Notes on Partnership and Agency
The freedom to establish such
PRELIMINARY CONSIDERATIONS
Review of the Law on Contracts
Statutory definition of a contract: A contract is a
meeting of minds between two persons whereby
one binds himself, with some respect to the other,
to give something or to render some service (Article
1305, New Civil Code).
 Effect: In effect, obligations arising from
contracts have the force of law between the
contracting parties and should be complied
with in good faith (Article 1159, NCC).
Essential elements (COC):
1. Consent. It is the conformity or
concurrence of wills (offer and acceptance)
and with respect to contracts, it is the
agreement of the will of one contracting
party with that of another or others, upon
the object and terms of the contract (De
Leon). In the Philippines, the theory of
cognition is followed. This means that the
offer and the acceptance concur only when
the offeror comes to know, and not when
the offeree merely manifests his
acceptance.
2. Object. It is the subject matter of the
contract.
3. Consideration/Cause. It is the “why” of the
contract.
Form: Contracts are obligatory in whatever form
they may have been entered into, provided that all
the essential requisites for their validity are present.
However, when the law requires that a contract be
in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain
way, that requirement is absolute and indispensable.
Principal characteristics of contracts (AMOR = love)
Morc’s Notes on Partnership and Agency
1. Autonomy.
stipulations, clauses, terms and conditions
as the parties may deem convenient.
However, the stipulations should not
contravene law, morals, good customs,
public order or public policy (Article 1306,
NCC).
2. Mutuality. Validity or compliance binds
both parties and cannot be left to the will of
one of them (Article 1308).
3. Obligatory force and consensuality.
Contracts are perfected by mere consent,
and from that moment, the parties are
bound not only to the fulfillment of what
has been expressly stipulated but also to all
the consequences which, according to their
nature, may be keeping with good faith,
usage and law (Article 1315).
4. Relativity. Contracts, as a general rule, take
effect only between the parties, their
assigns and heirs (Article 1311).
History of Partnership as a business organization
According to Professor Rowley (1916), the earliest
form of partnership was that of the first man and
first woman who joined forces against the elements
and the dangers while they gave one another mutual
protection and assistance. He described such
partnership as the rudest sort, with no laws
governing the subject except the law of the
strongest arm, the quickest eye, and the heaviest
club.
De Leon and De Leon (2010) have noted that,
between 3,000 BC and 1,000 BC at the time of
Babylonian civilization, people have learned to pool
their resources to a common fund. Hence,
Hammurabi provided for the regulation of
partnerships in his compilation of the system of laws
during that time. It can be gainsaid therefore that
the idea of forming partnerships was undoubtedly
practiced from the earliest time among those
individuals who did not have sufficient capitals and
not in a position to conduct business or to undertake
certain enterprises singly (Espiritu, 1918).
Page 1
However, most authors including De Leon, have Citing Professor Rowley’s work, Mendiola (1919)
credited the development of partnership as a form wrote that partnership as a legal relation is a
of business organization to the Romans, hence were product of the Babylonian partnership, modified by
regulated by Roman law (Paras; Villanueva). Jewish, and civil and common law.

During the Industrial Revolution in England, Philippine Law on Partnership

incorporations were restricted by the Parliament
through the criteria of “public policy.” Potential Spanish Influence
competitors of petitioners raised their objections to
1. There were two kinds of relationships, to
petitions for incorporation, framed in public interest
wit: commercial/mercantile partnerships
language but certainly aimed to further their
and civil partnerships.
interests as objectors. As a result, petitions were
a. Commercial or mercantile
frequently rejected. It was noted that firms that
partnerships are those which dealt
were successful in obtaining a charter were often in
in mercantile transactions and
industries that required a large lump sum capital and
governed by the Code of
additional legal privileges. More so, when firms
Commerce. In this kind of legal
ventured into unincorporated joint stock companies
relation, registration is absolutely
as substitute for incorporation, the Parliament
necessary to be complied with,
passed the Bubble Act which sought to restrict the
otherwise the association does not
formation of unincorporated joint stock companies.
become a juridical entity. As to
Furthermore, stock markets and financial
liability, commercial partners are
intermediaries had yet to catch up with the
jointly and severally liable for the
functionality offered by the legal system, aside from
whole debt of the firm after the
the absence of a comprehensive securities
firm’s assets have been exhausted
regulation scheme. From such circumstances
by the creditors.
contemporaneous during that time, some
b. Civil partnerships are those which
entrepreneurs have ventured into partnerships
engage in civil purposes and are
despite the business organization’s legal
governed by the Old Civil Code. In
characteristics (Bubb, 2015).
this kind of legal relation, no
It can be supposed that partnerships are but an registration is needed to give the
offshoot of entrepreneurship. Entrepreneurship can firm a legal personality. As to
be traced back when people began to dispose their liability, civil partners are only
surpluses. As people learned to specialize, they liable pro rata to the amount of
began to trade their own produce for others’ their contributions to the firm’s
produce and crafts (Small Enterprises Research and capital for the partnership debt.
Development Foundation, 1998). In the long run, as
Note: The classification was criticized for having no
trade relations became more complex and additional
clear-cut distinction. An author remarked that such
capital were needed, a sole proprietorship
absurdity is brought about by their common
transformed into a partnership (Rodriguez &
purpose: obtain profits.
Echanis, 2001). This, in turn, permitted
combinations of capital and experience (De Leon & 2. A partnership has a juridical personality of
De Leon, 2010; Espiritu, 1918). its own, distinct and separate from that
each of the partners.
Evolution of Law on Partnership
American influence

Morc’s Notes on Partnership and Agency Page 2

 1. The doctrine of estoppel
a. As culled from The Uniform
Partnership Act, persons who are
not persons as to each other are
partners as to third persons.
2. Provisions on limited partnerships. Chapter
4, which covers Articles 1843 to 1867, was
adopted with appropriate amendments
from the Uniform Limited Partnership Act.
According to the Code Commission, the
provisions on limited partnerships in the
Code of Commerce were considered too
meager and inadequate to govern such
juridical institution.
3. Since a substantial portion of Philippine
Partnership Law is derived from US laws, US
case laws which interpret and apply the
adopted provisions are highly persuasive
(Casis, 2011).
New Civil Code
1. With the advent of the New Civil Code, the
provisions of the Code of Commerce
relating to commercial partnerships have
been repealed. Hence, it did away with the
distinction between commercial and civil
partnerships. Under the NCC, the
partnerships contemplated are those
formed for private interest or purpose
under Article 45. More so, the Code now
governs all transactions of all partnerships,
whether the object be civil or commercial.
2. Under Article 46 of the NCC, a partnership,
being a juridical person, have rights, to wit:
a. Right to acquire and possess
property of all kinds;
b. Right to incur obligations; and,
Article 1767: Statutory Definition of Partnership
c. Right to bring civil or criminal
actions.
In the case of Smith Bell v. Navarro, the Supreme
Court recognized that juridical persons are entitled
to constitutional rights and guarantees. It
elucidated:
Morc’s Notes on Partnership and Agency
“Private corporations are ‘persons’ within
the scope of the guaranties in so far as their
property is concerned. It is but an
association of individuals under an assumed
name and with a distinct legal entity. In
organizing itself as a collective body, it
waives no constitutional immunities
appropriate for such body. Its property
cannot be taken without compensation. It
can only be proceeded against by due
process of law and is protected against
unlawful discrimination.”
“In the partnership setting, there is closer
identity between the partners and the
partnership in the sense that the partners
not only own the partnership and its affairs
and they directly manage the affairs of the
partnership, but more so that the separate
juridical personality is closely identified with
the personality of the partners under
delectus personae considerations.”
“It is understandable that a corporation,
which has no heart, feels no pain and no
soul that can be damned, cannot be
expected to be entitled to the constitutional
right against self-incrimination. It is quite
different in the case of partnership since its
person is merely an extension of the group
of partners, who having come together in
business, and acting still for such business
enterprise, could not be presumed to have
waived their individual right against self-
incrimination.”
GENERAL PROVISIONS
By the contract of partnership two or more
persons bind themselves to contribute
money, property, or industry to a common
fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a
partnership for the exercise of a profession.
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Characteristic elements of partnership: power, although not necessarily the right,
to dissolve the partnership. Verily, any one
1. It is a contract whereby two or more of the partners may, at his sole pleasure,
persons bind themselves to contribute dictate a dissolution of the partnership at
money, property or industry to a common will. However, he must act in good faith,
fund, with the intention of dividing the not that the attendance of bad faith can
profits among themselves, or in order to prevent the dissolution of the partnership
exercise a profession. but that it can result in a liability for
damages.
Being a contract, it has the following
characteristics: Can a partnership be created by operation of law?
No. As defined, a partnership is a contract; hence, it
a. It is consensual,
cannot be created by operation of law.
bilateral/multilateral, nominate,
principal, onerous and Essential features of partnership:
preparatory;
b. It consists of a contribution of 1. There must be a valid contract;
money, property or industry to a 2. The parties must have legal capacity to
common fund; enter into contract;
c. Object is a lawful one; 3. There must be a mutual contribution of
d. There is an intention of dividing money, property, or industry to a common
the profit among the partners; fund (existence of proprietary interest);
and, 4. The object must be a lawful one; and,
e. There is a desire to formulate an 5. The primary purpose must be to obtain
active union (affectio societatis). profits and to divide the same among the
parties.
2. The doctrine of delectus personae. Roughly,
it refers to mutual trust and confidence. As Distinctions:
defined by Villanueva (2012), the doctrine
Partnership Corporation
of delectus personae is that the contract of
It is created by voluntary It is created by the State
partnership creates the most personal
agreement of the in the form of a special
relationship between and among the
parties. charter or by a general
partners which when broken, also breaks
enabling law.
the bond of the partnership. It emphasizes
There is no time limit Not more than fifty
the personal-contractual relationship
except agreement of years; may be reduced,
between and among the partners as being
parties. but never extended.
more important than the property rights
It may be liable to It is liable only for
and the business enterprise created in the
strangers with their payment of their
partnership.
private property beyond subscribed capital stock.
Neither would the presence of a period for their contribution to the
its specific duration or the statement of a firm.
particular purpose for its creation prevent Even if a partner A transfer of interest
the dissolution of any partnership by an act transfers his interest to makes the transferee a
or will of a partner. Among partners, another, the transferee stockholder, even
mutual agency arises and the doctrine of does not become a without the consent of
delectus personae allows them to have the partner unless all other others.

Morc’s Notes on Partnership and Agency Page 4

partners consent.
Generally, partners Generally, the
acting on behalf of the stockholders cannot bind
partnership are agents the corporation since
thereof; consequently, they are not agents
they can bind both the thereof.
firm and the partners.
A partner can sue a A stockholder cannot
partner who sue a member of the
mismanages. board of directors who
mismanages: the action
must be in the name of
the corporation.
A partnership is a A corporation is a
national of the country it national of the country
was created. 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
corporate identity is
pierced and we go to the
nationality of the
controlling stockholders.
The firm becomes a The firm becomes a
juridical person from the juridical person from the
time contract begins. time it is registered in
the SEC, and all
requisites have been
complied with.
Causes of dissolution: Such causes do not
death, retirement, dissolve a corporation.
insolvency, civil
interdiction, or insanity
of a partner.
Ordinary Partnership Conjugal partnership of
gains
It is created by the will It is created by operation
or consent of the parties. of law upon the
celebration of the
Morc’s Notes on Partnership and Agency
marriage.
In general, the law which In general, it is the law
governs is the will of the that governs.
parties. The law is only
subsidiary.
It possesses a legal It does not possess any
personality. legal personality distinct
from that of the husband
or wife; hence, it cannot
sue or be sued as such.
It begins from the It commences precisely
moment of the on the date of the
execution of the contract celebration of the
but a contrary marriage and no
stipulation is allowed. contrary stipulation is
allowed.
It is formed for profit. It is not formed
particularly for profit.
As a rule, profits are As a rule, profits are
divided according to divided equally, but
previous agreement; and settlement can provide
if there is no agreement, otherwise.
in proportion to the
amount contributed.
As a rule, management is As a rule, the
conferred upon the administration and
partners so appointed by enjoyment of the
others; otherwise, all are conjugal partnership
equally considered property belong to both
agents of the firm. spouses jointly.
There are many grounds There are few grounds
for dissolution. for dissolution.
There may be division of There will be no
profits even without liquidation or giving of
dissolution. profits till after
dissolution.
Partnership Co-ownership
It is created by contract Created by contract, law
only. and other things.
It has legal or juridical It has no juridical
personality. personality.
It is for profit. It is for the collective
enjoyment.
As a rule, there is mutual As a rule, there is no
representation. mutual representation.
Cannot substitute Can dispose of his share
another as partner in his without the consent of
place, without the others.
Page 5
unanimous consent.
No term limit is set by Must not be more than
law. 10 years, although
agreement after
termination may be
renewed.
Profits may be stipulated Profits must always
upon. depend on
proportionate shares.
It is dissolved by death It is not dissolved by the
or incapacity of a death or incapacity of a
partner. co-owner.
It may be made in any No public instrument is
form except when real needed even if real
property is contributed. property is the object.
Partnership Agency
A partner is both a An agent never acts for
principal and an agent himself, but only for his
for the firm and the principal.
others.
Partnership Joint Stock Company
It is an association of It is association of
persons. capital.
Capital is not divided Although a special form
into shares. of partnership, its capital
is divided into shares,
like in a corporation.
Generally, all the Generally, management
partners are involved in is with the board of
the management of the directors.
enterprise.
Partners may be liable Liability of the members
with their individual is only up to the extent
properties after the of their shares if such is
exhaustion of what the statute
partnership assets. provides.
Transferee of the Transferee of the
partner’s share does not member’s shares himself
become a partner unless becomes a member
all the partners consent. without any necessity of
consent from the other
members.
Morc’s Notes on Partnership and Agency
Partnership Labor Union
Its purpose is essentially Its purpose is for
to enable its members, collective bargaining or
as principals, to conduct of dealing with
a lawful business, trade employers concerning
or profession for terms and conditions of
pecuniary gain of employment.
partners.
No one may become a Consent of all partners is
partner without consent not necessary for one to
of all partners. become a member, as
one simply needs to pay
membership fees.
However, the law
enumerates those who
cannot join labor unions.
Partnership Trust
All of the members are The trustee is only a
principals and are agents principal and is not an
of each other. agent. Only the trustee
and not the beneficiaries
is empowered to make
contracts to carry on the
business affairs and the
only one who has legal
title to the property.
Paragraph 2 relates to the exercise of a profession.
Strictly speaking, the practice of a profession is not a
business or an enterprise for profit. However, the
law allows the joint pursuit thereof by two or more
persons as partners. In such case, it is the individual
partners, and not the partnership, who engages in
the practice of the profession and are responsible
for their own acts as such.
Under Section 22 of the National Internal Revenue
Code, the term “corporation” includes partnerships,
no matter how created or organized, joint-stock
companies, joint accounts, association, or insurance
companies, but does not include general
professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to
Page 6
an operating consortium agreement under a service
contract with the Government. General professional
partnerships are partnerships formed by persons for
the sole purpose of exercising their common
profession, no part of the income of which is derived
from engaging in any trade or business.
Is there a conflict between the two? In reconciling
the two provisions, the Civil Code merely defined the
partnership as a contract, its composition,
enumerated the types of contribution, and the
purpose. Insofar as the NIRC is concerned, while it
did not categorically define the partnership, it means
that the tax treatment of the partnership shall be
that of the corporation mentioned in the Code
(Chavez).
Classifications of partnership:
1. As to the extent of its subject matter:
a. Universal partnership. It is one
which refers to all present
property or to all profits.
b. Particular partnership. It is one
which has for its object
determinate things, their use or
fruits, or specific undertaking, or
the exercise of a profession or
vocation.
2. As to liability:
a. General partnership. It is one
consisting of general partners who
are liable pro rata and subsidiarily
and sometimes solidarily, with
their separate property for
partnership debt.
b. Limited partnership. It is one
formed by two or more persons
having as members one or more
general partners and one or more
limited partners, the latter not
being personally liable for the
obligations of the partnership.
3. As to its duration:
a. Partnership at will. It is one in
which no time is specified and is
not formed for a particular
Morc’s Notes on Partnership and Agency
undertaking or venture and which
may be terminated at anytime by
mutual agreement of the partners,
or by the will of any one partner
alone; or one for a fixed term or
particular undertaking which is
continued by the partners after the
termination of such term or
particular undertaking without
express agreement.
b. Partnership with a fixed term. It is
one which the term for which the
partnership is to exist is fixed or
agreed upon or formed for a
particular undertaking, and upon
the expiration of the term or
completion of the particular
enterprise, the partnership is
dissolved, unless continued by the
partners.
4. As to the legality of its existence:
a. De jure partnerships. It is one
which has complied with all the
legal requirements for its
establishment.
b. De facto partnerships. It is one
which has failed to comply with all
the legal requirements for its
establishment.
5. As to representation to others:
a. Ordinary or real partnership. It is
one which actually exists among
the partners and also to third
persons.
b. Ostensible partnership or
partnership by estoppel. It is one
which in reality is not a
partnership, but is considered a
partnership only in relation to
those who, by their conduct or
admission, are precluded to deny
or disprove its existence.
6. As to publicity:
a. Secret partnership. It is one
wherein the existence of certain
persons as partners is not avowed
Page 7
 or made known to the public by
any of the partners.
b. Open or notorious partnership. It
is one whose existence is avowed
or made known to the public by
the members of the firm.
7. As to its purpose:
a. Commercial or trading partnership.
It is one formed for the transaction
of business.
b. Professional or non-trading
partnership. It is one formed for
the exercise of a profession.
Cases:
 Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., GR 136448, November 3,
1999
On the existence of a partnership:
Specifically, both lower courts ruled that a
partnership among the three existed based on the
following factual findings:
1. That Petitioner Lim Tong Lim requested
Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was
already Yao’s partner;
2. That after convening for a few times, Lim
Chua, and Yao verbally agreed to acquire
two fishing boats, the FB Lourdes and the FB
Nelson for the sum of P3.35 million;
3. That they borrowed P3.25 million from
Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.
4. That they bought the boats from CMF
Fishing Corporation, which executed a Deed
of Sale over these two (2) boats in favor of
Petitioner Lim Tong Lim only to serve as
security for the loan extended by Jesus Lim;
5. That Lim, Chua and Yao agreed that the
refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats
would be shouldered by Chua and Yao;
Morc’s Notes on Partnership and Agency
6. That because of the unavailability of funds,
Jesus Lim again extended a loan to the
partnership in the amount of P1 million
secured by a check, because of which, Yao
and Chua entrusted the ownership papers
of two other boats, Chua’s FB Lady Anne
Mel and Yao’s FB Tracy to Lim Tong Lim.
7. That in pursuance of the business
agreement, Peter Yao and Antonio Chua
bought nets from Respondent Philippine
Fishing Gear, in behalf of "Ocean Quest
Fishing Corporation," their purported
business name.
8. That subsequently, Civil Case No. 1492-MN
was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim
Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of
contracts; (c) declaration of ownership of
fishing boats; (d) injunction; and (e)
damages.
9. That the case was amicably settled through
a Compromise Agreement executed
between the parties-litigants the terms of
which are already enumerated above.
From the factual findings of both lower courts, it is
clear that Chua, Yao and Lim had decided to engage
in a fishing business, which they started by buying
boats worth P3.35 million, financed by a loan
secured from Jesus Lim who was petitioners
brother. In their Compromise Agreement, they
subsequently revealed their intention to pay the
loan with the proceeds of the sale of the boats, and
to divide equally among them the excess or loss.
These boats, the purchase and the repair of which
were financed with borrowed money, fell under the
term common fund under Article 1767. The
contribution to such fund need not be cash or fixed
assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or
profit from the sale and operation of the boats
would be divided equally among them also shows
that they had indeed formed a partnership.
Page 8
Moreover, it is clear that the partnership extended
not only to the purchase of the boat, but also to that
of the nets and the floats. The fishing nets and the
floats, both essential to fishing, were obviously
acquired in furtherance of their business. It would
have been inconceivable for Lim to involve himself
so much in buying the boat but not in the acquisition
of the aforesaid equipment, without which the
business could not have proceeded.
Given the preceding facts, it is clear that there was,
among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the
boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from
the sales and operations thereof would be divided
among them.
Partner vs. Lessor
Verily, as found by the lower courts, petitioner
entered into a business agreement with Chua and
Yao, in which debts were undertaken in order to
finance the acquisition and the upgrading of the
vessels which would be used in their fishing
business. The sale of the boats, as well as the
division among the three of the balance remaining
after the payment of their loans, proves beyond cavil
that F/B Lourdes, though registered in his name, was
not his own property but an asset of the partnership.
It is not uncommon to register the properties
acquired from a loan in the name of the person the
lender trusts, who in this case is the petitioner
himself. After all, he is the brother of the creditor,
Jesus Lim.
We stress that it is unreasonable indeed, it is absurd
for petitioner to sell his property to pay a debt he
did not incur, if the relationship among the three of
them was merely that of lessor-lessee, instead of
partners.
 Pascual v. CIR, GR 78133, October 18, 1988
On how a partnership is established
The sharing of returns does not in itself establish a
partnership whether or not the persons sharing
Morc’s Notes on Partnership and Agency
therein have a joint or common right or interest in
the property. There must be a clear intent to form a
partnership, the existence of a juridical personality
different from the individual partners, and the
freedom of each party to transfer or assign the
whole property.
 Evangelista v. CIR, L-9996, October 15, 1957
Pursuant to this article, the essential elements of a
partnership are two, namely: (a) an agreement to
contribute money, property or industry to a
common fund; and (b) intent to divide the profits
among the contracting parties. The first element is
undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund.
Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts
and circumstances surrounding the case, we are fully
satisfied that their purpose was to engage in real
estate transactions for monetary gain and then
divide the same among themselves, because:
1. Said common fund was not something they
found already in existence;
2. They invested the same, not merely in one
transaction, but in a series of transactions;
3. The affairs relative to said properties have
been handled as if the same belonged to a
corporation or business enterprise operated
for profit;
4. The foregoing conditions have existed for
more than 10 years, or, to be exact, over 15
years, since the first property was acquired,
and over 12 years, since Simeon Evangelista
became the manager; and,
5. Petitioners have not testified or introduced
any evidence, either on their purpose in
creating the set-up already adverted to, or
on the causes for its continued existence.
Although, taken singly, they might not suffice to
establish the intent necessary to constitute a
partnership, the collective effect of these
circumstances is such as to leave no room for doubt
on the existence of said intent in petitioners herein.
Page 9
Only one or two of the aforementioned
circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in
point.
 Estanislao v. CA, L-49982, April 27, 1988
The Joint Affidavit of April 11, 1966 (Exhibit A),
clearly stipulated by the members of the same family
that the P15,000.00 advance rental due to them
from Shell shall augment their "capital investment"
in the operation of the gasoline station. Moreover
other evidence in the record shows that there was in
fact such partnership agreement between the
parties. This is attested by the testimonies of private
respondent Remedios Estanislao and Atty. Angeles.
Petitioner submitted to private respondents periodic
accounting of the business. Petitioner gave a written
authority to private respondent Remedios
Estanislao, his sister, to examine and audit the books
of their "common business" (aming negosyo).
Respondent Remedios assisted in the running of the
business. There is no doubt that the parties hereto
formed a partnership when they bound themselves
to contribute money to a common fund with the
intention of dividing the profits among themselves.
The sole dealership by the petitioner and the
issuance of all government permits and licenses in
the name of petitioner was in compliance with the
afore-stated policy of Shell and the understanding of
the parties of having only one dealer of the Shell
products.
 Heirs of Lim v. Lim, GR 172690, March 3,
2010
A partnership exists when two or more persons
agree to place their money, effects, labor, and skill in
lawful commerce or business, with the
understanding that there shall be a proportionate
sharing of the profits and losses among them. A
contract of partnership is defined by the Civil Code
as one where two or more persons bind themselves
to contribute money, property, or industry to a
common fund, with the intention of dividing the
profits among themselves.
Morc’s Notes on Partnership and Agency
Undoubtedly, the best evidence would have been
the contract of partnership or the articles of
partnership. Unfortunately, there is none in this
case, because the alleged partnership was never
formally organized.
A careful review of the records persuades us to
affirm the CA decision. The evidence presented by
petitioners falls short of the quantum of proof
required to establish that: (1) Jose was the partner
and not Elfledo; and (2) all the properties acquired
by Elfledo and respondent form part of the estate of
Jose, having been derived from the alleged
partnership.
Agreeing with the findings of the CA, the Court
rendered:
It is notable too that Jose Lim died when the
partnership was barely a year old, and the
partnership and its business not only
continued but also flourished. If it were true
that it was Jose Lim and not Elfledo who was
the partner, then upon his death the
partnership should have been dissolved and
its assets liquidated. On the contrary, these
were not done but instead its operation
continued under the helm of Elfledo and
without any participation from the heirs of
Jose Lim.
Whatever properties appellant and her
husband had acquired, this was through their
own concerted efforts and hard work. Elfledo
did not limit himself to the business of their
partnership but engaged in other lines of
businesses as well.
 Sevilla v. CA, GR 41182-83, April 15, 1988
Employer-employee relationship vs. partnership vs.
agency
The records will show that the petitioner, Lina
Sevilla, was not subject to control by the private
respondent Tourist World Service, Inc., either as to
the result of the enterprise or as to the means used
in connection therewith. In the first place, under the
Page 10
contract of lease covering the Tourist Worlds Ermita
office, she had bound herself in solidum as and for
rental payments, an arrangement that would be like
claims of a master-servant relationship. True the
respondent Court would later minimize her
participation in the lease as one of mere guaranty,
that does not make her an employee of Tourist
World, since in any case, a true employee cannot be
made to part with his own money in pursuance of
his employer's business, or otherwise, assume any
liability thereof. In that event, the parties must be
bound by some other relation, but certainly not
employment.
The fact that Sevilla had been designated 'branch
manager" does not make her, ergo, Tourist World's
employee. As we said, employment is determined
by the right-of-control test and certain economic
parameters. But titles are weak indicators.
In rejecting Tourist World Service, Inc.'s arguments
however, we are not, as a consequence, accepting
Lina Sevilla's own, that is, that the parties had
embarked on a joint venture or otherwise, a
partnership. And apparently, Sevilla herself did not
recognize the existence of such a relation. In her
letter of November 28, 1961, she expressly
'concedes your [Tourist World Service, Inc.'s] right to
stop the operation of your branch office in effect,
accepting Tourist World Service, Inc.'s control over
the manner in which the business was run. A joint
venture, including a partnership, presupposes
generally a of standing between the joint co-
venturers or partners, in which each party has an
equal proprietary interest in the capital or property
contributed and where each party exercises equal
rights in the conduct of the business. Furthermore,
the parties did not hold themselves out as partners,
and the building itself was embellished with the
electric sign "Tourist World Service, Inc.” in lieu of a
distinct partnership name.
It is the Court's considered opinion, that when the
petitioner, Lina Sevilla, agreed to (wo)man the
private respondent, Tourist World Service, Inc.'s
Ermita office, she must have done so pursuant to a
contract of agency. It is the essence of this contract
Morc’s Notes on Partnership and Agency
that the agent renders services "in representation or
on behalf of another. In the case at bar, Sevilla
solicited airline fares, but she did so for and on
behalf of her principal, Tourist World Service, Inc. As
compensation, she received 4% of the proceeds in
the concept of commissions. And as we said, Sevilla
herself based on her letter of November 28, 1961,
pre-assumed her principal's authority as owner of
the business undertaking. We are convinced,
considering the circumstances and from the
respondent Court's recital of facts, that the ties had
contemplated a principal agent relationship, rather
than a joint management or a partnership.
But unlike simple grants of a power of attorney, the
agency that we hereby declare to be compatible
with the intent of the parties, cannot be revoked at
will. The reason is that it is one coupled with an
interest, the agency having been created for mutual
interest, of the agent and the principal. It appears
that Lina Sevilla is a bona fide travel agent herself,
and as such, she had acquired an interest in the
business entrusted to her. Moreover, she had
assumed a personal obligation for the operation
thereof, holding herself solidarily liable for the
payment of rentals. She continued the business,
using her own name, after Tourist World had
stopped further operations. Her interest, obviously,
is not to the commissions she earned as a result of
her business transactions, but one that extends to
the very subject matter of the power of
management delegated to her. It is an agency that,
as we said, cannot be revoked at the pleasure of the
principal. Accordingly, the revocation complained of
should entitle the petitioner, Lina Sevilla, to
damages.
 Torres v. CA, GR 134559, December 9, 1999
Under the above-quoted Agreement, petitioners
would contribute property to the partnership in the
form of land which was to be developed into a
subdivision; while respondent would give, in
addition to his industry, the amount needed for
general expenses and other costs. Furthermore, the
income from the said project would be divided
according to the stipulated percentage. Clearly, the
Page 11
contract manifested the intention of the parties to
form a partnership.
It should be stressed that the parties implemented
the contract. Thus, petitioners transferred the title
to the land to facilitate its use in the name of the
respondent. On the other hand, respondent caused
the subject land to be mortgaged, the proceeds of
which were used for the survey and the subdivision
of the land. As noted earlier, he developed the
roads, the curbs and the gutters of the subdivision
and entered into a contract to construct low-cost
housing units on the property.
Respondent’s actions clearly belie petitioners’
contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a
partner may contribute not only money or property,
but also industry.
 Sardane v. CA, 167 SCRA 524
On who is a partner
The fact that he had received 50% of the net profits
does not conclusively establish that he was a partner
of the private respondent herein. Article 1769(4) of
the Civil Code is explicit that while the receipt by a
person of a share of the profits of a business is prima
facie evidence that he is a partner in the business, no
such inference shall be drawn if such profits were
received in payment as wages of an employee.
Furthermore, herein petitioner had no voice in the
management of the affairs of the basnig.
Can a corporation become a partner in a
partnership? NO. The majority view is that a
corporation cannot become a partner on grounds of
public policy; otherwise, people other than its
officers may be able to bind it. However, a
corporation can enter into a joint venture with
another where the nature of that venture is in line
with the business authorized in its charter.
 Aurbach v. Sanitary Wares, 180 SCRA 350
On joint ventures and partnerships
Morc’s Notes on Partnership and Agency
The rule is that whether the parties to a particular
contract have thereby established among
themselves a joint venture or some other relation
depends upon their actual intention which is
determined in accordance with the rules governing
the interpretation and construction of contracts.
The legal concept of a joint venture is of common
law origin. It has no precise legal definition, but it
has been generally understood to mean an
organization formed for some temporary purpose.
(Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact
hardly distinguishable from the partnership, since
their elements are similar — community of interest
in the business, sharing of profits and losses, and a
mutual right of control. (Blackner v. McDermott, 176
F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d.,
1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183,
288 P. 2d. 12 289 P. 2d. 242 [1955]). The main
distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a
general business with some degree of continuity,
while the joint venture is formed for the execution
of a single transaction, and is thus of a temporary
nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d.
500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d.
74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).
This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership
may be particular or universal, and a particular
partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem
therefore that under Philippine law, a joint venture
is a form of partnership and should thus be governed
by the law of partnerships. The Supreme Court has
however recognized a distinction between these two
business forms, and has held that although a
corporation cannot enter into a partnership
contract, it may however engage in a joint venture
with others. (At p. 12, Tuazon v. Bolaños, 95 Phil.
906 [1954]) (Campos and Lopez — Campos
Comments, Notes and Selected Cases, Corporation
Code 1981)
It is said that participants in a joint venture, in
organizing the joint venture deviate from the
Page 12
traditional pattern of corporation management. A
noted authority has pointed out that just as in close
corporations, shareholders’ agreements in joint
venture corporations often contain provisions which
do one or more of the following: (1) require greater
than majority vote for shareholder and director
action; (2) give certain shareholders or groups of
shareholders power to select a specified number of
directors; (3) give to the shareholders control over
the selection and retention of employees; and (4) set
up a procedure for the settlement of disputes by
arbitration (See I O’Neal, Close Corporations, 1971
ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, p. 16)
Moreover, the usual rules as regards the
construction and operations of contracts generally
apply to a contract of joint venture. (O’Hara v.
Harman 14 App. Dev. (167) 43 NYS 556).
 Tocao v. CA, GR 127405, October 4, 2000
On the doctrine of attributes of proprietorship:
It is a means to prove or disprove the existence of a
partnership. This was used in the above case. In
brushing aside the assertions of no contract of
partnership, the Court, apart from holding that a
contract of partnership need not be in writing to be
valid and enforceable, held that all three parties had
the evidence adduced exercised rights of
proprietorship on the business ventures as to show
without doubt the existence of a partnership
(Villanueva). The Court held:
“Petitioners admit that private respondent
had the expertise to engage in the business
of distributorship of cookware. Private
respondent contributed such expertise to
the partnership and hence, under the law,
she was the industrial or managing partner.
It was through her reputation with the West
Bend Company that the partnership was
able to open the business of distributorship
of that companys cookware products; it was
through the same efforts that the business
was propelled to financial success.
Morc’s Notes on Partnership and Agency
Petitioner Tocao herself admitted private
respondents indispensable role in putting
up the business.”
 Heirs of Tan Eng Kee v. CA, GR 126881,
October 3, 2000
Thus, in order to constitute a partnership, it must be
established that (1) two or more persons bound
themselves to contribute money, property, or
industry to a common fund, and (2) they intend to
divide the profits among themselves. The
agreement need not be formally reduced into
writing, since statute allows the oral constitution of
a partnership, save in two instances: (1) when
immovable property or real rights are contributed,
and (2) when the partnership has a capital of three
thousand pesos or more. In both cases, a public
instrument is required. An inventory to be signed by
the parties and attached to the public instrument is
also indispensable to the validity of the partnership
whenever immovable property is contributed to the
partnership.
The trial court determined that Tan Eng Kee and Tan
Eng Lay had entered into a joint adventure, which it
said is akin to a particular partnership. A particular
partnership is distinguished from a joint adventure,
to wit:
(a) A joint adventure (an American concept
similar to our joint accounts) is a sort of
informal partnership, with no firm name and
no legal personality. In a joint account, the
participating merchants can transact
business under their own name, and can be
individually liable therefor.
(b) Usually, but not necessarily a joint adventure
is limited to a single transaction, although
the business of pursuing to a successful
termination may continue for a number of
years; a partnership generally relates to a
continuing business of various transactions
of a certain kind.
Page 13
A joint adventure presupposes generally a parity of
standing between the joint co-ventures or partners,
in which each party has an equal proprietary interest
in the capital or property contributed, and where
each party exercises equal rights in the conduct of
the business
 Rojas v. Maglana, GR 30616, December 10,
1990
The main issue in this case is the nature of the
partnership and legal relationship of the Maglana-
Rojas after Pahamotang retired from the second
partnership.
The lower court is of the view that the second
partnership superseded the first, so that when the
second partnership was dissolved there was no
written contract of co-partnership; there was no
reconstitution as provided for in the Maglana, Rojas
and Pahamotang partnership contract. Hence, the
partnership which was carried on by Rojas and
Maglana after the dissolution of the second
partnership was a de facto partnership and at will. It
was considered as a partnership at will because
there was no term, express or implied; no period
was fixed, expressly or impliedly (Decision, R.A. pp.
962-963).
On the other hand, Rojas insists that the registered
partnership under the firm name of Eastcoast
Development Enterprises (EDE) evidenced by the
Articles of Co-Partnership dated January 14, 1955
(Exhibit "A") has not been novated, superseded
and/or dissolved by the unregistered articles of co-
partnership among appellant Rojas, appellee
Maglana and Agustin Pahamotang, dated March 4,
1956 (Exhibit "C") and accordingly, the terms and
stipulations of said registered Articles of Co-
Partnership (Exhibit "A") should govern the relations
between him and Maglana. Upon withdrawal of
Agustin Pahamotang from the unregistered
partnership (Exhibit "C"), the legally constituted
partnership EDE (Exhibit "A") continues to govern
the relations between them and it was legal error to
consider a de facto partnership between said two
partners or a partnership at will. Hence, the letter of
Morc’s Notes on Partnership and Agency
appellee Maglana dated February 23, 1961, did not
legally dissolve the registered partnership between
them, being in contravention of the partnership
agreement agreed upon and stipulated in their
Articles of Co-Partnership (Exhibit "A"). Rather,
appellant is entitled to the rights enumerated in
Article 1837 of the Civil Code and to the sharing
profits between them of "share and share alike" as
stipulated in the registered Articles of Co-
Partnership (Exhibit "A").
After a careful study of the records as against the
conflicting claims of Rojas and Maglana, it appears
evident that it was not the intention of the partners
to dissolve the first partnership, upon the
constitution of the second one, which they
unmistakably called an "Additional Agreement"
(Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-
25). Except for the fact that they took in one
industrial partner; gave him an equal share in the
profits and fixed the term of the second partnership
to thirty (30) years, everything else was the same.
Thus, they adopted the same name, Eastcoast
Development Enterprises, they pursued the same
purposes and the capital contributions of Rojas and
Maglana as stipulated in both partnerships call for
the same amounts. Just as important is the fact that
all subsequent renewals of Timber License No. 35-36
were secured in favor of the First Partnership, the
original licensee. To all intents and purposes
therefore, the First Articles of Partnership were only
amended, in the form of Supplementary Articles of
Co-Partnership (Exhibit "C") which was never
registered (Brief for Plaintiff-Appellant, p. 5).
Otherwise stated, even during the existence of the
second partnership, all business transactions were
carried out under the duly registered articles. As
found by the trial court, it is an admitted fact that
even up to now, there are still subsisting obligations
and contracts of the latter (Decision, R.A. pp. 950-
957). No rights and obligations accrued in the name
of the second partnership except in favor of
Pahamotang which was fully paid by the duly
registered partnership (Decision, R.A., pp. 919-921).
Page 14
On the other hand, there is no dispute that the
second partnership was dissolved by common
consent. Said dissolution did not affect the first
partnership which continued to exist. Significantly,
Maglana and Rojas agreed to purchase the interest,
share and participation in the second partnership of
Pahamotang and that thereafter, the two (Maglana
and Rojas) became the owners of equipment
contributed by Pahamotang. Even more convincing,
is the fact that Maglana on March 17, 1957, wrote
Rojas, reminding the latter of his obligation to
contribute either in cash or in equipment, to the
capital investment of the partnership as well as his
obligation to perform his duties as logging
superintendent. This reminder cannot refer to any
other but to the provisions of the duly registered
Articles of Co-Partnership. As earlier stated, Rojas
replied that he will not be able to comply with the
promised contributions and he will not work as
logging superintendent. By such statements, it is
obvious that Roxas understood what Maglana was
referring to and left no room for doubt that both
considered themselves governed by the articles of
the duly registered partnership.
Under the circumstances, the relationship of Rojas
and Maglana after the withdrawal of Pahamotang
can neither be considered as a de facto partnership,
nor a partnership at will, for as stressed, there is an
existing partnership, duly registered.
Article 1768: Partnership as a juridical person
The partnership has a juridical personality
separate and distinct from that of each of
the partners, even in case of failure to
comply with the requirements of Article
1772, first paragraph.
Its juridical personality is separate and distinct from
that of each of the partners. Hence, a partnership
can, in general:
1. Acquire and possess property of all kinds;
2. Incur obligations;
3. Bring civil or criminal actions; and,
Morc’s Notes on Partnership and Agency
4. Can be adjudged insolvent even if the
individual members be each financially
solvent.
Existence of a separate juridical personality is
conditioned on the perfection and validity of the
contract. Even if it is not registered, it is a still a
juridical person so long as it has been validly
constituted.
To organize a corporation or a partnership that could
claim a juridical personality of its own and transact
business as such is not a matter of absolute right but
a privilege which may be enjoyed only under such
terms as the State may deem necessary to impose.
Thus, in the case of Ang Pue & Co. v. Secretary of
Commerce and Industry, it has been held that the
State, through Congress, and in the manner provided
by law, had the right to enact RA 1180 or Retail
Trade Nationalization Law, and to provide therein
that only Filipinos may engage in the retail business,
cannot be seriously doubted. The law provides,
among other things, that after its enactment, a
partnership not wholly formed by Filipinos could
continue to engage in the retail business only until
the expiration of its term. This provision is clearly
intended to apply to partnerships already existing at
the time of the enactment of the law. Hence, the
agreement in the articles of partnership to extend
the terms of its life must be deemed subject to RA
1180 if it was already in force when the parties came
to agree regarding the extension of the original term
of their partnership.
Cases:
 Sunga-Chan v. Sunga, GR 143340, August
15, 2001
A partnership may be constituted in any form,
except where immovable property or real rights are
contributed thereto, in which case a public
instrument shall be necessary. Hence, based on the
intention of the parties, as gathered from the facts
and ascertained from their language and conduct, a
verbal contract of partnership may arise. The
essential points that must be proven to show that a
Page 15
partnership was agreed upon are (1) mutual
contribution to a common stock, and (2) a joint
interest in the profits.
Article 1768 of the Civil Code explicitly provides that
the partnership retains its juridical personality even
if it fails to register. The failure to register the
contract of partnership does not invalidate the same
as among the partners, so long as the contract has
the essential requisites, because the main purpose
of registration is to give notice to third parties, and it
can be assumed that the members themselves knew
of the contents of their contract. In the case at bar,
non-compliance with this directory provision of the
law will not invalidate the partnership considering
that the totality of the evidence proves that
respondent and Jacinto indeed forged the
partnership in question.
 Villareal v. Ramirez, GR 144214, July 14,
2004
Since it is the partnership, as a separate and distinct
entity, that must refund the shares of the partners,
the amount to be refunded is necessarily limited to
its total resources. In other words, it can only pay
out what it has in its coffers, which consists of all its
assets. However, before the partners can be paid
their shares, the creditors of the partnership must
first be compensated. After all the creditors have
been paid, whatever is left of the partnership assets
becomes available for the payment of the partners
shares.
 Tocao v. CA, supra.
To be considered a juridical personality, a
partnership must fulfill these requisites: (1) two or
more persons bind themselves to contribute money,
property or industry to a common fund; and (2)
intention on the part of the partners to divide the
profits among themselves. It may be constituted in
any form; a public instrument is necessary only
where immovable property or real rights are
contributed thereto. This implies that since a
contract of partnership is consensual, an oral
contract of partnership is as good as a written one.
Morc’s Notes on Partnership and Agency
Where no immovable property or real rights are
involved, what matters is that the parties have
complied with the requisites of a partnership. The
fact that there appears to be no record in the
Securities and Exchange Commission of a public
instrument embodying the partnership agreement
pursuant to Article 1772 of the Civil Code did not
cause the nullification of the partnership.
 Aguila v. CA, GR 127347, November 25,
1999
On who is the proper party to a suit
Rule 3, 2 of the Rules of Court of 1964, under which
the complaint in this case was filed, provided that
every action must be prosecuted and defended in
the name of the real party in interest. A real party in
interest is one who would be benefited or injured by
the judgment, or who is entitled to the avails of the
suit. This ruling is now embodied in Rule 3, 2 of the
1997 Revised Rules of Civil Procedure. Any decision
rendered against a person who is not a real party in
interest in the case cannot be executed. Hence, a
complaint filed against such a person should be
dismissed for failure to state a cause of action.
Under Art. 1768 of the Civil Code, a partnership has
a juridical personality separate and distinct from that
of each of the partners. The partners cannot be held
liable for the obligations of the partnership unless it
is shown that the legal fiction of a different juridical
personality is being used for fraudulent, unfair, or
illegal purposes. In this case, private respondent has
not shown that A.C. Aguila & Sons, Co., as a separate
juridical entity, is being used for fraudulent, unfair,
or illegal purposes. Moreover, the title to the
subject property is in the name of A.C. Aguila & Sons,
Co. and the Memorandum of Agreement was
executed between private respondent, with the
consent of her late husband, and A. C. Aguila & Sons,
Co., represented by petitioner. Hence, it is the
partnership, not its officers or agents, which should
be impleaded in any litigation involving property
registered in its name. A violation of this rule will
result in the dismissal of the complaint. We cannot
understand why both the Regional Trial Court and
Page 16
the Court of Appeals sidestepped this issue when it 2. Co-ownership or co-possession does
was squarely raised before them by petitioner. not itself establish a partnership,
whether such co-owners or co-
 Syjuco v. Castro, GR 70403, July 7, 1989 possessors do or do not share any
profits made by the use of the
The respondent partnership is composed exclusively
property;
of the individual Lims in whose name all the cases
3. The sharing of gross returns does not of
herein referred to, with the sole exception of Civil
itself establish a partnership, whether
Case No. Q-36485, were brought and prosecuted,
or not the persons sharing them have a
their contribution to the partnership consisting
joint or common right or interest in any
chiefly, if not solely, of the property subject of the
property from which the returns are
Syjuco mortgage. It is also a fact that despite its
derived;
having been contributed to the partnership,
4. The receipt by a person of a share of
allegedly on March 30, 1959, the property was never
the profits of a business is prima facie
registered with the Register of Deeds in the name of
evidence that he is a partner in the
the partnership, but to this date remains registered
business, but no such inference shall be
in the names of the Lims as owners in common. The
drawn if such profits were received in
original mortgage deed of November 14, 1964 was
payment:
executed by the Lims as such owners, as were all
a. As a debt by instalments or
subsequent amendments of the mortgage. There
otherwise;
can be no dispute that in those circumstances, the
b. As wages of an employee or
respondent partnership was chargeable with
rent to a landlord;
knowledge of the mortgage from the moment of its
c. As an annuity to a widow or
execution. The legal fiction of a separate juridical
representative of a deceased
personality and existence will not shield it from the
partner;
conclusion of having such knowledge which naturally
d. As interest on a loan, though
and irresistibly flows from the undenied facts. It
the amount of payment vary
would violate all precepts of reason, ordinary
with the profits of the
experience and common sense to propose that a
business;
partnership, as such, cannot be held accountable
e. As the consideration for the
with knowledge of matters commonly known to all
sale of a goodwill of a business
the partners or of acts in which all of the latter,
or other property by
without exception, have taken part, where such
instalments or otherwise.
matters or acts affect property claimed as its own by
said partnership The purpose of this article is to indicate some tests
to determine if what may seem to be a partnership
Article 1769: Rules to Determine the existence of a
really is one, or it is not.
partnership
The best evidence to prove partnership’s existence is
In determining whether a partnership
still a contract of partnership or articles of
exists, these rules shall apply:
partnership. Should this not be present, as culled
1. Except as provided by Article 1825, from the cases of Heirs of Lim v. Lim and Heirs of Tan
persons who are not partners as to Eng Kee v. CA, he who alleges the partnership’s
each other are not partners as to third existence must prove the existence of the elements,
persons; as provided for by Article 1767.

