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AGENCY & TRUSTS, PARTNERSHIPS DEAN CESAR L. VILLANUEVA


& JOINT VENTURES1 ATTY. JOSE U. COCHINGYAN III
FIRST SEMESTER, SY 2016-17 ATTY. TERESA V. TIANSAY

A. LAW ON AGENCY
I. NATURE AND OBJECT OF AGENCY
1. Definition of Agency; Parties in an Agency Relationship (Art. 1868)
Under Article 1868, a contract of agency is one whereby a person binds himself to render some service or to
do something in representation or on behalf of another, with the consent or authority of the latter.
Spanish term for principal is mandante; and among the terms used for agent are mandatario, factor,
broker, attorney-in-fact, proxy, delegate or representative.

2. Root and Objectives of Agency (Arts. 1317 and 1403[1])


General rule is that what a man may do in person he may do through another. A stockholders right of
inspection can be exercised either by himself or by an attorney-in-fact, with or without the stockholders
attendance. xPhilpotts v. Phil. Mfg. Co., 40 Phil 471 (1919).
Underlying principle of the contract of agency is to accomplish results by using the services of othersto do
a great variety of things. Its aim 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. xWestmont Investment Corp. v. Francis, Jr., 661 SCRA
787 (2011).

3. Elements of the Contract of Agency


Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978):
(a) Consent, express or implied, of the parties to establish the relationship;
(b) Object, which is the Execution of Juridical Acts in Relation to Third Parties;
(c) Agent acts as a representative and not for himself; and
(d) Agent acts within the scope of his authority.2

a. CONSENT (Arts. 1317 and 1403[1])


The basis for agency is representation; there must be an actual intention on principals part to appoint, or an
intention naturally inferable from his words or actions; on agents part, there must also be an intention to accept
the appointment and act on it; in the absence of such intent, there is no agency. xDominion Insurance Corp. v.
CA, 376 SCRA 239 (2002).3
In agency, principals personality is extended through the facility of the agent, who by legal fiction becomes
the principal, authorized to perform all acts which latter would have him do. Such a relationship can only be
effected with principals consent, which must not, in any way, be compelled by law or by any court. xLitonjua, Jr.
v. Eternit Corp., 490 SCRA 204 (2006).

b. SUBJECT MATTER: Service Execution of Juridical Acts in Behalf of Principal and Within the
Scope of Authority
It is clear from Art. 1868 that the basis of agency is representation. One factor which most clearly distinguishes
agency from other legal concepts is control: the agent agrees to act under the control or direction of the principal;
indeed, the very word agency has come to connote control by the principal. xVictorias Milling Co. v. CA, 333
SCRA 663 (2000).4
No contract of agency exists where a common carrier leases the trucks of another carrier, for there is no power
of representation by one with respect to the other and neither was there any authority to represent the other by
the terms of the arrangements. xLoadmasters Customs Services v. Glodel Brokerage Corp., 639 SCRA 69
(2011).
c. CONSIDERATION: Agency Presumed to Be for Compensation,
Unless There Is Proof to the Contrary (Art. 1875)
Old Civil Code: Service rendered by the agent was deemed to be gratuitous; if it were true that agent and
principal had an understanding that the agent was to receive compensation aside from the use and occupation
of the houses of the deceased, it cannot be explained how the agent could have rendered services for eight years
without receiving and claiming any compensation from the deceased. xAgua v. Larena, 57 Phil 630 (1932).

1
Unless otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines.
2Reiterated in Yu Eng Cho v. Pan American World Airways, 328 SCRA 717 (2000); Manila Memorial Park v. Linsangan, 443 SCRA 377 (2004); Eurotech Industrial

Technologies v. Cuizon, 521 SCRA 584 (2007); Loadmasters Customs Services v. Glodel Brokerage Corp., 639 SCRA 69 (2011); Urban Bank v. Pena, 659 418
(2011); Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011); Villoria v. Continental Airlines, 663 SCRA 57 (2012); Jusayan v. Sombilla, 746 SCRA 437
(2015).
3Urban Bank v. Pea, 659 SCRA 418 (2011).
4Amon Trading Corp. v. CA, 477 SCRA 552 (2005).
Prescinding from the obligatory force of agency, the fact that other agents intervened in the consummation
of the sale and were paid their respective commissions could not vary the terms of the agency with the plaintiff-
agent who remains entitled to a 5% commission based on the selling price. xDe Castro v. Court of Appeals, 384
SCRA 607 (2002).

4. ESSENTIAL CHARACTERISTICS OF AGENCY


a. Nominate and Principal
Acts done by one person in behalf of another who authorized such acts is the essential nature one of agency
it will be an agency whether or not parties understood the exact nature of the relation. Also, the fact that two
agents enter into a contract of behalf of their principals, even if principals do not actually and personally know
each other, does not affect their juridical standing as agents, since the very purpose of agency is to extend
principals personality of through the facility of the agent. xDoles v. Angeles, 492 SCRA 607 (2006).
Even when the Agreement provides that the manager shall be considered an independent contractor and not
an agent, nonetheless since the manager is expressly authorized to solicit and remit offers to purchase interments
spaces, it covers an agency arrangement. xManila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377
(2004).
b. Unilateral5 and Primarily Onerous (Art. 1875)
Agency is presumed to be for compensation; when agent performs services for principal at latters request,
principals intent to compensate the agent will be inferred from the principal's request for the agents service.
xUrban Bank v. Pea, 659 SCRA 418 (2011).
c. Consensual (Arts. 1869 and 1870)
In Agency, principals personality is extended through the facility of the agentwho, 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.
Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991).6
An agency may be expressed or implied from the principals act, from his silence or lack of action, or failure to
repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
d. Personal, Representative and Derivative (Art. 1868)
Agency is basically personal, representative, and derivative in nature. The authority of the agent 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 per se. He who acts through another acts himself. Consequently, agency is
extinguished by the death of the principal or agent. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA
251 (1978).
Basis for agency is representation, and therefore every person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. xSafic Alcan & Cie. v. Imperial Vegetable Oil Co., Inc.,
355 SCRA 559 (2001). CONSEQUENTLY:
Where there is no showing that Brigida consented to or authorized the acts of Deganos, any attempt to
foist liability on her through the supposed agency relation with Deganos is groundless. It was grossly
negligent of petitioners to entrust to Deganos, not once or twice but on at least six occasions as evidenced
by receipts, several pieces of jewelry of substantial value without requiring a written authorization from his
alleged principal. Bordador v. Luz, 283 SCRA 374 (1997).
A co-owner does not become an agent of other co-owners, and any exercise of an option to buy a piece of
land transacted with one co-owner does not bind other co-owners. The most prudent thing for buyer should
have done was to ascertain the extent of said co-owners authority; being negligent, buyer cannot seek
relief on the basis of a supposed agency. xDizon v. Court of Appeals, 302 SCRA 288 (1999).
Art. 1897 reinforces the doctrine that an agent is not personally liable to the party with whom he contracts;
it is the principal who is liable on the contracts of the agent. xEurotech Industrial Technologies, Inc. v.
Cuizon, 521 SCRA 584 (2007).7
When an agent purchases the property in bad faith, the principal is deemed a purchaser in bad faith.
xCaram, Jr. v. Laureta, 103 SCRA 7 (1981).
Under principle that knowledge of agent is knowledge by principal, spouses cannot contend lack of
knowledge of the rules upon which they received their tickets from the airline company since their travel
agent, who handled their travel arrangements, was duly informed by the airline representatives. xAir France
v. CA, 126 SCRA 448 (1983).

