all the rights and powers,
and is subject to all the restrictions and liabilities of his assignor,
except those liabilities of which he was ignorant at the time he
became a limited partner and which could not be ascertained from
the certificate.
The substitution of the assignee as a limited partner does not
release the assignor from liability to the partnership under Articles
1847 and 1848.
Under
Article
1859
of
the
New
Civil
Code,
a
limited
partner's
interest
is
assignable,
and
like
in
an
ordinary
partnership,
the
assignee
steps
into
the
shoes
of
the
assigning
limited
partner
only
when
admitted
by
the
other
members:
"A
substituted
limited
partner
is
a
person
admitted
to
all
the
rights
of
a
limited
partner
who
had
died
or
has
assigned
his
interest
in
a
partnership."
The
article
also
provides
that
"An
assignee
shall
have
the
right
to
become
a
substituted
limited
partner
if
all
the
members
consent
thereto
or
if
the
assignor,
being
thereunto
empowered
by
the
certificate,
gives
the
assignee
that
right."
But
in
the
end
Article
1859
provides
expressly
that
there
is
a
need
to
amend
the
certificate,
thus:
"An
assignee
becomes
a
substituted
limited
partner
when
the
certificate
is
appropriately
amended."
In
addition,
Article
1859
provides
that
the
substituted
limited
partner
has
all
the
rights
and
powers,
and
is
subject
to
all
the
restrictions
and
liabilities
of
his
assignor,
except
those
liabilities
which
he
was
ignorant
of
at
the
time
he
became
a
limited
partner
and
which
could
not
be
ascertained
from
the
certificate.
The
article
also
provides
that
the
substitution
of
the
assignee
as
a
limited
partner
does
not
release
the
assignor
from
liability
to
754
NON-CORPORATE MEDIA OF DOING BUSINESS
the
partnership
for
false
statement
in
the
Certificate
under
Article
1847,
and
for
his
contributions
liabilities
under
Article
1858.
Finally,
Article
1859
provides
that
an
assignee
who
does
not
become
a
substituted
limited
partner,
has
no
right
to
require
any
information
or
account
of
the
partnership
transactions
or
to
inspect
the
partnership
books.
He
is
only
entitled
to
receive
the
share
of
the
profits
or
other
compensation
by
way
of
income,
or
the
return
of
his
contributions,
to
which
his
assignor
would
otherwise
be
entitled.
On
the
other
hand,
under
Article
1849
of
the
New
Civil
Code,
after
the
formation
of
a
limited
partnership,
additional
limited
partners
may
be
admitted
only
upon
filing
an
amendment
to
the
original
certificate
in
accordance
with
the
procedure
of
amendments
provided
under
Article
1865.
Since
Article
1849
does
not
provide
a
particular
procedure
or
voting
threshold
by
which
additional
limited
partners
may
be
admitted
into
the
partnership,
then
the
requirements
would
have
to
track
the
procedure
mandated
under
Article
1865
on
the
amendment
of
the
Certificate
which
provides
that
the
amending
certificate
"Be
signed
and
sworn
to
by
all
members,
and
an
amendment
substituting
a
limited
partner
or
adding
a
limited
or
general
partner
shall
be
signed
also
by
the
member
to
be
substituted
or
added,
and
when
a
limited
partner
is
to
be
substituted,
the
amendment
shall
also
be
signed
by
the
assigning
limited
partner."
If
existing
limited
partners
are
more
of
passive
investors
in
the
partnership
venture,
why
would
their
consent
be
essential
in
a
decision
by
the
general
partners
to
admit
additional
limited
partners,
whenever
that
power
is
not
expressly
provided
for
in
the
Certificate
of
Limited
Partnership?
Firstly,
the
institution
of
any
limited
partner
(whether
original
or
additional)
requires
a
formal
indication
in
the
Certificate,
otherwise
such
partners
are
not
deemed
to
be
limited
partners,
and
they
will
be
treated
as
general
partners.
Consequently,
the
admission
of
a
new
limited
partner
is
really
equivalent
to
an
amendment
or
novation
of
the
original
or
existing
limited
partnership
agreement,
which
under
the
principle
of
mutuality
in
Contract
Law,
cannot
be
done
without
the
consent
of
all
LIMITED PARTNERSHIPS
755
contracting
parties,
including
the
limited
partners.
This
point
emphasizes
the
legal
truism
that
limited
partners
must
be
treated
in
two
levels
of
legal
relationship
in
the
partnership
arrangement:
as
passive
investors
in
the
partnership
venture,
and
as
parties
to
the
contract
of
limited
partnership.
Secondly,
the
admission
of
a
new
limited
partner
into
the
partnership
venture
must
necessarily
"eat
up"
on
the
proportional
share
of
the
existing
limited
partners
in
the
partnership
profits,
and
therefore
like
the
principle
governing
pre-emptive
rights
of
stockholders
under
Corporate
Law,
limited
partners
must
give
their
consent
to
the
admission
of
a
new
limited
partner
which
would
have
the
effect
of
diluting
their
proportional
right
to
the
partnership
profits.
Finally,
the
admission
of
a
new
limited
partner
into
the
partnership
also
dilutes
the
proportional
share
that
each
of
the
existing
limited
partners
are
to
have
in
the
distribution
of
the
net
assets
of
the
partnership
upon
dissolution
and
winding-up.
If
the
equity
holdings
of
limited
partners
in
the
partnership
are
impersonal
in
nature,
because
they
do
not
entitle
the
limited
partners
to
participate
in
the
management
of
the
partnership
affairs,
much
less
to
act
as
agents
to
one
another,
then
it
becomes
a
little
difficult
understanding
why
the
substitution
by
a
limited
partner
of
another
person
in
his
place
cannot
happen
as
a
matter
of
commercial
right,
without
having
to
obtain
the
consent
of
all
the
other
partners.
Perhaps
the
free-transferability
of
the
equity
units
of
limited
partners
should
be
instituted
as
a
better
feature
of
the
institution
of
limited
partners
in
our
jurisdiction.
We
can
understand
the
rationale
for
the
need
to
formally
amend
the
Certificate
whenever
a
limited
partner
is
substituted
by
another
person
as
compliance
with
the
solemn
nature
of
the
limited
partners'
position
vis-6-vis
to
formally
bind
the
public
to
the
fact
that
they
are
only
limitedly
liable.
However,
the
same
solemnity
and
notice
to
the
public
can
be
achieved
simply
by
registering
with
the
SEC
the
sale
or
assignment
by
a
limited
partner
of
his
equity
to
another
person.
Requiring
the
formal
amendment
of
the
Certificate
unnecessary
involves
the
participation
of
all
the
other
partners
(by
their
written
consent
or
ratification),
which
makes
756
NON-CORPORATE MEDIA OF DOING BUSINESS
the
process
entirely
cumbersome
and
needlessly
costly,
when
such
consent
can
be
presumed
to
have
been
part
of
the
original
perfection
of
the
contract
of
partnership
among
the
parties,
and,
more
importantly,
the
process
of
sale
and
substitution
cannot
amount
to
a
diminution
or
prejudice
of
the
rights
of
any
of
the
other
partners,
whether
general
or
limited,
since
limited
partners,
whoever
they
may
be,
practically
have
no
right
or
power
except
as
it
pertains
to
their
proprietary
interest
in
the
partnership.
In
short,
the
entire
rationale
of
delectus
personae
is
completely
irrelevant
to
limited
partners
among
themselves,
and
even
in
their
contractual
relationship
with
the
general
partners.
e.
Heirs
of
Deceased
General
Partner
Succeed
Generally
as
Limited
Partners
Although
there
is
no
direct
statutory
provision
that
governs
this
particular
situation,
the
position
has
been
taken
that
when
the
heir
of
the
general
partner
succeeds
to
his
equity
in
the
limited
partnership
pursuant
to
an
express
provision
in
the
Certificate
the
presumption
is
that
he
succeeds
only
to
his
investments,
and
thereby
becomes
only
a
limited
partner,
unless
the
succeeding
heir
expressly
manifest
that
he
is
succeeding
as
a
general
partner;"because
he
would
normally
prefer
to
avoid
any
liability
in
excess
of
the
value
of
the
estate
29
inherited
so
as
not
to
jeopardize
his
personal
assets."
The
decision
in
3
Goquiolay
v.
Sycip,
seems
to
support
such
position,
thus
Besides,
as
we
pointed
out
in
our
main
decision,
the
heir
ordinarily
(and
we
did
not
say
"necessarily")
becomes
a
limited
partner
for
his
own
protection,
because
he
would
normally
prefer
to
avoid
any
liability
in
excess
of
the
value
of
the
estate
inherited
so
as
not
to
jeopardize
his
personal
assets.
But
this
statutory
limitation
of
responsibility
being
designed
to
protect
the
heir,
the
latter
may
disregard
it
and
instead
elect
to
become
a
collective
or
general
partner,
with
^
D
E
L
E
O
N
S
,
a
t
p
LIMITED PARTNERSHIPS
757
all
the
rights
and
privileges
of
one,
and
answering
for
the
debts
of
the
firm
not
only
with
the
inheritance
but
also
with
the
heir's
personal
fortune.
This
choice
pertains
exclusively
to
the
heir,
and
31
does
not
require
the
assent
of
the
surviving
partner.
The
author
does
not
agree
with
such
position.
The
institution
of
limited
partnership
is
solemn
or
formal
arrangement
under
our
Partnership
Law,
and
no
person
becomes
a
limited
partner,
whether
by
the
power
of
assignment
provided
under
the
Certificate,
or
by
the
power
of
substitution,
unless
the
Certificate
is
formally
amended
to
so
name
the
assignee
or
the
substitute,
as
a
limited
partners.
Consequently,
in
a
general
partnership,
when
the
articles
of
partnership
provide
expressly
that
a
deceased
partner
shall
be
substituted
by
his
heirs,
the
heirs
do
not
become
partners,
unless
formally
accepted
into
the
partnership
arrangement
under
the
doctrine
of
privity
or
relativity
applicable
to
partnerships
as
embodying
contractual
relationship.
Only
when
the
succeeding
heirs
confirm
that
he
takes
more
than
just
the
equity
rights
of
the
deceased
partner
and
actually
steps
into
the
shoes
of
the
deceased
partner
thus
he
even
becomes
a
partner,
and
in
that
case
a
general
partner.
In
order
for
him
to
come
in
as
a
limited
partnership,
there
is
a
need
to
formally
adopt
a
Certificate
of
Limited
Partnership
as
provided
by
Article
1844
of
the
New
Civil
Code.
On
the
other
hand,
in
a
limited
partnership
scenario,
where
the
Certificate
provides
for
substitution
of
a
general
partner
by
his
heir
in
the
event
of
death,
it
is
hard
to
see
how
the
automatic
application
of
such
provision
would
thereby
make
the
heir
a
partner
at
all,
whether
limited
or
general
partner.
Since
partnership
relationship
is
essentially
contractual
in
nature
where
consent
is
the
essence
to
make
one
a
partner,
then
an
heir
succeeds
only
to
the
equity
rights
of
the
deceased
general
partner
and
unless
he
formally
consents
to
become
a
partner,
then
he
does
not
become
"Ibid.
758
NON-CORPORATE MEDIA OF DOING BUSINESS
one, whether general or limited partner. In addition, if such consent is obtained,
whether expressly or impliedly, from such heir, in the absence of expressly
choosing to become a limited partner, the general rule should be that he
becomes a general partner by his acceptance into the partnership. To become a
limited partner, by succeeding a general partner, requires not only indication
that one chooses to join only as a limited partner, but actually requires
compliance with the formalities covering the amendment of the Certificate
without which one becomes a general partner subject to unlimited liability.
This position is bolstered by Article 1859 of the New Civil Code which
provides that even when there is a specific provision in the Certificate allowing a
limited partner to substitute another person in his stead, such substitution does
not become valid (i.e., the substituted partner does not become a limited
partner), unless there is a formal amendment to the Certificate. When such
solemnities are required when a limited partner is substituted in his stead, it is
hard to see why when a general partner dies and is substituted by an heir, the
ipso jure effect is for the substitute to be a limited partner.
f. Limited Right as to Partnership Affairs
ART. 1851. A limited partner shall have the same rights as a
general partner to:
(1) Have the partnership books kept at the principal place of
business of the partnership, and at a reasonable hour to inspect and
copy any of them;
(2) Have on demand true and full information of all things
affecting the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable; and
(3) Have dissolution and winding up by decree of court.
LIMITED PARTNERSHIPS
A limited partner shall have the right to receive a share of the
profits or other compensation by way of income, and to the return of
his contribution as provided in Articles 1856 and 1857.
Article 1851 of the New Civil Code provides that a limited
partner shall have the same rights as a general partner only to:
(a) Have the partnership books kept at the
principal place of business; and to inspect
and copy them at reasonable hours; and
(b) Have on demand true and full information
of all things affecting the partnership, and
a formal account of partnership affairs
whenever circumstances render it just
and reasonable.
g. Limited Partner May Loan Money to the Partnership
Art. 1854. A limited partner also may loan money to and
transact other business with the partnership, and, unless he is also a
general partner, receive on account of resulting claims against the
partnership, with general creditors, a pro rata share of the assets. No
limited partner shall in respect to any such claim:
(1) Receive or hold as collateral security and partnership
property, or
(2) Receive from a general partner or the partnership any
payment, conveyance, or release from liability if at the time the
assets of the partnership are not sufficient to discharge partnership
liabili
759
760
NON-CORPORATE MEDIA OF DOING BUSINESS
ties to persons not claiming as general or limited partners.
The receiving of collateral security, or payment, conveyance, or
release in violation of the foregoing provisions is a fraud on the
creditors of the partnership.
Under
Article
1854
of
the
New
Civil
Code,
a
limited
partner
may
loan
money
to,
and
transact
other
business
with,
the
partnership
without
adverse
consequences
to
his
standing
as
a
limited
partner
and
his
right
to
demand
only
limited
liability
exposure.
When
he
is
not
also
a
general
partner,
a
limited
partner
may
receive
on
account
of
resulting
claims
against
the
partnership
with
general
creditors
a
pro
rata
share
of
the
assets.
Nonetheless,
in
all
these
cases,
a
limited
partner
shall
not:
(a)
receive or hold as collateral security any partnership property;
or
(b)
receive from a general partner or the partnership any
payment, conveyance, or release from liability, if at the time
the assets of the partnership are not sufficient to discharge
partnership liabilities to persons as general or limited
partners.
The violation of any of the immediately foregoing prohibitions shall
constitute fraud on the creditors of the partnership.
h. Right to Dissolve the Limited Partnership
ART. 1857. A limited partner shall not receive from a general
partner or out of partnership property any part of his contributions
until:
(1) All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their contributions,
have been paid
LIMITED PARTNERSHIPS
or there remains property of the partnership sufficient to pay them;
(2) The
consent
of
all
members
is
had,
unless
the
return
of
the
contribution
may
be
rightfully
demanded
under
the
provisions
of
the
second
paragraph;
and
(3) The
certificate
is
cancelled
or
so
amended
as
to
set
forth
the
withdrawal
or
reduction.