Morc’s Notes on Partnership and Agency Page 17

The sharing of net profits is prima facie evidence
that one is a partner except in the five instances
enumerated under Article 1769(4).
Legal intention is the crux of partnership. Parties
may call themselves partners in no uncertain terms,
yet their contract may be adjudged something quite
different. Conversely, parties may expressly
stipulate that their contract is not partnership yet
the law may determine otherwise on the basis of
legal intent. It is true, however, that courts will be
influenced to some extent by what the parties call
their contract (De Leon).
In determining whether a partnership exists, it is
important to distinguish between tests or indicia and
incidents of partnership.
Tests or indicia Incidents
Only those terms of a 1. Partners share in
contract upon which the profits and losses.
parties have reached an This community of
actual understanding interest in profits is
may afford a test by not incidental to the
which to ascertain the ordinary agency;
legal nature of the 2. They have equal
contract. Once the legal rights in the
nature of a contract as management and
one of partnership has conduct of the
been established, certain partnership
consequences or business;
incidents follow as a 3. Every partner is an
matter of law, agent of the
irrespective of any actual partnership, and
understanding between entitled to bind the
the parties. other partners by
his acts, for the
purpose of its
business;
4. All partners are
personally liable for
the debts of the
partnership with
their separate
property except that
limited partners are
not bound beyond
the amount of their
investment.
5. A fiduciary relation
exists between the
Morc’s Notes on Partnership and Agency
partners; and,
6. On dissolution, the
partnership is not
terminated, but
continues until the
winding up of
partnership is
completed.
“Cause” “Effect”
Cases:
 Sardane v. CA, supra.
The fact that he had received 50% of the net profits
does not conclusively establish that he was a partner
of the private respondent herein. Article 1769(4) of
the Civil Code is explicit that while the receipt by a
person of a share of the profits of a business is prima
facie evidence that he is a partner in the business, no
such inference shall be drawn if such profits were
received in payment as wages of an employee.
Furthermore, herein petitioner had no voice in the
management of the affairs of the basnig.
 Tocao v. CA, supra.
While it is true that the receipt of a percentage of
net profits constitutes only prima facie evidence that
the recipient is a partner in the business, the
evidence in the case at bar controverts an employer-
employee relationship between the parties. In the
first place, private respondent had a voice in the
management of the affairs of the cookware
distributorship, including selection of people who
would constitute the administrative staff and the
sales force. Secondly, petitioner Tocao’s admissions
militate against an employer-employee relationship.
She admitted that, like her who owned Geminesse
Enterprise, private respondent received only
commissions and transportation and representation
allowances and not a fixed salary.
Culled from the cases of Sardane and Tocao, it is
therefore not sufficient to establish that one receives
his share in the net profits to prove that he is a
partner. It must likewise be established that he has a
role or power in the management of a business.
Page 18
  Heirs of Lim v. Lim, supra.
of the CA, to wit:
Applying the legal provision to the facts of this case,
the following circumstances tend to prove that
Elfledo was himself the partner of Jimmy and
Norberto:
1. Cresencia testified that Jose gave Elfledo
P50,000.00, as share in the partnership, on
a date that coincided with the payment of
the initial capital in the partnership;
2. Elfledo ran the affairs of the partnership,
wielding absolute control, power and
authority, without any intervention or
opposition whatsoever from any of
petitioners herein;
3. All of the properties, particularly the nine
trucks of the partnership, were registered in
the name of Elfledo;
4. Jimmy testified that Elfledo did not receive
wages or salaries from the partnership,
indicating that what he actually received
were shares of the profits of the business;
and,
5. None of the petitioners, as heirs of Jose, the
alleged partner, demanded periodic
accounting from Elfledo during his lifetime.
As repeatedly stressed in Heirs of Tan Eng
Kee, a demand for periodic accounting is
evidence of a partnership.
Furthermore, petitioners failed to adduce any
evidence to show that the real and personal
properties acquired and registered in the names of
Elfledo and respondent formed part of the estate of
Jose, having been derived from Jose’s alleged
partnership with Jimmy and Norberto. They failed to
refute respondent’s claim that Elfledo and
respondent engaged in other businesses. Edison
even admitted that Elfledo also sold Interwood
lumber as a sideline. Petitioners could not offer any
credible evidence other than their bare assertions.
Thus, we apply the basic rule of evidence that
between documentary and oral evidence, the former
carries more weight.
Morc’s Notes on Partnership and Agency
Finally, we agree with the judicious findings
The above testimonies prove that Elfledo
was not just a hired help but one of the
partners in the trucking business, active and
visible in the running of its affairs from day
one until this ceased operations upon his
demise. The extent of his control,
administration and management of the
partnership and its business, the fact that its
properties were placed in his name, and that
he was not paid salary or other
compensation by the partners, are indicative
of the fact that Elfledo was a partner and a
controlling one at that. It is apparent that
the other partners only contributed in the
initial capital but had no say thereafter on
how the business was ran. Evidently it was
through Elfredos efforts and hard work that
the partnership was able to acquire more
trucks and otherwise prosper. Even the
appellant participated in the affairs of the
partnership by acting as the bookkeeper sans
salary.
It is notable too that Jose Lim died when the
partnership was barely a year old, and the
partnership and its business not only
continued but also flourished. If it were true
that it was Jose Lim and not Elfledo who was
the partner, then upon his death the
partnership should have been dissolved and
its assets liquidated. On the contrary, these
were not done but instead its operation
continued under the helm of Elfledo and
without any participation from the heirs of
Jose Lim.
Whatever properties appellant and her
husband had acquired, this was through their
own concerted efforts and hard work.
Elfledo did not limit himself to the business
of their partnership but engaged in other
lines of businesses as well.
Page 19
In sum, we find no cogent reason to disturb the
findings and the ruling of the CA as they are amply
supported by the law and by the evidence on record.
 Heirs of Tan Eng Kee v. CA, supra.
Undoubtedly, the best evidence would have been
the contract of partnership itself, or the articles of
partnership but there is none. The alleged
partnership, though, was never formally organized.
Unfortunately for petitioners, Tan Eng Kee has
passed away. Only he, aside from Tan Eng Lay, could
have expounded on the precise nature of the
business relationship between them. In the absence
of evidence, we cannot accept as an established fact
that Tan Eng Kee allegedly contributed his resources
to a common fund for the purpose of establishing a
partnership. The testimonies to that effect of
petitioners’ witnesses is directly controverted by Tan
Eng Lay. It should be noted that it is not with the
number of witnesses wherein preponderance lies
the quality of their testimonies is to be considered.
None of petitioners’ witnesses could suitably
account for the beginnings of Benguet Lumber
Company, except perhaps for Dionisio Peralta whose
deceased wife was related to Matilde Abubo. He
stated that when he met Tan Eng Kee after the
liberation, the latter asked the former to accompany
him to get 80 pieces of G.I. sheets supposedly owned
by both brothers. Tan Eng Lay, however, denied
knowledge of this meeting or of the conversation
between Peralta and his brother. Tan Eng Lay
consistently testified that he had his business and his
brother had his, that it was only later on that his said
brother, Tan Eng Kee, came to work for him. Be that
as it may, co-ownership or co-possession (specifically
here, of the G.I. sheets) is not an indicium of the
existence of a partnership.
Besides, it is indeed odd, if not unnatural, that
despite the forty years the partnership was allegedly
in existence, Tan Eng Kee never asked for an
accounting. The essence of a partnership is that the
partners share in the profits and losses. Each has
the right to demand an accounting as long as the
partnership exists. We have allowed a scenario
Morc’s Notes on Partnership and Agency
wherein [i]f excellent relations exist among the
partners at the start of the business and all the
partners are more interested in seeing the firm grow
rather than get immediate returns, a deferment of
sharing in the profits is perfectly plausible. But in
the situation in the case at bar, the deferment, if
any, had gone on too long to be plausible. A person
is presumed to take ordinary care of his concerns
In the light of the aforequoted legal provision, we
conclude that Tan Eng Kee was only an employee,
not a partner. Even if the payrolls as evidence were
discarded, petitioners would still be back to square
one, so to speak, since they did not present and
offer evidence that would show that Tan Eng Kee
received amounts of money allegedly representing
his share in the profits of the enterprise. Petitioners
failed to show how much their father, Tan Eng Kee,
received, if any, as his share in the profits of Benguet
Lumber Company for any particular period. Hence,
they failed to prove that Tan Eng Kee and Tan Eng
Lay intended to divide the profits of the business
between themselves, which is one of the essential
features of a partnership.
In the instant case, we find private respondents
arguments to be well-taken. Where circumstances
taken singly may be inadequate to prove the intent
to form a partnership, nevertheless, the collective
effect of these circumstances may be such as to
support a finding of the existence of the parties
intent. Yet, in the case at bench, even the aforesaid
circumstances when taken together are not
persuasive indicia of a partnership. They only tend to
show that Tan Eng Kee was involved in the
operations of Benguet Lumber, but in what capacity
is unclear. We cannot discount the likelihood that as
a member of the family, he occupied a niche above
the rank-and-file employees. He would have
enjoyed liberties otherwise unavailable were he not
kin, such as his residence in the Benguet Lumber
Company compound. He would have moral, if not
actual, superiority over his fellow employees,
thereby entitling him to exercise powers of
supervision. It may even be that among his duties is
to place orders with suppliers. Again, the
Page 20
circumstances proffered by petitioners do not
provide a logical nexus to the conclusion desired;
these are not inconsistent with the powers and
duties of a manager, even in a business organized
and run as informally as Benguet Lumber Company.
 Oña v. CIR, L-19342, May 25, 1972
On when co-ownership ceases and an unregistered
partnership commences
From the moment petitioners allowed not only the
incomes from their respective shares of the
inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oña (who
managed the properties) as a common fund in
undertaking several transactions or in business, with
the intention of deriving profit to be shared by them
proportionally, such act was tantamount to actually
contributing such incomes to a common fund and, in
effect, they thereby formed an unregistered
partnership within the purview of the provisions of
the Tax Code.
In cases of inheritance, there is a period when the
heirs can be considered as co-owners rather than
unregistered co-partners within the contemplation
of our corporate tax laws. Before the partition and
distribution of the estate of the deceased, all the
income thereof does belong commonly to all the
heirs, obviously, without them becoming thereby
unregistered co-partners.
The co-ownership of inherited properties is
automatically converted into an unregistered
partnership, for it is easily conceivable that after
knowing their respective shares in the partition, they
(heirs) might decide to continue holding said shares
under the common management of the
administrator or executor or of anyone chosen by
them and engage in business on that basis.
On the application of the provision
As already indicated, for tax purposes, the co-
ownership of inherited properties is automatically
converted into an unregistered partnership the
moment the said common properties and/or the
Morc’s Notes on Partnership and Agency
incomes derived therefrom are used as a common
fund with intent to produce profits for the heirs in
proportion to their respective shares in the
inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate
or intestate proceeding. The reason for this is
simple. From the moment of such partition, the heirs
are entitled already to their respective definite
shares of the estate and the incomes thereof, for
each of them to manage and dispose of as
exclusively his own without the intervention of the
other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If
after such partition, he allows his share to be held in
common with his co-heirs under a single
management to be used with the intent of making
profit thereby in proportion to his share, there can
be no doubt that, even if no document or instrument
were executed for the purpose, for tax purposes, at
least, an unregistered partnership is formed. This is
exactly what happened to petitioners in this case.
In this connection, petitioners’ reliance on Article
1769, paragraph (3), of the Civil Code, providing
that: “The sharing of gross returns does not of itself
establish a partnership, whether or not the persons
sharing them have a joint or common right or
interest in any property from which the returns are
derived,” and, for that matter, on any other
provision of said code on partnerships is unavailing.
 Obillos v. CIR, L-68118, October 29, 1985
Article 1769(3) of the Civil Code provides that “the
sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing
them have a joint or common right or interest in any
property from which the returns are derived.” There
must be an unmistakable intention to form a
partnership or joint venture.
In the case at bar, no intent was present.
As testified by Jose Obillos, Jr., they had no such
intention. They were co-owners pure and simple. To
consider them as partners would obliterate the
Page 21
distinction between a co-ownership and a
partnership. The petitioners were not engaged in
any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for
residential purposes. If later on they found it not
feasible to build their residences on the lots because
of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-
ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state.
It had to be terminated sooner or later.
Article 1770: Object or purpose of partnership
A partnership must have a lawful object or
purpose, and must be established for the
common benefit or interest of the partners.
When an unlawful partnership is dissolved
by a judicial decree, the profits shall be
confiscated in favor of the State, without
prejudice to the provisions of the Penal
Code governing the confiscation of the
instruments and effects of a crime.
Illegality of purpose or object would have an effect
on the partnership contract. It is so because in our
law on contracts, object is an essential element. It
must foremost be lawful or within the commerce of
man, possible and not contrary to law, morals, good
customs, public order or public policy. Otherwise,
the contract is void ab initio and cannot be ratified
(Article 1409). It has likewise no legal personality.
Effects of an unlawful partnership:
1. The contract is void ab initio and the
partnership never existed in the eyes of the
law;
2. The profits shall be confiscated in favor of
the government;
3. The instruments or tools and proceeds of
the crime shall also be forfeited in favor of
the government; and,
Morc’s Notes on Partnership and Agency
4. The contributions shall not be confiscated
unless they were used for the crime.
If the firm is also guilty of a crime, the Revised Penal
Code governs both the criminal liability and the
forfeiture of the proceeds of the crime and the
instruments or tools with which it was committed.
Such proceeds and instruments or tools shall be
confiscated and forfeited in favor of the
Government, unless they be the property of a third
person not liable for the offense, but those articles
which are not subject of lawful commerce shall be
destroyed (Article 45, RPC).
Is a judicial decree needed to dissolve an unlawful
partnership? No, for the contract is void from the
very beginning and therefore never existed from the
viewpoint of the law. However, there would be
nothing wrong in having the court dissolve the
partnership as it affords convenience and peace of
mind to the parties. Moreover, there may be a
question as to whether or not the partnership is
indeed unlawful. This is particularly true when the
object was lawful at the beginning but has later on
become unlawful. Finally, third persons who deal
with the partnership without being aware of its
illegal purpose or character are protected, unless
such knowledge can be presumed as where the
transaction is plainly unlawful.
Effect of partial illegality of partnership business:
1. Where a part of the business of a
partnership is legal and part illegal, an
account of that which is legal may be had.
2. Where, without the knowledge or
participation of the partners, the firm’s
profits in a lawful busienss have been
increased by wrongful acts, the innocent
partners are not precluded as against the
guilty partners from recovering their share
of the profits.
Effect of subsequent illegality of partnership
business: Dissolution under Article 1830.
Cases:
Page 22
  Deluao v. Casteel, L-21906, December 24,
1968
Too well-settled to require any citation of authority
is the rule that everyone is conclusively presumed to
know the law. It must be assumed, conformably to
such rule, that the parties entered into the so called
"contract of service" cognizant of the mandatory and
prohibitory laws governing the filing of applications
for fishpond permits. And since they were aware of
the said laws, it must likewise be assumed — in
fairness to the parties — that they did not intend to
violate them. This view must perforce negate the
appellees’ allegation that the "contract of service"
created a contract of co — ownership between the
parties over the disputed fishpond. The contract
must be construed as one of partnership, divided
into two parts — namely, contract of partnership to
exploit the fishpond pending its award which is valid,
and a contract of partnership to divide the fishpond
between them after such award which is illegal. The
evidence preponderates in favor of the view that the
initial intention of the parties was not to form a co -
ownership but to establish a partnership, plaintiff
Deluao as capitalist partner and defendant —
appellant as an industrial partner — the ultimate
undertaking of which was to divide into two equal
parts such portion of the fishpond as might have
been developed by the amount extended by the
plaintiffs-appellees, with the further provision that
defendant appellant should reimburse the expenses
incurred by the appellees over one-half of the
fishpond that would pertain to him.
The arrangement under the so-called "contract of
service" continued until the decision both dated
Sept. 15, 1950 were issued by the Secretary of
Agriculture and Natural Resources in DANR Cases
353 and 353-B. This development, by itself, brought
about the dissolution of the partnership. Since the
partnership had for its object the division into two
equal parts of the fishpond between the appellees
and the appellant after it shall have been awarded to
the latter, and therefore it envisaged the
unauthorized transfer of one half thereof to parties
other than the applicant Casteel, it was dissolved by
Morc’s Notes on Partnership and Agency
the approval of his application and the award to him
of the fishpond. The approval was an event which
made it unlawful for the members to carry it on in
partnership. Moreover, subsequent events likewise
reveal the intent of both parties to terminate the
partnership because each refused to share the
fishpond with the other.
Why was it unlawful?
Act 4003, known as the Fisheries Act, prohibits the
holder of a fishpond permit (the permittee) from
transferring or subletting the fishpond granted to
him, without the previous consent or approval of the
Secretary of Agriculture and Natural Resources.
Sec. 40 of Commonwealth Act 141, otherwise known
as the Public Land Act, likewise provides that. "The
lessee shall not assign, encumber, or sublet his rights
without the consent of the Secretary of Agriculture
and Commerce, and the violation of this condition
shall avoid the contract; Provided, That assignment,
encumbrance, or subletting for purposes of
speculation shall not be permitted in any case:
Provided further, That nothing contained in this
section shall be understood or construed to permit
the assignment, encumbrance, or subletting of lands
leased under this Act, or under any previous Act, to
persons, corporations, or associations which under
this Act, are not authorized to lease public lands."
Article 1771: Form of contract of partnership
A partnership may be constituted in any
form, except where immovable property or
real rights are contributed thereto, in which
case a public instrument shall be necessary.
An agreement to form a partnership does not of
itself create a partnership. When there are
conditions to be fulfilled or when a certain period is
to elapse, first, the partnership is not created till
after the fulfillment of the conditions or the arrival
of the term, and this is true even if one of the parties
has already advanced his agreed share of the capital.
Moreover, there is a marked distinction between a
partnership actually consummated and an
agreement to enter into a partnership at a future
Page 23
time. So long as an agreement remains executory,
the partnership is inchoate, not having been called
into being by the concerted action necessary under
the partnership agreement (Paras).
When does the Statute of Frauds apply? It would
only apply when there is merely an agreement to
form a partnership after one year from the making
thereof. More so, the Statute of Frauds, in the law
on partnership, applies only for the purpose of
convenience and not for validity or enforceability.
Article 1772: Recording of contract of partnership
with the SEC
Every contract of partnership having a
capital of PhP 3,000.00 or more, money or
property, shall appear in a public
instrument, which must be recorded in the
Office of the Securities and Exchange
Commission.
Failure to comply with the requirements of
the preceding paragraph shall not affect the
liability of the partnership and the members
thereof to third persons.
Article 1773: Contribution of immovable property
in contract of partnership
A contract of partnership is void, whenever
immovable property is contributed thereto,
if an inventory of said property is not made,
signed by the parties, and attached to the
public instrument.
Required to appear in a public instrument:
1. Where immovable property or real right is
contributed;
 Effect: Contract of partnership is
void.
2. Where capital is P 3,000.00 or more, as in
the case of personal property.
 Effect: As provided by Article 1768,
failure to comply with above
provision does not affect its
acquisition of juridical personality.
Morc’s Notes on Partnership and Agency
It does not affect also the liability
of the partnership and the partners
to third persons.
Under Article 1773, other requirements should be
met in order that the contract of partnership is valid,
to wit:
1. An inventory of said property is made;
2. The inventory is signed by the parties; and,
3. The inventory must be attached to the
public instrument.
Cases:
 Agad v. Mabato, L-24193, June 28, 1968
The issue before us hinges on whether or not
"immovable property or real rights" have been
contributed to the partnership under consideration.
Mabato alleged and the lower court held that the
answer should be in the affirmative, because "it is
really inconceivable how a partnership engaged in
the fishpond business could exist without said
fishpond property (being) contributed to the
partnership." It should be noted, however, that, as
stated in Annex "A" the partnership was established
"to operate a fishpond", not to "engage in a fishpond
business." Moreover, none of the partners
contributed either a fishpond or a real right to any
fishpond. Their contributions were limited to the
sum of PhP 1,000.00 each. Indeed, Paragraph 4 of
the Annex "A" provides:
"That the capital of the said partnership is
Two Thousand (P2,000.00) Pesos Philippine
Currency, of which One Thousand
(P1,000.00) pesos has been contributed by
Severino Mabato and One Thousand
(P1,000.00) Pesos has been contributed by
Mauricio Agad.”
The operation of the fishpond mentioned in Annex
"A" was the purpose of the partnership. Neither said
fishpond nor a real right thereto was contributed to
the partnership or became part of the capital
thereof, even if a fishpond or a real right thereto
could become part of its assets.
Page 24
  Navarro v. CA, GR 101847, May 27, 1993
Furthermore, the Code provides under Article 1771
and 1772 that while a partnership may be
constituted in any form, a public instrument is
necessary where immovables or any rights is
constituted. Likewise, if the partnership involves a
capitalization of P3,000.00 or more in money or
property, the same must appear in a public
instrument which must be recorded in the Office of
the Securities and Exchange Commission. Failure to
comply with these requirements shall not affect
liability of the partners to third persons.
In consideration of the above, it is undeniable that
both the plaintiff and the defendant-wife made
admission to have entered into an agreement of
operating this Allied Air Freight Agency of which the
plaintiff personally constituted with the Manila
Office in a sense that the plaintiff did supply the
necessary equipments and money while her brother
Atty. Rodolfo Villaflores was the Manger and the
defendant the Cashier. It was also admitted that part
of this agreement was an equal sharing of whatever
proceeds realized. Consequently, the plaintiff
brought into this transaction certain chattels in
compliance with her obligation. The same has been
done by the herein brother and the herein
defendant who started to work in the business. A
cursory examination of the evidences presented no
proof that a partnership, whether oral or written had
been constituted at the inception of this transaction.
True it is that even up to the filing of this complaint
whose movables brought by plaintiff for the use in
the operation of the business remain registered in
her name.
 Torres v. CA, supra.
First, Article 1773 was intended primarily to protect
third persons. Thus, the eminent Arturo M.
Tolentino states that under the aforecited provision
which is a complement of Article 1771, the execution
of a public instrument would be useless if there is no
inventory of the property contributed, because
without its designation and description, they cannot
be subject to inscription in the Registry of Property,
Morc’s Notes on Partnership and Agency
and their contribution cannot prejudice third
persons. This will result in fraud to those who
contract with the partnership in the belief [in] the
efficacy of the guaranty in which the immovables
may consist. Thus, the contract is declared void by
the law when no such inventory is made. The case at
bar does not involve third parties who may be
prejudiced.
Second, petitioners themselves invoke the allegedly
void contract as basis for their claim that respondent
should pay them 60 percent of the value of the
property. They cannot in one breath deny the
contract and in another recognize it, depending on
what momentarily suits their purpose. Parties
cannot adopt inconsistent positions in regard to a
contract and courts will not tolerate, much less
approve, such practice.
In short, the alleged nullity of the partnership will
not prevent courts from considering the Joint
Venture Agreement an ordinary contract from which
the parties rights and obligations to each other may
be inferred and enforced.
 Angeles v. Secretary of Justice, GR 142612,
July 29, 2005
The Angeles spouses position that there is no
partnership because of the lack of a public
instrument indicating the same and a lack of
registration with the Securities and Exchange
Commission (SEC) holds no water. First, the Angeles
spouses contributed money to the partnership and
not immovable property. Second, mere failure to
register the contract of partnership with the SEC
does not invalidate a contract that has the essential
requisites of a partnership. The purpose of
registration of the contract of partnership is to give
notice to third parties. Failure to register the
contract of partnership does not affect the liability of
the partnership and of the partners to third persons.
Neither does such failure to register affect the
partnerships juridical personality. A partnership may
exist even if the partners do not use the words
partner or partnership.
Page 25
Indeed, the Angeles spouses admit to facts that
prove the existence of a partnership: a contract
showing a sosyo industrial or industrial partnership,
contribution of money and industry to a common
fund, and division of profits between the Angeles
spouses and Mercado.
 Litonjua v. Litonjua, GR 166299-30,
December 13, 2005
Annex A-1, on its face, contains typewritten entries,
personal in tone, but is unsigned and undated. As an
unsigned document, there can be no quibbling that
Annex A-1 does not meet the public instrumentation
requirements exacted under Article 1771 of the Civil
Code. Moreover, being unsigned and doubtless
referring to a partnership involving more than
P3,000.00 in money or property, Annex A-1 cannot
be presented for notarization, let alone registered
with the Securities and Exchange Commission (SEC),
as called for under the Article 1772 of the Code. And
inasmuch as the inventory requirement under the
succeeding Article 1773 goes into the matter of
validity when immovable property is contributed to
the partnership, the next logical point of inquiry
turns on the nature of petitioners contribution, if
any, to the supposed partnership.
The CA, addressing the foregoing query, correctly
stated that petitioner’s contribution consisted of
immovables and real rights. Wrote that court:
A further examination of the allegations in
the complaint would show that [petitioners]
contribution to the so-called
partnership/joint venture was his supposed
share in the family business that is
consisting of movie theaters, shipping and
land development under paragraph 3.02 of
the complaint. In other words, his
contribution as a partner in the alleged
partnership/joint venture consisted of
immovable properties and real rights.
Significantly enough, petitioner matter-of-factly
concurred with the appellate courts observation
that, prescinding from what he himself alleged in his
Morc’s Notes on Partnership and Agency
basic complaint, his contribution to the partnership
consisted of his share in the Litonjua family
businesses which owned variable immovable
properties. Petitioners assertion in his motion for
reconsideration of the CA’s decision, that what was
to be contributed to the business [of the partnership]
was [petitioners] industry and his share in the family
[theatre and land development] business leaves no
room for speculation as to what petitioner
contributed to the perceived partnership.
Lest it be overlooked, the contract-validating
inventory requirement under Article 1773 of the Civil
Code applies as long real property or real rights are
initially brought into the partnership. In short, it is
really of no moment which of the partners, or, in this
case, who between petitioner and his brother
Eduardo, contributed immovables. In context, the
more important consideration is that real property
was contributed, in which case an inventory of the
contributed property duly signed by the parties
should be attached to the public instrument, else
there is legally no partnership to speak of.
Petitioner, in an obvious bid to evade the
application of Article 1773, argues that the
immovables in question were not contributed,
but were acquired after the formation of the
supposed partnership. Needless to stress, the
Court cannot accord cogency to this specious
argument. For, as earlier stated, petitioner
himself admitted contributing his share in the
supposed shipping, movie theatres and realty
development family businesses which already
owned immovables even before Annex A-1 was
allegedly executed.
Considering thus the value and nature of
petitioners alleged contribution to the
purported partnership, the Court, even if so
disposed, cannot plausibly extend Annex A-1 the
legal effects that petitioner so desires and
pleads to be given. Annex A-1, in fine, cannot
support the existence of the partnership sued
upon and sought to be enforced. The legal and
factual milieu of the case calls for this
disposition. A partnership may be constituted in
Page 26
 any form, save when immovable property or
real rights are contributed thereto or when the
partnership has a capital of at least P3,000.00, in
which case a public instrument shall be
necessary. And if only to stress what has
repeatedly been articulated, an inventory to be
signed by the parties and attached to the public
instrument is also indispensable to the validity
of the partnership whenever immovable
property is contributed to it.
Torres, Angeles and Litonjua cases: As explained by
Villanueva
The rulings in Torres and Angeles which have their
basis from jurisprudence under the Old Civil Code
and the Code of Commerce, will continue to prevail;
and that the Litonjua doctrine of rendering the
contract of partnership void for failure to comply
with the requirements under Article 1773 of the Civil
Code is applicable only to situations where the
claimant who asserts that a contract of partnership
has been duly constituted relies only upon a note or
instrument, and does not have other evidence to
prove that indeed a contract of partnership has been
constituted. The best evidence presented by the
younger brother to prove a contract of partnership
has been constituted was the unsigned typewritten
note, and he failed to prove the essential elements
of the contract of partnership.
Under the provisions of the Code of Commerce and
the Old Civil Code which prescribed formalities for
the formation of a partnership where real property
is contributed, knowledge of the existence of the
new partnership or community of property must, at
least, be brought home to third persons dealing with
the surviving husband in regard to community real
property in order to bind them by the community
agreement. Consequently, third parties without
knowledge of the existence of the partnership who
deal with the property still registered in the name of
one of the partners have a right to expect full
effectivity of such transaction on the property, in
spite of the protestation of the other partners and
perhaps even the partnership creditors.
Morc’s Notes on Partnership and Agency
How should we appreciate the rulings in Angeles and
Torres, and Litonjua then?
According to Villanueva, it would have been better if
the Court made it categorical that Litonjua had
expressly set aside its ruling in Torres, so that its
doctrine would have been the clear guide to legal
practitioners. For him, the cases of Torres and
Angeles rendered the provision useless.
He suggested, the following afore-quoted passage is
the best way to appreciate the decision in Litonjua:
“Lest it be overlooked, petitioner is the
intended beneficiary of the PhP 1 Million or
10% equity of the family businesses
supposedly promised by Eduardo to give in
the near future. Any suggestion that the
stated amount or the equity component of
the promise was intended to go to a
common fund would be to read something
not written in Annex A-1. Thus, even this
angle alone argues against the very idea of
a partnership, the creation of which
requires two or more contracting minds
mutually agreeing to contribute money,
property, or industry to a common fund
with the intention of dividing the profits
between or among themselves.”
That, in the end, no contract of partnership arose
between the Litonjua siblings even on the basis of
the arrangement purported, since it lacked the
essential element of contributing to a common fund.
Thus, the rulings of the failure to comply with the
provisions of Article 1771 to 1773 of the Civil Code
ought to be considered as obiter dictum.
Article 1774: Acquisition of partnership of
immovable property
Any immovable property or an interest
therein may be acquired in the partnership
name. Title so acquired can be conveyed
only in the partnership name.
Article 1775. Secret Partnerships without juridical
personality.
Page 27
 Associations and societies, whose articles
are kept secret among the members and
wherein any one of the members may
contract in his own name with third
persons, shall have no juridical personality
and shall be governed by the provisions
relating to co-ownership.
In the following instances, the “partnership” does
not have juridical personality:
1. Unlawful partnerships due to unlawfulness
of object and/or purpose;
2. Articles which are kept secret among its
members;
3. Any one of the members may contract in his
own name with third persons;
4. Failure to comply with Article 1773; and,
5. Article 1782: Persons who are prohibited
from giving each other any donation or
advantage cannot enter into universal
partnership.
Article 1776: Classification of partnership; universal
or particular partnership
As to its object, a partnership is either
universal or particular.
As regards the liability of the partners, a
partnership may be general or limited.
Article 1777: Universal partnership of present
properties or profit
A universal partnership may refer to all the
present property or to all the profits.
Article 1778: Universal partnership of present
property defined
A partnership of all present property is that
in which the partners contribute all the
property which actually belongs to them to
a common fund, with the intention of
dividing the same among themselves, as
well as all the profits which they may
acquire therewith.
Morc’s Notes on Partnership and Agency
Article 1779. Rule of ownership of property in
universal partnership of all present property
In a universal partnership of all present
property, the property which belonged to
each of the partners at the time of the
constitution of the partnership, becomes
the common property of all the partners, as
well as the profits which they may acquire
therewith.
A stipulation for the common enjoyment of
any other profits may also be made; but the
property which the partners may acquire
subsequently by inheritance, legacy or
donations cannot be included in such
stipulation, except the fruits thereof.
Article 1780: Universal partnership of profits
A universal partnership of profits comprises
all that the partners may acquire by their
industry or work during the existence of the
partnership.
Movable or immovable property which
each of the partners may possess at the
time of the celebration of the contract shall
continue to pertain exclusively to each, only
the usufruct passing to the partnership.
Article 1781: Presumption in favor of universal
partnership of profits
Articles of universal partnership, entered
into without specification of its nature, only
constitute a universal partnership of profits.
Article 1782: Persons prohibited from entering into
a universal partnership
Persons who are prohibited from giving
each other any donation or advantage
cannot enter into universal partnership.
Article 1783. Particular partnership; definition and
object
Page 28
 A particular partnership has for its object Persons who are together cannot form a universal
determinate things, their use or fruits, or partnership:
specific undertaking, or the exercise of a
profession or vocation. 1. Husband and wife
2. Those guilty of adultery or concubinage
The above provisions pertain to the classification of 3. Those guilty of the same criminal offense, if
partnership according to its object. These are the partnership was entered into in
universal partnerships and particular partnerships. consideration of the same.

Definitions: Cases:

1. Universal partnership. This kind of  Commssioner of Internal Revenue v. Suter,

partnership is further divided into: L-25532, February 28, 1969
a. Universal partnership of all present
property under Article 1778; and, While spouses cannot enter into a universal
b. Universal partnership of profits as partnership, they can enter into a particular
defined by Article 1780. partnership or be members thereof.
2. Particular partnership. It is defined by
OBLIGATIONS OF THE PARTNERS
Article 1783.
Kinds of relations:
Distinctions:
1. Between the partners
All profits All present property
2. Between the partners and the partnership
Only the usufruct of the All property actually
3. Between partners and third persons
properties of the belonging to the
4. Between the partnership and third persons
partners becomes partners are contributed
common property. The – and said properties Kinds of partners:
naked ownership is become common
retained by each of the property except those 1. Capitalist partner. It is one who contributes
partners. properties subsequently money or property to a common fund.
acquired by inheritance, 2. Industrial partner. It is one who contributes
legacy or donation but only his industry or personal service.
the fruits thereof can be 3. General partner. It is one whose liability to
included in the third persons extends to his separate
stipulation. property; he may either be a capitalist or
All profits acquired by As a rule, aside from the industrial partner. He is also known as real
the industry or work of contributed properties, partner.
the partners become only the profits of said 4. Limited partner. It is one whose liability to
common property, contributed common third persons is limited to his capital
regardless of whether or property, not other contribution. He is also known as special
not said profits were profits. Profits from partner.
obtained through the other sources may 5. Managing partner. It is one who manages
usufruct contributed. become common, but the affairs or business of the partnership;
only if there is a he may be appointed either in the articles
stipulation to such of partnership or after the constitution of
effect. the partnership.

Morc’s Notes on Partnership and Agency Page 29

 6. Liquidating partner. It is one who takes known or held out as a partner. He would
charge of the winding up of partnership be both a silent and a secret partner. He
affairs upon dissolution. may retire from the partnership without
7. Partner by estoppel. It is one who is not giving notice and cannot be held liable for
really a partner, not being a party to a obligations of the firm subsequent to his
partnership agreement, but is liable as a withdrawal. His only interest in joining the
partner for the protection of innocent third partnership would be the sharing of the
persons. He is one who is represented as profits earned. He is called sleeping
being in fact a partner, but who is not so as partner.
between the partners themselves. He is 15. Original partner. It is one who is a member
also known as partner by implication, of the partnership from the time of its
nominal partner, or quasi-partner. organization.
8. Continuing partner. It is one who continues 16. Incoming partner. It is one who lately or
the business of a partnership after it has about to be taken into an existing
been dissolved by reason of the admission partnership as a member.
of a new partner, or the retirement, death 17. Retiring partner. It is one who withdraws
or expulsion of one or more partners. from the partnership.
9. Surviving partner. It is one who remains
after the partnership has been dissolved by Obligations of partners
death of any partner.
1. To give his contribution
10. Subpartner. It is one who, not being a
2. Not to convert firm money or property for
member of the partnership, contracts with
his own use
a partner with reference to the latter’s
3. Not to engage in unfair competition with his
share in the partnership.
own firm
11. Ostensible partner. It is one who takes
4. To account for and hold as trustee,
active part and is known to the public as a
unauthorized personal profits
partner in the business, whether or not he
5. Pay for damages caused by his fault
has an actual interest in the firm. Thus, he
6. Duty to credit to the firm, payment made
may be an actual partner or a nominal
by a debtor who owes him and the firm
partner. If he is not actually a partner, he is
7. Share with the other partners the share of
subject to liability by doctrine of estoppel.
the partnership credit which he has
12. Secret partner. It is one who takes active
received from an insolvent firm debtor
part in the business but is not known to be
a partner by outside parties nor held out as Rights of partners:
a partner by the other partners, although
he participates in the profits and losses of 1. Property rights
the partnership. He is an actual partner. 2. Right to associate with another person in
13. Silent partner. It is one who does not take his share
any active part in the business although he 3. Right to inspect and copy partnership books
may be known to be a partner. If he 4. Right to demand a formal account
withdraws from the partnership, he must 5. Right to ask for the dissolution of the firm at
give notice to those persons who did the proper time
business with the firm to escape liability in
Article 1784. Commencement and term of
the future.
partnership
14. Dormant partner. It is one who does not
take active part in the business and is not

Morc’s Notes on Partnership and Agency Page 30

 A partnership begins from the moment of
the execution of the contract, unless it is
otherwise stipulated.
Generally, a partnership begins from the moment of
the execution of the contract, except when there is a
contrary stipulation.
Article 1785: Duration of a partnership
When a partnership for a fixed term or
particular undertaking is continued after
the termination of such term or particular
undertaking without any express
agreement, the rights and duties of the
partners remain the same as they were at
such termination, so far as is consistent
with a partnership at will.
A continuation of the business by the
partners or such of them as habitually acted
therein during the term, without any
settlement or liquidation of the partnership
affairs, is prima facie evidence of a
continuation of the partnership.
A partnership is unlimited as to its duration in the
sense that no time limit is fixed by law. The duration
may be agreed upon expressly (as when there is a
definite period) or impliedly (as when a particular
enterprise is undertaken – it being understood that
the firm ends as soon as its purpose has been
achieved).
From the above, a partnership can be classified
according to its duration:
1. Partnership with a fixed term
2. Partnership for a particular undertaking
3. Partnership at will
Cases:
 Ortega v. CA, GR 109248, July 3, 1995
On partnership at will and its dissolution
A partnership that does not fix its term is a
partnership at will. That the law firm "Bito, Misa &
Morc’s Notes on Partnership and Agency
Lozada," and now "Bito, Lozada, Ortega and
Castillo," is indeed such a partnership need not be
unduly belabored. The birth and life of a partnership
at will is predicated on the mutual desire and
consent of the partners. The right to choose with
whom a person wishes to associate himself is the
very foundation and essence of that partnership. Its
continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each
partner’s capability to give it, and the absence of a
cause for dissolution provided by the law itself.
Verily, any one of the partners may, at his sole
pleasure, dictate a dissolution of the partnership at
will. He must, however, act in good faith, not that
the attendance of bad faith can prevent the
dissolution of the partnership but that it can result in
a liability for damages. In passing, neither would the
presence of a period for its specific duration or the
statement of a particular purpose for its creation
prevent the dissolution of any partnership by an act
or will of a partner. Among partners, mutual agency
arises and the doctrine of delectus personae allows
them to have the power, although not necessarily
the right, to dissolve the partnership. An unjustified
dissolution by the partner can subject him to a
possible action for damages. The dissolution of a
partnership is the change in the relation of the
parties caused by any partner ceasing to be
associated in the carrying on, as might be
distinguished from the winding up of, the business.
Upon its dissolution, the partnership continues and
its legal personality is retained until the complete
winding up of its business culminating in its
termination. The liquidation of the assets of the
partnership following its dissolution is governed by
various provisions of the Civil Code, however, an
agreement of the partners, like any other contract, is
binding among them and normally takes precedence
to the extent applicable over the Code’s general
provisions. And here, the term "retirement" must
have been used in the Articles of Partnership in a
generic sense to mean the dissociation by a partner,
inclusive of resignation or withdrawal, from the
partnership that thereby dissolves it.
Page 31
On the dissolution of a partnership at will due to
withdrawal of a partner, absent any bad faith
Attorney Misa did not act in bad faith. Public
respondents viewed his withdrawal to have been
spurred by "interpersonal conflict" among the
partners. It would not be right, to let any of the
partners remain in the partnership under such an
atmosphere of animosity; certainly, not against their
will. Indeed, for as long as the reason for withdrawal
of a partner is not contrary to the dictates of justice
and fairness, nor for the purpose of unduly visiting
harm and damage upon the partnership, bad faith
cannot be said to characterize the act. Bad faith, in
the context here used, is no different from its
normal concept of a conscious and intentional
design to do a wrongful act for a dishonest purpose
or moral obliquity.
Article 1786: Obligations of a partner with respect
to contribution of property
Every partner is a debtor of the partnership
for whatever he may have promised to
contribute thereto.
He shall also be bound for warranty in case
of eviction with regard to specific and
determinate things which he may have
contributed to the partnership, in the same
cases and in the same manner as the
vendor is bound with respect to the vendee.
He shall also be liable for the fruits thereof
from the time they should have been
delivered, without the need of any demand.
Three important duties of every partner:
1. The duty to contribute what had been
promised;
2. The duty to deliver the fruits of what should
have been delivered;
3. The duty to warrant in cases of eviction, as
it applies only to specific and determinate
things already contributed;
4. The duty to preserve the property with the
diligence of a good father of a family
pending delivery to the partnership; and,
Morc’s Notes on Partnership and Agency
5. The duty to indemnify the partnership for
any damage caused to it by the retention of
the same or by the delay in its contribution.
Effect is enunciated by Article 1788, paragraph 1. It
provides that a person who has undertaken to
contribute a sum of money and fails to do so
becomes a debtor for the interest and damages from
the time he should have complied with his
obligation.
Cases:
 Moran v. CA, L-59956, October 31, 1984
The rule is, when a partner who has undertaken to
contribute a sum of money fails to do so, he
becomes a debtor of the partnership for whatever
he may have promised to contribute and for
interests and damages he should have complied with
his obligation.
If the partnership venture is a failure, a partner is not
entitled to his promised commission, if said promise
does not state the basis of the commission.
Who owns the property before it is delivered?
According to Paras, both in the case of money or
property, it is the partner who still owns the same
before delivery, for it is delivery, actual or
constructive, that transfers ownership.
If a partner fails to contribute within the stipulated
time what was promised, may the partnership
contract be rescinded? As a general rule, no. The
reason is, rescission is not the proper remedy; the
remedy should be to collect what is owing, as well as
damages. However, if the defaulting partner is
already dead, rescission may prosper.
Article 1787: When contribution consists of goods;
appraisal of property
When the capital or a part thereof which a
partner is bound to contribute consists of
goods, their appraisal must be made in the
manner prescribed in the contract of
partnership, and in the absence of
Page 32
 stipulation, it shall be made by experts
chosen by the partners, and according to
current prices, the subsequent changes
thereof being for the account of the
partnership.
Article 1788. Effect of failure to contribute and
obligation for conversion
A partner who has undertaken to
contribute a sum of money and fails to do
so becomes a debtor for the interest and
damages from the time he should have
complied with his obligation.
The same rule applies to any amount he
may have taken from the partnership
coffers, and his liability shall begin from the
time he converted the amount to his own
use.
The coverage of liability due to his failure to
contribute:
1. Interest at the agreed rate; if none, at the
legal rate of 6% per annum
2. Damages that may be suffered by the
partnership.
Is demand necessary to put partner in default?
In the case of contribution, because time is of the
essence, a partnership is formed precisely to make
use of the 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. Thus, the injury is constant.
In the case of conversion, because the firm is
deprived of the benefits of the money, from the very
moment of conversion.
Cases:
 Uy v. Puson, L-19819, October 26, 1977
Facts:
Morc’s Notes on Partnership and Agency
Bartolome Puzon had a contract with the Republic of
the Philippines, through the Bureau of Public
Highways, for the construction of 2 projects. Since
he found difficulty in accomplishing the projects, he
sought financial assistance from William Uy,
proposing that they create a partnership, which is to
be considered as the subcontractor of the projects,
and the profits to be divided equally between them.
Uy agreed to Puzon’s proposition.
They agreed that the capital would be P100,000.00,
each partner to contribute P50,000.00 in cash.
However, Puzon was short of cash and he promised
to contribute his share in the partnership capital as
soon as his application for a loan with the PNB in the
amount of P150,000.00 be approved.
However, before his loan application could be acted
upon, he had to clear his collaterals of its
encumbrances. Hence, Uy gave Puzon P10,000.00 as
advance contribution of his share in the partnership
organized between them. On a later date, Uy gave
Puzon P30,000.00 as his partial contribution to the
proposed partnership. The P30,000.00 was used by
Puzon to clear his obligations with the Rehabilitation
Finance Corporation.
Puzon promised Uy that the amount of P150,000.00
(amount to be borrowed from PNB) would be given
to the partnership, broken down as follows:
P40,000.00 as reimbursement of the capital
contribution of Uy which he (Uy) had advanced to
the partnership; and the balance of P60,000.00 as
Puzon’s personal loan to the partnership.
Puzon’s loan application with the PNB was approved,
and he gave Uy the amount of P60,000.00. Of this
amount, P40,000.00 was for the reimbursement of
Uy’s contribution to the partnership which was used
to clear the title to Puzon’s property, and the
P20,000.00 as Puzon’s contribution to the
partnership capital.
To guarantee the repayment of the loan, Puzon,
without the knowledge and consent of Uy, assigned
to the PNB all the payments to be received on
account of the contracts with the Bureau of Public
Page 33
Highways for the construction of the projects. By
virtue of said agreement, the Bureau of Public
Highways paid the money due on the partial
accomplishments on the projects to the PNB which,
in turn, applied portions of it in payment of Puzon’s
loan. Of the amount of P1,047,181.07 released by
the Bureau in payment of the partial work
completed by the partnership on the projects, the
amount of P332,539.60 was applied in payment of
Puzon’s loan and only the amount of P27,820.80 was
deposited in the partnership funds, which was also
under Puzon’s account since Puzon was the
custodian of the common funds.
Uy asked Puzon to comply with his obligations under
the terms of their partnership agreement and to
place his capital contribution at the disposal of the
partnership. However, Puzon failed to do so. Uy
consequently wrote Puzon formal letters of demand
to which Puzon replied that he was unable to put in
additional capital to continue with the projects.
Having failed to reach an agreement with Uy, Puzon
wrote the subcontractor, which is the partnership
between Uy and Puzon (U.P. Construction
Company), that unless they presented an immediate
solution and capacity to carry out the work
effectively, he (Puzon) would consider the
subcontract terminated and thereafter, assume all
the responsibilities in the construction of the
projects in accordance with his original contract with
the Bureau. On a later date, Puzon again wrote the
partnership that he was finally terminating the
subcontract agreement.
During the termination of the agreement, Uy had
contributed to the partnership the amount of
P115,453.39, including his capital through the
arrangement he had had with Puzon.
Uy claimed that Puzon had violated the terms of
their partnership agreement and hence instituted an
action seeking the dissolution of the partnership and
the payment of damages.
The trial court found that Puzon failed to contribute
his share in the capital of the partnership, applied
Morc’s Notes on Partnership and Agency
partnership funds to his personal use, ousted Uy
from the management of the firm, and caused the
failure of the partnership to realize the expected
profits. Puzon appealed from the decision, but
during the pendency, died. He was substituted by
Franco Puzon.
Ruling:
The Court affirmed the findings of the trial court.
On Bartolome Puzon’s failure to make his
contribution:
Bartolome Puzon indeed failed to contribute his
share in the capital of the partnership. The record
shows that, after the appellant’s loan of P150,000.00
was approved by the PNB, he gave the amount of
P60,000.00 to Uy who was then managing the
construction projects. Of this amount, P40,000.00
was to applied as reimbursement of Uy’s
contribution to the partnership which was used to
clear the title to Puzon’s property; and the balance
of P20,000.00 as his (Puzon) contribution to the
partnership. Thereafter, Puzon failed to make any
further contributions to the partnership funds as
shown in his letters to Uy wherein he confessed his
inability to put in additional capital to continue with
the projects.
On the misappropriation of partnership funds
The findings of the trial court were likewise
sustained. As shown, Bartolome Puzon assigned to
the PNB all the payments to be received on account
of the contracts with the Bureau of Public Highways
for the construction of the projects to guarantee the
repayment of his personal loan with the bank. By
virtue of said assignment, the Bureau paid the
money due on the partial accomplishments on the
construction projects in question to the PNB which,
in turn, applied portions of it in payment of his loan.
Bartolome Puzon claimed that it was with Uy’s
consent, and that the assignment did not prejudice
the partnership as he reimbursed the partnership.
However, Uy categorically denied such knowledge
and consent. He likewise stated that when he
Page 34
learned of said assignment, he called the attention
of Puzon who assured him that the assignment was
only temporary as he would transfer the loan to the
RFC within 3 months time.
As found by the trial court, out of the P1,047,184.01
as payment for the construction projects,
P332,539.60 was used by Puzon to pay his personal
loan with PNB, and only P27,820.80 was deposited in
the partnership’s account. The balance of
P686,823.61 was deposited in his own account.
This provision underscores the industrial partner’s
duty of loyalty. Hence, regardless of whether he
engages in the same business or not, he is prohibited
from engaging in other businesses other than the
partnership. There is an exception however, that is
when the partnership expressly permitted him to do
so.
Consequences if an industrial partner engages in
business for himself, absent the express approval of
the partnership:

If Puzon gave to the partnership all that were earned 1.
and due it under the subcontract agreements, the 2.
money would have been used as a safe reserve for
the discharge of all obligations of the firm and the
partnership would have been able to successfully
and profitably execute the projects it subcontracted. Cases:
Exclusion from the firm, plus damages; or,
Benefits he had obtained from the other
businesses can be availed of by the other
partners, plus damages.