5A unilateral contract has been defined as A contract in which one party makes a promise or undertakes a performance. Thus, it was observed that [M]any

unilateral contacts are in reality gratuitous promises enforced for good reason with no element of bargain. [BLACKS LAW DICTIONARY 326 (1990)] It is perhaps in this
sense that agency is unilateral because it is the agent who undertakes the performance of the agency. However, one must not forget that agency is still a contract
with a bilateral character. Manresa explains: As regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion, from the
point of view of the Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily supposes, there will be obligations
exclusively for the agent and rights exclusively for the principal. It is clear that at times it happens this way, but what is common in agency with other contracts is
the mutuality and the reciprocity that arises from the existence of an obligation against another obligation, a right against another right. 11 MANRESA. COMENTARIOS
AL CODIGO CIVIL ESPAOL 443 (1950)
6Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Villoria v. Continental Airlines, 663 SCRA 57 (2012).
7Tan v. Engineering Services, 498 SCRA 93 (2006); Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

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e. Fiduciary and Revocable
The relations of an agent to his principal are fiduciary and in regard to the property forming the subject matter
thereof, he is estopped from acquiring or asserting a title adverse to that of the principal. xSeverino v. Severino,
44 Phil. 343 (1923).
Agency is generally revocable as it is a personal contract of representation based on trust and confidence
reposed by the principal on his agent. As the power of the agent to act depends on the will and license of the
principal he represents, the power of the agent ceases when the will or permission is withdrawn by the principal.
Thus, generally, the agency may be revoked by the principal at will. xRepublic v. Evangelista, 466 SCRA 544
(2005).

f. Agency Is a Preparatory Contract

5. DISTINGUISHED FROM OTHER SIMILAR CONTRACTS:


a. FROM BROKERAGE
Difference in the Nature of the Service Covered: Real estate broker is one who negotiates the sale of real
properties. His business is only to find a purchaser who is willing to buy the land upon terms fixed by the owner.
He has no authority to bind the principal by signing a contract of sale. Indeed, an authority to find a purchaser of
real property does not include an authority to sell. xLitonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).8
On the Duties and Obligations Assumed: The duties and liability of a broker to his employer are essentially
those which an agent owes to his principal. Consequently, the decisive legal provisions on determining whether
a broker is mandated to give to the employer the propina or gift received from the buyer would be Articles 1891
and 1909 of the Civil Code. (NOTE: Yet the facts did indicate clearly that the real estate broker was appointed
as an exclusive agent.) Domingo v. Domingo, 42 SCRA 131 (1971).
Since brokerage relationship is necessarily a contract for the employment of an agent, principles of contract
law also govern the broker-principal relationship [?]. xAbacus Securities Corp. v. Ampil, 483 SCRA 315 (2006).
Entitlement to the Commission Agreed Upon: Agent receives a commission upon successful conclusion of a
sale; whereas, broker earns his pay merely by bringing the buyer and the seller together, even if no sale is
eventually made. [?] xHahn v. Court of Appeals, 266 SCRA 537 (1997); Tan v. Gullas, 393 SCRA 334 (2002).
A real estate brokers business is only to find a bona fide purchaser. The settled rule is that, in the absence of
an express stipulation on the matter, the broker becomes entitled to the usual commissions only when he brings
to his principal a party who is able and willing to take the property and enter into a valid contract upon the terms
then named by the principal, although the particulars may be arranged and the matter negotiated and completed
between the principal and the purchaser directly. Macondray & Co. v. Sellner, 33 Phil. 370 (1916).
Thus, when the terms of the brokerage arrangement is to the effect that entitlement to the commission was
contingent on the purchase by a customer of a fire truck, the implicit condition being that the broker would earn
the commission if he was instrumental in bringing the sale about. Since the agent had nothing to do with the sale
of the fire truck, he is not entitled to any commission at all. Guardex v. NLRC, 191 SCRA 487 (1990).
Doctrine of Efficient Procuring Cause In agencies to sell where the entitlement of the commission is
subject to the successful consummation of the sale with the buyer located by the agent, said agent would still be
entitled to the commission on sales consummated after the expiration of his agency when the facts show that the
agent was the efficient procuring cause in bringing about the sale. Pratts v. Court of Appeals, 81 SCRA 360
(1978).
Although sale of object of agency was perfected three days after expiration of the agency, agent would still be
entitled to receive commission stipulated based on doctrine in Pratts v. Court of Appeals, 81 SCRA 360 (1978),
that when agent was the efficient procuring cause in bringing about the sale he was entitled to compensation.
Manotok Bros. Inc. v. Court of Appeals, 221 SCRA 224 (1993).
Although buyer was introduced by broker to seller, nonetheless broker was not entitled to commission even
with the consummation of the sale because the lapse of the period of more than one (1) year and five (5) months
between the expiration of brokers authority to sell and the consummation of the sale to the buyer, is significant
index of the brokers non-participation in the really critical events leading to the consummation of said sale. Broker
was not the efficient procuring cause in bringing about the sale and therefore not entitled to the stipulated brokers
commission. Inland Realty v. Court of Appeals, 273 SCRA 70 (1997).
Procuring cause, in describing a brokers activity, refers to a cause originating a series of events which,
without break in their continuity, result in the accomplishment of the prime objective of the employment of the
brokerproducing a purchaser ready, willing and able to buy on the owners terms. To be regarded as the
procuring cause of a sale as to be entitled to a commission, a brokers efforts must have been the foundation
on which the negotiations resulting in a sale began. Medrano v. Court of Appeals, 452 SCRA 77 (2005).9

b. From Employment Contract

8Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
9Reiterated in Phil. Healthcare Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008).
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The relationship between corporation which owns and operates a theatre, and security guard it hires to
maintain the peace and order at the entrance of the theatre is not that of principal and agent, because the principle
of representation was in no way involved. xDela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954).10
The concept of a single person having the dual role of agent and employee while doing the same task is a
novel one in our jurisprudence, which must be viewed with caution especially when it is devoid of any
jurisprudential support or precedent. Read without any clear understanding of fine legal distinctions, appears
to speak of control by insurance company over its agents. They are, however, controls aimed only at specific
results in undertaking an insurance agency, and are, in fact, parameters set by law in defining an insurance
agency and the attendant duties and responsibilities an insurance agent must observe and undertake. They do
not reach the level of control into the means and manner of doing an assigned task that invariably characterizes
an employment relationship as defined by labor law. xTongko v. Manufacturers Life Insurance Co. (Phils.), 640
SCRA 395 (2011).

c. From Contract for a Piece-of-Work


That operator owed his position to the company which could remove or terminate him at will; that the service
station belonged to the company and bore its tradename and operator sold only the products of the company;
that equipment used by operator belonged to the company and were just loaned to operator and company took
charge of their repair and maintenance; that an employee of the company supervised operator and conducted
periodic inspection of the companys gasoline and service station; that the price of the products sold by the
operator was fixed by the company and not by the operator; the finding of the Court of Appeals that the operator
was an agent of the company and not an independent contractor should not be disturbed. xShell v. Firemens
Ins. Co., 100 Phil 757 (1957).

d. Agency to Sell Differentiated from a Contract of Sale


When agency agreement compels agent to pay for the products received from principal within the stipulated
period, even when there has been no sale thereof to the public, the relationship is not one of agency to sell, but
one of actual sale. A true agent does not assume personal responsibility for the payment of the price of the object
of the agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he receives them
from the buyer. Consequently, since the underlying agreement is not an agency agreement, it cannot be revoked
at the will of the principal. xQuiroga v. Parsons, 38 Phil 502 (1918).
When under the agreement the agent becomes responsible for any changes in the acquisition cost of the
object he has been authorized to purchase from a supplier in the United States, the underlying agreement is not
a contract of agency to buy, since a true agent does not bear any risk relating to the subject matter or the price.
Being a contract of sale and not agency, any profits realized by the purported agent from discounts received from
the American supplier pertained to it with no obligation to account for it, much less to turn it over, to the purported
principal. xGonzalo Puyat v. Arco, 72 Phil. 402 (1941).
Primordial difference between a sale and an agency to sell is the transfer of ownership or title over the subject
property. In an agency, the principal retains ownership and control over the property and the agent merely acts
on the principal's behalf and under his instructions in furtherance of the objectives for which the agency was
established. On the other hand, the contract is clearly a sale if the parties intended that the delivery of the property
will effect a relinquishment of title, control and ownership in such a way that the recipient may do with the property
as he pleases. xSpouses Viloria v. Continental Airlines, 663 SCRA 57 (2012).
e. From Agricultural Tenancy
There is no agency relationship existing in a tenancy arrangement over agricultural land: the tenant farmer, who
has possession of the land, and has sole discretion in all matters of agricultural production, acts for his sole benefit and
not under the control of the landowner, whose only right under the set-up is to demand annually the delivery of the
agreed number of cavanes of palay, without any concern about how the cultivation could be improved in order to yield
more produce. xJusayan v.Sombilla, 746 SCRA 437 (2015).

II. FORMS AND KINDS OF AGENCY


1. How Agency May Be Constituted (Art. 1869)
There are legal provisions which require certain contractual formalities: First, when form is required for the
validity of the contract; second, when it is required to make the contract effective as against third parties; third,
when the form is required for the purpose of proving the contracts existence. 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 in may be entered into. Consequently, when the agent signs her signature on any face of the receipt showing
that she receives the jewelry for her to sell on commission, she is bound to the obligations of an agent. Lim v.
Court of Appeals, 254 SCRA 170 (1996).
A contract of agency may be inferred from all the dealings between Oliver and Castro. Agency can 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. 36 The question of whether an agency has
been created is ordinarily a question which may be established in the same way as any other fact, either by direct

10Mamaril v. Boy Scouts of the Philippines, 688 SCRA 437 (2013).