Subject
to
the
provisions
of
the
first
paragraph,
a
limited
partner
may
rightfully
demand
the
return
of
his
contribution:
(1) On the dissolution of a partnership; or
(2) When the date specified in the certificate for its return has
arrived, or
(3) After he has six months' notice in writing to all other
members, if no time is specified in the certificate, either for the
return of the contribution or for the dissolution of the partnership.
In the absence of any statement in the certificate to the contrary
or the consent of all members, a limited partner, irrespective of the
nature of his contribution, has only the right to demand and receive
cash in return for his contribution.
A limited partner may have the partnership dissolved and its
affairs wound up when:
(1) He rightfully but unsuccessfully demands the return of his
contribution, or
(2) The other liabilities of the partnership have not been paid,
or the partnership property is insufficient for their payment as
required by the first paragraph, No. 1, and the limited partner would
otherwise be entitled to the return of his contribution.
761
762
NON-CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1857
of
the
New
Civil
Code,
a
limited
partner
may
have
the
partnership
dissolved
and
its
affairs
wound-up
when:
(a) He
rightfully
but
unsuccessfully
demands
the
return
of
his
contribution;
or
(b) The
other
liabilities
of
the
partnership
have
not
been
paid,
or
the partnership property is insufficient for their payment, and
the limited partner would otherwise be entitled to the return
of his contribution.
4. Obligations of Limited Partners
a. On Original Contributions to the Partnership
ART. 1858. A limited partner is liable to the partnership:
(1) For the difference between his contribution as actually
made and that stated in the certificate as having been made; and
(2) For any unpaid contribution which he agreed in the
certificate to make in the future at the time and on the conditions
stated in the certificate.
A limited partner holds as trustee for the partnership:
Specific property stated in the certificate as contributed by
him, but which was not contributed or which has been wrongfully
returned, and
Money or other property wrongfully paid or conveyed to
him on account of his contribution.
The liabilities of a limited partner as set forth in this article can
be waived or compromised only
LIMITED PARTNERSHIPS
763
by the consent of all 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 filing and before a cancellation or
amendment of the certificate, to enforce such liabilities.
When a contributor has rightfully received the return in whole or
in part of the capital of his contribution, he is nevertheless liable to
the partnership for any sum, not in excess of such return with
interest, necessary to discharge its liabilities to all creditors who
extended credit or whose claims arose before such return.
Aside from the prohibition against giving service as contribution to the
limited partnership as provided in Article 1845 of the New Civil Code, under
Article 1858 a limited partner is liable to the partnership for the difference
between his contribution as having been made and for any unpaid contribution
which he agreed in the certificate to make in the future at the time and on the
conditions stated therein, i
b. On Additional Contributions
Under Article 1844(1 )(g) of the New Civil Code, a limited partner may be
obliged during the life of the partnership to give additional contribution if such
obligation is provided for in the Certificate of Limited Partnership. The default
rule therefore is that in the absence of a provision in the Certificate, limited part-
ners cannot be compelled to give additional contribution to the partnership.
Do the provisions of Article 1791 of the New Civil Code, which obliges a
partner to sell his interest to the other partners in the event such selling partner
refuses to contribute additional share to the capital to save the partnership
from the imminent loss of its business? We posit that the provisions of Article
1791
764
NON-CORPORATE MEDIA OF DOING BUSINESS
cannot apply to limited partners for its suppletory application to limited
partners would ran contrary to the basic principle that limited partners are
assured, so long as they remain within their passive role as investors, that they
cannot be made to assume greater risk or additional loss arising from the
operations of the partnership business, beyond what they have contractually
committed to contribute.
c. On
Returned
Contributions
Article
1858
of
the
New
Civil
Code
provides
that
"When
a
contributor
has
rightfully
received
the
return
in
whole
or
in
part
of
the
capital
of
his
contribution;
he
is
nevertheless
liable
to
the
partnership
for
any
sum,
not
in
excess
of
such
return
with
interest,
necessary
to
discharge
its
liabilities
to
all
creditors
who
extended
credit
or
whose
claims
arose
before
such
return."
d. Liable as Trustee of the Partnership
Under Article 1858 of the New Civil Code, aside from the fact that a
limited partner is liable to the partnership for his unpaid contributions when it
has become due under the terms of the certificate, he would become liable as a
trustee for the partnership for:
(a)
Specific property stated in the certificate as contributed by
him, which was not been delivered or wrongfully returned to
him;
(b)
Money or other property wrongfully paid or conveyed to him
on account of his contribution.
The foregoing liabilities of a limited partner can be waived or
compromised only by the consent of all members, and provided it shall not
affect the right of a creditor of the partnership who extended credit or whose
claim arose after the filing and before a cancellation or amendment of the
certificate, to enforce such liabilities.
LIMITED PARTNERSHIPS
765
e. Fiduciary Duties of Limited Partners
Are limited partners, being merely passive investors into the partnership
business enterprise, bound by any fiduciary obligations and duties to the limited
partnership and to the other partners? There is no doubt that general partners
owe fiduciary duties not only to one another under the principle of mutual
agency, and to the limited partners on the consideration that general partners
act as agents (i.e., trustees) for the limited partners. On the other hand, by
definition, limited partners do not, and cannot participate in the management of
the partnership affairs, and therefore do not act as agents for one another, for
the general partners, nor for the limited partnership itself. Not assuming the
position of agents in the partnership arrangement, limited partners are not
bound by fiduciary obligations.
Therefore, it has been posited by writers, such as the De Leons, that while
a capitalist general partner cannot engage in competitive business with the
partnership business, a limited partner is not prohibited from engaging in such
competitive business, thus: "In the absence of statutory restrictions, a limited
partnership may carry on any business which could be carried on by a general
32
partnership."
The SEC has ruled that limited partners that are foreign corporations are
33
not deemed to be doing business in the Philippines. The SEC ruling supports
the position that limited partners are not deemed to participate in management
of the business enterprise, nor do they constitute mutual agents to one another
or are they deemed agents representing the limited partnership.
f. General Lack of Standing in Partnership Suits
ART. 1866. A contributor, unless he is a general partner, is not a
proper party to proceedings by or
32
DE
LEONS,
at
p.
301.
^SEC
OPINION,
6
August
1998.
766
NON-CORPORATE MEDIA OF DOING BUSINESS
against a partnership, except where the object is to enforce a limited
partner's right against or liability to the partnership.
Under Article 1866, a contributor, unless he is a general partner (which
means that "contributor" covers a limited partner), is not a proper party to
proceedings by or against a partnership, except where the object is to enforce a
limited partner's right against or liability to the partnership.
DISSOLUTION AND WINDING UP OF LIMITED PARTNERSHIP
ART. 1860. The retirement, death, insolvency,
insanity or civil interdiction of a general partner
dissolves the partnership, unless the business is
continued by the remaining general partners:
or
(1) Under a right so to do stated in the certificate,
(2) With the consent of all members.
ART. 1861. On the death of a limited partner his
executor or administrator shall have all the rights
of a limited partner for the purpose of setting
his estate, and such power as the deceased had
to constitute his assignee a substituted limited
partner.
The estate of a deceased limited partner shall
be liable for all his liabilities as a limited partner.
ART. 1862. On due application to a court of
competent jurisdiction by any creditor of a limited
partner, the court may charge the interest of the
indebted limited partner with payment of the
unsatisfied amount of such claim, and may appoint
LIMITED PARTNERSHIPS
a
receiver,
and
make
all
other
orders,
directions
and
inquiries
which
the
circumstances
of
the
case
may
require.
The
interest
may
be
redeemed
with
the
separate
property
of
any
general
partner,
but
may
not
be
redeemed
with
partnership
property.
The
remedies
conferred
by
the
first
paragraph
shall
not
be
deemed
exclusive
of
others
which
may
exist.
Nothing
in
this
Chapter
shall
be
held
to
deprive
a
limited
partner
of
his
statutory
exemption.
ART.
1863.
In
setting
accounts
after
dissolution
the
liabilities
of
the
partnership
shall
be
entitled
to
payment
in
the
following
order:
(1) Those to creditors, in the order of priority as provided by
law, except those to limited partners on account of their
contributions, and to general partners;
(2) Those to limited partners in respect to their share of the
profits and other compensation by way of income on their
contributions;
(3) Those to limited partners in respect to the capital of their
contributions;
(4) Those to general partners other than for capital and
profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subsequent
agreement, limited partners share in the partnership assets in
respect to their claims jfor capital, and in respect to their claims for
profits
767
768
NON-CORPORATE MEDIA OF DOING BUSINESS
or for compensation by way of income on their contribution
respectively, in proportion to the respective amounts of such claims.
1.
Causes
of
Dissolution
Under
Article
1860,
the
retirement,
death,
insolvency,
insanity
or
civil
interdiction
of
a
general
partner
dissolves
the
partnership,
but
not
that
in
the
case
of
a
limited
partner.
But
even
in
those
cases
the
partnership
is
not
dissolved
if
the
business
is
continued
by
the
remaining
general
partners:
(a)
under a right so to do stated in the certificate; or
(b)
with the consent of all members.
Under
Article
1861
of
the
New
Civil
Code,
in
case
of
death
of
a
limited
partner,
his
executor
or
administrator
shall
have
all
the
rights
of
a
limited
partner
for
the
purpose
of
settling
his
estate,
and
such
power
as
the
deceased
had
to
constitute
his
assignee
a
substituted
limited
partner.
In
turn,
the
estate
of
the
deceased
limited
partner
shall
be
liable
for
all
his
liabilities
as
a
limited
partner.
Under
Article
1862
of
the
New
Civil
Code,
on
due
application
by
any
creditor
of
a
limited
partner,
and
without
prejudice
to
other
existing
remedies,
the
courts
may
charge
the
interest
of
the
indebted
limited
partner
with
payment
of
the
unsatisfied
amount
of
such
claim,
and
may
appoint
a
receiver,
and
make
all
other
orders,
directions,
and
inquiries
which
the
circumstances
of
the
case
may
require.
Such
interest
may
be
redeemed
with
the
separate
property
of
any
general
partner,
but
may
not
be
redeemed
with
partnership
property.
It
should
also
be
noted
that
upon
the
declaration
of
insanity
of
the
general
partner,
it
would
constitute
a
cause
for
the
dissolution
of
the
limited
partnership.
This
is
in
contrast
to
the
rule
for
non-
limited
partnerships,
particular
under
Article
1831
of
the-New
LIMITED PARTNERSHIPS
769
Civil
Code
which
provides
that
the
insanity
of
a
partner
becomes
only
a
basis
by
which
to
go
to
court
for
a
judicial
declaration
of
dissolution
of
the
partnership.
2.
Settling
of
Accounts
Under
Article
1863
of
the
New
Civil
Code,
in
settling
accounts
after
dissolution,
the
liabilities
of
the
partnership
shall
be
entitled
to
payment
in
the
following
order:
(a)
Those to creditors, in the order of priority as provided by law,
except those to limited partners on account of their
contributions, and to general partners;
(b)
Those to limited partners in respect to their share of the
profits and other compensation by way of income on their
contributions;
(c)
Those to limited partners in respect to the capital of their
contributions;
(d)
Those to general partners other than for capital and profits;
(e)
Those to general partners in respect to profits;
(f)
Those to general partners in respect to capital.
Article 1863 specifically provides that "Subject to any statement in the
certificate or to subsequent agreement, limited partners share in the partnership
assets in respect to their claims for capital, and in respect to their claims for
profits or for compensation byway of income on their contribution respectively,
in proportion to the respective amounts of such claims."
The order of priority in the distribution of the assets of the limited
partnership in the event of dissolution and winding- up provides priority to the
claims of partners "as to their share in the profits and compensation by way of
income," over their claims "in respect to capital." This actually is the reverse
order in the general rules on distribution of partnership assets upon
770
NON-CORPORATE MEDIA OF DOING BUSINESS
dissolution
under
Article
1839(2),
which
in
its
ranking
of
the
liabilities
of
the
partnership
in
order
of
payment,
give
preference
ranking
to
"(c)
Those
owning
to
partners
in
respect
of
capital,"
than
to
"(d)
Those
owing
to
partners
in
respect
of
profits."
Why
the
difference
in
preference
when
it
comes
to
dissolution
of
a
limited
partnership?
The
difference
in
liquidation
priority
among
partners
in
a
limited
partnership
shows
that
the
primary
reason
for
the
institution
of
a
class
of
limited
partners
is
that
of
"investment,"
rather
than
management,
of
the
partnership
business
enterprise.
Whereas,
the
ability
to
participate
in
profits
is
also
a
main
focus
in
non-limited
partnership
set-up,
nonetheless,
the
partners
come
together
as
a
group
of
contractually
bound
"sole
proprietors,"
where
the
right
to
manage
and
participate
in
the
affairs
of
the
partnership
business
enterprise
is
the
main
focus.
In
a
limited
partnership
scenario,
in
order
to
be
entitled
to
the
feature
of
"limited
liability,"
the
limited
partners
do
not
participate
in
the
management
of
the
affairs
of
the
business
enterprise;
they
come
in
only
as
passive
investors;
and
therefore,
the
main
nexus
of
the
relationship
between
the
general
partners
on
one
hand,
and
the
limited
partners
on
the
other
hand,
mainly
focuses
on
the
profits
that
would
be
earned
from
the
capital
contribution
of
the
limited
partners.
The
return
of
capital
itself
is
not
the
priority,
for
indeed
under
the
limited
liability
rule,
the
capital
contribution
is
intended
to
be
the
main
source
of
claim
of
partnership
creditors
as
against
the
limited
partners.
That
is
perhaps
the
main
reason
why
upon
dissolution
and
winding-up
of
a
limited
partnership,
after
having
paid
all
claims
of
partnership
creditors,
the
priority
for
the
remaining
assets
of
the
limited
partnership
would
have
to
go
to
"[t]hose
to
limited
partners
in
respect
to
their
share
of
the
profits
and
other
compensation
by
way
of
income
on
their
contributions,"
before
"Those
to
limited
partners
in
respect
to
the
capital
of
their
contributions."
0O0
PHILIPPINE LAW AND PRACTICE ON:
JOINT VENTURES
INTRODUCTION
It
is
fitting
that
a
course
in
Philippine
Partnership
Law
should
end
with
the
section
on
joint
ventures,
for
it
is
in
this
field
where
Supreme
Court
decisions
have
become
truly
transcendent
when
it
comes
to
protecting
national
interests,
and
consequently
where
the
essence
of
partnership
principles
have
become
more
lucent.