Article 1789: Obligations of an industrial partner  Evangelista v. Abad-Santos, L-31684, June

28, 1973
An industrial partner cannot engage in
business for himself, unless the partnership It is not disputed that the provision against the
expressly permits him to do so, and if he industrial partner engaging in business for himself
should do so, the capitalist partners may seeks to prevent any conflict of interest between the
either exclude him from the firm or avail industrial partner and the partnership, and to insure
themselves of the benefits which he may faithful compliance by said partner with this
have obtained in violation of this provision, prestation. There is no pretense, however, even on
with a right to damages in either case. the part of the appellee is engaged in any business
antagonistic to that of appellant company, since
Distinctions: being a Judge of one of the branches of the City
Court of Manila can hardly be characterized as a
Industrial partner Capitalist partner
business. That appellee has faithfully complied with
One who furnishes One who furnishes
her prestation with respect to appellants is clearly
industry or labor. capital.
shown by the fact that it was only after filing of the
He is exempted from He is not exempted from
complaint in this case and the answer thereto
losses as between the losses.
appellants exercised their right of exclusion under
partner.
the codal art just mentioned by alleging in their
He cannot engage in any He can engage in other
Supplemental Answer dated June 29, 1964 - or after
other business without business provided that
around nine (9) years from June 7, 1955 -
the express consent of there is no competition
subsequent to the filing of defendants' answer to the
the other partners, between the partner and
complaint, defendants reached an agreement
otherwise he suffers his business.
whereby the herein plaintiff been excluded from,
consequences
and deprived of, her alleged share, interests or
enumerated by law.
participation, as an alleged industrial partner, in the
defendant partnership and/or in its net profits or
income, on the ground plaintiff has never

Morc’s Notes on Partnership and Agency Page 35

contributed her industry to the partnership, instead
she has been and still is a judge of the City Court
(formerly Municipal Court) of the City of Manila,
devoting her time to performance of her duties as
such judge and enjoying the privilege and
emoluments appertaining to the said office, aside
from teaching in law school in Manila, without the
express consent of the herein defendants' (Record
On Appeal, pp. 24-25). Having always knows as a
appellee as a City judge even before she joined
appellant company on June 7, 1955 as an industrial
partner, why did it take appellants many years
before excluding her from said company as
aforequoted allegations? And how can they
reconcile such exclusive with their main theory that
appellee has never been such a partner because
"The real agreement evidenced by Exhibit "A" was to
grant the appellee a share of 30% of the net profits
which the appellant partnership may realize from
June 7, 1955, until the mortgage of P30,000.00
obtained from the Rehabilitation Finance Corporal
shall have been fully paid." (Appellants Brief, p. 38).
Does an industrial partner then have a right to
demand for a formal accounting and receive share in
the net profit? YES. In the words of the Court in the
case of Evangelista:
What has gone before persuades us to hold
with the lower Court that appellee is an
industrial partner of appellant company,
with the right to demand for a formal
accounting and to receive her share in the
net profit that may result from such an
accounting, which right appellants take
exception under their second assigned
error. Our said holding is based on the
following article of the New Civil Code:
ART. 1809. Any partner shall have the right
to a formal account as to partnership
affairs:
1. If he is wrongfully excluded from the
partnership business or possession of
its property by his co-partners;
Morc’s Notes on Partnership and Agency
2. If the right exists under the terms of
any agreement;
3. As provided by Article 1807;
4. Whenever other circumstances render
it just and reasonable.
We find no reason in this case to depart from
the rule which limits this Court's appellate
jurisdiction to reviewing only errors of law,
accepting as conclusive the factual findings of
the lower court upon its own assessment of the
evidence.
Article 1790: Capital contribution to the partnership
Unless there is a stipulation to the contrary,
the partners shall contribute equal shares
to the capital of the partnership.
It is permissible to contribute unequal shares, if
there is a stipulation to that effect. In the absence of
proof, the shares are presumed equal.
Article 1791: Obligation of capitalist partner to
contribute additional capital
If there is no agreement to the contrary, in
case of an imminent loss of the business of
the partnership, any partner who refuses to
contribute an additional share to the
capital, except an industrial partner, to save
the venture, shall be obliged to sell his
interest to the other partners.
When is a capitalist partner obliged to sell his
interest to the other partners? There are four
requisites, to wit:
1. There is an imminent los of the
partnership’s business;
2. The majority of the capitalist partners are of
the opinion that an additional contribution
to the common fund would save the
business;
3. The capitalist partner deliberately refuses
to contribute an additional share to the
capital; and,
Page 36
 4. There is no agreement to the contrary.
Article 1792: Obligation of managing partner who
collects debts; duty of loyalty
If a partner authorized to manage collects a
demandable sum, which was owed to him
in his own name, from a person who owed
the partnership another sum also
demandable, the sum thus collected shall
be applied to the two credits in proportion
to their amounts, even though he may have
given a receipt for his own credit only, but
should he have given it for the account of
the partnership credit, the amount shall be
fully applied to the latter.
The provisions of this article are understood
to be without prejudice to the right granted
to the debtor by Article 1252 but only if the
personal credit of the partner should be
more onerous to him.
For this article to apply, the following requisites
must concur:
1. The existence of at least 2 debts – one
where the firm is the creditor and the
other, where the partner is the creditor;
2. Both sums are demandable; and,
3. The collecting partner is a managing
partner.
Who is a managing partner? One who manages
actively the firm’s affairs.
Article 1252 provides that a debtor may declare at
the time of the payment to which of the debts is the
payment applied. In relation to Article 1792, it
applies when partner’s credit is more onerous than
that of the partnership’s.
Article 1793: Obligation of partner who received
shares of partnership credit
A partner who has received, in whole or in
part, his share of a partnership credit, when
the other partners have not collected
Morc’s Notes on Partnership and Agency
theirs, shall be obliged, if the debtor should
thereafter become insolvent, to bring to the
partnership capital what he received even
though he may have given receipt for his
share only.
Distinctions:
Article 1792 Article 1793
Two debts One debt only (firm
credit)
Applies only to managing Applies to any partner
partner
Article 1794: Obligations of partner for damages to
the partnership
Every partner is responsible to the
partnership for damages suffered by it
through his fault and he cannot
compensate them with the profits and
benefits which he may have earned for the
partnership by his industry. However, the
courts may equitably lessen his
responsibility if through the partner’s
extraordinary efforts in other activities of
the partnership, unusual profits have been
realized.
Article 1795: Risk of loss of things contributed
The risk of specific and determinate things,
which are not fungible, contributed to the
partnership so that only their use and fruits
may be for the common benefit, shall be
borne by the partner who owns them.
If the things contributed are fungible, or
cannot be kept without deteriorating, or if
they were contributed to be sold, the risk
shall be borne by the partnership. In the
absence of stipulation, the risk of things
brought and appraised in the inventory,
shall also be borne by the partnership, and
in such case the claim shall be limited to the
value of which they were appraised.
Who bears risk of loss?
Page 37
 1. For specific and determinate things. The
usufruct is enjoyed by a firm; hence,
partner who owns it bears loss because
ownership was never transferred to the
firm.
2. Fungible or deteriorable. The firm bears
loss for evidently ownership was being
transferred; otherwise, use is impossible.
3. Things contributed to be sold. The firm
bears loss for evidently, the firm was
intended to be the owner; otherwise, a sale
could not be made.
4. Contributed under appraisal. The firm
bears loss because this has the effect of an
implied sale.
Article 1796: Responsibility of the partnership to
the partners
The partnership shall be responsible to
every partner for the amounts he may have
disbursed on behalf of the partnership and
for the corresponding interest, from the
time the expenses are made, it shall also
answer to each partner for the obligations
he may have contracted in good faith in the
interest of the partnership business, and for
risks in consequence of its management.
Responsibility of firm:
1. Refund amounts disbursed on behalf of the
firm plus interest from the time expenses
were made; and,
2. Answer to each partner for obligations he
may have entered into in good faith in the
interest of the partnership as well as for
risks in consequence of its management.
Article 1797: Rules for the distribution of profits
and losses
The losses and profits shall be distributed in
conformity with the agreement. If only the
share of each partner in the profits has
been agreed upon, the share of each of the
losses shall be in the same proportion.
Morc’s Notes on Partnership and Agency
In the absence of stipulation, the share of
each partner in the profits and losses shall
be in proportion to what he may have
contributed but the industrial partner shall
not be liable for the losses. As for the
profits, the industrial partner shall receive
such share as may be just and equitable
under the circumstances. If besides his
services he has contributed capital, he shall
also receive a share in the profits in
proportion to his capital.
Article 1798: Designation by a third person of
shares in profits and losses
If the partners have agreed to intrust to a
third person the designation of the share of
each one in the profits and losses, such
designation may be impugned only when it
is manifestly inequitable. In no case may a
partner who has begun to execute the
decision of the third person, or who has not
impugned the same within a period of 3
months from the time he had knowledge
thereof, complain of such decision.
The designation of losses and profits cannot
be intrusted to one of the partners.
Article 1799: Stipulation excluding partner from
profits and losses
A stipulation which excludes one or more
partners from any share in the profits or
losses is void.
Rules on division of profits and losses:
1. Agreement or stipulation
2. Contribution
How about for industrial partners? The second
paragraph of Article 1797 applies only in case there
is no stipulation. Hence, if an industrial partner
agreed to the stipulation as regards his share in the
profits, he is to shoulder the same share in losses.
He cannot claim the contract to be valid in one
breath and impugn its validity in another. It is a valid
Page 38
stipulation and should therefore be enforced.
Otherwise, to exempt him from losses would violate
Article 1799.
 Reason: He consented to the stipulation.
Hence, the contract becomes the law
between the parties.
The general rule is that a stipulation excluding one or
more partners from any share in the profits or losses
is void.
Generally, an industrial partner is exempted from
losses unless there is a stipulation to the effect and
he consented to it.
Cases:
 Marsman Drysdale Land, Inc. v. Philippine
Geoanalytics, Inc. & Gotesco Properties,
Inc., GR 183374 & 183376, June 29, 2010
In the JVA, Marsman Drysdale and Gotesco agreed
on a 50-50 ratio on the proceeds of the project.
They did not provide for the splitting of losses,
however. Applying the above-quoted provision of
Article 1797 then, the same ratio applies in splitting
the P535,353.50 obligation-loss of the joint
venture.
The appellate court’s decision must be modified,
however. Marsman Drysdale and Gotesco being
jointly liable, there is no need for Gotesco to
reimburse Marsman Drysdale for 50% of the
aggregate sum due to PGI.
Allowing Marsman Drysdale to recover from
Gotesco what it paid to PGI would not only be
contrary to the law on partnership on division of
losses but would partake of a clear case of unjust
enrichment at Gotescos expense. The grant by the
lower courts of Marsman Drysdale cross-claim
against Gotesco was thus erroneous.
 Jarantila v. Jarantila, GR 154486, December
1, 2010
It is clear from the foregoing that a partner is
entitled only to his share as agreed upon, or in the
Morc’s Notes on Partnership and Agency
absence of any such stipulations, then to his share in
proportion to his contribution to the partnership.
The petitioner himself claims his share to be 6%, as
stated in the Acknowledgement of Participating
Capital. However, petitioner fails to realize that this
document specifically enumerated the businesses
covered by the partnership: Manila Athletic Supply,
Remotigue Trading in Iloilo City and Remotigue
Trading in Cotabato City. Since there was a clear
agreement that the capital the partners contributed
went to the three businesses, then there is no
reason to deviate from such agreement and go
beyond the stipulations in the document. Therefore,
the Court of Appeals did not err in limiting
petitioners share to the assets of the businesses
enumerated in the Acknowledgement of
Participating Capital.
 Ramnani v. Ramnani, GR 85494 & 85496,
May 7, 1991
Nevertheless, under the peculiar circumstances of
this case and despite the fact that Choithram, et al.,
have committed acts which demonstrate their bad
faith and scheme to defraud spouses Ishwar and
Sonya of their rightful share in the properties in
litigation, the Court cannot ignore the fact that
Choithram must have been motivated by a strong
conviction that as the industrial partner in the
acquisition of said assets he has as much claim to
said properties as Ishwar, the capitalist partner in
the joint venture. Through the industry and genius of
Choithram, Ishwar’s property was developed and
improved into what it is now — a valuable asset
worth millions of pesos. As of the last estimate in
1985, while the case was pending before the trial
court, the market value of the properties is no less
than P22,304,000.00. It should be worth much more
today. We have a situation where two brothers
engaged in a business venture. One furnished the
capital, the other contributed his industry and talent.
Justice and equity dictate that the two share equally
the fruit of their joint investment and efforts.
Perhaps this Solomonic solution may pave the way
towards their reconciliation. Both would stand to
Page 39
gain. No one would end up the loser. After all, blood
is thicker than water.
Article 1800: Appointment of a manager
The partner who has been appointed
manager in the articles of partnership may
execute all acts of administration despite
the opposition of his partners, unless he
should act in bad faith; and his power is
irrevocable without just or lawful cause.
The vote of the partners representing the
controlling interest shall be necessary for
such revocation of power.
A power granted after the partnership has
been constituted may be revoked at any
time.
Article 1801: Rule when there are two or more
managers
If two or more partners have been intrusted
with the management of the partnership
without specification of their respective
duties, or without a stipulation that one of
them shall not act without the consent of all
the others, each one may separately
execute all acts of administration, but if any
of them should oppose the acts of the
others, the decision of the majority shall be
prevail. In case of a tie, the matter shall be
decided by the partners owning the
controlling interest.
Article 1802: Unanimity of action by managing
partners
In case it should have been stipulated that
none of the managing partners shall act
without the consent of the others, the
concurrence of all shall be necessary for the
validity of the acts, and the absence or
disability of any one of them cannot be
alleged unless there is imminent danger or
grave or irreparable injury to the
partnership.
Morc’s Notes on Partnership and Agency
Article 1803: Rule when manner of management
not agreed
When the manner of management has not
been agreed upon, the following rules shall
be observed:
1. All the partners shall be considered
agents and whatever any one of them
may do alone shall bind the
partnership, without prejudice to the
provisions of Article 1801.
2. None of the partners may, without the
consent of the others, make any
important alteration in the immovable
property of the partnership, even if it
may be useful to the partnership. But if
the refusal of consent by the other
partners is manifestly prejudicial to the
interest of the partnership, the court’s
intervention may be sought.
Appointment in articles of partnership:
1. Power is irrevocable without just or lawful
cause. Therefore, to remove him for just
cause, the controlling partners should vote
to oust him. To remove him without cause
or for an unjust cause, there must be
unanimity.
2. As to the extent of power, should the
articles of partnership be silent on the
specification of their respective duties or on
the need for the consent of all the others, if
he acts in good faith, he may do all acts of
administration despite the opposition of his
partners. However, if he is in bad faith, he
cannot do any act.
3. When there are two or more managers,
each may separately execute all acts of
administration. In case of opposition, the
majority prevails. In case of tie, partners
having controlling interest prevail.
4. Should there be a stipulation requiring
unanimity in the acts of management, none
of the managing partners should act
without the consent of the others.
Page 40
What is the scope of powers of a manager? Unless
his powers are specifically restricted, he has the
power of a general agent, as well as all the incidental
powers needed to carry out the objectives of the
partnership. Moreover, as manager he has, even
without approval of the other partners, the power to
dismiss an employee, particularly when a justifiable
cause exists.
Rules to be observed when manner of management
has not been agreed upon or there is no stipulation
to that effect:
1. Partners are considered agents and
whatever any one of them may do alone
will bind the partnership. However, should
any one of them opposed, the majority’s
decision prevails.
2. None of the partners may, without the
consent of the others, make any important
alteration in the immovable property of the
partnership, even if it may be useful to the
partnership. However, when refusal of
consent is manifestly prejudicial to the
partnership’s interest, any one of them may
seek the court’s intervention.
Cases:
 Bachrach v. La Protectora, L-11624, January
21, 1918
Several members of a civil partnership executed a
document authorizing one of the members to buy
two automobile trucks in the name and
representation of the firm. The partner holding this
authority effected the purchase and signed the
name of the partnership to the purchase money
notes and added his own name as an individual,
thereby assuming, as to himself, joint and several
liability with the firm. It was held that the partners
who emitted the authority were not liable on the
note, as the document in question contained no
authority to bind them personally and in fact the
notes did not purport to do so; but they were liable
in their capacity as partners.
Morc’s Notes on Partnership and Agency
Article 1804: Contract of sub-partnership
Every partner may associate another person
with him in his share, but the associate shall
not be admitted in the partnership without
the consent of all the other partners, even if
the partner having an associate should be a
manager.
This article underscores the doctrine of delectus
personae. It is because:
1. Before an associate may become a partner,
all of the partners must consent.
2. However, for a partner to have an associate
in his share, consent of the other partners is
not required.
Article 1805: Partnership books
The partnership books shall be kept, subject
to any agreement between the partners, at
the principal place of business of the
partnership, and every partner shall at any
reasonable hour have access to and may
inspect and copy any of them.
Article 1806: Duty to give information
Partners shall render on demand true and
full information of all things affecting the
partnership to any partner or the legal
representative of any deceased partner or
of any partner under legal disability.
Article 1807: Duty to account
Every partner must account to the
partnership for any benefit, and hold as
trustee for it any profits derived by him
without the consent of the other partners
from any transaction connected with the
formation, conduct, or liquidation of the
partnership or from any use by him of its
property.
Article 1808: Prohibition for capitalist partner to
engage in business
Page 41
 The capitalist partners cannot engage for
their own account in any operation which is
of the kind of business in which the
partnership is engaged, unless there is a
stipulation to the contrary.
Any capitalist partner violating this
prohibition shall bring to the common funds
any profits accruing to him from his
transactions, and shall personally bear all
the losses.
While the industrial partner is prohibited from
engaging in business for himself, the capitalist
partner is prohibited from engaging for his own
account in any operation which is of the same kind
of business in which the partnership is engaged. The
competition may become unfair in view of the
knowledge by the capitalist partner of the firm’s
business secrets.
Consequences of violation:
1. Bring to the common fund what he had
benefited; and,
2. Shoulder all the losses.
Article 1809: Right to demand a formal account
Any partner shall have the right to a formal
account as to the partnership affairs:
1. If he is wrongfully excluded from the
partnership business or possession of
its property by his co-partners;
2. If the right exists under the terms of
any agreement;
3. As provided by Article 1807;
4. Whenever other circumstances render
it just and reasonable.
Generally, no formal accounting is demandable till
after dissolution. This is so because there is access
to the partnership books.
Cases:
 Evangelista v. Abad-Santos, supra.
Morc’s Notes on Partnership and Agency
What has gone before persuades us to hold with the
lower Court that appellee is an industrial partner of
appellant company, with the right to demand for a
formal accounting and to receive her share in the
net profit that may result from such an accounting,
which right appellants take exception under their
second assigned error.
 Lim Tanhu v. Ramolete, L-40098, August 29,
1975
If Po Chuan was in control of the affairs and the
running of the partnership, how could the
defendants have defrauded him of such huge
amounts as plaintiff had made his Honor believe?
Upon the other hand, since Po Chuan was in control
of the affairs of the partnership, the more logical
inference is that if defendants had obtained any
portion of the funds of the partnership for
themselves, it must have been with the knowledge
and consent of Po Chuan, for which reason no
accounting could be demanded from them therefor,
considering that Article 1807 of the Civil Code refers
only to what is taken by a partner without the
consent of the other partner or partners. Incidentally
again, this theory about Po Chuan having been
actively managing the partnership up to his death is
a substantial deviation from the allegation in the
amended complaint to the effect that "defendants
Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim
Teck Chuan and Eng Chong Leonardo, through fraud
and machination, took actual and active
management of the partnership and although Tee
Hoon Lim Po Chuan was the manager of Glory
Commercial Co., defendants managed to use the
funds of the partnership to purchase lands and
buildings etc. (Par. 4, p. 2 of amended complaint,
Annex B of petition) and should not have been
permitted to be proven by the hearing officer, who
naturally did not know any better.
The decision is rather emphatic in that Lim Tanhu
and Ng Sua had no known income except their
salaries. Actually, it is not stated, however, from
what evidence such conclusion was derived in so far
as Ng Sua is concerned. On the other hand, with
respect to Lim Tanhu, the decision itself states that
Page 42
according to Exhibit NN-Pre trial, in the supposed
income tax return of Lim Tanhu for 1964, he had an
income of P4,800 as salary from Philippine Metal
Industries alone and had a total assess sable net
income of P23,920.77 that year for which he paid a
tax of P4,656.00. (p. 14. Annex L, id.) And per Exhibit
GG-Pretrial in the year, he had a net income of
P32,000 for which be paid a tax of P3,512.40. (id.) As
early as 1962, "his fishing business in Madridejos
Cebu was making money, and he reported "a net
gain from operation (in) the amount of P865.64" (id.,
per Exhibit VV-Pre-trial.) From what then did his
Honor gather the conclusion that all the properties
registered in his name have come from funds
malversed from the partnership?
It is rather unusual that His Honor delved into
financial statements and books of Glory Commercial
Co. without the aid of any accountant or without the
same being explained by any witness who had
prepared them or who has knowledge of the entries
therein. This must be the reason why there are
apparent inconsistencies and inaccuracies in the
conclusions His Honor made out of them. In Exhibit
SS-Pre-trial, the reported total assets of the
company amounted to P2,328,460.27 as of
December, 1965, and yet, Exhibit TT-Pre-trial,
according to His Honor, showed that the total value
of goods available as of the same date was
P11,166,327.62. On the other hand, per Exhibit XX-
Pre-trial, the supposed balance sheet of the
company for 1966, "the value of inventoried
merchandise, both local and imported", as found by
His Honor, was P584,034.38. Again, as of December
31, 1966, the value of the company's goods available
for sale was P5,524,050.87, per Exhibit YY and YY-
Pre-trial. Then, per Exhibit II-3-Pre-trial, the
supposed Book of Account, whatever that is, of the
company showed its "cash analysis" was
P12,223,182.55. We do not hesitate to make the
observation that His Honor, unless he is a certified
public accountant, was hardly qualified to read such
exhibits and draw any definite conclusions
therefrom, without risk of erring and committing an
injustice. In any event, there is no comprehensible
explanation in the decision of the conclusion of His
Morc’s Notes on Partnership and Agency
Honor that there were P12,223,182.55 cash money
defendants have to account for, particularly when it
can be very clearly seen in Exhibits 11-4, 11-4- A, 11-
5 and 11-6-Pre-trial, Glory Commercial Co. had
accounts payable as of December 31, 1965 in the
amount of P4,801,321.17. (p. 15, id.) Under the
circumstances, We are not prepared to permit
anyone to predicate any claim or right from
respondent court's unaided exercise of accounting
knowledge.
 Leung v. IAC, GR 70926, January 31, 1989
Regarding the prescriptive period within which the
private respondent may demand an accounting,
Articles 1806, 1807, and 1809 show that the right to
demand an accounting exists as long as the
partnership exists. Prescription begins to run only
upon the dissolution of the partnership when the
final accounting is done.
 Emnace v. CA, GR 126334, November 23,
2001
The three (3) final stages of a partnership are: (1)
dissolution; (2) winding-up; and (3) termination. The
partnership, although dissolved, continues to exist
and its legal personality is retained, at which time it
completes the winding up of its affairs, including the
partitioning and distribution of the net partnership
assets to the partners. For as long as the partnership
exists, any of the partners may demand an
accounting of the partnerships business.
Prescription of the said right starts to run only upon
the dissolution of the partnership when the final
accounting is done.
Contrary to petitioners protestations that
respondents right to inquire into the business affairs
of the partnership accrued in 1986, prescribing four
(4) years thereafter, prescription had not even
begun to run in the absence of a final accounting.
Article 1842 of the Civil Code provides:
The right to an account of his interest shall
accrue to any partner, or his legal
representative as against the winding up
Page 43
 partners or the surviving partners or the increased or diminished
person or partnership continuing the by unanimous consent of
business, at the date of dissolution, in the the partners.
absence of any agreement to the contrary. Partnership property Partnership capital
includes not only the represents the aggregate
Applied in relation to Articles 1807 and 1809, which original capital of the individual
also deal with the duty to account, the above-cited contribution of the contributions made by
provision states that the right to demand an partners, but all the partners in
accounting accrues at the date of dissolution in the
property subsequently establishing or
absence of any agreement to the contrary. When a acquired on account of continuing the business.
final accounting is made, it is only then that the partnership, or in the
prescription begins to run. In the case at bar, no
partnership name with
final accounting has been made, and that is precisely partnership funds,
what respondents are seeking in their action before unless a contrary
the trial court, since petitioner has failed or refused
intention is shown,
to render an accounting of the partnerships business including partnership
and assets. Hence, the said action is not barred by name and the goodwill
prescription. of the partnership.
PROPERTY RIGHTS OF PARTNERS
Article 1811: Nature of partner’s right in specific
Article 1810: Property rights of partners partnership property

The property rights of a partner are: ART. 1811. A partner is co-owner with his
partners of specific partnership property. The
1. His rights in specific partnership incidents of this co-ownership are such that:
property;
2. His interest in the partnership; and, 1. A partner, subject to the provisions of
3. His right to participate in the this Title and to any agreement
management. between the partners, has an equal
right with his partners to possess
The rights enumerated above are considered as specific partnership property for
principal property rights of a partner. partnership purposes; but he has no
right to possess such property for any
Distinction:
other purpose without the consent of
his partners;
Partnership property Partnership capital
2. A partner’s right in specific partnership
In terms of changes in In terms of changes in
property is not assignable except in
value, partnership value, partnership
connection with the assignment of
property is variable. Its capital is constant. It
rights of all the partners in the same
value may vary from day remains unchanged as
property;
to day with changes in the amount fixed by the
3. A partner’s right in specific partnership
the market value of the agreement of the
property is not subject to attachment
partnership assets. partners, and is not
or execution, except on a claim against
affected by fluctuations
the partnership. When partnership
in the value of
property is attached for a partnership
partnership property,
debt the partners, or any of them, or
although it may be

Morc’s Notes on Partnership and Agency Page 44

 the representatives of a deceased
partner, cannot claim any right under
the homestead or exemption laws;
4. A partner’s right in specific partnership
property is not subject to legal support
under Article 291.
Partners have equal right of possession. However,
the rules on co-ownership do not necessarily apply;
the rules on “co-ownership” are applicable.
In general he has an equal right with his partners to
possess the partnership property but only for
partnership purposes. A partner, as such, does not
actually own any part of partnership property or
property owned by the partnership as a separate
business entity, although he does have rights in
specific partnership assets.
1. Equal right of possession for partnership
purposes;
2. A partner cannot separately assign his right
to specific partnership property but all of
them can assign their rights in the same
property.
3. No particular partnership property or any
specific or an aliquot part thereof can be
considered the separate or individual
property of any partner. The whole of
partnership property belongs to the
partnership considered as a juridical person
and a partner has no interest in it but his
share of what remains after all partnership
debts are paid.
Cases:
 Navarro v. Escobido, GR 153788, November
27, 2009
Article 124 of the Family Code, on the
administration of the conjugal property, provides:
Art. 124. The administration and
enjoyment of the conjugal
partnership property shall belong
to both spouses jointly. In case
of disagreement, the husband’s
Morc’s Notes on Partnership and Agency
decision shall prevail, subject to
recourse to the court by the wife
for proper remedy, which must be
availed of within five years from
the date of the contract
implementing such decision.
This provision, by its terms, allows either Karen or
Glenn Go to speak and act with authority in
managing their conjugal property, i.e., Kargo
Enterprises. No need exists, therefore, for one to
obtain the consent of the other before performing
an act of administration or any act that does not
dispose of or encumber their conjugal property.
Under Article 108 of the Family Code, the conjugal
partnership is governed by the rules on the
contract of partnership in all that is not in conflict
with what is expressly determined in this Chapter
or by the spouses in their marriage settlements. In
other words, the property relations of the husband
and wife shall be governed primarily by Chapter 4
on Conjugal Partnership of Gains of the Family
Code and, suppletorily, by the spouses’ marriage
settlement and by the rules on partnership under
the Civil Code. In the absence of any evidence of a
marriage settlement between the spouses Go, we
look at the Civil Code provision on partnership for
guidance.
A rule on partnership applicable to the spouses’
circumstances is Article 1811 of the Civil Code,
which states:
Art. 1811. A partner is a co-owner
with the other partners of specific
partnership property.
The incidents of this co-ownership
are such that:
(1) A partner, subject to the
provisions of this Title and to any
agreement between the partners,
has an equal right with his
partners to possess specific
partnership property for
partnership purposes; xxx
Page 45
Under this provision, Glenn and Karen Go are
effectively co-owners of Kargo Enterprises and the
properties registered under this name; hence, both
have an equal right to seek possession of these
properties. Applying Article 484 of the Civil Code,
which states that in default of contracts, or special
provisions, co-ownership shall be governed by the
provisions of this Title, we find further support in
Article 487 of the Civil Code that allows any of the
co-owners to bring an action in ejectment with
respect to the co-owned property.
 Clemente v. Galvan, GR 45662, April 26,
1939
The evidence of record shows that the machines in
contention originally belonged to the defendant and
from him were transferred to the partnership Galvan
y Compañia. This being the case, said machines
belong to the partnership and not to him, and shall
belong to it until partition is effected according to
the result thereof after the liquidation.
Article 1812: Nature of partner’s interest in the
partnership
A partner’s interest in the partnership is his
share of the profits and surplus.
While in general, a partner’s interest in specific
partnership property cannot be assigned, cannot be
attached and is not subject to legal support, a
partner’s interest in the partnership (i.e., his share in
the profits and surplus) can in general be assigned,
be attached and be subject to legal support (Paras).
Article 1813: Assignment of partner’s whole
interest in the partnership
A conveyance by a partner of his whole
interest in the partnership does not of itself
dissolve the partnership, or, against the
other partners in the absence of
agreement, entitle the assignee, during the
continuance of the partnership, to interfere
in the management or administration of the
partnership business or affairs, or to require
any information or account of partnership
Morc’s Notes on Partnership and Agency
transactions, or to inspect the partnership
books; but it merely entitles the assignee to
receive in accordance with his contract the
profits to which the assigning partner would
otherwise be entitled. However, in case of
fraud in the management of the
partnership, the assignee may avail himself
of the usual remedies.
In case of a dissolution of the partnership,
the assignee is entitled to receive his
assignor’s interest and may require an
account from the date only of the last
account agreed to by all the partners.
The assignee does not necessarily become a partner.
He can neither interfere in the management or
administration of the partnership business or affairs.
He cannot also demand information, accounting, and
inspection of the accounting book. The assignor is
still the partner, with a right to demand accounting
and settlement.
Effect of assignment: No dissolution of the
partnership. The assignor is still the partner.
Rights of the 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 he was induced to enter into
it thru any of the vices of consent or if he
himself was incapacitated to give consent;
4. To demand an accounting once the
partnership is dissolved. The account
covers the period only from the date of the
last accounting which has been agreed to by
all the partners.
Does Article 1813 cover also a case when the partner
merely mortgages his interest in the profits? Yes, but
here said interest is not alienated; it is merely given
as security, and therefore the rules on securities for
loans can properly apply (Paras).
Page 46
Cases:
 Villareal v. Ramirez, supra.
We hold that respondents have no right to demand
from petitioners the return of their equity share.
Except as managers of the partnership, petitioners
did not personally hold its equity or assets. The
partnership has a juridical personality separate and
distinct from that of each of the partners. Since the
capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the
equity of the retiring partners.
 Realubit v. Jaso, GR 178782, September 21,
2011
From the foregoing provision, it is evident that (t)he
transfer by a partner of his partnership interest does
not make the assignee of such interest a partner of
the firm, nor entitle the assignee to interfere in the
management of the partnership business or to
receive anything except the assignees profits. The
assignment does not purport to transfer an interest
in the partnership, but only a future contingent right
to a portion of the ultimate residue as the assignor
may become entitled to receive by virtue of his
proportionate interest in the capital. Since a
partner’s interest in the partnership includes his
share in the profits, we find that the CA committed
no reversible error in ruling that the Spouses Jaso
are entitled to Biondo’s share in the profits, despite
Juanita’s lack of consent to the assignment of said
Frenchmans interest in the joint venture. Although
Eden did not, moreover, become a partner as a
consequence of the assignment and/or acquire the
right to require an accounting of the partnership
business, the CA correctly granted her prayer for
dissolution of the joint venture conformably with the
right granted to the purchaser of a partner’s interest
under Article 1831 of the Civil Code.
Article 1814: Remedies of separate judgment
creditor of a partner
Without prejudice to the preferred rights of
partnership creditors under article 1827, on
Morc’s Notes on Partnership and Agency
due application to a competent court by
any judgment creditor of a partner, the
court which entered the judgment, or any
other court, may charge the interest of the
debtor partner with payment of the
unsatisfi ed amount of such judgment debt
with interest thereon; and may then or later
appoint a receiver of his share of the profi
ts, and of any other money due or to fall
due to him in respect of the partnership,
and make all other orders, directions,
accounts and inquiries which the debtor
partner might have made, or which
circumstances of the case may require.
The interest charged may be redeemed at
any time before foreclosure, or in case of a
sale being directed by the court, may be
purchased without thereby causing a
dissolution:
1. With separate property, by any one or
more of the partners; or,
2. With partnership property, by any one
or more of the partners with the
consent of all the partners whose
interests are not so charged or sold.
Nothing in this Title shall be held to deprive
a partner of his right, if any, under the
exemption laws, as regards his interest in
the partnership.
This provision provides for the available remedies.
While a separate creditor of a partner cannot attach
or levy upon specific partnership property for the
satisfaction of his credit because partnership assets
are reserved for partnership creditors, he can secure
a judgment on his credit and then apply to the
proper court for a charging order.
What is a charging order? It is that which is applied
for by a judgment creditor of a partner after he had
secured a judgment on his credit. By virtue of the
charging order, the interest of the debtor-partner in
the partnership is used to secure for the payment of
the unsatisfied amount of such judgment with
Page 47
interest thereon. More so, by virtue of the charging
order, any amount or portion thereof which the
partnership would otherwise pay to the debtor-
partner should instead be given to the judgment
creditor.
However, this remedy is subject to the preferred
rights of partnership creditors. It means that the
claims of partnership creditors must be satisfied first
before the separate creditors of the partners can be
paid out of the interest charged.
Is the judgment creditor of the partner entitled to a
writ of execution? From the provisions of the article,
it seems he is not.
Other remedies:
1. Receivership. 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 other
money due him.
What is the remedy of the debtor-partner then?
Should the charging order be granted, the interest of
the debtor-partner so charged may be redeemed or
purchased with the separate property of any or
more of the partners, or with partnership property
but with the consent of all the partners whose
interests are not so charged or sold. Redemption
here merely means the extinguishment of the charge
or attachment on the partner’s interest in the
profits.
How is this redemption made?
1. The charge may be redeemed or bought at
anytime before foreclosure.
2. After foreclosure, it may still be bought with
separate property by any one or more of
the partners, or with partnership property
with consent of all the other partners.
Article 1815: Partnership name
Morc’s Notes on Partnership and Agency
Every partnership shall operate under a firm
name, which may or may not include the
name of one or more of the partners.
Those who, not being members of the
partnership, include their names in the firm
name, shall be subject to the liability of a
partner.
A partnership must have a firm name under which it
will operate. A firm name is 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.
The partners enjoy the utmost freedom in the
selection of the partnership name. This is different
from the mandate of Article 126 of the Code of
Commerce which requires that the name of at least
one of the general partners in the general
partnership should appear.
Strangers who include their names in the firm are
liable as partners because of estoppel but do not
have the rights of partners for after all, they had not
entered into any partnership contract.
Cases:
 In re: Petition for authority to continue use
of the firm name “Ozaeta, Romulo, De
Leon, Mabanta & Reyes,” GR X92-1, July 30,
1979
It is clearly tacit in the above provision that names in
a firm name of a partnership must either be those of
living partners and, in the case of non-partners,
should be living persons who can be subjected to
liability. In fact, Article 1825 of the Civil Code
prohibits a third person from including his name in
the firm name under pain of assuming the liability of
a partner. The heirs of a deceased partner in a law
firm cannot be held liable as the old members to the
creditors of a firm particularly where they are non-
lawyers. Thus, Canon 34 of the Canons of
Professional Ethics "prohibits all agreement for the
payment to the widow and heirs of a deceased
Page 48
lawyer of a percentage, either gross or net, of the
fees received from the future business of the
deceased lawyer’s clients, both because the
recipients of such division are not lawyers and
because such payments will not represent service or
responsibility on the part of the recipient."
Accordingly, neither the widow nor the heirs can be
held liable for transactions entered into after the
death of their lawyer-predecessor. There being no
benefits accruing, there can be no corresponding
liability.
Prescinding the law, there could be practical
objections to allowing the use by law firms of the
names of deceased partners. The public relations
value of the use of an old firm name can tend to
create undue advantages and disadvantages in the
practice of the profession. An able lawyer without
connections will have to make a name for himself
starting from scratch. Another able lawyer, who can
join an old firm, can initially ride on that old firm’s
reputation established by deceased partners
However, as it applies to law firms, Rule 3.02 of the
Code of Professional Responsibility allows or permits
the surviving partners of a law firm the continued
use of the name of a deceased partner provided
there is an indication that said partner is already
dead.
 Teck Seing & Co. Ltd. v. Pacific Commercial
Company, GR 19892, September 6, 1923
On the presence of “Ltd.”
Article 126 of the Code of Commerce requires the
general co-partnership to transact business under
the name of all its members, or of several of them,
or of one only. The object of the article is manifestly
to protect the public against imposition and fraud.
Article 126 of the Code of Commerce was intended
more for the protection of the creditors than of the
partners themselves. A distinction can be drawn
between the right of the alleged partnership to
institute action when failing to live up to the
provision of the law, or even the rights of the
Morc’s Notes on Partnership and Agency
partners as among themselves, and the right of a
third person to hold responsible a general
partnership which merely lacks a firm name, in order
to make it a partnership de jure. the law should be
construed as rendering contracts made in violation
of it unlawful and unenforceable at the instance of
the offending party only, but not as designed to take
away the rights of innocent parties who may have
dealt with the offenders in ignorance of their having
violated the law.
Citing Dr. Echavarri y Vivanco in his Codigo de
Comercio:
"The name of the collective merchant is
called firm name. By this name, the new
being is distinguished from others, its
sphere of action fixed, and the juridical
personality better determined, without
constituting an exclusive character of the
general partnership to such an extent as to
serve the purpose of giving a definition of
said kind of a mercantile partnership, as is
the case in our Code.”
"Having in mind that these partnership are
prevailingly of a personal character, article
126 says that they must transact business
under the name of all its members, of some
of them or of one only, the words ’and
company’ to be added in the latter two
cases.”
"It is rendered impossible for the general
partnership to adopt a firm name
appropriate to its commercial object; the
law wants to link, and does link, the solidary
and unlimited responsibility of the member
of this partnership with the formation of its
name, and imposes a limitation upon
personal liberty in its selection, not only by
prescribing the requisites, but also by
prohibiting persons not members of the
company from including their names in its
firm name under penalty of civil solidary
responsibility.”
Page 49
 "Of course, the form required by the Code
for the adoption of the firm name does not
prevent the addition thereto of any other
title connected with the commercial
purpose of the association. The reader may
see our commentaries on the mercantile
registry about the business names and firm
names of associations, but it is proper to
establish here that, while the business
name may be alienated by any of the means
admitted by the law, it seems impossible to
separate the firm names of general
partnerships from the juridical entity for the
creation of which it was formed."
The legal intention deducible from the acts of the
parties controls in determining the existence of a
partnership. If they intend to do a thing which in law
constitute a partnership, they are partners, although
their purpose was to avoid the creation of such
relation. Here, the intention of the persons making
up Teck Seing & Co., Ltd. was to establish a
partnership which they erroneously denominated a
limited partnership. If this was their purpose, all
subterfuges resorted to in order to evade liability for
possible losses, while assuming their enjoyment of
the advantages to be derived from the relation must
be disregarded. The partners who have their identity
under a designation distinct from that of any of the
members of the firm should be penalized, and not
the creditors who presumably have dealt with the
partnership in good faith.
Article 1816: Liability of partners for contractual
obligations of the partnership
All partners, including industrial ones, shall
be liable pro rata with all their property and
after all the partnership assets have been
exhausted, for the contracts which may be
entered into in the name and for the
account of the partnership, under its
signature and by a person authorized to act
for the partnership. However, any partner
may enter into a separate obligation to
perform a partnership contract.
Morc’s Notes on Partnership and Agency
The provision lays down the rule that the partners,
including the industrial partner, are liable to
creditors of the partnership for the obligations
contracted by a partner in the name and for the
account of the partnership. The debts and
obligations of the partnership, are in substance, also
the debts and obligations of each individual member
of the firm. Their individual liability to creditors is
pro rata and subsidiary.
Principles governing individual liability:
 Pro rata. It means equally or jointly, not
proportionately because it is based on the
number of partners and not on the amount
of their contributions to the common fund.
 Subsidiary. It is secondary because the
partners become personally liable only after
all the partnership assets have been
exhausted.
Note that while an industrial partner is exempted by
law from losses, he is not exempted from liability
insofar as third persons are concerned. This means
that the third person can sue the firm and the
partners, including the industrial partner.
What is the liability of a partner who has withdrawn
from the partnership? A partner who withdraws is
not liable for liabilities contracted after he has
withdrawn, for then he is no longer a partner. If his
interest has not yet been paid him, his right to the
same is that of a mere creditor.
What is the effect of a stipulation exempting liability
to third persons? The stipulation would be null and
void, pursuant to Article 1817. Such stipulation will
be valid insofar as among the partners.
The provision likewise recognizes a partner assuming
a separate undertaking in his name with a third party
to perform a partnership contract or make himself
solidarily liable on a partnership contract. In such
case, the partner is personally bound by his contract
even if only the partnership is shown to have derived
benefits from it.
Cases:
Page 50
  Island Sales, Inc. v. United Pioneers General
Construction, L-22493, July 31, 1975
The defendant company, a general partnership,
purchased from Island Sales, Inc. a motor vehicle,
executing for that purpose a promissory note for the
entire price, payable in twelve monthly installments.
Having failed to receive the third installment, Island
Sales sued the company, including its general
partners as co-defendants. On motion of plaintiff,
the complaint was later dismissed insofar as one of
the partners was concerned. After trial, judgment
was entered sentencing the defendant to pay the
sum due, with interest, and expressly stating that
the four of the five partners would pay in case the
company has no properties with which to satisfy
judgment. One of the partners appealed claiming
that the liability of each partner should not exceed
1/5 of the obligation due inasmuch as there are five
partners in the company.
The Supreme Court ruled that under Art. 1816 of the
Civil Code, the liability of partners shall be pro-rata;
that the dismissal of the complaint to favor one of
the general partners results in the condonation of
the debt of that partner’s individual share and that
appellant’s share in the obligation shall not be
increased thereby but shall be limited to 1/5 of the
obligation of defendant company.
 Muñasque v. CA, L-39780, November 11,
1985
While it is true that under Article 1816 of the Civil
Code, "All partners, including industrial ones, shall
be liable pro rata with all their property and after all
the partnership assets have been exhausted, for the
contracts which may be entered into the name and
for the account of the partnership, under its
signature and by a person authorized to act for the
partnership. . . .", this provision should be construed
together with Article 1824 which provides that: "All
partners are liable solidarily with the partnership for
everything chargeable to the partnership under
Articles 1822 and 1823." In short, while the liability
of the partners are merely joint in transactions
entered into by the partnership, a third person who
Morc’s Notes on Partnership and Agency
transacted with said partnership can hold the
partners solidarily liable for the whole obligation if
the case of the third person falls under Articles 1822
or 1823.
 PNB v. Lo, L-26937, October 5, 1927
The judgment against the appellants is in accordance
with article 127 of the Code of Commerce which
provides that all the members of a general
partnership, be they managing partners thereof or
not, shall be personally and solidarily liable with all
their property, for the results of the transactions
made in the name and for the account of the
partnership, under the signature of the latter, and by
a person authorized to use it.
 Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., supra.
There is no dispute that the respondent, Philippine
Fishing Gear Industries, is entitled to be paid for the
nets it sold. The only question here is whether
petitioner should be held jointly liable with Chua and
Yao. Petitioner contests such liability, insisting that
only those who dealt in the name of the ostensible
corporation should be held liable. Since his name
does not appear on any of the contracts and since he
never directly transacted with the respondent
corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of
the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the
partnership. He in fact questions the attachment of
the nets, because the Writ has effectively stopped
his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that
Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown
reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in
representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
Page 51
Technically, it is true that petitioner did not directly
act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by
persons with whom he previously had an existing
relationship, he is deemed to be part of said
association and is covered by the scope of the
doctrine of corporation by estoppel.
Article 1817: Stipulation against liability
Any stipulation against the liability laid
down in the preceding article shall be void,
except as among the partners.
A stipulation among the partners contrary to the pro
rata and subsidiary liability expressly imposed by
Article 1816 is void and of no effect insofar as it
affects the rights of third persons. It is valid and
enforceable only as among the partner.
Article 1818: Partner as agent; powers
Every partner is an agent of the partnership
for the purpose of its business, and the act
of every partner, including the execution in
the partnership name of any instrument, for
apparently carrying on in the usual way the
business of the partnership of which he is a
member binds the partnership, unless the
partner so acting has in fact no authority to
act for the partnership in the particular
matter, and the person with whom he is
dealing has knowledge of the fact that he
has no such authority.
An act of a partner which is not apparently
for the carrying on of the business of the
partnership in the usual way does not bind
the partnership unless authorized by the
other partners.
Except when authorized by the other
partners or unless they have abandoned the
business, one or more but less than all the
partners have no authority to:
1. Assign the partnership property in trust
for creditors or on the assignee’s
Morc’s Notes on Partnership and Agency
promise to pay the debts of the
partnership;
2. Dispose of the goodwill of the business;
3. Do any other act which would make it
impossible to carry on the ordinary
business of a partnership;
4. Confess a judgment;
5. Enter into a compromise concerning a
partnership claim or liability;
6. Submit a partnership claim or liability
to arbitration;
7. Renounce a claim of the partnership.
No act of a partner in contravention of a
restriction on authority shall bind the
partnership to persons having knowledge of
the restriction.
This article speaks of:
1. The fact that the partner is an agent;
2. The instances when he can bind the
partnership;
3. The instances when he cannot bind the
partnership should he enter into the
contract alone.
In the absence of an agreement to the contrary, all
partners have equal rights in the management and
conduct of the partnership business. Hence, when a
partner performs an act within the scope of his
actual, implied, or apparent authority, he is not only
a principal as to himself but is also for all purposes,
an agent as to his co-partners or to the partnership.
It follows that the general rules on agency apply to
partners. Interestingly, it has been truthfully said
that a 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 a partner acts under the usual way of the
partnership or carries on in the usual way the
business of the partnership, he binds the partnership
unless the partner so acting has in fact no authority
to act for the partnership in the particular matter
and the person with whom he is dealing has
knowledge of the fact that he has no authority. On
Page 52
the other end of the spectrum, when a partner’s acts
are not apparently for the carrying on of business of
the partnership in the usual way, his acts do not bind
the partnership unless authorized by the other
partners.
Put simply, here are the rules:
1. If the partner’s acts are pursuant to the
regular business of the partnership, the
partner binds the partnership, subject to 2
exceptions.
2. If the partner’s acts are not in the regular
business of the partnership, his acts do not
bind the partnership for all of the partners
must have authorized him to do so.
Cases:
 Mendoza v. Paule, GR 175885, February 13,
2009
Records show that Paule (or, more appropriately,
EMPCT) and Mendoza had entered into a
partnership in regard to the NIA project. Paule’s
contribution thereto is his contractor’s license and
expertise, while Mendoza would provide and secure
the needed funds for labor, materials and services;
deal with the suppliers and sub-contractors; and in
general and together with Paule, oversee the
effective implementation of the project. For this,
Paule would receive as his share three per cent (3%)
of the project cost while the rest of the profits shall
go to Mendoza. Paule admits to this arrangement in
all his pleadings.
Although the SPAs limit Mendoza’s authority to such
acts as representing EMPCT in its business
transactions with NIA, participating in the bidding of
the project, receiving and collecting payment in
behalf of EMPCT, and performing other acts in
furtherance thereof, the evidence shows that when
Mendoza and Cruz met and discussed (at the EMPCT
office in Bayuga, Muñoz, Nueva Ecija) the lease of
the latters heavy equipment for use in the project,
Paule was present and interposed no objection to
Mendoza’s actuations. In his pleadings, Paule does
Morc’s Notes on Partnership and Agency
not even deny this. Quite the contrary, Mendoza’s
actions were in accord with what she and Paule
originally agreed upon, as to division of labor and
delineation of functions within their partnership.
Under the Civil Code, every partner is an agent of the
partnership for the purpose of its business; each one
may separately execute all acts of administration,
unless a specification of their respective duties has
been agreed upon, or else it is stipulated that any
one of them shall not act without the consent of all
the others. At any rate, Paule does not have any
valid cause for opposition because his only role in
the partnership is to provide his contractor’s license
and expertise, while the sourcing of funds, materials,
labor and equipment has been relegated to
Mendoza.
Doctrine of apparent authority. The partnership may
still be held liable even if the transacting partner had
no authority to do so; Provided, that the partner acts
on transactions which are part of the regular
business of the enterprise and the partnership made
it appear that said partner has authority and third
persons subsequently believed such representation.
 Goquiolay v. Sycip, L-11840, July 26, 1960
We are not unaware of the provision of Article 129
of the Code of Commerce to the effect that –
If the management of the general
partnership has not been limited by special
agreement to any of the members, all shall
have the power to take part in the direction
and management of the common business,
and the members present shall come to an
agreement for all contracts or obligations
which may concern the association.
(Emphasis supplied)
but this obligation is one imposed by law on the
partners among themselves, that does not
necessarily affect the validity of the acts of a partner,
while acting within the scope of the ordinary course
of business of the partnership, as regards third
persons without notice. The latter may rightfully
assume that the contracting partner was duly
Page 53
authorized to contract for and in behalf of the firm
and that, furthermore, he would not ordinarily act to
the prejudice of his co-partners. The regular course
of business procedure does not require that each
time a third person contracts with one of the
managing partners, he should inquire as to the
latter's authority to do so, or that he should first
ascertain whether or not the other partners had
given their consent thereto. In fact, Article 130 of
the same Code of Commerce provides that even if a
new obligation was contracted against the express
will of one of the managing partners, "it shall not be
annulled for such reason, and it shall produce its
effects without prejudice to the responsibility of the
member or members who contracted it, for the
damages they may have caused to the common
fund."
Article 1819: Conveyance of real property belonging
to the partnership
Where title to real property is in the
partnership name, any partner may convey
title to such property by a conveyance
executed in the partnership name; but the
partnership may recover such property
unless the partner’s act binds the
partnership under the provisions of the first
paragraph of Article 1818, or unless such
property has been conveyed by the grantee
or a person claiming through such grantee
to a holder for value without the knowledge
that the partner, in making the conveyance,
has exceeded his authority.
Where title to real property is in the name
of the partnership, a conveyance executed
by a partner, in his own name, passes the
equitable interest of the partnership,
provided the act is one within the authority
of the partner under the provisions of the
first paragraph of Article 1818.
Where title to real property is in the name
of one or more but not all the partners, and
the record does not disclose the right of the
partnership, the partners in whose name
Morc’s Notes on Partnership and Agency
the title stands may convey title to such
property, but the partnership may recover
such property if the partners’ act does not
bind the partnership under the provisions
of the first paragraph of Article 1818, unless
the purchaser or his assignee, is a holder for
value, without knowledge.
Where the title to real property is in the
name of one or more or all the partners, or
in a third person in trust for the
partnership, a conveyance executed by a
partner in the partnership name, or in his
name, passes the equitable interest of the
partnership, provided the act is one within
the authority of the partner under the
provisions of the first paragraph of Article
1818.
Where the title to real property is in the
names of all the partners a conveyance
executed by all the partners passes all their
rights in such property.
According to Paras, this article is a particular
elaboration of Article 1818 but is applicable to real
property alone.
What does “equitable interest” mean? An equitable
interest or title is one not only recognized by law,
but also by the principles of equity. It refers to all
interest which the partnership had, except title. One
is entitled to the beneficial interests like use and
fruits, but not the naked ownership.
A firm may get back the land unless the firm is
engaged in the buying and selling of land or the
buyer had in turn sold the same land to another for
value and the later buyer did not know of the
partner’s lack of authority. Regardless of the fact
that one partner cannot convey partnership realty
without the concurrence of his co-partners, it is
fundamental that innocent purchasers without
notice must be protected.
A conveyance of partnership realty by one partner
may be authorized by his co-partners, or when made
without authority, may be ratified by them. Such
Page 54
authority or ratification must affirmatively appear,
for the authority of one partner to make and
acknowledge a deed for the partnership will not be
presumed. However, after a lapse of many years
from the time of execution of a conveyance by a
partner purporting to act for the partnership,
authority or ratification will be presumed (estoppel
by silence).
Cases:
 Syjuco v. Castro, supra.
On failure to impugn mortgage for more than 17
years (estoppel by silence)
If, therefore, the respondent partnership was
inescapably chargeable with knowledge of the
mortgage executed by all the partners thereof, its
silence and failure to impugn said mortgage within a
reasonable time, let alone a space of more than
seventeen years, brought into play the doctrine of
estoppel to preclude any attempt to avoid the
mortgage as allegedly unauthorized.
On acts of all the individual members being
considered as acts of the partnership
Equally or even more preclusive of the respondent
partnership’s claim to the mortgaged property is the
last paragraph of Article 1819 of the Civil Code,
which contemplates a situation duplicating the
circumstances that attended the execution of the
mortgage in favor of Syjuco and therefore applies
foursquare thereto:
"Where the title to real property is in the
names of all the partners a conveyance
executed by all the partners passes all their
rights in such property."
The term "conveyance" used in said provision, which
is taken from Section 10 of the American Uniform
Partnership Act, includes a mortgage.
Interpreting Sec. 10 of the Uniform Partnership Act,
it has been held that the right to mortgage is
included in the right to convey. This is different from
Morc’s Notes on Partnership and Agency
the rule in agency that a special power to sell
excludes the power to mortgage.”
As indisputable as the propositions and principles
just stated is that the cause of action in Civil Case
No. Q-36485 is barred by prior judgment. The right
subsumed in that cause is the negation of the
mortgage, postulated on the claim that the parcels
of land mortgaged by the Lims to Syjuco did not in
truth belong to them but to the partnership.
Assuming this to be so, the right could have been
asserted at the time that the Lims instituted their
first action on December 24,1968 in the Manila
Court of First Instance, Civil Case No. 75180, or when
they filed their subsequent actions: Civil Case No.
112762, on December 19, 1977; Civil Case No. 83-
19018, in 1983, and Civil Case No. Q-39294, also in
1983. The claim could have been set up by the Lims,
as members composing the partnership, "Heirs of
Hugo Lim." It could very well have been put forth by
the partnership itself, as co-plaintiff in the
corresponding complaints, considering that the
actions involved property supposedly belonging to it
and were being prosecuted by the entire
membership of the partnership, and therefore, the
partnership was in actuality, the real party in
interest. In fact, consistently with the Lims’ theory,
they should be regarded, in all the actions presented
by them, as having sued for vindication, not of their
individual rights over the property mortgaged, but
those of the partnership. There is thus no reason to
distinguish between the Lims, as individuals, and the
partnership itself, since the former constituted the
entire membership of the latter. In other words,
despite the concealment of the existence of the
partnership, for all intents and purposes and
consistently with the Lims’ own theory, it was that
partnership which was the real party in interest in all
the actions; it was actually represented in said
actions by all the individual members thereof, and
consequently, those members’ acts, declarations
and omissions cannot be deemed to be simply the
individual acts of said members, but in fact and in
law, those of the partnership.
Article 1820: Admission by a partner
Page 55
 An admission or representation made by
any partner concerning partnership affairs
within the scope of his authority in
accordance with this Title is evidence
against the partnership.
Statements of a partner bind the partnership only if
they are made in the course of, related to, and are
material to, the transaction of the partnership’s
business. A partnership is a joint affair and to charge
it with liability, there must be joint words or actions.
An individual partner cannot do this.
Restrictions on the rule:
1. Admissions made before dissolution are
binding only when the partner has authority
to act on the particular matter.
2. Admissions made after dissolution are
binding only if the admissions were
necessary to wind up the business.
According to Paras, citing the Court in Ormachea Tin
Congco v. Trillana, an admission by a former partner,
made after he has retired from the partnership, is
not evidence against the firm.
When is a previous admission of a partner admissible
in evidence against the partnership? When it was
made within the scope of the partnership and during
its existence, provided of course that the existence
of the partnership is first proved by evidence other
than such act or declaration.
Article 1821: Notice to partners
Notice to any partner of any matter relating
to partnership affairs, and the knowledge of
the partner acting in the particular matter,
acquired while a partner or then present to
his mind, and the knowledge of any other
partner who reasonably could and should
have communicated it to the acting partner,
operate as notice to or knowledge of the
partnership except in the case of a fraud on
the partnership, committed by or with the
consent of that partner.
Morc’s Notes on Partnership and Agency
Notice to a partner is notice to the partnership. Like
the law of agency, the law of partnership imputes
notice to, or knowledge of, any partner of any
matter relating to partnership affairs to the
partnership except in case of fraud. The reason is
that members of a partnership stand in a fiduciary
relationship to one another, and it is presumed that
the partners disclose to one another all relevant
information concerning partnership business.
Article 1821 speaks of three cases of knowledge:
1. Knowledge of the partner acting in the
particular matter acquired while a partner;
2. Knowledge of the partner acting in the
particular matter then present to his mind;
and,
3. Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner.
Article 1822: Liability for wrongful acts or omission
Where, by any wrongful act or omission of
any partner acting in the ordinary course of
the business of the partnership or with the
authority of his co-partners, loss or injury is
caused to any person, not being a partner in
the partnership, or any penalty is incurred,
the partnership is liable therefor to the
same extent as the partner so acting or
omitting to act.
Article 1823: When partnership bound to make
good loss
The partnership is bound to make good the
loss:
1. Where one partner acting within the
scope of his apparent authority
receives money or property of a third
person and misapplies it; and,
2. Where the partnership in the course of
its business receives money or property
of a third person and the money or
property so received is misapplied by
Page 56
 any partner while it is in the custody of
the partnership.
Article 1824: Solidary liability of partners under
Articles 1822 and 1823
All partners are liable solidarily with the
partnership for everything chargeable to
the partnership under articles 1822 and
1823.
The above three articles provide for the solidary
liability of the partners and also the partnership to
third persons for the wrongful act or omission, or
breach of trust of a partner acting within the scope
of the firm’s business or with the authority of his co-
partners.
Cases:
 Muñasque v. CA, supra.
The obligation is solidary because the law protects
him, who in good faith relied upon the authority of a
partner, whether such authority is real or apparent.
That is why under Article 1824 of the Civil Code, all
partners, whether innocent or guilty, as well as the
legal entity, which is the partnership, are solidarily
liable.
In the case at bar the respondent Tropical had every
reason to believe that a partnership existed between
the petitioner and Galan and no fault or error can be
imputed against it for making payments to "Galan
and Associates" and delivering the same to Galan
because as far as it was concerned, Galan was a true
partner with real authority to transact on behalf of
the partnership with which it was dealing. This is
even more true in the cases of Cebu Southern
Hardware and Blue Diamond Glass Palace who
supplied materials on credit to the partnership.
Thus, it is but fair that the consequences of any
wrongful act committed by any of the partners
therein should be answered solidarily by all the
partners and the partnership as a whole.
However, as between the partners Muñasque and
Galan, justice also dictates that Muñasque be
Morc’s Notes on Partnership and Agency
reimbursed by Galan for the payments made by the
former representing the liability of their partnership
to herein intervenors, as it was satisfactorily
established that Galan acted in bad faith in his
dealings with Muñasque as a partner.
Article 1825: Partnership by estoppel
When a person, by words spoken or writ-
ten or by conduct, represents himself, or
consents to another representing him to
anyone, as a partner in an existing
partnership or with one or more persons
not actual partners, he is liable to any such
persons to whom such representation has
been made, who has, on the faith of such
representation given credit to the actual or
apparent partnership, and if he has made
such representation or consented to its
being made in a public manner he is liable
to such person, whether the representation
has or has not been made or communicated
to such person so giving credit by or with
the knowledge of the apparent partner
making the representation or consenting to
its being made:
1. When a partnership liability results, he
is liable as though he were an actual
member of the partnership;
2. When no partnership liability results,
he is liable pro rata with the other
persons, if any, so consenting to the
contract or representation as to incur
liability, otherwise separately.
When a person has been thus represented
to be a partner in an existing partnership, or
with one or more persons not actual
partners, he is an agent of the persons
consenting to such representation to bind
them to the same extent and in the same
manner as though he were a partner in fact,
with respect to persons who rely upon the
representation. When all the members of
the existing partnership consent to the
representation, a partnership act or
Page 57
 obligation results; but in all other cases it is
the joint act or obligation of the person
acting and the persons consenting to the
representation.
Persons who are not partners as to each other are
not partners as to third persons. No one can be held
liable nor claim rights as a partner unless he has
given his consent to become such. An exception to
this rule is Article 1825. Due to the doctrine of
estoppel, one may become liable as a partner even
though he is not a partner in fact.
A person may:
1. Represent himself as a partner of an
existing partnership with or without the
consent of the partnership;
2. Represent himself as a partner of a non-
existent partnership.
If a third person is misled and acts because of such
misrepresentation, the deceiver is a partner by
estoppel. If the partnership consented to the
misrepresentation, partnership liability results. This
gives rise to a partnership by estoppel with the
original members and the deceiver as partners. If
the firm had not consented, no partnership liability
results, but the deceiver is considered still as a
partner by estoppel with all the obligations, but not
the rights of a partner.
Hence, the holding out as a partner may be done by
the person himself, or by his consent, or with his
knowledge. To hold the party liable, the third
person must prove such misrepresentation by the
purported partner and that a bona fide or justifiable
reliance by him upon it caused him injury.
Heed however that the above provision does not
create a partnership as between the alleged
partners. A contract, express or implied, is essential
to the formation of a partnership. The law only
considers them as partners and the association as a
partnership insofar as it is favorable to third persons
by reasons of equitable principle of estoppel.
Cases:
Morc’s Notes on Partnership and Agency
 Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., supra.
Thus, even if the ostensible corporate entity is
proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. The
reason behind this doctrine is obvious - an
unincorporated association has no personality and
would be incompetent to act and appropriate for
itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or
agents do so without authority and at their own risk.
And as it is an elementary principle of law that a
person who acts as an agent without authority or
without a principal is himself regarded as the
principal, possessed of all the right and subject to all
the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts performed
as such agent.
The doctrine of corporation by estoppel may apply
to the alleged corporation and to a third party. In the
first instance, an unincorporated association, which
represented itself to be a corporation, will be
estopped from denying its corporate capacity in a
suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for
a contract it entered into and by virtue of which it
received advantages and benefits.
On the other hand, a third party who, knowing an
association to be unincorporated, nonetheless
treated it as a corporation and received benefits
from it, may be barred from denying its corporate
existence in a suit brought against the alleged
corporation. In such case, all those who benefited
from the transaction made by the ostensible
corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly
assented to or took advantage of.
Page 58
There is no dispute that the respondent, Philippine
Fishing Gear Industries, is entitled to be paid for the
nets it sold. The only question here is whether
petitioner should be held jointly liable with Chua and
Yao. Petitioner contests such liability, insisting that
only those who dealt in the name of the ostensible
corporation should be held liable. Since his name
does not appear on any of the contracts and since he
never directly transacted with the respondent
corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of
the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the
partnership. He in fact questions the attachment of
the nets, because the Writ has effectively stopped
his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that
Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown
reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in
representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
Technically, it is true that petitioner did not directly
act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by
persons with whom he previously had an existing
relationship, he is deemed to be part of said
association and is covered by the scope of the
doctrine of corporation by estoppel.
Article 1826: Liability of incoming partners for
partnership debts
A person admitted as a partner into an
existing partnership is liable for all the
obligations of the partnership arising before
his admission as though he had been a
partner when such obligations were
incurred, except that this liability shall be
satisfied only out of partnership property,
unless there is a stipulation to the contrary.
Morc’s Notes on Partnership and Agency
When a person is admitted as a partner into an
existing partnership, he is liable for all obligations
existing at the time of his admission as though he
was already a partner when such obligations were
incurred. For such obligations, his liability s limited
to his share in the partnership property, unless there
is a stipulation to the contrary. For all the
obligations accruing subsequent to the admission of
the new partner, all the partners are liable with their
separate properties. Such obligations may have
been incurred by virtue of a contract made before
his admission.
It therefore results that existing and subsequent
creditors have equal rights as against partnership
property and separate property of the previously
existing members of the partnership while only
subsequent creditors have rights against the
separate estate of the newly admitted partner.
Does the admission of a new partner dissolve the old
firm and create a new one? Yes and it is precisely
because of this principle in Article 1826 has been
enacted. The reason is simple: 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. To
avoid this injustice, under the NCC, they are also
considered creditors of the new firm.
Is not the rule of holding the new partner liable, with
his share of the firm’s assets, for previous obligations
of the firm unduly harsh on said new partner? No, it
is not unduly harsh. After all, the incoming partner
partakes of the benefit of the partnership property
and an established business. He has every means of
obtaining full knowledge and protecting himself,
because he may insist on the liquidation or
settlement of existing partnership debts. On the
other hand, the creditors have no means of
protecting themselves.
Article 1827: Preference of creditors as regards
partnership property
The creditors of the partnership shall be
preferred to those of each partner as
Page 59
 regards the partnership property. Without
prejudice to this right, the private creditors
of each partner may ask the attachment
and public sale of the share of the latter in
the partnership assets.
With respect to partnership assets, the partnership
creditors are entitled to priority of payment. This is
anchored on the principle that a partnership enjoys
a separate and distinct personality from the
members composing the same. It is a juridical
person with whom the creditors have contracted.
What is the effect of a 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 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.
DISSOLUTION AND WINDING UP
Article 1828: Definition of dissolution of
partnership
The dissolution of a partnership is the
change in the relation of the partners
caused by any partner ceasing to be
associated in the carrying on as
distinguished from the winding up of the
business.
Article 1829: Effects of dissolution
On dissolution the partnership is not
terminated, but continues until the winding
up of partnership affairs is completed.
Definitions:
1. Dissolution is the change in the relation of
the partners caused by any partner ceasing
to be associated in the carrying on of the
business. It is that point of time when the
partners cease to carry on the business
together.
2. Winding up is actual process of settling the
business or partnership affairs after
Morc’s Notes on Partnership and Agency
dissolution, involving the collection and
distribution of partnership assets, payment
of debts, and determination of the value of
each partner’s interest in the partnership.
3. Termination is that point in time when all
partnership affairs are completely wound
up and finally settled. It signifies the end of
the partnership life. It takes place after
both dissolution and winding up have
occurred.
Effects of change in membership can either result to:
1. Change in the relation dissolves the
partnership but will not disturb the
continuance by the remaining partners:
a. Dissolution of existing partnership
and formation of a new one.
b. Regard all partners as incoming
partners. All partners forming the
new partnership upon the
admission of the new person into
the business are “incoming
partners,” even though the same
business had theretofore been
conducted by the others through
the medium of partnership.
c. Continuance by remaining partners
of partnership as before. A
partnership is a contractual and
fiduciary relation dependent upon
the personality of its members,
and the withdrawal or admission
of a member changes so radically
the contractual rights and duties
inter se as to produce essentially a
new relation even though the
parties contemplate no actual
dissolution of the firm.
2. Change in the relation of the partners
caused the dissolution and the partners
may choose to proceed with winding up
and termination of the partnership.
Cases:
 Yu v. NLRC, GR 97212, June 30, 1993
Page 60
Two (2) main issues are thus posed for our
consideration in the case at bar: (1) whether the
partnership which had hired petitioner Yu as
Assistant General Manager had been extinguished
and replaced by a new partnerships composed of
Willy Co and Emmanuel Zapanta; and (2) if indeed a
new partnership had come into existence, whether
petitioner Yu could nonetheless assert his rights
under his employment contract as against the new
partnership.
In respect of the first issue, we agree with the result
reached by the NLRC, that is, that the legal effect of
the changes in the membership of the partnership
was the dissolution of the old partnership which had
hired petitioner in 1984 and the emergence of a new
firm composed of Willy Co and Emmanuel Zapanta in
1987.
The applicable law in this connection — of which the
NLRC seemed quite unaware — is found in the Civil
Code provisions relating to partnerships.
In the case at bar, just about all of the partners had
sold their partnership interests (amounting to 82%
of the total partnership interest) to Mr. Willy Co and
Emmanuel Zapanta. The record does not show what
happened to the remaining 18% of the original
partnership interest. The acquisition of 82% of the
partnership interest by new partners, coupled with
the retirement or withdrawal of the partners who
had originally owned such 82% interest, was enough
to constitute a new partnership.
On the effects of dissolution
The occurrence of events which precipitate the legal
consequence of dissolution of a partnership do not,
however, automatically result in the termination of
the legal personality of the old partnership. Article
1829 of the Civil Code states that:
“[o]n dissolution the partnership is not
terminated, but continues until the winding
up of partnership affairs is completed.”
In the ordinary course of events, the legal
personality of the expiring partnership persists for
Morc’s Notes on Partnership and Agency
the limited purpose of winding up and closing of the
affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business
of the old partnership was simply continued by the
new partners, without the old partnership
undergoing the procedures relating to dissolution
and winding up of its business affairs. In other
words, the new partnership simply took over the
business enterprise owned by the preceding
partnership, and continued using the old name of
Jade Mountain Products Company Limited, without
winding up the business affairs of the old
partnership, paying off its debts, liquidating and
distributing its net assets, and then re-assembling
the said assets or most of them and opening a new
business enterprise. There were, no doubt, powerful
tax considerations which underlay such an informal
approach to business on the part of the retiring and
the incoming partners. It is not, however, necessary
to inquire into such matters.
 Singson v. Isabela Sawmill, L-27343,
February 28, 1979
It is true that the dissolution of a partnership is
caused by any partner ceasing to be associated in
the carrying on of the business. However, on
dissolution, the partnership is not terminated but
continuous until the winding up to the business.
The remaining partners did not terminate the
business of the partnership "Isabela Sawmill".
Instead of winding up the business of the
partnership, they continued the business still in the
name of said partnership. It is expressly stipulated in
the memorandum-agreement that the remaining
partners had constituted themselves as the
partnership entity, the "Isabela Sawmill".
There was no liquidation of the assets of the
partnership. The remaining partners, Leon Garibay
and Timoteo Tubungbanua, continued doing the
business of the partnership in the name of "Isabela
Sawmill". They used the properties of said
partnership.
Page 61
The properties mortgaged to Margarita G. Saldajeno
by the remaining partners, Leon Garibay and
Timoteo Tubungbanua, belonged to the partnership
"Isabela Sawmill." The appellant, Margarita G.
Saldajeno, was correctly held liable by the trial court
because she purchased at public auction the
properties of the partnership which were mortgaged
to her.
It does not appear that the withdrawal of Margarita
G. Saldajeno from the partnership was published in
the newspapers. The appellees and the public in
general had a right to expect that whatever, credit
they extended to Leon Garibay and Timoteo
Tubungbanua doing the business in the name of the
partnership "Isabela Sawmill" could be enforced
against the proeprties of said partnership. The
judicial foreclosure of the chattel mortgage executed
in favor of Margarita G. Saldajeno did not relieve her
from liability to the creditors of the partnership.
The appellant, Margarita G. Saldajeno, cannot
complain. She is partly to blame for not insisting on
the liquidation of the assets of the partnership. She
even agreed to let Leon Garibay and Timoteo
Tubungbanua continue doing the business of the
partnership "Isabela Sawmill" by entering into the
memorandum-agreement with them.
Although it may be presumed that Margarita G.
Saldajeno had action in good faith, the appellees
also acted in good faith in extending credit to the
partnership. Where one of two innocent persons
must suffer, that person who gave occasion for the
damages to be caused must bear the consequences.
Had Margarita G. Saldajeno not entered into the
memorandum-agreement allowing Leon Garibay and
Timoteo Tubungbanua to continue doing the
business of the partnership, the applees would not
have been misled into thinking that they were still
dealing with the partnership "Isabela Sawmill".
Under the facts, it is of no moment that technically
speaking the partnership "Isabela Sawmill" was
dissolved by the withdrawal therefrom of Margarita
G. Saldajeno. The partnership was not terminated
and it continued doing business through the two
remaining partners.
Morc’s Notes on Partnership and Agency
 Dira v. Tañega, L-23232, June 17, 1970
On the inapplicability of Article 1829
Equally untenable is appellant’s reliance on the
theory that as a member of the partnership,
appellee continued as a trustee even after 1947,
when said appellee took the business for himself and
even after 1951, the expiry date of the agreements.
The provisions of Article 1785 to the effect that:
“When a partnership for a fixed term or
particular undertaking is continued after
the termination of such term or particular
undertaking without any express
agreement, the rights and duties of the
partners remain the same as they were at
such termination, so far as is consistent
with a partnership at will.”
“A continuation of the business by the
partners or such of them as habitually acted
therein during the term, without any
settlement or liquidation of the partnership
affairs, is prima facie evidence of a
continuation of the partnership”
and Article 1829 thus:
“On dissolution the partnership is not
terminated, but continues until the winding
up of partnership affairs is completed.”
are clearly inapplicable here, for the simple reason
that those articles are premised on a continuation of
the partnership as such, which is not our case,
because here appellee repudiated the partnership as
early as 1947 with either actual or presumed
knowledge of the appellant. By analogy, at least,
with the rule as to a co-ownership, which a
partnership essentially is, prescription does not run
in favor of any of the co-owners only as long as the
co-owner claiming against the others "expressly or
impliedly recognizes the co-ownership," a
circumstance irreconcilably inconsistent with
appellee’s conduct of transferring the place of
business, changing its name and not paying
Page 62
appellant any of the salaries agreed upon in the its partners should perfunctorily follow. On the
articles of partnership. contrary, the dissolution simply effected a change in
the relationship among the partners. The
 Sunga-chan v. Chua, supra. partnership, although dissolved, continues to exist
until its termination, at which time the winding up of
With regard to petitioners’ insistence that laches
its affairs should have been completed and the net
and/or prescription should have extinguished
partnership assets are partitioned and distributed to
respondents claim, we agree with the trial court and
the partners.
the Court of Appeals that the action for accounting
filed by respondent three (3) years after Jacinto’s Article 1830: Causes of dissolution
death was well within the prescribed period. The
Civil Code provides that an action to enforce an oral Dissolution is caused:
contract prescribes in six (6) years while the right to
demand an accounting for a partner’s interest as 1. Without violation of the agreement
against the person continuing the business accrues between the partners:
at the date of dissolution, in the absence of any a. By the termination of the
contrary agreement. Considering that the death of a definite term or particular
partner results in the dissolution of the partnership, undertaking specified in the
in this case, it was after Jacinto’s death that agreement;
respondent as the surviving partner had the right to b. By the express will of any
an account of his interest as against petitioners. It partner, who must act in good
bears stressing that while Jacinto’s death dissolved faith, when no definite term or
the partnership, the dissolution did not immediately particular undertaking is
terminate the partnership. The Civil Code expressly specified;
provides that upon dissolution, the partnership c. By the express will of all the
continues and its legal personality is retained until partners who have not
the complete winding up of its business, culminating assigned their interests or
in its termination. suffered them to be charged
for their separate debts, either
 Sy v. CA, GR 94285, August 31, 1999 before or after the
termination of any specified
On dissolution vs. winding up vs. partition or term or particular
distribution undertaking;
d. By the expulsion of any
Petitioners fail to recognize the basic distinctions
partner from the business
underlying the principles of dissolution, winding up
bona fi de in accordance with
and partition or distribution. The dissolution of a
such a power conferred by the
partnership is the change in the relation of the
agreement between the
parties caused by any partner ceasing to be
partners;
associated in the carrying on, as might be
2. In contravention of the agreement
distinguished from the winding up, of its business.
between the partners, where the
Upon its dissolution, the partnership continues and
circumstances do not permit a
its legal personality is retained until the complete
dissolution under any other provision
winding up of its business culminating in its
of this article, by the express will of any
termination. The dissolution of the partnership did
partner at any time;
not mean that the juridical entity was immediately
3. By any event which makes it unlawful
terminated and that the distribution of the assets to
for the business of the partnership to