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or circumstantial evidence. The question is ultimately one of intention. Oliver v. Philippine Savings Bank,
G.R. No. 214567, 04 April 4, 2016.
a. From Side of the Principal (Art. 1869)
Where buyers failed for several years to clear their title to property purchased and allowed seller-a-retro to
remain in possession in spite of expiration of redemption period, execution of memorandum of repurchase by
buyers son-in-law, which stood for years unrepudiated, constituted an implied agency under Art. 1869, from their
silence or lack of action, or their failure to repudiate the agency. xConde v. Court of Appeals, 119 SCRA 245
(1982).
Where the principal has acquiesced in the act of his agent for a long period of time, and has received and
appropriated to his own use the benefits result in from the acts of his agent, courts cannot declare the acts of the
agent null and void. Linan v. Puno, 31 Phil. 259 (1915).
b. From Side of the Agent (Arts. 1870, 1871 and 1872)
Whether or not an agency has been created is determined by the fact that one is representing and acting for
another. The law makes no presumption of agency; proving its existence, nature and extent is incumbent upon
the person alleging it. xUrban Bank v. Pea, 659 SCRA 418 (2011).
Whether or not an agency has been created is determined by the fact that one is representing and acting for
another. xJusayan v. Sombilla, 746 SCRA 437 (2015).
c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)
(i) Agency Is Not Presumed to Exist
One who alleges the existence of an agency must prove such fact for the law does not make presumption of
agency and proving its existence, nature and extent is incumbent upon the person alleging it. xYun Kwan Byung
v. PAGCOR, 608 SCRA 107 (2009).11
Persons dealing with an agent must ascertain not only the fact of agency, but also the nature and extent of
the agents authority. 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. The basis for agency is
representation and a person dealing with an agent is put upon inquiry and must discover on his own peril
the authority of the agent. According to Article 1990 of the New Civil Code, insofar as third persons are
concerned, an act is deemed to have been performed within the scope of the agents authority, if such as is within
the terms of the power of attorney, as written. Salvador v. Rabaja, 749 SCRA 654 (2015).12
The law does not presume agency; hence, proving its existence, nature and extent is incumbent upon the
person alleging it. xJusayan v. Sombilla, 746 SCRA 437 (2015).
(ii) Agency by Estoppel with Respect to Third Parties
Registered owner who placed in the hands of another an executed deed of transfer of the registered land, has
effectively represented to a third party that the holder of such document is authorized to deal with the property.
xBlondeau v. Nano, 61 Phil. 625 (1935).13
When owner of a hotel/caf business allows a person to use the title managing agent and allows such person
to take charge of the business during his prolonged absence, performing the duties usually entrusted to managing
agent, then such owner is bound by the act of such person. One who clothes another 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 following
pre-assumptions or deductions, which the law expressly directs to be made from particular facts, are deemed
conclusive. xMacke v. Camps, 7 Phil 522 (1907).
When the law firm has allowed for quite a period the messenger of another office to receive mails and
correspondence on their behalf, an implied agency had been duly constituted, especially when there is no
showing that counsel had objected to such practice or took step to put a stop to it. xEquitable PCI-Bank v. Ku,
355 SCRA 309 (2001).
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. Country
Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

2. KINDS OF AGENCY
a. Based on Business or Transactions Encompassed (Art. 1876): General or Universal Agency versus
Special or Particular Agency
Siasat v. IAC, 139 SCRA 238 (1985) describes them as follows:
Universal agent is authorized to do all acts for his principal which can lawfully be delegated to an agent;
such an agent may be said to have universal authority.

11Nevada v. Casuga, 668 SCRA 441 (2012).


12Woodschild Holdings, v. Roxas Electric and Construction Co., 436 SCRA 235 (2004); Manila Memorial Park v. Linsangan, 443 SCRA 377 (2004); Country

Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012); Umipig v. People, 677 SCRA 53 (2012); Recio v. Heirs of Spouses Altamirano, 702 SCRA 137
(2013).
13Domingo v. Robles, 453 SCRA 812 (2005).

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General agent is authorized to do all acts pertaining to a business of a certain kind or at a particular place,
or all acts pertaining to a business of a particular class or series. He has usually authority expressly
conferred in general terms or in effect made general by the usages, customs or nature of the business
which he is authorized to transact.
Special agent is authorized to do some particular act or to act upon some particular occasion; he acts
usually in accordance with specific instructions or under limitations necessarily implied from the nature of
the act to be done.

b. Whether It Covers Legal Matters: Attorney-at-Law versus Attorney-in-Fact


The relation of attorney and client is in many respects one of agency, and the general rules of agency apply
to such relation; the acts of an agent are deemed the acts of the principal only if the agent acts within the scope
of his authority. Therefore, only the employee-client, not his counsel, can impugn the consideration of the
compromise as being unconscionable. On the other hand, although a client has undoubtedly the right to
compromise a suit without the intervention of his lawyer, the same cannot be done to defraud the lawyer of the
earned attorneys fees. xJ-Phil Marine av. NLRC, 561 SCRA 675 (2008).
An attorney cannot, without a clients authorization, settle the action or subject matter of the litigation, even
when he believes that such a settlement will best serve his clients interest. xPhil. Aluminum Wheels, Inc. v.
FASGI Enterprises, Inc., 342 SCRA 722 (2000).

c. Whether It Covers Acts of Administration or Acts of Dominion: General Power of Attorney versus
Special Power of Attorney
(1) Formal Requisite: Must Be in Writing and Signed by Principal
When no particular formality is required by law, then the principal may appoint his agent in any form which
might suit his convenience or that of the agent, in this case a letter addressed to the agent requesting him to
file a protest in behalf of the principal with the Collector of Customs against the appraisement of the merchandise
imported into the country by the principal. xKuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).
A power of attorney to convey real property need not be in a public document, it need only be in writing,
since a private document is competent to create, transmit, modify, or extinguish a right in real property. xJimenez
v. Rabot, 38 Phil 378 (1918).
The dated letter relied upon by the petitioners was signed by Fernandez alone, without any authority from
the owners. There is no actuation of 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. xLitonjua v. Fernandez, 427
SCRA 478 (2004).
In a case involving authority to act in barangay conciliation cases covering an ejectment for failure to pay
rentals: A power of attorney is an instrument in writing by which one person, as principal, appoints another as
his agent and confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the
principal. The written authorization itself is the power of attorney, and this is clearly indicated by the fact that it
has also been called a letter of attorney. xWee v. De Castro, 562 SCRA 695 (2008).

(2) How Powers of Attorney Construed or Interpreted


General rule is that a power of attorney must be strictly construed; it will be held to grant only those powers
that are specified, and the agent may neither go beyond nor deviate from the power of attorney. xOlaguer v.
Purugganan, Jr., 515 SCRA 460 (2007).
Contracts of agency and general powers of attorney, must be interpreted in accordance with the language
used by the partiesthe real intention of the parties is primarily to be determined from the language used, and
to be gathered from the whole instrument. In case of doubt, resort must be had to the situation, surroundings,
and relations of the parties. Whenever it is possible, effect is to be given to every word or clause used by the
parties, for it is to be presumed that the parties said what they intended to say and that they used each word or
clause with sole purpose, and that purpose is, if possible, to be ascertained and enforced. If the contract be
open to two constructions, one of which would while the other would overthrow it, the former is to be chosen; if
by one construction the contract would be illegal, and by another equally permissible construction would be
lawful, the latter must be adopted. The acts of the parties will be presumed to be done in conformity with and
not contrary to the intent of the contract. The meaning of general words must be construed with reference to the
specific object to be accomplished and limited by the recitals made in reference to such object. xLinan v. Puno,
31 Phil. 259 (1915).