Discussions
on
joint
ventures
appeared
as
a
sort-of
esoteric
medium
of
doing
business
in
Philippine
jurisprudence,
with
an
original
impression
that
they
were
a
commercial
association
radically
different
from
partnerships.
The
tendency
had
been
to
ascribe
to
joint
venture
arrangements
certain
legal
allowances
that
would
never
have
been
accepted
in
the
case
of
partnerships.
This
"partiality"
for
joint
venture
arrangements,
which
still
has
remnants
in
sprinkling
statutory
provisions,
may
be
attributed
to
the
perception
that
the
joint
venture
is
a
more
project-oriented
medium
when
compared
to
the
partnership
which
tends
to
be
branded
with
the
attributes
of
primarily
being
a
contractual
relationship
bounded
by
the
doctrine
of
delectus
personae,
and
The
original
paper
was
submitted
by
the
author
to,
and
published
by,
the
CENTER
FOR
INTERNATIONAL
LEGAL
STUDIES
based
in
Salzburg,
Austria,
as
part
of
its
international
publication.
This
is
an
abridged
and
updated
version
of
what
appeared
as
Appendix
C
in
the
author's
book
on
PHILIPPINE
CORPORATE
LAW.
771
772
NON-CORPORATE MEDIA OF DOING BUSINESS
thereby being more "party-oriented", "person-oriented" or even
"personality-oriented."
Although it may not be readily apparent, joint venture arrangements have
become fairly a common medium for doing business or undertaking major
projects in the Philippines, both covering local transactions, when it comes to
large infrastructure undertakings involving the resources of big corporations; or
structuring partnership arrangements between foreign investors and their local
partners in the pursuit of local projects in the Philippines.
The Philippine Government encourages the pursuit of construction
projects and petroleum, coal, geothermal, and other energy operations under
joint venture arrangements. Under the National Internal Revenue Code of 1997
(NIRC), joint ventures formed for the purpose of engaging in petroleum, coal,
geothermal, and other energy operations under an operating or service contract
with the Government, or those formed for the purpose of undertaking
construction projects, are exempt from corporate income tax.
Joint venture arrangements have particularly been the more popular
medium when foreign participation is involved in local projects, since the
contractual nature of the arrangement allows the parties flexibility to adopt
special rules and procedures covering their situation, which otherwise would be
inapplicable in a regular corporate vehicle because of the restrictive rules of the
Corporation Code and the covering jurisprudence in Philippine Corporate Law.
NATURE OF JOINT VENTURES IN PHILIPPINE SETTING
1. Joint Venture Arrangements Primarily Governed by Contract Law Principles
There was a time when joint ventures were treated separately from
2
partnerships. Take the 1954 decision of Tuason v. Bolahos,
95 Phil. 106 (1954).
JOINT VENTURES
773
where
the
Supreme
Court
upheld
as
applicable
the
old
adage
in
American
Corporate
Law
that
"though
a
corporation
has
no
power
to
enter
into
a
partnership,
it
may
nevertheless
enter
into
a
joint
venture
with
another
where
3
the
nature
of
that
venture
is
in
line
with
the
business
authorized
by
its
charter."
Tuason
does
not
explain
why
there
was
a
difference
in
treatment
of
corporate
involvement
by
partnerships
as
distinguished
from
joint
ventures.
If
we
pursue
the
position
that
joint
ventures
must
be
treated
differently
from
partnerships
then
it
can
be
said
that
apart
from
specific
reference
in
the
National
Internal
Revenue
Code,
there
is
no
statutory
provision
that
formally
governs
joint
ventures,
although
they
have
been
recognized
in
jurisprudence
and
have
relatively
become
commonplace
in
commercial
ventures.
Consequently,
joint
venture
agreements
fall
generally
within
the
realm
of
Contract
Law.
Since
the
prevailing
contract
rule
in
the
Philippines
is
that
parties
to
a
contract
may
establish
such
stipulations,
clauses,
terms
and
conditions,
as
they
may
deem
convenient,
provided
that
they
are
not
contrary
to
laws,
morals,
4
good
customs,
public
order,
or
public
policy,
no
model
joint
venture
agreements
have
been
published
by
the
Securities
and
Exchange
Commission
(SEC),
Board
of
Investments
(BOI),
nor
any
other
authority,
except
fairly
recently
by
the
Office
of
the
Government
Corporate
Counsel
(OGCC)
jointly
with
the
National
Economic
Development
Authority
(NEDA).
2. Joint Ventures Are Species of Partnership
The treatment of joint ventures today has come full circle, in that the
prevailing school of thought in the Philippines is that joint ventures are a species
of partnership, because they fall within the definition of a partnership under
Article 1767 of the New Civil Code, which provides that when "two or more
persons
3
lbid, at p. 109, quoting from Wyoming-Indiana Oil Gas Co., v. Weston, 80
A.L.R., 1043, citing 2 FLETCHER CYC. OF CORP., 1082.
4
Article 1306, New Civil Code.
774
NON-CORPORATE MEDIA OF DOING BUSINESS
bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves," then a partnership
is created.
At present, it is considered that the main distinction between an ordinary
partnership and a joint venture is that the ordinary partnership is organized for
general business venture and does not have a definite term of existence;
whereas a joint venture is organized for a specific project or undertaking. But
even under that distinction, a joint venture would fall under the category of a
"particular partnership," which is defined as one which "has for its object
5
determinate things, their use or fruits, or specific undertaking."
In Kilosbayan, Inc. v. Guingona* the Court adopted Black's definition of a
joint venture, thus:
Joint venture is defined as an association of persons or
companies jointly undertaking some commercial enterprise
generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a
right to direct and govern the policy connected therewith, and duty,
which may be altered by agreement to share both in profit and
7
losses; the acts of working together in a joint project.
The foregoing definition of a joint venture essentially falls within the
statutory definition of what constitutes a partnership. Another reason given for
why a joint venture must be considered a species of partnership is that the Law
on Partnerships provides that "A partnership may be constituted in any form,
except where immovable property or real rights are contributed, thereto, in
8
which case a public instrument shall be necessary." That means
Art. 1783, New Civil Code.
232 SCRA 110 (1994).
7
Ibid, at pp. 143-44, citing BLACK'S LAW DICTIONARY. Reiterated in Information
Technology Foundation of the Philippines v. Commission on Elections, 419 SCRA
141 (2004).
8
11
Art. 1771, New Civil Code.
6
JOINT VENTURES
775
that
no
special
form,
even
one
seeking
to
establish
a
joint
venture
arrangement,
is
necessary
to
give
rise
to
a
partnership.
Following-up
on
the
Kilosbayan's
definition
of
a
joint
venture,
the
Supreme
Court
in
Information
Technology
Foundation
of
the
Philippines
v.
9
Commission
of
Elections,
considered
a
"consortium"
to
be
an
association
of
corporations
bound
in
a
joint
venture
arrangements,
and
held
that
the
involvement
of
several
companies
in
a
large
project
would
not
constitute
them
into
a
consortium
nor
a
joint
venture
when
nothing
shows
a
community
of
interest,
a
sharing
of
risks,
profits
and
losses,
or
even
a
representation
by
them
that
they
have
come
together
in
common
venture.
The
Court
found
in
that
case
that
apart
from
a
short
and
unsupported
statement
by
one
of
the
companies
that
it
was
representing
a
consortium,
no
evidence
was
adduced
covering
a
joint
venture
agreement,
or
authority
given
by
the
other
companies
authorizing
the
declaring
company
that
to
represent
or
bind
them
in
a
collective
basis.
The
position
that
a
joint
venture
is
a
species
of
partnership
has
been
upheld
by
the
Court
in
Aurbach
v.
Sanitary
Wares
Manufacturing
Corp.,"
where
it
approvingly
quoted
from
the
brief
of
one
of
the
parties
that:
.
.
.
The
main
distinction
cited
by
most
opinions
in
common
law
jurisdiction
is
that
the
partnership
contemplates
a
general
business
with
some
degree
of
continuity,
while
the
joint
venture
is
formed
for
the
execution
of
a
single
transaction,
and
is
thus
of
a
temporary
nature.
.
.
This
.
observation
is
not
entirely
accurate
in
this
jurisdiction,
since
"
under
the
Civil
Code,
a
partnership
may
be
particular
or
universal,
and
a
particular
partnership
may
have
for
its
object
a
specific
undertaking.
(Article
1783,
Civil
Code)
It
would
seem
therefore
that
under
Philippine
law,
a
joint
venture
is
a
form
of
partnership
and
should
thus
be
governed
by
the
laws
of
partnership."
419 SCRA 141 (2004).
180 SCRA 130 (1989).
"Ibid, at p. 147; emphasis
supplied.
10
776
NON-CORPORATE MEDIA OF DOING BUSINESS
Without qualms or equivocation, the Court in JG Summit Holdings, Inc. v.
12
Court of Appeals, treated a joint venture arrangement as a partnership. In
13
Heirs of Tan Eng Kee v. Court of Appeals, the Court observed that a joint
venture is akin to a particular partnership. In Primelink Properties and Dev.
14
Corp. v. Lazatin-Magat, the Court ruled that "When the parties have entered
into a Joint Venture Agreement, they have entered into a joint venture
arrangement which is a form of partnership, and as such is to be governed by
15
the laws on partnership."
With joint venture arrangements being clearly classified as a form of
particular partnership, there is no doubt that the incidents imposed by the Law
on Partnerships on every kind of partnership must befall every joint venture
arrangement. Only recently, in Philex Mining Corp. v. Commissioner of Internal
Revenue, although the corporate parties executed the instrument as a "Power
of Attorney" and referred to themselves as "principal" and "manager," the
Court held that when the essential elements of a partnership are present, then
it would be a joint venture arrangement, governed by the Law on Partnerships,
thus
An examination of the "Power of Attorney" reveals that a
partnership or joint venture was indeed intended by the parties.
Under a 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. While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its
charter, it has been held that it may enter into a joint venture which
is akin to a particular partnership relationship: x x x Perusal of
the agreement denominated as the 'Power of Attorney' indicates
that the parties had intended to create a partnership and establish
a common fund for the purpose. They also had a joint interest
12
412
SCRA
10
(2003).
341
SCRA
740
"493
SCRA
444
(2000).
K
(2006).
lbid
at
p.
467.
16
551
SCRA
428
(2008).
13
JOINT VENTURES
in the profits of the business as shown by a 50-50 sharing in
17
the income of the mine.
3. Partnership Characteristics of the Joint Venture
Since a joint venture is a species or a special type of part-
nership, it ought to have the following characteristics of a partner-
ship:
(a)
It constitutes a juridical personality separate and
distinct from that of each of the co-venturers. Article
1768 of the New Civil Code provides specifically
that the partnership has a juridical personality
separate and distinct from that of each of the
partners even in case of failure to comply with the
registration requirements of law. Therefore, a joint
venture as a firm can enter into contract and own
18
properties in the firm's name.
(b)
Each of the co-venturers would be liable with
their separate property to the creditors of the joint
venture beyond their contributions or promised
19
contributions to the joint venture.
(c)
Even if a co-venturer transfers his interest to
another, the transferee does not become a co-
venturer to the others in the joint venture unless
all the other co-venturers consent. This is in
consonance with the delectus personae principle
20
applicable to partnerships.
(d)
Generally, the co-venturers acting on behalf of
the joint venture are agents of joint venture and of
21
each other.
"Ibid, at pp. 438-439.
18
cf Art. 1774, New Civil Code.
19
Arts. 1816,1817,1824 to 1826, and 1839, New Civil
20
Code.
Arts. 1804 and 1813, New Civil Code.
21
Arts. 1803,1818 to 1823, New Civil Code.
777
778
NON-CORPORATE MEDIA OF DOING BUSINESS
(e) Death, retirement, insolvency, civil interdiction or dissolution of
22
a co-venturer dissolves the joint venture.
33
In
Litonjua,
Jr.
v.
Litonjua,
Sr.,
the
Court
held
that
a
joint
venture
is
hardly
distinguishable
from,
and
may
be
likened
to,
a
partnership
since
their
elements
are
similar,
i.e.,
community
of
interests
in
the
business
and
sharing
of
profits
and
losses;
and
that
being
a
form
of
partnership,
a
joint
venture
is
generally
governed
by
the
Law
on
Partnerships.
4.
Special
Treatments
Given
to
Joint
Ventures
Jurisprudence,
however,
has
tended
to
give
joint
ventures
special
treatment
not
accorded
to
ordinary
partnerships.
Philippine
jurisprudence
had
adopted
the
prevailing
rule
in
the
United
States
that
a
corporation
cannot
ordinarily
enter
into
partnerships
with
other
corporations
or
with
individuals.
The
basis
for
such
prohibition
on
corporations
is
that
in
entering
into
a
partnership,
the
identity
of
the
corporation
is
lost
or
merged
with
that
of
another
and
the
direction
of
the
affairs
is
placed
in
other
hands
than
those
provided
by
the
law
of
its
creation.
The
doctrine
is
grounded
on
the
theory
that
the
stockholders
of
a
corporation
are
entitled,
in
the
absence
of
any
notice
to
the
contrary
in
the
articles
of
incorporation,
to
assume
that
their
directors
will
conduct
the
corporate
business
without
sharing
that
duty
24
and
responsibility
with
others.
As
discussed
previously,
Tuason
v.
Bolanosrecognized
in
Philippine
jurisdiction
the
doctrine
in
Anglo-American
jurisprudence
that
"a
corporation
has
no
power
to
enter
into
a
partnership."
Nevertheless,
Tuason
recognized
that
a
corporation
may
validly
enter
into
a
joint
venture
agreement,
"where
the
^Art. 1830, New Civil Code.
23
477 SCRA 576 (2005).
24
BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW, 1978 Ed., at p. 9.
2S
95 Phil. 106(1954).
JOINT VENTURES
779
26
nature
of
that
venture
is
in
line
with
the
business
authorized
by
its
charter."
Although
Tuason
does
not
elaborate
on
why
a
corporation
may
become
a
venturer
or
partner
in
a
joint
venture
arrangement,
it
would
seem
that
the
policy
behind
the
prohibition
on
why
a
corporation
cannot
be
made
a
partner
does
not
apply
in
a
joint
venture
arrangement.
In
a
joint
venture,
usually
covering
only
a
particular
project
or
undertaking,
when
the
board
of
directors
of
a
corporation
evaluate
the
risks
and
responsibilities
involved,
they
can
more
or
less
exercise
their
own
business
judgment
is
determining
the
extent
by
which
the
corporation
would
be
involved
in
the
project
and
the
likely
liabilities
to
be
incurred.
Unlike
in
an
ordinary
partnership
arrangement
which
may
expose
the
corporation
to
various
liabilities
and
risks
which
cannot
all
be
evaluated
and
anticipated
beforehand
by
the
board,
a
joint
venture
arrangement
covering
a
single
project
or
transaction
allows
the
board
to
fully
bind
the
corporation
to
matters
essentially
within
the
boards
business
appreciation
and
anticipation.
a.
