PARTNERSHIP AND AGENCY

General Provisions
Art. 1767 – Definition:
Partnership – a contract whereby 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, or in order to exercise profession.
Profession – 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 be a means of livelihood.
Characteristics of Partnership
1. Consensual
2. Nominate
3. Bilateral
4. Onerous
5. Commutative
6. Principal
7. Preparatory
Elements
1. consensual;
2. there must be a contribution of money, property or industry to a common fund;
3. the subject must be a lawful one;
4. there must be an intention of dividing the profit among the partners;
5. there must be a desire to formulate an active union (affectio societatis);
6. a new personality, that of the firm – must arise, distinct from the separate personality of each of the members
Essential Features of Partnership
1. there must be a valid contract;
2. the parties must have legal capacity to enter into the contract;
3. there must be a mutual contribution of money, property, or industry to a common fund;
4. the object must be lawful; and
5. the primary purpose must be to obtain profits and to divide the same among the parties
Attributes
1. mere consent brings about pp
2. juridical person
3. mutual agency
4. delectus personae
5. unlimited liability

Differentiation:
Partnership (P) vs. Corporation (C)
a. creation
P – voluntary agreement of parties
C – created by the state in the form of a special charter or by a general enabling law
b. how long it exists
P – no time limit except agreement by parties
C – not more than 50 years; may be reduced, but never extended
c. liability to strangers
P – may be liable with their private property beyond their contribution to the firm
C – liable only for payment of their subscribed capital stock
d. transferability of interest
P – even if a partner transfers his interest to another, the transferee does not become a partner unless all other parties consent
C – a transfer of interest makes the transferee a stockholder, even without the consent of the others
e. ability to bind the firm
P – generally, partners acting on behalf of the partnership are agents thereof; consequently they can bind both the firm and the
partners
C – generally, the stockholders cannot bind the corporation since they are not agents thereof
f. mismanagement
P – a partner can sue a partner who mismanages
C – a stockholder cannot sue a member of the board of directors who mismanages: the action must be in the name of the
corporation
g. nationality
P- a partnership is a national of the country it was created

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C – a corporation is a national of the country under whose laws it was incorporated, except for wartime purposes or for the
acquisition of land, natural resources and the operation of public utilities in the Philippines, in which case the veil of the corporate
identity is pierced and we go to the nationality of the controlling stockholders
h. attainment of legal personality
P – the firm becomes a juridical person from the time the contract begins
C – the firm becomes a juridical person from the time it is registered in the Securities and Exchange Commission, and all requisites
have been complied with
i. dissolution
P – death, retirement, insolvency, civil interdiction, or insanity of a partner dissolves the firm
C – such causes do not dissolve the corporation

Ordinary Partnership (OP) vs. Conjugal Partnership of Gains (CPG)

a. how created
OP – by will or consent of the parties
CPG – created by operation of law upon the celebration of the marriage
b. law that governs
OP – in general, it is the will of the partners that governs matters like object, length of existence, etc; the law is only subsidiary
CPG – in general, it is the law that governs
c. legal personality
PO - possesses a legal personality
CPG – does not possess any legal personality distinct from that of the husband or wife; hence, it cannot sue or be sue as such
d. commencement of the partnership
PO – begins at the moment of the execution of the contract but a contrary stipulation is allowed
CPG – commences precisely on the date o the celebration of the marriage – no contrary stipulation is allowed
e. purpose
PO – formed for profit
CPG – not formed particularly for profit
f. division of profits
as a rule, profits are divided according to previous agreement; and if there is no agreement, in proportion to the amount
contributed
CPG – as a rule, profits are divided equally (but settlement can provide otherwise)
g. management
PO – as a rule, management is conferred upon the partners so appointed by the others; otherwise, all are equally considered
agents of the firm
CPG – as a rule, the administration and enjoyment of the conjugal partnership property belong to both spouses jointly
h. dissolution
PO – there are many grounds for dissolution
CPG – there are few grounds for dissolution
i. liquidation of profits
PO – there may be division of profits even without dissolution
CPG – there will be no liquidation or giving of profits till after dissolution

Partnership v Joint Venture

JV: assoc of persons or companies jointly undertaking some commercial enterprise: generally all contribute assets and risks. It
requires community of interests in the performance of the SM, a right to direct and govern the policy in connection therewith,
and a duty which may be altered by agreement to share both in profits and losses
1. transactions
P: continuing business of various transactions
JV: limited to the period in which the goods are sold or the project is carried on or in a single trans
2. duration
P: permanent
JV: temporary

3. legal personality
P: there is
JV: none
4. firm name
P: nece
JV: not nece
5. with corpo
P: cannot, by reason of public policy

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JV: can be if in line with business and authorized by the charter
Partnership (P) vs. Co-Ownership
a. creation
P – created by contract only (express or implied)
CO – created by contract, law and other things
b. juridical
P – has juridical or legal personality
CO – has none, hence, it cannot sue or be sued as such
c. purpose
P – for profit
CO – collective enjoyment (hence, not necessarily for profit)
d. agency or representation
P – as a rule, there is mutual representation
CO – as a rule, there is no mutual representation (although it is enough for one co-owner to bring an action for ejectment
against a stranger)
e. transfer of interest
P – cannot substitute another as partner in his place, without unanimous consent
CO – can dispose of his share without the consent of the others
f. length of existence if created by contract
P – no term limit is set by law
CO – must not be for more that 10 years (although agreement after termination may be renewed) (hence, if more than 10 years,
the excess is VOID)
 20 years is the maximum if imposed by the testator or donee of the common property
g. profits
P- may be stipulated upon
CO – profits must always depend on proportionate shares (any stipulation to the contrary is VOID)
h. dissolution
P – dissolved by death or incapacity of a partner
CO – not dissolved by the death or incapacity of co-owner
i. form
P – may be made in any form except when real property is contributed (here, a public instrument is required)
CO – no public instrument needed even if real property is the object of the co-ownership

Partnership (P) vs. Joint-Stock Company (JSC)

a. as to composition
P – essentially, an association of persons
JSC – essentially, an association of capital
b. as to division of capital
P – capital is not divided into shares
JSC – although a special form of partnership, its capital is divided into shares, like in a corporation
c. as to management
P – generally, in all the partners
JSC – generally, in a board of directors
d. as to liability
P – partners may be liable with their individual properties after exhaustion of the partnership assets
JSC – liability of the members is only up to the extent of their shares if such is what the statute provides
e. effect of transfer of interest
P – transferee of partner’s share does not become a partner unless all the other partners consent
JSC – transferee of member’s shares himself becomes a member without any necessity of consent from the other members
Partnership (P) vs. Social Organizations (SO)
a. as to contribution
P – capital is given in money, property or services
SO – no capital is given although, of course, fees are usually collected
b. as to liability of debts
P – partners are liable only after the partnership assets are exhausted
SO – members are the ones individually liable for the debts of the organization, debts authorized or ratified by said members
c. as to purpose of objective
P – organized for gain, principally financial
SO – organized usually only for social or civic objectives
d. as to personality
P – a legal person

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SO – not a legal person
Partnership (P) vs. Voluntary Association (V)
a. juridical personality
P – has juridical personality
V - none
b. purpose
P – always organized for pecuniary profit
V – such objective is lacking
c. contribution of members
P – there is contribution of capital, either in the form of money, property, or services
V – for social purposes, although fees are usually collected from the members to maintain the organization, there is no
contribution of capital
d. liability of members
P – the partnership, as a rule, is the one liable in the first place for the debts of the firm
V – the members are individually liable for the debts of the association, authorized by them either expressly or impliedly, or
subsequently ratified by them
Partnership vs. Business Trusts
when certain persons entrust their property or money to others who will manage the same for the former, a business trust is
created. The investors are called cestui que trust; the managers are the trustees. In a true business trust, the cestui que trust
(beneficiaries) does not at all participate in the management; hence, they are exempted from personal liability, in that they can
be bound only to the extent of their contribution.
Partnership vs. Tenancy
a. a partner acts as agent for the partnership whom he represents; the tenant does not represent the landlord.
b. a partnership is a legal person; no such person is created in the relationship between landlord and tenant.
Partnership vs. Agency
a. “agency” may in one sense be considered the broader term because: partnership” is only a form of “agency.”
b. an agent never acts for himself but only for his principal; a partner is both a principal (for his own interest) and an agent (for
the firm and the others).
Partnership vs. Joint Adventure (joint accounts)
a. a joint adventure 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 it to a
successful termination may continue for a number of years; a partnership generally relates to a continuing business of
various transactions of a certain kind.
Partnership vs. Labor Union
- a labor union is any association of employees which exists in whole or in part for the purpose of collective bargaining or of
dealing with employers concerning terms and conditions of employment.
- partnerships and labor unions have some characteristics in common, but the purpose of partnership is essentially to enable its
members, as principals, to conduct a lawful business, trade, or profession for pecuniary gain of partners, and no one may
become a partner without consent of all partners
Partnership vs. Syndicate
a syndicate is usually a particular partnership, that is, it may have been organized to carry out a particular undertaking or for
some temporary objective

Art. 1768 – Partnership is a juridical person separate and distinct from each of the partners.
Consequences:
1. Its juridical personality is separate and distinct from that of each of the partners.
2. The partnership can:
- acquire and possess property of all kinds;
- incur obligations;
- bring civil or criminal actions;
- can be adjudged insolvent even if the individual members be each financially solvent
3. A partner has no right to make a separate appearance in court, if the partnership being sued is already
represented, unless he is personally sued.
 Limitations on Alien Partnership
- Secs. 2, 7, 10 and 11 of Art. 12 of the 1987 the Philippine Constitution

 Rules in case of Associations now lawfully organized as Partnerships

1. If an association is not lawfully organized as a partnership, it possesses no legal personality. Therefore, it cannot sue.
However, the “partners,” in their individual capacity can.

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2. One who enters into contract with a “partnership” as such cannot, when sued later on for recovery of the debt,
allege the lack of legal personality on the part of the firm, even if it indeed had no personality.

Art. 1769 – Determinants for the Existence of a Partnership

1. persons who are not partners to each other are not partners as to third persons
EXCEPTION:
> PARTNERSHIP BY ESTOPPEL
2. CO-OWNERSHIP of a property does not itself establish a partnership, even
though the co-owners share in the profits derived from the incident of joint
ownership
3. SHARING OF GROSS RETURNS ALONE does not indicate a partnership whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are derived
4. the receipt of the share in the profits is a strong presumptive evidence of partnership HOWEVER, no such inference will
be drawn if such profits were received in payment
A) as a DEBT by installments or otherwise
B) as WAGES of an employee
C) as RENT to a landlord
D) as an ANNUITY to a widow or representative of a deceased partner
E) as INTEREST on a LOAN, though the amount of payment vary with the
profits of the business
F) as the CONSIDERATION for the sale of a GOOD WILL of a business or
other property or otherwise
> creditors are not partners, for their only interest in the sharing of profits is
the receipt or payment of their credits
> in a partnership, the partners are supposed to trust and have confidence
in all the partners
 Purpose:
- to indicate some test to determine if what may seem to be a partnership really is one, or it is not
Requisites for Existence of Partnership
1. intention to create a partnership;
2. common fund obtained from contributions;
3. there was joint interest in the profits;
Therefore:
mere co-ownership or co-possession; mere profit sharing or GROSS returns do not establish a partnership
Sharing of net profits
- a prima facie evidence that one is a partner except in the 5 instances under Art. 1769

Art. 1770 – Lawful Object or Purpose

1. must be within the commerce of man, possible and not contrary to law, morals, good customs, public order or
public policy
2. if a partnership has several purposes, one of which is unlawful, the partnership can still validly exist so long as the
illegal purpose can be separated from the legal purpose
 Judicial decree is not necessary to dissolve an unlawful partnership. the contract is void and therefore never existed
from the viewpoint of the law
Consequences of Unlawful Partnerships
1. Art. 45, RPC
2. The partners forfeit the proceeds or profits, but not their contributions, provided no criminal prosecution has been
instituted.

- if the contributions have already been made, they can be returned;

- if the contributions have not yet been made, the parties cannot be made to make the contributions
3. An unlawful partnership has no legal personality.

Art. 1771 – Formalities of Partnership

1. General Rule:
-for the validity of the contract, as well as for enforceability, no form is required, regardless of the value of the
contributions
Exception:

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whenever real properties or real rights in real properties are contributed – regardless of the value – a public instrument is
needed. Moreover, an inventory of the immovables is needed. This must be signed by the parties and attached to the
public instrument
1. for effectivity of the partnership contract insofar as innocent third persons are concerned, the same must be
registered if real properties are involved.

Art. 1772 – Partnership with capital of Php 3,000 or more – Registration with the SEC
Purpose of the registration with the office of the SEC: to set a condition for the issuance of licenses to engage in business
or trade

Effect of non-registration
1. even if not registered, the partnership having a capital of Php 3,000.00 or more is still a valid one, and therefore has
legal personality;
2. if registration is needed, or desired, any of the partners of a valid partnership can compel the others to execute the
needed public instrument, and to subsequently cause its registration.