(3) Notarized Power of Attorney


When a special power of attorney is duly notarized, the notarial acknowledgment is prima facie evidence of
the fact of its due executiona buyer has every reason to rely on a persons authority to sell a particular property
owned by a corporation on the basis of a notarized board resolutionundeniably the buyer is an innocent
purchaser for value in good faith. xSt. Marys Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).14

3. GENERAL POWERS OF ATTORNEY (Art. 1877)


Agency couched in general terms comprises only acts of administration, even if principal should state that he
withholds no power or that the agent may execute such acts as he may consider appropriate, or even though the
14Veloso v. CA, 260 SCRA 593 (1996).
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agency should authorize a general and unlimited management. xYoshizaki v. Joy Training Center of Aurora, Inc.,
702 SCRA 631 (2013).
Acts of Administration means to perform acts which the principal himself may pursue in the ordinary course
of the business, thus:
When agent has been given general control and management of the business, he is deemed to have power
to employ such agents and employees as are usual and necessary in the conduct of the business, and
needs no SPA for such purpose. xYu Chuck v. Kong Li Po, 46 Phil. 608 (1924).
A co-owner who is made an attorney-in-fact, with the same power and authority to deal with the property
which the principal might or could have had if personally present, may retain the services of legal counsel
to preserve the ownership and possession of the principals property. xGovernment of PI v. Wagner, 54
Phil. 132 (1929).
Admissions obtained by agent from the adverse party prior to the formal amendment of complaint that
included principal as a party, can be availed of by the principal, since an agent may do such acts as may
be conducive to the accomplishment of the purpose of the agency, admissions secured by the agent within
the scope of the agency ought to favor the principal. xBay View Hotel v. Ker & Co., 116 SCRA 327 (1982).
Power of administration does not include dispositions or encumbrances which are acts of strict ownership.
Authority to dispose cannot proceed from authority to administer, and vice versa, for the two powers may
only be exercised by an agent by following the provisions Arts. 1876 to 1878. xAggabao v. Parulan Jr., 629
SCRA 562 (2010).

4. SPECIAL POWERS OF ATTORNEY


Although document is entitled Special Power of Attorney its wordings show that it sought only to establish
an agency that comprises all the business of the principal within the designated locality, but couched in general
terms, and consequently was limited only to acts of administration. A general power permits the agent to do all
acts for which the law does not require a special power, and only covers acts of administration. Dominion
Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).
Even when instruments title is General Power of Attorney, but its operative clause contains an authority to
sell, it constituted the requisite special power of attorney to sell a piece of land. Thus, there was no need to
execute a separate and special power of attorney since the general power of attorney had expressly authorized
the agent or attorney in fact the power to sell the subject property. Veloso v. Court of Appeals, 260 SCRA
593 (1996).

a. CASES WHERE SPECIAL POWERS OF ATTORNEY ARE NECESSARY (Art. 1878)


Article 1878 does not state that a special power of attorney must be in writing. As long as the mandate is
express, such authority may be either oral or written. We unequivocably declared that the requirement under Art.
1878 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. Patrimonio v. Gutierrez, 724 SCRA 636 (2014).

(1) WITH RESPECT TO MATTERS INVOLVED IN LITIGATION INVOLVING THE PRINCIPAL:


(a) To Compromise
(b) To Submit Questions to Arbitration
(c) To Renounce the Right to Appeal from a Judgment
(d) To Waive Objections to the Venue of an Action
(e) To Abandon a Prescription Already Acquired
Power to Compromise Excludes Power to Submit to Arbitration; Vice Versa (Art.
1880)
Power to Bring Suits in Behalf of the Principal to collect amounts accruing in the ordinary course of business
properly belonging to the class of acts described in Art. 1713 of the old Civil Code as acts of strict ownership.
Nonetheless, the provision in the power of attorney to exact the payment of sums of money by legal means
must be construed to be an express power to sue. xGermann v. Donaldson, 1 Phil 63 (1901).
True,Although counsel asserted verbal authority to compromise the case. , however, Sec. 23, Rule
138Rules, however, require a special authority, for attorneys to compromise the litigation of their clients., a
special authority (Sec. 23, Rule 138, Rules of Court). While the same does not state that the special authority
be in writing, courtsthe 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 to him.
F for, authority to compromise cannot lightly be presumed. xHome Insurance Co. v. United Shipping Lines, 21
SCRA 863 (1967).

(2) WITH RESPECT TO MONEY OR FUNDS OF THE PRINCIPAL:


(2-A) To Make Payments Are Not Usually Considered as Acts of Administration [if the power is not
included in the SPA, agent has no authority to do the act]
The payment of claims by the area manager of an insurance company is not an act of administration, and that
since the settlement of claims was not included among the acts enumerated in the SPA issued by the insurance
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company, nor is of a character similar to the acts enumerated therein, then a special power of attorney was
required before such area manager could settle the insurance claims of the insured. Consequently, the amounts
paid by the area manager to settle such claims cannot be reimbursed from the principal insurance company.
Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).
(2-B) To Collect or Receive Payments on Behalf of the Principal
The right of an agent to indorse check will not be lightly inferred. A salesman with authority to collect money
for his principal does not have the implied authority to indorse checks received in payment. Any person taking
checks made payable to a corporation which can act only by agents does so at his peril, and must abide by the
consequence if the agent who indorses the same is without authority. xInsular Drug v. PNB, 58 Phil. 684 (1933).
(2-C) To Loan or Borrow Money
EXCEPT: Agent May Borrow Money When It Is Urgent and Indispensable for the Preservation of the
Things Which Are Under Administration
An SPA is necessary for an agent to borrow money, unless it be urgent and indispensable for the preservation
of the things which are under administration. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).15
Wife may not be held liable for the mortgage loan contracted by the husband personally, where the power of
attorney given to the husband was limited to a grant of authority to mortgage land titled in the wifes name. De
Villa v. Fabricante, 105 Phil. 672 (1959).
Entrusting by the principal of blank pre-signed checks to the agent, does not give the agent the implied
authority to enter into loan in the name of the principal. The contract of agency and the special fiduciary
relationship inherent in this contract must exist as a matter of fact. The person alleging it has the burden of proof
to show, not only the fact of agency, but also its nature and extent. Patrimonio v. Gutierrez, 724 SCRA 636
(2014)

(3) WITH RESPECT TO OBLIGATIONS DUE TO/FROM THE PRINCIPAL:


(3-A) To Effect Novations Which Put an End to Obligations Already in Existence at the Time the Agency
Was Constituted
(3-B) To Waive Any Obligation Gratuitously
(3-C) To Ratify or Recognize Obligations Contracted Before the Agency
Where a wife gave her husband a power of attorney to loan and borrow money and to mortgage her property,
that fact does not carry with it or imply that he has a legal right to sign her name to a promissory note which would
make her liable for the payment of a pre-existing debt of the husband or that of his firm, for which she was not
previously liable, or to mortgage her property to secure the pre-existing debt. B.P.I. v. De Coster, 47 Phil 594
(1925).
Where the power granted to attorney-in-fact was to the end that the principal-seller may be able to collect the
balance of the selling price of the printing establishment sold, such agent had no power to enter into new sales
arrangements with the buyer, or to novate the terms of the original sale. Villa v. Garcia Bosque, 49 Phil 126
(1926).

(4) WITH RESPECT TO IMMOVABLE PROPERTIES:


(4-A) To Enter Into Any Contract by Which Ownership of an Immovable Is Transmitted or
Acquired, Gratuitously or For a Valuable Consideration
(4-B) Sale of a Piece of Land or Interest Therein (Art. 1874)
Old Civil Code: Under Sec. 335 of the Code of Civil Procedure, an agreement for the leasing for a longer
period than one year, or for the sale of real property, or of an interest therein, is invalid if made by the agent
unless the authority of the agent be in writing and subscribed by the party sought to be charged. Rio y Olabbarrieta
v.Yutec, 49 Phil 276 (1926).
Where the nephew in his own name sold a house and lot to the company, when in fact it was the uncles
property, but in the estafa case filed by the company against the nephew, the uncle swore that he had authorized
his nephew to sell the property, the uncle can be compelled in the civil action to execute the deed of sale covering
the property. It having been proven at the trial that he gave his consent to the said sale, it follows that the
defendant conferred verbal, or at least implied, power of agency upon his nephew Duran, who accepted it in the
same way by selling the said property. The principal must therefore fulfill all the obligations contracted by the
agent, who acted within the scope of his authority. (Arts. 1709, 1710 and 1727) Gutierrez Hermanos v.
Orense, 28 Phil. 572 (1914).
Authority found in a power of attorney to sell any kind of realty that might belong to the principal is deem to
include also such as the principal might afterwards have or acquire during the time it was in force. Katigbak v. Tai
Hing Co., 52 Phil. 622 (1928).
Express mandate required by Art. 1874 is for power of attorney to expressly empower the agent to sell land
belonging to the principal. It need not contain a specific description of the land to be sold, such that giving the
agent the power to sell any or all tracts, lots, or parcels of land belonging to the principal is adequate. Domingo
v. Domingo, 42 SCRA 131 (1971).

15Gozun v. Mercado 511 SCRA 305 (2006).