SEC
Rulings
27
The
previous
ruling
of
the
SEC
on
the
matter
is
that
a
corporation
cannot
enter
into
a
contract
of
partnership
with
an
individual
or
another
corporation
on
the
premise
that
if
a
corporation
enters
into
a
partnership
agreement,
it
would
be
bound
by
the
acts
of
the
persons
who
are
not
its
duly
appointed
and
authorized
agents
and
officers,
which
is
entirely
inconsistent
with
the
policy
of
the
law
that
the
corporation
shall
mange
its
own
affairs
separately
and
exclusively.
Later,
the
SEC
provided
for
a
clear
exception
to
the
foregoing
ruling,
and
allowed
corporations
to
enter
into
partnership
arrangement,
provided
the
28
following
conditions
are
met:
lbid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R.,
1043, citing FLETCHER CYC. OF CORP., 1082).
27
SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 6
FLETCHER CYC. CORP., Perm. Ed. Rev. Rep. 1950, Sec. 2520.
^SEC Opinion, 29 February 1980; SEC Opinion, dated 3 September 1984.
Under Sec. 192 of the NATIONAL INTERNAL REVENUE CODE, documentary stamps of
P15.00 must be affixed on each proxy.
780
NON-CORPORATE MEDIA OF DOING BUSINESS
(a)
The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the
corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business
authorized by the charter or articles of incorporation;
(b)
The agreement on the articles of partnership must provide
that all the partners shall manage the partnership, and the
articles of partnership must stipulate that all the partners
shall be jointly and severally liable for all the obligations of the
partnership; and
(c)
If it is a foreign corporation, it must obtain a license to
transact business in the country in accordance with the
Corporation Code of the Philippines.
29
In
one
opinion,
the
SEC
clarified
that
the
conditions
imposed
meant
that
since
the
partners
in
a
partnership
of
corporations
are
required
to
stipulate
that
all
of
them
shall
manage
the
partnership
and
they
shall
be
jointly
and
severally
liable
for
all
the
obligations
of
the
partnership,
it
necessarily
followed
that
a
partnership
of
corporations
should
be
organized
as
a
"general
partnership."
30
Lately
in
a
new
ruling,
the
SEC,
realizing
that
the
second
condition
actually
prevented
a
corporation
from
entering
into
a
limited
partnership,
which
if
allowed
to
do
so
would
then
be
more
congruent
with
the
policy
that
the
corporation
would
then
not
be
held
liable
for
its
venture
beyond
the
investments
made
and
determined
by
its
board
of
directors,
and
would
therefore
not
be
held
liable
(beyond
its
investment)
for
debts
arising
from
the
acts
of
the
general
partners,
reconsidered
its
position
and
ruled
that
a
corporation
may
become
a
limited
partner
in
SEC Opinion, 23 February 1994, XXVIII SEC QUARTERLY BULLETIN 18 (No.
3, Sept. 1994).
^SEC Opinion, 17 August 1995, XXX SEC QUARTERLY BULLETIN 8 (No. 1, June
1996).
JOINT VENTURES
781
a limited partnership, since "there is no existing Philippine law that expressly
prohibits a corporation from becoming a limited partner in a partnership." In
effect, the SEC dropped the second condition imposed previously.
ALTERNATIVE FORMS IN STRUCTURING A JOINT VENTURE
3
In Aurbach v. Sanitary Wares Manufacturing Corp., ' the Supreme Court
discussed background of the use of joint ventures when it comes to Filipino
investors inviting foreign participation in a local project, and the risks involved,
thus
Quite often, Filipino entrepreneurs in their desire to develop
the industrial and manufacturing capacities of a local firm are
constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance.
However, there is always the danger from such arrangements. The
foreign group may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to
speak. Or the covetousness may come later. As the Philippine firm
enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to
say the least. To the extent that such subversive actions can be
lawfully prevented, the courts should extend protection especially
in industries where constitutional and legal requirements reserve
32
controlling ownership to Filipino citizens.
31
180 SCRA 130
(1989).
mid, at p. 142.
782
NON-CORPORATE MEDIA OF DOING BUSINESS
Parties have varied choices of legal forms in planning a joint venture
arrangement, and they can pursue the same through the following formats:
(a)
Informal or Contractual Joint Venture Arrangement,
(b) Partnership Arrangement, or
(c) Joint Venture Corporation.
1. Accounting for Joints Ventures
Under Philippine Accounting Standards 31 on Interest In Joint Ventures
("PAS 31"), the term "joint venture" refers primarily to "a contractual
arrangement whereby two or more parties undertake an economic activity
which is subject to joint control. . . . [which is] the power to govern the financial
and operating policies of an economic activity as to obtain benefits from it." In
addition, it defines a joint venture as "a business entity owned, and jointly
controlled by a small group of investors as a separate and specific business
project organized for the mutual benefit of the ownership group."
For purposes of Accounting and reporting in financial statements, PAS 31
recognizes three forms of joint venture arrangements:
(a) Jointly Controlled Operations;
(b) Jointly Controlled Assets; and
(c) Jointly Controlled Entities.
Under
PAS
31,
the
legal
form
of
the
joint
venture
arrangement
33
determines
its
substance,
classification
and
corresponding
accounting.
33See
Guantes,
Martin
C.,
Joint
Venture
Accounting:
Changes
and
Chal-
lenges,
12
July
2010
issue
of
BUSINESSWORLD.
JOINT VENTURES
783
There is a move by the International Accounting Standards Board (IASB)
and the Financial Accounting Standards Board (FASB) to recast PAS 31 so that
the parties in a joint venture arrangement would recognize their contractual
rights and obligations arising from the joint arrangement as the bases for
recognizing assets, liabilities, income and expenses of the joint venture, rather
34
than being based on the legal form assumed by the co-venturers.
a. Jointly Controlled Operations (JCO)
Under PAS 31, in "jointly controlled operations," a separate entity is not
established, with each venturer using its own assets, incurs its own expenses and
raising it own financing, and what covers the joint venture arrangement is an
agreement setting out the details of the sharing the revenues and expenses.
Under such arrangement, each venturerwill reflect separately in its own
financial statements the assets that intended for the project but remain in its
control, the liabilities it incurs intended for the project, and its share in the
income derived from the project.
As will be discussed hereunder, the type of joint venture under "Jointly
Controlled Operations" of PAS 31 is equivalent to the Informal or Contractual
Joint Venture Arrangement
b. Jointly Controlled Assets (JCA)
Under PAS 31, in the "jointly controlled assets" type of joint venture
arrangement, there is joint control and ownership by the venturers of assets
contributed to or acquired for the purpose of the project; and with each
venturer sharing in the income earned and expenses incurred from the jointly
controlled assets.
Under this setting, there is normally no company or partnership
established because there are really no operations involved (e.g., jointly
operating leased properties), and the co-
lbid.
784
NON-CORPORATE MEDIA OF DOING BUSINESS
venturers
come
to
the
project
more
as
co-owners;
and
that
each
venturer
control
its
income
participation
or
benefit
through
its
share
of
the
asset
covered
in
the
project.
Under
such
an
arrangement,
each
venturer
will
reflect
in
its
financial
statements
its
share
in
the
joint
assets,
and
share
in
any
liability
incurred
for
the
project;
its
share
in
the
income
proceeds
from
the
project,
as
well
as
it
share
in
the
expenses
incurred
for
the
project.
The
JCA,
which
is
more
like
a
co-ownership
arrangement,
has
no
direct
similarly
to
any
of
the
types
of
joint
ventures
described
below,
but
more
akin
to
an
informal
partnership
arrangement
much
similar
to
Informal
Joint
Venture
Arrangement
In
fact,
under
the
proposed
changes
to
PAS
31
is
to
merged
35
together
JCO
and
JCA
into
a
single
classification
as
"Joint
Operations".
c.
Jointly
Controlled
Entities
(JCE)
Under
PAS
31,
the
"jointly
controlled
entities"
arrangement
would
involve
setting-up
a
company
or
a
partnership
or
other
form
of
media
in
which
each
of
the
venturers
shall
have
an
equity
interest.
When
done
in
a
corporate
format,
such
joint
venture
arrangement
formalizes
within
the
corporate
entity
the
legal
relationship
of
the
co-venturers,
and
takes
advantage
of
the
"limited
liability"
features.
The
assets
and
other
contributions
of
the
co-venturers
would
be
recognized
in
each
of
their
books
and
financial
statements
as
investments
in
the
project.
The
joint
venture
company
would
then
maintain
its
own
records
and
financial
statements
like
any
other
enterprise
in
conformity
with
Philippine
Financial
Reporting
Standards
(PFRS).
As
discussed
in
the
next
section,
this
type
of
arrangement
would
be
equivalent
to
the
Partnership
Arrangement
or
the
Joint
Venture
Corporations
arrangements,
depending
on
the
medium
employed
by
the
co-venturers.
^Ibid.
JOINT VENTURES
785
2. Informal or Contractual Joint Venture Arrangement
In spite of the peremptory provisions under the Law on Partnerships that
any agreement by which two or more persons bind themselves to contribute
money, property or industry to a common fund (i.e., to pursue a business
enterprise) with the intention of dividing the profits among themselves, would
36
necessarily give rise to a partnership, and thereby a partnership juridical
37
personality arises "separate and distinct from that of the partners,"
nonetheless, in cases of corporations which come together in co-venture over a
particular project, there has been an implicit recognition that such a venture can
be pursued merely as a private enterprise with no intention to present a new or
separate "firm" or "company," and much less a separate juridical person, to the
public.
36
In
Heirs
of
Tan
Eng
Kee
v.
Court
of
Appeals,
after
the
Court
held
that
a
joint
venture
is
akin
to
a
particular
partnership,
it
distinguished
one
from
the
other
as
follows:
(a)
A joint adventure (an American concept similar to our joint
accounts) is a sort of informal partnership. with no firm name
and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and
can be individually liable therefor;
(b)
Usually, but not necessarily a joint adventure is limited to a
SINGLE TRANSACTION, although the business of pursuing to a
successful termination may continue for a number of years; a
partnership generally relates to a continuing business of
39
various transactions of a certain kind.
"Art. 1767, New Civil Code.
37
Art. 1768, New Civil Code.
M
341 SCRA 740 (2000).
mid, at p. 753, citing V.E. PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED
546 (13th ed., 1995); underscoring supplied.
786
NON-CORPORATE MEDIA OF DOING BUSINESS
In such a situation, a "Joint Venture Agreement" or a "Memorandum of
Agreement" is executed by the co-venturers to provide for the terms of
arrangement, but the business enterprise will be pursued in the names of the
co-venturers through their duly authorized representatives. No separate
company office is setup, no separate books of accounts are kept, no formal
registration of the enterprise is made with the appropriate government
agencies. The co-venturers therefore intend their relationship to be primarily
governed by the contractual terms agreement upon them in the joint venture
agreement.
a. SEC Recognition of the Informal Joint Venture
Arrangement
Even the SEC itself has recognized such an informal arrangement. It has
ruled that generally, a joint venture agreement of two corporations need not be
registered with the SEC, provided it will not result in the formation of a new
partnership or corporation. However, should there be an intention to acquire a
separate Tax Identification Number (TIN) from the Bureau of Internal Revenue
for the business venture, it requires registration with the SEC in order to have a
40
separate legal personality to obtain a separate TIN.
The SEC has also ruled that two or more corporations may enter into a
joint venture through a contract or agreement (contractual joint venture) if the
nature of the venture is authorized by their charters, which contract need not be
registered with the SEC; provided, however that the joint venture will not result
41
in the formation of a new partnership or corporation.
Thus, under a "contractual joint-venture format," the co- venturers pursue
the joint venture arrangement by a private contract between them, choosing
not to represent to third parties or to the public a separate firm undertaking the
project. Under such an arrangement, the relationship of the co-venturers, their
^SEC
Opinion,
30
March
1995,
XXIX
SEC
QUARTERLY
BULLETIN
32
(No.
3,
Sept.
1995).
41
SEC
Opinion,
29
April
1985,
SEC
ANNUAL
OPINIONS
1985,
at
p.
89.
'
JOINT VENTURES
787
rights
and
liabilities,
are
governed
by
the
joint
venture
contract
executed
among
them.
b.
Jurisprudential
Example
of
an
Informal
Joint
Venture
Arrangement
A
good
example
of
an
informal
joint
venture
arrangement
was
that
42
covered
in
Travefio
v.
Bobongon
Banana
Growers
Multi-Purpose
Cooperative,
where
a
labor
dispute
was
settled
by
the
Supreme
Court
employing
partnership
and
joint
venture
principles.
In
Traveho,
the
Diamond
Farms,
Inc.
(DFI)
entered
into
an
arrangement
landowners
in
Santo
Tomas,
Davao
Del
Norte
to
convert
their
lands
into
banana
plantation
and
for
which
DFI
would
purchase
their
quality
export
produce.
The
landowners
organized
themselves
into
a
Cooperative
and
entered
into
a
formal
"Banana
Production
and
Purchase
Agreement"
(the
"Contract")
"under
which
the
Cooperative
would
handle
and
fund
the
production
of
bananas
and
operation
of
the
plantation
covering
lands
owned
by
its
members
in
consideration
of
DFI's
commitment
to
provide
financial
and
technical
assistance
as
needed,
including
the
supply
of
information
and
equipment
in
growing,
packing,
and
shipping
bananas.
The
Cooperative
would
hire
its
own
workers
and
pay
their
wages
and
benefits,
and
sell
exclusively
to
DFI
all
export
quality
43
bananas
produced
that
meet
the
specifications
agreed
upon."
When
some
of
the
laborers
working
the
banana
plantation
were
laid-off
by
the
Cooperative
and
a
labor
case
for
unlawful
termination
was
brought,
the
claimants
included
DFI
as
respondent
on
the
ground
that
the
arrangement
arrived
at
under
the
Contract
was
the
prohibited
job-contracting
or
44
sub-contracting
practice.
42
598 SCRA 27 (2009).
"Ibid, at p. 38.
4
* ibid, at pp. 37-38: "Job contracting or subcontracting refers to an arrange-
ment whereby a principal agrees to farm out with a contractor or subcontractor
the performance of a specific job, work or service within a definite or prede-
termined period, regardless of whether such job, work or service is to be per-
formed or completed within or outside the premises of the principal."
788
NON-CORPORATE MEDIA OF DOING BUSINESS
The
Court
held
that
"DFI
did
not
farm
out
to
the
Cooperative
the
performance
of
45
a
specific
job,
work,
or
service,"
in
that
To
the
Court,
the
Contract
between
the
Coope-rative
and
DFI,
far
from
being
a
job
contracting
arrangement,
is
in
essence
a
business
partnership
that
partakes
of
the
nature
of
a
joint
venture.