Art. 1773 – Where real property is contributed

 Requirements where real property is contributed
1. There must be a public instrument regarding the partnership;
2. The inventory of the realty must be made, signed by the parties, and attached to the public instrument
 Applicability
1. applies regardless of the value of the property;
2. applies even if only real rights over real property are contributed;
3. applies also if cash or personal property is contributed
Registration
– transfer of the land to the partnership must be duly recorded in the Registration of Property to make the transfer
effective insofar as third persons are concerned

Art. 1774 – Acquisition of property under the Partnership name

- applicable to immovable as well as personalty because the partnership is a juridical entity, capable of owning
and possessing property
- alien partners must comply with the requirements as provided for in Sec. 7, Art 12 of the 1987 Constitution
 Limitations on Acquisition
- a partnership, even if entirely of Filipino capital may not:
1. acquire, lease or hold public agricultural lands in excess of 1,024 hectares;
2. lease public lands adapted to grazing in excess of 2,000

Art. 1775 – Secret Partnership

 If articles are kept secret
1. the association here is certainly not a partnership and therefore not a legal person, because anyone of the members
may contract in his own name with third persons and not in the name of the firm;
2. although not a juridical entity, it may be sued by third persons under the common name it uses, otherwise, said
innocent third parties may be prejudiced;
3. however, it cannot sue as such, because it has no legal personality and therefore, cannot ordinarily be a party to a
civil action;
4. therefore, insofar as innocent third parties are concerned, the partners can be considered as members of a
partnership; but as between themselves, or insofar as third persons are prejudiced, only the rules on co-ownership
must apply. Same rule applies in the case of a partnership by estoppel
 Note: contracts entered into by a partner in his own name may be sued upon still by him in his own individual
capacity, notwithstanding the absence of partnership
 Partnership needs publicity to prevent fraud/deceit

Art. 1776 – Classification of Partnership

a. as to object/subject matter

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 1. Universal Partnership
- may refer to all the present
property or to all the profits
a. universal of all present property
- that which the partners contribute all the property which actually belongs to them to a common
b. universal of profits
- comprises all that the partners may acquire by their industry or work during the existence of the partnership
2. Particular Partnership
- object are determinate things, their use or fruits; a specific undertaking or the exercise of a profession or occupation
b. as to liability of partners
1. General
- they are liable even with respect to their individual properties, in pro rata after the assets of the partnership 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
2. Limited
- formed by two or more persons 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
 A limited partner is one whose liability is limited only up to the extent of his contribution
c. as to duration
1. at will
2. at a fixed term
- the term of existence has been agreed upon expressly or impliedly
- the expiration of the term thus fixed or the accomplishment of the particular undertaking specified will cause the automatic
dissolution of the partnership

d. as to legality of existence
1. de jure –
2. de facto
e. as to representation
1. ordinary/real
2. ostensible/ partnership by estoppel
f. as to publicity
1. secret
2. open or notorious
g. as to purpose
1. commercial
2. professional
 Kinds of Partners
1. Capitalist Partners
- one who furnishes capital;
- not exempted from losses; can engage in other business provided there is no competition between the partner and his
business
2. Industrial
- one who furnishes industry or labor;
- can be a general partner but never a limited partner;
- exempted from losses as between the partner; cannot engage in any other business without express consent of the partners,
otherwise
- he can be excluded from the firm (plus damage)
- or the benefits he obtains from the other business can be availed of by the other partners (plus damages)
3. General/Real
- one who is liable beyond the extent of his contribution
4. Managing
- one who manages actively the firm’s affairs
5. Liquidating
- one who liquidates or winds up the affairs of the firm after it has been dishonored

6. Partner by estoppel/Quasi-partner
- one who is not really a partner but who may become liable as such insofar as third persons are concerned
7. Continuing
8. Surviving
9. Subpartner

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 Other classifications
a. ostensible partner
- one whose connection with the firm is public and open
b. secret
- one whose connection with the firm is concealed or kept a secret
c. silent
- one who does not participate in the management, though he shares in the profits or losses
d. dormant/sleeping
- one who is both a secret and silent partner (not managing)
e. original
f. incoming
g. retiring
Arts. 1778-80 – Universal Partnership
 2 kinds of Universal Partnership
A. Universal property of all present property
- one which comprises all that the partners may acquire by their industry or work during the existence of the
partnership and the usufruct of movable or immovable property which each of the partners may possess at the
time of the celebration of the contract.
 The following become common property of all the partners:
1. property which belonged to each of them at the time of the construction of the partnership
2. profits which they may acquire from the property contributed
 Property which the partners may acquire subsequently by inheritance, legacy or donation cannot be included for
the stipulation for common enjoyment
 Fruits thereof may be included
B. All profits
- comprises all that the partners may acquire by their industry or work during the existence of the partnership
-
Distinction between all profits and all present property
 All profits
- only the usufruct of the properties of the partners become common property; naked ownership is retained by
each of the partners
- all profits required by the industry or work of the partners become common property
 All present property
- all the property actually belonging to the partners are contributed- and said properties become common
properties
- as a rule, aside from the properties, only the profits of the said contributed common property
 Note:
- profits from other sources may become common, but only if there is a stipulation to such effect.
- Properties subsequently acquired by inheritance, legacy or donation, cannot be included in the stipulation, but
the fruits thereof can be included in the stipulation

Art. 1781 – Presumption in favor of partnership of profits

applicable only when a universal partnership has been entered into
 note: future property cannot be included in the stipulation regarding universal partnership of all present property
Reasons:
1. contracts regarding successions rights cannot be made;
2. partnership demands that the contributed things be determinate, known and certain;
3. universal partnership of all present properties really implies a donation and future property cannot be donated

Art. 1782 – Persons prohibited by law to give donation- cannot enter into Universal Partnership
1. HUSBAND and WIFE
2. those guilty of ADULTERY or CONCUBINAGE
3. those guilty of the same criminal offense if the partnership was entered into in consideration
> while spouses cannot enter into a universal partnership, they can enter into a particular partnership or be members thereof
> a universal partnership is virtually a donation to each other of the partners properties
or at least their usufruct

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Reason: they should not be allowed to do indirectly what the law forbids directly
Art. 1783 – Particular Partnership
- it has for its object determinate things, their use of fruits, or specific undertaking, or the exercise of a profession or
vocation
 Doctrine:
If two (2) individuals form a particular partnership for a deal in reality, it does not necessarily follow that all deals are for
the benefit of the partnership. In the absence of agreement, each particular deal results in a particular partnership. If
one of them, on his account, and using his own funds, should make transactions in the same business, it is his own
undertaking

Art. 1784 – When partnership begins

General Rule:
- begins from the moment of the execution of the contract
Exception:
- unless it is otherwise stipulated
 Intent to create a future partnership
 Art 1784 presupposes that there can be a future partnership which at the moment has no juridical existence yet
 The agreement for a future partnership does not itself result in a partnership. The intent must be later on actualized
by the formation of the intended partnership
 Rule if contributions have not yet been actually made
- generally, even if contributions have not yet been made, the firm already exists, for partnership is a consensual contract
(all requisites for such consent must be present)

Art. 1785 – Duration of Partnership

 Duration: unlimited in the sense that no time limit is fixed by law; may be agreed upon (expressly or impliedly)
 Partnership “at will”
- 2 kinds
a. when there is no term, express or implied
b. when continued by habitual managers
note: It is called “at will” because its continued existence really depends upon the will of the partners or even on the will
of any of them.

PARTNERHSIP OBLIGATIONS
A. OBLIGATIONS AMONG THEMSELVES
1. To make contributions promised
2. Obligation for additional contribution
3. Duty/obligation of diligence and fidelity
4. Right to accounting

B. PROPERTY RIGHTS OF PARTNERS

1. Co-ownership power – right to specific pp prop
2. Management power
3. Equity rights of partners
4. Other rights
a. reimbursement (1796)
b. associate with another person (1804)
c. access pp books (1805)
d. render true and full info of things aff pp (1806)
e. formal acct of pp affairs (1809)
f. pp dissolved in certain conds

C. OBLIGATIONS TO 3RD PARTIES

1. Firm name
2. unlitd liab of esisting partners
3. subeseq admitted partners
4. non partners

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5. creds of pp and pr

D. OBLIGATIONS OF THE FIRM/PP

1. for what is the pp respon to every partner (1796)
2. liab of pp for acts of prs (1818)

II. Obligations of the Partners among themselves

Art. 1786 – Duties of Parties
 3 Important Duties of a partner
1. to contribute what has been promised;
2. to deliver the fruits of what should have been delivered; and
3. to warrant
Obligations with respect to contribution of property
1. to contribute at the beginning of the partnership or at the stipulated time the money, property or industry which he
may have promised to contribute;
2. to answer for eviction in case the partnership is deprived of the determinate property contributed ; and
3. to answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they
should have been contributed up to the time of actual delivery

in addition, the partner has the obligation:

4. to preserve said property with the diligence of a good father of a family pending delivery to the partnership;
and
5. to indemnify the partnership for any damage caused to it by the retention of the sane or by the delay in its
contribution
Effects of failure to contribute property promised
The mutual contribution to a common fund being of the essence of the contract of partnership, for without the
contributions the partnership is useless, it is but logical that the failure to contribute is to make the partner ipso jure a
debtor of the partnership even in the absence of any demand.
The remedy of the partner is not rescission but an action for specific performance with damages and interest from the
defaulting partner from the time he should have complied with his obligation.

Art. 1787 – Appraisal of Goods

manner prescribed by the contract of partnership in the absence of stipulation, appraisal shall be made by experts
chosen by the partners and according to current prices
A. When contribution consist of goods
- appraisal of value is needed to determine how much has been contributed
B. How appraisal is made
- as prescribed by the contract
- in default of the first, experts chosen by the partners, and at current prices
C. Necessity of the Inventory Appraisal
- proof is needed to determine how much goods or money had been contributed. An inventory is useful
D. Risk of loss
- after goods have been contributed, the partnership bears the risk of subsequent changes in their value

Art. 1788- Obligations with respect to contribution of money

1. to contribute on the date due the amount he has undertaken to contribute to the partnership;
2. to reimburse any amount he may have taken from the partnership coffers and converted to his own use;
3. to pay the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from the
common fund and converts it for his own use; and
4. to indemnify the partnership for the damages caused to it by the delay in the contribution or the conversion of any
sum for his personal benefit

 Liability of guilty partner for interest and damages

- the guilty partner is liable for interest and damages not from the time judicial or extrajudicial demand is made but from
the time he should have complied with his obligation or from the time he converted the amount to his own use, as the
case may be.

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- Unless there is a stipulation fixing a different time, this obligation of a partner to give his promised contribution arises
from the commencement of the partnership, that is, upon perfection of the contract.
Cases covered by the article:
a. when money promised is not given on time;
b. when partnership money is converted to the personal use of the partner
Coverage of liability
a. interest at the agreed rate (if none, the legal interest)
b. damages that may be suffered by the partnership
Why no demand is needed to put partners in default:
a. contribution
- a partnership is formed precisely to make use of contributions, and this use should start from its formation, unless a
different period has been set; otherwise the firm is necessarily deprived of the benefits thereof
- injury is constant
- time is of the essence
b. conversion
- the form is deprived of the
benefits of the money, from the very moment of conversion
 note: even if no actual injury results, the liability exists because Art. 1788 is absolute

Art. 1789 – Obligations of an Industrial Partner

Remedies where industrial partner engages in business
- if the industrial partner engages in business for himself, without the express permission of the partnership, the capitalist
partners have the right to exclude him from the firm or to avail themselves of the benefits which he may have obtained.
In either case, the capitalist partners have the right to damages
note: the permission given must be express; hence, mere toleration by the partnership will not exempt the industrial
partner from liability

Distinction between Capitalist Partner and Industrial Partner

a. as to contribution
CP – contributes money or property
IP – contributes industry (mental or physical)
b. as to prohibition to engage in other business
CP – cannot generally engage in the same or similar enterprise as that of his firm (possibility of unfair competition)
IP – cannot engage in any business for himself (all his industry is supposed to be contributed to the firm)
c. as to profits
CP – shares in the profits according to the agreement thereon; if none, pro rata to his contribution
IP – receives a just and equitable share
d. as to losses
CP – stipulation; if no stipulation, the agreement as to the profits; if none, pro rata contribution
IP – exempted as to losses (as between the partners0; but is liable to strangers without prejudice to reimbursement from
capitalist partners

Art. 1790 - Contribution

General Rule: Partner shall contribute equal shares to the capital of the partnership
Exception: stipulation to the contrary
 Amount of contribution
- it is permissible to contribute unequal shares, if there is a stipulation to that effect
 To whom applicable: both to industrial as well as to capital partners undoubtedly
Art. 1791 – Obligation of Capitalist Partner
General Rule:
a capitalist partner is not bound to contribute to the partnership more than what he agreed to contribute but in case of
imminent loss of the business, and there is no agreement to the contrary, he is under obligation to contribute an
additional share to save the venture.
- if he refuses to contribute, he shall be obliged to sell his interest to the other partners
 Requisites when a capitalist partner is obliged to sell his interest to the other partners:

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 1. if there is imminent loss of the partnership;
2. he refuses to contribute an additional share to the capital; and
3. there is no agreement to the contrary
note: industrial partner is exempted for he is already giving his entire industry

Art. 1792 – Obligations of Managing Partner who collects debt

a. existence of at least two debts;
b. both sums are demandable; and
c. collecting partner is authorized to manage and actually manages the partnership
 when not applicable
- if the partner collecting is not a managing partner
- here, there is no basis for the suspicion that the partner is in BAD FAITH

Art. 1793 – Obligation of Partner who receives share of partnership credit

- to bring such to the partnership capital in case of insolvency of the debtor and other partners have not yet
collected their share
 as compared to Art. 1792
a. one debt only (firm credit)
b. applies to any partner

Art. 1794 – Obligation of partner for damages to partnership

 Why General Damages cannot be offset by benefits:
a. the partner has the duty to secure benefits for the partnership; on the other hand, he has the duty also not to be at
fault
b. since both are duties, compensation should not take place, the partner being the debtor in both instances
- compensation requires 2 persons who are reciprocally debtors and creditors of each other

 Mitigation of Liability
- equity may mitigate liability if there are “extraordinary efforts” resulting in unusual “profits”
 Need for Liquidation
- before a partner sues another for alleged fraudulent management and resultant damages, a liquidation must first be
effected to know the extent of damages
Effect of Death of the negligent Partner
- suit for recovery may be had against his estate

Art. 1795 – Risk of Loss of things contributed

1. Specific and determinate things which are not fungible where only the use is contributed
- the risk of loss is borne by the partner because he remains the owner of the things
2. Specific and determinate things the ownership of which is transferred to the partnership
- the risk of loss is for the account of the partnership, being the owner
3. Fungible things or things which cannot be kept without deteriorating even if they are contributed only for the use of
the partnership
- the risk of loss is borne by the partnership for evidently the ownership was being transferred since use is impossible
without the things being consumed or impaired
4. Things contributed to be sold
- the partnership bears risk of loss for there cannot be any doubt that the partnership was intended to be the owner;
otherwise’ the partnership could not effect the sale
5. Things brought and appraised in the inventory
- the partnership bears the risk of loss because the intention of the parties was to contribute to the partnership the price
of the things contributed with an appraisal in the inventory. There is thus an implied sale making the partnership
owner of the said things, the price being represented by their appraised value.

Art. 1796 – Responsibility of the Firm

Obligation of the partnership to the partners:
1. refund amounts disbursed by the partner in behalf of the partnership plus the corresponding interest from the
time the expenses are made;

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 2. to answer for the obligations the partner may have contracted in good faith in the interest of the partnership
business; and
3. answer for risk in consequence of its management

Art. 1805 – Partnership Books

a. such a right is granted to enable the partner to obtain true and fuel information of the partnership affairs
b. the article presupposes an “ongoing partnership”
c. “reasonable hour”
- contemplates business days throughout the year
 Value of Partnership Books of Account as Evidence
- they constitute an admission of the facts stated therein, an admission that can be introduced on evidence as against
the keeper or maker thereof.

Art. 1806 – Duty of Partner to render Information

- there must be no concealment between partners in all matters affecting the firm’s interest
- requires good faith
- duty to give on demand “true and full information”
Errors in the Book
- if partnership books contain error, but said errors have not been alleged, the books must be considered entirely correct
insofar as the keeper of said books of account is concerned
Who can demand information
a. any partner;
b. legitimate representative of dead partner;
c. legitimate representative of any partner under any legal disability

Art. 1807 – Duty to Account

 Partner accountable as fiduciary
- the relation between the partners is essentially fiduciary involving trust and confidence, each partner being
considered in law, as he is, the confidential agent of the others
 Duties of a partner
1. Duty to act for common benefit
2. Duty begins during the formation of partnership
3. Duty continues even after dissolution of partnership
4. Duty to account for secret and similar profits
5. Duty to account for earnings accruing even after termination of partnership
6. Duty to make full disclosure of information belonging to partnership
7. Duty not to acquire interest or right adverse to partnership
 Duty to Account
REASON:
- the fiduciary relation between the partners are relationships of trust and confidence which must not be abused or
used to personal advantage
- trust relations exists only during the life of the partnership, not before nor after
Art. 1808 – Prohibition against a Capitalist Partner
- prohibited from engaging for his own account in any operation which is the kind of business in which the partnership is
engaged
Instances where there is no prohibition
a. when there is an express stipulation allowing the capitalist partner to engage himself;
b. when the other partners expressly allow him to do so;
c. when the other partners impliedly allowed him to do so;
d. when the company ceases to be engaged in business during the period of liquidation and winding up; and
e. when the general-capitalist partner becomes merely a limited partner in a competitive enterprise
 Effect of Violation
a. the violator shall bring the partner shall of the profits illegally obtained;
b. he shall personally bear all the losses

 Art. 1809 – Right of Partner to a Formal Account

a. generally, no formal accounting is demandable until after dissolution

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b. however, under Art. 1809, formal accounting may be properly asked for
Estoppel
- cannot be questioned anymore if it was accepted without objection for this would now be a case of estoppel, unless
fraud and error are alleged and proved
Stipulation and Continuing Share
- valid and proper accounting must be made

III. Property Rights of a Partner

Art. 1810 – Property Rights of a Partner
Principal Rights:
a. specific partnership property
b. interest in the partnership
c. right to participate in the management
Related Rights:
a. the right to reimbursement for amounts advanced to the partnership and to indemnification for risks in
consequence of management;
b. the right to access the inspection of partnership books;
c. the right to true and full information of all things affecting the partnership;
d. the right to formal account of partnership affairs under certain circumstances; and
e. the right to have the partnership dissolved also under certain conditions

Distinction between Partnership Property and Partnership Capital

a. as to changes in value
PP – variable; its value may vary from day to day with changes in the market value of the partnership assets
PC – constant; remains unchanged as the amount fixed by agreement of partners, and is not affected by fluctuations in
the value of partnership property, although it may be increased or diminished by unanimous consent of the partners
b. as to assets included
PP – includes not only the original capital contributions of the partners, but all property subsequently acquired on
account of the partnership or with partnership funds, including partnership name and the good will of the partnership
PC – represents the aggregate of the individual contributions made by the partners in establishing or continuing the
partnership

MANAGING POWER
Art.1800 - Rights and Obligations of a Managing Partner
 Modes of Appointing a Manager
1. appointment as manager in the articles of partnership
2. appointment as manager made in an instrument other than the articles of partnership or made orally
Distinction between Appointment in Articles of Partnership and Appointment from other Source (other than the articles of
partnership)
a. as to power
Partnership – power is irrevocable without just or lawful cause
- to justify removal for just cause: controlling partners should vote to oust him (fin maj)
- without just cause: there must be unanimity
other source - power to act may be revoked at any time, with or without just cause
- such appointment is a mere delegation of power; revocable at any time
- removal shall also be done by the controlling interest
b. as to extent of power
 good faith – he may do all acts of administration (not ownership) despite the opposition of his partners
 bad faith – he cannot
other source – as long as he remains manager, he can perform all acts of administration, but of course, if the others
oppose and he persists, he can be removed
 Scope of the Powers of the Manager
Unless specifically restricted:
- he has the powers of a general agent;
- as well as the incidental powers needed to carry out the objectives of the partnership
-
 Rules as to Compensation

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General Rule:
- in the absence of an agreement to the contrary, each member of the partnership assumes the duty to give his time,
attention, and skill to the management of its affairs, so far at least, as may be reasonable necessary to the success
of the common enterprise; and for this service a share of the profits is only his compensation.
Exceptions:
a. a partner engaged by his co-partners to perform services not required of him in fulfillment of the duties which the
partnership relation imposes and in a capacity other than that of a partner is entitled to receive the compensation
agreed upon therefor;
b. a contract for compensation may be implied where there is extraordinary neglect on the part of one partner to
perform his duties toward the firm’s business, thereby imposing the entire burden on the remaining partner;
c. one partner may employ his co-partner to do work for him outside of and independent of the co-partnership, and
become personally liable therefor;
d. partners exempted by the terms of partnership from rendering services to the firm may demand pay for services
rendered;
e. where one partner is entrusted with the management of the partnership business and devotes his whole time and
attention thereto, at the instance of the other partners who are attending to their individual business and giving no
time or attention to the business of the firm, the case presents unusual conditions, is taken out of the general rule as
to compensation and warrants the implication of an agreement to make compensation, In such cases, the amount
of compensation depends, of course, upon the agreement of the parties, express or implied, as well as upon the
particular circumstances of the case; and
f. by the contract of partnership, one partner is exempted from the duty of rendering personal services to the
concerned, if he afterwards does render such service at the instance and request of his co-partners, or where the
services rendered are extraordinary.

Art. 1801 – Rule where there are 2 or more Managers

 Applicability of the Article
1. there are two or more managers;
2. there is no specification of respective duties; and
3. there is no stipulation requiring unanimity
 Specific Rules:
1. Each may separately execute all acts of administration;
2. except if any of the managers should oppose (division of the majority of the managers shall prevail)
- if there is a tie, the partners owning the controlling interest prevail; provided they are also managers
 when opposition may be made
- before the acts produce legal effects insofar as third persons are concerned

Art. 1802 – Unanimity of Action

 When Unanimity is Required
a. applies when there must be unanimity in the actuations of the managers
b. absence or incapacity of one of the managers still requires unanimity
except:
- when there is imminent danger of grave or irreparable injury to the partnership
 Duty of third persons
RULE:
Third persons are not required to inquire as to whether or not a partner with whom he transacts has the consent of all the
managers, for the presumption is that he acts with due authority and can bind the partnership.

APPLICABILITY:
When they innocently deal with a partner apparently carrying on in the usual way the business, it is imperative that if
unanimity is required it is essential that there be unanimity; otherwise the act shall not be valid, that is the partnership is
not bound.

Art. 1803 – Rule when manner of management has not been agreed upon
a. Generally, each partner is an agent
b. Although each is an agent, still if the acts are opposed by the rest, the majority should prevail for the presumed intent
is for all the partners to manage as in Art. 1801;

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c. When a partner acts as an agent, it is understood that he acts in behalf of the firm; therefor when he acts in his own
name, he does not bind the partnership generally
d. On the other hand, the authority to bind the firm does not apply if somebody else had been given authority to
manage in the articles of organization or thru other means.

 Rule on Alterations
a. “important alterations”
- deals with immovable property because of their greater importance than personality. Also, in proper cases, they
should be returned to the partners in the same condition as when they were delivered to the partnership
b. “alteration”
- contemplates useful expenses
c. consent of the others may be express or implied

Art. 1804 – Contract of Subpartnership

Subpartnership – partnership formed between a member of a partnership and a third person for a division of the profits
coming to him from the partnership enterprise
- partnership within a partnership and is distinct and separate from the main or principal partnership

 Right of person associated with partner share

- subpartnership agreements do not in any wise affect the composition, existence, or operations of the firm. The
partners are partners inter se, but, in the absence of the mutual assent of all the parties, the subpartner does not
become a member of the partnership, even the agreement is known to the other members of the firm.
 Associate of Partner
a. for a partner to have an associate in his share, consent of the other partners is not required;
b. for the associate to become a partner, all must consent
SPECIFIC PROPERTIES
Art. 1811 – Partnership in Specific Partnership Property
 Co-ownership in Specific Partnership Property
- partners are co-owners but rules on co-ownership does not necessarily apply
Rights of a partner in specific partnership property
1. in general, he has an equal right with his partners to posses, but only for partnership purposes;
2. he cannot assign his right;
3. his right is not subject to attachment or execution; and
4. his rights is not subject to legal support

EQUITY POWER
Art. 1812 – Partner’s Interest in the Partnership is his share of the profits and surplus
In general., a partner’s interest in the partnership (his share in the profits and surplus) may be assigned, attached or be
subject to legal support
Surplus: assets-liabs | P: exp-profits
Art. 1813 – Conveyance of Interest
Effects of conveyance by partner of his Interest in the Partnership
1. Partnership may still remain; partnership may be dissolved
2. Assignee does not necessarily become a partner
3. Assignee cannot even interfere in the management or administration of the partnership business or affairs
4. Assignee cannot demand information, accounting or inspection of the partnership books
Rights of Assignee
1. to get whatever profits the assignor-partner would have obtained;
2. to avail himself of the usual remedies in case of fraud in the management;
3. to ask for annulment of the contract of assignment if there was fraud, error, intimidation, force, undue influence;
4. to demand an accounting

Art. 1814 – Charging Interest of a Partner

- while a partner’s interest in the partnership may be charged or levied upon, his interest in a specific firm property
cannot as a rule be attached.
 Preferential Rights of Partnership Creditors
- preference is given to partnership creditors in the partnership assets;

16
 - separate or individual creditors have preference in separate or individual properties

 Remedies of separate Judgment Creditor of a Partner

1. Application for the “charging order” after securing judgment on his credit
2. Availability of other remedies
 Receivership
a. when the charging order is applied for and granted, the court may at the same time or later appoint a receiver
of the partner’s share in the profits or money due him
b. the receiver appointed is entitled to any relief necessary to conserve the partnership assets for partnership
purposes
 Redemption of the Interest Charged
a. redemption- means the extinguishment of the charge or attachment on the partner’s interest in the profits;
b. when redemption is made
- any time before closure;
- after closure, it may still be bought with separate property or with partnership property

Art. 1797 – Rules for Distribution of Profits and Losses

 Distribution of Profits
a. partners share the profits according to their agreement subject to Art. 1799
b. if there is no such agreement:
1. the share of each capitalist partner shall be in proportion to his capital contribution (this rule is based on the
presumed will of the partners)
2. the industrial partner shall receive such share, which must be satisfied first before the capitalist partners shall divide
the profits, as may be just and equitable under the circumstances.
- the share of the industrial partner in the profits is not fixed, as in the case of the capitalist partners, as it is very difficult
to ascertain the value of the services of a person
 Distribution of Losses
a. the losses shall be distributed according to their agreement subject to Art. 1799
b. if there is no such agreement, but the contract provides for the share of the partners in the profits, the share of
each in the losses shall be in accordance with the profit-sharing ratio, but the industrial partner shall not be liable
for losses. The profits or losses of the partnership cannot be determined by taking into account the result of one
particular transaction but of all the transactions had.
c. If there is also no profit-sharing stipulated in the contract, then losses shall be born by the partners in proportion to
their capital contributions, but the purely industrial partner shall not be liable for the losses.