Morc’s Notes on Partnership and Agency Page 63

 be carried on or for the members to On the application of the purchaser of a
carry it on in partnership; partner’s interest under Article 1813 or
4. When a specific thing, a partner had 1814:
promised to contribute to the
partnership, perishes before the 1. After the termination of the specified
delivery; in any case by the loss of the term or particular undertaking;
thing, when the partner who 2. At any time if the partnership was a
contributed it having reserved the partner- ship at will when the interest
ownership thereof, has only was assigned or when the charging
transferred to the partnership the use order was issued.
or enjoyment of the same; but the
The causes of dissolution can be categorized into 4
partnership shall not be dissolved by
causes:
the loss of the thing when it occurs
after the partnership has acquired the 1. With violation of agreement;
ownership thereof; 2. Without violation of agreement;
5. By the death of any partner; 3. Beyond the partners’ control or by
6. By the insolvency of any partner or of operation of law; and,
the partnership; 4. By court decree.
7. By the civil interdiction of any partner;
8. By decree of court under the following Other causes are provided in Article 1840.
article.
Distinctions:
Article 1831: Judicial dissolution of partnership
Article 1830 Article 1831 Article 1840
On application by or for a partner, the court Results to Does not Results in
shall decree a dissolution whenever: automatic result to automatic
dissolution automatic dissolution
1. A partner has been declared insane in dissolution
any judicial proceeding or is shown to Causes range Causes are Causes are
be of unsound mind; from those grounds for when a new
2. A partner becomes in any other way brought about judicial partner is
incapable of performing his part of the by violation or dissolution. admitted or
partnership contract; non-violation of when a partner
3. A partner has been guilty of such agreement to retires,
conduct as tends to affect prejudicially those brought withdraws or is
the carrying on of the business; about by expelled from
4. A partner willfully or persistently operation of law, the partnership.
commits a breach of the partnership and dissolution
agreement, or otherwise so conducts may be effected
himself in matters relating to the judicially or
partnership business that it is not extrajudicially.
reasonably practicable to carry on the
business in partnership with him;
5. The business of the partnership can Should the partner withdraw from the partnership,
only be carried on at a loss; can he be held liable for breach of contract? No. In
6. Other circumstances render a the law on partnerships, the doctrine of delectus
dissolution equitable. personae is given a much higher premium than the

Morc’s Notes on Partnership and Agency Page 64

general principles governing contracts. Absent any
bad faith, a partner cannot be held liable for breach
of contract as no person can be compelled either to
become a partner or to remain one, as the relation
of partners is one of mutual agency, a distinct
feature among partnerships. By way of obiter in the
case of Tocao, the Court ruled that an unjustified
dissolution of a partner can subject him to action for
damages because by mutual agency that arises in a
partnership, the doctrine of delectus personae
allows the partners to have the power, although not
necessarily the right to dissolve the partnership.
In the absence of an express agreement to that
effect, there exists no right or power of any member,
or even a majority of the members, to expel all other
members of the firm at will. Nor can they at will
forfeit the share or interest of a member or
members and compel him or them to quit the firm,
even paying what is due him.
The insolvency of the partner or of the partnership, a
ground enumerated in Article 1830, must be
adjudged by court. Will it be recognized as a ground
under Article 1831 then, and not of Article 1830? No.
This is so in pursuance to the Insolvency law. The
determination is to the extent of the partner’s
insolvency only, and no judicial decree is rendered
ordering the partnership’s dissolution.
Can the partners in their contract decrease or limit
the causes of dissolution? No. In the case of
Lichauco v. Lichauco, the Court held that a
contractual provision prohibiting dissolution except
by authorization of two-thirds of the members
cannot be sustained when the firm had lost its
capital, or had become bankrupt, or had utterly
abandoned the enterprise for which it had been
organized.
Who can sue for dissolution?
1. A partner for any of the 6 causes
enumerated in Article 1831;
2. The purchaser of a partner’s interest in the
partnership under Article 1813 or 1814,
provided that the period has expired or if
Morc’s Notes on Partnership and Agency
the firm was a partnership at will when the
interest was assigned or changed.
Cases:
 Fue Leung v. IAC, GR 70926, January 31,
1989
The private respondent is a partner of the petitioner
in Sun Wah Panciteria. The requisites of a
partnership which are — 1) two or more persons
bind themselves to contribute money, property, or
industry to a common fund; and 2) intention on the
part of the partners to divide the profits among
themselves (Article 1767, Civil Code; Yulo v. Yang
Chiao Cheng, 106 Phil. 110) — have been
established. As stated by the respondent, a partner
shares not only in profits but also in the losses of the
firm. If excellent relations exist among the partners
at the start of business and all the partners are more
interested in seeing the firm grow rather than get
immediate returns, a deferment of sharing in the
profits is perfectly plausible. It would be incorrect to
state that if a partner does not assert his rights
anytime within ten years from the start of
operations, such rights are irretrievably lost. The
private respondent’s cause of action is premised
upon the failure of the petitioner to give him the
agreed profits in the operation of Sun Wah
Panciteria. In effect the private respondent was
asking for an accounting of his interests in the
partnership.
Considering the facts of this case, the Court may
decree a dissolution of the partnership under Article
1831 of the Civil Code.
There shall be a liquidation and winding up of
partnership affairs, return of capital, and other
incidents of dissolution because the continuation of
the partnership has become inequitable
 Rojas v. Maglana, supra.
As to the question of whether or not Maglana can
unilaterally dissolve the partnership in the case at
bar, the answer is in the affirmative.
Page 65
Hence, as there are only two parties when Maglana
notified Rojas that he dissolved the partnership, it is
in effect a notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if
there is a specified term, one partner can cause its
dissolution by expressly withdrawing even before
the expiration of the period, with or without
justifiable cause. Of course, if the cause is not
justified or no cause was given, the withdrawing
partner is liable for damages but in no case can he
be compelled to remain in the firm. With his
withdrawal, the number of members is decreased,
hence, the dissolution. And in whatever way he may
view the situation, the conclusion is inevitable that
Rojas and Maglana shall be guided in the liquidation
of the partnership by the provisions of its duly
registered Articles of Co-Partnership; that is, all
profits and losses of the partnership shall be divided
"share and share alike" between the partners.
But an accounting must first be made and which in
fact was ordered by the trial court and accomplished
by the commissioners appointed for the purpose.
As to whether Maglana is liable for damages because
of such withdrawal, it will be recalled that after the
withdrawal of Pahamotang, Rojas entered into a
management contract with another logging
enterprise, the CMS Estate, Inc., a company engaged
in the same business as the partnership. He
withdrew his equipment, refused to contribute
either in cash or in equipment to the capital
investment and to perform his duties as logging
superintendent, as stipulated in their partnership
agreement. The records also show that Rojas not
only abandoned the partnership but also took funds
in an amount more than his contribution (Decision,
R.A., p. 949).
In the given situation Maglana cannot be said to be
in bad faith nor can he be liable for damages.
Article 1832: Termination of authority of partner
Except so far as may be necessary to wind
up partnership affairs or to complete
transactions begun but not then finished,
Morc’s Notes on Partnership and Agency
dissolution terminates all authority of any
partner to act for the partnership.
1. With respect to the partners:
a. When the dissolution is not by
the act, insolvency or death of
a partner; or
b. When the dissolution is by
such act, insolvency or death
of a partner, in cases where
Article 1833 so requires;
2. With respect to persons not partners,
as declared in Article 1834.
Article 1833: Liability to share in any liability
created by partner
Where the dissolution is caused by the act,
death or insolvency of a partner, each
partner is liable to his co-partners for his
share of any liability created by any partner
acting for the partnership as if the
partnership had not been dissolved unless:
1. The dissolution being by act of any
partner, the partner acting for the
partnership had knowledge of the
dissolution; or,
2. The dissolution being by the death or
insolvency of a partner, the partner
acting for the partnership had
knowledge or notice of the death or
insolvency.
Upon dissolution, the partnership ceases to be a
going concern and the partner’s power of
representation is confined only to acts incident to
winding up or completing the transactions begun but
not then finished. Hence, the event of dissolution
terminates the actual authority of a partner to
undertake new business for the partnership.
Rules:
1. When the dissolution is caused not by the
act, insolvency or death of a partner, the
authority of any partner to bind the
Page 66
 partnership by a new contract is
immediately terminated.
2. When the dissolution is caused by the act,
death, or insolvency of a partner and there
is no knowledge or notice of dissolution,
death or insolvency, a partner’s acts would
still bind the co-partners. The co-partners
cannot proceed against said partner.
3. Conversely, transactions entered into after
dissolution will not bind the firm:
a. If dissolution is caused by an act
and the partner had knowledge of
the dissolution.
b. If dissolution is caused by death or
insolvency and the partner had
knowledge or notice of the death
or insolvency.
In such instances, the co-partners would
still contribute to extinguish liability but
they may proceed against the erring
partner.
Article 1833 applies only if the contract of the
partner binds the partnership. If the partnership is
not bound, only the acting partner is personally
liable.
Article 1834: Power to bind dissolved partnership
to third persons
After dissolution, a partner can bind the
partnership, except as provided in the third
paragraph of this article:
1. By an act appropriate for winding up
partnership affairs or completing
transactions unfinished at dissolution;
2. By any transaction which would bind
the partnership if dissolution had not
taken place, provided the other party
to the transaction:
a. Had extended credit to the
partnership prior to
dissolution and had no
knowledge or notice of the
dissolution; or
Morc’s Notes on Partnership and Agency
b. Though he had not so
extended credit, had
nevertheless known of the
partnership prior to
dissolution, and having no
knowledge or notice of
dissolution, the fact of
dissolution had not been
advertised in a newspaper of
general circulation in the place
(or in each place if more than
one) at which the partnership
was regularly carried on.
The liability of a partner under the first
paragraph, No. 2, shall be satisfied out of
partnership assets alone when such partner
had been prior to dissolution:
1. Unknown as a partner to the person
with whom the contract is made; and
2. So far unknown and inactive in
partnership affairs that the business
reputation of the partnership could not
be said to have been in any degree due
to his connection with it.
The partnership is in no case bound by any
act of a partner after dissolution:
1. Where the partnership is dissolved
because it is unlawful to carry on the
business, unless the act is appropriate
for winding up partnership affairs; or
2. Where the partner has become
insolvent; or
3. Where the partner had no authority to
wind up partnership affairs, except by a
transaction with one who —
a. Had extended credit to the
partnership prior to
dissolution and had no
knowledge or notice of his
want of authority; or
b. Had not extended credit to the
partnership prior to
dissolution, and, having no
Page 67
 knowledge or notice of his
want of authority, the fact of
his want of authority has not
been advertised in the manner
provided for advertising the
fact of dissolution in the fi rst
paragraph, No. 2(b).
Nothing in this article shall affect the
liability under Article 1825 of any person
who after dissolution represents himself or
consents to another representing him as a
partner in a partnership engaged in carrying
on business.
This article speaks of two possibilities:
1. When the partnership is bound to
strangers:
a. Business is for winding up;
b. Business is to complete unfinished
transactions; and,
c. Completely new business with
third parties considered innocent.
2. When the partnership is not bound to
strangers:
a. Completely new business with
third parties having knowledge or
notice of the dissolution;
b. Where the firm was dissolved
because it was unlawful to carry on
the business, except when the act
is for winding up;
c. Where the partner that acted in
the transaction has become
insolvent; and,
d. Where the partner is unauthorized
to wind up, except if the
transaction is with a customer in
good faith.
Is a retired partner liable to previous customers who
transact with the new firm if the firm still uses the
old firm name? Yes, unless said partner notifies said
old customers or unless said customers actually
know of his retirement.
Morc’s Notes on Partnership and Agency
Under the second paragraph, the liability of a
partner unknown as such to the person with whom
the contract is made or so far unknown and inactive
in the partnership affairs shall be satisfied out of
partnership assets alone. This applies to dormant
partners, who are both inactive and secret.
Article 1835: Effect of dissolution on partners’
existing liability
The dissolution of the partnership does not
of itself discharge the existing liability of any
partner.
A partner is discharged from any existing
liability upon the dissolution of the
partnership by an agreement to that effect
between himself, the partnership creditor
and the person or partnership continuing
the business; and such agreement may be
inferred from the course of dealing
between the creditor having knowledge of
the dissolution and the person or
partnership continuing the business.
The individual property of a deceased
partner shall be liable for all obligations of
the partnership incurred while he was a
partner, but subject to the prior payment of
his separate debts.
A partner may be relieved from all existing liabilities
upon dissolution only by an agreement to that effect
between himself, the partnership creditor, and the
other partners. The consent, however, of the
creditor and the partners to the novation may be
implied from their conduct.
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
administrator. Thus, it is wrong to just continue the
action for accounting and substitute the dead
defendant with his heirs.
Article 1836: Manner of winding up
Page 68
 Unless otherwise agreed, the partners who
have not wrongfully dissolved the
partnership or the legal representative of
the last surviving partner, not insolvent, has
the right to wind up the partnership affairs,
provided, however, that any partner, his
legal representative or his assignee, upon
cause shown, may obtain winding up by the
court.
Who may wind up the firm?
1. Those mentioned in the agreement;
2. Partners who have not wrongfully dissolved
the partnership; and,
3. Legal representative of the last surviving
partner, provided the last surviving partner
is not insolvent.
Distinctions:
Extrajudicial winding up Judicial winding up
By the partners Under the control and
themselves, without direction of the court,
intervention of the upon proper cause that
court. is shown to the court by
any partner, his legal
representative, or his
assignee.
For the purpose of winding up the affairs of a
dissolved partnership, the surviving partner has full
authority to do every thing that may be necessary,
but his power is limited to the performance of acts
which are indispensable to that end. The deceased
partner’s estate is not liable for any subsequent
debts or losses incurred by the surviving partners
who continued the partnership business.
Article 1837: Application of partnership property on
dissolution
When dissolution is caused in any way,
except in contravention of the partnership
agreement, each partner, as against his co-
partners and all persons claiming through
them in respect of their interests in the
Morc’s Notes on Partnership and Agency
partnership, unless otherwise agreed, may
have the partnership property applied to
discharge its liabilities, and the surplus
applied to pay in cash the net amount
owing to the respective partners. But if
dissolution is caused by expulsion of a
partner, bona fide under the partnership
agreement and if the expelled partner is
discharged from all partnership liabilities,
either by payment or agreement under the
second paragraph of Article 1835, he shall
receive in cash only the net amount due
him from the partnership.
When dissolution is caused in contravention
of the partnership agreement, the rights of
the partners shall be as follows:
1. Each partner who has not caused
dissolution wrongfully shall have:
a. All the rights specified in the
first paragraph of this article,
and,
b. The right, as against each
partner who has caused the
dissolution wrongfully, to
damages for breach of the
agreement.
2. The partners who have not caused the
dissolution wrongfully, if they all desire
to continue the business in the same
name either by themselves or jointly
with others, may do so, during the
agreed term for the partnership and for
that purpose may possess the
partnership property, provided they
secure the payment by bond approved
by the court, or pay to any partner who
has caused the dissolution wrongfully,
the value of his interest in the
partnership at the dissolution, less any
damages recoverable under the second
paragraph, No. 1(b) of this article, and
in like manner indemnify him against all
present or future partnership liabilities.
Page 69
 3. A partner who has caused the
dissolution wrongfully shall have:
a. If the business is not
continued under the
provisions of the second
paragraph, No. 2, all the rights
of a partner under the first
paragraph, subject to liability
for damages in the second
paragraph, No. 1(b), of this
article.
b. If the business is continued
under the second paragraph,
No. 2, of this article, the right
as against his co-partners and
all claiming through them in
respect of their interests in the
partnership, to have the value
of his interest in the
partnership, less any damage
caused to his co-partners by
the dissolution, ascertained
and paid to him in cash, or the
payment secured by a bond
approved by the court and to
be released from all existing
liabilities of the partnership;
but in ascertaining the value of
the partner’s interest, the
value of the good will of the
business shall not be
considered.
Rights of all partners (no contravention):
1. Have the partnership property applied to its
liabilities;
2. Surplus is distributed among them.
Right of expelled partner who was discharged from
all partnership liabilities:
1. Instead of having the surplus, he receives in
cash the net amount due him.
Rights of partners (there is contravention of
agreement):
Morc’s Notes on Partnership and Agency
1. Have the partnership property applied to its
liabilities;
2. Surplus is distributed among them;
3. Damages against the cause of dissolution;
4. May continue the business subject to
certain provisions of law
Rights of partners who wrongfully caused the
dissolution:
1. Same with other partners except that they
pay damages, if the partners decide not to
continue the business
2. If the business is continued, to have the
value of his interest in the partnership at
the time of the dissolution, less any
damages caused by the dissolution to his
co-partners, ascertained and paid in cash or
secured by bond approved by the court and
to be released from all existing and future
liabilities of the partnership.
Article 1838: Rights of partners when partnership is
rescinded
Where a partnership contract is rescinded
on the ground of the fraud or
misrepresentation of one of the parties
thereto, the party entitled to rescind is,
without prejudice to any other right,
entitled:
1. To a lien on, or right of retention of, the
surplus of the partnership property
after satisfying the partner- ship
liabilities to third persons for any sum
of money paid by him for the purchase
of an interest in the partnership and for
any capital or advances contributed by
him;
2. To stand on, after all liabilities to third
persons have been satisfied, in the
place of the creditors of the
partnership for any payments made by
him in respect of the partnership
liabilities; and
Page 70
 3. To be indemnified by the person guilty
of the fraud of making the
representation against all debts and
liabilities of the partnership.
The article speaks of 3 rights of injured partner
should the contract be annulled:
1. Right of lien or retention;
2. Right of subrogation;
3. Right of indemnification.
Article 1839: Liquidation and distribution of assets
of dissolved partnership
In settling accounts between the partners
after dissolution, the following rules shall be
observed, subject to any agreement to the
contrary:
1. The assets of the partnership are:
a. The partnership property,
b. The contributions of the
partners necessary for the
payment of all the liabilities
specified in No. 2.
2. The liabilities of the partnership shall
rank in order of payment, as follows:
a. Those owing to creditors other
than partners;
b. Those owing to partners other
than for capital and profits,
c. Those owing to partners in
respect of capital,
d. Those owing to partners in
respect of profits.
3. The assets shall be applied in the order
of their declaration in No. 1 of this
article to the satisfaction of the
liabilities.
4. The partners shall contribute, as
provided by article 1797, the amount
necessary to satisfy the liabilities.
5. An assignee for the benefit of creditors
or any person appointed by the court
shall have the right to enforce the
Morc’s Notes on Partnership and Agency
contributions specified in the preceding
number.
6. Any partner or his legal representative
shall have the right to enforce the
contributions specified in No. 4, to the
extent of the amount which he has paid
in excess of his share of the liability.
7. The individual property of a deceased
partner shall be liable for the
contributions specified in No. 4.
8. When partnership property and the
individual properties of the partners
are in possession of a court for
distribution, partnership creditors shall
have priority on partnership property
and separate creditors on individual
property, saving the rights of lien or
secured creditors.
9. Where a partner has become insolvent
or his estate is insolvent, the claims
against his separate property shall rank
in the following order:
a. Those owing to separate
creditors;
b. Those owing to partnership
creditors;
c. Those owing to partners by
way of contributions.
Order of payment of firm’s liabilities:
1. First, give to creditors (who are strangers),
otherwise they may be prejudiced.
2. Then give to partners who are also creditors
(they should be placed in a subordinate
position to outside creditors for otherwise
they may prefer their own interests).
3. Then give to the partners their capital.
4. Lastly, the profits must be distributed.
If a partner is insolvent, how will his individual
properties be distributed? First, give to the
individual or separate creditors. Then, to the
partnership creditors. Then, those owing to the
other partners by way of contribution.
Page 71
Doctrine of the marshalling of assets. It involves the
ranking of assets in a certain order toward the
payment of outstanding debts. Stated otherwise,
the general rule is: “Partnership assets to
partnership creditors, individual assets to individual
creditors; anything left from either goes to the
other.”
Cases:
 Claridades v. Mercader, L-20341, May 14,
1966
An action for the liquidation of a partnership is a
personal one which may be brought in the place of
residence of either the plaintiff or the defendant.
The fact that plaintiff prays for the sale of the assets
of the partnership, including a fishpond located in a
province other than that where the action was
brought, does not change the nature or character of
the action, such sale being merely a necessary
incident of the liquidation of the partnership, which
should precede and/or is part of its proper
dissolution.
 Ortega v. CA, GR 109248, July 3, 1995
Upon its dissolution, the partnership continues and
its legal personality is retained until the complete
winding up of its business culminating in its
termination. The liquidation of the assets of the
partnership following its dissolution is governed by
various provisions of the Civil Code, however, an
agreement of the partners, like any other contract, is
binding among them and normally takes precedence
to the extent applicable over the Code’s general
provisions. And here, the term "retirement" must
have been used in the Articles of Partnership in a
generic sense to mean the dissociation by a partner,
inclusive of resignation or withdrawal, from the
partnership that thereby dissolves it.
 Primelink Properties and Development
Corporation v. Lazatin-Magat, GR 167379,
June 27, 2006
When the RTC rescinded the JVA on complaint of
respondents based on the evidence on record that
Morc’s Notes on Partnership and Agency
petitioners willfully and persistently committed a
breach of the JVA, the court thereby
dissolved/cancelled the partnership. With the
rescission of the JVA on account of petitioners
fraudulent acts, all authority of any partner to act for
the partnership is terminated except so far as may
be necessary to wind up the partnership affairs or to
complete transactions begun but not yet finished.
On dissolution, the partnership is not terminated but
continues until the winding up of partnership affairs
is completed. Winding up means the administration
of the assets of the partnership for the purpose of
terminating the business and discharging the
obligations of the partnership.
The transfer of the possession of the parcels of land
and the improvements thereon to respondents was
only for a specific purpose: the winding up of
partnership affairs, and the partition and distribution
of the net partnership assets as provided by law.
After all, Article 1836 of the New Civil Code provides
that unless otherwise agreed by the parties in their
JVA, respondents have the right to wind up the
partnership affairs.
It must be stressed, too, that although respondents
acquired possession of the lands and the
improvements thereon, the said lands and
improvements remained partnership property,
subject to the rights and obligations of the parties,
inter se, of the creditors and of third parties under
Articles 1837 and 1838 of the New Civil Code, and
subject to the outcome of the settlement of the
accounts between the parties as provided in Article
1839 of the New Civil Code, absent any agreement
of the parties in their JVA to the contrary. Until the
partnership accounts are determined, it cannot be
ascertained how much any of the parties is entitled
to, if at all.
It was thus premature for petitioner Primelink to be
demanding that it be indemnified for the value of
the improvements on the parcels of land owned by
the joint venture/partnership. Notably, the JVA of
the parties does not contain any provision
designating any party to wind up the affairs of the
partnership.
Page 72
Thus, Article 1837 of the New Civil Code provides for
the rights of the parties when dissolution is caused
in contravention of the partnership agreement. And
under Article 1838 of the New Civil Code, the party
entitled to rescind is, has other rights, to wit: right to
lien, right to indemnification and right to
subrogation.
The accounts between the parties after dissolution
have to be settled as provided in Article 1839 of the
New Civil Code.
 Villareal v. Ramirez, supra.
Petitioners further argue that respondents acted
negligently by permitting the partnership assets in
their custody to deteriorate to the point of being
almost worthless. Supposedly, the latter should
have liquidated these sole tangible assets of the
partnership and considered the proceeds as
payment of their net capital. Hence, petitioners
argue that the turnover of the remaining partnership
assets to respondents was precisely the manner of
liquidating the partnership and fully settling the
latter’s share in the partnership.
We disagree. The delivery of the store furniture and
equipment to private respondents was for the
purpose of storage. They were unaware that the
restaurant would no longer be reopened by
petitioners. Hence, the former cannot be faulted for
not disposing of the stored items to recover their
capital investment.
Article 1840: Dissolution because of change in
membership
In the following cases, creditors of the
dissolved partnership are also creditors of
the person or partnership continuing the
business:
1. When any new partner is admitted into
an existing partnership, or when any
partner retires and assigns (or the
representative of the deceased partner
assigns) his rights in partnership
property to two or more of the
Morc’s Notes on Partnership and Agency
partners, or to one or more of the
partners and one or more third
persons, if the business is continued
without liquidation of the partnership
affairs;
2. When all but one partner retire and
assign (or the representative of a
deceased partner assigns) their rights in
partnership property to the remaining
partner, who continues the business
without liquidation of partnership
affairs, either alone or with others;
3. When any partner retires or dies and
the business of the dissolved
partnership is continued as set forth in
Nos. 1 and 2 of this article, with the
consent of the retired partners or the
representative of the deceased partner,
but without any assignment of his right
in partnership property;
4. When all the partners or their
representatives assign their rights in
partnership property to one or more
third persons who promise to pay the
debts and who continue the business of
the dissolved partnership;
5. When any partner wrongfully causes a
dissolution and the remaining partners
continue the business under the
provisions of article 1837, second
paragraph, No. 2, either alone or with
others, and without liquidation of the
partnership affairs;
6. When a partner is expelled and the
remaining partners continue the
business either alone or with others
without liquidation of the partnership
affairs.
The liability of a third person becoming a
partner in the partnership continuing the
business, under this article, to the creditors
of the dissolved partnership shall be
satisfied out of the partnership property
only, unless there is a stipulation to the
contrary.
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 When the business of a partnership after
dissolution is continued under any
conditions set forth in this article the
creditors of the dissolved partnership, as
against the separate creditors of the retiring
partner or deceased partner or the
representative of the deceased partner,
have a prior right to any claim of the retired
partner or the representative of the
deceased partner against the person or
partnership continuing the business, on
account of the retired or deceased partner’s
interest in the dissolved partnership or on
account of any consideration promised for
such interest or for his right in partnership
property.
Nothing in this article shall be held to
modify any right of creditors to set aside
any assignment on the ground of fraud.
The use by the person or partnership
continuing the business of the partnership
name, or the name of a deceased partner as
part thereof, shall not of itself make the
individual property of the deceased partner
liable for any debts contracted by such
person or partnership.
A partnership dissolved by:
a. When a new partner is admitted;
b. When a partner retires;
c. When a partner dies;
d. When a partner withdraws;
e. When a partner is expelled from
the partnership;
f. When the other partners assign
their rights to the sole remaining
partner;
g. When all the partners assign their
rights in partnership property to
third persons.
need not undergo the procedure relating to
dissolution and winding of its business affairs. The
remaining partners may elect to continue the
Morc’s Notes on Partnership and Agency
business of the old partnership without interruption
by simply taking over the business enterprise owned
by the preceding partner and continuing the use of
the old name.
The Article deals with the rights of creditors when
the partnership is dissolved by a change of
membership and its business is continued by a
former partner, either alone or with new partners,
without liquidation of partnership affairs. Both
classes of creditors, the old and the new, are treated
alike, being given equal rights in partnership
property.
The last paragraph of Article 1840 primarily deals
with the exemption from liability to creditors of a
dissolved partnership of the individual property of
the deceased partner for debts contracted by the
person or partnership which continues the business
using the partnership name or the name of the
deceased partner as part thereof.
As a general rule, upon the dissolution of a
commercial partnership, the succeeding partners or
parties have the right to carry on the business under
the old name, in the absence of stipulation
forbidding it, since the name of a commercial
partnership is a partnership asset inseparable from
the goodwill of the firm. On the other hand, a
professional partnership the reputation of which
depends on the individual skill of the members has
no goodwill to be distributed as a firm on its
dissolution, however, intrinsically valuable such skill
and reputation may be, especially where there is no
provision in the partnership agreement relating to
goodwill as an asset.
Article 1841: Rights of retiring, or estate of
deceased partner
When any partner retires or dies, and the
business is continued under any of the
conditions set forth in the preceding article,
or in article 1837, second paragraph, No. 2,
without any settlement of accounts as
between him or his estate and the person
or partnership continuing the business,
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 unless otherwise agreed, he or his legal
representative as against such person or
partnership may have the value of his
interest at the date of dissolution
ascertained, and shall receive as an ordinary
creditor an amount equal to the value of his
interest in the dissolved partnership with
interest, or at his option or at the option of
his legal representative, in lieu of interest,
the profits attributable to the use of his
right in the property of the dissolved
partnership; provided that the creditors of
the dissolved partnership as against the
separate creditors, or the representative of
the retired or deceased partner, shall have
priority on any claim arising under this
article, as provided by Article 1840, third
paragraph.
Rights of retiring or of estate of deceased partner
when business is continued
This right of a partner or the one who represents
him as owner of his interest to an account, and to a
payment of the amount of his interest, may be
exercised against:
1. The winding up partner
2. The surviving partner
3. The person or partnership continuing the
business
A partner’s share cannot be returned without first
dissolving and liquidating the partnership, for the
return is dependent on the discharge of creditors,
whose claims enjoy preference over the partners;
and it is self-evident that all members of the
partnership are interested in its assets and business,
and are entitled to be heard in the matter of the
firm’s liquidation and the distribution of its property.
LIMITED PARTNERSHIPS
Distinctions:

1. To have the value of the interest of the General Limited

retiring partner or deceased partner in the partnership/partner
partnership ascertained as of the date of One consisting of
dissolution; and, general partners who
2. To receive thereafter, as an ordinary are liable pro rata and
creditor, an amount equal to the value of subsidiarily and
his share in the dissolved partnership. sometimes solidarily
with their separate
Article 1842: Accrual and prescription of partner’s
property for partnership
right to account of his interest
debt
The right to an account of his interest shall
accrue to any partner, or his legal A general partnership, as
representative as against the winding up a general rule, may be
partners or the surviving partners or the constituted in any form
person or partnership continuing the by contract or conduct
business, at the date of dissolution, in the of the parties.
absence of any agreement to the contrary. A general partner is
personally liable for
Under Article 1842, the right to demand accrues at partnership obligations.
the date of dissolution in the absence of any When the manner of
contrary agreement. Prescription runs only upon management has not
the dissolution of the partnership when the final been agreed upon, all of
accounting is done. the general partners
have an equal right in
partnership/partner
One formed by two or
more persons having as
members one or more
general partners and one
or more limited
partners, the latter not
being personally liable
for the obligations of the
partnership.
A limited partnership is
created by the members
after compliance with
the requirements set
forth by law.
A limited partner’s
liability extends only to
his capital contributions.
When the manner of
management has not
been agreed upon, a
limited partner has no
share in the

Morc’s Notes on Partnership and Agency Page 75

the management of the
business.
A general partner may
contribute money,
property, or industry to
the partnership
A general partner is a
proper party to
proceeding by or against
a partnership.
A general partner’s
interest in the
partnership may not be
assigned as to make the
assignee a new partner
without the consent of
the other partners
although he may
associate a third person
with him in his share.
The name of a general
partner may appear in
the firm name.
A general partner is
prohibited from
engaging in a business
which is of kind of
business in which the
partnership is engaged,
if he is a capitalist
partner or in any
business for himself if he
is an industrial partner.
The retirement, death,
insanity or insolvency of
a general partner
dissolves the
partnership.
Morc’s Notes on Partnership and Agency
management of a limited
partnership as his rights
being limited to those
specified by law.
A limited partner must
contribute cash or
property to the
partnership but not
services
A limited partner is not a
proper party to
proceeding by or against
a partnership.
A limited partner’s
interest is freely
assignable, with the
assignee acquiring all the
rights of the limited
partner subject to
certain qualifications.
The name of a limited
partner must not appear
in the firm name.
There is no such
prohibition in the case of
a limited partner who is
considered as a mere
contributor to the
partnership.
The retirement, death,
insanity or insolvency of
a limited partner does
not have the same
effect, for his executor
or administrator shall
have the rights of a
limited partner for the
purpose of selling his
estate.
A partnership where all the partners are “limited
partners” cannot exist as a limited partnership. It
will even be refused registration. If at all it
continues, it will be a general partnership, and all the
partners will be general partners (Paras).
Article 1843. Concept and definition of limited
partnership
A limited partnership is one formed by two
or more persons under the provisions of the
following article, having as members one or
more general partners and one or more
limited partners. The limited partners as
such shall not be bound by the obligations
of the partnership.
It is so called because the liability to third persons of
one or more of its members referred to as limited, or
special partners, is limited to a fixed amount, their
capital contributions or the amount they have
invested in the partnership. This limited liability is
the key characteristic of the limited partnership.
Characteristics of limited partnership:
1. Formed by compliance with the statutory
requirements;
2. One or more general partners control the
business and are personally liable to
creditors;
3. One or more limited partners contribute to
the capital and share in the profits but do
not participate in the management of the
business and are not personally liable for
partnership obligations beyond the amount
of their capital contributions;
4. Limited partners may ask for the return of
their capital contributions under the
conditions prescribed by law;
5. The partnership debts are paid out of
common fund and the individual properties
of the general partners.
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Article 1844: Creation of limited partnership; k. The right, if given, of the
requirements partners to admit additional
limited partners;
Two or more persons desiring to form a l. The right, if given, of one or
limited partnership shall: more of the limited partners
to priority over other limited
1. Sign and swear to a certificate, which
partners, as to contributions
shall state:
or as to compensation by way
a. The name of the partnership,
of income, and the nature of
adding thereto the word
such priority;
“Limited”;
m. The right, if given, of the
b. The character of the business;
remaining general partner or
c. The location of the principal
partners to continue the
place of business;
business on the death,
d. The name and place of
retirement, civil interdiction,
residence of each member,
insanity or in- solvency of a
general and limited partners
general partner; and
being respectively designated;
n. The right, if given, of a limited
e. The term for which the
partner to demand and
partnership is to exist;
receive property other than
f. The amount of cash and
cash in return of his
description of and the agreed
contribution.
value of the other property
2. File for record the certificate in the
contributed by each limited
Office of the Securities and Exchange
partner;
Commission.
g. The additional contributions, if
any, to be made by each A limited partnership is formed if there has
limited partner and the times been substantial compliance in good faith
at which or events on the with the foregoing requirements.
happening of which they shall
be made; Two important things are needed:
h. The time, if agreed upon,
when the contribution of each 1. The signing under oath of the required
limited partner is to be certificate, with all the enumerated items;
returned; and,
i. The share of the profits or the 2. The filing for record of the certificate in the
other compensation by way of Office of the SEC.
income which each limited
The creation of a limited partnership is a formal
partner shall receive by reason
proceeding and is not a mere voluntary agreement,
of his contribution;
as in the case of a general partnership. Accordingly,
j. The right, if given, of a limited
the requirements of the statute must be followed. A
partner to substitute an
limited partnership is formed if there has been
assignee as contributor in his
substantial compliance in good faith with the
place, and the terms and
requirements set forth in Article 1844. More so, a
conditions of the substitution;
person who files a false certificate thereby renders
himself liable as a general partner.