The
rules
on
job
contracting
are,
therefore,
inapposite.
The
Court
may
not
alter
the
intention
of
the
contracting
parties
as
gleaned
from
their
stipulations
without
violating
the
autonomy
of
contracts
principle
under
Article
1306
of
the
Civil
Code
which
gives
the
contracting
parties
the
utmost
liberality
and
freedom
to
establish
such
stipulations,
clauses,
terms
and
conditions
as
they
may
deem
convenient,
provided
they
are
not
contrary
to
laws,
48
morals,
good
custom,
public
order
or
public
policy.
Traveno
therefore
reiterates
the
principle
that
a
joint
venture
arrangement
is
a
species
of
partnership,
and
that
like
an
ordinary
partnership
arrangement,
it
is
primarily
contractual
in
character
and
subject
to
the
principle
of
autonomy.
One
of
the
issues
that
could
have
been
raised
in
Traveho
is
that
even
when
the
arrangement
between
DFI
and
the
Cooperative
was
a
joint
venture
one
rather
than
a
job-contracting
arrangement,
it
was
still
possible
to
have
made
DFI
liable
for
the
labor
claims
poised
against
the
Cooperative
on
the
principle
of
"mutual
agency"
applicable
to
all
forms
of
partnership.
In
other
words,
when
the
Cooperative
hired
the
laborers
in
the
plantation,
and
eventually
terminated
their
services
purportedly
in
an
unlawful
manner,
it
may
be
considered
as
binding
on
DFI
also,
since
the
act
of
a
partner
or
co-venturer
binds
not
only
the
acting
party,
but
also
the
partnership
and
the
other
partners.
The
Court
in
Traveho
may
have
addressed
this
issue
when
it
held
that
in
a
joint
venture
agreement,
the
co-venturers
are
held
bound
by
their
promised
contribution
or
commitment
to
the
joint
venture
arrangement:
"Ibid,
at
p.
38.
"Ibid,
at
p.
38.
JOINT VENTURES
789
On the second requisite, which refers to the pay-ment of
wages, it was likewise the Cooperative that paid the same. As
reflected earlier, under the Contract the Cooperative was to handle
and fund the production of bananas and operation of the
plantation. The Cooperative was also to be responsible for the
proper conduct, safety, benefits, and general welfare of its
members and workers in the plantation.
As to the third requisites, which refers to the power of
dismissal, and the fourth requisite, which refers to the power of
control, both were retained by the Cooperative. Again, the
Contract stipulated that the Cooperative was to be responsible for
the proper conduct and general welfare of its members and
47
workers in the plantation.
c. Joint Venture Arrangement Hidden Through Another Form of
Contract
Sometimes, the parties to a joint venture arrangement, in order to avoid
having to present to the public the real nature of their arrangement, execute
another form of contract that will either facilitate the implementation of their
agreement, or that will hide their true intent and arrangement.
46
In the case of Mendoza v. Paule, a joint venture arrangement to
undertake one particular government project was pursued among the two
partners (Paule and Mendoza) through the use of the existing registered and
accredited construction company (a sole proprietorship) of one of the partners.
Instead of executing a formal joint venture arrangement the parties followed the
following format: "Engineer Eduardo M. Paule (PAULE) is the proprietor of E M.
Paule Construction and Trading (EMPCT). . . PAULE executed a special power of
attorney (SPA) authorizing Zenaida G. Mendoza (MENDOZA) to participate in the
pre-qualification and bidding of a National Irrigation Administration (NIA) project
49
and to represent him in all transactions related thereto."
47
Ibid, at p. 39; underscored italics
supplied.
579 SCRA 341 (2009).
4
*lbid, at p. 345.
48
790
NON-CORPORATE MEDIA OF DOING BUSINESS
Although dubbed as an attorney-in-fact arrangement, the Court noted
that the real arrangement between Paule and Mendoza was a partnership or
joint venture arrangement, thus:
Records show that PAULE (or, more appropriately, EMPCT)
and MENDOZA entered into a partnership in regard to the NIA
project. PAULE's contribution thereto is his contractor's license and
expertise, while MENDOZA would provide and secure the needed
funds for labor, materials and services; deal with the suppliers and
sub-contractors; and in general and together with PAULE, oversee
the effective implementation of the project. For this, PAULE would
receive as his share three per cent (3%) of the project cost while
the rest of the profits shall go to MENDOZA. PAULE admits to this
50
arrangement in all his pleadings.
Although Paule was shown to be the principal of Mendoza, he was made
liable for revoking the purported agency arrangement: "PAULE should be made
civilly liable for abandoning the partnership, leaving MENDOZA to fend for her
own, and for unduly revoking her authority to collect payments from NIA,
payments which were necessary for the settlement of obligations contracted for
and already owing to laborers and suppliers of materials and e q u i p m e n t . . .
not to mention the agreed profits to be derived from the venture that are owing
51
to MENDOZA by reason of their partnership agreement."
An informal joint venture arrangement was also pursued in Philex Mining
Corp. v. Commissioner of Internal Revenue, where in the operation of a mining
concession betweeni two corporations, they executed merely a "Power of
Attorney" and designated one another "principal" (the owner of the concession)
and "manager" (the entity that would directly manage development and
operations). The Court refused to consider the relationship between the parties
as debtor-creditor, principal-agent, or as
lbid, at p. 354.
5
1
t
o
/
o
f
,
a
t
p
JOINT VENTURES
791
principal-manager, since by the terms of the arrangement the essential
elements of a partnership existed, thus
An examination of the "Power of Attorney" reveals that a
partnership or joint venture was indeed intended by the parties.
Under a 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. While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its
charter, it has been held that it may enter into a joint venture which
is akin to a particular partnership relationship: x x x Perusal of the
agreement denominated as the 'Power of Attorney' indicates that
the parties had intended to create a partnership and establish a
common fund for the purpose. They also had a joint interest in the
profits of the business as shown by a 50-50 sharing in the income of
53
the mine.
It is clear from the ruling in Philex Mining, that the parties to a business
venture may choose to treat one another as not being bound by a partnership
relationship, but when controversy arises by which their rights and obligations
have to be determined, the courts would have no choice by to impute the legal
relationship of a partnership or joint venture arrangement when the essential
elements of a partnership are present.
In Philex Mining, the Court refused to allow the parties to treat the
advances made to the venture as loans or advances to one another, holding that
advances made by a co-venturer in the joint venture business which cannot be
recovered cannot be treated as bad debts and deducted for income tax
purposes; the relationship between co-venturers in a joint venture arrangement
cannot be considered a creditor-debtor relationship with respect to their
advances and contributions to the business enterprise.
Ultimately, the failed attempt in Philex Mining to veil the arrangement as
one as not being a joint venture arrangement,
^Ibid, at pp. 438-439.
792
NON-CORPORATE MEDIA OF DOING BUSINESS
caused
the
mining
companies
the
obligation
to
pay
unpaid
income
taxes
in
the
several
millions
of
pesos.
The
hard
lesson
that
was
learned
was
that
since
a
joint
venture
arrangement
is
a
species
of
partnership,
then
the
peremptory
provisions
and
principles
under
the
Law
on
Partnerships
will
be
the
once
employed
by
the
courts
to
smoke
out
whether
the
underlying
agreement
was
a
joint
venture
arrangement.
A
more
graphical
example
of
an
attempt
to
hide
the
joint
venture
5
arrangement
can
be
found
in
Kilosbayan,
Inc.
v.
Guingona,
Jr. *
In
that
case,
the
Philippine
Charity
and
Sweepstakes
Office
(PCSO)
was
prohibited
by
its
charter
from
holding
and
conducting
lotteries
"in
collaboration,
association
or
joint
venture
with
any
person,
association,
company
or
entity,
whether
domestic
or
55
foreign."
In
order
not
to
be
violate
such
prohibition,
PCSO
entered
into
a
"Contract
of
Lease"
with
the
Philippine
Gaming
Management
Corporation
(PGMC),
purported
for
PCSO
to
lease
the
lottery
facilities
of
the
latter
in
order
to
operate
nationally
the
on-iine
lottery
system
known
as
"lotto."
In
finding
that
"notwithstanding
its
denomination
or
designation
as
a
Contract
of
Lease,"the
purported
lease
arrangement
violated
the
statutory
prohibition,
in
that
it
actually
covered
a
joint
venture
arrangement
between
PCSO
and
PGMC,
the
Court
held
The
contemporaneous
acts
of
the.
PCSO
and
the
PGMC
reveal
that
the
POCSO
had
neither
funds
of
its
own
nor
the
expertise
to
operate
and
manage
an
on-line
lottery
system,
and
that
although
it
wished
to
have
the
system,
it
would
have
it
"at
no
expense
or
risks
to
the
government."
x x x .
In
short,
the
only
contribution
the
PCSO
would
have
is
its
franchise
or
authority
to
operate
the
on-line
lottery
system;
with
the
rest,
including
the
risks
of
the
business,
being
borne
by
the
proponent
or
bidder,
x x x .
The
so-called
Contract
of
Lease
is
not,
therefore,
what
is
purports
to
be.
Its
denomination
as
such
is
a
crafty
device,
carefully
conceived,
to
provide
a
built-in
defense
in
the
event
"232 SCRA 110 (1994).
K
Sec. 1, Rep. Act No. 1169, as amended
by B.P. Blng. 42. "Ibid, at p. 143.
JOINT VENTURES
793
that the agreement is questioned as violate of the exception in
Section 1(b) of the PCSO's charter. The acuity or skill of its draftsmen
to accomplish that purpose easily manifest itself in the Contract of
Lease. It is outstanding for its careful and meticulous drafting
designed to given an immediate impression that it is a contract of
lease. Yet, woven therein are provisions which negate its title and
betray the true intention of the parties to be in or to have a joint
venture for a period of eight years in the operation and
maintenance of the on-line lottery system *
The joint venture arrangement was found to exist under the terms of the
Contract of Lease, with the finding by the Court of the essential element of
participating in the profits of the on-line lottery system, and at the same time
bearing the risks of loss. The Court held that "This risk-bearing provision is
68
unusual in a lessor-lessee relationship, but inherent in a joint venture." The
Court observed that "All of the foregoing unmistakably confirm the
indispensable role of the PGMC in the pursuit, operation, conduct, and
management of the On-Line Lottery System. They exhibit and demonstrate the
parties' indivisible community of interest in the conception, birth and growth of
the on-line lottery, and, above all, in its profits, with each having a right in the
formulation and implementation of policies related to the business and sharing,
as well, in the losses with the PGMC bearing the greatest burden because of
its assumption of expenses and risks, and the PCSO the lease, because of its
59
confessed unwillingness to bear expenses and risks."
3. Joint Venture Pursued under Formal Partnership
Arrangement
A second type of joint venture arrangement is to formally operate the joint
venture set-up as a partnership, with a separate and distinct juridical
personality. Under such an arrangement, the
57
Ibid, at pp. 144-146; emphasis
supplied,
mid, at p. 147.
^Ibid, at pp. 148-149.
794
NON-CORPORATE MEDIA OF DOING BUSINESS
co-venturers execute formal Articles of Partnership, which may also be
denominated as a "Joint Venture Agreement," embodying their arrangements,
as well as the firm name and structure of the company that they are forming,
and register the same with the SEC.
Such a joint venture arrangement would then be operated as, and be
governed by the legal rules and principles pertaining to, particular partnerships.
As contrasted from the informal joint venture arrangement discussed
above, a formal joint venture pursued under formal partnership arrangements
provides better protection for the parties in the sense that they have a set of
laws by which they can base their rights and claims.
Apart from the lessons learned from the decisions in Kilosbayan and
Philex Mining already discussed above, this lesson can best be shown in the
60
decision in Tan Eng Kee v. Court of Appeals, where the heirs of the purported
co-venturer in a lumber and construction supply business sought to recover the
decedents share in the enterprise and accumulated profits. Although the trial
court found that there was a joint venture arrangement, the Supreme Court
affirmed the ruling of the Court of Appeals that in the absence of a contract of
partnership, plus the inability of the heirs to indicate by clear evidence the
essential elements of a partnership, no joint venture arrangement can be
imputed into the business enterprise, thus
Undoubtedly, the best evidence [of a partnership] would
have been the contract of partnership itself, or the articles of
partnership ___ The net effect, however, is that we are asked
to determine whether a partnership existed based purely on
circumstantial evidence. A review of the record persuades
Us that the Court of Appeals correctly reversed the decision
of the trial court. The evidence presented by petitioners
falls short of the quantum of proof required to establish a
61
partnership.
341 SCRA 740
61
(2000).
/b/d, at p. 754.
JOINT VENTURES
795
4. Joint Venture Pursued under a Joint Venture
Corporation
Equity joint ventures are also available in Philippine setting, which may
cover the formation of a new joint venture company, with each co-venturer
being allocated proportionate shareholdings in the outstanding capital stock of
i
the joint venture corporation.
>y*.-
An equity joint venture may also be pursued where a co- venturer is
allocated the Agreed shares of stock in an existing corporation, either from neto
issuances of the capital stock of the existing corporation, or sold shares from
those already issued in the names of the other co-venturers.
a. Corporate Principles Versus JVA Provisions
In equity joint ventures, the rights and obligations of the parties among
themselves are covered not only in a separate joint venture agreement, but also
implemented by certain provisions of the articles of incorporation and by-laws
of.the joint venture corporation.
In a situation where a corporate vehicle is formed in pursuance of the
joint venture arrangements, ideally the co-venturers should be able to fit into
the various terms and clauses of the articles of incorporation and by-laws
(known as the "charter") of the joint venture company the salient features of
their joint venture arrangement. Considering that the co-venturers have chosen
the corporate vehicle by which to pursue their business enterprise, then it would
be posited that in situations where joint venture agreements contain provisions
not covered by the charter of the joint venture corporation or vice-versa, the
resolutions of issues arising therefrom ought to be as follows:
(a)
In case of conflicts between the provisions of the joint venture
agreement and the charter of the joint venture corporation,
the provisions of the latter shall prevail; and
(b)
In case fhere are provisions or clauses in the joint venture
agreement not found in the charter of the
796
NON-CORPORATE MEDIA OF DOING BUSINESS
joint venture corporation, such provisions and clauses remain
binding contracts among the joint venture parties signatory to
the agreement, but do not bind the joint venture corporation
or other parties not signatories thereto.
The foregoing rules of resolution are based on the well- established
doctrine under Philippine Corporate Law that the articles of incorporation forms
a basic contract document defining the charter of the corporation. The articles
of incorporation is characterized as a contract between and among three
parties: (a) between the State and the corporation; (b) between the
stockholders and the State; and (c) between the corporation and its
62
stockholders.