 Industrial Partner’s Profit

- a just and equitable share
 Industrial Partner’s Losses
- while he may be held liable by third persons, still he can recover whatever he is made to give them, from the
other partners, for he is exempted from losses, with or without stipulation to this effect
 Non-applicability to Strangers
- Art. 1797 applies only to the partners, not when liability in favor of strangers are concerned, particularly with
reference to the industrial partner

Art. 1798 – Designation by Third Persons

a. third person
- in the article, not a partner; to avoid partiality
b. when designation by the 3rd party may be impugned
- when it is manifestly inequitable
c. when designation cannot be impugned even if manifestly inequitable:
- if the aggrieved partner has already begun to execute the decision
- if he has not impugned the same within 3 months from the time he had knowledge thereof

Art. 1799 – (1) Stipulation excluding a partner from any share in profits or losses
General Rule: a stipulation excluding one or more partners from any share in the profits or losses is void
Reason: partnership is for COMMON BENEFIT
Exception: in the case of the industrial partner whom the law itself excludes from losses

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note: stipulation exempting a partner from losses should be allowed
 Reason why industrial partner is generally exempted from losses
- the industrial partner cannot withdraw any labor or industry he had already exerted.

IV. Obligation of the Partners

to Third Persons
Art. 1815 – Firm Name
- name, title or style under which a company transacts business; a partnership of two or more persons; a commercial
house
 Purpose
- necessary to distinguish the partnership which has a distinct and separate juridical personality from the
individuals composing the partnership and from other partnerships and entities.
 Liability of strangers who include their name
- liability as partners because of estoppel, but do not have the rights as partners
Art. 1816 – Liability for Contractual Obligations of Partners
 Partnership Liability
 Individual Liability
Liability Distinguished from Losses
- an industrial partner is exempted by law for losses’ but not from liability;
- third persons may sue the firm and the partners, including the industrial partners;
- partners will be personally liable only after the assets of the partnership have been exhausted
Stipulations such as those exempting all the industrial partners and some of the capitalist partners, insofar as third persons
are concerned, would be null and void

Art 1817 – Stipulations Eliminating Liability

Art. 1799 and 1817 reconciled:
- it is permissible to stipulate among them that a capitalist partner will be exempted from liability in excess of the original
capital contributed; but will not be exempted insofar as his capital is concerned
Liability vs. Losses
Liability – refers to responsibility towards third persons
Losses – refers to responsibility as among partners

Art. 1818 – Partner as an Agent of Partnership

When a partner can bind or cannot bind the firm
a. Art. 1818 speaks of an instance when the partner is an agent; and
b. when he can and cannot bind as agent
 Agency of a partner
- partnership is a contract of mutual agency
- each partner acting as a principal on his own behalf and as an agent for his co-partners or the firm
When can a partner bind the partnership
Requisites:
a. when he is expressly authorized or impliedly authorized; and
b. when he acts in behalf and in the name of the partnership
When will act not bind the partnership
A. when, although for apparently carrying on in the usual way the business of the partnership,” still the partner has in fact
NO AUTHORITY, and the third party knows that the partner has no authority;
B. when the act is not for apparently carrying on in the usual way of the partnership and the partner has no authority
NOTE: The 7 kinds of acts enumerated in Art. 1818 are instances of acts which are NOT for apparently carrying on in the
usual way the business of the partnership.
In the 7 instances, the authority must be unanimous except if the business has been abandoned.
 Reasons why 7 acts are “unusual”
a. assign the firm property – firm will virtually be dishonored
b. dispose of the goodwill – good will is valuable property
c. do any other act which would make it impossible to carry on – this is evidently prejudicial
d. confers a judgment – if done before a case is filed, this is null and void; if done later, the firm would be
jeopardized
e. compromise – an act of ownership and may be said to be equivalent to alienation

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 f. arbitration – an act of ownership which may not be justified
g. renounce a claim – why should a partner renounce a claim that does not belong to him but to the partnership?

Art. 1819 – Conveyance of Real Property

 the article speaks of “:to convey” or a conveyance
 real property may be registered or owned in the name of
- the partnership, all the partners, one, some or not all the partners in trust for the partnership
RULES on CONVEYANCE of REAL PROPERTY
1. title to real property is in the pp name
a. partnership
b. pr sells without auth: recover\ gf and for value
c. pr own name with auth: equit interest
d. pr own name /o auth: no title passed

2. title is in 1/more/all partners

a. pr with auth conveys in own name: equit interest
b. pr w/o auth: no title (not regd in own name)

3. title is in the name of one or more BUT not all the partners
a. pp interest has been disclosed in the record
1. suff auth: valid
2. w/o auth: recover\gf
b. pp interest not disclosed
1. w/o auth: recover against any transferee

4. when property “held in trust” by partner

> a sale only conveys EQUITABLE INTEREST

5. when title is in the name of all partners

> conveyance executed by all partners possess all rights of such property
EQUITABLE INTEREST
-beneficial interest, not naked title

Art. 1820 – Admission or representation made by a partner

Conditions:
- admission must concern partnership affairs;
- within the scope of the authority
Restrictions on the rule:
a. admission made BEFORE dissolution are binding only when the partners has authority to act on the particular matter
b. admissions made AFTER dissolution are binding only if the admissions were necessary to wind up the business
note: a previous admission of a partner is admissible in evidence against the partnership when it is made within the
scope of the partnership, and during the existence, provided of course that the existence of the partnership is first
proved by evidence other than such act or declaration
Art. 1821 – Notice to a Partner
 Cases of Knowledge of a Partner
1. knowledge of a partner acting in a particular matter acquired while a partner;
2. knowledge of a partner acting in a particular matter then present to his mind; and
3. knowledge of any partner who reasonably could and should have communicated it to the acting partner
 Effect of Notice to a Partner
a. in general, notice to a partner is notice to the partnership, that is, a partnership cannot claim ignorance if a partner
knew (but this is with restriction)
b. notice to a partner, given while already a partner, is a notice to the partnership provided it relates to partnership
affairs

 Effect of knowledge although no notice was given

- notice of the partner is also knowledge of the firm provided:

19
a. the knowledge was acquired by a partner who is acting in the particular matter involved;
b. the knowledge may have been acquired by a partner not acting in the particular matter involved
Art. 1822 – Liability of Partnership
 Requisites for Liability
a. the partner must be guilty of a wrongful act or omission; and
b. he must be acting in the ordinary course of business, or with the authority of his co-partners even if the act is
unconnected with the business
note: partnership liability does not extend to criminal liability
 Instances when the firm and other partners are not liable:
a. if the wrongful act or omission was not done within the scope of the partnership business and for its benefit;
b. if the act or omission was not wrongful;
c. if the act or omission, although wrongful, did not make the partner concerned liable himself; and
d. if the wrongful act or omission was committed after the firm had been dissolved and the same was not in connection
with the process of winding up

Art. 1823 – Liability for Misappropriation

the difference between par. 1 and par. 2 is that in the former misappropriation is made by the receiving partner, while in
the latter, the culprit may be any partner. The effect however is the same in both cases

Art. 1824 – Solidary Liability of partners

not only the partners that are liable in solidum; it is also the partnership

Art. 1825 – Partner by Estoppel and Partnership by Estoppel

 Estoppel
- a bar which precludes a person from denying or asserting anything contrary to that which has been established as the
truth by his own deed or representation, either express or implied
Elements to establish liability as a partner on ground of estoppel:
1. proof by plaintiff that he was individually aware of the defendant’s representations as to his being a partner or that
such representations were made by others and not denied or refuted by the defendant;
2. reliance on such representations by the plaintiff; and
3. lack of denial or refutation of the statements by the defendants; such denial need not precede plaintiff’s acting
thereon if the denial was forthcoming promptly upon hearing of the representations, and if, by prudence and diligence
the plaintiff might have learned the truth or untruth of the representations.
 if a third person is misled and acts because of such misrepresentation
® the deceiver is a partner by estoppel
When Partnership Liability Results:
- if all the actual partners consented to the representation, then the liability of the person who represented himself to
be a partner or who consented to such representation and the actual partners is considered a partnership liability.
When Liability is PRO RATA:
- no existing pp and all those who represented as partners consented to the repn, then liab of the person who repd
himself to be a partner and all who made and consented to such, is joint or pro rata
When Liability is Separate:
- no existing pp and not all but only some of those repd as partners consented to the repn, or none of the pp in an
existing pp consented to such repn, then the liab will be separate
When the problem may arise:
A person may:
a. represent himself as a partner of an existing partnership with or without the consent of the partnership;
b. represent himself as a partner of a non-consent partnership

When estoppel does not apply:

- when although there is misrepresentation, the third party is not deceived, the doctrine of estoppel does not apply

Burden of Proof
- the creditor, or whoever alleges the existence of a partner or partnership by estoppel has the burden of proving the
existence of the misrepresentation and the innocent reliance on it

Art. 1826 – Entry of a New Partner

Entry of a new partner into an existing partnership

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the newly admitted partner would be liable as an ordinary original partner for all partnership obligations incurred after his
admission to the firm
Creation of a new partnership in view of the entry
- the admission of a new partner dissolves the old firm and creates a new one;
- since the old firm is dissolved, the original creditors would not be the creditors of the new firm, but only of the original partners;
hence, they may lose their preference;
- under the civil code, they are considered creditors of the new firm
Liability of incoming partner for partnership obligations
1. limited to his share in partnership property for existing obligations, unless there is stipulation to the contrary;
2. extends to his separate property for subsequent obligations
Liability of an Outgoing Partner
- where a partner gives notice of his retirement or withdrawal from the partnership, he is freed from any liability on contracts
entered into thereafter, but his liability on existing incomplete contract continues.
 the rule of holding the new partner liable for previous obligations of the firm is not harsh on the said new partner. After all the
incoming partner partakes of the benefit of the partnership, property and an established business

Art. 1827 – Creditors of Partnership

Reason for the Preference of Partnership Creditors
- after all, the partnership is a juridical person with whom the creditors have contracted; moreover the assets of the
partnership must first be executed
Reason why industrial creditors may still attach the partner’s share
- after all, remainder belongs to the partner
Sale by a partner of his share to a third party
- if a partner sells his share to a third party, but the firm itself still remains solvent, creditors of the partnership cannot assail
the validity of the sale by alleging that it is made in fraud of them, since they have not really been prejudiced

IV. Dissolution and Winding Up

Art. 1828 & 1829 – Definition of Dissolution, Winding up and Termination; Effects of Dissolution
Dissolution
- the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the
business
- that point of time when the partners cease to carry on the business together
Effects of Dissolution:
a. partnership is not terminated;
b. partnership continues for a limited purpose; and
c. transaction of new business is prohibited
Causes for Dissolution
1. voluntary 2. involuntary 3. judicial

Winding Up
- the process of settling business affairs after dissolution
Termination
- the point in time after all the partnership affairs have been wound up

Effect on Obligations
a. a partner cannot evade previous obligations entered into by the partnership
b. absolution saves the former partners from new obligation to which they have not expressly or impliedly consented,
unless the same be essential for winding up

Art. 1830 – Causes of Dissolution

1. as to first cause
- partnership agreement has not been violated
4 instances:
 termination of the definite term or specific undertaking;
 express will of a partner who must act in good faith when there is no definite term and specific undertaking;
 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;