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Where SPA primarily empowered the agent of the corporation to bring an ejectment case against the occupant
and also to compromise . . . so far as it shall protect the rights and interest of the corporation in the
aforementioned lots, and that the agent did execute a compromise in the legal proceedings filed which sold the
lots to the occupant, the compromise agreement is void for the power to sell by way of compromise could not be
implied to protect the interests of the principal to secure possession of the properties. Cosmic Lumber v. Court
of Appeals, 265 SCRA 168 (1996).
The rule under Art. 1874 that when the 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, applies when the sale of corporate
piece of land is pursued through an officer without written authority. City-Lite Realty Corp. v. Court of Appeals,
325 SCRA 385 (2000).16
Art. 1878 provides that an SPA 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 therefore in writing from the said
owner is null and void; declarations of the agent alone are generally insufficient to establish the fact or extent of
her authority. Litonjua v. Fernandez, 427 SCRA 478 (2004).17
Under Art. 1878, an SPA is necessary for agent to enter into a contract by which the ownership of an
immovable property is transmitted or acquired, either gratuitously or for a valuable consideration. Absence of a
written authority makes sale of 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. However, we apply estoppel principle to enforce
of the sale with respect to the principal. Pahud v. Court of Appeals, 597 SCRA 13 (2009).
As a general rule, an agency may be oral; however, Art. 1874 provides that the contract of agency must be
written for the validity of the sale of a piece of land or any interest therein; otherwise, the sale shall be void. A
related provision, Art. 1878 states that special powers of attorney are necessary to convey real rights over
immovable properties. Yoshizaki v. Joy Training Center of Aurora, Inc., 702 SCRA 631 (2013).18
(4-C) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2])
Prohibition against agents purchasing property held for sale or management is not absolute; when so
authorized by principal, agent is not disqualified from purchasing property held under an agency to sell. xOlaguer
v. Purugganan, Jr., 515 SCRA 460 (2007).
(4-D) Power to Sell Excludes Power to Mortgage, Vice Versa (Art. 1879)
Where the power of attorney authorized agent By means of a mortgage of my real property, to borrow and
lend sums in cash, at such interest and for such periods and conditions as he may deem property and to collect
or to pay the principal and interest thereon when due, while it did not authorize the agent to execute deeds of
sale with right of repurchase over the property of the principal, nonetheless would validate the main contract of
loan entered into with the deed of sale with right of repurchase constituting merely an equitable mortgage.
xRodriguez v. Pamintuan and De Jesus, 37 Phil 876 (1918).
Where power of attorney vested agent with authority for me and in my name to sign, seal and execute, and
as my act and deed, deliver any lease, any other deed for conveying any real or personal property or any other
deed for the conveying of any real or personal property, it does not carry with it or imply that agent has power to
execute a promissory note or a mortgage to secure its payment. xPNB v. Tan Ong Sze, 53 Phil. 451 (1929).
An SPA to mortgage real estate is limited to such authority to mortgage and does not bind the grantor
personally to other obligations contracted by the grantee (in this case the personal loan obtained by the agent in
his own name from the PNB). In other words, the power to mortgage does not include the power to obtain loans,
especially when the grantors allege that they had no benefit at all from the proceeds of the loan taken by the
agent in his own name from the bank. xPNBv. Sta. Maria, 29 SCRA 303 (1969).
In Agency, 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.
xGozun v. Mercado 511 SCRA 305 (2006).

(4-E) To Lease Real Property for More Than One Year


Art. 1878 expresses that a special power of attorney is necessary to lease any real property to another person
for more than one year, for such is considered not merely an act of administration but an act of strict dominion or
of ownership. xShoppers Paradise Realty v. Roque, 419 SCRA 93 (2004).
Where lease contract involves the lease of real property for a period of more than one year was entered into
by an agent on behalf of the principle, Art. 1878 requires that the agent be armed with an SPA to lease the
premises; otherwise, the provisions of the contract of lease, including the grant therein of an option to purchase
to the lessee, would be unenforceable. Vda. De Chua v. IAC, 229 SCRA 99 (1994).
(5) WITH RESPECT TO SPECIFIC CONTRACTS DEEMED PERSONAL TO THE PRINCIPAL:
(5-A) To Accept or Repudiate an Inheritance

16San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises

and Dev. Corp., 414 SCRA 190 (2003).


17
Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
18Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008); Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. v. Pajo-Reyes, 632 SCRA 400 (2010);

Recio v. Heirs of the Spouses Altamirano, 702 SCRA 137 (2013); Bautista v. Spouses Jalandoni, 710 SCRA 670 (2013).
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(5-B) To Make Gifts
(5-C) To Bind the Principal to Render Some Service without Compensation
(5-D) To Bind the Principal in a Contract of Partnership
(5-E) To Obligate the Principal as a Guarantor or Surety
When principal empowered his agent to mortgage his property, as well as a contract of surety, but the agent
only entered into a contract of mortgage, no inference can be made to make the principal liable as a surety. xWise
and Co. v. Tanglao, 63 Phil. 372 (1936).
Where a power of attorney is executed primarily to enable manager of a mercantile business, to conduct its
affairs for and on behalf of the principal-owner, i.e., act and deed delivery, any lease, or any other deed for the
conveying any real or personal property and act and deed delivery, any lease, release, bargain, sale,
assignment, conveyance or assurance, or any other deed for the conveying any real or personal property, such
cannot be interpreted as giving the manager power to bind the principal to a contract of guaranty or surety
unconnected with the business. xDirector v. Sing Juco, 53 Phil 205 (1929).
SPA to approve loans does not carry power to bind the principal to a guaranty even to the extent of the amount
for which a loan could have been granted by agent. Guaranty is not presumed, it must be expressed and cannot
be extended beyond its specified limits (Director v. Sing Juco, 53 Phil. 205). Where a wife gave her husband
power to loan money, such fact did not authorized him to make her liable as a surety for the payment of the debt
of a third person. BA Finance v. Court of Appeals, 211 SCRA 112 (1992).
A power of attorney authorizing agent to bind principal to a surety bond to a particular entity, cannot be relied
upon as sufficient authority to a surety bond issued to other persons or entity. xCountry Bankers Insurance v
Keppel Cebu Shipyard, 673 SCRA 427 (2012).
(6) ANY OTHER ACT OF STRICT DOMINION
5. Doctrine of Implied Powers Emanating from Express Powers Specific grants of Powers of Dominion
necessarily includes those implied powers or those necessary to fulfill those powers of ownership granted, thus:
Empowering the agent to sell hemp in a foreign country, carries with it implied power to make and enter
into the usual and customary contract for its sale, which may provide for settlement of issues by arbitration.
xRobinson Fleming v. Cruz, 49 Phil 42 (1926).
An SPA to make an assignment of credits, hire lawyers to take charge of actions necessary or expedient
for principals interests, and defend suits brought against principal, necessarily implies authority to pay for
professional services thus engaged, which includes assignment of the judgment secured for the principal
in settlement of outstanding fees. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
SPA to sell for such price or amount is broad enough to cover exchange in the Deed of Assignment
between the properties and the corresponding corporate shares in a corporation, with the latter replacing
the cash equivalent of the option money initially agreed to be paid by the corporation under the MOA.
xHernandez-Nievera v. Hernandez, 642 SCRA 646 (2011).
6. Express Power of Attorney Excludes Powers of Administration (e.g., General
Power of Attorney)
Instrument which grants agent power To follow-up, ask, demand, collect and receipt for my benefit
indemnities or sum due me relative to the sinking of M.V. NEMOS in the vicinity of El Jadida, Casablanca,
Morocco on the evening of February 17, 1986, are SPAs, and exclude any intent to grant a GPA or to constitute
a universal agency. Being SPAs, they must be strictly construed, and cannot be read to give power to the
attorney-in-fact to obtain, receive, receipt from the insurance company the proceeds arising from the death of
the seaman-insured, especially when the commercial practice for group insurance of this nature is that it is the
employer-policyholder who took out the policy who is empowered to collect the proceeds on behalf of the covered
insured or their beneficiaries. Pineda v. Court of Appeals, 226 SCRA 754 (1993).

III. POWER, DUTIES AND OBLIGATIONS OF THE AGENT


1. General Obligation of Agent Who Accepts the Agency: Agent Bound to Carry Agency to Its
Completion for the Benefit of Principal (Art. 1884)
OTHERWISE: Agent Will Be Liable for Damages Which the Principal May Suffer Through His Non-
Performance.
COMPARE: Agent Who Withdraws From the Agency (Art. 1929): He Must Continue to Act Until Principal
Takes Necessary Steps to Meet Situation.
In Event of Death of Principal (Art. 1919[3]): Agent Must Finish Business Already Begun
Should Delay Entail Any Danger Even If Principals Death Extinguishes Agency.