In addition, although the joint venture agreement may contain rules on
management and control of the joint venture corporation, it does not authorize
the co-venturers, as equity owners, to override the business management of the
corporate affairs of the joint venture corporation by its board of directors. Any
stipulation therefore in the joint venture agreement that seeks to arrogate unto
the stockholders thereof the management prerogatives of its board of directors
would be null and void. In short, by having adopted the corporate entity as the
medium by which the co-venturers have sought to pursue the joint venture
enterprise, they are bound by Corporate Law principles under which the entity
must operate.
63
Nonetheless, in Aurbach v. Sanitary Wares Manufacturing Corpm the
Supreme Court had affirmed the principle that joint venture arrangements must
primarily be viewed as binding contractual commitments, thus: "Moreover, the
usual rules as regards the construction and operation of contracts generally
64
apply to a contract of joint venture;" and that the contractual intent and
agreement between and among the co-venturers must
^Government of the P.l. v. Manila Railroad Co., 52 Phil. 699 (1929).
^180 SCRA 130 (1989).
M
lbid, at p. 147, citing O'Hara v. Harman, 14 App. Dev. (167) 43 NYS
556.
JOINT VENTURES
797
somehow
be
given
binding
effect
into
the
corporate
set-up
of
the
joint
venture
arrangement.
The
decision
in
Aurbach
best
illustrates
the
strength
and
weakness
of
a
joint
venture
arrangement
pursued
through
the
medium
of
a
joint
venture
corporation.
In
Aurbach,
the
American
Standards
Inc.
(ASI),
a
Delaware
corporation,
entered
into
an
Agreement
with
Filipino
group
"to
participate
in
the
ownership
of
an
enterprise
which
would
engage
primarily
in
the
business
of
manufacturing
in
the
Philippines
and
selling
abroad
vitreous
china
and
sanitary
wares.
The
parties
agreed
that
the
business
operations
in
the
Philippines
shall
be
carried
on
by
an
incorporated
enterprise
and
that
the
name
of
the
corporation
shall
initially
65
be
'Sanitary
Wares
Manufacturing
Corporation."'
The
Agreement
executed
between
the
American
group
taking
40%
equity
in
the
venture,
and
Filipino
group
taking
60%
equity
in
the
venture,
provided
for
the
particulars
covering
the
articles
of
incorporation
of
the
joint
venture
company
to
be
formed,
the
manner
of
management
thereof,
as
well
as
"provisions
designed
to
protect
[ASI]
as
a
minority
group,
including
the
grant
of
veto
powers
over
a
number
of
corporate
acts
and
the
right
to
designate
certain
officers,
such
as
a
member
of
the
Executive
Committee
whose
vote
was
required
66
for
important
corporate
transactions."
In
particular,
the
Agreement
contained
the
following
provision
on
the
Management
of
the
joint
venture
corporation,
and
the
manner
by
which
the
two
groups
would
elect
the
Board
of
Directors,
thus:
5.
Management
(a)
The
management
of
the
Corporation
shall
be
vested
in
a
Board
of
Directors,
which
shall
consist
of
nine
[9]
individuals.
As
long
as
American-Standard
[ASI]
shall
own
at
least
30%
of
the
outstanding
stock
of
the
M
/b/d,
at
p.
134.
<*lbid,
at
pp.
134-135.
798
NON-CORPORATE MEDIA OF DOING BUSINESS
Corporation, three [3] of the nine directors shall be
designated by American-Standard [ASI], and the other six [6]
shall be designated by the other stockholders of the
67
Corporation.
The joint venture company was registered, and "The joint enterprise thus
entered into by the Filipino investors and the American corporation [ASI]
prospered. Unfortunately, with the business successes, there came a
deterioration of the initially harmonious relations between the two groups.
According to the Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected as it
apparently had other subsidiaries of joint venture groups in the countries where
68
Philippine exports were contemplated."
In the annual stockholders' meeting in 1983, the friction between the two
groups came to a head, when the American group wanted to cast their votes,
not only on their three (3) nominees, but also on the nominees of the Filipino
group on the ground that under Section 24 of the Corporation Code, which
provided for cumulative voting for stock corporations, they had a right to cast
their votes on all nominees for the Board of Directors, and not just on their
allotted three nominees.
The Court was asked to decide the issue on "the nature of the business
69
established by the parties - whether it was a joint venture or a corporation,"
because it was the contention of ASI that "the actual intention of the parties
should be viewed strictly on the 'Agreement' . . . wherein it is clearly stated that
70
the parties' intention was to form a corporation and not a joint venture" since
a particular provision in the Agreement provided that "nothing herein contained
shall be construed to constitute any of the parties hereto partners or joint
71
venturers in respect of any transaction hereunder."
67
Ibid;
at
p.
134.
<*lbid,
at
p.
135.
at
p.
70
lbid,
139.
at
p.
"Ibid.
139.
JOINT VENTURES
799
In
resolving
the
issues,
the
Court
gave
the
basic
doctrine
when
it
cpmes
to
joint
venture
arrangement,
which
like
any
partnership
arrangement,
it
is
primarily
contractual
in
character,
thus:
"The
rule
is
that
whether
the
parties
to
a
particular
contract
have
thereby
established
among
themselves
a
joint
venture
or
some
other
relation
depends
upon
the
actual
intention
which
is
determined
in
accordance
with
the
rules
governing
the
interpretation
and
construction
of
72
contracts."
The
Court
resolved
that
"In
the
instant
cases,
our
examination
of
important
provisions
of
the
Agreement
as
well
as
the
testimonial
evidence
presented
by
the
[witnesses]
shows
that
the
parties
agreed
to
establish
a
joint
venture
and
not
a
corporation.
The
history
of
the
organization
of
Saniwares
and
the
unusual
arrangements
which
govern
its
policy
making
body
are
all
consistent
73
with
a
joint
venture
and
not
with
an
ordinary
corporation."
The
Court
resolved
to
apply
the
mandatory
provisions
of
the
Corporation
Code
within
the
contractual
intentions
of
the
parties
provided
in
the
Joint
Venture
Agreement,
and
affirmed
the
formula
adopted
by
the
Court
of
Appeals
that
the
American
group
can
cumulate
their
votes
only
within
the
nominees
allotted
to
them,
and
held
To allow the ASI Group to vote their additional equity to help
elect even a Filipino director who would be beholden to them
would obliterate their minority status as agreed upon by the
parties. As aptly stated by the appellate court: x x x ASI, however,
should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the
three directors it is allowed to designate under the Agreement, and
may even be able to get a majority of the board seats, a result
which is clearly contrary to the contractual intent of the parties, x x
x.
lbid,
at
p.
139,
citing
Terminal
Shares,
Inc.
v.
Chicago,
B.
and
Q.R.
Co.
(DC
MO),
65
F.
Suppl
678;
Universal
Sales
Corp.
v.
California
Press
Mfg.,
Co.,
20
Cal.
2nd
751,128
P.
2nd
668.
"Ibid,
at
pp.
140-141.
800
NON-CORPORATE MEDIA OF DOING BUSINESS
Equally important as the consideration of the contractual
intent of the parties is the consideration as regards the possible
domination by the foreign investors of the enterprise in violation of
the nationalization requirements enshrined in the Constitution and
74
circumvention of the Anti-Dummy Act. x x x.
In essence, Aurbach emphasized that joint venture arrangement is first
and foremost contractual agreement, and as much as possible the contractual
intent of the co-venturers should be given realization within the corporate
medium by which they pursued the business enterprise. Aurbach recognized
that such a principle is not alien to Corporate Law when it quoted arguments
that Section 100 of the Corporation Code expressly makes binding written
agreements between the stockholders in a close corporation.
b. JV Company Organized as a Close Corporation
Under the Corporation Code, a close corporation is one which provides in
its articles of incorporation the following three requisites: (a) all of the
corporation's issued stock of all classes, exclusive of treasury shares, shall be
held on record by not more than a specified number of persons, not exceeding
twenty (20); (b) all of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer in the nature of a "right of first refusal;"
and (c) the corporation shall not list in any stock exchange or make any public
75
offering of any of its stock of any class.
Under a close corporation setting, it may be provided in the articles of
incorporation that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board of directors, and the
officers and employees may be elected or appointed directly by the
76
stockholders.
"Ibid,
at
p.
148.
75
Sec.
98,
Corporation
78
Code.
Sec.
97,
Corporation
Code.
JOINT VENTURES
that:
801
In particular, Section 100 of the Corporation Code provides
Sec. 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation
and shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such
agreements are not inconsistent with the articles of incorporation,
irrespective of whether the provisions of such agreements are
contained, except those required by this Title [on close
corporations] to be embodied, in said articles of incorporation.
x x x
Although
the
Court
in
Aurbuch
did
not
make
a
formal
ruling
on
the
matter,
it
seems
to
have
given
its
imprimatur
to
the
proposition
that
even
when
a
corporation
does
not
comply
with
the
definition
of
a
close
corporation
under
the
Corporation
Code
because
the
three
requisites
are
not
expressly
provided
for
in
its
articles
of
incorporation,
nonetheless,
the
same
principles
applicable
to
formal
close
corporations,
should
also
apply
to
equally
closely-
held
corporation,
such
as
those
organized
pursuant
to
a
formal
joint
venture
agreement,
thus
The
Lagdameo
Group
stated
in
their
appellees'
brief
in
the
Court
of
Appeals:
" x x x
"Secondly,
even
assuming
that
Saniwares
is
technically
not
a
close
corporation
because
it
has
more
than
20
stockholders,
the
undeniable
fact
is
that
it
is
a
close-held
corporation.
Surely,
appellants
cannot
honestly
claim
that
Saniwares
is
a
public
issue
or
a
widely
held
corporation.
"In
the
United
States,
many
courts
have
taken
a
realistic
approach
to
joint
venture
corporations
and
have
not
rigidly
applied
principles
of
corporation
law
designed
primarily
for
public
issue
corporation.
Theses
courts
have
indicated
that
802
NON-CORPORATE MEDIA OF DOING BUSINESS
express arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually
applied to corporate entities and with more consideration given to
the nature of the agreement between
the joint venturers____ These Amercan cases dealt with legal
questions as to the extent to which the requirements arising from
the corporate form of joint venture corporations should control,
and the courts ruled that substantial justice lay with those litigants
who relied on the joint venture agreement rather than the litigants
who relied on the orthodox principles of corporation law.
xxx
77
The provisions of the Corporation Code on close corporations, which
provides for informal management of its affairs, binding effect of written
agreements among stockholders, etc., should be deemed to be available to
resolve issues pertaining to joint venture corporations.
c. Right of First Refusal, a Delectus Personae Feature in JV Company
Scheme
Another reported case of a joint venture company arrangement would be
76
in JG Summit Holdings, Inc. v. Court of Appeals, where the National
Investment and Development Corporation (NIDC), a government corporation,
entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries,
Ltd. of Kobe, Japan, forming the Philippine Shipyard and Engineering Corpo-
ration (PHILSECO) to engage in operation and management of shipyard.
The JVA provided for a 60% Filipino-40% Japanese equity, and provided
for a "right of first refusal" on the equity shares should either of the co-venturers
decide to sell, assign or transfer its interest in the joint venture. When later on
the government shares in PHILSECO were bided-out, one of the issues that had
"
a
t
p
p
.
1
4
2
-
1
JOINT VENTURES
803
to
be
resolved
was
the
validity
of
the
right
of
first
refusal
clause
found
in
the
JVA.
The
Court
matter-of-factly
recognized
the
"partnership"
arrangement
between
the
original
parties
in
the
joint
venture
company,
and
characterized
the
right
of
first
refusal
clause
in
the
JVA
as
a
"protective
mechanisms
to
preserve
their
respective
interests
in
the
partnership
in
the
event
that
(a)
one
party
decides
to
sell
its
shares
to
third
parties;
and
(b)
new
Philseco
shares
are
79
issued."
The
Court
further
held
.
.
.
The
right
of
first
refusal
is
meant
to
protect
the
original
or
remaining
joint
venturers)
or
shareholders)
from
the
entry
of
third
persons
who
are
not
acceptable
to
it
as
co-
venturers)
or
co-shareholder(s).
The
joint
venture
between
the
Philippine
Government
and
KAWASAKI
is
in
the
nature
of
a
partnership
which,
unlike
an
ordinary
corporation,
is
based
on
delectus
personae.
No
one
can
become
a
member
of
the
partnership
association
without
the
consent
of
all
the
other
associates.
The
right
of
first
refusal
thus
ensures
that
the
parties
are
given
control
over
who
may
become
a
new
partner
in
substitution
of
or
in
addition
to
the
original
partners.
Should
the
selling
partner
decide
to
dispose
all
its
shares,
the
non-selling
partner
may
acquire
all
these
shares
and
terminate
the
partnership.
No
person
or
corporation
can
be
compelled
to
remain
80
or
to
continue
the
partnership
..
.
What
one
notices
clearly
extant
from
the
decision
in
JG
Summit
Holdings
is
that
although
what
were
bided-out
were
shares
of
stock
in
a
duly
registered
corporation,
and
the
right
of
first
refusal
was
not
found
expressed
in
any
provision
of
the
articles
of
incorporation
and
by-laws,
nonetheless,
the
Court
applied
its
enforceability
to
a
third
party
bidder
who
was
not
privy
to
the
terms
of
the
private
JVA
between
the
Government
and
the
foreign
investor.
"At
p.
29.
""Ibid,
at
p.
31.
804
NON-CORPORATE MEDIA OF DOING BUSINESS
ASPECTS WHICH INFLUENCE CHOICE OF JV SCHEME
The important aspects in choosing the format or scheme by
which to pursue the joint venture arrangement would be the issues
relating to limited liability considerations, exclusion of new parties
and non-dilution of equity considerations, tax consequences, and
limitation of foreign equity.
1. Defining Joint Ventures Scope of Business Activity
When it involves foreign investments, the principal consideration in
defining the scope of business to be undertaken by joint venture in the
Philippines basically revolves around the issue of restrictions on foreign equity,
management and control on certain restricted areas or activities. These areas
must involve foreign investments as defined under Republic Act No. 7042,
known as the Foreign Investments Act of 1991.
"FIA '91" was enacted to promote foreign investments, and prescribes the
procedures for registering enterprises doing business in the Philippines, it is the
basic law that provides the conditions, activities, and procedures where foreign
enterprises may invest and do business in the Philippines. It also applies to joint
venture arrangements in the Philippines. By the negative list scheme, the Act
simply established the restricted areas, and declared all other areas as open to
unlimited foreign equity participation.
Essentially, the FIA '91 provides for foreign investment negative list which
spells out the activities reserved for Philippine national. Export enterprises may
enter all activities not restricted by Lists A and B of the negative list, and
domestic enterprises, with foreign equity, may enter all activities not restricted
by Lists A, B, and C of the negative lists.
2. Limited Liability Features
Whether it be the contractual joint venture arrangement or the formal
partnership arrangement, the co-venturers would be
JOINT VENTURES
805
faced with the prospects of "unlimited liability" pervading in such arrangement.