21
  by the expulsion of any partner from the business bona fide in accordance with such p[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. when a specific thing, which a partner had promised to contribute to the partnership, perishes before delivery
4. by the death of any partner;
5. by the insolvency of any partner or of the partnership;
6. by the civil interdiction of any partner; and
7. by decree of court

note: partners in their contract cannot limit the cause for dissolution

Art. 1831 – Judicial determination as to dissolution

 this article speaks of a dissolution by decree of court. In a suit for dissolution proof as to the existence of the firm must
be given
 Who may sue for dissolution:
a. a partner for any of the causes given under 1831
b. the purchaser of a partner’s interest in the partnership under Art. 1813/1814, provided that the period has expired or if
the firm was a partnership at will when the interest was assigned or changed
note: if period is not yet over, said purchaser cannot sue for dissolution
Grounds for Dissolution
a. insanity
b. incapacity
c. misconduct and persistent breach of partnership agreement
d. business can be carried on only at a loss
e. other circumstances
 Insanity of a partner
a. even if a partner has not yet been previously declared insane by the court, dissolution may be asked, as long as the
insanity is duly proved in court;
b. insanity is a cause since the partner will be incapacitated to contract

 Incapability to perform part

- may happen when the partner enters the government service which would prohibit him from participating in the firm,
or when he will stay abroad for a long time
Appointment of a receiver
In a suit for dissolution, the court may appoint a receiver at its own discretion but a receiver is not needed when
practically all the firm assets are in the hands of a sheriff under a writ of replevin, or when the existence of a partnership
with the plaintiff is denied, particularly if the business of the firm is being conducted successfully
Time of Dissolution
- a firm becomes a dissolved partnership at the time the judicial decree become s a final judgment

Art. 1832 – Effects of Dissolution

General Rile: Art. 1832
Exception: Art. 1833 and 1834
Effects of dissolution
- when a partnership is dissolved, certain effects are inevitable, insofar as the relations of the firm toward third persons are
concerned, and insofar as the partners themselves are affected in their relations with one another
Effect of previous contract
- when a firm is dissolved, it does not mean that the contracts and obligations entered into, whether the firm is the
creditor or debtor, automatically cease;
- the firm is still allowed to collect previously acquired credits, it is also bound to pay all the debts;
- a dissolved partnership still has the personality for winding up its affairs

Creditors who have not been prejudiced

- if the obligations and rights of a dissolved firm are transferred to another firm, the creditors may not hold the former
liable even if said creditors have not been prejudiced, as long as the new firm can indeed take care of said creditors. It
would be erroneous to let the old firm pay, if the new firm can really pay.

22
Art. 1833 – Kinds of Causes of Dissolution
a. Act-Insolvency-Death
b. Other things like termination
Effect of AID
all partners are still bound to each other generally, except:
a. if the partner had knowledge (as distinguished by NOTICE without actual knowledge)
- if dissolution is caused by an act (e.g. withdrawing, retiring)
b. if the partner acting had knowledge or notice, if dissolution was caused by death or insolvency
note:
Death or insolvency being more ordinary than an “act,” notice is enough. Hence, the law provides “knowledge” or
notice.
However, it is still essential that there be knowledge or notice of the fact of death or insolvency to justify non-liability of
the other partners to the parties acting.
Right of partner to contribution from co-partners
- when a partner enters into a new contract with a third person after dissolution, the new contract generally will bind
the partners (Art. 1834, par. 1). Each of them is liable for his share of any liability created by the acting partner as if
the partnership had not been dissolved.

Art. 1834 – When Partnership is Bound

Article speaks of 2 possibilities:
a. when the partnership is bound to strangers; and
b. when the partnership is not bound to strangers
When Partnership is bound:
(a partnership liability is created)
a. business is for winding up;
b. business is to complete unfinished transactions; and
c. completely new business with third parties considered innocent
When firm is not bound:
a. in all cases not included when partnership is bound;
b. when the firm was discharged because it was unlawful to carry on the business; except when the act is winding up;
c. where the partner had acted in the transaction has become insolvent;
d. where the partner is unauthorized to wind up
except: if the transaction is with a customer in good faith
Note:
it is understood that if after dissolution a stranger will represent himself as a partner although he is not one, he will be a
partner by estoppel

Art. 1835 – Effect of Dissolution on Partner’s Existing Liability

Dissolution ordinarily does not discharge existing liability of partners, otherwise, creditors would be prejudiced, particularly
if a partner will just withdraw anytime from the firm
How a Partner’s liability is discharged
- the following must agree:
a. the partner concerned;
b. the other partners; and
c. the creditors
Effect of death on pending action
- An action for accounting against a managing partner should be discontinued if he dies during the pendency of the
action;
- The suit must be conducted in the settlement proceedings of the deceased’s estate, particularly if this is the desire of
his administration;
- Thus, it is wrong to just continue the action for accounting and substitute the dead defendant with his heirs

WINDING UP
Art. 1836 – Judicial and Extrajudicial Wind up; Persons authorized to wind up
Extrajudicial winding up
- by the partners who have not wrongfully dissolved the partnership;

23
- or by the legal representative of the last surviving partner provided the last survivor was not insolvent
Judicial winding up
- under the control and direction of the court, upon proper cause that is shown to the court;
- petition for judicial winding up can be done by any partner, his legal representative or assignee
Rule if survivor is not the manager
- he is not required to serve as liquidator thereof;
- he is not required as liquidator without compensation; and
- if he liquidates the affairs upon promise of a certain compensation by the managing partners, he is naturally entitled
to receive compensation
Profits
- profits are supposed to accrue only during the existence of the partnership before dissolution;
- profits that will actually enter the firm after dissolution as a consequence of transactions already made before
dissolution are included because they are considered as profits existing at the time of dissolution; and
- any other income earned after the time should not be disturbed as profits, but merely as additional income to the
capital
Persons authorized to wind up:
a. the partners designated by the agreement;
b. in the absence of such agreement, all the partners who have not wrongfully dissolved the partnership; and
c. the legal representative (executor or administrator) of the last surviving partner (when all the partners are already
dead) not insolvent.

Art. 1837 - Right of Partner to Application of Partnership Property on Dissolution

 rights where dissolution not in contravention of agreement (par. 1)
 rights where dissolution is in contravention of agreement (par.2)
Two aspects of dissolution
Dissolution may be caused:
a. although the partnership contract is not violated;
b. because the partnership contract is violated
Innocent Partners:
- have better rights than guilty partners;
- may continue the business (new partnership);
- rights of the guilty partners are safeguarded by a:
a. bond approved by the court
b. payment of interest at the time of dissolution minus damages
Right to get cash
- in case of non-continuance of the business, the interest of the partner should, if he desires, be given in CASH
note: a guilty partner, in ascertaining the value of his interest is not entitled to a proportionate share of the value of the
GOOD WILL
Partner wrongfully excluded
- he should be considered an innocent party;
- the other partner must account not only for what is due to him at the date of the dissolution but also for damages or
for his share of the profits realized from the appreciation of the partnership business and good will (provided the
excluded partner had not substantially broken the partnership agreement)
Division of Losses
-rule on losses must apply, provided that their real market values at the time of liquidation are the values considered

Art. 1838 – Right of Partner to Rescind Contract of Partnership

if the contract is annulled, the injured partner is entitled to restitution
Rescission or annulment of partnership contract
- fraud or misrepresentation violates the consent whereby the contract of partnership had been entered into, hence, it
is really also causante
Three Rights (without prejudice to the other rights under other legal provisions)
a. right to lien or retention;
b. right of subrogation; and
c. right of indemnification

Art. 1839 – Liquidation and Distribution of Assets of Dissolved Partnership

24
Liquidation
- before liquidation is made, no action for accounting of a partner’s share in the profit or for a return of his capital assets
can properly be made, since it is essential to first pay off the creditors
Assets of Partnership
- partnership property
- contributions of the partners, which are made to pay off the partnership liabilities

Order of Payment of Firm’s Liabilities

1. creditors (who are strangers) otherwise they may be prejudiced;
2. partners (who are already creditors);
3. distribute profits

notes:
- if the partnership assets are insufficient the other partners must contribute more money or property
- such contributors may be enforced by:
- any assignee for the benefit of the creditor, or any person appointed by the court;
- any partner or his legitimate representative
Preference with respect to the assets
It depends:
- regarding partnership property, partnership creditors have preference
- regarding individual property, creditors are prejudiced
Rules if partners are insolvent
a. give to the individual/separate creditors;
b. give to the partnership creditor;
c. then those owing to the other partners by way of contribution

Art. 1840 – Dissolution of Partnership by Change in Membership

a. a new partner is admitted;
b. when a partner dies, retires, expelled or withdraws;
c. when the other partners assign their rights to the sole remaining partner;
d. when all the partners assign their rights in partnership property to third persons
Rights of creditors of dissolved partnership which is continued
1. equal rights of dissolved and new partnership creditors
2. liability of persons continuing business (see par. 2 and par. 1, no.4)
3. prior right of dissolved partnership as against purchaser
- without a final settlement with creditors of the partnership
Why are the old creditors considered creditors of the new firm?
- the reason for the law (in making creditors of the dissolved firm also creditors of the person or partnership continuing
the business) is for said creditors not to loss their preferential rights as creditors to the partnership property

Art. 1841 – Retirement or Death of a partner

General Rule:
- when a partner retires from the firm he is entitled to the payment of what may be due him after liquidation
- but no liquidation is needed when there already is a settlement as to what the retiring partner shall receive

Art. 1842 – Accrual and Prescription of Partner’s right to account for his Interest

When right to account accrues

- at the date of dissolution in the absence of any contrary agreement
Possible defendants:
Action against
- winding up partners
- surviving partners

25
- person in partnership continuing the business
Prescription
- begins to run only upon the dissolution of the partnership when the final accounting is done

LIMITED PARTNERSHIP
Art. 1843 – Limited Partnership
Characteristics:
a. formed by compliance with the statutory requirements;
b. one or more general partners control the business and are personally liable to creditors
c. one or more limited partners contribute to the capital and share in the profits but do not participate in the management of
the business and are not personally liable for partnership obligations beyond the amount of their capital contributions;
d. the ;limited partners may ask for the return of their capital contributions under the conditions prescribed by law; and
e. the partnership debts are paid out of common fund and the individual properties of the general partners
Limited Partnership
- one formed by two or more persons under the provisions of Art. 1844, having as members one ore more general
partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the
partnership

Art. 1844 – Requirements for the Formation of Limited Partnership

Presumption of General Partnership
- a partnership transacting business is prima facie, a general partnership and those who seek to avail themselves of
the protection of the laws prevailing the creation of limited partnership must show due compliance with such laws
Requisites:
a. signing under oath of the required certificate;
b. filing for record of the certificate in the SEC
Effect of non-fulfillment of the requirements
- then it is not considered a limited partnership but a general partnership
Effect of only aggregate contribution is stated
- the law says that the contribution of each limited partner must be stated. Therefore, if the aggregate sum given by
two or more limited partners is given, the law has not been complied with.

Effect of omitting the term “limited” in the firm name

- the law requires the firm name to have the word “limited.” If such is violated, the name cannot be considered the firm
name of the limited partnership.

Art. 1845 – Limited Partner’s Contribution

Rule:
a. a limited partner is not allowed to contribute industry or services alone
b. an industrial partner can become a general partner in a limited partnership

Art. 1846 – Effect where surname of limited partner appears in partnership name
- the limited partner violating this article is liable, as a general rule, to partnership creditors without, however, the rights
of a general partner. Of course, such limited partner shall not be liable as a general partner with respect to third
persons with actual knowledge that he is only a limited partner.

Art. 1848 – Liability of limited partner for participating in management of p[partnership

- a limited partner is liable as a general partner for the firm’s obligations if he takes part or interfere in the
management of the firm’s business.

The following do not constitute taking part in the control of the business:
a. mere dealing with a customer;
b. mere consultation on one occasion with the general partners

Acts constituting interference in the management

26
 a. selection of who will be managing partners;
b. supervision over a superintendent of the business of the firm

note: participation in the control of the business makes the limited partners liable as a general partner without getting
the latter’s rights

Art. 1849 – Admission of additional limited partners

- even after a limited partnership has already been formed, the firm may still admit new limited partners,
provided there is a proper amendment to the certificate
- failure to amend the certificate does not necessarily mean the dissolution of the limited partnership

Art. 1850 – Rights, powers and liabilities of a general partner

a. right of control/unlimited personal liability

b. acts of administration/acts of strict dominion
c. other limitations:
- no power to bind the limited partners beyond the latter’s investment
- no power to act for the firm beyond the purpose and scope of the partnership
- no authority to change the nature of the business without the consent of the limited partners

 Under the acts enumerated (under Art. 1850), the general partners (even if unanimous) must still get the written
consent of all the limited partners.
 If a general partner in a limited partnership goes abroad, his capacity to bind the firm is governed by the law of
the place where the limited partnership was formed.