Morc’s Notes on Partnership and Agency Page 77

If the proposed limited partnership has not
conformed substantially with the requirements of
this article, as when the name of one of the general
partners appear in the firm name, it is not
considered a limited partnership but a general
partnership. This is because a firm transacting
business as a partnership is presumed to be a
general partnership.
Article 1845: Contribution of a limited partner
The contributions of a limited partner may
be cash or other property, but not services.
Article 1846. Name of limited partnership; effects
of surname of limited partner found in partnership
name
The surname of a limited partner shall not
appear in the partnership name unless:
1. It is also the surname of a general
partner, or
2. Prior to the time when the limited
partner be- came such, the business
had been carried on under a name in
which his surname appeared.
A limited partner whose surname appears
in a partnership name contrary to the
provisions of the first paragraph is liable as
a general partner to partnership creditors
who extend credit to the partnership
without actual knowledge that he is not a
general partner.
Article 1847: False statement in certificate filed
with the SEC; effects; liability
If the certificate contains a false statement,
one who suffers loss by reliance on such
statement may hold liable any party to the
certificate who knew the statement to be
false:
1. At the time he signed the certificate, or
2. Subsequently, but within a sufficient
time be- fore the statement was relied
Morc’s Notes on Partnership and Agency
upon to enable him to cancel or amend
the certificate, or to fi le a petition for
its cancellation or amendment as
provided in Article 1865.
This article does not say that the guilty partner shall
be liable as a general partner. This liability imposed
by the article is merely a statutory penalty and does
not make the limited partner a general partner for
all purposes, even as to third persons.
Article 1848: Liability of limited partner for
participating in management
A limited partner shall not become liable as
a general partner unless, in addition to the
exercise of his rights and powers as a
limited partner, he takes part in the control
of the business.
The following acts do not constitute taking “part in
the control of the business”:
1. Mere dealing with a customer;
2. Mere consultation on one occasion with the
general partners.
It would seem that such control contemplates active
participation in the management of the partnership
business and does not comprehend the mere giving
of advice to general partners as to specific matters
which the latter may follow or not.
Article 1849: Admission of additional limited
partners
After the formation of a limited partnership,
additional limited partners may be admitted
upon filing an amendment to the original
certificate in accordance with the
requirements of Article 1865.
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.
Article 1850: Rights, powers, and liabilities of a
general partner is a limited partnership
Page 78
 A general partner shall have the rights and
powers and be subject to all the restrictions
and liabilities of a partner in a partnership
without limited partners. However, without
the written consent or ratification of the
specific act by all the limited partners, a
general partner or all of the general
partners have no authority to:
1. Do any act in contravention of the
certificate;
2. Do any act which would make it
impossible to carry on the ordinary
business of the partnership;
3. Confess a judgment against the
partnership;
4. Possess partnership property, or assign
their rights in specific partnership
property, for other than a partnership
purpose;
5. Admit a person as a general partner;
6. Admit a person as a limited partner,
unless the right to do so is given in the
certificate;
7. Continue the business with partnership
property on the death, retirement,
insanity, civil interdiction or insolvency
of a general partner, unless the right so
to do is given in the certificate.
In the absence of an agreement to the contrary, a
limited partner is not entitled to compensation for
his services beyond his share of the profits.
Does the general partner enjoy plenary powers in a
limited partnership? As a rule, a general partner
may bind the partnership by any act of
administration, but he has no power to do the
specific acts enumerated in the article above, even if
agreed to by all the general partners, without the
written consent or at least ratification of all the
limited partners.
The general partners have no power to bind the
limited partners beyond the latter’s investment.
Morc’s Notes on Partnership and Agency
Article 1851: Rights of a limited partner in the
partnership
A limited partner shall have the same rights
as a general partner to:
1. Have the partnership books kept at the
principal place of business of the
partnership, and at a reasonable hour
to inspect and copy any of them;
2. Have on demand true and full
information of all things affecting the
partnership, and a formal account of
partnership affairs whenever
circumstances render it just and
reasonable; and,
3. Have dissolution and winding up by
decree of court.
A limited partner shall have the right to
receive a share of the profits or other
compensation by way of in- come, and to
the return of his contribution as provided in
Articles 1856 and 1857.
The rights of limited partners are enumerated in the
Article above. A limited partner has lesser rights
than a general partner.
Specific rights of a limited partner:
1. To require that the partnership books be
kept at the principal place of business of the
partnership;
2. To inspect and copy at a reasonable hour
partnership books or any of them;
3. To demand true and full information of all
things affecting the partnership;
4. To demand a formal account of partnership
affairs whenever circumstances render it
just and reasonable;
5. To ask for dissolution and winding up by
decree of court;
6. To receive a share of the profits or other
compensation by way of income; and,
7. To receive the return of his contributions
provided the partnership assets are in
excess of all its liabilities.
Page 79
Article 1852: Error in belief as to being a limited
partner; status
Without prejudice to the provisions of
Article 1848, a person who has contributed
to the capital of a business conducted by a
person or partnership erroneously believing
that he has become a limited partner in a
limited partnership, is not, by reason of his
exercise of the rights of a limited partner, a
general partner with the person or in the
partnership carrying on the business, or
bound by the obligations of such person or
partnership; provided that on ascertaining
the mistake he promptly renounces his
interest in the profits of the business or
other compensation by way of income.
The article grants exemption from liability in favor of
one who has contributed to the capital of a business
conducted by a person or partnership erroneously
believing that he has become a limited partner in a
limited partnership or in a general partnership
thinking that it is a limited partnership.
Conditions for exemption from liability as a general
partner:
1. Renunciation of his interest upon
ascertaining mistake;
2. Does not participate in the management of
business; and,
3. Surname does not appear in the
partnership name.
The person, however, must promptly renounce his
interest before the partnership has become liable to
third persons who cannot be blamed for considering
him a general partner. However, where partnership
creditors are not prejudiced, it would seem that
renunciation of his interest is not necessary.
An heir of a deceased general partners admitted as a
partner under the articles of partnership providing
for such admission, ordinarily becomes a limited
partner for his own protection, because he would
normally prefer to avoid any liability in excess of the
Morc’s Notes on Partnership and Agency
value of the estate inherited so as not to jeopardize
his personal assets.
Article 1853: Rights and powers of a person who is
both a general and limited partner
A person may be a general partner and a
limited partner in the same partnership at
the same time, provided that this fact shall
be stated in the certificate provided for in
article 1844.
A person who is a general, and also at the
same time a limited partner shall have all
the rights and powers and be subject to all
the restrictions of a general partner; except
that, in respect to his contribution, he shall
have the rights against the other members
which he would have had if he were not
also a general partner.
A person may be a general and a limited partner at
the same time, provided that this fact is stated in the
certificate signed, sworn to, and recorded in the
office of the SEC.
Generally, his rights and powers are those of a
general partner. Hence, he is liable with his separate
property to third persons. However, with respect to
his contribution as a limited partner, he would have
the right of a limited partner insofar as the other
partners are concerned. This means that while he is
not relieved from personal liability to third persons
for partnership debts, he is entitled to recover from
the general partners the amount he has paid to such
third persons; and in settling accounts after
dissolution, he shall have priority over general
partners in the return of their respective
contributions.
Article 1854: Loan and other business transactions
with a limited partnership by a limited partner
A limited partner also may loan money to
and transact other business with the
partnership, and, unless he is also a general
partner, receive on account of resulting
claims against the partnership, with general
Page 80
 creditors, a pro rata share of the assets. No
limited partner shall in respect to any such
claim:
1. Receive or hold as collateral security
any partnership property, or
2. Receive from a general partner or the
partner- ship any payment,
conveyance, or release from liability, if
at the time the assets of the
partnership are not sufficient to
discharge partnership liabilities to
persons not claiming as general or
limited partners.
The receiving of collateral security, or a
payment, conveyance, or release in
violation of the foregoing pro- visions is a
fraud on the creditors of the partnership.
While the limited partner, in the case of a claim
referred to in the article, is prohibited to receive or
hold as collateral security any partnership property,
still he if not prohibited to purchase partnership
assets which are used to satisfy partnership
obligations toward third parties.
Allowable transactions:
1. Granting loans to the partnership;
2. Transacting other business with it;
3. Receiving a pro rata share of the
partnership assets with general creditors if
he is not also a general partner.
Prohibited transactions:
1. Receiving or holding as collateral security
any partnership property;
2. Receiving any payment, conveyance or
release from liability if it will prejudice the
right of third persons.
Article 1855: Who are preferred limited partners
Where there are several limited partners,
the members may agree that one or more
of the limited partners shall have a priority
Morc’s Notes on Partnership and Agency
over other limited partners as to the return
of their contributions, as to their
compensation by way of income, or as to
any other matter. If such an agreement is
made, it shall be stated in the certificate,
and in the absence of such a statement all
the limited partners shall stand upon equal
footing.
Nature of the preference:
1. Agreement;
2. Return of contributions;
3. Compensation;
4. Other matters
In the absence of such statement in the certificate,
even if there is an agreement, all the limited
partners shall stand on equal footing in respect of
these matters.
Article 1856: Compensation of a limited partner
A limited partner may receive from the
partnership the share of the profits or the
compensation by way of income stipulated
for in the certificate; provided, that after
such payment is made, whether from the
property of the partnership or that of a
general partner, the partnership assets are
in excess of all liabilities of the partnership
except liabilities to limited partners on
account of their contributions and to
general partners.
Third-party creditors have priority over the limited
partner’s rights.
In determining the liabilities of the partnership, the
liabilities to the limited partners for their
contributions and to general partners, whether for
contributions or not, are not included. Liabilities to
limited partners other than on account of their
contributions arising from business transactions by
them with the partnership, enjoy protection, subject
to the preferential rights of partnership creditors.
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Article 1857: Requisites for return of contribution
of a limited partner
A limited partner shall not receive from a
general partner or out of partnership
property any part of his contributions until:
1. All liabilities of the partnership, except
liabilities to general partners and to
limited partners on account of their
contributions, have been paid or there
remains property of the partnership
sufficient to pay them;
2. The consent of all members is had,
unless the return of the contribution
may be rightfully demanded under the
provisions of the second paragraph;
and
3. The certificate is cancelled or so
amended as to set forth the withdrawal
or reduction.
Subject to the provisions of the first
paragraph, a limited partner may rightfully
demand the return of his contributions:
1. On the dissolution of a partnership, or
2. When the date specified in the
certificate for its return has arrived, or
3. After he has given six months notice in
writing to all other members, if no time
is specified in the certificate, either for
the return of the contribution or for the
dissolution of the partnership.
In the absence of any statement in the
certificate to the contrary or the consent of
all members, a limited partner, irrespective
of the nature of his contribution, has only
the right to demand and receive cash in
return for his contribution.
A limited partner may have the partnership
dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully
demands the return of his contribution,
or,
Morc’s Notes on Partnership and Agency
2. The other liabilities of the partnership
have not been paid, or the partnership
property is insufficient for their
payment as required by the first
paragraph, No. 1, and the limited
partner would otherwise be entitled to
the return of his contribution.
Article 1858: Liabilities of a limited partner
A limited partner is liable to the
partnership:
1. For the difference between his
contribution as actually made and that
stated in the certificate as having been
made, and
2. For any unpaid contribution which he
agreed in the certificate to make in the
future at the time and on the
conditions stated in the certificate.
A limited partner holds as trustee for the
partnership:
1. Specific property stated in the
certificate as contributed by him, but
which was not contributed or which
has been wrongfully returned, and
2. Money or other property wrongfully
paid or conveyed to him on account of
his contribution.
The liabilities of a limited partner as set
forth in this article can be waived or
compromised only by the consent of all
members; but a waiver or compromise shall
not affect the right of a creditor of a
partnership who extended credit or whose
claim arose after the filing and before a
cancellation or amendment of the
certificate, to enforce such liabilities.
When a contributor has rightfully received
the re- turn in whole or in part of the capital
of his contribution, he is nevertheless liable
to the partnership for any sum, not in
excess of such return with interest,
Page 82
 necessary to discharge its liabilities to all
creditors who extended credit or whose
claims arose before such return.
As limited partners are not principals in the
transaction of a partnership, their liability, as a rule,
is to the partnership, not to the creditors of the
partnership. The general partners cannot, however,
waive any liability of the limited partners to the
prejudice of such creditors.
A limited partner is liable for partnership obligations:
1. When he contributes services instead of
only money or property to the partnership;
2. When allows his surname to appear in the
firm name;
3. When he fails to have a false statement in
the certificate corrected, knowing it to be
false;
4. When he takes part in the control of the
business;
5. When he receives partnership property as
collateral security, payment, conveyance, or
release in fraud of partnership creditors;
and,
6. When there is failure to substantially
comply with the legal requirements
governing the formation of limited
partnerships.
As in general partnership, the creditor of a limited
partner may, in addition to other remedies allowed
under existing laws, apply to the proper court for a
“charging order” subjecting the interest in the
partnership of debtor-partner for the payment of his
obligation.
May the liabilities in the preceding problem be
waived or compromised? Yes, but two conditions
must be followed: all the other partners must agree,
and innocent third party creditors must not be
prejudiced.
Article 1859: Assignment of limited partner’s
interest; effects, rights and liabilities
A limited partner’s interest is assignable.
Morc’s Notes on Partnership and Agency
A substituted limited partner is a person
admitted to all the rights of a limited
partner who has died or has assigned his
interest in a partnership.
An assignee, who does not become a
substituted limited partner, has no right to
require any information or account of the
partnership transactions or to inspect the
partnership books; he is only entitled to
receive the share of the profits or other
compensation by way of income, or return
of his contribution, to which his assignor
would otherwise be entitled.
An assignee shall have the right to become
a substituted limited partner if all the
members consent thereto or if the assignor,
being thereunto empowered by the
certificate, gives the assignee that right.
An assignee becomes a substituted limited
partner when the certificate is
appropriately amended in accordance with
Article 1865.
The substituted limited partner has all the
rights and powers, and is subject to all the
restrictions and liabilities of his assignor,
except those liabilities of which he was
ignorant at the time he became a limited
partner and which could not be ascertained
from the certificate.
The substitution of the assignee as a limited
partner does not release the assignor from
liability to the partnership under Articles
1847 and 1858.
The substitution of a person as a limited partner in
place of an existing limited partner, or the
withdrawal, death, insolvency, insanity, or civil
interdiction of a limited partner, or the addition of
new limited partners does not necessarily dissolve
the partnership.
What is a substituted limited partner? He is a person
admitted to all the rights of a limited partner who
Page 83
has died or has assigned his interest in a partnership.
The following are the requisites in order that the
assignee may become a substituted limited partner:
1. All the members must consent to the
assignee becoming a substituted limited
partner or the limited partner, being
empowered by the certificate, must give
the assignee the right to become a limited
partner;
2. The certificate must be amended in
accordance with Article 1865; and,
3. The certificate as amended must be
registered in the SEC.
Is a substituted limited partner responsible for the
liabilities of his assignor? Yes, except those liabilities
of which he was ignorant at the time he became a
limited partner and which could not be ascertained
from the certificate.
Is the limited partner relieved of all his liabilities to
the partner to the partnership if he assigned his
interest to another who subsequently became a
substituted limited partner? No. The limited partner
is still liable under Article 1847 to a person who
relies on a false statement and under Article 1858 to
creditors who extended credit or whose claims rose
before the assignment.
Article 1860: Effect of retirement, death,
insolvency, insanity or civil interdiction of a general
partner
The retirement, death, insolvency, insanity,
or civil interdiction of a general partner
dissolves the partnership, unless the
business is continued by the remaining
general partners:
1. Under the right so to do stated in the
certificate, or
2. With the consent of all the members.
The retirement or withdrawal, death, insolvency,
insanity, or civil interdiction of a general partner
dissolves the partnership while any of such causes
Morc’s Notes on Partnership and Agency
affecting a limited partner does not result in its
dissolution unless there is only one limited partner.
When may the remaining general partners continue
the business? If the right to do so is stated in the
certificate, or if all the members consent. But, at any
event, there should be an amendment of the
certificate.
Article 1861: Right of executor on the death of a
limited partner
On the death of a limited partner, his
executor or administrator shall have all the
rights of a limited partner for the purpose
of settling his estate, and such power as the
deceased had to constitute his assignee as
substituted limited partner.
The estate of a deceased limited partner
shall be liable for all his liabilities as a
limited partner.
Article 1862: Rights of creditors of limited partner
On due application to a court of competent
jurisdiction by any creditor of a limited
partner, the court may charge the interest
of the indebted limited partner with
payment of the unsatisfied amount of such
claim, and may appoint a receiver, and
make all other orders, directions, and
inquiries which the circumstances of the
case may require.
The interest may be redeemed with the
separate property of any general partner,
but may not be redeemed with partnership
property.
The remedies conferred by the first
paragraph shall not be deemed exclusive of
others which may exist.
Nothing in this Chapter shall be held to
deprive a limited partner of his statutory
exemption.
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The creditor of a limited partner may apply to the
proper court for an order charging the limited
partner’s interest in the partnership for the payment
of any unsatisfied amount of his claim. The interest
so charged may be redeemed with the separate
property of any general partner but not with
partnership property.
Article 1863: Dissolution of a limited partnership
In settling accounts after dissolution the
liabilities of the partnership shall be entitled
to payment in the following order:
1. Those to creditors, in the order of
priority as provided by law, except
those to limited partners on account of
their contributions, and to general
partners;
2. Those to limited partners in respect to
their share of the profits and other
compensation by way of income on
their contributions;
3. Those to limited partners in respect to
the capital of their contributions;
4. Those to general partners other than
for capital and profits;
5. Those to general partners in respect to
profits;
6. Those to general partners in respect to
capital.
Subject to any statement in the certificate
or to subsequent agreement, limited
partners share in the partnership assets in
respect to their claims for capital, and in
respect to their claims for profits or for
compensation by way of income on their
contribution respectively, in proportion to
the respective amounts of such claims.
A limited partnership is dissolved in much the same
way as an ordinary partnership. It may be dissolved
for the misconduct of a general partner, for fraud
practiced on the limited partner by the general
partner, or on the retirement, death, etc. of a
general partner or when all the limited partners
Morc’s Notes on Partnership and Agency
ceased to be such, or on the expiration of the term
for which it was to exist, or by mutual consent of the
partners before the expiration of the firm’s original
term.
A limited partner may bring a suit for the dissolution
of the firm, an accounting, and the appointment of a
receiver when the misconduct of a general partner
or the insolvency of the firm warrants it.
When the firm is dissolved by the expiration of the
term fixed in the certificate, notice of the dissolution
need not be given since the papers filed and
recorded in the SEC are notice to the world of the
term of the partnership.
The consequences of the dissolution of a general
partnership apply to limited partnership. Therefore,
the partnership continues in operation while winding
up.
Article 1864: Amendment or cancellation of
certificate
The certificate shall be cancelled when the
partnership is dissolved or all limited
partners cease to be such. A certificate shall
be amended when:
1. There is a change in the name of the
partnership or in the amount or
character of the contribution of any
limited partner;
2. A person is substituted as a limited
partner;
3. An additional limited partner is
admitted;
4. A person is admitted as a general
partner;
5. A general partner retires, dies,
becomes insolvent or insane, or is
sentenced to civil interdiction and the
business is continued under article
1860;
6. There is change in the character of the
business of the partnership;
7. There is a false or erroneous statement
in the certificate;
Page 85
 8. There is a change in the time as stated
in the certificate for the dissolution of
the partnership or for the return of a
contribution;
9. A time is fixed for the dissolution of the
partnership, or the return of a
contribution, no time having been
specified in the certificate; or
10. The members desire to make a change
in any other statement in the
certificate in order that it shall
accurately represent the agreement
among them.
Article 1865: Requirements for the amendment or
cancellation of certificate
The writing to amend a certificate shall:
1. Conform to the requirements of article
1844 as far as necessary to set forth
clearly the change in the certificate
which it is desired to make; and
2. Be signed and sworn to by all members,
and an amendment substituting a
limited partner or adding a limited or
general partner shall be signed also by
the member to be substituted or
added, and when a limited partner is to
be substituted, the amendment shall
also be signed by the assigning limited
partner.
The writing to cancel a certificate shall be
signed by all members.
A person desiring the cancellation or
amendment of a certificate, if any person
designated in the first and second
paragraphs as a person who must execute
the writing refuses to do so, may petition
the court to order a cancellation or
amendment thereof.
If the court finds that the petitioner has a
right to have the writing executed by a
person who refuses to do so, it shall order
the Office of the Securities and Exchange
Morc’s Notes on Partnership and Agency
Commission where the certificate is
recorded, to record the cancellation or
amendment of the certificate; and when
the certificate is to be amended, the court
shall also cause to be filed for record in the
said office a certified copy of its decree
setting forth the amendment.
A certificate is amended or cancelled when
there is filed for record in the Office of the
Securities and Exchange Commission, where
the certificate is recorded:
1. A writing in accordance with the
provisions of the first or second
paragraph; or
2. A certified copy of the order in
accordance with the provisions of the
fourth paragraph;
3. After the certificate is duly amended in
accordance with this article, the
amended certificate shall thereafter be
for all purposes the certificate provided
for in this Chapter.
Article 1866: Standing of a limited partner in
proceedings by or against a partnership
A contributor, unless he is a general
partner, is not a proper party to
proceedings by or against a partnership,
except where the object is to enforce a
limited partner’s right against or liability to
the partnership.
Unlike in the case of a general partner, the
relationship between a limited partner, on the one
hand, and the other partners and the partnership,
on the other hand, is not one of trust and
confidence. A limited partner is, therefore, not
prohibited from engaging in business for himself
even in competition with that conducted by the
partnership and may transact business with the
partnership for ordinary purposes as though he were
a stranger.
When is a limited partner considered a proper party?
Page 86
 1. When it is for the purpose of enforcing his
individual rights against the partnership and
recovering damages for violation of such
right;
2. When the creditors of a firm institutes an
action to account for and restore sums
withdrawn by him from the capital of the
firm with outstanding debts on a voluntary
dissolution.
A limited partner’s contribution is not a mere
investment, as in the case of one purchasing stock in
a corporation. A limited partner is, in a sense, an
owner, which in interest in the capital of the firm
and its business as such, but he has no property right
in the firm’s assets. The nature of the limited
partner’s interest in the firm amounts to a share in
the partnership assets after its liabilities have been
deducted and a balance struck. This interest is a
chose in action, and hence, intangible personal
property.
Article 1867: Conversion of a limited partnership
existing prior to the New Civil Code
A limited partnership formed under the law
prior to the effectivity of this Code, may
become a limited partnership under this
Chapter by complying with the provisions of
Article 1844, provided the certificate sets
forth:
1. The amount of the original contribution
of each limited partner, and the time
when the contribution was made; and
2. That the property of the partnership
exceeds the amount sufficient to
discharge its liabilities to per- sons not
claiming as general or limited partners
by an amount greater than the sum of
the contributions of its limited
partners.
A limited partnership formed under the law
prior to the effectivity of this Code, until or
unless it becomes a limited partnership
Morc’s Notes on Partnership and Agency
under this Chapter, shall continue to be
governed by the provisions of the old law.
AGENCY
Article 1868: Concept and definition of agency
By the contract of agency a person binds
himself to render some service or to do
something in representation or on behalf of
another, with the consent or authority of
the latter.
According to De Leon and Paras, the definition of
agency as provided for by Article 1868 is very broad
enough as it includes all situations in which one
person is employed to render service for another.
As worded, the definition includes the relationship
of master and servant, of employer and employee,
of employer and independent contractor.
As worded, it would seem that the agent must
always expressly represent the principal. This is not
necessarily so, for sometimes an agent does not
disclose his principal: he may even act in behalf of
himself, but here the principal would still be bound
when the contract involves things belonging to the
principal.
Justice J.B.L. Reyes had stated that this article does
not draw clearly the distinction between the lease of
services and agency without representation. The
laborer also does something or renders service on
behalf of another. The true essence of the
distinction, he submits, lies in that the agent enters
or is designed to enter judicial relations, with or
without representation of the principal.
Agency is a relationship which implies a power in an
agent to contract with a third person on behalf of a
principal. It is this power to affect the principal’s
contractual relations with third persons that
differentiates the agent from the employee, the
servant, and the independent contractor.
Other definitions of agency:
Page 87
 1. An agency may be defined as a contract
either express or implied upon a
consideration, or a gratuitous undertaking,
by which one of the parties confides to the
other, the management of some business to
be transacted in his name or on his account,
and by which that other assumes to do
business and renders an account of it.
2. Agency is the relationship which results
from the manifestation of consent by one
person to another that the other shall act
on his behalf and subject to his control, and
consented by the other so to act.
3. Agency is an act which one person gives to
another the power to do something for the
principal and in his name.
Why is agency important? It 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 diverse activities at
the same time.
Characteristics of a contract of agency:
1. It is a principal, nominate, bilateral,
preparatory, commutative, and generally
onerous contract;
2. Generally, it is also a representative
relation, not a status, since agency is not
inherent or permanent;
3. It is a fiduciary relation since it is based on
trust and confidence.
Essential elements of agency:
1. There is consent, express or implied, of the
parties to establish the relationship.
2. The object is the execution of a juridical act
in relation to third persons;
3. The agent acts as a representative and not
for himself;
4. The agent within the scope of his authority.
Relationship of third party with principal and agent:
Since an agent’s contract is not his own but his
principal’s, a third party’s liability on such contract is
to the principal and not to the agent, and liability to
Morc’s Notes on Partnership and Agency
such third party is enforceable against the principal,
not the agent.
Parties to the contract:
1. Principal. He whom the agent represents
and from whom he derives authority; he is
the one primarily concerned in the contract.
2. Agent. He who acts or stands for another.
Usually, he is given full or partial discretion,
but sometimes he acts under a specific
command.
Capacity of the principal: In general, if he is
capacitated to act for himself, he can act thru an
agent. He must, therefore, be capacitated to give
consent. If any special capacity is needed, it is he
who must possess it and not the agent, for the latter
merely acts in his behalf. The principal may be
natural or a juridical person.
Capacity of an agent: His capacity is in general the
same as in the law of contracts, that is, he must be
able to bind himself, but only insofar as his
obligations to his principal are 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.
Usually, therefore, the contract with a stranger is
valid, even if the agent be a minor so long as his
principal was capacitated. However, as between
them, the minor-agent can set up his incapacity,
provided he is not in estoppel.
Nature of relations between principal and agent:
1. Relation is fiduciary in character, hence, it is
based on trust and confidence, on a degree
which varies considerably from situation to
situation.
2. Agent is estopped from asserting interest
adverse to his principal or from acquiring a
title adverse to that of the principal.
3. Agents cannot act so as to bind their
principals, where they have an adverse
interest in themselves.
4. Agent cannot serve two masters, unless
both consent or unless he is a mere
Page 88
 middleman or intermediary with no Acts that may be/not be delegated to agents: The
independent initiative. general rule is that what a man may do in person, he
5. Agent must not use or disclose secret may do thru another. Some acts, however, cannot
information as requirements of good faith be done through an agent, like:
and loyalty demand of the agent such duty,
especially those obtained in the course of a. Personal acts;
his agency. b. Criminal acts or acts not allowed
6. Agent must make known to the principal by law.
every and all material facts, of which the
Distinctions:
agent has cognizance, which concern the
transaction and subject matter of the Agency Partnership
agency. More so, knowledge of agent is Agent acts not for A partner acts for
imputed to principal. himself but for his himself, for his firm, and
principal. for his partners.
Nature, basis and purpose of agency:
*It may even be said that partnership is a branch of
1. Since agency is a contract, the following the law on agency (Paras).
requisites must concur:
Agency Loan
a. Consent of the contracting parties;
An agent may be given A borrower is given
b. Object which is the subject matter
funds by the principal to money for purposes of
of the contract; and,
advance the latter’s his own, and he must
c. Cause which is established.
business. generally return it
2. Agency is also a representative relation.
whether or not his own
The agent renders some service or does
business is successful.
something in representation or on behalf of
another. Representation constitutes the
basis of agency. The acts of the agent on
Agency Guardianship
behalf of the principal within the scope of
The agent represents a A guardian represents an
his authority produce the same legal and
capacitated person. incapacitated person.
binding effect as if they were personally
The agent is appointed The guardian is
done by the principal. By this legal fiction
by the principal and can appointed by the court
of representation, the actual or real
be removed by the and stands in loco
absence of the principal is transformed into
latter. parentis.
legal or juridical presence.
The agent is subject to The guardian is not
3. The relation of an agent to his principal is
the directions of the subject to the directions
fiduciary in character since it is based on
principal. of the ward, but must of
trust and confidence.
course act for the
4. The purpose of agency is to extend the
benefit of the latter.
personality of the principal. It enables the
The agent can make the The guardian has no
activity of man which is naturally limited in
principal personally power to impose
its exercise by his physiological conditions
liable. personal liability on the
to be extended, permitting him to perform
ward.
diverse juridical acts through another, when
his physical presence is impossible or
inadvisable, at the same time in different Agency Judicial administration
places. Agent is appointed by Judicial administrator is

Morc’s Notes on Partnership and Agency Page 89

the principal. appointed by the court. may be controlled by the contractor are not the
He represents the He represents not only principal. employees of the
principal. the court but also the employer of the
heir and creditors of the contractor.
estate. Agent can bind the Ordinarily, the
Agent generally does not The administrator files a principal. independent contractor
file a bond. bond. cannot bind the
Agent is controlled by His acts are subject to employer by tort.
the principal thru their specific orders from the The negligence of the The negligence of the
agreement. court. agent is imputable to the independent contractor
principal. is generally not
imputable to his
Agency Lease of property employer.
The agent is controlled The lease is not
by the principal. controlled by the lessor.
The agency may involve A lease of property Agency Negotiorium gestio
things other than involves property only. The representation is It is not only without the
property. expressly conferred. authority of the owner
The agent can bind the The lessee, as such, of the business, but is
principal. cannot bind the lessor. without his knowledge.
It is a contract. It is a quasi-contract
Agent is controlled by The officious manager
Agency Lease of service the principal. follows his judgment and
The basis is The basis is the presumed will of the
representation. employment. owner.
The agent exercises The lessor ordinarily The legal relation is The legal relation is
discretionary powers. performs only ministerial created by the parties. created by law,
functions. occasioned by the acts of
Relationship can be Generally, the the manager.
terminated at the will of relationship can be *In both, there is representation.
either principal or agent. terminated only at the
will of both.
Usually involves 3 Usually involves only two
Agency Brokerage
persons: the principal, persons.
A commission agent is A broker has no relation
the agent, and a
one engaged in the with the thing he buys or
stranger.
purchase or sale for sells. He is merely an
another of personal intermediary between
Agency Independent contract property which for this the purchaser and the
The agent is subject to The independent purpose is placed in his vendor. He acquires
the control of the contractor exercises his possession and at his neither the custody nor
principal whom he employment disposal. He maintains a the possession of the
represents. independently, and not relation not only with his thing he sells. His only
in representation of the principal and the function is to bring
employer. purchaser or vendor, but together the parties to
The agent of the agent The employees of the also with the property the transaction.

Morc’s Notes on Partnership and Agency Page 90

which is the subject price.
matter of the
transaction.
Agency to Buy Sale
The agent acquires The buyer acquires
Who is a broker? A broker is one who is engaged, ownership on behalf of ownership for himself.
for others, on a commission, negotiating contracts the principal.
relative to property with the custody of which he has The agent must account The buyer who obtains a
no concern; the negotiator between other parties, for all benefits or discount does not have
never acting in his own name but in the name of discounts received from to reveal such fact to its
those who employed him. A broker is one whose the seller. own buyer.
occupation is to bring the parties together, in The agent delivers the The buyer pays the price.
matters of trade, commerce or navigation (Schmid & price.
Oberly v. RJL Martinez Fishing Corporation [1988]).

How do we determine the existence of agency then?

The question of whether an agency has been created
Agency Trust
is ordinarily a question which may be established in
Agent usually holds no Trustee may hold legal
the same way as any other fact, either by direct or
title at all. title to the property.
circumstantial evidence. The question is ultimately
Usually, agent acts in the The trustee may act in one of intention. Note that the relation of agency
name of the principal. his own name. cannot be inferred from mere relationship or family
Usually, agent may be The trust is usually ties unattended by conditions, acts or conduct
terminated or revoked at ended by the clearly implying an agency.
any time. accomplishment of the
purposes for which it Cases:
was formed.
Agency may not be Trust involves control  Rallos v. Felix Go Chan & Sons Realty
connected at all with over the property. Corporation, L-24332, January 31, 1978
property.
It is a basic axiom in civil law embodied in our Civil
Agent has authority to Trustee does not
Code that no one may contract in the name of
make contracts which necessarily or even
another without being authorized by the latter, or
will be binding on his possess such authority
unless he has by law a right to represent him. A
principal. to bind the trustor or the
contract entered into in the name of another by one
cestui que trust.
who has no authority or the legal representation or
Agency is really a A trust may be the result
who has acted beyond his powers, shall be
contractual relation, of the contract or not; it
unenforceable, unless it is ratified, expressly or
may be created also by
impliedly, by the person on whose behalf it has been
law.
executed, before it is revoked by the other
contracting party.
Agency to Sell Sale Out of the above given principles, sprung the
Ownership of the goods Ownership is transferred creation and acceptance of the relationship of
is not transferred to the to the buyer after agency whereby one party, caged the principal
agent. delivery. (mandante), authorizes another, called the agent
The agent delivers the The buyer pays the price. (mandatario), to act for and in his behalf in