Under Philippine Partnership Law, partners (except limited partners in a
formally registered limited partnership) and co-venturers are liable for
partnership debts beyond their contributions to the partnership or joint venture
arrangements.
Therefore, the use of the joint venture company as the format to pursue
the joint venture arrangement allows the co-venturers to take full advantage of
the limited liability features of the corporate vehicle especially in projects and
undertakings which embody certain risks.
3. Exclusions of New Parties; Non-Dilution of Equity
The ability of the co-venturers to present the venture among the original
parties through a "right of first refusal clause" has been recognized as valid by
the Supreme Court as a means "to protect the original or remaining joint
venturer(s) or shareholder(s) from the entry of third persons who are not
acceptable to it as co- venturer(s) or co-shareholder(s)... [because] The joint
venture . . . is in the nature of a partnership which, unlike an ordinary
corporation, is based on delectus personae. No one can become a member of
the partnership association without the consent of all the other associates. The
right of first refusal thus ensures that the parties are given control over who may
become a new partner in substitution of or in addition to the original
81
partners."
4. Tax Issues Pertinent to Joint Ventures
a. Like a Partnership, a Joint Venture Is Considered a Corporate
Taxpayer
Under the National Internal Revenue Code of the Philippines ("NIRC of
1997"), both a partnership and a joint venture are
81
JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10, 29-31 (2003).
806
NON-CORPORATE MEDIA OF DOING BUSINESS
treated
as
corporate
taxpayers,
and
both
are
subject
to
corporate
income
tax.
The
pursuit
of
joint
venture
arrangements
under
a
formal
partnership
arrangement
has
the
disadvantage
of
inviting
into
the
arrangement
the
features
of
unlimited
liability
for
partnership
debts
to
the
co-venturers,
and
also
the
inability
to
take
advantage
of
the
zero-rate
of
dividends
for
corporation,
when
the
partnership
declares
and
distributes
profits.
The
aspect
of
double
taxation
looms
largely
in
a
partnership
joint
venture
arrangement,
since
partnerships
are
82
subject
to
the
30%
net
income
tax
for
corporations.
b. Joint Ventures Exempt from Income Taxation
Under Pres. Decree No. 929, joint ventures formed for the purpose of
undertaking construction projects were exempt from corporate income
taxation.
Under Pres. Decree No. 1682, joint ventures formed to engage in
petroleum operations pursuant to an operating agreement under a service
contract with the Government were exempt from corporate taxation.
At present, under Sec. 22(B), NIRC of 1997, "a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the
Government," shall not be taxed separately as a corporate taxpayer.
c. Informal Joint Venture May Enjoy Tax Advantages
The informal or contractual joint venture has the advantage of limiting the
extent of the arrangement between and among the co-venturers, as in
undertakings that require privacy. In addition, since formal joint ventures are
taxed as corporate
^Originally
at
35%
and
went
down
to
30%
beginning
01
January
2009,
per
amendment
to
NIRC
of
1997
introduced
by
Rep.
Act
No.
9337.
JOINT VENTURES
807
taxpayer,
the
contractual
joint
venture
lessens
the
need
to
have
to
register
the
project
as
a
separate
corporate
taxpayer,
since
the
private
arrangements
should
allow
the
co-venturers
to
continue
reporting
separately
their
participation
in
the
project
in
their
own
tax
returns.
It
is
possible
therefore
that
because
of
the
informal
and
private
nature
of
a
contractual
joint
venture
that
it
could
escape
the
view
of
the
tax
authorities
as
a
separate
taxable
entity,
since
income
and
expenses
pertaining
to
the
joint
venture
are
being
reported
separately
by
each
of
the
co-venturers.
Nonetheless,
when
the
underlying
joint
venture
arrangement
is
discovered
by
the
authorities,
nothing
prevents
them
from
applying
the
principles
of
Partnership
Law
as
to
treat
the
arrangement
between
the
co-
venturers
as
a
partnership
with
a
separate
juridical
entity,
and
impose
all
taxes
dues
on
the
joint
venture
as
a
separate
corporate
taxpayer.
Such
was
the
situation
in
Philex
Mining
Corp.
v.
Commissioner
of
Internal
63
Revenue,
where
in
the
operation
of
a
mining
concession
between
two
corporations,
they
executed
merely
a
Tower
of
Attorney"
and
designated
one
another
"principal"
(the
owner
of
the
concession)
and
"manager"
(the
entity
that
would
directly
manage
development
and
operations).
The
BIR
refused
to
allow
the
advances
made
by
one
co-venturer
to
the
other
member
of
the
joint
venture
arrangement
as
a
form
of
loans
which
could
be
later
on
deducted
as
bad
debts.
d.
Zero-Rated
Dividends
for
JV
Corporation
In
the
Philippines,
the
corporation
has
traditionally
been
subjected
to
heavier
taxation
than
other
forms
of
business
organization;
dividends
distributed
are
subject
to
another
tax
when
received
by
the
stockholders.
With
the
thrust
of
Government
to
encourage
both
local
and
foreign
investments
in
the
country,
and
to
entice
the
use
of
the
corporation
as
the
vehicle
for
such
investment,
many
of
the
previous
tax
laws
that
tended
to
make
corpo
551 SCRA 428 (2008).
NON-CORPORATE MEDIA OF DOING BUSINESS
808
rate
vehicles
expensive
had
been
abolished.
Except
for
dividends
declared
by
64
domestic
corporation
in
favor
of
foreign
corporation, dividends
received
by
85
individuals
from
corporation,
as
well
as
inter-corporate
dividends
between
88
domestic
corporations,
were
subject
to
zero-rate
of
income
taxation.
There
had
also
been
an
abolition
of
the
personal
holding
companies
tax
and
tax
on
un-
87
reasonably
accumulated
surplus
of
corporations.
In
a
joint
venture
arrangement,
the
corporate
entity
route
allowed
the
co-venturers
to
take
advantage
of
zero
rate
taxability
of
dividends
declared
by
corporations
in
instances
provided
under
the
NIRCof
1997.
Lately,
however,
under
the
reforms
embodied
in
the
NIRC
of
1997,
a
final
tax
of
10%
has
been
re-imposed
on
dividends
received
by
residents
and
citizens
88
declared
from
corporate
earnings
after
1
January
1998;
a
final
tax
of
20%
on
dividends
received
by
a
nonresident
alien
individual
has
been
re-imposed
from
89
corporate
earnings
after
1
January
1998;
and
the
tax
on
improperly
90
accumulated
earnings
has
likewise
been
re-imposed.
GUIDELINES AND PROCEDURE FOR ENTERING INTO JOINT VENTURE (JV)
AGREEMENTS BETWEEN GOVERNMENT AND PRIVATE ENTITIES
1. Legal Basis for the Guidelines
On 30 April 2005, then President Gloria Macapagal Arroyo
issued Executive Order No. 423 which mandated the National
Economic and Development Authority (NEDA), in consultation
with the Government Procurement Policy Board (GPPB), to
M
Sec. 25(a) and (b), NIRC of
1977.
"Sec. 21, NIRCof 1977.
"Sec. 24, NIRC of 1977.
"
E
x
"Sec.
25(A)(1), NIRC of 1997
e
"Sec.
29, NIRC of 1997.
c
u
t
i
v
e
O
r
d
e
JOINT VENTURES
809
"issue
guidelines
regarding
joint
venture
agreements
with
private
entities
with
the
objective
of
promoting
transparency,
competitiveness,
and
accountability
in
government
transactions,
and,
where
applicable,
complying
with
the
91
requirements
of
an
open
and
competitive
public
bidding."
On
16
April
2008,
the
Office
of
the
Government
Corporate
Counsel
(OGCC)
issued
the
"GUIDELINES
AND
PROCEDURES
FOR
ENTERING
INTO
JOINT
VENTURE
(JV)
AGREEMENTS
BETWEEN
GOVERNMENT
AND
PRIVATE
ENTITIES"
(the
"2008
JV
Guidelines,"
or
simply
"Guidelines"),
which
according
to
its
opening
section
that
in
addition
to
the
consultation
done
with
NEDA
and
GPPB,
"The
Office
of
the
Government
Corporate
Counsel
(OGCC),
Department
of
Justice
(DOJ),
GOCCs
and
the
private
92
sector[s]
have
also
been
consulted
in
the
formulation
of
the
Guidelines."
OGCC
also
issued
with
the
Guidelines
"A
PRIMER
ON
THE
2008
JOINT
VENTURE
GUIDELINES"
(the
"OGCC
Primer").
2. Joint Venture Arrangements Covered by the Guidelines
The Guidelines define the particular types of"Joint Venture" covered,
thus:
5.4 Joint Venture (JV). A contractual arrangement whereby a
private sector entity or a group of private sector entities on one
hand, and a Government Entity or a group of Government Entities
on the other hand, contribute money/ capital, services, assets
(including equipment, land or intellectual property), or a
combination of any or all of the foregoing. Parties to a JV share risks
to jointly undertake an investment activity in order to accomplish a
specific, limited or special goal or purpose with the end view of
facilitating private sector initiative in a particular industry or sector,
and eventually transferring ownership of the investment activity
91
Sec. 8, Executive Order No. 423 (30 April
2005).
^Sec. 1.0,2008 JV Guidelines.
810
NON-CORPORATE MEDIA OF DOING BUSINESS
to the private sector under competitive market conditions. It
involves a community or pooling of interest in the performance of
the service function, business or activity, with each party having a
right to direct and govern the policy in connection therewith, and
with a view of sharing both profits and losses, subject to agreement
93
by the parties. A JV may be contractual JV, or a corporate JV.
The OGCC Primer describes a "JV" "to be a strategic alliance where two or
more entities agree to contribute goods, services and/or capital to a common
commercial enterprise. It is usually a one-time grouping of two or more persons
in a business undertaking for a specific purpose. Unlike a partnership, a JV does
94
not entail a continuing relationship among the parties."
On the issue of whether a JV is a partnership as defined under Philippine
laws, the OGCC Primer states that:
There is no precise definition of JVs under Philippine Law;
hence, resort is made to the common law concept of JVs. Most
opinions in common law jurisdictions differentiate a partnership as
a business vehicle which contemplates a general business with
some degree of continuity, while the JV is formed for the execution
of a single transaction, and is thus of a temporary nature. The
Philippine Supreme Court has stated this observation is not entirely
accurate in the Philippine context. Under our Civil Code, a
partnership may be particular or universal, and a particular
95
partnership may have for its object a specific undertaking. Hence,
under Philippine law, a JV is a form of partnership and should thus
96
be governed by the general law on partnership.
The Guidelines therefore recognize the distinction between a contractual
JV and a corporate JV. It defines a "JV Company
^Sec. 5.4,2008 JV Guidelines.
M
At pp. 3-4, OGCC Primer.
95
Citing Information .Technology Foundation of the Philippines v. COME-
LEC, 419 SCRA 141 (2004); Aurbach v. Sanitary Wares Manufacturing Corp., 180
SCRA 130 (1989).
"At pp. 4-5, OGCC Primer.
811
JOINT VENTURES
as "An entity registered with the Securities and Exchange Com-
mission (SEC) by the JV partners that shall perform the primary
functions and obligations of the JV as stipulated under the JV
97
Agreement;" and mandates that "The JV Company shall pos-
98
sess the characteristics stipulated under these Guidelines."
On the other hand, the Guidelines define a"Contractual JV"
as "A legal and binding agreement under which the JV partners
shall perform the primary functions and obligations under the JV
88
Agreement without forming a JV Company."
The Guidelines do not recognize formal JV arrangement
whereby a partnership is registered with the SEC.
100
The Guidelines provides for the following "Coverage:"
(a)
The Guidelines shall apply to all GOCCs, gov-
ernment corporate entities (GCEs), government
instrumentalities with corporate powers (GICPs),
government financial institutions (GFIs), state uni-
versities and colleges (SUCs) which are expressly
authorized by law or their respective charters to
enter into JV Agreements;
(b)
Local Government Units (LGUs) are not covered
by the Guidelines; and
(c)
Transactions of GFIs in the ordinary course of
business as part of their normal and ordinary
banking, financial or portfolio management opera-
tions shall not be covered by the Guidelines.
3. Nature of JV Covered by the Guidelines
The OGCC Primer explains that the covered Joint Ven-
tures, constitute one of the frameworks under Public-Private
97
Sec.
5.5,2008
JV
Guidelines
*lbid
"Sec.
5.6,2008
JV
100
Guidelines
Sec.
4.0,
2008
JV
Guidelines
NON-CORPORATE MEDIA OF DOING BUSINESS
812
Partnerships
(PPPs),
the
other
three
of
which
cover
the
Build-
Operate-Transfer
101
102
(BOT)
Law,
the
Government
Procurement
Reform
Act
(GPRA),
and
the
Independent
Framework.
The
OGCC
Primer
also
explains
that
the
term
"Public-Private
Partnerships
(PPPs)"
"broadly
refer[s]
to
long-term,
contractual
partnerships
between
the
public
and
private
sector
agencies,
specifically
targeted
towards
financing,
designing,
implementing,
and
operating
infrastructure
facilities
and
services
that
were
traditionally
provided
by
the
public
sector.
These
collaborative
ventures
are
built
around
the
expertise
and
capacity
of
the
project
partners
and
are
based
on
a
contractual
agreement,
which
ensures
appropriate
and
mutually
103
agreed
allocation
of
resources,
risks,
and
returns."
The
OGCC
Primer
provides
a
table
on
the
differences
between
the
frameworks,
based
on
the
purpose,
source
of
financing,
term
of
cooperation,
ownership,
fees,
price
escalation
provisions,
payments,
proceeds,
costs,
104
incentives,
and
application.
Purpose
Financing
101
GPRA
BOT
JV
Joint
Procurement
of
goods
Development
of
undertaking
of
an
and
services
within
infrastructure
the
budget
cycle
of
projects
through
enterprise
the
government
project
finance
and
agency/LGU
other
financing
modes
Generally,
financed
from
public
sector
Generally,
financed
from
private
sector
Joint financing from
public and private
sector
Rep. Act No. 6957, as amended by R.A. No. 7718.
Rep. Act No. 9184.
103
At p. 1, OGCC Primer, citing the Workshop Report (December 2006) of
the Department of Economic Affairs, Ministry of Finance, Government of India,
and the Asian Development Bank, Facilitating Public-Private Partnership for
Accelerated Infrastructure Development in India (Regional Workshop of Chief
Secretaries on Public-Private Partnerships).
104
At pp. 1-2, OGCC Primer.
102
JOINT VENTURES
813
Term
Generally, short- term Generally, long-
term
Generally,
short-term.
Ownership
Stays
with
Government
Allows
takeover
by
private
sector;
divestiture
is
encouraged
as
soon
as
possible.
Fees
Fixed fees. Attached
to ABC (approved
budget for the
contract).