2. Obligation of Agent Who Declines Agency Who Has Custody of Goods: Agent Must Observe Due
Diligence in the Custody and Preservation of the Goods Until New Agent Appointed (Art. 1885)

3. DUTY OF OBEDIENCE

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a. Agent Must Act In the Name of the Principal, Within the Scope of His Authority (Art. 1881)
(i) Act Deemed to Have Been Performed within the Scope of Agents Authority, If Such Act Is
Within the Terms of the Written Power of Attorney, Even If in Fact the Agent Exceeded the
Limits of the Authority According the Private Understanding With the Principal (Art. 1900)
(ii) Authority of Agent Shall Not Be Deemed Exceeded If Performed in a Manner More
Advantageous to Principal. (Art. 1882)19
b. Primary Obligation of Agent Is to Carry Out Agency in Accordance with Principals Instructions (Art.
1887)
If Agent Followed Instructions, Principal Cannot Set-up Agents Ignorance or Circumstance which
Principal Was/Ought to Have Been Aware Of (Art. 1899)
Pursuant principals instructions, agent purchased a piece of land in their names using the sums given by
principals, and thereafter principals had ratified the transaction and even received profits arising from the
investment in the land. Since there is nothing which would indicate that agent failed to exercise reasonable care
and diligence in the performance of his duty, or that he undertook to guarantee the vendors title to the land
purchased, the eventual loss sustained by said principals from a defect in the title in the land cannot be a basis
to hold the agent personally liable for damages. xNepomuceno v. Heredia, 7 Phil 563 (1907).
When an agent in executing the orders and commissions of his principal carries out the instructions he has
received from his principal, and does not appear to have exceeded his authority or to have acted with negligence,
deceit or fraud, he cannot be held responsible for the failure of his principal to accomplish the object of the agency.
Agents, although they act in representation of the principal, are not guarantors for the success of the business
enterprise they are asked to manage. xGuiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).
When bank officers, acting as agent, had not only gone against the instructions, rules and regulations of the
bank in releasing loans to numerous borrowers who were not qualified, then such bank officers are liable
personally for the losses sustained by the bank. That bank had also filed suits against the borrowers to recover
the amounts given does not amount to ratification of the acts done by the bank officers. xPNB v. Bagamaspad,
89 Phil. 365 (1951).
c. Effects of Acts Done Within the Scope of Agents Authority: Valid, and Principal Is the One Liable;
Agent Is Not Personally Liable (Art. 1881)
Under Art. 1881, when agent acts within the scope of authority, principal is bound by acts effected in his behalf,
whether or not third person dealing with the agent believes that the agent has actual authority. xSargasso Const.
& Dev. Corp. v. PPA, 623 SCRA 260 (2010).
The legal impact of Art. 1881 which provides that the agent must act within the scope of his authority, is that
the gent is granted the right to affect the legal relations of his principal by the performance of acts effectuated in
accordance with the principal's manifestation of consent. Pacific Rehouse Corp. v. EIB Securities, Inc., 633
SCRA 214 (2010).

d. Effects When Agents Act Beyond the Scope of His Authority: Unenforceable, Not Void; UNLESS
PRINCIPAL RATIFIES, WHICH MAKE IT VALID (Arts. 1317, 1403 and 1898)
When money received as a deposit by an agent is given to principal, with notice that it is the money of the
depositor, principal is bound to return to depositor, even if his agent was not authorized to receive such deposit.
[There has, in effect, ratification of the unauthorized act of the agent, thereby binding the principal]. xCason v.
Rickards, 5 Phil 639 (1906).
When the administrator enters into a contract that is outside of the scope of authority, the contract would
nevertheless not be an absolute nullity, but simply voidable [unenforceable!] at the instance of the parties who
had been improperly represented, and only such parties can assert the nullity of said contracts as to them. xZayco
v. Serra, 49 Phil 985 (1925).
Under Art. 1898, acts of an agent beyond the scope of his authority do not bind the principal, unless the latter
ratifies the same expressly or impliedly. When third person knows that the agent was acting beyond his power or
authority, the principal cannot be held liable for the acts of the agent. If the said third person is aware of the limits
of the authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook
to secure the principals ratification. Cervantes v. Court of Appeals, 304 SCRA 25 (1999).20
Even when attorney-at-law in forging a compromise agreement, had exceeded his authority in inserting a
penalty clause, same is not void but merely voidable [unenforceable!], i.e., capable of being ratified. Clients
failure to question the inclusion of the penalty clause despite several opportunities to do so and with the
representation of new counsel, was tantamount to ratification. xBorja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003).
Contracts entered 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 unauthorized contracts and are unenforceable (!), unless
they are ratified. xGozun v. Mercado 511 SCRA 305 (2006).
e. Effects When Agent Acts in His Own Name (Art. 1883):
Principal Has No Right Against Third Person Contracting with Agent

19See application in Olaqguer v. Purugganan, Jr., 515 SCRA 460 (2007).


20Reiterated in Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001).
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Agent Is Directly Bound to Third Person as If the Transaction Were His Own
EXCEPT: When Contract Involves Things Belonging to Principal
It being established that the agent acted in his own name in selling the merchandise to the defendants who
fully believed that they were dealing with the said agent on his own, without any knowledge that he was the agent
of the plaintiffs, and having paid him in full for the merchandise purchased, they are not liable to the plaintiffs, for
said merchandise. xLim Tiu v. Ruiz & Rementeria, 15 Phil. 367 (1910).
Even when the agent has written authority to convey real property, nevertheless when the deed of sale was
executed by the agent in her own name without showing the capacity in which she acted, although the act was
doubtless irregular, the deed operated to bind the principal who had authorized the sale. xJimenez v. Rabot, 38
Phil. 378 (1918).
Under Art. 1883, if agent acts in his own name, principal has no right of action against the persons with whom
he has contracted; neither have such persons against the principal. In such case, agent is 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. xSmith Bell v. Sotelo Matti, 44 Phil. 874 (1922); xMarimperio Cia. Naviera, S.A.
v. CA, 156 SCRA 368 (1987).
When agent executes a contract in his personal capacity, the fact that he is described in the contract as agent
of the principal and the properties mortgaged pertain to the principal, may not be taken to mean that he enters
into the contract in the name of the principal. A mortgage on real property of the principal not made and signed
in the name of the principal is not valid as to the principal. xPhil. National Bank v. Palma Gil, 55 Phil. 639 (1931).21
Where a co-owner transfers the entirety of the mining claim to the buyer, who knew that it included the one-
half share pro-indiviso of the other co-owner, the transaction may be considered as one where the disposing co-
owner acted as agent of the other co-owner. Consequently, under Art. 1883, such other co-owner may sue the
person with whom the agent dealt with in his (agents) own name, when the transaction involves things belong to
the principal. xGoldstar v. Lim, 25 SCRA 597 (1968).
When a commission agent enters into a shipping contract in his own name to transport NFA grains on a vessel
owned by a shipping company, NFA cannot claim it is not liable to the shipping company under Art. 1883 when
things belong to the principal are dealt with, agent is bound to the principal although he does not assume the
character of such agent and appears acting in his own name. If the principal can be obliged to perform his duties
under the contract, then it can also demand the enforcement of its rights arising from the contract. xNFA v. IAC,
184 SCRA 166 (1990).
(1) Provisions Are Without Prejudice to Actions Between Principal and Agent
Where plaintiffs appointed defendant to purchase a vessel and giving him money for that purpose, but the
agent purchased the boat and placed it in his own name, he has breached his fiduciary obligation and is obliged
to transfer the same to the plaintiffs, or the plaintiffs have a right to be subrogated. According to the exception
under Art. 1717 (old Civil Code) when things belonging to the principal are dealt with, the agent is bound to the
principal although he does not assume the character of such agent and appears acting in his own name. xSy-
Juco v. Sy-Juco, 40 Phil. 634 (1920).

4. DUTY OF DILIGENCE:
a. Agent Must Exercise Due Diligence in the Pursuit of the Principals Business
b. Agent Should Not Act If It Would Manifestly Result in Damage to Principal (Art. 1888)
c. Agent Also Liable Personally (with the Principal) for Fraud and Negligence Committed in Pursuit of
the Principals Affairs (Arts. 1884 and 1909)
The provision is clear that an agent is bound to carry out the agency. The relationship existing between
principal and agent is a fiduciary one, demanding conditions of trust and confidence. It is the duty of the agent to
act in good faith for the advancement of the interests of the principal. In this case, BPI had the obligation to carry
out the agency by informing the beneficiary, who appeared before BPI to withdraw funds of the insured who was
BPI's depositor, not only of the existence of the insurance contract but also the accompanying terms and
conditions of the insurance policy in order for the beneficiary to be able to properly and timely claim the benefit.
Bank of the Philippine Islands v. Laingo, G.R. No. 205206, 16 March 16, 2016.