Morc’s Notes on Partnership and Agency Page 91

transactions with third persons. The essential
elements of agency are: (1) there is consent, express
or implied of the parties to establish the
relationship; (2) the object is the execution of a
juridical act in relation to a third person; (3) the
agents acts as a representative and not for himself,
and (4) the agent acts within the scope of his
authority.
Agency is basically personal representative, and
derivative in nature. The authority of the agent to
act emanates from the powers granted to him by his
principal; his act is the act of the principal if done
within the scope of the authority. Qui facit per alium
facit se. "He who acts through another acts himself"
 Orient Air Services & Hotel Representatives
v. CA, GR 76931 & 76933, May 29, 1991
It is a well settled legal principle that in the
interpretation of a contract, the entirety thereof
must be taken into consideration to ascertain the
meaning of its provisions. The various stipulations in
the contract must be read together to give effect to
all. After a careful examination of the records, the
Court finds merit in the contention of Orient Air that
the Agreement, when interpreted in accordance
with the foregoing principles, entitles it to the 3%
overriding commission based on total revenue, or as
referred to by the parties, "total flown revenue."
As the designated exclusive General Sales Agent of
American Air, Orient Air was responsible for the
promotion and marketing of American Air’s services
for air passenger transportation, and the solicitation
of sales therefor. In return for such efforts and
services, Orient Air was to be paid commissions of
two (2) kinds: first, a sales agency commission,
ranging from 7-8% of tariff fares and charges from
sales by Orient Air when made on American Air
ticket stock; and second, an overriding commission
of 3% of tariff fares and charges for all sales of
passenger transportation over American Air services.
It is immediately observed that the precondition
attached to the first type of commission does not
obtain for the second type of commissions. The
latter type of commissions would accrue for sales of
Morc’s Notes on Partnership and Agency
American Air services made not on its ticket stock
but on the ticket stock of other air carriers sold by
such carriers or other authorized ticketing facilities
or travel agents. To rule otherwise, i.e., to limit the
basis of such overriding commissions to sales from
American Air ticket stock would erase any distinction
between the two (2) types of commissions and
would lead to the absurd conclusion that the parties
had entered into a contract with meaningless
provisions. Such an interpretation must at all times
be avoided with every effort exerted to harmonize
the entire Agreement.
It is clear from the records that American Air was the
party responsible for the preparation of the
Agreement.
By affirming this ruling of the trial court, respondent
appellate court, in effect, compels American Air to
extend its personality to Orient Air. Such would be
violative of the principles and essence of agency,
defined by law as a contract whereby "a person
binds himself to render some service or to do
something in representation or on behalf of another,
WITH THE CONSENT OR AUTHORITY OF THE
LATTER." (Emphasis supplied) In an agent-principal
relationship, the personality of the principal is
extended through the facility of the agent. In so
doing, the agent, by legal fiction, becomes the
principal, authorized to perform all acts which the
latter would have him do. Such a relationship can
only be effected with the consent of the principal,
which must not, in any way, be compelled by law or
by any court. The Agreement itself between the
parties states that "either party may terminate the
Agreement without cause by giving the other 30
days’ notice by letter, telegram or cable." We,
therefore, set aside the portion of the ruling of the
respondent appellate court reinstating Orient Air as
general sales agent of American Air.
 Eurotech Industrial Technologies v. Cuizon,
GR 167552, April 23, 2007
In a contract of agency, a person binds himself to
render some service or to do something in
representation or on behalf of another with the
Page 92
latter’s consent. The underlying principle of the
contract of agency is to accomplish results by using
the services of others to do a great variety of things
like selling, buying, manufacturing, and transporting.
Its purpose is to extend the personality of the
principal or the party for whom another acts and
from whom he or she derives the authority to act. It
is said that the basis of agency is representation,
that is, the agent acts for and on behalf of the
principal on matters within the scope of his authority
and said acts have the same legal effect as if they
were personally executed by the principal. By this
legal fiction, the actual or real absence of the
principal is converted into his legal or juridical
presence qui facit per alium facit per se
The elements of the contract of agency are: (1)
consent, express or implied, of the parties to
establish the relationship; (2) the object is the
execution of a juridical act in relation to a third
person; (3) the agent acts as a representative and
not for himself; (4) the agent acts within the scope of
his authority.
 Bordador v. Luz, GR 130148, December 15,
1997
The basis for agency is representation. Here, there is
no showing that Brigida consented to the acts of
Deganos or authorized him to act on her behalf,
much less with respect to the particular transactions
involved. Petitioners’ attempt to foist liability on
respondent spouses through the supposed agency
relation with Deganos is groundless and ill-advised.
Besides, it was grossly and inexcusably negligent of
petitioners to entrust to Deganos, not once or twice
but on at least six occasions as evidenced by six
receipts, several pieces of jewelry of substantial
value without requiring a written authorization from
his alleged principal. A person dealing with an agent
is put upon inquiry and must discover upon his peril
the authority of the agent.
The records show that neither an express nor an
implied agency was proven to have existed between
Deganos and Brigida D. Luz. Evidently, petitioners,
Morc’s Notes on Partnership and Agency
who were negligent in their transactions with
Deganos, cannot seek relief from the effects of their
negligence by conjuring a supposed agency relation
between the two respondents where no evidence
supports such claim.
 Dizon v. CA, GR 122544, January 28, 1999
In an attempt to resurrect the lapsed option, private
respondent gave P300,000.00 to petitioners (thru
Alice A. Dizon) on the erroneous presumption that
the said amount tendered would constitute a
perfected contract of sale pursuant to the contract
of lease with option to buy. There was no valid
consent by the petitioners (as co-owners of the
leased premises) on the supposed sale entered into
by Alice A. Dizon, as petitioners alleged agent, and
private respondent. The basis for agency is
representation and a person dealing with an agent is
put upon inquiry and must discover upon his peril
the authority of the agent. As provided in Article
1868 of the New Civil Code, there was no showing
that petitioners consented to the act of Alice A.
Dizon nor authorized her to act on their behalf with
regard to her transaction with private respondent.
The most prudent thing private respondent should
have done was to ascertain the extent of the
authority of Alice A. Dizon. Being negligent in this
regard, private respondent cannot seek relief on the
basis of a supposed agency.
Reiterating the rule in delaing with an agent in
Bacaltos Coal Mines v. Court of Appeals:
“Every person dealing with an agent is put
upon inquiry and must discover upon his
peril the authority of the agent. If he does
not make such inquiry, he is chargeable
with knowledge of the agent’s authority,
and his ignorance of that authority will not
be any excuse. Persons dealing with an
assumed agent, whether the assumed
agency be a general or special one, are
bound at their peril, if they would hold the
principal, to ascertain not only the fact of
the agency but also the nature and extent
of the authority, and in case either is
Page 93
 controverted, the burden of proof is upon
them to establish it.”
 Victorias Milling Co., Inc. v. CA, GR 117356,
June 19, 2000
Petitioner heavily relies upon STM's letter of
authority allowing CSC to withdraw sugar against
SLDR No. 1214M to show that the latter was STM's
agent. The pertinent portion of said letter reads:
“This is to authorize Consolidated Sugar
Corporation or its representative to
withdraw for and in our behalf (stress
supplied) the refined sugar covered by
Shipping List/Delivery Receipt = Refined
Sugar (SDR) No. 1214 dated October 16,
1989 in the total quantity of 25, 000 bags.”
It is clear from Article 1868 that the basis of agency
is representation. On the part of the principal, there
must be an actual intention to appoint or an
intention naturally inferable from his words or
actions and on the part of the agent, there must be
an intention to accept the appointment and act on it
and in the absence of such intent, there is generally
no agency. One factor which most clearly
distinguishes agency from other legal concepts is
control; one person - the agent - agrees to act under
the control or direction of another - the principal.
Indeed, the very word "agency" has come to
connote control by the principal. The control factor,
more than any other, has caused the courts to put
contracts between principal and agent in a separate
category. The Court of Appeals, in finding that CSC,
was not an agent of STM, opined:
“This Court has ruled that where the
relation of agency is dependent upon the
acts of the parties, the law makes no
presumption of agency, and it is always a
fact to be proved, with the burden of proof
resting upon the persons alleging the
agency, to show not only the fact of its
existence, but also its nature and extent
(Antonio vs. Enriquez [CA], 51 O.G. 3536].
Here, defendant-appellant failed to
Morc’s Notes on Partnership and Agency
sufficiently establish the existence of an
agency relation between plaintiff-appellee
and STM. The fact alone that it (STM) had
authorized withdrawal of sugar by plaintiff-
appellee "for and in our (STM's) behalf"
should not be eyed as pointing to the
existence of an agency relation ...It should
be viewed in the context of all the
circumstances obtaining. Although it would
seem STM represented plaintiff-appellee as
being its agent by the use of the phrase "for
and in our (STM's) behalf" the matter was
cleared when on 23 January 1990, plaintiff-
appellee informed defendant-appellant that
SLDFR No. 1214M had been "sold and
endorsed" to it by STM (Exhibit I, Records,
p. 78). Further, plaintiff-appellee has shown
that the 25, 000 bags of sugar covered by
the SLDR No. 1214M were sold and
transferred by STM to it ...A conclusion that
there was a valid sale and transfer to
plaintiff-appellee may, therefore, be made
thus capacitating plaintiff-appellee to sue in
its own name, without need of joining its
imputed principal STM as co-plaintiff.”
In the instant case, it appears plain to us that private
respondent CSC was a buyer of the SLDFR form, and
not an agent of STM. Private respondent CSC was
not subject to STM's control. The question of
whether a contract is one of sale or agency depends
on the intention of the parties as gathered from the
whole scope and effect of the language employed.
That the authorization given to CSC contained the
phrase "for and in our (STM's) behalf" did not
establish an agency. Ultimately, what is decisive is
the intention of the parties That no agency was
meant to be established by the CSC and STM is
clearly shown by CSC's communication to petitioner
that SLDR No. 1214M had been "sold and endorsed"
to it. The use of the words "sold and endorsed"
means that STM and CSC intended a contract of sale,
and not an agency. Hence, on this score, no error
was committed by the respondent appellate court
when it held that CSC was not STM's agent and could
independently sue petitioner.
Page 94
  Tuazon v. Heirs of Bartolome Ramos, GR
156262, July 14, 2005
In a contract of agency, one binds oneself to render
some service or to do something in representation
or on behalf of another, with the latter’s consent or
authority. The following are the elements of agency:
(1) the parties’ consent, express or implied, to
establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third
person; (3) the representation, by which the one
who acts as an agent does so, not for oneself, but as
a representative; (4) the limitation that the agent
acts within the scope of his or her authority. As the
basis of agency is representation, there must be, on
the part of the principal, an actual intention to
appoint, an intention naturally inferable from the
principals words or actions. In the same manner,
there must be an intention on the part of the agent
to accept the appointment and act upon it. Absent
such mutual intent, there is generally no agency.
This Court finds no reversible error in the findings of
the courts a quo that petitioners were the rice
buyers themselves; they were not mere agents of
respondents in their rice dealership. The question of
whether a contract is one of sale or of agency
depends on the intention of the parties.
The declarations of agents alone are generally
insufficient to establish the fact or extent of their
authority. The law makes no presumption of
agency; proving its existence, nature and extent is
incumbent upon the person alleging it. In the
present case, petitioners raise the fact of agency as
an affirmative defense, yet fail to prove its existence.
The Court notes that petitioners, on their own
behalf, sued Evangeline Santos for collection of the
amounts represented by the bounced checks, in a
separate civil case that they sought to be
consolidated with the current one. If, as they claim,
they were mere agents of respondents, petitioners
should have brought the suit against Santos for and
on behalf of their alleged principal, in accordance
with Section 2 of Rule 3 of the Rules on Civil
Procedure. Their filing a suit against her in their own
Morc’s Notes on Partnership and Agency
names negates their claim that they acted as mere
agents in selling the rice obtained from Bartolome
Ramos.
 Patrimonio v. Gutierrez, GR 187769, June 4,
2014
Article 1868 of the Civil Code defines a contract of
agency as a contract whereby a person "binds
himself to render some service or to do something in
representation or on behalf of another, with the
consent or authority of the latter." Agency may be
express, or implied from the acts of the principal,
from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person
is acting on his behalf without authority.
 Yoshizaki v. Joy Training Center of Aurora,
GR 174978, July 1, 2013
Article 1868 of the Civil Code defines a contract of
agency as a contract whereby a person “binds
himself to render some service or to do something in
representation or on behalf of another, with the
consent or authority of the latter.” It may be
express, or implied from the acts of the principal,
from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person
is acting on his behalf without authority.
 Jusayan v. Sombilla, GR 163928, January 21,
2015
Yet, the lease of an agricultural land can be either a
civil law or an agricultural lease. In the civil law lease,
one of the parties binds himself to give to another
the enjoyment or use of a thing for a price certain,
and for a period that may be definite or indefinite.
In the agricultural lease, also termed as a leasehold
tenancy, the physical possession of the land devoted
to agriculture is given by its owner or legal possessor
(landholder) to another (tenant) for the purpose of
production through labor of the latter and of the
members of his immediate farm household, in
consideration of which the latter agrees to share the
harvest with the landholder, or to pay a price certain
or ascertainable, either in produce or in money, or in
Page 95
both. Specifically, in Gabriel v. Pangilinan, this Court
differentiated between a leasehold tenancy and a
civil law lease in the following manner, namely: (1)
the subject matter of a leasehold tenancy is limited
to agricultural land, but that of a civil law lease may
be rural or urban property; (2) as to attention and
cultivation, the law requires the leasehold tenant to
personally attend to and cultivate the agricultural
land; the civil law lessee need not personally
cultivate or work the thing leased; (3) as to purpose,
the landholding in leasehold tenancy is devoted to
agriculture; in civil law lease, the purpose may be for
any other lawful pursuits; and (4) as to the law that
governs, the civil law lease is governed by the Civil
Code, but the leasehold tenancy is governed by
special laws.
The sharing of the harvest in proportion to the
respective contributions of the landholder and
tenant, otherwise called share tenancy, was
abolished on August 8, 1963 under Republic Act No.
3844. To date, the only permissible system of
agricultural tenancy is leasehold tenancy, a
relationship wherein a fixed consideration is paid
instead of proportionately sharing the harvest as in
share tenancy.
In Teodoro v. Macaraeg, this Court has synthesized
the elements of agricultural tenancy to wit: (1) the
object of the contract or the relationship is an
agricultural land that is leased or rented for the
purpose of agricultural production; (2) the size of the
landholding is such that it is susceptible of personal
cultivation by a single person with the assistance of
the members of his immediate farm household; (3)
the tenant-lessee must actually and personally till,
cultivate or operate the land, solely or with the aid
of labor from his immediate farm household; and (4)
the landlord-lessor, who is either the lawful owner
or the legal possessor of the land, leases the same to
the tenant-lessee for a price certain or ascertainable
either in an amount of money or produce.
It can be gleaned that in both civil law lease of an
agricultural land and agricultural lease, the lessor
gives to the lessee the use and possession of the
land for a price certain. Although the purpose of the
Morc’s Notes on Partnership and Agency
civil law lease and the agricultural lease may be
agricultural cultivation and production, the
distinctive attribute that sets a civil law lease apart
from an agricultural lease is the personal cultivation
by the lessee. An agricultural lessee cultivates by
himself and with the aid of those of his immediate
farm household. Conversely, even when the lessee is
in possession of the leased agricultural land and
paying a consideration for it but is not personally
cultivating the land, he or she is a civil law lessee.
 Spouses Fernando v. Continental Airlines,
Inc., GR 188288, January 16, 2012
According to the CA, agency is never presumed and
that he who alleges that it exists has the burden of
proof. Spouses Viloria, on whose shoulders such
burden rests, presented evidence that fell short of
indubitably demonstrating the existence of such
agency.
We disagree. The CA failed to consider undisputed
facts, discrediting CAI’s denial that Holiday Travel is
one of its agents. Furthermore, in erroneously
characterizing the contractual relationship between
CAI and Holiday Travel as a contract of sale, the CA
failed to apply the fundamental civil law principles
governing agency and differentiating it from sale.
Reiterating the ruling of the Court in Rallos v. Felix
Go Chan & Sons Realty Corp:
“Out of the above given principles, sprung
the creation and acceptance of the
relationship of agency whereby one party,
called the principal (mandante), authorizes
another, called the agent (mandatario), to
act for and in his behalf in transactions with
third persons. The essential elements of
agency are: (1) there is consent, express or
implied of the parties to establish the
relationship; (2) the object is the execution
of a juridical act in relation to a third
person; (3) the agent acts as a
representative and not for himself, and (4)
the agent acts within the scope of his
authority.”
Page 96
Contrary to the findings of the CA, all the elements
of an agency exist in this case. The first and second
elements are present as CAI does not deny that it
concluded an agreement with Holiday Travel,
whereby Holiday Travel would enter into contracts
of carriage with third persons on CAI’s behalf. The
third element is also present as it is undisputed that
Holiday Travel merely acted in a representative
capacity and it is CAI and not Holiday Travel who is
bound by the contracts of carriage entered into by
Holiday Travel on its behalf. The fourth element is
also present considering that CAI has not made any
allegation that Holiday Travel exceeded the
authority that was granted to it. In fact, CAI
consistently maintains the validity of the contracts of
carriage that Holiday Travel executed with Spouses
Viloria and that Mager was not guilty of any
fraudulent misrepresentation. That CAI admits the
authority of Holiday Travel to enter into contracts of
carriage on its behalf is easily discernible from its
February 24, 1998 and March 24, 1998 letters,
where it impliedly recognized the validity of the
contracts entered into by Holiday Travel with
Spouses Viloria. When Fernando informed CAI that it
was Holiday Travel who issued to them the subject
tickets, CAI did not deny that Holiday Travel is its
authorized agent.
Article 1869: Kinds of agency; form of agency
Agency may be express, or implied from the
acts of the principal, from his silence or lack
of action, or his failure to repudiate the
agency, knowing that another person is
acting on his behalf without authority.
Agency may be oral, unless the law requires
a specific form.
In general, there are no formal requirements
governing the appointment of an agent. The agent’s
authority may be oral or written. An instance when
the law requires a specific form for the agency is
Article 1874.
Agency is constituted impliedly from the acts of the
principal, from his silence or lack of action or his
Morc’s Notes on Partnership and Agency
failure to repudiate the agency. In such cases of
implied agency, the principal knows that another
person is acting on his behalf without authority. It is
an actual agency as much as an express.
As a general rule, agency is not presumed. The
relation between principal and agent must exist as a
fact. Thus, it is held that where the relation of
agency is dependent upon the acts of the parties,
the law makes no presumption of agency, and it is
always a fact to be proved, with the burden of proof
resting upon the person alleging the agency to show,
not only the fact of its existence, but also its nature
and extent.
Cases:
 Lim v. CA, GR 102784, February 28, 1996
There are some provisions of the law which require
certain formalities for particular contracts. The first
is when the form is required for the validity of the
contract; the second is when it is required to make
the contract effective as against the third parties
such as those mentioned in Articles 1357 and 1358;
and the third is when the form is required for the
purpose of proving the existence of the contract,
such as those provided in the Statute of Frauds in
Article 1403. A contract of agency to sell on
commission basis does not belong to any of these
three categories, hence, it is valid and enforceable in
whatever form it may be entered into.
 Equitable PCI Bank v. Ku, GR 142950, March
26, 2001
The Court is not wholly convinced by petitioners
argument. The Affidavit of Joel Rosales states that
he is not the constituted agent of Curato Divina
Mabilog Nedo Magturo Pagaduan Law Office. An
agency may be express but it may also be implied
from the acts of the principal, from his silence, or
lack of action, or his failure to repudiate the agency,
knowing that another person is acting on his behalf
without authority. Likewise, acceptance by the
agent may also be express, although it may also be
implied from his acts which carry out the agency, or
Page 97
from his silence or inaction according to the
circumstances. In this case, Joel Rosales averred
that [o]n occasions when I receive mail matters for
said law office, it is only to help them receive their
letters promptly, implying that counsel had allowed
the practice of Rosales receiving mail in behalf of the
former. There is no showing that counsel had
objected to this practice or took steps to put a stop
to it. The facts are, therefore, inadequate for the
Court to make a ruling in petitioners favor.
 Conde v. CA, L-40242, December 15, 1982
Of significance, however, is the fact that from the
execution of the repurchase document in 1945,
possession, which heretofore had been with the
Alteras, has been in the hands of petitioner as
stipulated therein. Land taxes have also been paid
for by petitioner yearly from 1947 to 1969 inclusive
(Exhibits "D" to "D-15"; and "E"). If, as opined by
both the Court a quo and the Appellate Court,
petitioner had done nothing to formalize her
repurchase, by the same token, neither have the
vendees-a-retro done anything to clear their title of
the encumbrance therein regarding petitioner's right
to repurchase. No new agreement was entered into
by the parties as stipulated in the deed of pacto de
retro, if the vendors a retro failed to exercise their
right of redemption after ten years. If, as alleged,
petitioner exerted no effort to procure the signature
of Pio Altera after he had recovered from his illness,
neither did the Alteras repudiate the deed that their
son-in-law had signed. Thus, an implied agency must
be held to have been created from their silence or
lack of action, or their failure to repudiate the
agency.
Possession of the lot in dispute having been
adversely and uninterruptedly with petitioner from
1945 when the document of repurchase was
executed, to 1969, when she instituted this action,
or for 24 years, the Alteras must be deemed to have
incurred in laches. That petitioner merely took
advantage of the abandonment of the land by the
Alteras due to the separation of said spouses, and
that petitioner's possession was in the concept of a
tenant, remain bare assertions without proof.
Morc’s Notes on Partnership and Agency
 Spouses Fernando v. Continental Airlines,
Inc., supra.
Prior to Spouses Viloria’s filing of a complaint against
it, CAI never refuted that it gave Holiday Travel the
power and authority to conclude contracts of
carriage on its behalf. As clearly extant from the
records, CAI recognized the validity of the contracts
of carriage that Holiday Travel entered into with
Spouses Viloria and considered itself bound with
Spouses Viloria by the terms and conditions thereof;
and this constitutes an unequivocal testament to
Holiday Travel’s authority to act as its agent. This
Court cannot therefore allow CAI to take an
altogether different position and deny that Holiday
Travel is its agent without condoning or giving
imprimatur to whatever damage or prejudice that
may result from such denial or retraction to Spouses
Viloria, who relied on good faith on CAI’s acts in
recognition of Holiday Travel’s authority. Estoppel is
primarily based on the doctrine of good faith and the
avoidance of harm that will befall an innocent party
due to its injurious reliance, the failure to apply it in
this case would result in gross travesty of justice.
Estoppel bars CAI from making such denial.
As categorically provided under Article 1869 of the
Civil Code, “*a+gency may be express, or implied
from the acts of the principal, from his silence or lack
of action, or his failure to repudiate the agency,
knowing that another person is acting on his behalf
without authority.”
Considering that the fundamental hallmarks of an
agency are present, this Court finds it rather peculiar
that the CA had branded the contractual relationship
between CAI and Holiday Travel as one of sale. The
distinctions between a sale and an agency are not
difficult to discern and this Court, as early as 1970,
had already formulated the guidelines that would
aid in differentiating the two (2) contracts.
Article 1870: Form of acceptance of agency
Acceptance by the agent may also be
express, or implied from his acts which
Page 98
 carry out the agency, or from his silence or
inaction according to the circumstances.
Article 1871: Acceptance of agency between
persons present
Between persons who are present, the
acceptance of the agency may also be
implied if the principal delivers his power of
attorney to the agent and the latter
receives it without any objection.
As regards implied acceptance by the agent, the law
distinguishes between cases where persons are
present, and where persons are absent. Agency is
impliedly accepted if the agent receives a power of
attorney from the principal himself personally
without any objection, both being present.
What is a power of attorney? It is a written
authorization to an agent to perform specified acts
in behalf of his principal which acts, when
performed, shall have binding effect on the principal.
A power of attorney is strictly construed and strictly
pursued. Under this rule, the instrument will be held
to grant only those powers which are specified and
defined, and the agent may neither go beyond nor
deviate from the power of attorney. In other words,
the act done must be legally identical with that
authorized to be done. Moreover, where the mode
of exercising a power is prescribed in the instrument
in which it is created, there must be a strict
compliance therewith in every substantial particular.
This is but in accord with the disinclination of courts
to enlarge the authority granted
Article 1872: Acceptance of agency between
persons absent
Between persons who are absent, the
acceptance of the agency cannot be implied
from the silence of the agent, except:
1. When the principal transmits his power
of attorney to the agent, who receives
it without any objection;
Morc’s Notes on Partnership and Agency
2. When the principal entrusts to him by
letter or telegram a power of attorney
with respect to the business in which
he is habitually engaged as an agent,
and he did not reply to the letter or
telegram.
If both the principal and the agent are absent,
acceptance 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.
In No. 1 as distinguished from No. 2, just because the
offeree did not reply does not mean that the agency
has been accepted. For if this would be equivalent
to implied acceptance, there would be no difference
between the two. A good instance of implied
acceptance in No. 1 would be when the offeree
writes a letter acknowledging the receipt of the
offer, but offers no objection to the agency. If he
does not write such a letter, it may be because he
simply wants to ignore the offer, or he may have
forgotten about it, or he is still undecided; hence, in
this latter case, it would be unfair to presume
acceptance. Another instance of implied acceptance
is when the silent offeree begins to act under the
authority conferred upon him. Indeed, acceptance
can be implied from the acts which carry out the
agency.
Distinctions:
Article 1871 Article 1872
The principal personally The principal transmits
delivers the power of the power of attorney to
attorney to the agent. the agent.
Article 1873: Communication of existence of agency
If a person specially informs another or
states by public advertisement that he has
given a power of attorney to a third person,
the latter thereby becomes a duly
authorized agent, in the former case with
respect to the person who received the
Page 99
 special information, and in the latter case
with regard to any person.
The power shall continue to be in full force
until the notice is rescinded in the same
manner in which it was given.
There are 2 ways of giving notice of agency with
different effects:
1. If by special information, 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. Public advertisement may be made
in any form.
According to Justice J.B.L. Reyes, to forestall fraud,
another paragraph must be added to said article. It
reads: “But revocation made in any manner shall be
effective against all persons having actual knowledge
thereof.”
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 contradicting with
specified persons, its revocation shall not prejudice
the latter if they were not given notice thereof.
Kinds of estoppel to deny agency:
1. Estoppel of agent: One professing to act as
agent for another may be estopped to deny
his agency both as against his asserted
principal and the third persons interested in
the transaction in which he engaged.
2. Estoppel of principal, discussed in Article
1911:
3. Estoppel of third persons: A third person,
having dealt with one as an agent may be
estopped to deny the agency as against the
principal, agent, or third persons in interest.
He will not, however, be estopped where
he has withdrawn from the contract made
with the unauthorized agent before
receiving any benefits thereunder.
Morc’s Notes on Partnership and Agency
4. Estoppel of the government: The
government is neither estopped by the
mistake or error on the part of its agents.
But, it may be estopped through affirmative
acts of its officers acting within the scope of
their authority.
Distinctions:
Agency by estoppel Implied Agency
The “agent” is not a true The agent is a true agent
agent; hence, he has no with rights and duties of
rights as such. an agent.
If the estoppel is caused The principal is always
by the principal, he is liable.
liable but only if the
third person acted on
the misrepresentation.
If the estoppel is caused The agent is never
by the agent, it is only personally liable.
the agent who is liable,
never the alleged
principal.
Cases:
 Naguiat v. CA, GR 118375, October 3, 2003
Naguiat questions the admissibility of the various
written representations made by Ruebenfeldt on the
ground that they could not bind her following the res
inter alia acta alteri nocere non debet rule. The
Court of Appeals rejected the argument, holding that
since Ruebenfeldt was an authorized representative
or agent of Naguiat the situation falls under a
recognized exception to the rule. Still, Naguiat
insists that Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency
relationship between Naguiat and Ruebenfeldt is
supported by ample evidence. As correctly pointed
out by the Court of Appeals, Ruebenfeldt was not a
stranger or an unauthorized person. Naguiat
instructed Ruebenfeldt to withhold from Queao the
checks she issued or indorsed to Queao, pending
delivery by the latter of additional collateral.
Page 100
Ruebenfeldt served as agent of Naguiat on the loan
application of Queaos friend, Marilou Farralese, and
it was in connection with that transaction that
Queao came to know Naguiat. It was also
Ruebenfeldt who accompanied Queao in her
meeting with Naguiat and on that occasion, on her
own and without Queao asking for it, Reubenfeldt
actually drew a check for the sum of P220,000.00
payable to Naguiat, to cover for Queaos alleged
liability to Naguiat under the loan agreement.
The Court of Appeals recognized the existence of an
agency by estoppel citing Article 1873 of the Civil
Code. Apparently, it considered that at the very
least, as a consequence of the interaction between
Naguiat and Ruebenfeldt, Queao got the impression
that Ruebenfeldt was the agent of Naguiat, but
Naguiat did nothing to correct Queao’s impression.
In that situation, the rule is clear. One who clothes
another with apparent authority as his agent, and
holds him out to the public as such, cannot be
permitted to deny the authority of such person to
act as his agent, to the prejudice of innocent third
parties dealing with such person in good faith, and in
the honest belief that he is what he appears to be.
The Court of Appeals is correct in invoking the said
rule on agency by estoppel.
 Yun Kwan Byung v. PAGCOR, GR 163553,
December 11, 2009
Petitioner alleges that there is an implied agency.
Alternatively, petitioner claims that even assuming
that no actual agency existed between PAGCOR and
ABS Corporation, there is still an agency by estoppel
based on the acts and conduct of PAGCOR showing
apparent authority in favor of ABS Corporation.
Petitioner states that one factor which distinguishes
agency from other legal precepts is control and the
following undisputed facts show a relationship of
implied agency:
1. Three floors of the Grand Boulevard Hotel
were leased to PAGCOR for conducting
gambling operations;
2. Of the three floors, PAGCOR allowed ABS
Corporation to use one whole floor for
Morc’s Notes on Partnership and Agency
foreign exchange gambling, conducted by
PAGCOR dealers using PAGCOR facilities,
operated by PAGCOR employees and using
PAGCOR chips bearing the PAGCOR logo;
3. PAGCOR controlled the release, withdrawal
and return of all the gambling chips given to
ABS Corporation in that part of the casino
and at the end of the day, PAGCOR
conducted an inventory of the gambling
chips;
4. ABS Corporation accounted for all gambling
chips with the COA, the official auditor of
PAGCOR;
5. PAGCOR enforced, through its own
manager, all the rules and regulations on
the operation of the gambling pit used by
ABS Corporation.
Petitioner’s argument is clearly misplaced. The basis
for agency is representation, that is, the agent acts
for and on behalf of the principal on matters within
the scope of his authority and said acts have the
same legal effect as if they were personally executed
by the principal. On the part of the principal, there
must be an actual intention to appoint or an
intention naturally inferable from his words or
actions, while on the part of the agent, there must
be an intention to accept the appointment and act
on it. Absent such mutual intent, there is generally
no agency.
There is no implied agency in this case because
PAGCOR did not hold out to the public as the
principal of ABS Corporation. PAGCORs actions did
not mislead the public into believing that an agency
can be implied from the arrangement with the
junket operators, nor did it hold out ABS Corporation
with any apparent authority to represent it in any
capacity. The Junket Agreement was merely a
contract of lease of facilities and services.
The players brought in by ABS Corporation were
covered by a different set of rules in acquiring and
encashing chips. The players used a different kind of
chip than what was used in the regular gaming areas
of PAGCOR, and that such junket players played
specifically only in the third floor area and did not
Page 101
mingle with the regular patrons of PAGCOR.
Furthermore, PAGCOR, in posting notices stating
that the players are playing under special rules,
exercised the necessary precaution to warn the
gaming public that no agency relationship exists.
For the second assigned error, petitioner claims that
the intention of the parties cannot apply to him as
he is not a party to the contract.
We disagree. The Court of Appeals correctly used
the intent of the contracting parties in determining
whether an agency by estoppel existed in this case.
An agency by estoppel, which is similar to the
doctrine of apparent authority requires proof of
reliance upon the representations, and that, in turn,
needs proof that the representations predated the
action taken in reliance.
There can be no apparent authority of an agent
without acts or conduct on the part of the principal
and such acts or conduct of the principal must have
been known and relied upon in good faith and as a
result of the exercise of reasonable prudence by a
third person as claimant, and such must have
produced a change of position to its detriment.
Such proof is lacking in this case.
In the entire duration that petitioner played in
Casino Filipino, he was dealing only with ABS
Corporation, and availing of the privileges extended
only to players brought in by ABS Corporation. The
facts that he enjoyed special treatment upon his
arrival in Manila and special accommodations in
Grand Boulevard Hotel, and that he was playing in
special gaming rooms are all indications that
petitioner cannot claim good faith that he believed
he was dealing with PAGCOR. Petitioner cannot be
considered as an innocent third party and he cannot
claim entitlement to equitable relief as well.
For his third and final assigned error, petitioner
asserts that PAGCOR ratified the acts of ABS
Corporation.
The trial court has declared, and we affirm, that the
Junket Agreement is void. A void or inexistent
contract is one which has no force and effect from
Morc’s Notes on Partnership and Agency
the very beginning. Hence, it is as if it has never been
entered into and cannot be validated either by the
passage of time or by ratification. Article 1409 of the
Civil Code provides that contracts expressly
prohibited or declared void by law, such as gambling
contracts, cannot be ratified.
Article 1874: Sale of land through agent;
requirement
When a sale of a piece of land or any
interest therein is through an agent, the
authority of the latter shall be in writing;
otherwise, the sale shall be void.
Under this article, the sale of a piece of land or any
interest thereon, like usufruct, mortgage, etc.,
through an agent is void unless the authority of the
agent is in writing. Hence, a letter containing the
authority to sell is held sufficient.
Does the phrase “any interest therein” include
usufruct, easement and buildings? Strictly speaking,
it does not. But, if this would be the construction, it
would follow that in an agency to sell a building, it
does not have to be in writing.
Effect if the article is violated: The sale is void, not
merely unenforceable. Therefore, the principal
cannot technically ratify. If he does so, there should
be no retroactive effect.
More so, under Article 1403(2)(e), an oral agreement
for the sale of real property or of an interest is
unenforceable even if there is no agent.
Cases:
 Pahud v. CA, GR 160346, August 25, 2009
The focal issue to be resolved is the status of the sale
of the subject property by Eufemia and her co-heirs
to the Pahuds. We find the transaction to be valid
and enforceable.
Also, under Article 1878, a special power of attorney
is necessary for an agent to enter into a contract by
which the ownership of an immovable property is
transmitted or acquired, either gratuitously or for a
Page 102
valuable consideration. Such stringent statutory
requirement has been explained in Cosmic Lumber
Corporation v. Court of Appeals:
“*T+he authority of an agent to execute a
contract [of] sale of real estate must be
conferred in writing and must give him
specific authority, either to conduct the
general business of the principal or to
execute a binding contract containing terms
and conditions which are in the contract he
did execute. A special power of attorney is
necessary to enter into any contract by
which the ownership of an immovable is
transmitted or acquired either gratuitously
or for a valuable consideration. The express
mandate required by law to enable an
appointee of an agency (couched) in
general terms to sell must be one that
expressly mentions a sale or that includes a
sale as a necessary ingredient of the act
mentioned. For the principal to confer the
right upon an agent to sell real estate, a
power of attorney must so express the
powers of the agent in clear and
unmistakable language. When there is any
reasonable doubt that the language so used
conveys such power, no such construction
shall be given the document.”
In several cases, we have repeatedly held that the
absence of a written authority to sell a piece of land
is, ipso jure, void, precisely to protect the interest of
an unsuspecting owner from being prejudiced by the
unwarranted act of another.
Based on the foregoing, it is not difficult to conclude,
in principle, that the sale made by Eufemia, Isabelita
and her two brothers to the Pahuds sometime in
1992 should be valid only with respect to the 4/8
portion of the subject property. The sale with
respect to the 3/8 portion, representing the shares
of Zenaida, Milagros, and Minerva, is void because
Eufemia could not dispose of the interest of her co-
heirs in the said lot absent any written authority
from the latter, as explicitly required by law. This
was, in fact, the ruling of the CA.
Morc’s Notes on Partnership and Agency
Still, in their petition, the Pahuds argue that the sale
with respect to the 3/8 portion of the land should
have been deemed ratified when the three co-heirs,
namely: Milagros, Minerva, and Zenaida, executed
their respective special power of attorneys
authorizing Eufemia to represent them in the sale of
their shares in the subject property.
While the sale with respect to the 3/8 portion is void
by express provision of law and not susceptible to
ratification, we nevertheless uphold its validity on
the basis of the common law principle of estoppel.
More so, it is a basic rule in the law of agency that a
principal is subject to liability for loss caused to
another by the latter’s reliance upon a deceitful
representation by an agent in the course of his
employment (1) if the representation is authorized;
(2) if it is within the implied authority of the agent to
make for the principal; or (3) if it is apparently
authorized, regardless of whether the agent was
authorized by him or not to make the
representation.
By their continued silence, Zenaida, Milagros and
Minerva have caused the Pahuds to believe that they
have indeed clothed Eufemia with the authority to
transact on their behalf. Clearly, the three co-heirs
are now estopped from impugning the validity of the
sale from assailing the authority of Eufemia to enter
into such transaction.
 AF Realty & Development, Inc. v. Dieselman
Freight Services Co., GR 111448, January 16,
2002
Involved in this case is a sale of land through an
agent. Thus, the law on agency under the Civil Code
takes precedence. This is well stressed in Yao Ka Sin
Trading vs. Court of Appeals:
“Since a corporation, such as the private
respondent, can act only through its officers
and agents, all acts within the powers of
said corporation may be performed by
agents of its selection; and, except so far as
limitations or restrictions may be imposed
Page 103
 by special charter, by-law, or statutory
provisions, the same general principles of
law which govern the relation of agency
for a natural person govern the officer or
agent of a corporation, of whatever status
or rank, in respect to his power to act for
the corporation; and agents when once
appointed, or members acting in their
stead, are subject to the same rules,
liabilities, and incapacities as are agents of
individuals and private persons. (Emphasis
supplied).
Pertinently, Article 1874 of the same Code provides:
ART. 1874. When a sale of piece of land or
any interest therein is through an agent,
the authority of the latter shall be in
writing; otherwise, the sale shall be void.
(Emphasis supplied)
Considering that respondent Cruz, Jr., Cristeta
Polintan and Felicisima Ranullo were not authorized
by respondent Dieselman to sell its lot, the supposed
contract is void. Being a void contract, it is not
susceptible of ratification by clear mandate of Article
1409 of the Civil Code.
Upon the other hand, the validity of the sale of the
subject lot to respondent Midas is unquestionable.
As aptly noted by the Court of Appeals, the sale was
authorized by a board resolution of respondent
Dieselman dated May 27, 1988.
 Cosmic Lumber Corporation v. CA, GR
114311,, November 29, 1996
When the sale of a piece of land or any interest
thereon is through an agent, the authority of the
latter shall be in writing otherwise, the sale shall be
void. Thus the authority of an agent to execute a
contract for the sale of real estate must be conferred
in writing and must give him specific authority,
either to conduct the general business of the
principal or to execute a binding contract containing
terms and conditions which are in the contract he
did not execute. A special power of attorney is
Morc’s Notes on Partnership and Agency
necessary to enter into any contract by which the
ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable
consideration. The express mandate required by law
to enable an appointee of an agency (couched) in
general terms to sell must be one that expressly
mentions a sale or that includes a sale as a necessary
ingredient of the act mentioned. For the principal to
confer the right upon an agent to sell real estate, a
power of attorney must so express the powers of the
agent in clear and unmistakable language. When
there is any reasonable doubt that the language so
used conveys such power, no such construction shall
be given the document.
The authority granted Villamil-Estrada under the
special power of attorney was explicit and
exclusionary; for her to institute any action in court
to eject all persons found on Lots Nos. 9127 and 443
so that petitioner could take material possession
thereof, and for this purpose, to appear at the pre-
trial and enter into any stipulation of facts and/or
compromise agreement but only insofar as this was
protective of the rights and interests of petitioner in
the property. Nowhere in this authorization was
Villamil-Estrada granted expressly or impliedly any
power to sell the subject property nor a portion
thereof. Neither can a conferment of the power to
sell be validly inferred from the specific authority "to
enter into a compromise agreement" because of the
explicit limitation fixed by the grantor that the
compromise entered into shall be "so far as it shall
protect the rights and interest of the corporation in
the aforementioned lots." In the context of the
specific investiture of powers to Villamil-Estrada,
alienation by sale of an immovable certainly cannot
be deemed protective of the right of petitioner to
physically possess the same, more so when the land
was being sold for a price of P80.00 per square
meter, very much less than its assessed value of
P250.00 per square meter, and considering further
that petitioner never received the proceeds of the
sale. It is therefore clear that by selling to
respondent Perez a portion of petitioner's land
through a compromise agreement, Villamil-Estrada
acted without or in obvious authority. The sale ipso
Page 104
jure is consequently void. So is the compromise
agreement. This being the case, the judgment based
thereon is necessarily void. Antipodal to the opinion
expressed by respondent court in resolving
petitioner's motion for reconsideration, the nullity of
the settlement between Villamil-Estrada and Perez
impaired the jurisdiction of the trial court to render
its decision based on the compromise agreement.
This ruling was adopted in Jacinto v. Montesa, by Mr.
Justice J.B.L. Reyes, a much-respected authority on
civil law, where the Court declared that a judgment
based on a compromise entered into by an attorney
without specific authority from the client is void.
Such judgment may be impugned and its execution
restrained in any proceeding by the party against
whom it is sought to be enforced. The Court also
observed that a defendant against whom a judgment
based on a compromise is sought to be enforced
may file a petition for certiorari to quash the
execution. He could not move to have the
compromise set aside and then appeal from the
order of denial since he was not a party to the
compromise. Thus it would appear that the obiter of
the appellate court that the alleged nullity of the
compromise agreement should be as a defense
against its enforcement is not legally feasible.
Petitioner could not be in a position to question the
compromise agreement in the action to revive the
compromise judgment since it was never privy to
such agreement. Villamil-Estrada who signed the
compromise agreement may have been the
attorney-in-fact but she could not legally bind
petitioner thereto as she was not entrusted with a
special authority to sell the land, as required in Art.
1878, par. (5), of the Civil Code.
 Spouses Bautista v. Spouses Jalandoni, GR
171464, November 27, 2013
Before resolving the issue on whether Spouses
Bautista were purchasers in good faith for value, the
Court shall first discuss the validity of the sale.
Likewise, Article 1878 paragraph 5 of the Civil Code
specifically mandates that the authority of the agent
Morc’s Notes on Partnership and Agency
to sell a real property must be conferred in writing,
to wit:
Art. 1878. Special powers of attorney are
necessary in the following cases:
5. To enter into any contract by which the
ownership of an immovable is transmitted
or acquired either gratuitously or for a
valuable consideration;
The foregoing provisions explicitly require a written
authority when the sale of a piece of land is through
an agent, whether the sale is gratuitously or for a
valuable consideration. Absent such authority in
writing, the sale is null and void.
In the case at bar, it is undisputed that the sale of
the subject lots to Spouses Bautista was void. Based
on the records, Nasino had no written authority
from Spouses Jalandoni to sell the subject lots. The
testimony of Eliseo that Nasino was empowered by a
special power of attorney to sell the subject lots was
bereft of merit as the alleged special power attorney
was neither presented in court nor was it referred to
in the deeds of absolute sale. Bare allegations,
unsubstantiated by evidence, are not equivalent to
proof under the Rules of Court.
Article 1875: Agency presumed to be with
compensation
Agency is presumed to be for a
compensation, unless there is proof to the
contrary.
The principal must pay the agent the compensation
agreed upon, or the reasonable value of the agent’s
services if no compensation was specified. This
presupposes, however, that the agent has complied
with his obligation as such to the principal.
Under the old Civil Code, agency was presumed to
be gratuitous. In the present Code, agency is
presumed to be for compensation.
In the absence of stipulation, the agent is entitled to
compensation only after he has completely or
Page 105
substantially completed his obligation as an agent.
The compensation may be contingent or dependent
upon the realization of profit for the principal. This
is so in case there is a stipulation to this effect.
Cases:
 Oriental Petroleum and Minerals
Corporation v. Tuscan Realty, Inc., GR
195481, July 10, 2013
The CA invoked the principle of “procuring cause”
(Prats doctrine) in ordering the payment of broker’s
commission to Tuscan Realty. The term “procuring
cause” refers to a cause which starts a series of
events and results, without break in their continuity,
in the accomplishment of a broker’s prime objective
of producing a purchaser who is ready, willing, and
able to buy on the owner’s terms. This is similar to
the concept of proximate cause in Torts, without
which the injury would not have occurred. To be
regarded as the procuring cause of a sale, a broker’s
efforts must have been the foundation of the
negotiations which subsequently resulted in a sale.
Here, it was Tuscan Realty that introduced Gateway
to Oriental Petroleum as an interested buyer of its
condominium units. Oriental Petroleum’s own
Executive Vice President attested to this, saying that
they learned of Gateway’s interest in the properties
from Mr. Capotosto of Tuscan Realty.
The evidence shows that on August 14, 1996, Tuscan
Realty submitted an initial list of prospective buyers
with contact details. It twice updated this list with
Gateway always on top of the lists. Clearly then, it
was on account of Tuscan Realty’s effort that
Oriental Petroleum got connected to Gateway, the
prospective buyer, resulting in the latter two
entering into a contract to sell involving the two
condominium units. Although Gateway turned
around and sold the condominium units to Ancheta,
the fact that such ultimate sale could not have
happened without Gateway’s indispensable
intervention as intermediate buyer. Applying the
principle of procuring cause, therefore, Tuscan
Realty should be given its broker’s commission.
Morc’s Notes on Partnership and Agency
Oriental Petroleum of course claims that Gateway
was not a ready, willing, and able purchaser and that
it in fact assigned its right to Ancheta who became
the ultimate buyer and that, moreover, it was not
Tuscan Realty that introduced Ancheta to Oriental
Petroleum. But there is no question that the
contract to sell that Oriental Petroleum concluded
with Gateway was a valid and binding contract to
sell, which precluded Oriental Petroleum from
peddling the properties to others. Indeed, Oriental
Petroleum executed a deed of absolute sale in
Ancheta’s favor by virtue of Gateway’s assignment
to him of its rights under the contract to sell.
Consequently, it cannot be said that Oriental
Petroleum found a direct buyer in Ancheta without
the intermediate contract to sell in favor of
Gateway, Tuscan Realty’s proposed buyer.
Oriental Petroleum further points out that Tuscan
Realty took no part in its negotiation with Gateway.
That may be the case but the reason why Tuscan
Realty refrained from doing so was because of
Oriental Petroleum’s advice that it would henceforth
directly negotiate the sale with Gateway. Besides,
assuming that the advice amounted to a revocation
of Tuscan Realty’s authority to sell, the Court has
always recognized the broker’s right to his
commission, although the owner revoked his
authority and directly negotiated with the buyer
whom he met through the broker’s efforts. It would
be unfair not to give the broker the reward he had
earned for helping the owner find a buyer who
would pay the price.
 Lim v. Saban, GR 163720, December 16,
2004
The Court affirms the appellate courts finding that
the agency was not revoked since Ybaez requested
that Lim make stop payment orders for the checks
payable to Saban only after the consummation of
the sale on March 10, 1994. At that time, Saban had
already performed his obligation as Ybaezs agent
when, through his (Sabans) efforts, Ybaez executed
the Deed of Absolute Sale of the lot with Lim and the
Spouses Lim.
Page 106
To deprive Saban of his commission subsequent to
the sale which was consummated through his efforts
would be a breach of his contract of agency with
Ybaez which expressly states that Saban would be
entitled to any excess in the purchase price after
deducting the P200,000.00 due to Ybaez and the
transfer taxes and other incidental expenses of the
sale.
In Macondray & Co. v. Sellner, the Court recognized
the right of a broker to his commission for finding a
suitable buyer for the sellers property even though
the seller himself consummated the sale with the
buyer. The Court held that it would be in the height
of injustice to permit the principal to terminate the
contract of agency to the prejudice of the broker
when he had already reaped the benefits of the
broker’s efforts.
In Infante v. Cunanan, et al., the Court upheld the
right of the brokers to their commissions although
the seller revoked their authority to act in his behalf
after they had found a buyer for his properties and
negotiated the sale directly with the buyer whom he
met through the broker’s efforts. The Court ruled
that the seller’s withdrawal in bad faith of the
broker’s authority cannot unjustly deprive the
brokers of their commissions as the sellers duly
constituted agents.
The pronouncements of the Court in the aforecited
cases are applicable to the present case, especially
considering that Saban had completely performed
his obligations under his contract of agency with
Ybaez by finding a suitable buyer to preparing the
Deed of Absolute Sale between Ybaez and Lim and
her co-vendees. Moreover, the contract of agency
very clearly states that Saban is entitled to the
excess of the mark-up of the price of the lot after
deducting Ybaez’ share of P200,000.00 and the taxes
and other incidental expenses of the sale.
However, the Court does not agree with the
appellate courts pronouncement that Sabans agency
was one coupled with an interest. Under Article
1927 of the Civil Code, an agency cannot be revoked
if a bilateral contract depends upon it, or if it is the
Morc’s Notes on Partnership and Agency
means of fulfilling an obligation already contracted,
or if a partner is appointed manager of a partnership
in the contract of partnership and his removal from
the management is unjustifiable. Stated differently,
an agency is deemed as one coupled with an interest
where it is established for the mutual benefit of the
principal and of the agent, or for the interest of the
principal and of third persons, and it cannot be
revoked by the principal so long as the interest of
the agent or of a third person subsists. In an agency
coupled with an interest, the agents interest must be
in the subject matter of the power conferred and not
merely an interest in the exercise of the power
because it entitles him to compensation. When an
agent’s interest is confined to earning his agreed
compensation, the agency is not one coupled with
an interest, since an agents interest in obtaining his
compensation as such agent is an ordinary incident
of the agency relationship.
Saban’s right to receive compensation for
negotiating as broker for Ybaez arises from the
Agency Agreement between them. Lim is not a party
to the contract. However, the record reveals that she
had knowledge of the fact that Ybaez set the price of
the lot at P200,000.00 and that the P600,000.00the
price agreed upon by her and Sabanwas more than
the amount set by Ybaez because it included the
amount for payment of taxes and for Sabans
commission as broker for Ybaez.
Article 1876: General and special agencies
An agency is either general or special. The
former comprises all the business of the
principal. The latter, one or more specific
transactions.
Distinctions:
Universal General agent Special or
agent particular
agent
One authorized One authorized One authorized
to do all acts to transact all to act in one or
that the the business of more specific
principal may his principal, or transactions or
Page 107
personally do, all business of a to act upon a A general agency is in its A special agency is in its
and which he particular kind particular general nature, nature temporary and
can lawfully or in a occasion. continuing and naturally suggests
delegate to particular unrestricted by limitations of power
another the place, or to do limitations other than which third persons
power of doing. all acts those which confine the must inform themselves.
connected with authority within the
a particular bounds of what is usual,
trade, business proper, and necessary
or under like
employment. circumstances; hence, if
there are limitations, the
principal must disclose
The distinction here depends on the extent of the them.
business covered. Hence, the more the special the The apparent authority The duty imposed upon
power is, the more specific it is (Paras). created in a general the third party to inquire
agent does not makes termination of
Attorney-in-fact Attorney at law
terminate by the mere the relationship as
One who is given One whose business is to
revocation of his between principal and
authority by his principal represent clients in legal
authority without notice agent effective as to
to do a particular act not proceedings.
to the third party. such third party unless
of a legal character.
agency has been
entrusted for the
General agent Special/particular agent purpose of contracting
Usually authorized to do Authorized to do only with such third party.
all acts connected with one or more specific acts
the business or in pursuance of a
Article 1877: Agency couched in general terms
employment in which particular instructions or
the principal is engaged. with restrictions An agency couched in general terms
necessarily implied form comprises only acts of administration, even
the act to be done. if the principal should state that he
Authorized to conduct a Authorized to conduct a withholds no power or that the agent may
series of transactions single transaction or a execute such acts as he may consider
over time involving series of transactions not appropriate, or even though the agency
continuity of service. involving continuity of should authorize a general and unlimited
service and covering a management.
relatively limited period
of time. According to the power or authority conferred, the
He may bind his principal He cannot bind his agency may be:
by any act within the principal in a manner
1. Couched in general terms; or,
scope of his authority beyond or outside the
2. Couched in specific terms.
although it may be specific acts which he is
contrary to his special authorized to perform The power of authority includes only acts of
instructions. on behalf of the administration and an express power is necessary to
principal.

Morc’s Notes on Partnership and Agency Page 108

perform any act of strict ownership, even if the
principal states that:
1. He withholds no power;
2. The agent may execute such acts as he may
consider appropriate; or,
3. He authorizes a general or unlimited
management.
What are acts of administration? Acts of
administration are those which do not imply the
authority to alienate for the exercise of which an
express power is necessary, such as entering into a
compromise, accepting or repudiating an
inheritance, or selling or mortgaging properties.
Article 1878: Necessity of special powers of
attorney; instances
Special powers of attorney are necessary in
the following cases:
1. To make such payments as are not
usually considered as acts of
administration;
2. To effect novations which put an end to
obligations already in existence at the
time the agency was constituted;
3. To compromise, to submit questions to
arbitration, to renounce the right to
appeal from judgment, to waive
objections to the venue of an action or
to abandon a prescription already
acquired;
4. To waive any obligation gratuitously;
5. To enter into any contract by which the
ownership of an immovable is
transmitted or acquired either
gratuitously or for a valuable
consideration;
6. To make gifts, except customary ones
for charity or those made to employees
in the business managed by the agent;
7. To loan or borrow money, unless the
latter act be urgent and indispensable
for the preservation of the things which
are under administration;
Morc’s Notes on Partnership and Agency
8. To lease any real property to another
person for more than a year;
9. To bind the principal to render some
service without compensation;
10. To bind the principal in a contract of
partnership;
11. To obligate the principal as a guarantor
or surety;
12. To create or convey real rights over
immovable property;
13. To accept or repudiate an inheritance;
14. To ratify or recognize obligations
contracted before the agency;
15. Any other act of strict dominion.
The 15 cases enumerated are general acts of strict
dominion or ownership. Hence, a special power of
attorney is necessary for their execution through an
agent.
According to Justice J.B.L. Reyes, the acts referred to
in this article can be reduced to 3:
1. Acts of strict dominion or ownership;
2. Gratuitous contracts;
3. Contracts where personal trust or
confidence is of the essence of the
agreement.
What is a special power of attorney? It refers to a
clear mandate, express or implied, specifically
authorizing the performance of the act, and must
therefore be distinguished from an agency couched
in general terms.
Powers of attorney are generally construed strictly
and courts will not infer or presume broad powers
from deeds which do not sufficiently include
property or subject under which the agent is to deal.
Hence, authority in the cases enumerated in this
Article must be couched in clear and unmistakable
language.
Should the SPA be notarized in order to be valid? A
power of attorney is valid although no notary public
intervened in its execution. However, a notarized
power of attorney carries the weight conferred upon
with respect to its due execution.
Page 109
Scope of authority to purchase: Where an agent’s
power to purchase is general and unrestricted, he
has implied authority to do whatever is usual and
necessary in the exercise of such power. He may
determine the usual and necessary details of the
contract, agree upon the prices, modify or rescind
the contract of purchase, accept delivery for his
principal, give directions for the delivery of the
property purchased, and may borrow money to pay
for the care and preservation of the property
purchased; but he has no special power to settle a
contest between the principal and a third person as
to the ownership of the goods purchased, or to
agree to an account stated, or to do anything not
usual and necessary to the exercise of such
authority. However, where the agency is a special
one, or is restricted to purchases upon certain terms
and conditions, the agent has no authority to
purchase upon different terms and conditions from
those authorized or to modify or rescind a contract
of purchase made by the principal.
Cases:
 Litonjua v. Fernandez, GR 148116, April 14,
2004
There is no documentary evidence on record that
the respondents-owners specifically authorized
respondent Fernandez to sell their properties to
another, including the petitioners. Article 1878 of
the New Civil Code provides that a special power of
attorney is necessary to enter into any contract by
which the ownership of an immovable is transmitted
or acquired either gratuitously or for a valuable
consideration, or to create or convey real rights over
immovable property, or for any other act of strict
dominion. Any sale of real property by one
purporting to be the agent of the registered owner
without any authority therefor in writing from the
said owner is null and void. The declarations of the
agent alone are generally insufficient to establish the
fact or extent of her authority. In this case, the only
evidence adduced by the petitioners to prove that
respondent Fernandez was authorized by the
respondents-owners is the testimony of petitioner
Antonio Litonjua that respondent Fernandez openly
Morc’s Notes on Partnership and Agency
represented herself to be the representative of the
respondents-owners, and that she promised to
present to the petitioners on December 8, 1996 a
written authority to sell the properties.
The petitioners cannot feign ignorance of
respondent Fernandez lack of authority to sell the
properties for the respondents-owners. It must be
stressed that the petitioners are noted businessmen
who ought to be very familiar with the intricacies of
business transactions, such as the sale of real
property.
The settled rule is that persons dealing with an
assumed agent are bound at their peril, and if they
would hold the principal liable, to ascertain not only
the fact of agency but also the nature and extent of
authority, and in case either is controverted, the
burden of proof is upon them to prove it. In this
case, respondent Fernandez specifically denied that
she was authorized by the respondents-owners to
sell the properties, both in her answer to the
complaint and when she testified. The Letter dated
January 16, 1996 relied upon by the petitioners was
signed by respondent Fernandez alone, without any
authority from the respondents-owners. There is no
evidence on record that the respondents-owners
ratified all the actuations of respondent Fernandez
in connection with her dealings with the petitioners.
As such, said letter is not binding on the respondents
as owners of the subject properties.
 Patrimonio v. Gutierrez, supra.
As a general rule, a contract of agency may be oral.
However, it must be written when the law requires a
specific form, for example, in a sale of a piece of land
or any interest therein through an agent.
Article 1878 paragraph 7 of the Civil Code expressly
requires a special power of authority before an
agent can loan or borrow money in behalf of the
principal.
Article 1878 does not state that the authority be in
writing. As long as the mandate is express, such
authority may be either oral or written. We
Page 110
unequivocably declared in Lim Pin v. Liao Tian, et al.,
that the requirement under Article 1878 of the Civil
Code refers to the nature of the authorization and
not to its form. Be that as it may, the authority must
be duly established by competent and convincing
evidence other than the self serving assertion of the
party claiming that such authority was verbally
given, thus:
“The requirements of a special power of
attorney in Article 1878 of the Civil Code
and of a special authority in Rule 138 of
the Rules of Court refer to the nature of
the authorization and not its form. The
requirements are met if there is a clear
mandate from the principal specifically
authorizing the performance of the act. As
early as 1906, this Court in Strong v.
Gutierrez-Repide (6 Phil. 680) stated
that such a mandate may be either oral or
written, the one vital thing being that it
shall be express. And more recently, We
stated that, if the special authority is not
written, then it must be duly established by
evidence:
x x x the Rules require, for attorneys to
compromise the litigation of their clients, a
special authority. And while the same does
not state that the special authority be in
writing the Court has every reason to
expect that, if not in writing, the same be
duly established by evidence other than
the self-serving assertion of counsel
himself that such authority was verbally
given him. (Home Insurance Company vs.
United States lines Company, et al., 21 SCRA
863; 866: Vicente vs. Geraldez, 52 SCRA
210; 225). (emphasis supplied).”
A review of the records reveals that Gutierrez did
not have any authority to borrow money in behalf of
the petitioner. Records do not show that the
petitioner executed any special power of attorney
(SPA) in favor of Gutierrez. In fact, the petitioner’s
testimony confirmed that he never authorized
Gutierrez (or anyone for that matter), whether
Morc’s Notes on Partnership and Agency
verbally or in writing, to borrow money in his behalf,
nor was he aware of any such transaction.
Marasigan however submits that the petitioner’s
acts of pre-signing the blank checks and releasing
them to Gutierrez suffice to establish that the
petitioner had authorized Gutierrez to fill them out
and contract the loan in his behalf.
Marasigan’s submission fails to persuade us.
In the absence of any authorization, Gutierrez could
not enter into a contract of loan in behalf of the
petitioner. As held in Yasuma v. Heirs of De Villa,
involving a loan contracted by de Villa secured by
real estate mortgages in the name of East Cordillera
Mining Corporation, in the absence of an SPA
conferring authority on de Villa, there is no basis to
hold the corporation liable, to wit:
“The power to borrow money is one of
those cases where corporate officers as
agents of the corporation need a special
power of attorney. In the case at bar, no
special power of attorney conferring
authority on de Villa was ever presented. x
x x There was no showing that respondent
corporation ever authorized de Villa to
obtain the loans on its behalf.”
“Therefore, on the first issue, the loan was
personal to de Villa. There was no basis to
hold the corporation liable since there was
no authority, express, implied or apparent,
given to de Villa to borrow money from
petitioner. Neither was there any
subsequent ratification of his act.”
“The liability arising from the loan was the
sole indebtedness of de Villa (or of his
estate after his death). (citations omitted;
emphasis supplied).”
In the absence of any showing of any agency
relations or special authority to act for and in behalf
of the petitioner, the loan agreement Gutierrez
entered into with Marasigan is null and void. Thus,
Page 111
the petitioner is not bound by the parties’ loan
agreement.
Article 1879: Scope of authority to sell/mortgage
A special power to sell excludes the power
to mortgage; and a special power to
mortgage does not include the power to
sell.
The power to sell carries with it the:
1. Power to find a purchaser or to sell directly;
2. Power to deliver the property;
3. Power to make the usual representation
and warranty;
4. Power to execute the necessary transfer
documents;
5. Power to fix the terms of the sale, including
the time, place, mode of delivery, price of
the goods, and the mode of payment unless
there be set conditions stipulated by the
principal;
6. Power to sell only for cash;
7. Power to receive the price, unless he was
authorized only to solicit orders
The power to mortgage does not include the power:
1. To sell;
2. To execute a second mortgage;
3. To mortgage for the agent’s personal
benefit or for the benefit of any third
person, unless contrary has been clearly
indicated.
Power to revoke and right to revoke authority: The
principal always has the power to revoke but not
having the right to do so in those cases wherein he
has agreed not to exercise his power during a certain
period. The authority may be withdrawn at any
moment but the contract cannot be terminated in
violation of its terms, without making the principal
liable for damages.
Cases:
Morc’s Notes on Partnership and Agency
 Hernandez v. Hernandez, GR 171165,
February 14, 2011
Demetrio’s special power of attorney granting the
powers to sell and/or mortgage reads in part:
1. To sell and/or mortgage in favor of any
person, corporation, partnership,
private banking or financial institution,
government or semi-government
banking or financial institution for such
price or amount and under such terms
and conditions as our aforesaid
attorney-in-fact may deem just and
proper, parcels of land more
particularly described as follows:
2. To carry out the authority aforestated,
to sign, execute and deliver such deeds,
instruments and other papers that may
be required or necessary;
3. To further attain the authority herein
given, to do and perform such acts and
things that may be necessary or
incidental to fully carry out the
authority herein granted.
It is in the context of this vesture of power that
Demetrio, representing his shared interest with
Carolina and Margarita, entered into the MOA with
PMRDC. It is likewise within this same context that
Demetrio later on entered into the DAC and
accordingly extinguished the previously subsisting
obligation of PMRDC to deliver the stipulated option
money and replaced said obligation with the delivery
instead of participation certificates in favor of
Demetrio.
The powers conferred on Demetrio were exclusive
only to selling and mortgaging the properties.
Between these two specific powers, the power to
sell is quite controversial because it is the sale
transaction which bears close resemblance to the
deal contemplated in the DAC. In fact, part of the
testimony of Atty. Danilo Javier, counsel for
respondent HIGC and head of its legal department at
the time, is that in the execution of the DAC,
respondents had relied on Demetrio’s special power
Page 112
of attorney and also on his supposed agreement to
be paid in kind, i.e., in shares of stock, as
consideration for the assignment and conveyance of
the subject properties to the Asset Pool. What
petitioners miss, however, is that the power
conferred on Demetrio to sell for such price or
amount is broad enough to cover the exchange
contemplated in the DAC between the properties
and the corresponding corporate shares in PMRDC,
with the latter replacing the cash equivalent of the
option money initially agreed to be paid by PMRDC
under the MOA. Suffice it to say that price is
understood to mean the cost at which something is
obtained, or something which one ordinarily accepts
voluntarily in exchange for something else, or the
consideration given for the purchase of a thing.
designation has been made by the principal and on
the contrary, the agent was authorized to submit the
controversy to anyone, it was held that the agent
could agree to an arrangement for the appointment
of additional arbitrators; moreover, it would be
permissible for the agent to agree that an award
could be validly made by less than the full number of
the arbitrators selected.
Article 1881: Authority of agent
The agent must act within the scope of his
authority. He may do such acts as may be
conducive to the accomplishment of the
purpose of the agency.
Article 1882: Limits to agent’s authority; exceptions

Thus, it becomes clear that Demetrio’s special power The limits of the agent’s authority shall not
of attorney to sell is sufficient to enable him to make be considered exceeded should it have
a binding commitment under the DAC in behalf of been performed in a manner more
Carolina and Margarita. In particular, it does include advantageous to the principal than that
the authority to extinguish PMRDC’s obligation specified by him.
under the MOA to deliver option money and agree
to a more flexible term by agreeing instead to There are two very important principles of a true
receive shares of stock in lieu thereof and in agency:
consideration of the assignment and conveyance of
1. The agent must act within the scope of his
the properties to the Asset Pool. Indeed, the terms
authority; and,
of his special power of attorney allow much leeway
2. The agent must act on behalf of his
to accommodate not only the terms of the MOA but
principal.
also those of the subsequent agreement in the DAC
which, in this case, necessarily and consequently has Distinctions:
resulted in a novation of PMRDC’s integral
obligations. Authority Power
Cause Effect
Article 1880: Scope of special power to compromise
It emanates from a It is that given to the
A special power to compromise does not principal. agent.
authorize submission to arbitration.