Price
escalation
Prohibits
price
escalation
Allows
price
escalation
Payment
/
Proceeds
Procuring entity will
pay private entity
Operator/
contractor
will
remit
fees
to
public
entity
Cost
ABC covers costs of
individual
components
Fees regard the With regard to the
project as a whole entire enterprise
Incentives
Prohibits incentives
Provides incentives No incentives
for large capital
investments
Application
Applies
to
all
Applies
to
all
Government
Entities;
Government
Entities
Exempts
from
its
coverage
those
projects
falling
within
BOT
law.
Stays
with
Government
Fees
may
be
No
prescribed
fees
adjustable
in
accordance
with
predetermined
parametric
formulas.
GE
and
Private
partner
share
in
the
proceeds
according
to
their
proportionate
ownership
Limited
to
GOCCs,
GCE,
GICPs,
GFIs,
and
SUCs.
(LGUs
under
separate
guidelines)
NON-CORPORATE MEDIA OF DOING BUSINESS
814
4. Objectives and Principles Underpinning the Guidelines
The Guidelines expressly state that they have been formulated to meeting
105
the following objectives:
(a)
To prescribe the rules, guidelines and procedure forging JV
Agreements between government corporations and private
entities;
(b)
To encourage pooling of resources and expertise between
government and private sector entities through JVs as a
viable, efficient, and practical alternative in pursuing
development goals of the government; and
(c)
To ensure that all JV Agreements are entered into under the
policy that all government contracts shall be awarded
through a transparent process.
The Guidelines mandate that "The Government shall enter into a JV
106
arrangement consistent with the following principles," and which have been
107
appropriately subcaptioned in the OGCC Primer, as follows:
(a)
Free Competition: The creation of the JV should not prevent
potential players from profitably entering into business
venture/market;
(b)
Efficiency. The cost of producing the particular product,
activity, or service should be efficient or potentially efficient
towards earning potential profits for government and the
market player/ private sector partner;
(c)
Government Exit There should be no barriers for the
government's withdrawal of its contribution to the JV
investment;
105
Sec. 3.0, 2008 JV
Guidelines.
Sec. 2.0, 2008 Guidelines.
107
At p. 9, OGCC Primer.
108
JOINT VENTURES
(d)
Conflict Free: The role of government as a
regulator of the business of the JV should be
clearly and explicitly delineated from its role as
implementer of the business to avoid conflicts of
interest;
(e)
Government Divestiture: As differentiated from
projects procured under ODA, BOT and GPRA
where ownership of the asset/business will stay
with the government, JV Agreements allow the
private sector to take over the undertaking of the
projects in its entirety after the government divests
itself of any interest in the JV;
(f)
Agency Accountability: Accountability for the
JV project ultimately devolves on the Head of the
Government Entity involved in the JV Agreements
and the implementation of the JV project. The
private parties dealing with the Government are
similarly held accountable for all their actions
relative thereto.
5. General Guidelines in Entering into
Covered JV Agreements
a. Parameters for JV Agreements
The Guidelines mandate that JV Agreements entered into
108
shall consider the given parameters, as follows:
(a)
Investments or JV Agreements must be made only
in activities directly and immediately related to and
in furtherance of the primary corporate purpose,
mandate, or charter of the investing Government
Entity;
(b)
The JV should be clear in its intent to undertake
a specific activity that is responsive to national
development goals and objectives;
108
Sec. 6.1,2008 JV Guidelines.
815
NON-CORPORATE MEDIA OF DOING BUSINESS
816
(c)
The JV should not tend to crowd out private sector initiative
in a particular industry or sector; and
(d)
DTI, BOI and NEDA shall issue a negative list of industries or
sectors on a periodic basis where the formation of a JV is
likely to crowd out private sector initiative.
The
OGCC
Primer
explains
that
"The
non-issuance
of
a
negative
list
shall
not
prevent
GOCCs
from
entering
into
JVs
with
the
private
sector
under
the
provisions
of
the
2008
JV
Guidelines.
It
is
opined
that
the
negative
list
to
be
issued
by
the
Department
of
Trade
and
Industry,
Board
of
Investments
and
109
NEDA
shall
apply
prospectively."
b.
JV
Company
as
Preferred
Mode
of
Implementing
JV
Agreement
The
Guidelines
also
mandate
that
the
preferred
mode
of
implementing
a
JV
Agreement
shall
be
through
a
JV
Company
to
be
formed
by
the
Government
110
Entity
and
the
private
sector
entity,
under
the
following
parameters:
(a)
JV Company shall be registered as a stock corporation in
accordance with the provisions of the Corporation Code and
the prevailing and applicable rules and regulations
promulgated by the SEC;
(b)
Ownership and nationality requirements under the
Constitution and other pertinent laws should be complied
with;
PROVIDED THAT:
(i) Government Entity's equity contribution shall only be less
that 50% of the outstanding capital stock of the JV
Company;
109
At p. 12, OGCC Primer.
Sec. 6.2, 2008 JV
Guidelines.
110
JOINT VENTURES
(ii)
Government's contribution may be through assets
(including money, equipment, land, intellectual property
rd
or any thing of value) which shall be subject to a 3 party
independent valuation; and
(iii) For as long as the Government Entity is involved in the JV
undertaking, the private sector party shall not
sell/transfer its interest in the JV Company without the
express written consent of the Government Entity;
(c)
GE shall be represented in the Board of the JV Company in
proportion to its investment;
(d)
JV Company shall be permitted to derive income from the
activities authorized under the JV Agreement thereof during
the term thereof.
(e)
GE and the private sector partner shall be entitled to receive
dividends and/or any other form of share from net profits
earned by the JV Company in accordance with the JV
Agreement; and that the determination of net profits shall be
subject to a verification process for allowable operations and
management expenses specified therein;
(f)
JV Company is encouraged to stipulate a fixed period for the
participation of the GE, under the following terms:
(i)
Period shall be determined by the attainment of the
Government Entity's objective in pursuing the
investment, or when the private sector partner is
projected to be able to proceed with the JV activity
without further need of government support;
(ii)
Withdrawal of the GE's capital contribution before the
expiration of the said period is likewise encouraged;
817
818
NON-CORPORATE MEDIA OF DOING BUSINESS
PROVIDED: The divestment is made through competitive
selection, initial pub-lic offering (IPO), or
any other means that promote
competition, fairness and transparency.
The foregoing factors shall be accorded greater importance
than the financial impact or financial benefit of the proposed
investment to the Government Entity concerned.
(g) In drafting the incorporation documents of the JV Company and
other contracts governing the relationship between the GE
and the private sector participant, the parties should consider
the following guidelines:
(i)
Clearly defined business objectives;
(ii)
Specified degree of participation and the management
roles of each party in the JV activity;
(iii)
Defined contribution of capital and ownership rights to
property;
(iv)
Specified division of the profits and losses;
Identified dispute mechanism to avoid management
impasses that may produce deadlock or litigation;
(v)
(vi)
Specified termination/liquidation of the JV Company
and indicate buy-out provisions;
(vii) Specified confidentiality terms; and
(viii) Stipulated indemnification mechanisms.
If the formation of a JV Company is not the best mode to implement a JV
activity as determined by the Government Entity, it may opt to implement the
JV project through a contractual agreement. Prior to entering into a Contractual
JV, the parameters similar to those governing JV Companies are to be observed.
JOINT VENTURES
On the issue "May Government Entities enter into JV
Agreements for the sole purpose of making a profitT the OGCC
Primer sttes:
Though the parties to the JV are expressly allowed to
profit and earn dividends from the JV activity, it is the clear
intention of the guidelines that profit making is not the main
purpose for the participation of a Government Entity in a
JV activity. The guidelines clearly state that government
participation is limited (less than 50% of equity; limited period
of participation). And that the development of the particular
JV activity involved is of greater importance than the financial
impact or financial benefit of the proposed investment to the
112
Government Entity concerned.
6. Process for Entering into JV Agreements
Under the Guidelines, prior to entering into a JV Agreement,
the proposed JV activity shall first be approved in principle, in
accordance with the procedures discussed below.
a. Approval in Principle by Head of GE
(a)
Justification that the JV activity is within the
mandate and charter of the Government Entity
concerned as certified and notarized by the head
of the Government Entity.
(b)
Clear description of the proposed investment,
including its activities, objectives, source(s)
of funding, extent and nature of the proposed
participation of the investing Government Entity,
period of participation of the Government Entity,
and the relevant terms and conditions of the
undertaking under the proposed JV Agreement,
among others.
111
At
p.
14,
OGCC
2
"Primer.
lbid.
819
NON-CORPORATE MEDIA OF DOING BUSINESS
820
(c)
Justification as to the responsiveness and relative priority of
the proposed JV activity in meeting national or specific
development goals and objectives.
(d)
All other components of the JV Agreement, including the
technical, financial, legal and other aspects in determining the
over-all feasibility of the proposed JV activity, among others,
shall be established.
For JV activity that will require national government undertakings,
subsidies or guarantees, clearance/approval of the Department of Finance
(DOF) and/or the Department of Budget and Management (DBM), as the case
may be, shall be secured.
b. Modes of Selecting a JV Partner (1)
Competitive Seiection
"Competitive Selection" is defined under the Guidelines as the "process of
selection by a Government Entity of a JV partner(s), based on transparent
criteria, which should not constrain or limit competition, and is open to
113
participation by any interested and qualified private entity."
The process for the conduct of Competitive Selection, contract award and
final approval shall be stipulated under Annex A of the Guidelines.
In the conduct of the Competitive Selection process, the Government
114
Entity shall ensure the following:
(a) All activities during the competitive selection, award,
and final approval are conducted in a transparent and
competitive process that promotes accountability and
efficiency; and
113
Sec.
5.7,2008
JV
Guidelines.
Sec.
7.3.2008
JV
Guidelines.
114
JOINT VENTURES
821
(b) The competitive selection parameters are clearly
defined and shall include the parameters as approved
by the Head of the Government Entity.
(2) Negotiated Agreements
The Guidelines provide that negotiated agreements may be entered
under the following circumstances:
(a)
When a GE receives an "unsolicited proposal," which shall be
governed by the rules under Annex C of the Guidelines
entitled "Detailed Guidelines for Competitive Challenge Type
Procedure Public- Private Joint Ventures;"
(b)
When there is failure of competition when no proposals are
received or no private sector participant is found qualified and
the GE decides to seek out a JV partner, which shall also be
governed by the rules under Annex C of the Guidelines; and
(c)
When there is failure of competition, i.e., there is only a single
interested party remaining as defined under VIII (6) of Annex
A, which shall be governed by the procedures outlined in
Annex B entitled "Limited Negotiation Procedures in Case of
Failed Competitive Selection under Section 6 of Annex A."
An "Unsolicited ProposaF' is defined by the Guidelines as "Referring] to
project proposals submitted by the private sector to undertake Infrastructure or
Development Projects without a formal solicitation issued by a Government
Entity. These projects may be entered into by the Government Entity on a
negotiated basis, provided, however, that there shall be no direct government
115
guarantees for JVs resulting from an unsolicited proposal."
115
Sec. 5.10,2008 JV Guidelines.
822
NON-CORPORATE MEDIA OF DOING BUSINESS
An unsolicited proposal is always subject to a competitive challenge. The
Guidelines define Competitive Challenge" as "An alternative selection process
wherein third parties shall be invited to submit comparative proposals to an
unsolicited proposal. Accordingly, the private sector entity that submitted the
unsolicited proposal is accorded the right to match any superior offers given by
118
a comparative private sector participant."
"Negotiated Project' therefore are "desired project [which] is the result of
an unsolicited proposal from a private sector proponent or, if the government
has failed to identify an eligible private sector partner for a desired activity after
117
subjecting the same to a competitive selection."
c. Deviation and Amendment of the JV Agreement
The Guidelines mandate that the concerned Government Entity shall not
proceed with the award and signing of the contract if there are material
deviations from the parameters and terms and conditions set forth in the
proposal/tender documents that may have the following effects:
(a)
Tend to increase the financial exposure, liabilities, and risks of
government; or
(b)
Any other factors that would cause disadvantage to
government and any deviation that will cause prejudice to
losing private sector participants.
Material deviations and amendments shall be subjected to the approval
requirements for approval of Head of a GE and approval by DOF and/or DBM,
when applicable.
The Head of the Government Entity concerned shall be responsible for
compliance with this policy.
Violation of this provision shall render the award and/or the signed JV
Agreement invalid.
116
Sec.
5.8,2008
JV
Guidelines.
Sec.
5.9,2008
JV
Guidelines.
117
JOINT VENTURES
823
The Guidelines also provide that any amendment to a JV Agreement after
award and signing of contract, which does not materially affect the substance of
the competitive selection, shall nevertheless be subjected to the requirements
for approval of Head of a GE and approval by DOF and/or DBM, when
applicable; that that non-compliance with the corresponding approval process
stated shall render the amendment null and void.
7. Reporting Requirements
a. Annual Report to the DOF
During the course of implementation of the JV Agreement, the concerned
Government Entity shall submit, within the first quarter of the succeeding year,
an annual report on the status of its implementation during a current year to the
DOF for monitoring purposes.
The report shall use current standards in the production of corporate
annual reports and shall include audited financial statements of the JV. In
addition, the report shall also contain the JVs work program for a period of three
(3) years starting from the year the annual report is issued.
b. Submission of Salient Features and Copy of JV Agreement to
NEDA
Pursuant to Sec. 10 of Executive Order No. 423, Heads of GE shall submit
to NEDA the salient features and a copy of JV Agreements amounting to at least
F300 Million, together with all documents required thereto for monitoring of
compliance with relevant policies, procedures and conditions for approval of the
JV undertaking.
oOo
JOINT VENTURES
823
The Guidelines also provide that any amendment to a JV Agreement after
award and signing of contract, which does not materially affect the substance of
the competitive selection, shall nevertheless be subjected to the requirements
for approval of Head of a GE and approval by DOF and/or DBM, when
applicable; that that non-compliance with the corresponding approval process
stated shall render the amendment null and void.
7. Reporting Requirements
a. Annual Report to the DOF
During the course of implementation of the JV Agreement, the concerned
Government Entity shall submit, within the first quarter of the succeeding year,
an annual report on the status of its implementation during a current year to the
DOF for monitoring purposes.
The report shall use current standards in the production of corporate
annual reports and shall include audited financial statements of the JV. In
addition, the report shall also contain the JV's work program for a period of three
(3) years starting from the year the annual report is issued.
b. Submission of Salient Features and Copy of JV Agreement to
NEDA
Pursuant to Sec. 10 of Executive Order No. 423, Heads of GE shall submit
to NEDA the salient features and a copy of JV Agreements amounting to at least
P300 Million, together with all documents required thereto for monitoring of
compliance with relevant policies, procedures and conditions for approval of the
JV undertaking.
oOo
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