Art. 1851 – Rights of a limited partner

Rights, in general, of a limited partner

- as members of the firm, the limited partner, in order to protect his interest in the firm, has the same right to
compel the partners to account as a general partner has

Rights of a limited partner

a. a limited partner necessarily has lesser rights than a general partner (as enumerated in Art. 1851)
b. however, he has also the right to have dissolution and winding up by decree of court; he cannot, however,
bind the firm by a contract

Art. 1852 – Status of partner where there if failure to create limited partnership

 a contributor who erroneously believes he has become a limited partner and thereupon exercises the rights of
a limited partner, he should not be considered as a general partner
 however, he can be held liable as a general partner:
- unless in ascertaining the mistake, he promptly renounces his interest in the profits of the business or other
compensation by way of income;
- unless, even if no such renouncing is made, partnership creditors are not prejudiced

Art. 1853 – A person may be both a general partner and a limited partner

 a person may be a general and a limited partners at the same time, provided the same is stated in the
certificate
 generally, his rights are those of a limited partner

exception:
- regarding his contribution, he would be considered a limited partner, with the rights of a limited partner insofar
as the other partners are concerned

Art. 1854 – Loan and other business transactions with limited partners

27
Right of a limited partner to lend money and transact other business with the firm
a. the parties are always given preferential rights insofar as the firm’s assets are concerned
b. while a limited partner, in the case of claims referred to in the article, is prohibited to receive or hold as
collateral security any partnership property, still he is not prohibited to purchase partnership assets which are
used to satisfy partnership obligations towards third parties

Allowable transactions
a. granting loans to the partnership;
b. transacting other business with it; and
c. receiving a pro rata share of the partnership assets with general creditors if he is not also a general partner

Prohibited transactions
a. receiving or holding collateral security any partnership property
b. receiving any payment, conveyance, or release from liability if it will prejudice the right of third persons

Art. 1855 – Preferred limited partners

Preference to some limited partners:

- such preference must be stated in the certificate

Preference involves:
- return of contribution
- compensation
- other matters

Art. 1856 – Compensation of limited partners

For this article to apply, partnership assets must be in excess of partnership liabilities to third persons, not liabilities
to partners

Art. 1857 – Requisites for return of contribution of limited partner

a. all liabilities of the partnership have been paid or if they have not yet been paid, the assets of the partnership
are sufficient to pay such liabilities
b. the consent of all the members has been obtained except when the return may be rightfully demanded; and
c. the certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution

Par. 1 – deals with the conditions that must exist before contribution by a limited partner can be returned to him

Par. 2 – deals with the time when such contributions can be returned, provided that the conditions are complied with

 even if a limited partner has contributed property, he has the right to demand and receive cash in return
 if par. 1 is violated, previous creditors can sue, but they must allege and prove the non-existence of the
conditions

Liability of a partner who has withdrawn

- a limited partner who withdraws rightfully his contribution, and the certificate is amended properly, would still
be liable to previous creditors if later on the firm becomes insolvent. His contribution is to be treated as a trust
fund for the discharge of liabilities

Art. 1858 – Liabilities of a limited partner

- liabilities may be waived provided the following concur:

- all the other limited partners must agree
- innocent third party creditors must not be prejudiced

28
Liabilities of a limited partner
a. to the partnership
- their liability is to the partnership not to the creditors of the partnership
b. to partnership creditors and other partners
- see arts. 1843, 1846-48,1854,and 1844, par.2
c. to separate creditors
- see art 1862

When return of contribution a matter of right

a. on the dissolution of the partnership; or
b. upon the arrival of the date specified in the certificate for the return
c. after the expiration of the 6 months’ notice in writing given by him to the other partners if no time is fixed in the
certificate for the return of the contribution or for the dissolution of the partnership

Art. 1859 – Change in the relation of limited partners

Effect of change in the relationship of limited partners

- does not necessarily dissolve the partnership. No limited par6tner, however, can withdraw his contribution until
all liabilities to creditors are paid

Substituted Limited Partner

- a person admitted to all the rights of a limited partner who has died or has assigned his interest in the
partnership except only those of which he was ignorant at the time he became a limited partner and which could not
be ascertained from the certificate
- see arts. 1847 and 1858 for the liabilities of an assignor

Rights of assignees of limited partner

- the assignee is only entitled to receive the share of the profits or other compensation by way of income or the
return of the contribution to which the assignor would otherwise be entitled

Art. 1860 – Causes for the dissolution of limited partnership

- new provision
- source: Sec. 20 Uniform Limited Partnership Act

Art. 1861 – Death of limited partner

- new provision
- source: Sec. 21 Uniform Limited Partnership Act

Art. 1862 – Charging the interest of a limited partner

- new provision
- source: Sec. 22 Uniform Limited Partnership Act

Art. 1863 – Payment of liabilities of limited partner

- new provision
- source: Sec. 23 Uniform Limited Partnership Act

Art. 1864 – When Certificate is cancelled or amended

- new provision
- source: Sec. 24 Uniform Limited Partnership Act

Cancellation

29
 - when the partnership is dissolved, or when all the limited partners cease to be limited partners, the limited
partners shall be cancelled, not merely amended. The writing to cancel a certificate shall be signed b y all the
members

Art. 1865 – Requisites for amending or canceling the certificate

- new provision
- source: Sec. 25 Uniform Limited Partnership Act

Art. 1866 – When contributors (other than general partners) should be made parties to proceedings

Art. 1867 – Transitional provision on Limited Partnership

- new provision
- source: Sec. 30 Uniform Limited Partnership Act

Nature, Form and Kinds of Agency

Art. 1868

Definition of agency
- a relationship which implies a power in an agent to contract with a third person on behalf of the principal.
- The power to effect the principal’s contractual relations with third persons that differentiates the agent from the
employee, the servant, and the independent contractor

Importance
- enables a man to increase the range of his individual and corporate activity by enabling him to be
constructively present in many places and to carry on divers activities at the same time

Characteristics
a. principal
b. nominate
c. bilateral
d. preparatory
e. commutative
f. generally onerous
g. fiduciary

Nature – a contract
Basis – representation constitutes the basis of agency
Purpose – to extend the personality of the principal through the facility of the agent

Parties:

a. principal
- he whom the agent represents and from whom he derives authority; he is the one primarily concerned in the contract

b. agent
- he who acts or stands for another
- usually, he is given full or partial discretion, but sometimes he acts under a specific command

Elements of Agency

a. there is consent, express or implied, of the parties to establish the relationship;

b. the object is the execution of a juridical act in relation to third persons;
c. the agent acts as a representative and not for himself; and

30
 d. the agent acts within the scope of his authority

Capacity of the Principal

a. capacitated to give consent;
b. natural or a juridical person

Capacity of an Agent
 the same as the law on contracts
- able to bind himself but only insofar as his obligation to his principal is concerned;
- insofar as third persons are concerned, however, it is enough that his principal be the one
capacitated, for generally an agent assumes no personal liability

Distinctions

Agency (A) vs. Partnership (P)

An agent acts not for himself, but for his principal; a partner acts for himself, for his firm, and for his partners. It
may be even said that partnership is a branch of the law on agency.

Agency vs. Loan

An agent may be given funds by the principal to advance the latter’s business, while the borrower is given money for
purposes of his own, and he must generally return it, whether or not his own business is successful. A lot however depends
on the intent of the
parties.

Agency vs. Guardianship

1. The agent represents a capacitated person while the guardian represents an incapacitated person

2. The agent is appointed by the principal and can be removed by the latter while the guardian is appointed by the
court and stands in locos parentis

3. The agent is subject to the directions of the principal while the guardian is not subject to the directions of the ward, but
must of course act for the benefit of the ward.
4. The agent can make the principal personally liable while the guardian has no power to impose personal liability on the
ward.

Agency vs. Judicial Administration

(1) The agent is appointed by the principal while the judicial administrator (JA) is appointed by the court.

(2) The agent represents the principal while the JA represents not only the court but also the heirs and creditors
of the estate.

(3)Agent generally does not file a bond while the JA files a bond.

(4)The agent is controlled by the principal thru their agreement while the acts of the JA are subject to the specific orders
from the court.

Agency from Lease of property

(1)The agent is controlled by the principal while the lease is not controlled by the lessor

(2) The agency may involve things other than property while, obviously, a lease of property involves property only.

31
(3) The agent can bind the principal while the lessee, as such, cannot bind the lessor.

Agency from Lease of Services

1. The agent represents the principal while the lessor of services does not represent his employer
2. relationship can be terminated at the will of either principal or agent while in lease, generally, the relationship
can be terminated only at the will of the both
3. agent exercises discretionary powers while the employee has ministerial functions
4. in agency, it usually involves 3 persons: the principal, the agent, and a stranger while lease of services usually
involves only two persons

NOTE: it should be understood however that an agent may incidentally render acts of service, while a lessor of services
or employee may incidentally make contracts

Agency vs. Contract with an independent contractor

a. the agent acts under the control of the principal, while the independent contractor is authorized to do the
work according to his own method, without being subject to the other party’s control, except insofar as
the RESULT of the work is concerned
b. the agent of the agent may be controlled by the principal while the employees of the contractor are not
the employees of the employer of the contractor
c. agent can bind the principal while ordinarily, the independent contractor cannot bind the employer by
tort
d. the negligence of the agent is imputable to the principal while the negligence if the independent
contractor is generally not imputable to his employer

Agency vs. Negotiorum Gestio

a. in agency there is a contract caused by a meeting of the minds, expressly or impliedly while in negotiorum
gestio, there is only a quasi-contract, there having been no meeting of minds. Hence, the representation
was not agreed upon
b. agent is controlled by the principal while the officious manager follows his judgment and the presumed will
of the owner
c. in agency the legal relation is created by the parties while in negotiorum gestio the legal relationship is
created by law (occasioned of course by the acts of the manager)

Agency vs. Trust

a. an agent usually holds no title at all while the trustee may hold legal title to the property
b. usually, agent acts in the name of the principal while the trustee may act in his own name
c. usually, agency may be terminated or revoked at any time while the trusty is usually ended by the
accomplishment of the purposes for which it was formed
d. agency may not be connected at all with property while trust involves control over property
e. agent has authority to make contracts which will be binding on his principal while trustee does not
necessarily or even possess such authority to bind the trustor or the cestui que trust
f. agency is really a contractual relation while a trust may be the result of the contract or not: it may be
created also by law

Art. 1869 – Kinds of agency

a. according to manner of constitution

 express
- one where the agent has been actually authorized by the principal, either orally or in writing
 implied
- one which is implied from the acts of the principal,
- acts of principal

32
 - principal’s silence
- principal’s lack of action
- principal’s failure to repudiate agency

b. according to form
- oral
- written

c. as to character
 gratuitous
- one where the agent receives no compensation for his services
 compensated or onerous
- one where the agent receives compensation for his services

d. as to extent of business covered

 general – one which comprises all the business of the principal
 special – one which comprises one or more specific transaction

e. as to authority conferred
 couched in general terms – one which is created in general terms and is deemed to comprise only acts of
administration
 couched in specific terms – one authorizing only the performance of a specific act or acts

f. as to its nature and effects

 ostensible or representative – one where the agents acts in the name and representation of the principal
 simple or commission – one where the agent acts in his own name but for the account of the principal

Form of agency
In general, there are no formal requirements governing the appointment of an agent. The agent’s authority
may be oral or written. It may be in public or private writing.

Agency may even be implied from words and conduct of the parties and the circumstances of the particular
case. But agency cannot be inferred from mere relationship or family ties.

Appointment of agent

It is not essential that an agent be appointed directly by the principal, but the appointment may be made
through another, as by referring an applicant to another and representing that he has authority to act, or the relation
may arise out of an agent to employ the agent of the first party.

An agent appointed by the directors of a corporation to act for the corporation is an agent of the corporation
and not of the directors.

Presumption of agency

General Rule:
- agency is generally not presumed. The relationship between the principal and the agent must exist as a fact.

Exception:
- a presumption of agency may arise, however, in those few cases where an agency may arise by operation of
law or to prevent unjust enrichment

Art. 1870 – Form of acceptance by agent

Forms:
a. express
b. implied

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Art. 1871 – Acceptance between persons present

Rules:
Acceptance cannot be implied from the silence of the agent except:
a. transmission of the Power of Attorney by the principal to the agent, who receives it without objection; and
b. principal entrusts to the agent a letter or telegram a Power of Attorney, and he did not reply to the same

Power of Attorney
- an instrument in writing by which one person, as principal, appoints another as his agent and
confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the
principal
- the written authority itself is the power of the attorney and this is clearly indicated by the fact it
has also been called a “letter of attorney.”

Primary Purpose:
- not to define the authority of the agent as between himself and his principal but to evidence the authority of
the agent to the third parties within whom the agent deals; and the person holding the power of attorney is shown and
designated as an “attorney in fact,” thus distinguishing such person from an attorney at law

Construction of powers of attorney:

General Rule: The instrument will be held to grant only those powers which are specified, and the agent may neither go
beyond nor deviate from the power of attorney.