When an agent is specifically empowered to submit Authority Instructions

a matter to arbitration, the arbitral award binds the Principal affects only Concern only the
principal, provided the agent acted within the scope third persons, because if principal and the agent.
of his authority. In a case decided by the US the act is done outside
Supreme Court, it was held that if the principal had the scope of the agent’s
specifically designated who the arbitrators should authority, the principal is
be, the agent has no authority to submit the not bound.
question to other arbitrators. However, when no Third persons must Third persons do not

Morc’s Notes on Partnership and Agency Page 113

therefore verify or have to investigate or unenforceable, but it subject matter belongs
investigate the verify the instructions. may be ratified, in which to the principal,
authority. case it may be validated provided that at the time
from the very beginning. delivery is to be made,
the “agent” can transfer
What is an authority of an agent? It is the power of legally the ownership of
the agent to affect the legal relations of the principal the thing. Otherwise, he
by acts done in accordance with the principal’s will be held liable for
manifestation of consent to him. This can be breach of warranty
express, implied, general, special, apparent or against eviction.
ostensible, actual, or authority by necessity.

What is the doctrine of authority by necessity? By Liability of principal or agent for acts of agent
virtue of the existence of an emergency, the beyond his authority of power:
authority of an agent is correspondingly enlarged in
order to cope with the exigencies or the necessities 1. For the principal: As a general rule, the
of the moment. Five conditions were laid down by principal is not bound by the acts of an
the US Supreme Court for “authority of agency by agent beyond his limited powers. There are
necessity”: however four qualifications whereby the
principal is held liable:
1. The real existence of an emergency a. Where his acts have contributed to
2. Inability of the agent to communicate with deceive a third person in good
the principal faith;
3. The exercise of the additional authority for b. Where the limitations upon the
the principal’s own protection power created by him could not
4. The adoption of fairly reasonable means, have been known by third persons;
premises duly considered c. Where the principal has placed in
5. The ceasing of the authority the moment the hands of the agent instruments
the emergency no longer demands the signed by him in blank; and,
same d. Where the principal has ratified
the acts of the agent.
Effects:
2. For the agent: The agent who exceeds his
1. With authority authority is personally liable either to the
principal or to the third party in the absence
On principal’s behalf On agent’s behalf of ratification by the principal.
Valid, which means that Generally, it is not a. If the principal is liable to the third
the principal is bound binding on the principal; party on the ground of apparent
and the agent is not agent and stranger are authority, the agent’s liability is to
personally liable unless the only parties, except the principal.
he bound himself. regarding things b. If the principal is not liable to the
belonging to the third person because the facts are
principal such not apparent authority is
2. Without authority present, then the agent’s liability is
to the third party.
On “principal’s” behalf On “agent’s” behalf c. If the agent personally assumes
Unauthorized and Valid, whether or not the responsibility for the particular

Morc’s Notes on Partnership and Agency Page 114

 transaction, if the principal
defaults, he, in effect, also
becomes obligated as a co-
principal.
Article 1883: Acts of agent in his own name; right of
action of parties
If an agent acts in his own name, the
principal has no right of action against the
persons with whom the agent has
contracted; neither have such persons
against the principal.
In such case, the agent is the one directly
bound in favor of the person with whom he
has contracted, as if the transaction were
his own, except when the contract involves
things belonging to the principal.
The provisions of this article shall be
understood to be without prejudice to the
actions between the principal and agent.
This article speaks of a case where the agent was
authorized, but instead of acting on behalf of the
principal, he acts in his own behalf. Thus, Article
1883 does not apply if the agent was unauthorized
or he acts in excess of his authority.
Kinds of principal:
1. Disclosed principal. If at the time of the
transaction contracted by the agent, the
other party thereto has notice that the
agent is acting for a principal and of the
principal’s identity. This is the usual type of
agency.
2. Partially disclosed principal. If the other
party has notice that the agent is or may be
acting for a principal but has no notice of
the principal’s identity.
3. Undisclosed principal. If the other party has
no notice that the agent is acting for a
principal.
Should the agent act in his name when he should
have had acted on behalf of the principal, the agent
Morc’s Notes on Partnership and Agency
is the one directly liable to the person with whom he
had contracted as if the transaction were his own. In
effect, the resulting contractual relation is only
between the agent and the third person. Therefore,
the principal does not have a right of action against
the third person nor the third person against him.
What does the phrase “things belonging to the
principal” mean? This means that in the case of this
exception, 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
obligations belong to the former, to him alone must
also belong the rights arising from the contract.
Cases:
 Maritime Agencies & Services, Inc. v. CA, GR
77638, July 12, 1990
As regards the goods damaged or lost during
unloading, the charterer is liable therefor, having
assumed this activity under the charter party "free of
expense to the vessel." The difficulty is that
Transcontinental has not been impleaded in these
cases and so is beyond our jurisdiction. The liability
imposable upon it cannot be borne by Maritime
which, as a mere agent, is not answerable for injury
caused by its principal. It is a well-settled principle
that the agent shall be liable for the act or omission
of the principal only if the latter is undisclosed.
Union seeks to hold Maritime liable as ship agent on
the basis of the ruling of this Court in the case of
Switzerland General Insurance Co., Ltd. v. Ramirez.
However, we do not find that case is applicable
In that case, the charterer represented itself on the
face of the bill of lading as the carrier. The vessel
owner and the charterer did not stipulate in the
Charter party on their separate respective liabilities
for the cargo. The loss/damage to the cargo was
sustained while it was still on board or under the
custody of the vessel. As the charterer was itself the
carrier, it was made liable for the acts of the ship
Page 115
captain who was responsible for the cargo while
under the custody of the vessel.
As for the charterer’s agent, the evidence showed
that it represented the vessel when it took charge of
the unloading of the cargo and issued cargo receipts
(or tally sheets) in its own name. Claims against the
vessel for the losses/damages sustained by that
cargo were also received and processed by it. As a
result, the charterer’s agent was also considered a
ship agent and so was held to be solidarily liable with
its principal.
The facts in the cases at bar are different. The
charterer did not represent itself as a carrier and
indeed assumed responsibility only for the unloading
of the cargo, i.e, after the goods were already
outside the custody of the vessel. In supervising the
unloading of the cargo and issuing Daily Operations
Report and Statement of Facts indicating and
describing the day-to-day discharge of the cargo,
Maritime acted in representation of the charterer
and not of the vessel. It thus cannot be considered a
ship agent. As a mere charterer’s agent, it cannot be
held solidarily liable with Transcontinental for the
losses/damages to the cargo outside the custody of
the vessel. Notably, Transcontinental was disclosed
as the charterer’s principal and there is no question
that Maritime acted within the scope of its authority.
 Gozun v. Mercado, GR 167812, December
19, 2006
By the contract of agency a person binds himself to
render some service or to do something in
representation or on behalf of another, with the
consent or authority of the latter. Contracts entered
into in the name of another person by one who has
been given no authority or legal representation or
who has acted beyond his powers are classified as
unauthorized contracts and are declared
unenforceable, unless they are ratified.
Generally, the agency may be oral, unless the law
requires a specific form. However, a special power
of attorney is necessary for an agent to, as in this
case, borrow money, unless it be urgent and
Morc’s Notes on Partnership and Agency
indispensable for the preservation of the things
which are under administration. Since nothing in
this case involves the preservation of things under
administration, a determination of whether Soriano
had the special authority to borrow money on behalf
of respondent is in order.
It bears noting that Lilian signed in the receipt in her
name alone, without indicating therein that she was
acting for and in behalf of respondent. She thus
bound herself in her personal capacity and not as an
agent of respondent or anyone for that matter.
It is a general rule in the law of agency
that, in order to bind the principal by a
mortgage on real property executed by an
agent, it must upon its face purport to be
made, signed and sealed in the name of the
principal, otherwise, it will bind the agent
only. It is not enough merely that the agent
was in fact authorized to make the
mortgage, if he has not acted in the name
of the principal. x x x (Emphasis and
underscoring supplied)
 Rural Bank of Bombon, Inc. v. CA, GR 95703,
August 3, 1992
In view of this rule, Aquino's act of signing the Deed
of Real Estate Mortgage in his name alone as
mortgagor, without any indication that he was
signing for and in behalf of the property owner,
Ederlinda Gallardo, bound himself alone in his
personal capacity as a debtor of the petitioner Bank
and not as the agent or attorney-in-fact of Gallardo.
The Court of Appeals further observed:
“It will also be observed that the deed of
mortgage was executed on August 26, 1981
therein clearly stipulating that it was being
executed "as security for the payment of
certain loans, advances or other
accommodation obtained by the Mortgagor
from the Mortgagee in the total sum of
Three Hundred Fifty Thousand Pesos only
(P350,000.00)" although at the time no
such loan or advance had been obtained.
Page 116
 The promissory notes were dated August
31, September 23 and October 26, 1981
which were subsequent to the execution of
the deed of mortgage. The appellant is
correct in claiming that the defendant Rural
Bank should not have agreed to extend or
constitute the mortgage on the properties
of Gallardo who had no existing
indebtedness with it at the time.”
“Under the facts the defendant Rural Bank
appeared to have ignored the
representative capacity of Aquino and dealt
with him and his wife in their personal
capacities. Said appellee Rural Bank also did
not conduct an inquiry on whether the
subject loans were to benefit the interest of
the principal (plaintiff Gallardo) rather than
that of the agent although the deed of
mortgage was explicit that the loan was for
purpose of the bangus and sugpo
production of defendant Aquino.”
“In effect, with the execution of the
mortgage under the circumstances and
assuming it to be valid but because the loan
taken was to be used exclusively for
Aquino's business in the "bangus" and
"sugpo" production, Gallardo in effect
becomes a surety who is made primarily
answerable for loans taken by Aquino in his
personal capacity in the event Aquino
defaults in such payment. Under Art. 1878
of the Civil Code, to obligate the principal as
a guarantor or surety, a special power of
attorney is required. No such special power
of attorney for Gallardo to be a surety of
Aquino had been executed. (pp. 42-
43, Rollo.)”
Petitioner claims that the Deed of Real Estate
Mortgage is enforceable against Gallardo since it
was executed in accordance with Article 1883 where
in such case the agent is the one directly bound in
favor of the person with whom he has contracted, as
if the transaction were his own, except when the
contract involves things belonging to the principal.
Morc’s Notes on Partnership and Agency
The above provision of the Civil Code relied upon by
the petitioner Bank, is not applicable to the case at
bar. Herein respondent Aquino acted purportedly as
an agent of Gallardo, but actually acted in his
personal capacity. Involved herein are properties
titled in the name of respondent Gallardo against
which the Bank proposes to foreclose the mortgage
constituted by an agent (Aquino) acting in his
personal capacity. Hence, Gallardo’s property is not
liable on the real estate mortgage.
OBLIGATIONS OF THE AGENT
The obligations, in general, of agent to principal
should be done in good faith, and impressed with
loyalty to his trust, obedience to principal’s
instructions, and exercise of reasonable care.
Specific obligations of agent to principal:
1. To carry out the agency in accordance with
its terms, and in good faith;
2. To answer for the damages which through
his non-performance the principal may
suffer;
3. To finish the business already begun on the
death of the principal, should delay entail
any danger;
4. 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
in case he declines an agency, until an agent
is appointed;
5. To advance the necessary funds should
there be a stipulation to that effect;
6. To act in accordance with the instructions
of the principal;
7. Not to carry out the agency if its execution
would manifestly result in loss or damage to
the principal;
8. To answer for damages should he prefer in
case of conflict, his own interests to those
of the principal;
9. Not to loan to himself without the consent
of the principal when he has been
authorized to lend at interest;
Page 117
 10. To render an account of his transactions
and to deliver to the principal whatever he
may have received by virtue of the agency;
11. To distinguish goods by countermarks and
designate the merchandise respectively
belonging to each principal, in the case of a
commission agent who handles goods of
the same kind and mark, which belong to
different owners;
12. To be responsible in certain cases for the
acts of the substitute appointed by him;
13. To pay interest on funds he has applied to
his own;
14. To inform the principal, where an
authorized sale of credit has been made, of
such sale;
15. To bear the risk of collection, should he
receive also on a sale, a guarantee
commission;
16. To indemnify the principal for damages for
his failure to collect the credits of his
principal at the time that they become due;
17. To answer for his fraud or negligence.
Article 1884: General obligations of an agent to
principal
The agent is bound by his acceptance to
carry out the agency and is liable for the
damages which, through his non-
performance, the principal may suffer.
He must also finish the business already
begun on the death of the principal, should
delay entail any danger.
A person is free to refuse to be agent but once he
accepts, he is bound to carry it out in accordance
with its terms in good faith and following the
instructions, if any, of the principal. An agent who
does not carry out the agency is liable for damages.
Upon the other hand, if he fulfils his duty, he is not
personally liable unless he so binds himself.
Cases:
Morc’s Notes on Partnership and Agency
 BA Finance Corporation v. CA, GR 82040,
August 27, 1991
B.A. Finance Corporation was deemed subrogated to
the rights and obligations of Supercars, Inc. when
the latter assigned the promissory note, together
with the chattel mortgage constituted on the motor
vehicle in question, in favor of the former.
Consequently, B.A. Finance Corporation is bound by
the terms and conditions of the chattel mortgage
executed between the Cuadys and Supercars, Inc.
Under the deed of chattel mortgage, B.A. Finance
Corporation was constituted attorney-in-fact with
full power and authority to file, follow-up,
prosecute, compromise or settle insurance claims; to
sign, execute and deliver the corresponding papers,
receipts and documents to the Insurance Company
as may be necessary to prove the claim, and to
collect from the latter the proceeds of insurance to
the extent of its interests, in the event that the
mortgaged car suffers any loss or damage (Rollo, p.
89). In granting B.A. Finance Corporation the
aforementioned powers and prerogatives, the Cuady
spouses created in the former’s favor an agency.
Under Article 1884 of the Civil Code of the
Philippines, B.A. Finance Corporation is bound by its
acceptance to carry out the agency, and is liable for
damages which, through its non-performance, the
Cuadys, the principal in the case at bar, may suffer.
Article 1885: Obligation of a person who declines
an agency
In case a person declines an agency, he is
bound to observe the diligence of a good
father of a family in the custody and
preservation of the goods forwarded to him
by the owner until the latter should appoint
an agent. The owner shall as soon as
practicable either appoint an agent or take
charge of the goods.
Duty of the owner:
1. Appointing an agent; or,
2. Taking charge of the goods.
Page 118
Article 1886: Obligation to advance necessary funds
Should there be a stipulation that the agent
shall advance the necessary funds, he shall
be bound to do so except when the
principal is insolvent.
As a rule, the principal must advance to the agent,
should the latter so request, the sums necessary for
the execution of the agency. The contract of 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.
Article 1887: Agent to act according to instructions
In the execution of the agency, the agent
shall act in accordance with the instructions
of the principal.
In default thereof, he shall do all that a
good father of a family would do, as
required by the nature of the business.
What are instructions? There are private directions
which the principal may give the agent in regard to
the manner of performing his duties as such agent,
but of which a third party is ignorant.
If the agent exceeds, violates or fails to act upon
such instructions, he will be liable to the principal for
any loss or damage resulting therefrom. This is so as
the fundamental duty of the agent is to obey all the
reasonable and lawful instructions given to him by
his principal. Conversely, the agent may disobey the
principal’s instruction where it calls for the
performance of illegal acts, or where he is privileged
to do so to protect his security interest in the subject
matter of the agency.
It is the duty of the principal, if he desires an
authority executed in a particular manner to make
his terms so clear and unambiguous that they cannot
reasonably be misconstrued. If he does this, it is the
agent’s duty to the principal to execute the authority
strictly and faithfully; and third persons who know of
the limitations, or who from the circumstances of
Morc’s Notes on Partnership and Agency
the case ought to have known of them can claim no
rights against the principal based upon their
violation. If, on the other hand, the authority is
couched in such uncertain terms as to be reasonably
susceptible of two different meanings, and the agent
in good faith and without negligence adopts one of
them, the principal cannot be heard to assert, either
as against the agent or against third persons who
have, in like good faith and without negligence,
relied upon the same construction, with the other
interpretation. If in such a case, the agent exercises
his best judgment and an honest discretion, he fulfils
his duty, and though a loss ensues, it cannot be cast
upon the agent (Paras, citing Mechem).
Article 1888: When agent shall not carry out agency
An agent shall not carry out an agency if its
execution would manifestly result in loss or
damage to the principal.
The duty of the agent is to render service for the
benefit of the principal and not to act to his
detriment. Hence, if justified or proven, this
provision can be used as a defense for non-
performance under Article 1884.
Article 1889: Conflict of interest; liability of agent
The agent shall be liable for damages if,
there being a conflict between his interests
and those of the principal, he should prefer
his own.
The underlying basis of the rule prohibiting an agent
from engaging in self-dealing is to shut the door
against temptation on his part and to ensure that he
places the rights and welfare of his principal above
his own in performing his agency.
When there is a conflict between the agent’s own
interests and those of the principal, the agent has
the duty to prefer the principal’s interest over his
own. However, where the agent’s interests are
superior, such as where he has a security interest in
goods of the principal in his possession, he may
protect this interest even if in so doing, he disobeys
the principal’s orders or injures his interest.
Page 119
Article 1890: Obligations in relation to borrowing of
money; loan
If the agent has been empowered to
borrow money, he may himself be the
lender at the current rate of interest. If he
has been authorized to lend money at
interest, he cannot borrow it without the
consent of the principal.
The agent cannot, without a special power of
attorney, loan or borrow money.
1. If he has been 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 any case if
the loan were obtained from a third person;
2. 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. There is here a possible
conflict of interest; hence, it may be
prejudicial to the principal.
Article 1891: Obligations to render account
Every agent is bound to render an ac- count
of his transactions and to deliver to the
principal whatever he may have received by
virtue of the agency, even though it may
not be owing to the principal.
Every stipulation exempting the agent from
the obligation to render an account shall be
void.
The article does not apply to case 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.
If the agent fails to deliver and instead converts or
appropriates for his own use the money or property
Morc’s Notes on Partnership and Agency
belonging to the principal, the agent is liable for
estafa.
They duty embodied in this Article will not apply if
the agent or broker acted only as a middleman with
the task of merely bringing together the vendor and
the vendee, who themselves thereafter negotiate on
the terms and conditions of the transaction.
Doctrines on the duty to account:
1. Whoever administers another’s affairs must
render an account because of the
representative relation and because of the
fiduciary position;
2. If an agent refuses to account when it is his
duty to do so, the principal may at once
terminate the agency and sue for the
balance due. If the principal dies, the
agency is extinguished but the duty to
account subsists, and can be demanded by
the principal’s heirs or legal
representatives;
3. The principal, or his legal representative,
has the right to pass upon the correctness
of the accounting;
4. Corollary to his right to demand an
accounting, a principal has the right to
make a reasonable inspection of the book
of account and memoranda, including the
original entries;
5. An agent, as a consequence of his duty to
account, cannot dispute his principal’s title
to the property in his possession.
Article 1892: Appointment of sub-agent; sub-agent
defined
The agent may appoint a substitute if the
principal has not prohibited him from doing
so; but he shall be responsible for the acts
of the substitute:
1. When he was not given the power to
appoint one;
2. When he was given such power, but
without designating the person, and the
Page 120
 person appointed was notoriously
incompetent or insolvent.
All acts of the substitute appointed against the
prohibition of the principal shall be void.
What is a sub-agent? A sub-agent is 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.
Unless prohibited by the principal, the agent may
appoint a subagent or substitute. While ordinarily
the selection of an agent is determined largely by
the trust and confidence that the principal has in the
agent, the principal need not fear prejudice as he
has a right of action not only against the agent but
also against the substitute.
Effects of substitution:
1. When the substitute is appointed by the
agent against the express prohibition of the
principal, the agent exceeds the limits of his
authority. The law says that all acts of the
substitute in such a case shall be void.
2. If in the contract of agency, the agent is
given the power to appoint a substitute, the
substitution has the effect of releasing the
agent from his responsibility unless the
person appointed is notoriously
incompetent or insolvent. But if the
substitute is the person designated by the
principal, the consequence is the absolute
exemption of the agent.
3. If the agent appoints a substitute when he
was not given the power to appoint one,
the law recognizes the validity of the
substitution if the same is beneficial to the
principal because the agency has thus been
executed in fulfillment of its object. If the
substitution has occasioned damage to the
principal, the agent shall be primarily
responsible for the acts of the substitute as
if he himself executed them. But the
Morc’s Notes on Partnership and Agency
principal has also a right of action against
the substitute.
Cases:
 Escueta v. Lim, 512 SCRA 411
Applying the above-quoted provision to the special
power of attorney executed by Ignacio Rubio in favor
of his daughter Patricia Llamas, it is clear that she is
not prohibited from appointing a substitute. By
authorizing Virginia Lim to sell the subject
properties, Patricia merely acted within the limits of
the authority given by her father, but she will have
to be responsible for the acts of the sub-agent,
among which is precisely the sale of the subject
properties in favor of respondent.
Even assuming that Virginia Lim has no authority to
sell the subject properties, the contract she
executed in favor of respondent is not void,
but simply unenforceable.
 Serona v. CA, GR 130423, November 18,
2002
Where, as in the present case, the agents to whom
personal property was entrusted for sale,
conclusively proves the inability to return the same
is solely due to malfeasance of a subagent to whom
the first agent had actually entrusted the property in
good faith, and for the same purpose for which it
was received; there being no prohibition to do so
and the chattel being delivered to the subagent
before the owner demands its return or before such
return becomes due, we hold that the first agent
cannot be held guilty of estafa by either
misappropriation or conversion. The abuse of
confidence that is characteristic of this offense is
missing under the circumstances.
Labrador admitted that she received the jewelry
from petitioner and sold the same to a third person.
She further acknowledged that she owed petitioner
P441,035.00, thereby negating any criminal intent
on the part of petitioner. There is no showing that
petitioner derived personal benefit from or
conspired with Labrador to deprive Quilatan of the
Page 121
jewelry or its value. Consequently, there is no estafa
within contemplation of the law.
Notwithstanding the above, however, petitioner is
not entirely free from any liability towards Quilatan.
The rule is that an accused acquitted of estafa may
nevertheless be held civilly liable where the facts
established by the evidence so warrant. Then too, an
agent who is not prohibited from appointing a sub-
agent but does so without express authority is
responsible for the acts of the sub-
agent.[29] Considering that the civil action for the
recovery of civil liability arising from the offense is
deemed instituted with the criminal action,
petitioner is liable to pay complainant Quilatan the
value of the unpaid pieces of jewelry.
Article 1893: Remedy of principal against the sub-
agent
In the cases mentioned in Nos. 1 and 2 of
the preceding article, the principal may
furthermore bring an action against the
substitute with respect to the obligations
which the latter has contracted under the
substitution.
Under the premises given in the Article, the principal
can sue both the agent and the substitute. This is
one exception to the principle of privity of contracts.
Article 1894: Responsibility of two or more agents
The responsibility of two or more agents,
even though they have been appointed
simultaneously, is not solidary, if solidarity
has not been expressly stipulated.
Article 1895: Solidarity of responsibility of two or
more agents
If solidarity has been agreed upon, each of
the agents is responsible for the non-
fulfillment of the agency, and for the fault
or negligence of his fellow agents, except in
the latter case when the fellow agents
acted beyond the scope of their authority.
Morc’s Notes on Partnership and Agency
The liability referred in the two articles is the liability
of the agents towards the principal, and not that
towards third parties.
Distinction:
Article 1894 Article 1895
Liability is joint. Liability is solidary due to
an express stipulation.
If solidarity has been agreed upon, each of the
agents becomes solidarily liable:
1. For the fulfillment of the agency; and,
2. For the fault or negligence of his fellow
agents provided the latter acted within the
scope of their authority.
Article 1896: Liability of agent for interest
The agent owes interest on the sums he has
applied to his own use from the day on
which he did so, and on those which he still
owes after the extinguishment of the
agency.
The article contemplates 2 distinct cases:
1. One refers to sums belonging to the
principal which the agent applied to his own
use;
2. Another refers to sums which the agent still
owes the principal after the expiration of
the agency.
This article is without prejudice to a criminal action
that may be brought because of conversion.
Is it always necessary that a demand for payment be
made by the principal in order that delay on the part
of the agent shall exist? No. It is clear that if, by
provision of law, the agent is bound to deliver to the
principal whatever he may have received by virtue of
the agency, demand is no longer necessary.
Article 1897: Duties and liabilities of agent to third
persons
Page 122
 The agent who acts as such is not personally
liable to the party with whom he contracts,
unless he expressly binds himself or
exceeds the limits of his authority without
giving such party sufficient notice of his
powers.
The rule is that 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. The agent acquires no rights
whatsoever, nor does he incur any liabilities arising
from the contract entered into by him on behalf of
his principal.
An agent who acts as such within the scope of his
authority represents the principal so that his
contract is really the principal’s. Hence, the agent is
not personally liable to the party with whom he
contracts unless he expressly binds himself or he
exceeds the limits of his authority without giving
such party sufficient notice of his powers.
Moreover, action must be brought against the
principal; otherwise, there is no cause of action.
If the agent pays, even if he expressly binds himself
to the transaction, to the benefit of the principal, the
principal’s obligation to pay is still not relieved.
A third party’s liability on agent’s contracts is to the
principal, not to the agent, because such contracts
are not his own but his principal’s. There are few
instances in which a third party subjects himself to
liability at the hands of an agent:
1. Where the agent contracts in his own name
for an undisclosed principal, in which case,
the agent may sue the third party to
enforce the contract;
2. Where the agent possesses a beneficial
interest in the subject matter of the agency.
A factor selling under a del credere
commission would illustrate such an agent,
as would also an auctioneer by virtue of his
lien;
3. Where the agent pays money of his
principal to a third person by mistake or
Morc’s Notes on Partnership and Agency
under a contract which proves
subsequently to be illegal, the agent being
ignorant with respect to its illegal nature;
and,
4. Where the third party commits a tort
against the agent.
Cases:
 Eurotech Industrial Technologies, Inc. v.
Cuizon, GR 167552, April 23, 2007
Article 1897 reinforces the familiar doctrine that an
agent, who acts as such, is not personally liable to
the party with whom he contracts. The same
provision, however, presents two instances when an
agent becomes personally liable to a third person.
The first is when he expressly binds himself to the
obligation and the second is when he exceeds his
authority. In the last instance, the agent can be held
liable if he does not give the third party sufficient
notice of his powers. We hold that respondent
Edwin does not fall within any of the exceptions
contained in this provision.
 Soriamont Steamship Agencies, Inc. v.
Sprint Transport Services, Inc., GR 174610,
July 14, 2009
Alternatively, if PTS is found to be its agent,
Soriamont argues that PTS is liable for the loss of the
subject equipment, since PTS acted beyond its
authority as agent. Soriamont cites Article 1897 of
the Civil Code, which provides:
“Art. 1897. The agent who acts as such is
not personally liable to the party with
whom he contracts, unless he expressly
binds himself or exceeds the limits of his
authority without giving such party
sufficient notice of his powers.”
The burden falls upon Soriamont to prove its
affirmative allegation that PTS acted in any manner
in excess of its authority as agent, thus, resulting in
the loss of the subject equipment. To recall, the
subject equipment was withdrawn and used by PTS
with the authority of Soriamont. And for PTS to be
Page 123
personally liable, as agent, it is vital that Soriamont
be able to prove that PTS damaged or lost the said
equipment because it acted contrary to or in excess
of the authority granted to it by Soriamont. As the
Court of Appeals and the RTC found, however,
Soriamont did not adduce any evidence at all to
prove said allegation. Given the lack of evidence
that PTS was in any way responsible for the loss of
the subject equipment, then, it cannot be held liable
to Sprint, or even to Soriamont as its agent. In the
absence of evidence showing that PTS acted
contrary to or in excess of the authority granted to it
by its principal, Soriamont, this Court cannot merely
presume PTS liable to Soriamont as its agent. The
only thing proven was that Soriamont, through PTS,
withdrew the two chassis units from Sprint, and that
these have never been returned to Sprint.
Article 1898: Effects of acts of agent without
authority to third persons
If the agent contracts in the name of the
principal, exceeding the scope of his
authority, and the principal does not ratify
the contract, it shall be void if the party
with whom the agent contracted is aware
of the limits of the powers granted by the
principal. In this case, however, the agent is
liable if he undertook to secure the
principal’s ratification.
This article refers only to the liability of the agent
towards the third person. It is clear that under the
premises given, the principal is not at all bound,
except of course if there is subsequent ratification by
him.
Cases:
 Safic Alcan & Cie v. Imperial Vegetable Oil
Co., Inc., GR 126751, March 28, 2001
It can be clearly seen from the foregoing provision of
IVO’s By-laws that Monteverde had no blanket
authority to bind IVO to any contract. He must act
according to the instructions of the Board of
Directors. Even in instances when he was authorized
Morc’s Notes on Partnership and Agency
to act according to his discretion, that discretion
must not conflict with prior Board orders,
resolutions and instructions. The evidence shows
that the IVO Board knew nothing of the 1986
contracts and that it did not authorize Monteverde
to enter into speculative contracts. In fact,
Monteverde had earlier proposed that the company
engage in such transactions but the IVO Board
rejected his proposal. Since the 1986 contracts
marked a sharp departure from past IVO
transactions, Safic should have obtained from
Monteverde the prior authorization of the IVO
Board. Safic cannot rely on the doctrine of implied
agency because before the controversial 1986
contracts, IVO did not enter into identical contracts
with Safic. The basis for agency is representation
and a person dealing with an agent is put upon
inquiry and must discover upon his peril the
authority of the agent. In the case of Bacaltos Coal
Mines v. Court of Appeals, we elucidated the rule on
dealing with an agent thus:
“Every person dealing with an agent is put
upon inquiry and must discover upon his
peril the authority of the agent. If he does
not make such inquiry, he is chargeable
with knowledge of the agent’s authority,
and his ignorance of that authority will not
be any excuse. Persons dealing with an
assumed agent, whether the assumed
agency be a general or special one, are
bound at their peril, if they would hold the
principal, to ascertain not only the fact of
the agency but also the nature and extent
of the authority, and in case either is
controverted, the burden of proof is upon
them to establish it.”
The most prudent thing petitioner should have done
was to ascertain the extent of the authority of
Dominador Monteverde. Being remiss in this regard,
petitioner cannot seek relief on the basis of a
supposed agency.
Under Article 1898 of the Civil Code, the acts of an
agent beyond the scope of his authority do not bind
the principal unless the latter ratifies the same
Page 124
expressly or impliedly. It also bears emphasizing
that when the third person knows that the agent
was acting beyond his power or authority, the
principal cannot be held liable for the acts of the
agent. If the said third person is aware of such limits
of authority, he is to blame, and is not entitled to
recover damages from the agent, unless the latter
undertook to secure the principals ratification.
There was no such ratification in this case. When
Monteverde entered into the speculative contracts
with Safic, he did not secure the Boards approval.
He also did not submit the contracts to the Board
after their consummation so there was, in fact, no
occasion at all for ratification. The contracts were
not reported in IVOs export sales book and turn-out
book. Neither were they reflected in other books
and records of the corporation. It must be pointed
out that the Board of Directors, not Monteverde,
exercises corporate power. Clearly, Monteverdes
speculative contracts with Safic never bound IVO
and Safic cannot therefore enforce those contracts
against IVO.
 Cervantes v. CA, GR 125138, March 2, 1999
From the aforestated facts, it can be gleaned that
the petitioner was fully aware that there was a need
to send a letter to the legal counsel of PAL for the
extension of the period of validity of his ticket.
Since the PAL agents are not privy to the said
Agreement and petitioner knew that a written
request to the legal counsel of PAL was necessary,
he cannot use what the PAL agents did to his
advantage. The said agents, according to the Court
of Appeals, acted without authority when they
confirmed the flights of the petitioner.
Under Article 1898 of the New Civil Code, the acts of
an agent beyond the scope of his authority do not
bind the principal, unless the latter ratifies the same
expressly or impliedly. Furthermore, when the third
person (herein petitioner) knows that the agent was
acting beyond his power or authority, the principal
cannot be held liable for the acts of the agent. If the
said third person is aware of such limits of authority,
Morc’s Notes on Partnership and Agency
he is to blame, and is not entitled to recover
damages from the agent, unless the latter undertook
to secure the principals ratification.
 DBP v. CA, GR 109937, March 21, 1994
Under Article 1897 of the Civil Code of the
Philippines, "the agent who acts as such is not
personally liable to the party with whom he
contracts, unless he expressly binds himself or
exceeds the limits of his authority without giving
such party sufficient notice of his powers."
The DBP is not authorized to accept applications for
MRI when its clients are more than 60 years of age
(Exh. "1-Pool"). Knowing all the while that Dans was
ineligible for MRI coverage because of his advanced
age, DBP exceeded the scope of its authority when it
accepted Dan’s application for MRI by collecting the
insurance premium, and deducting its agent’s
commission and service fee.
The liability of an agent who exceeds the scope of his
authority depends upon whether the third person is
aware of the limits of the agent’s powers. There is
no showing that Dans knew of the limitation on
DBP’s authority to solicit applications for MRI.
If the third person dealing with an agent is unaware
of the limits of the authority conferred by the
principal on the agent and he (third person) has
been deceived by the non-disclosure thereof by the
agent, then the latter is liable for damages to him (V
Tolentino, Commentaries and Jurisprudence on the
Civil Code of the Philippines, p. 422 [1992], citing
Sentencia [Cuba] of September 25, 1907). The rule
that the agent is liable when he acts without
authority is founded upon the supposition that there
has been some wrong or omission on his part either
in misrepresenting, or in affirming, or concealing the
authority under which he assumes to act (Francisco,
V., Agency 307 [1952], citing Hall v. Lauderdale, 46
N.Y. 70, 75). Inasmuch as the non-disclosure of the
limits of the agency carries with it the implication
that a deception was perpetrated on the
unsuspecting client, the provisions of Articles 19, 20
Page 125
and 21 of the Civil Code of the Philippines come into
play.
Article 1899: Effects of ignorance of agent
If a duly authorized agent acts in
accordance with the orders of the principal,
the latter cannot set up the ignorance of
the agent as to circumstances whereof he
himself was, or ought to have been, aware.
If the principal appoints an agent who is ignorant,
the fault is his alone and he must suffer the
consequences of his acts.
Notice that under this Article, 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.
Article 1900: Scope of agent’s authority to third
persons
So far as third persons are concerned, an
act is deemed to have been performed
within the scope of the agent’s authority, if
such act is within the terms of the power of
attorney, as written, even if the agent has in
fact exceeded the limits of his authority
according to an understanding between the
principal and the agent.
The scope of the agent’s authority includes not only
the actual authorization conferred upon the agent
by his principal, but also that which has apparently
or impliedly been delegated to him.
Where the authority is not in writing, every person
dealing with an assumed agent is under obligation, if
he would hold the principal liable, to make an
inquiry not only as to existence of the agency, but
also as to the nature and extent of authority of the
agent.
If the authority of the agent is in writing, such person
is not required to inquire further than the terms of
the written power of attorney. As far as he is
concerned, an act of the agent within the terms of
Morc’s Notes on Partnership and Agency
the power of attorney as written is within the scope
of the agent’s authority although the agent has in
fact exceeded the limits of his actual authority
according to the secret understanding between him
and the principal.
Methods of broadening and restricting agent’s
authority:
1. By implication. This means that the agent’s
authority extends not only to the express
requests, but also to those acts and
transactions incidental thereto.
2. By usage and custom.
3. By necessity.
4. By the doctrines of apparent authority, of
liability by estoppel, and of ratification
5. By the rule of ejusdem generis
The scope of the agent’s authority is what appears in
the written terms of the power of attorney. While
third persons are bound to inquire into the extent or
scope of the agent’s authority, are they required to
go beyond the terms of the written power of
attorney? No. Third persons cannot be adversely
affected by an understanding between the principal
and his agent as to the limits of the latter’s
authority. In the same way, third persons need not
concern themselves with instructions given by the
principal to his agent outside of the written power of
attorney.
The motive of the agent in entering into a contract
with a third person is immaterial, except where the
third person knew that the agent was acting for his
private benefit or where the owner is seeking
recovery of personal property of which he has been
unlawfully deprived.
Cases:
 Eugenio v. CA, GR 103737, December 15,
1994
The next inquiry then would be as to what exactly is
the nature of the TPRs insofar as they are used in the
day-to-day business transactions of the company.
These trade provisional receipts are bound and given
Page 126
in booklets to the company sales representatives,
under proper acknowledgment by them and with a
record of distribution thereof. After every
transaction, when a collection is made the customer
is given by the sales representative a copy of the
trade provisional receipt, that is the triplicate copy
or customer’s copy, properly filled up to reflect the
completed transaction. All unused TPRs, as well as
the collections made, are turned over by the sales
representative to the appropriate company officer.
According to respondent court, "the questioned
TPR’s are merely ‘provisional’ and were, as printed
at the bottom of said receipts, as to be officially
confirmed by plaintiff within fifteen (15) days by
delivering the original copy thereof stamped paid
and signed by its cashier to the customer. . . .
Defendants-appellants (herein petitioners) failed to
present the original copies of the TPRs in question,
showing that they were never confirmed by the
plaintiff, nor did they demand from plaintiff the
confirmed original copies thereof."
We do not agree with the strained implication
intended to be adverse to petitioners. The TPRs
presented in evidence by petitioners are disputably
presumed in evidence as evidentiary of payments
made on account of petitioners. There are
presumptions juris tantum in law that private
transactions have been fair and regular and that the
ordinary course of business has been followed. The
role of presumptions in the law on evidence is to
relieve the party enjoying the same of evidential
burden to prove the proposition that he contends
for, and to shift the burden of evidence to the
adverse party. Private respondent having failed to
rebut the aforestated presumptions in favor of valid
payment by petitioners, these would necessarily
continue to stand in favor in this case.
Besides, even assuming arguendo that herein private
respondent’s cashier never received the amounts
reflected in the TPRs, still private respondent failed
to prove that Estrada, who is its duly authorized
agent with respect to petitioners, did not receive
those amounts from the latter. As correctly
explained by petitioners, "in so far as the private
Morc’s Notes on Partnership and Agency
respondent’s customers are concerned, for as long
as they pay their obligations to the sales
representative of the private respondent using the
latter’s official receipt, said payment extinguishes
their obligations." Otherwise, it would unreasonably
cast the burden of supervision over its employees
from respondent corporation to its customers.
The substantive law is that payment shall be made
to the person in whose favor the obligation has been
constituted, or his successor-in-interest or any
person authorized to receive it. As far as third
persons are concerned, an act is deemed to have
been performed within the scope of the agent’s
authority, if such is within the terms of the power of
attorney, as written, even if the agent has in fact
exceeded the limits of his authority according to an
understanding between the principal and his agent.
In fact, Atty. Rosario, private respondent’s own
witness, admitted that "it is the responsibility of the
collector to turn over the collection."
 Toyota Shaw, Inc. v. CA, L-116650, May 23,
1995
Moreover, Exhibit "A" shows the absence of a
meeting of minds between Toyota and Sosa. For one
thing, Sosa did not even sign it. For another, Sosa
was well aware from its title, written in bold letters,
viz.,
AGREEMENTS BETWEEN MR. SOSA &
POPONG BERNARDO OF TOYOTA SHAW,
INC.
that he was not dealing with Toyota but with Popong
Bernardo and that the latter did not misrepresent
that he had the authority to sell any Toyota vehicle.
He knew that Bernardo was only a sales
representative of Toyota and hence a mere agent of
the latter. It was incumbent upon Sosa to act with
ordinary prudence and reasonable diligence to know
the extent of Bernardo's authority as an agent in
respect of contracts to sell Toyota's vehicles. A
person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the
agent.
Page 127
  Litonjua v. Eternit Corporation, GR 144805,
June 8, 2006
It bears stressing that in agent-principal relationship,
the personality of the principal is extended through
the facility of the agent. In so doing, the agent, by
legal fiction, becomes the principal, authorized to
perform all acts which the latter would have him do.
Such a relationship can only be effected with the
consent of the principal, which must not, in any way,
be compelled by law or by any court.
The petitioners cannot feign ignorance of any regular
and valid authority of respondent EC empowering
Adams, Glanville, or Delsaux to offer the properties
for sale and to sell the said properties to the
petitioners. A person dealing with a known agent is
not authorized, under any circumstances, blindly to
trust the agents; statements as to the extent of his
powers; such person must not act negligently but
must use reasonable diligence and prudence to
ascertain whether the agent acts within the scope of
his authority. The settled rule is that, persons
dealing with an assumed agent are bound at their
peril, and if they would hold the principal liable, to
ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is
controverted, the burden of proof is upon to prove
it.
 Country Bankers Insurance Corporation v.
Keppel Cebu Shipyard, GR 166044, June 18,
2012
Our law mandates an agent to act within the scope
of his authority. The scope of an agent’s authority is
what appears in the written terms of the power of
attorney granted upon him. Under Article 1878 (11)
of the Civil Code, a special power of attorney is
necessary to obligate the principal as a guarantor or
surety.
In the case at bar, CBIC could be held liable even if
Quinain exceeded the scope of his authority only if
Quinain’s act of issuing Surety Bond No. G (16)
29419 is deemed to have been performed within the
written terms of the power he was granted.
Morc’s Notes on Partnership and Agency
However, contrary to what the RTC held, the special
power of attorney accorded to Quinain clearly states
the limits of his authority and particularly provides
that in case of surety bonds, it can only be issued in
favor of the DPWH, the NAPOCOR, and other
government agencies; furthermore, the amount of
the surety bond is limited to P 500,000.00.
 Esguerra v. CA, GR 119310, February 3,
1997
On a compromise agreement being a source of
agent’s authority
The Civil Code provides that a contract is
unenforceable when it is entered into in the name of
another person by one who has been given no
authority or legal representation, or who has acted
beyond his powers. And that contract entered into
in the name of another by one who has no authority
or legal representation, or who has acted beyond his
powers, shall be unenforceable. After a thorough
review of the case at bench, the Court finds the sale
of Esguerra Building II by VECCI to private
respondent Sureste Properties, Inc. valid. The sale
was expressly and clearly authorized under the
judicially-approved compromise agreement freely
consented to and voluntarily signed by petitioner
Julieta Esguerra. Thus, petitioner’s contention that
the sale is unenforceable as to her share for being
unauthorized is plainly incongruous with the express
authority granted by the compromise agreement to
VECCI, which specified no condition that the latter
shall first consult with the former prior to selling any
of the properties listed there.
As far as private respondent Sureste Properties, Inc.
is concerned, the sale to it by VECCI was completely
valid and legal because it was executed in
accordance with the compromise agreement,
authorized not only by the parties thereto, who
became co-principals in a contract of agency created
thereby, but by the approving court as well.
Consequently, the sale to Sureste Properties, Inc. of
Esguerra Building II cannot in any manner or guise be
deemed unenforceable, as contended by petitioner.
Page 128
Article 1901: Ratification by principal; effect on
third persons
A third person cannot set up the fact that
the agent has exceeded his powers, if the
principal has ratified, or has signified his
willingness to ratify the agent’s acts.
Article 1902: Proof of authority or instruction
required by third person
A third person with whom the agent wishes
to contract on behalf of the principal may
require the presentation of the power of
attorney, or the instructions as regards the
agency. Private or secret orders and
instructions of the principal do not
prejudice third persons who have relied
upon the power of attorney or instructions
shown them.
Article 1903: Factor or commission agent
The commission agent shall be responsible
for the goods received by him in the terms
and conditions and as described in the
consignment, unless upon receiving them
he should make a written statement of the
damage and deterioration suffered by the
same.
A factor or commission agent is one whose business
is to receive and sell goods for a commission and
who is entrusted by the principal with the possession
of goods to be sold.
Distinctions:
Ordinary agent Commission agent
Does not need to have Must have in possession
possession of the goods the goods of his principal
of his principal
Commission agent Broker
One engaged in the He maintains no relation
purchase and sale for a with the thing which he
principal of personal purchases or sells. He is
Morc’s Notes on Partnership and Agency
property, which for this supposed to be merely a
purpose, has to be go-between, an
placed in his possession intermediary between
and at his disposal. He the seller and the buyer.
has a relation not only As such, he does not
with his principal, and have either the custody
the buyers or sellers, but or the possession of the
also with the property thing that he disposes of.
which constitutes the His only function is to
object of the bring the parties to the
transaction. transaction.
This article gives a presumption to the effect that the
damage to the merchandise were suffered while in
the possession and custody of the agent. Hence, 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.
Article 1904: Obligation of a commission agent as to
goods of the same mark or kind
The commission agent who handles goods
of the same kind and mark, which belong to
different owners, shall distinguish them by
countermarks, and designate the
merchandise respectively belonging to each
principal.
Article 1905: Authority of commission agent to sell
on credit; effect
The commission agent cannot, without the
express or implied consent of the principal,
sell on credit. Should he do so, the principal
may demand from him payment in cash,
but the commission agent shall be entitled
to any interest or benefit, which may result
from such sale.
A commission agent can sell on credit only with the
express or implied consent of the principal. Hence,
an agent who sells the goods on credit without the
consent of the principal is liable for the price of the
Page 129
goods. However, the agent shall get the extra
benefits derived from selling goods on credit.
The commission agent is not allowed to escape the
effects of this article by proving that the profits
would have been less had the sale been made on a
cash basis. This defense on the part of the agent is
not tenable because if this were to be allowed, the
way will be open for delay, fraud, and bad faith.
Two choices are given to the principal if such sale
was made, absent any authority:
1. He may require payment in cash, in which
case, any interest or benefit from the sale
shall belong to the agent since the principal
cannot be allowed to enrich himself at the
agent’s expense; or,
2. He may ratify the sale on credit in which
case it will have all the risks and advantages
to him.
Cases:
 Green Valley Poultry & Allied Products, Inc.
v. IAC, L-49395, December 26, 1984
Whether viewed as an agency to sell or as a contract
of sale, the liability of Green Valley is indubitable.
Adopting Green Valley’s theory that the contract is
an agency to sell, it is liable because it sold on credit
without authority from its principal, contrary to
Article 1905 of the Civil Code.
Article 1906: Obligation of commission agent to sell
on credit
Should the commission agent, with
authority of the principal, sell on credit, he
shall so inform the principal, with a
statement of the names of the buyers.
Should he fail to do so, the sale shall be
deemed to have been made for cash insofar
as the principal is concerned.
Under this article, 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
Morc’s Notes on Partnership and Agency
to inform the principal of such sale on credit with a
statement of the names of the buyers.
This article only talks of the relations between the
commission agent and the principal; third parties
should not be prejudiced.
Article 1907: Guarantee commission; definition;
purpose; del credere commission
Should the commission agent receive on a
sale, in addition to the ordinary
commission, another called a guarantee
commission, he shall bear the risk of
collection and shall pay the principal the
proceeds of the sale on the same terms
agreed upon with the purchaser.
What is a guarantee commission? Also called a del
credere commission, it is one where, in
consideration of an increased commission, the factor
or commission agent guarantees to the principal the
payment of the debts arising through his agency. An
agent who guarantees payment of the customer’s
account in consideration of the higher commission is
called a del credere agent.
An agent with a del credere commission is liable to
the principal if the buyer fails to pay or is incapable
of paying. But he is not primarily the debtor. On the
contrary, the principal may sue the buyer in his own
name notwithstanding the del credere commission,
so that the latter amounts to no more than a
guaranty.
Liability of a del credere agent is a contingent
pecuniary liability in the event the buyer fails to pay
or is incapable of paying.
Does this article include both cash and credit sales?
Yes, since the law makes no distinction. Moreover,
there are cash sales which may give a short term or
period (Paras).
If the agent receives a guarantee commission, he
cannot put up the defense that the debtor-third
person possesses property. This is precisely the risk
the commission agent assumed.
Page 130
Article 1908: Obligation of commission agent to
collect credit
The commission agent who does not collect
the credits of his principal at the time when
they become due and demandable shall be
liable for damages, unless he proves that he
exercised due diligence for that purpose.
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 a commission agent without a guarantee
commission should prove he exercised due diligence
in the collection of the credit, and the credit is not
collected because of the fault of the third party, the
agent is freed from responsibility. In such an
eventuality, the debtor can be directly proceeded
against by the principal. The principal need not fear
in this case that the debtor can put defences which
the debtor could have set up against the agent.
Article 1909: Liability of agent for fraud and
negligence
The agent is responsible not only for fraud,
but also for negligence, which shall be
judged with more or less rigor by the
courts, according to whether the agency
was or was not for a compensation.
In the fulfillment of his obligation, the agent is
responsible to the principal not only for fraud
committed by him but also, for negligence.
1. For fraud, he is always liable.
2. For negligence, liability is affected by
whether the agency is gratuitous or not.
Mismanagement of the enterprise by a principal,
through his agent, does not relieve him from his
responsibilities he had contracted with third
persons.
Remedy of the principal: Sue the agent for the
damages he suffered.
Morc’s Notes on Partnership and Agency
Cases:
 NAPOCOR v. National Merchandising
Corporation, L-33819 & L-33897, October
23, 1982
An agent who exceeds the limits of his authority is
personally liable
Under Article 1897 of the Civil Code, the agent who
exceeds the limits of his authority without giving the
party with whom he contracts sufficient notice of his
powers is personally liable to such party.
In the present case, Namerco, the agent of a New
York-based principal, entered into a contract of sale
with the NAPOCOR without disclosing to NAPOCOR
the limits of its powers and, contrary to its principal’s
prior cable instructions that the sale should be
subject to availability of a steamer, it agreed that
non-availability of a steamer was not a justification
for non-payment of the liquidated damages.
Namerco, therefore, is liable for damages.
The rule that every person dealing with an agent is
put upon inquiry and must discover upon his peril
the authority of the agent would only apply in cases
where the principal is sought to be held liable on the
contract entered into by the agent. The said rule is
not applicable in the instant case since it is the
agent, not the principal, that is sought to be held
liable on the contract of sale which was expressly
repudiated by the principal because the agent took
chances, it exceeded its authority and, in effect, it
acted in its own name.
On the liability of an agent
Defendant’s contention that Namerco’s liability
should be based on tort or quasi-delict as held in
some American cases is not well-taken. As correctly
argued by the NAPOCOR, it would be unjust and
inequitable for Namerco to escape liability of the
contract after it had deceived the NAPOCOR by not
disclosing the limits of its powers and entering into
the contract with stipulations contrary to its
principal’s instructions.
Page 131
  Lopez v. Alvendia, L-20697, December 24,
1964
The principal is responsible for the acts of the agent,
done within the scope of his authority, and should
bear the damages caused to third parties.
OBLIGATIONS OF THE PRINCIPAL
The primary obligation of the principal to the agent
is simply that of complying with the terms of their
contract, if one exists. The principal may be justified
to perform his part of the contracts when the agent
has already breached the contract.
Specific obligations of principal to agent:
1. To comply with all the obligations which the
agent may have contracted within the
scope of his authority;
2. To advance to the agent, should the latter
so request, the sums necessary for the
execution of the agency;
3. To reimburse the agent for all advances
made by him provided the agent is free
from fault;
4. To indemnify the agent for all the damages
which the execution of the agency may
have caused the latter without fault or
negligence; and,
5. To pay the agent the compensation agreed
upon, or if no compensation was specified,
the reasonable value of the agent’s
services.
Article 1910: Obligations of the principal in general
The principal must comply with all the
obligations which the agent may have
contracted within the scope of his
authority.
As for any obligation wherein the agent has
exceeded his power, the principal is not
bound except when he ratifies it expressly
or tacitly.
Morc’s Notes on Partnership and Agency
Aside from acting within the scope of his authority,
the agent must also act in the name of the principal,
and not in his own name; otherwise, the principal is
not bound except when the transaction concerns
things belonging to the principal. After all,
representation is the essence of agency. It is thus
evident that the obligations contracted by the agent
are for and on behalf of the principal to bind him if
he personally contracted.
An agent is the instrumentality of the principal
whose primary design is to obtain rights against third
parties. The principal’s rights are the third parties’
liabilities.
If an agent misrepresents to a purchaser, and the
principal accepts the benefits of such
misrepresentation, he cannot at the same time deny
responsibility for such misrepresentation.
As a general rule, the principal is civilly liable to third
persons for torts of an agent committed at the
principal’s direction or in the course and within the
scope of the agent’s employment. The principal
cannot escape liability so long as the tort was
committed by the agent while performing his duties
in furtherance of the principal’s business or at his
direction although outside the scope of his
employment or authority.
 Business hazard theory. It advances the
argument that it is thought that the hazards
of business should be borne by the business
directly. It is reasoned that if the cost then
is added to the expense of doing business, it
will ultimately be borne by the consumer of
the product; that the consumer should pay
the costs which the hazards of the business
shave incurred.
 Motivation-deviation test. The bounds of
the agent’s authority are not the limits of
the principal’s tort liability, but rather the
scope of the employment which may or
may not be within the bounds of authority.
There are two factors which lead to the
imposition of the liability for tort:
Page 132
 a. Satisfactory evidence that the
employee in doing the act, in the
doing of which the tort was
committed, was motivated in part,
at least, by a desire to serve his
employer; and,
b. Satisfactory evidence that the act,
in the doing of which the tort was
committed, was not an extreme
deviation from the normal conduct
of such employee.
Under the second paragraph of this Article, the
agent who exceeds his authority is not deemed a
representative of the principal. Hence, the principal
is not bound unless he ratifies the act expressly or
impliedly. Without such ratification, the agent is the
one personally liable.
Conditions for ratification:
1. Intent to ratify;
2. Principal must have the capacity and power
to ratify;
3. He must have had knowledge or had reason
to know of material or essential facts about
the transaction;
4. He must ratify the acts in its entirety;
5. The act must be capable of ratification; and,
6. The act must be done on behalf of the
principal.
Effects of ratification:
1. With respect to agent. It relieves the agent
from liability to third party to the
unauthorized transaction, and to his
principal for acting without authority and
he may recover compensation for
performing the act which has been ratified;
2. With respect to the principal himself. The
principal who ratifies thereby assumes
responsibility for the unauthorized act, as
fully as if the agent had acted under original
authority but he is not liable for acts
outside the authority approved by his
ratification;
Morc’s Notes on Partnership and Agency
3. With respect to third persons. Ordinarily, a
third person is bound by a ratification to the
same extent as he would have been bound
if the ratified act had been authorized in the
first instance, and he cannot raise the
question of the agent’s authority to do the
ratified act.
To be effective, ratification need not be
communicated or made known to the agent or the
third party. The act or conduct of the principal
rather than his communication is the key. But
before the ratification, the third party is free to
revoke the unauthorized contract.
Ratification so operates upon an unauthorized act to
have retroactive effect. The authority created by
ratification is subsequent but it is equivalent to intial
approval or prior authority.
However, if the third party has withdrawn from the
contract, the act or transaction is no longer capable
of ratification. There is no ratification with
retroactive effect to speak of.
Cases:
 Air France v. CA, L-57339, December 29,
1983
Knowledge of agent is chargeable as knowledge of
principal; hence, third party is not liable for damages
for failure of the agent to give notice.
 Filipinas Life Assurance Company v.
Pedroso, GR 159489, February 4, 2008
Filipinas Life, as the principal, is liable for obligations
contracted by its agent Valle. By the contract of
agency, a person binds himself to render some
service or to do something in representation or on
behalf of another, with the consent or authority of
the latter. The general rule is that the principal is
responsible for the acts of its agent done within the
scope of its authority, and should bear the damage
caused to third persons. When the agent exceeds
his authority, the agent becomes personally liable
for the damage. But even when the agent exceeds
Page 133
his authority, the principal is still solidarily liable
together with the agent if the principal allowed the
agent to act as though the agent had full powers. In
other words, the acts of an agent beyond the scope
of his authority do not bind the principal, unless the
principal ratifies them, expressly or impliedly.
Ratification in agency is the adoption or
confirmation by one person of an act performed on
his behalf by another without authority.
 China Airlines v. Chiok, GR 152122, July 30,
2003
In American Airlines v. Court of Appeals, we have
noted that under a general pool partnership
agreement, the ticket-issuing airline is the principal
in a contract of carriage, while the endorsee-airline
is the agent.
x x x Members of the IATA are under a
general pool partnership agreement
wherein they act as agent of each other in
the issuance of tickets to contracted
passengers to boost ticket sales worldwide
and at the same time provide passengers
easy access to airlines which are otherwise
inaccessible in some parts of the world.
Booking and reservation among airline
members are allowed even by telephone
and it has become an accepted practice
among them. A member airline which
enters into a contract of carriage consisting
of a series of trips to be performed by
different carriers is authorized to receive
the fare for the whole trip and through the
required process of interline settlement of
accounts by way of the IATA clearing house
an airline is duly compensated for the
segment of the trip serviced. Thus, when
the petitioner accepted the unused portion
of the conjunction tickets, entered it in the
IATA clearing house and undertook to
transport the private respondent over the
route covered by the unused portion of the
conjunction tickets, i.e., Geneva to New
York, the petitioner tacitly recognized its
commitment under the IATA pool
Morc’s Notes on Partnership and Agency
arrangement to act as agent of the principal
contracting airline, Singapore Airlines, as to
the segment of the trip the petitioner
agreed to undertake. As such, the petitioner
thereby assumed the obligation to take the
place of the carrier originally designated in
the original conjunction ticket. The
petitioners argument that it is not a
designated carrier in the original
conjunction tickets and that it issued its
own ticket is not decisive of its liability. The
new ticket was simply a replacement for the
unused portion of the conjunction ticket,
both tickets being for the same amount of
US$ 2,760 and having the same points of
departure and destination. By constituting
itself as an agent of the principal carrier the
petitioners undertaking should be taken as
part of a single operation under the
contract of carriage executed by the private
respondent and Singapore Airlines in
Manila.
 PNB v. Bagamaspad, L-3407, June 29, 1951
To us who have always had the impression and the
idea that the business of a Bank is conducted in an
orderly, methodical and businesslike manner, that its
papers, especially those relating to loans with their
corresponding securities, are properly filed, well-
kept and in a safe place, its books kept up-to-date,
and that its funds are not given out in loans without
careful and scrupulous scrutiny of the responsibility
and solvency of the borrowers and the sufficiency of
the security given by them, the conditions obtaining
in the Cotabato Agency due to the apparent
indifference, carelessness or negligence of the
appellants, is indeed shocking. And it is because of
these shortcomings of the appellants their disregard
of the elementary rules and practice of banking and
their violation of instructions of their superiors, that
these anomalies resulting in financial losses to the
Bank were made possible.
The trial court based the civil liability of the
appellants herein on the provisions of Arts. 1718 and
1719 of the Civil Code, defining and enumerating the
Page 134
duties and obligations of an agent and his liability for a. As to agent: One who knows that
failure to comply with such duties, and Art. 259 of another is acting as his agent and
the Code of Commerce which provides that an agent fails to repudiate his acts, or
must observe the provisions of law and regulations accepts the benefits of them will
with respect to business transactions entrusted to be stopped to deny the agency as
him otherwise he shall be responsible for the against such other.
consequences resulting from their breach or b. As to sub-agent: To estop, the
omissions; and also Art. 1902 of the Civil Code which principal from denying his liability
provides for the liability of one for his tortious act, to a third person, he must have
that is to say, any act or omission which causes known or be charged with
damage to another by his fault or negligence. knowledge of the fact of the
Appellants while agreeing with the meaning and transaction and the terms of the
scope of the legal provisions cited, nevertheless agreement between the agent and
insist that those provisions are not applicable to sub-agent.
them inasmuch as they are not guilty of any violation c. As to third persons: One who
of instructions or regulations of the plaintiff Bank; knows that another is acting as his
and that neither are they guilty of negligence of agent or permitted another to
carelessness as found by the trial court. A careful appear as his agent, to the injury of
study and consideration of the record, however, third persons who have dealt with
convinces us and we agree with the trial court that the apparent agent as such in good
the defendants-appellants have not only violated faith and in the exercise of
instructions of the plaintiff Bank, including things reasonable prudence, is stopped to
which said Bank wanted done or not done, all of deny the agency.
which were fully understood by them, but they
(appellants) also violated standing regulations Distinctions:
regarding the granting of loans; and, what is more,
Ratification Estoppel
thru their carelessness, laxity and negligence, they
It rests on intention, It rests on prejudice
allowed loans to be granted to persons who were
express or implied, rather than intention.
not entitled to receive loans.
regardless of prejudice
Article 1911: Agency by estoppel; when principal is to another.
solidarily liable with agent It has retroactive effect It operates upon
and makes the agent’s something which has
Even when the agent has exceeded his unauthorized act good been done but after the
authority, the principal is solidarily liable from the beginning. misleading act and in
with the agent if the former allowed the reliance on it and may
latter to act as though he had full powers. only extend to so much
of such act as can be
What is an agency by estoppel? The principal cannot
shown to be affected by
deny the existence of the agency after third parties,
the conduct.
relying on his conduct, have had dealings with the
The substance of The substance of
supposed agent. This method of creating an agency
ratification is estoppel is the
is known as agency by estoppel or implication.
confirmation of the principal’s inducement
Kinds of estoppel of principal: unauthorized act or to another to act to his
contract after is has prejudice.
been done or made.