What Shall Aggravate or Mitigate Liability Arising Out of Negligence Whether Agency Was for a
Compensation or Was Gratuitous
He who seeks to make agent liable has the burden to show that the losses and damage were occasioned by
his fault or negligence; mere allegation without substantiation is not enough to make the agent personally liable.
xHeredia v. Salina, 10 Phil 157 (1908).
While an agent who acts for a revealed principal does not become personally bound to the other party, yet
that rule does apply when the agent intercepted and appropriated for himself the thing which the principal is
bound to deliver, and thereby made the performance of the principal impossible. The agent in any event must be

21Reiterated in Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925); PNB v. Agudelo, 58 Phil 655 (1933); Rural Bank of Bombon v. CA, 212 SCRA

25 (1992); Gozun v. Mercado 511 SCRA 305 (2006).


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precluded from doing any positive act that could prevent performance on the part of his principal, otherwise the
agent becomes liable also on the contract. xPhil. National Bank v. Welsh Fairchild, 44 Phil 780 (1923).
Where holder of an exclusive and irrevocable power of attorney to make collections, failed to collect the sums
due to principal and thereby allowed the allotted funds to be exhausted by other creditors, such agent has failed
to act with the care of a good father of a family required under Art. 1887 and became personally liable for the
damages which the principal may suffer through his non-performance. Phil. National Bank v. Manila Surety, 14
SCRA 776 (1965).
In stressing that it was acting only as a collecting agent, Metrobank seems to be suggesting that as a mere
agent it cannot be liable to the principal; this is not exactly true. On the contrary, Art. 1909 clearly provides that
the agent is responsible not only for fraud, but also for negligence. xMetrobank v. Court of Appeals, 194 SCRA
169 (1991).
Provision in mortgage contract that in the eventcase of accident or loss, finance company shall make a proper
claim against insurance company, was in effect an agency, and that under Art. 1884, the finance company was
bound by its acceptance to carry out the agency., Iand in spite of the borrowers instructions of the borrowers to
make such claims, it instead insisted on having the vehicle repaired but eventually resulting in loss of the
insurance coverage, the finance company had breached its duty of diligence, and must assume the damages
suffered by the borrowers, and consequently can no longer collect on the balance of the mortgage loan secured
thereby. BA Finance v. Court of AppealsCA, 201 SCRA 157 (1991).

It is wWell-settled is the rule is that an agent is also responsible for any negligence in the performance of its
function (Art. 1909) and is liable for the damages which principal may suffer by reason of its negligent act. (Art.
1884). British Airways v. Court of Appeals, 285 SCRA 450 (1998).22

5. DUTY OF LOYALTY:
a. Agent Shall Be Liable for Damages Sustained by the Principal Where in Case of Conflict-of-Interests
Situations, He Should Prefer His Own Interest (Art. 1889)
b. Agent Is Prohibited from Buying Property Entrusted to Him for Administration or Sale Without
Principals Consent (Art. 1491[2]).
Where agent by means of misrepresentation of the condition of the market induces principal to sell to him the
property consigned to his custody at a price less than that for which he has already contracted to sell part of it,
and who thereafter disposes of the whole at an advance, is liable to principal for the difference. Such conduct
constituted fraud, entitling principal to annul the sale. Although commission earned by agent on the fraudulent
sale may be disallowed, nonetheless commission earned from other transactions which were not tainted with
fraud should be allowed. xCadwallader v. Smith Bell, 7 Phil. 461 (1907).
General manager, who also was the majority stockholder, and designated to be the main negotiator for the
company with the Government for the sale of its large tract of land, having special knowledge of commercial
information that would increase the value of the shares in relation to the sale of the land to the Government, can
be treated legally as being an agent of the stockholders, with a fiduciary obligation to reveal to other stockholders
such special information before proceeding to purchase from the other stockholders their shares of stock. If he
purchases the shares of a stockholder without having disclosed important facts or to render the appropriate report
on the expected increase in value of the company, there was fraud committed for which the director shall be liable
for the earnings earned against the stockholder on the sale of shares. xStrong v. Guiterrez Repide, 41 Phil. 947
(1909).
A confidential employee who, knowing that his principal was negotiating with the owner of some land for the
purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an act of disloyalty and
infidelity to his principal, whereby he becomes liable, among other things, for the damages caused, which meant
to transfer the property back to the principal under the terms and conditions offered to the original owner. xSing
Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil 589 (1922).
Uncle who was acting as agent/administrator of property belonging to a niece had procured Torrens title in his
own name is deemed to be a trustee, and must surrender the property and transfer title to the niece. The relations
of an agent to his principal are fiduciary and agent is estopped from acquiring or asserting a title adverse to that
of the principal. Consequently, an action in personam will lie against an agent to compel him to return or retransfer
to his principal, or the latters estate, the real property committed to his custody as such agent and also to execute
the necessary documents of conveyance to effect such retransfer. xSeverino v. Severino, 44 Phil. 343 (1923).
AAn agent cannot represent both himself and his principal in a transaction involving the shifting to another
person of the agents liability for a debt to the principal. xAboitiz v. De Silva, 45 Phil 883 (1924).
Under Art. 267 of Code of Commerce which declared that no agent shall purchase for himself or for another
that which he has been ordered to sell, then a sale by a broker to himself without the consent of the principal
would be void and ineffectual whether the broker has been guilty of fraudulent conduct or not. Consequently,
such broker is not entitled to receive any commission under the contract, much less any reimbursement of
expenses incurred in pursuing and closing such sales. The same prohibition is now contained in Art. 1491(2) of
Civil Code. xBarton v. Leyte Asphalt, 46 Phil 938 (1924).

22Also Metrobank v. CA, 194 SCRA 169 (1991).


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When an agent is involved in the perpetration of fraud upon his principal for his extrinsic benefit, he is not
really acting for the principal but is really acting for himself, entirely outside the scope of his agency the basic
tenets of agency rest on the highest consideration of justice, equity and fair play, and an agent will not be
permitted to pervert his authority to his own personal advantage. Cosmic Lumber v. Court of Appeals, 265
SCRA 168 (1996).
Relation of agent to his principal is fiduciary and, an agent is estopped from acquiring or asserting a title
adverse to that of the principala position analogous to that of a trusteehe cannot, consistently with the
principles of good faith, be allowed to create in himself an interest in opposition to that of his principal or cestui
que trust. Hernandez v. Hernandez, 645 SCRA 24 (2011).
c. Agent Obliged to Render an Accounting to the Principal of All Matters Relating Agency (Art. 1891):
Stipulation Exempting Agent from Obligation to Render an Accounting Is Void
Agent Must Deliver to Principal Whatever Is Received by Virtue of Agency
Obligation Arises and Becomes Demandable at the Time Agency Ends
An administrator of an estate is liable under Art. 1720 (now Art. 1891) for failure to render an account of his
administration to the heirs, unless the heirs consented thereto or are estopped by having accepted the
correctness of his account previously rendered. xOjinaga v. Estate of Perez, 9 Phil 185 (1907).
When principal approves agents report, he has no right to ask afterwards for a revision of the same or for a
detailed account of the business, unless he can show that there was fraud, deceit, error or mistake in the approval
of the accounts. xPastor v. Nicasio, 6 Phil. 152 (1906); xGuiterrez Hermanos v. Oria Hermanos, 30 Phil. 491, 505
(1915).
There is an essential distinction between the possession by a receiving teller of funds received from third
persons paid to the bank, and an agent who receives the proceeds of sales of merchandise delivered to him in
agency by his principal. In the former case, payment by third persons to the teller is payment to the bank itself;
the teller is a mere custodian or keeper of the funds received, and has no independent right or title to retain or
possess the same as against the bank. An agent, on the other hand, can even assert, as against his own principal,
an independent, autonomous, right to retain money or goods received in consequence of the agency; as when
the principal fails to reimburse him for advances he has made, and indemnify him for damages suffered without
his fault. xChua-Burce v. Court of Appeals, 331 SCRA 1 (2000).23 Consequently:
An insurance agent is guilty of estafa for failing to deliver sums of money paid to him as agent for the
account of his employer. Where nothing to the contrary appears, the provisions of Art. 1720 of Civil Code
impose upon an agent the obligation to deliver to his principal all funds collected on his account. xU.S. v.
Kiene, 7 Phil 736 (1907)
A travelling sales agent who misappropriated or failed to return to his principal the proceeds of the things
or goods he was commissioned or authorized to sell, is liable for estafa. xGuzman v. Court of Appeals, 99
Phil. 703 (1956).
Whereas, bank teller or cash custodian, being merely an employee of the bank, cannot be held liable for
estafa, but rather for theft. xChua-Burce v. Court of Appeals, infra.
As a necessary consequence of such breach of trust, an agent must then forfeit his right to the commission
and must return the part of the commission he received from his principal. Domingo v. Domingo, 42 SCRA
131 (1971).
Submission by administrator of four letter reports during the entire 18 years that he was administering the
property can hardly be considered as sufficient to keep the principal informed and updated of the condition and
status of the latters properties. xSazon v. Vasquez-Menancio, 666 SCRA 707 (2012).
d. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890)
If Empowered to Borrow Money, He May Be the Lender at Current Interest Rates;
If Empowered to Lend Money, He Cannot Borrow Without Principals Consent.
When power granted to agent was only to borrow money and mortgage principals property to secure the loan,
it cannot be interpreted to include the authority to mortgage the properties to support the agents personal loans
and use the proceeds thereof for his own benefit. The lender who lends money to the agent knowing that is was
for personal purpose and not for the principals account, is a mortgagee in bad faith and cannot foreclose on the
mortgage thus constituted. xHodges v. Salas and Salas, 63 Phil. 567 (1936).
e. Agent Is Liable to the Principal for Interests (Art. 1896):
On Sums He Applied to His Own Use (from the Time He Used Them)
On Sums Owing the Principal (from the Time Agency Is Extinguished)
As to the interest imposed in the judgment on amounts received by agent which were not turned over to the
principal, Art. 1724 provides that an agent shall be liable for interest upon any sums he may have applied to his
own use, from the day on which he did so, and upon those which he still owes, after the expiration of the agency,
from the time of his default. xMendezonna v. Vda. De Goitia, 54 Phil 557 (1930).
The successor-in-interest of the principal is not entitled to collect interest from the agent of the father for sums
loaned to and collected by the agent from various persons for the deceased principal. In all the aforementioned
23Also Guzman v, CA, 99 Phil. 703, 706-707 (1956); Balerta v. People of the Philippines, 743 SCRA 166 (2014).
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transactions, the defendant acted in his capacity as attorney-in-fact of the deceased father, and there being no
evidence showing that he converted the money entrusted to him to his own use, he is not liable for interest
thereon, in accordance with Art.1724 of the Civil Code. xDe Borja v. De Borja, 58 Phil 811 (1933).