Exception to the Rule: The general rule shall not be applied to the extent of destroying the very purpose of the power.

Art. 1872: Acceptance if the parties are absent:

Rules:
Acceptance of the agency by the agent is not implied from his silence or inaction. Since the agent is not
bound to accept the agency, he can simply ignore the offer.

However, there is implied acceptance if:

1. There is transmission of the Power of Attorney by the principal to the agent, who receives it
without objection.
2. The Principal entrusts to the agent a letter or telegram a Power of Attorney, and he did not reply
to the letter or telegram.

Art. 1873: Ways of Giving notice of Agency

There are two ways of giving notice of agency with different effects:
1. If by special information (by letter), the person appointed as agent is considered such with
respect to the person to whom it was given.
2. If by public advertisement, the agent is considered as such with regard to any person.
In either case, the agency is deemed to exist whether there is actually an agency or not.

Manner of Revocation of Agency:

The power of attorney must be revoked in the same manner in which it was given.
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. 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.

Art. 1874: Sale of Land through Agent

Rule: The authority of the agent shall be in writing in case of sale of a piece of land. Otherwise, the sale is void.

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Art. 1875: Agency presumed to be with compensation

This article changes the rule in the old Civil Code under which an agency was presumed to be gratuitous.
Hence, the agent does not have to prove that the agency is for compensation.

Art. 1876: General vs. Special Agencies

Distinction:
The distinction is based on the scope of the business covered. A General Agency must not be confused with
one couched in general terms which is a special agency when it involves only one or more specific transactions.

CLASSES AND KINDS OF AGENTS:

Agents may be classified as express or implied, according to the manner in which the agency is create; or as
actual or ostensible, with reference to their authority in fact.
According to the nature and extent of their authority agents have been classified into universal, general, and
special or particular.
a. A UNIVERSAL AGENT is one employed to do all acts that the principal may personally do, and which he can
lawfully delegate to another the power of doing.
b. A GENERAL AGENT is one employed to transact all the business of his principal, or all business of a particular
kind or in a particular place, or in other words, to do all acts, connected with a particular trade, business, or
employment.
c. A SPECIAL OR PARTICULAR AGENT is one authorized to act in one or more specific transactions, or to do one or
more specific acts, or to act upon a particular occasion.

The more common special types of agents are the following:

1. Attorney at law, one whose business is to represent client in legal proceedings;
2. Auctioneer, one whose business is to sell property for other to the highest bidder at a public sale;
3. Broker, one whose business is to act as intermediary between two other parties such as insurance
broker and real estate broker; and
4. Factor (synonymous with commission merchant), one whose business is to receive and sell goods for a
commission, being entrusted with the possession of the goods involved in the transaction.

Art. 1877 : Agency couched in general terms

As to the extent of the power conferred, agency may be couched in general terms or couched in specific
terms.
An agency couched in general terms may be a general agency or a special agency. It includes only acts of
administration and an express power is necessary to perform any act of strict ownership

Meaning of Acts of Administration:

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. But, unless the contrary
appears, the authority of an agent is presumed to include all the necessary and usual means to carry out the agency
into effect.

Construction of contracts of agency:

a. Contracts of agency as well as general powers of attorney must be interpreted in accordance with the
language used by the parties
b. The real intention of the parties is primarily to be determined from the language used and gathered from the
whole instrument.
c. In case of doubt, resort must be had to the situation surroundings, and relations of the parties.
d. The intention of the parties must be sustained rather that be defeated.
e. The acts of the parties in carrying out the contract will be presumed to have been done in good faith and in
conformity with and not contrary to the intent of the contract.

Art. 1878: When Special Powers of Attorney are necessary:

35
15 instances:
1. To make payment
2. To effect novation
3. To compromise, etc
4. To waive an obligation gratuitously
5. To convey or acquire immovable
6. To make gifts
7. To loan or borrow money
8. To lease realty for more than 1 year
9. To bind the principal to render service gratuitously
10. To bind the principal in a contract of partnership
11. To obligate principal as guarantor or surety
12. To create or convey real rights over immovable property

Art. 1879: - Special Power to Sell excludes the Power to Mortgage

 Special Power to Mortgage does not include the Power to Sell.

Art. 1880: Scope of special power to compromise

An agent authorized to compromise can do anything which the principal himself can do to effect a settlement,
unless there is a contrary legal provision.
A special power to submit to arbitration does not authorize the power to compromise.

Art. 1881 and Art. 1882:

Definition of the Authority of an Agent

Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance
with the principal’s manifestation of consent to him.

Authority vs. Power

a. as to existence
-the former may be considered the source or cause, while the latter, the effect

note: the power of an agent is also the limitation upon his ability to bind the principal, for it is well settled that an
agent binds his principal only as to acts within his actual or apparent authority

b. as to scope
general rule: the extent of the agent’s authority depends upon the purpose of the agency
- as between the agent and the principal, an act is within the authority of the agent if it is not a violation of his
duty to the principal, and it is within the power if he has the legal ability to bind the p[principal to a third parson although
the act constitutes a violation of his duty to the principal

- so far as third persons are concerned, no distinction exists. An act within the power of the agent is deemed
within the scope of his authority even if the agent has, in fact, exceeded the limits of his authority or he has no authority
whatever to do so

Kinds of authority:
1. actual
2. express
3. implied
4. apparent or ostensible
5. general
6. special
7. authority by necessity or by operation of law
- when it is demanded by virtue of the existence of an emergency; it terminates when the agency has passed

36
Requisites when
1. principal is bound by act of agent
a. agent must act within the scope of his authority; and
b. the agent must act in behalf of the principal

2. not bound by act of agent

a. the latter acts without or beyond the scope of his authority in the former’s name; and
b. the latter acts within the scope of his authority but in his own name, except when the transaction involves
things belonging to the principal

3. principal bound by acts of agent beyond his power

a. where his (principal’s) acts have contributed to deceive third person in good faith;
b. where the limitations upon the power created by him could not have been known by the third person;
c. where the principal has placed in the hands of the agent instruments signed by him in blank; and
d. where the principal has ratified the acts of the agent

Art. 1883 – Kinds of Principal

a. Disclosed Principal
- if at the time of the transaction contracted by the agent, the other party thereto has known that
the agent is acting for a principal and of the principal’s identity.
- This is the usual type of agency
b. Partially Disclosed Principal
- if the other part knows or has reason to know that the agent is or may be acting for a principal
but is unaware of the principal’s identity.
- The par6tially disclosed partner may enforce against the third person the contract of the agent
like any disclosed principal. Similarly, the third has the right of action against the principal
c. Undisclosed Principal
- if the party has no notice of the fact that the agent is acting as such for a principal

 Agency with an undisclosed principal

- the article speaks of a case where the agent was authorized, but instead of acting in behalf of
the principal, he acts in his own behalf
- does not apply if the agent was unauthorized or he acts in excess of his authority

 When authorized agent buys in his own name but really in behalf of principal
- seller has the option to look to either for payment unless:
a. he trusted the agent exclusively;
b. by usage and understanding of business, the agent only is held;
c. unless the special circumstances of the case reveal that the agent was intended to be bound and
the seller knew it, or was chargeable with knowledge of it
 When authority of agent is doubtful
- the action must be directed against both the principal and “agent”

 Regarding things belonging to the principal

- this means that 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 and consequently,
if the obligation belongs to the former, to him alone must also belong the rights arising from the contract

Obligations of the Agent

Art. 1884 – Obligations of agent to principal

General obligations
a. Loyalty to his trust agent’s first duty

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 b. Obedience to principal’s instruction
c. Exercise of reasonable care

Duty of agent to carry out the agency

- an agent who does not carry out the agency is liable for damages; if he fulfills his duty, he is not personally
liable unless he so binds himself

Effect of principal’s death

- extinguishes the agency, but agent is obliged to finish the business already begun if delay should entail
danger

Agent who sells to himself

-an agent who has been authorized to sell some merchandise is not allowed to bind the principal by selling to
himself directly or indirectly.

Art. 1885 – Obligation of person who declines agency

Duty of Owner
a. by appointing an agent
b. by taking charge of the goods

Obligation of person who declines agency

- in the event a person declines an agency, he is still 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.

Art. 1886 – Obligation to advance necessary funds

Rule:
- the principal must advance to the agent, should the latter so request, the sums necessary for the execution of
the agency
- the contract on agency, however, may stipulate that the agent shall advance the necessary funds
- in such case, the agent is bound to furnish such funds except when the principal is insolvent

Art. 1887 – Agent’s duty to follow instructions

Instruction of principal
- private directions which the principal may give the agent in regard to the manner of performing his duties as
such agent

Instructions vs. Authority

a. authority, the sum total of the powers committed or permitted to the agent by the principal, may be
limited in scope and such limitations are themselves a part of the authority, but instructions direct the
manner of transacting the authorized business and contemplates only a private rule of guidance to the
agent and are independent and distinct in character;
b. authority relates to the subject with which the agent is empowered to deal or the kind of business or
transactions upon which he is empowered to act, while instructions refer to the manner or mode of his
action with respect to matters which in their substance are within the scope of permitted action;
c. limitations of authority are operative as against those who have or charged with knowledge of them, while
instructions are without significance as against those dealing with the agent with neither knowledge nor
notice of them; and
d. authority is contemplated to be made known to the third person dealing with the agent, while instructions
are not expected to be made known to those with whom the agent deals

Effects of violation of principal’s instructions:

a. liability of principal to third person
b. liability of agent to principal

38
Obligation to act in accordance with principal’s instructions

a. duty to obey reasonable and lawful instructions

b. liability for the loss or damage
c. duty to act in good faith and with due care
d. exception from liability for failure of undertaking
e. right to disobey principal’s instructions

Justification in case of violation of principal’s instructions

a. sudden emergency
b. ambiguous instructions
c. insubstantial departure

Effect if instructions are followed

- he cannot be held responsible for the failure of his principal to accomplish the objective of the agency unless
the said agent exceeded his authority or has acted with negligence, deceit or fraud

Art. 1888 – When agent shall not carry out agency

- agent must not carry out the agency if its execution would manifestly result in the loss or damage to the
principal
a. agent should exercise due diligence;
b. agent must presumably act for the benefit, and not to the detriment of the principal

manifestly – means that the execution would damage only the principal

Art. 1889 – Obligation by the agent not to prefer his own interest to those of principal

- the article applies whether the agency is onerous or gratuitous for here the law does not distinguish

a. reason for the rule:

- agency being a fiduciary relation, the agent is required to observe with utmost good faith and
loyalty towards his principal
- he is therefore, liable for damages if, there being a conflict between his interest and those of the
principal, he should prefer his own

b. basis:
- the underlying basis of the rule is to shut the door against temptation and keep the agent’s eye
single to the rights and welfare of his principal

c. where agents’ interest are superior

- where the agent’s rights are superior, such as where he has a security interest in goods of the
principal in his possession, he may protect his interest even if in so doing he disobeys the
principal’s orders or injures his interest

Art. 1890 – Obligation of agent not to loan or borrow money to himself

a. if he is expressly empowered to borrow money, he may himself be the lender at the current rate of interest
for there is no danger of the principal suffering any damage since the current rate of interest would have
to be paid in case if the loan were obtained from a third person.
b. If the agent has been authorized to lend money at interest, he cannot be the borrower without the
consent of the principal because the agent may prove to be a bad debtor.

Art. 1891 – Obligation of agent to render accounts

39
Duty to render account:
- the article does not apply to cases of solutio indebiti for in such cases, recovery can be had by the payor
against the agent himself. Therefore, the agent meantime can keep what had been given to him by error

Stipulation exempting agent from duty to account

- void, against public policy because it would be conducive to fraud

Duty to deliver funds

- if nothing in the contract of agency provides otherwise, 1891 imposes on the agent the obligation to deliver to
his principal all funds collected on his account

When obligation to account not applicable

a. if the agent or broker acted only as a middleman with the task of merely bringing together the vendor and
the vendee, who themselves thereafter will negotiate on the terms and conditions of the transaction
b. if the agent or broker had informed the principal of the gift or bonus or profit he received from the
purchaser and his principal did not object thereto
c. where the right of lien exists in favor of the agent

Art. 1892 ; Art. 1893 – Appointment of substitute for the agent

- while ordinarily the agent upon whom the principal has reposed confidence must do the act himself, still the
principal need not fear prejudice for, in some cases, he can still exact responsibility from his agent

Definition of Sub-agent
A person to whom the agent delegates, as his agent, the performance of an act for the principal which the agent has
been empowered to perform through his representative.

Power of agent to appoint sub-agent

Unless prohibited by the principal, the agent may appoint a sub-agent. The agent, in this situation is a principal
with respect to the substitute.

Effects of Substitution.

a. When the substitute is appointed by the agent against the express prohibition of the principal, the agent
exceeds the limits of his authority. All acts of the substitute in such case is VOID.
b. If the agent is given the power to appoint a substitute and the principal did not designate any person to be
appointed, the substitution has the effect of releasing the agent from his responsibility unless the person
appointed is notoriously incompetent or insolvent.
c. If the agent appoints a substitute when he was not given the power to appoint one, the substitution is valid if
the same is BENEFICIAL to the principal.