Morc’s Notes on Partnership and Agency Page 135


Apparent authority Authority by estoppel
It is that which though It arises in those cases
not actually granted, the where the principal, by
principal knowingly his culpable negligence,
permits the agent to permits his agent to
exercise or holds him out exercise powers not
as possessing. granted to him, even
though the principal may
have no notice or
knowledge of the
conduct of the agent.
It is not founded in Its basis is the negligence
negligence of the of the principal in failing
principal but in the properly to supervise the
conscious permission of affairs of the agent,
acts beyond the powers allowing him to exercise
granted. powers not granted to
him and so justifies
others in believing he
possesses the requisite
authority.
This article also provides for solidary liability. This is
an instance when solidarity is imposed by law. It
would seem however, that this Article is unjust for if
the agent is considered innocent and acting within
the scope of his authority, he should be exempted
from liability (Paras).
Cases:
 Litonjua v. Eternit Corporation, supra.
3. Relying upon such representation, such
third person has changed his position to his
detriment.
An agency by estoppel, which is similar to the
doctrine of apparent authority, requires proof of
reliance upon the representations, and that, in turn,
needs proof that the representations predated the
action taken in reliance.
 The Manila Remnant Co. v. CA, GR 82978,
November 22, 1990
More in point, we find that by the principle of
estoppel, Manila Remnant is deemed to have
allowed its agent to act as though it had plenary
powers. Article 1911 of the Civil Code provides:
“Even when the agent has exceeded his
authority, the principal is solidarily liable
with the agent if the former allowed the
latter to act as though he had full powers.”
The above-quoted article is new. It is intended to
protect the rights of innocent persons. In such a
situation, both the principal and the agent may be
considered as joint feasors whose liability is joint and
solidary.
Authority by estoppel has arisen in the instant case
because by its negligence, the principal, Manila
Remnant, has permitted its agent, A.U. Valencia and
Co., to exercise powers not granted to it. That the
principal might not have had actual knowledge of
the agent’s misdeed is of no moment. Consider the
following circumstances:

For an agency by estoppel to exist, the following
must be established:
1. The principal manifested a representation
of the agent’s authority or knowingly
allowed the agent to assume such
authority;
2. The third person, in good faith, relied upon
such representation;
Firstly, Manila Remnant literally gave carte blanche
to its agent A.U. Valencia and Co. in the sale and
disposition of the subdivision lots. As a disclosed
principal in the contracts to sell in favor of the
Ventanilla couple, there was no doubt that they
were in fact contracting with the principal. Section 7
of the Ventanillas’ contracts to sell states:
“7. That all payments whether
deposits, down payment and monthly
installment agreed to be made by the

Morc’s Notes on Partnership and Agency Page 136

 vendee shall be payable to A.U. Valencia
and Co., Inc. It is hereby expressly
understood that unauthorized payments
made to real estate brokers or agents shall
be the sole and exclusive responsibility and
at the risk of the vendee and any and all
such payments shall not be recognized by
the vendors unless the official receipts
therefor shall have been duly signed by the
vendors’ duly authorized agent, A.U.
Valencia and Co., Inc."
Indeed, once Manila Remnant had been furnished
with the usual copies of the contracts to sell, its only
participation then was to accept the collections and
pay the commissions to the agent. The latter had
complete control of the business arrangement.
Secondly, it is evident from the records that Manila
Remnant was less than prudent in the conduct of its
business as a subdivision owner. For instance,
Manila Remnant failed to take immediate steps to
avert any damage that might be incurred by the lot
buyers as a result of its unilateral abrogation of the
agency contract. The publication of the cancelled
contracts to sell in the Times Journal came three
years after Manila Remnant had revoked its
agreement with A.U. Valencia and Co.
Moreover, Manila Remnant also failed to check the
records of its agent immediately after the revocation
of the agency contract despite the fact that such
revocation was due to reported anomalies in
Valencia’s collections. Altogether, as pointed out by
the counsel for the Ventanillas, Manila Remnant
could and should have devised a system whereby it
could monitor and require a regular accounting from
A.U. Valencia and Co., its agent. Not having done so,
Manila Remnant has made itself liable to those who
have relied on its agent and the representation that
such agent was clothed with sufficient powers to act
on behalf of the principal.
Even assuming that Manila Remnant was as much a
victim as the other innocent lot buyers, it cannot be
gainsaid that it was precisely its negligence and laxity
in the day to day operations of the real estate
Morc’s Notes on Partnership and Agency
business which made it possible for the agent to
deceive unsuspecting vendees like the Ventanillas.
In essence, therefore, the basis for Manila
Remnant’s solidary liability is estoppel which, in
turn, is rooted in the principal’s neglectfulness in
failing to properly supervise and control the affairs
of its agent and to adopt the needed measures to
prevent further misrepresentation. As a
consequence, Manila Remnant is considered
estopped from pleading the truth that it had no
direct hand in the deception employed by its agent.
 Rural Bank of Milaor v. Ocfemia, GR
137686, February 8, 2000
In passing upon the liability of a corporation in cases
of this kind it is always well to keep in mind the
situation as it presents itself to the third party with
whom the contract is made. Naturally he can have
little or no information as to what occurs in
corporate meetings; and he must necessarily rely
upon the external manifestation of corporate
consent. The integrity of commercial transactions
can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in
accordance with law; and we would be sorry to
announce a doctrine which would permit the
property of man in the city of Paris to be whisked
out of his hands and carried into a remote quarter of
the earth without recourse against the corporation
whose name and authority had been used in the
manner disclosed in this case. As already observed, it
is familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to do
acts within the scope of an apparent authority, and
thus holds him out to the public as possessing power
to do those acts, the corporation will, as against any
one who has in good faith dealt with the corporation
through such agent, be estopped from denying his
authority; and where it is said "if the corporation
permits this means the same as "if the thing is
permitted by the directing power of the
corporation."
In this light, the bank is estopped from questioning
the authority of the bank manager to enter into the
Page 137
contract of sale. If a corporation knowingly permits
one of its officers or any other agent to act within
the scope of an apparent authority, it holds the
agent out to the public as possessing the power to
do those acts; thus, the corporation will, as against
anyone who has in good faith dealt with it through
such agent, be estopped from denying the agent's
authority.
Unquestionably, petitioner has authorized Tena to
enter into the Deed of Sale. Accordingly, it has a
clear legal duty to issue the board resolution sought
by respondent's. Having authorized her to sell the
property, it behooves the bank to confirm the Deed
of Sale so that the buyers may enjoy its full use.
Article 1912: Obligation to advance funds
The principal must advance to the agent,
should the latter so request, the sums
necessary for the execution of the agency.
Should the agent have advanced them, the
principal must reimburse him therefor,
even if the business or undertaking was not
successful, provided the agent is free from
all fault.
The reimbursement shall include interest on
the sums advanced, from the day on which
the advance was made.
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.
If the principal fails to do so, the agent will not be
liable for the damage, which through his non-
performance, the principal may suffer.
In case the agent advanced the sums necessary for
the execution of the agency, whether on his own
initiative or by virtue of stipulation, the said
advances must be reimbursed by the principal with
interest from the day the advance was made.
Morc’s Notes on Partnership and Agency
Even if the agency be gratuitous, this Article will also
apply; hence, the agent will still be entitled to
reimbursement and interest. This is so because the
reimbursement and interest spoken of in this Article
do not refer to compensation or commission.
Article 1913: Obligation to indemnify agent for
damages
The principal must also indemnify the agent
for all the damages which the execution of
the agency may have caused the latter,
without fault or negligence on his part.
The liability of the principal for damages is limited
only to that which the execution of the agency has
caused the agent.
Naturally, this Article can be made use of only if the
agency exists, otherwise this Article cannot apply. In
such a case, the supposed agent is not acting on
behalf of a true principal and the reason for the law
would cease.
Article 1914: Right of agent to retain in pledge
object of agency
The agent may retain in pledge the things
which are the object of the agency until the
principal effects the reimbursement and
pays the indemnity set forth in the two
preceding articles.
This Article speaks of one kind of pledge by
operation of law.
Rules from 1912 to 1914:
1. Reimbursement with interest for advances
made by agent
2. Indemnification for damages caused by the
execution of the agency
3. Remedy of agent’s lien should principal fail
in reimbursing or indemnifying the agent
Nature of agent’s right of lien:
Page 138
 1. The right is limited only to the subject
matter of agency. Hence, the lien of the
agent is specific or particular in character.
2. The right requires the possession by agent
of the subject matter. In order to have a
lien, the agent must have some possession,
custody, control, or disposing power in and
over the subject matter in which the lien is
claimed.
3. In the absence of ratification of a sub-
agent’s acts by the principal, the right of
lien exists only in favor of the agent, and
cannot be claimed by one to whom the
agent delegates his authority where no
privity exists between the sub-agent and
the principal.
Article 1915: Solidary liability of two or more
principals
If two or more persons have appointed an
agent for a common transaction or
undertaking, they shall be solidarily liable to
the agent for all the consequences of the
agency.
Solidarity is the rule under this Article because of the
common transaction. Thus, even if the agent have
been appointed separately, the rule should apply in
the interest of justice.
Requisites for solidary liability:
1. There are two or more principals;
2. The principals have all concurred in the
appointment of the same agent; and,
3. The agent is appointed for a common
transaction or undertaking.
This rule is opposite of that in regard to the
responsibility of two or more agents which is
proportionate even though they have been
appointed simultaneously.
Cases:
 Constante Amor de Castro v. CA, GR
115838, July 18, 2002
Morc’s Notes on Partnership and Agency
The rule in Article 1915 applies even when the
appointments were made by the principals in
separate acts, provided that they are for the same
transaction. The solidarity arises from the common
interest of the principals, and not from the act of
constituting agency.
By virtue of this solidarity, the agent can recover
from any principal the whole compensation and
indemnity owing to him by the others. The parties,
however, may, by express agreement, negate this
solidarity responsibility. The solidarity does not
disappear by the mere partition effected by the
principals after the accomplishment of the agency.
If the undertaking is one in which several are
interested, but only some create the agency, only
the latter are solidarily liable, without prejudice to
the effects of negotiorum gestio with respect to the
others. And if the power granted includes various
transactions some of which are common and others
are not, only those interested in each transaction
shall be liable for it.
Article 1916: Rule where two persons contract
separately with agent and principal
When two persons contract with regard to
the same thing, one of them with the agent
and the other with the principal, and the
two contracts are incompatible with each
other, that of prior date shall be preferred,
without prejudice to the provisions of
Article 1544.
Two persons may contract separately with the agent
and the principal with regard to the same thing. If
the two contracts are incompatible with each other,
the one of prior date shall be preferred. This is
subject, however, to the rules under Article 1544.
This is not similar to Article 1924 as this does not
result to the termination of the agency. Moreover,
the sale involves two different buyers, one
approaching the principal and the other approaching
the agent.
Page 139
Article 1544 provides for the rules on double sale. It
is as follows:
What do we mean by ‘oldest title?’ It means one
“If the same thing should have been sold to who first bought the property in good faith.
different vendees, the ownership shall be
transferred to the person who may have Article 1917: Liability of principal if agent acted in
first taken possession thereof in good faith, good faith or in bad faith in relation to Article 1916
if it should be movable property.”
In the case referred to in the preceding
“Should it be immovable property, the article, if the agent has acted in good faith,
ownership shall belong to the person the principal shall be liable in damages to
acquiring it who in good faith first recorded the third person whose contract must be
it in the Registry of Property.” rejected. If the agent acted in bad faith, he
alone shall be responsible.
“Should there be no inscription, the
ownership shall pertain to the person who, Article 1918: When principal is not liable for agent’s
in good faith was first in the possession; expenses
and, in the absence thereof, to the person
The principal is not liable for the expenses
who presents the oldest title, provided
incurred by the agent in the following cases:
there is good faith.”
1. If the agent acted in contravention of
Distinctions:
the principal’s instructions, unless the
Contract to sell Deed of absolute sale latter should wish to avail himself of
the benefits derived from the contract;
A contract to sell is a A deed of absolute sale
2. When the expenses were due to the
bilateral contract manifests a sale when no
fault of the agent;
whereby the prospective condition is imposed and
3. When the agent incurred them with
seller, while expressly ownership passes to the
knowledge that an unfavorable result
reserving the ownership vendee upon delivery of
would ensue, if the principal was not
of the subject property the thing subject of the
aware thereof;
despite delivery thereof sale. There is neither a
4. When it was stipulated that the
to the prospective buyer, stipulation in the deed
expenses would be borne by the agent,
binds himself to sell the that title to the property
or that the latter would be allowed only
said property exclusively sold is reserved in the
a certain sum.
to the prospective buyer seller until the full
upon fulfillment of the payment of the price, MODES OF EXTINGUISHMENT OF AGENCY
condition agreed upon, nor one giving the
that is, full payment of vendor the right to Article 1919: Modes of extinguishing an agency
the purchase price. It is unilaterally resolve the
akin to a conditional sale contract the moment Agency is extinguished:
where the efficacy or the buyer fails to pay
1. By its revocation;
obligatory force to the within a fixed period.
2. By the withdrawal of the agent;
vendor’s obligation to
3. By the death, civil interdiction, insanity
transfer title is
or insolvency of the principal or of the
subordinated to the
agent
happening of a
condition.

Morc’s Notes on Partnership and Agency Page 140

 4. By the dissolution of the firm or
corporation which entrusted or
accepted the agency;
5. By the accomplishment of the object or
purpose of the agency;
6. By the expiration of the period for
which the agency was constituted.
An agency may be terminated:
1. By agreement (accomplishment,
expiration);
2. By the subsequent acts of the parties
(revocation, withdrawal); and,
3. By operation of law (death, civil
interdiction, insanity, insolvency,
dissolution)
Keyword: EDWARD (Expiration; Death, civil
interdiction, insanity, insolvency; Withdrawal;
Accomplishment; Revocation; Dissolution)
The modes enumerated in the article are not
exclusive. Other causes include:
1. Termination by mutual consent;
2. Novation;
3. Loss of subject matter of the agency; and,
4. Outbreak of war if inconsistent with the
agency.
What are exceptions to the effects of such
termination? Articles 1930 and 1931, and Act 3135.
Cases:
 Rallos v. Felix Go Chan & Sons Realty
Corporation, supra.
There are various ways of extinguishing agency, but
here We are concerned only with one cause - death
of the principal Paragraph 3 of Art. 1919 of the Civil
Code which was taken from Art. 1709 of the Spanish
Civil Code provides:
ART. 1919. Agency is extinguished:
xxx xxx xxx
Morc’s Notes on Partnership and Agency
3. By the death, civil interdiction, insanity or
insolvency of the principal or of the agent;
... (Emphasis supplied)
By reason of the very nature of the relationship
between Principal and agent, agency is extinguished
by the death of the principal or the agent. This is the
law in this jurisdiction.
Manresa commenting on Art. 1709 of the Spanish
Civil Code explains that the rationale for the law is
found in the juridical basis of agency which is
representation them being an in. integration of the
personality of the principal integration that of the
agent it is not possible for the representation to
continue to exist once the death of either is
establish. Pothier agrees with Manresa that by
reason of the nature of agency, death is a necessary
cause for its extinction. Laurent says that the
juridical tie between the principal and the agent is
severed ipso jure upon the death of either without
necessity for the heirs of the fact to notify the agent
of the fact of death of the former.
The same rule prevails at common law - the death of
the principal effects instantaneous and absolute
revocation of the authority of the agent unless the
Power be coupled with an interest. This is the
prevalent rule in American Jurisprudence where it is
well-settled that a power without an interest
conferred upon an agent is dissolved by the
principal's death, and any attempted execution of
the power afterward is not binding on the heirs or
representatives of the deceased.
Is the general rule provided for in Article 1919 that
the death of the principal or of the agent
extinguishes the agency, subject to any exception,
and if so, is the instant case within that exception?
That is the determinative point in issue in this
litigation. It is the contention of respondent
corporation which was sustained by respondent
court that notwithstanding the death of the principal
Concepcion Rallos the act of the attorney-in-fact,
Simeon Rallos in selling the former's sham in the
property is valid and enforceable inasmuch as the
Page 141
corporation acted in good faith in buying the
property in question.
Articles 1930 and 1931 of the Civil Code provide the
exceptions to the general rule afore-mentioned.
“ART. 1930. The agency shall remain in full
force and effect even after the death of the
principal, if it has been constituted in the
common interest of the latter and of the
agent, or in the interest of a third person
who has accepted the stipulation in his
favor.”
“ART. 1931. Anything done by the agent,
without knowledge of the death of the
principal or of any other cause which
extinguishes the agency, is valid and shall
be fully effective with respect to third
persons who may have contracted with him
in good faith.”
Article 1930 is not involved because admittedly the
special power of attorney executed in favor of
Simeon Rallos was not coupled with an interest.
Article 1931 is the applicable law. Under this
provision, an act done by the agent after the death
of his principal is valid and effective only under two
conditions, viz: (1) that the agent acted without
knowledge of the death of the principal and (2) that
the third person who contracted with the agent
himself acted in good faith. Good faith here means
that the third person was not aware of the death of
the principal at the time he contracted with said
agent. These two requisites must concur the
absence of one will render the act of the agent
invalid and unenforceable.
In the instant case, it cannot be questioned that the
agent, Simeon Rallos, knew of the death of his
principal at the time he sold the latter's share in Lot
No. 5983 to respondent corporation. The knowledge
of the death is clearly to be inferred from the
pleadings filed by Simon Rallos before the trial court.
That Simeon Rallos knew of the death of his sister
Concepcion is also a finding of fact of the court a quo
and of respondent appellate court when the latter
Morc’s Notes on Partnership and Agency
stated that Simon Rallos 'must have known of the
death of his sister, and yet he proceeded with the
sale of the lot in the name of both his sisters
Concepcion and Gerundia Rallos without informing
appellant (the realty corporation) of the death of the
former.
On the basis of the established knowledge of Simon
Rallos concerning the death of his principal
Concepcion Rallos, Article 1931 of the Civil Code is
inapplicable. The law expressly requires for its
application lack of knowledge on the part of the
agent of the death of his principal; it is not enough
that the third person acted in good faith.
Thus in Buason & Reyes v. Panuyas, the Court
applying Article 1738 of the old Civil rode now Art.
1931 of the new Civil Code sustained the validity , of
a sale made after the death of the principal because
it was not shown that the agent knew of his
principal's demise. To the same effect is the case of
Herrera, et al., v. Luy Kim Guan, et al., 1961, where
in the words of Justice Jesus Barrera the Court
stated:
“... even granting arguemendo that Luis
Herrera did die in 1936, plaintiffs presented
no proof and there is no indication in the
record, that the agent Luy Kim Guan was
aware of the death of his principal at the
time he sold the property. The death 6f the
principal does not render the act of an
agent unenforceable, where the latter had
no knowledge of such extinguishment of
the agency.”
Article 1920: Revocation by principal or agent
The principal may revoke the agency at will,
and compel the agent to return the
document evidencing the agency. Such
revocation may be express or implied.
Agency is generally revocable at the will of the
principal because the trust and confidence may have
been lost. It is proper even if the agency is onerous,
or even if the period fixed has not yet expired. It is
Page 142
subject only to the exceptions provided in Article
1927 (Agency coupled with an interest).
Distinction:
Revocation Renunciation
Terminated by the Terminated by the
subsequent acts of the subsequent acts of the
principal. agent.
The agency cannot be revoked at will in the
following instances:
1. When it is coupled with an interest, interest
possessed by the agent not in the proceeds
arising from the exercise of the power but
interest in the subject matter of the power;
2. In cases mentioned under Article 1927:
a. When a bilateral contract depends
on the agency;
b. When the agency is the means of
fulfilling an obligation already
contracted;
c. In the case of a partner appointed
manager in the contract of
partnership and his removal from
the management is unjustifiable;
3. When there has been a waiver by the
principal;
4. When the principal is obliged not to revoke
as innocent third parties should not be
prejudiced;
5. When the revocation is done in bad faith.
Under the general rule, when the revocation is
proper, the agent cannot get damages because the
principal is merely exercising a right.
If the authority of the agent is in writing, the
principal can compel the agent to return the
document evidencing the agency. It is proper in
order to prevent the agent from making use of the
power of attorney and thus avoid liability to third
persons who may subsequently deal with the agent
on the faith of the instrument.
Kinds of revocation:
Morc’s Notes on Partnership and Agency
1. Express
2. Implied
a. Appointment of a new agent for
the same business or transaction,
provided there is incompatibility;
b. If the principal directly manages
the business entrusted to the
agent, dealing directly with third
persons, in a way incompatible
with the agency.
Notice of revocation:
1. To agent. As between the principal and the
agent, express notice to the agent that the
agency is revoked is not always necessary.
If the party to be notified actually knows, or
has reason to know, facts indicating that
this authority has been terminated or is
suspended, there is sufficient notice. A
revocation without notice to the agent will
not render invalid an act done in pursuance
of the authority.
2. To third persons. It has been held that
actual notice must be brought home to
former customers, while notice by
publications is sufficient as to other
persons.
Renunciation of the agency by the agent: The agent
has the power to renounce the agency relationship,
subject only to the contractual obligations owing to
the principal. Thus, if there is no contract existing
between the parties or if the contract is for no fixed
or definite period of time, it is terminable by the
agent at will. An agent cannot legally terminate an
agency in order to take advantage of the principal’s
condition or to profit by information resulting from
his agency.
Article 1921: Agency for contracting with specified
persons
If the agency has been entrusted for the
purpose of contracting with specified
persons, its revocation shall not prejudice
Page 143
 the latter if they were not given notice
thereof.
Article 1922: Agency when third parties are not
specified
If the agent had general powers, revocation
of the agency does not prejudice third
persons who acted in good faith and
without knowledge of the revocation.
Notice of the revocation in a newspaper of
general circulation is a sufficient warning to
third persons.
Distinctions:
Article 1921 Article 1922
Third persons have been Third persons have not
specified. been specified.
Revocation must be Revocation may be
personal. personal.
If the agency is created for the purpose of
contracting with specific persons, its revocation will
not prejudice such third person until notice thereof
is given them. In case the agent has general powers,
innocent third parties dealing with the agent will not
be prejudiced by the revocation before they had
knowledge thereof. In this case, the fact the
revocation was advertised in a newspaper of general
circulation would be sufficient warning to third
persons.
Article 1923: Effect of appointment of new agent
The appointment of a new agent for the
same business or transaction revokes the
previous agency from the day on which
notice thereof was given to the former
agent, without prejudice to the provisions
of the two preceding articles.
Appointment of a new agent revokes the first agency
only in case of incompatibility. This is an implied
revocation of the previous agency. It does not
become effective however as between the principal
Morc’s Notes on Partnership and Agency
and the agent until it is in some way communicated
to the latter.
Essential requisites of a valid substitution of counsel
of record:
1. There must be a written request for
substitution;
2. It must be filed with the written consent of
the client;
3. It must be with the written consent of the
attorney to be substituted; and,
4. In case the consent of the attorney to be
substituted cannot be obtained, there must
be at least a proof of notice, that the
motion for substitution was served on him
in the manner prescribed by the Rules of
Court.
Article 1924: Effect if the principal directly manages
the business
The agency is revoked if the principal
directly manages the business entrusted to
the agent, dealing directly with third
persons.
The rule applies only in case of incompatibility,
because it may be that the only desire of the
principal is for him and the agent to manage the
business together. In case of true inconsistency, the
agency is revoked, for there would no longer be any
basis therefor.
Article 1924 should be distinguished from Article
1916 which governs the relations as between
themselves of third persons who separately contract
with the agent and the principal with regard to the
same thing.
Cases:
 CMS Logging, Inc. v. D.R. Aguinaldo
Corporation, L-41420, July 10, 1992
The principal may revoke a contract of agency at will
and such revocation may be express or implied, and
may be availed of even if the period fixed in the
Page 144
contract of agency has not yet expired. As the
principal has this absolute right to revoke the
agency, the agent cannot object thereto; neither
may he claim damages arising from such revocation,
unless it is shown that such was done in order to
evade the payment of agent’s commission.
In the case at bar, CMS appointed DRACOR as its
agent for the sale of its logs to Japanese firms. Yet
during the existence of the contract of agency,
DRACOR admitted that CMS sold its logs directly to
several Japanese firms. This act constituted an
implied revocation of the contract of agency under
Article 1924. And since the contract of agency was
revoked by CMS when it sold its logs to Japanese
firms without the intervention of DRACOR, the latter
is no longer entitled to its commission from the
proceeds of such sale and is not entitled to retain
whatever money it may have received as its
commission for said transactions. Neither would
DRACOR be entitled to collect damages from CMS,
since damages are generally not awarded to the
agent for the revocation of the agency, and the case
at bar is not one falling under the exception
mentioned, which is to evade the payment of the
agent’s commission.
Be it noted that the act of a contractor who, after
executing the powers of attorney in favor of another
empowering the latter to collect whatever amounts
may be due to him from the government, and
thereafter, demanded and collected from the
government the money the collection of which he
entrusted to his attorney-in-fact, constituted
revocation of the agency in favor of the attorney-in-
fact.
 Mendoza v. Paule, supra.
There was no valid reason for Paule to revoke
Mendoza’s SPAs. Since Mendoza took care of the
funding and sourcing of labor, materials and
equipment for the project, it is only logical that she
controls the finances, which means that the SPAs
issued to her were necessary for the proper
performance of her role in the partnership, and to
discharge the obligations she had already contracted
Morc’s Notes on Partnership and Agency
prior to revocation. Without the SPAs, she could not
collect from NIA, because as far as it is concerned,
EMPCT and not the Paule-Mendoza partnership is
the entity it had contracted with. Without these
payments from NIA, there would be no source of
funds to complete the project and to pay off
obligations incurred. As Mendoza correctly argues,
an agency cannot be revoked if a bilateral contract
depends upon it, or if it is the means of fulfilling an
obligation already contracted, or if a partner is
appointed manager of a partnership in the contract
of partnership and his removal from the
management is unjustifiable.
Paule’s revocation of the SPAs was done in evident
bad faith. Admitting all throughout that his only
entitlement in the partnership with Mendoza is his
3% royalty for the use of his contractor’s license, he
knew that the rest of the amounts collected from
NIA was owing to Mendoza and suppliers of
materials and services, as well as the laborers. Yet,
he deliberately revoked Mendoza’s authority such
that the latter could no longer collect from NIA the
amounts necessary to proceed with the project and
settle outstanding obligations.
From the way he conducted himself, Paule
committed a willful and deliberate breach of his
contractual duty to his partner and those with whom
the partnership had contracted. Thus, Paule should
be made liable for moral damages.
Article 1925: Revocation by one of two or more
principals
When two or more principals have granted
a power of attorney for a common
transaction, any one of them may revoke
the same without the consent of the others.
In solidary obligation, the act of one is considered by
the law as an act of all.
The appointment of an agent by two or more
principals for a common transaction or undertaking
makes them solidarily liable to the agent for all the
consequences of the agency.
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Article 1926: Partial revocation of general power
A general power of attorney is revoked by a
special one granted to another agent, as
regards the special matter involved in the
latter.
In this article, two agents are involved: one to whom
a general power is previously granted and the other,
to whom a special power is subsequently conferred.
A specific power prevails over a general power.
Article 1927: When an agency cannot be revoked;
agency coupled with an interest
An agency cannot be revoked if a bilateral
contract depends upon it, or if it is the
means of fulfilling an obligation already
contracted, or if a partner is appointed
manager of a partnership in the contract of
partnership and his removal from the
management is unjustifiable.
This enumerates three instances of irrevocability:
1. If a bilateral contract depends upon the
agency;
2. If the agency is the means of fulfilling an
obligation already contracted;
3. If a partner is appointed manager of a
partnership in the contract of partnership
and his removal from the management is
unjustifiable.
According to De Leon, the rule that the principal may
revoke an agency at will is subject to two exceptions:
1. When the agency is created not only for the
interest of the principal but also for the
interest of third persons; and,
2. When the agency is created for the mutual
interest of both principal and agent.
An agency coupled with an interest cannot be
terminated by the sole will of the principal although
it is so revocable after the interest ceases. Hence, if
the government allows the De la Rama Steamship
Co. to manage the former’s vessel for 2 years in
Morc’s Notes on Partnership and Agency
order to pay the company for its help in acquiring
the vessels, at the end of said 2 years, the
government may end the agency.
In order that an agency may be irrevocable because
it is coupled with an interest, it is essential that the
interest of the agent shall be in the subject matter of
the power conferred and not merely an interest in
the exercise of the power because it entitles him to
compensation therefor. Thus, an agency is coupled
with an interest:
1. Where the agent has parted with value or
incurred liability at the principal’s request,
looking to the exercise of the power as the
means of reimbursement or indemnity; or,
2. Where the interest in the thing concerning
which the power is to be exercised arises
from an assignment, pledge or lien created
by the principal with the agent being given
the power to deal with the thing in order to
make the assignment, pledge or lien
effectual.
As to what constitutes a sufficient interest to take
the holder out of agency relation, it is sometimes
said it must be present interest in the subject matter
itself and that an interest in the proceeds of the
power’s exercise as compensation is insufficient.
Article 1928: Withdrawal by agent
The agent may withdraw from the agency
by giving due notice to the principal. If the
latter should suffer any damage by reason
of the withdrawal, the agent must
indemnify him therefor, unless the agent
should base his withdrawal upon the
impossibility of continuing the performance
of the agency without grave detriment to
himself.
It is based on the constitutional prohibition against
involuntary servitude.
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
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the latter suffer damage by reason of such
withdrawal. The reason for the indemnity imposed
by law is that the agent fails in his obligation and as
such, he must answer for losses and damages
occasioned by the non-fulfillment.
If the agent withdraws from the agency for a valid
cause as when the withdrawal is based on the
impossibility of continuing with the agency without
grave detriment to himself, or is due to a fortuitous
event, the agent cannot be held liable.
When an agent files a complaint against the principal
for a monetary claim in the former’s favor, dignity
and decorum will not ordinarily permit the
continuation of the agency. Such a complaint is
therefore equivalent to withdrawal of the agent
from the agency.
Article 1929: Obligation of agent to continue to act
after withdrawal
The agent, even if he should withdraw from
the agency for a valid reason, must
continue to act until the principal has had
reasonable opportunity to take the
necessary steps to meet the situation.
The law reconciles the interests of the agent with
those of the principal, and if it permits the
withdrawal of the agent, it is on the condition that
no damage results to the principal, and if the agent
desires to be relieved of the obligation of making
reparation when he withdraws for a just cause, he
must continue to act so that no injury may be caused
to the principal.
Article 1930: When agency continues even after the
death of the principal
The agency shall remain in full force and
effect even after the death of the principal,
if it has been constituted in the common
interest of the latter and of the agent, or in
the interest of a third person who has
accepted the stipulation in his favor.
Morc’s Notes on Partnership and Agency
As a general rule, agency is terminated by the death
of the principal. In the following cases, the agency
remains in full force and effect even after the death
of the principal:
1. If the agency has been constituted in the
common interest of the principal and the
agent; and,
2. If it has been constituted in the interest of a
third person who has accepted the
stipulation in his favor.
It is a well-settled general rule that if the authority of
an agent is coupled with an interest, it is not
revocable by the death, act, or condition of the
principal, unless there is some agreement to the
contrary between the parties. This is a well-
recognized exception to the rule that the death of
the principal revokes the authority of an agent
appointed by him. However, it must be noted that
an agent whose agency is coupled with an interest
cannot stand on a better ground than a partner
appointed as manager in the articles of partnership
insofar as revocability of authority or power is
concerned. Inasmuch as a partner appointed as
manager in the articles of partnership can be
divested of his power if there is a just or lawful
cause, it follows that an agent whose agency is
coupled with an interest can also be stripped of is
power of attorney, if there is just cause.
Cases:
 del Rosario v. Abad, 104 Phil 648
The sale is not valid because the principal had
already died when it was made. The agency was
certainly not one coupled with an interest. The
mere mention of the interest in the power of
attorney is not enough. The power of attorney
should have stated what precisely the interest
consisted of. The mere fact that the improvements
on the land had been mortgaged in favor of Abad,
which fact, incidentally, was not even mentioned in
the power of attorney, is immaterial. The mortgage
of the improvement had nothing to do with the
power of attorney. The proper remedy of Abad is to
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foreclose the mortgage, and not to avail himself of
the power of attorney. As the agency was not
coupled with an interest, it ended on Tiburcio’s
death, and the subsequent sale of the land cannot
be considered valid.
The article does not impose a duty on the heirs of
the principal to notify the agent of the death of the
principal.

Article 1931: Nature of agent’s authority after the

death of the principal

Anything done by the agent, without

knowledge of the death of the principal or
of any other cause which extinguishes the
agency, is valid and shall be fully effective
with respect to third persons who may have
contracted with him in good faith.

The death of the principal extinguishes the agency

but in the same way that revocation of the agency
does not prejudice third persons who have dealt
with the agent in good faith without notice of the
revocation, such third persons are protected where
the agent acted without knowledge of the death of
the principal or of any other cause which
extinguishes the agency.

What is the rule in case business was already begun?

Under the second paragraph of Article 1884, the
agent must also finish the business already begun on
the death of the principal should delay entail any
danger.

Article 1932: Death of the agent

If the agent dies, his heirs must notify the

principal thereof, and in the meantime
adopt such measures as the circumstances
may demand in the interest of the latter.

If the heirs of the dead agent are unable to give

notice, one good measure for them to do is to
consign the object or property of the agency in
court. In this way, they can still protect the interests
of the principal, who trusted their predecessor in
interest. The heir’s duty arises from what may be
termed as a presumed agency or tacit agency or an
agency by operation of law.

Morc’s Notes on Partnership and Agency Page 148