Art. 1894; Art 1895 : Necessity of concurrence in case of 2 or more agents

Rule: It is advisable that when a principal hires several agents to act for him, he must define their respective powers –
whether that may act only as a unit or whether they may act separately.

Nature of Liability of 2 or more agents to their principal

a. The presumption is that an obligation is joint. The rule in 1894 follows the general principle respecting solidarity.
b. If solidarity has been agreed upon, each of the agents becomes solidarily liable:
a. For the non-fulfillment of the agency even though in this case, the fellow agents acted beyond the
scope of their authority; and
b. For the fault or negligence of his fellow agents provided the latter acted within the scope of their
authority.
c. An agent who exceeds his powers does not act as such agent, and therefore, the principal assumes no liability
to third person.

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Art. 1896 – Liability of Agent for Interest

The article is without prejudice to a criminal action that may be brought because of conversion;
On the other hand, there is no liability for interest on sums which have not been converted for the agent’s own use,
unless of course, at the expiration of the agency, the agent still owed the principal certain sums.

Art. 1897: Duties and liabilities of agent to third persons

Rule: The PRINCIPAL is responsible for the acts of the agent done within the scope of his authority and should bear any
damage caused to third persons.

Third party’s liability towards agent:

 When the agent contracts in his own name for an undisclosed principal.
 Where the agent possesses a beneficial interest in the subject matter of the agency
 Where the agent pays money of his principal to a third party by mistake or under a contract which proves
subsequently to be illegal, the agent being ignorant with respect to its illegal nature; and
 Where the third party commits a tort against the agent.

Art. 1898: Contracts entered into in excess of authority

This article refers only to the liability of the agent towards third persons.
Principal is not bound except if there is subsequent ratification by him.

Art. 1899: Effect of Agent’s Ignorance

It is not enough for the agent to act within the scope of his authority. It is also imperative for such agent to have
complied with the orders and instructions of the principal. If the agent is ignorant, the principal is liable.

Art. 1900: Act performed within Terms of Written Authority.

Designed to protect the interest of third persons.

For the article to apply, the authority must be in writing
Principal may broaden the authority of agent by implication, usage and custom, necessity, by the rule of
ejusdem generis and by certain doctrines

Art. 1901: Effect of Ratification

Ratification in effect grants authority to the agent. The ratification may be in the future. Note also that only the
principal can ratify.

Art. 1902 – Third persons may require the agent to present Power of Attorney or instructions as regards agency.
Third person deals with an agent at his peril. Hence, he is bound to inquire as to the extent of the agent’s
authority, and this is especially true where the act of the agent is of an unusual nature.

Art. 1903 : Commission / Factor Agent

A factor or Commission Agent is one whose business is to receive and sell goods for a commission (factorage)
and who is entrusted by the principal with the possession of goods to be sold, and usually selling in his own name.

Liability of commission agent as to goods received:

The commission agent is responsible for any damage or deterioration suffered by the same in the terms and
conditions and as described in the consignment. To avoid liability, the commission agent should make a written
statement of the damage or deterioration if the goods received by him do not agree with the description in the
consignment.

Art. 1904 – Duty of Commission Agent to place Countermarks

Reason: To put countermarks and designate them is employed to AVOID CONFUSION OR DECEPTION.

41
Art. 1905 – Sale by the Commission Agent on Credit.
General Rule: Commission Agent cannot sell on credit.
Exception: When there is an express or implied consent of the Principal.

Art. 1906 – Obligation of Commission Agent where sale on credit is authorized

An authorized sale on credit shall be deemed to have been on a cash basis insofar as the principal is
concerned, upon failure of the agent to inform the principal of such sale on credit with a statement of the names of the
buyers.

Art. 1907 – Guarantee Commission

Guarantee Commission (or del credere commission) is one where, in consideration of an increased commission, the
factor or commission agent guarantees to the principal the payment of debts arising through his agency

Nature of liability of a del credere agent

Del credere agents is liable to the principal if the buyer fails to pay or is incapable of paying. But he is not
primarily the debtor. The liability of the del credere agent is a contingent pecuniary liability.

Art. 1908: Obligation of Commission Agent to collect credits of Principal

A commission agent who has made an authorized sale on credit must collect the credits due the principal at
the time they become due and demandable. If he fails to do so, he shall be liable for damages unless he can show that
the credit cannot be collected notwithstanding the exercise of due diligence on his part.

Art. 1909: Liability of Agent for FRAUD and NEGLIGENCE

The agent is responsible to the principal not only for fraud committed by him but also for negligence.

OBLIGATIONS OF THE PRINCIPAL

Art. 1910: Obligations, in general, of the Principal to Agent.

The duties and liabilities of the principal are primarily based upon the contract and the validity of the contract
between them. In addition to his contractual duties, the principal is under an obligation to deal fairly and in good faith
with his agent.

Art. 1911: Estoppel

Estoppel is a bar which precludes a person from denying or asserting anything contrary to that which has been
established as the truth by his own deed or representation either express or implied.

When the Principal is in estoppel, therefore innocent third persons should not be prejudiced.

RATIFICATION vs ESTOPPEL
Ratification differs from estoppel mainly in that the former rests on intention, express or implied, regardless of
prejudice to another, whereas estoppel rests on prejudice rather than intention.

Apparent authority vs. authority by estoppel

Apparent authority is that which though not actually granted, the principal knowingly permits the agent to
exercise or holds him out as possessing. Authority by estoppel arises in those cases where the principal , by his culpable
negligence, permits his agent to exercise powers not granted to him, even though the principal may have no notice or
knowledge of the conduct of the agent.

Liability of Principal because of Estoppel

-instance when solidarity is imposed by la -principal is in estoppel and therefore innocent third parties
should not be prejudiced

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Art. 1912
In the absence of stipulation that the agent shall advance the necessary funds, the principal must advance to
the agent upon his request the sums necessary for the execution of the agency .
Even if the agency is gratuitous,1912 will also apply; hence, the agent will still be entitled to reimbursement

Art. 1913
Obligation of the principal to reimburse agent for damages
Article is based on equity, and applies even if the agency is gratuitous.

Art.1914
Right of agent to retain by way of pledge
-speaks of one kind of pledge—pledge by operation of law

Nature of agent’s right of lien

(1)Right limited to subject matter of agency
(2) Right acquires possession by agent of subject matter
(3) In the absence of a ratification of a sub-agent’s acts by the principal, right generally
only in favor of the agent.

Art.1915
Solidarity liability of principals
Solidarity is the rule under 1915 because of the common transaction (even if the agent have been appointed
separately).

Requisites for solidarity liability

(1)There are two or more principals;
(2)The principals have all concurred in the appointment of the same agent; and
(3)The agent is appointed for a common transaction or undertaking.

Art.1916
-the article is subject, however, to the rules under art. 1544.

Art. 1917
Liability to third persons of agent or principal who contracts separately
-if agent is in good faith, the principal shall be liable in damages to third persons whose contract must be
rejected.
-agent alone in bad faith is solely responsible

Art.1918
In four cases provided in this article, the principal I not liable for expenses incurred by the agent.

Reasons :
Under no.1, is to punish the agent; for the exception, the acceptance of benefits is implied ratification;
Under no.2, it is self-evident;
Under no.3 the agent is guilty of bad faith and lack of diligence; and
Under no.4, an express stipulation which is not contrary to law, morals, good customs, public order, or public policy is
binding between the parties

IV. Modes of Extinguishment of Agency

Art. 1919 – How agency is extinguished

a. revocation;
b. withdrawal of the agent;
c. death, civil interdiction, insanity or insolvency of the principal or agent;

43
 d. dissolution of the firm or corporation
e. accomplishment of the object or purpose of the agency;
f. expiration of the period

General Classification of modes of extinguishment:

a. by agreement – nos. 5 and 6
b. by the act of both the parties or by mutual consent
c. by the unilateral act of one of them – nos. 1 and 2
d. by operation of law – nos. 3 and 4

note: presence, capacity, and solvency of parties are essential for continuance of agency

 Presumption of continuance of agency

- when once shown to have existed, an agency relation will be presumed to have continued, in the absence of anything
to show its termination; and the burden of proving a revocation or other termination of an agency is on the party
asserting it

Art. 1920 – Revocation of agency by principal

Reason:
- agency is generally irrevocable at the will of the principal because the trust and confidence may have been
lost

Revocation at will is proper even if:

a. agency is onerous
b. the period fixed has not yet expired

When agency cannot be revoked at will

- when it is coupled with interest
- in relation to 1927
- when there has been a waiver by the principal
- when principal is not obliged to revoke
- when revocation is done in bad faith

Gen. Rule:
- when revocation is proper, the agent cannot get damages because the principal is merely exercising a right

Liability of principal caused by revocation

-he just respond in damages in those cases wherein not having the right to do so, he should discharge the
agent

Kinds of revocation
- express or implied

Necessity of notice of revocation

a. to agent
b. to third persons

Renunciation of agency by agent

a. agency terminable at will subject only to the contractual obligations owing to the principal
b. Reason:
- where the agent terminates the agency in violation of a contract, the principal has no right to affirmative specific
performance of the agency for the essence of the relationship is consensual – the willingness of the agent to act for the
principal

Art. 1921 - 22 – Effect of revocation in relation to third persons

44
 a. agent authorized to contract with specified persons
- its revocation will not prejudice such third persons until notice thereof is given to the same
Reason: since the third parties have been made to believe by the principal that the agent is authorized to deal with
them, they have a right to presume that the representation continues to exist in the absence of notification by the
principal

Agency for contracting with specified persons;

a. so that third parties may not be prejudiced, the principal who fails to give the notification can be held
liable for damages
b. no notice is required for persons who already know of the revocation for then the purpose of the
notification shall have been served

Art. 1923 – Appointment of new agent for the same business

a. appointment of a new revokes the first agency only in case of incompatibility;

b. a special power revokes a general one;
c. if the agent is not notified of the appointment of the second agent, it is understood that the first agency
still exists

 appointment of new agent is an IMPLIED REVOCATION of the previous agency from the day on
which notice was given thereof.

Art. 1924 – Revocation by direct management of business by the principal himself

Effect:
a. in case of true inconsistency, the agency is revoked, for there would no lo0nger be any basis therefore
b. another case of implied revocation

Art. 1925 – Revocation by 1 of two or more principals

Effect:
- the power to revoke is a consequence of the solidary liability of the principals
- any of the principals may revoke without the consent of the others

Art. 1926 – Partial revocation of general power by a special power

Requirements for application:

a. two agents are involved;
b. a specific right naturally prevails over a general one

 the general power is impliedly revoked as to matters covered by the special power.
 It is indispensable that notice of the revocation be communicated in some way to the agent

Art. 1927 – When agency not revocable

General rule: agency may be revoked at the will of the principal

Exceptions:
a. when the agency is created not only for the interest of the principal and the agent; and
b. when the agency is created for the mutual interest of both the principal and the agent

Art. 1928 – Right of agent to withdraw from the agency

Withdrawal by agent
- reasons of health can justify withdrawal

Effect when agent sues principal

45
 a. will not ordinarily permit the continuation of the agency;
b. such a complaint will be equivalent to withdrawal of the agent from the agency
Kinds of withdrawal:
a. without just cause
- the law imposes upon the agent the duty to give due notice to the principal and if the withdrawal is without just cause,
to indemnify the principal should the latter suffer damage by reason of such withdrawal
b. with just cause
- if the withdrawal is with a valid reason, the agent cannot be held liable

Art. 1929 – Obligation of agent to continue to act after withdrawal

Reason: to prevent damage to the principal

Art. 1930 – When death of principal does not terminate agency

Instances when death does not affect agency:

a. if the agency has been constituted in the common interest of the principal and the agent; and
b. if it has been constituted in the interest of a third person who has accepted the stipulation in his favor

Art. 1931 – Nature of agent’s authority after the death of the principal

* the law requires that there must be good faith

- the death of the principal extinguishes the agency; but in the same way that revocation of the agency does
not prejudice persons who have dealt with the agent in good faith without notice of the revocation

Art. 1932 – Death of agent

Duty of agent’s heirs:

a. the heirs duty to continue the agency after the death of the agent arises from what may be termed as an
agency by operation of law or a presumed tacit agency
- only temporarily
b. where the agency is one coupled with an interest in the subject matter of agency, the death of the agent will not
instantly end the relationship, and consequently, his heirs or representatives may subsequently exercise the power
conferred at least insofar as may be necessary to protect the estate of the agent

Effect of agent’s death in case agency coupled with an interest

- generally, the agent’s death terminates the agency for it should not be continued by one upon whom the
principal has reposed no confidence

Continuation by agent’s heirs of agency

General rule:
- an agency calls for personal services. Ordinarily, therefore, the agent’s duties cannot be performed by his
personal representatives, and in case of death, the agency is generally thereby terminated

exceptions:
see duty of agent’s heirs

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