6. Agent Has No Obligation to Advance Funds (Art. 1886):


It Is Principals Obligation to Advance the Funds, But Principal to Pay Interest on Advances Made
by Agent from Day Advances Made. (Art. 1912)
EXCEPT: (1) If Stipulated in the Agency Agreement;
(2) Principal Is Insolvent; Insolvency Extinguishes the Agency (Art. 1919[3])

7. POWER OF AGENT TO APPOINT A SUB-AGENT (Art. 1892)


a. General Rule: Agent Must Act Himself, But May Appoint a Not-Prohibited Substitute. Agent Is
Responsible for Acts of Substitute When:
Agent Was Not Expressly Given the Power to Appoint a Substitute
Agent Was Given the Power, But Without Designating the Person and the Substitute Was
Notoriously Incompetent or Was Insolvent.
A sub-agent cannot be held at greater liability that the main agent, and when the subagent has not received
any special instructions from the agent to insure the object of the agency, the subagent cannot be held liable
for the loss of the thing from fire, which is merely force majeure. xInternational Films (China) v. Lyric Film, 63
Phil. 778 (1936).
Law on Agency allows the appointment by an agent of a substitute or sub-agent in the absence of an express
agreement to the contrary between the agent and the principal. Therefore, an aAgent who receives jewelry for
sale or return cannot be charged with estafa for there was no misappropriation when she delivered the jewelry
to a sub-agent under the sale terms which the agent received it, but a client of the sub-agent absconded with
them and could no longer be recovered;. The appointment of a sub-agent and delivery of the jewelry, in the
absence of a prohibition, does not amount to conversion or misappropriation as to constitute estafa; but the
agent remains civilly liable for the value of the jewelry to the principal. xSerona v. Court of Appeals, 392 SCRA
35 (2002).24
The legal maxim potestas delegate non delegare potest, a power once delegated cannot be re-delegated,
while applied primarily in political law to the exercise of legislative power, is a principle of agency for another,
a re-delegation of the agency would be detrimental to the principal as the second agent has no privity of contract
with the former. (?) xBaltazar v. Ombudsman 510 SCRA 74 (2006).
Under Art. 1892, when a special power of attorney to sell a piece of land does not contain a clear prohibition
against the agent in appointing a substitute, the appointment by the agent of a substitute to execute the contract
is within the limits of the authority given by the principle, although the agent then would have to be responsible
for the acts of the sub-agent. Escueta v. Lim, 512 SCRA 411 (2007).
c. All Acts of Substitute Appointed Against Principals Prohibition Are Void as to the
Principal.
Where the SPA to sell a piece of land contains a prohibition to appoint a substitute, but agent appoints a
substitute who executes the deed of sale in name of the principal, while the agent may have acted outside the
scope of his authority, that did not make the sale void, but merely unenforceable under the second paragraph of
Art. 1317 of the Civil Code. And only the principal denied the sale, his acceptance of the proceeds thereof are
tantamount to ratification thereof. Escueta v. Lim, 512 SCRA 411 (2007).
d. Rights of Principal Against Substitute (Art. 1893)
Principal is liable upon a sub-agency contract entered into by its selling agent in the name of the principal,
where it appears that the general agent was clothed with such broad powers as to justify the interference that he
was authorized to execute contracts of this kind, and it not appearing from the record what limitations, if any,
were placed upon his powers to act for his principal, and more so when the principal had previously acknowledged
the transactions of the subagent. xDel Rosario v. La Badenia, 33 Phil. 316 (1916).

8. Liability When Two Or More Agents Appointed by the Same Principal: Responsibility of Agents Not
Solidary (Art. 1894)
EXCEPT : Where Two or More Agents Agree to Be Solidarily Bound (Art. 1895)
COMPARE: Two Principals with Common Agent Principals Solidarily Liable (Art. 1915)
When two letters of attorney are issued simultaneously to two different attorneys-in-fact, but covering the same
powers shows that it was not the principals intention that they should act jointly in order to make their acts valid;
the separate act of one of the attorney-in-fact, even when not consented to by the other attorney in fact, is valid
and binding on the principal, especially the principal did not only repudiate the act done, but continued to retain
the said attorney-in-fact. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

24Also Lim v. CA, 271 SCRA 12 (1997).


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9. RULE ON LIABILITY RULES TO THIRD PARTIES: Agent Not Bound to Third Parties; It Is the Principal Who
Is Bound by the Contracts Entered Into By the Agent (Art. 1897)
A promissory note and mortgages executed by agent for and on behalf of his principal, in accordance with a
power of attorney, are valid, and as provided by Art. 1727, the principal must fulfill the obligations contracted by
the agent. xPNB v. Palma Gil, 55 Phil. 639 (1931).
The settlement or adjustment agent in the Philippines of a New York insurance company is no different from
any other agent from the point of view of his responsibility: whenever he adjusts or settles a claim, he does it in
behalf of his principal, and his action is binding upon his principal, and the agent does not assume any personal
liability, and he cannot be sued on his own right; the recourse of the insured is to press his claim against the
principal. xSalonga v. Warner Barnes, 88 Phil 125 (1951).25
A resident agent, as a representative of the foreign insurance company, is tasked only to receive legal
processes on behalf of its principal and not to answer personally for the any insurance claims. xSmith Bell v.
Court of Appeals, 267 SCRA 530 (1997).
Where buyer effects payment of part of purchase price to one of sellers creditors pursuant to the terms of the
deed of sale, there is no subrogation that takes place, as the buyer then merely acts as an agent of seller effecting
payment that was due to the seller in favor of a third-party creditor. xChemphil Export v. Court of Appeals, 251
SCRA 217 (1995).
Agents who have been authorized to sell parcels of land cannot claim personal damages in the nature of
unrealized commission where the buyer refuses to proceed with the sale. The rendering of such service did not
make them parties to the contracts of sale executed in behalf of the latter. Since a contract may be violated only
by the parties thereto as against each other, the real parties-in-interest, either as plaintiff or defendant, in an
action upon that contract must, generally, either be parties to said contract. xUy v. Court of Appeals, 314 SCRA
69 (1999).26
A person acting as a mere representative of another acquires no rights whatsoever, nor does he incur any
liabilities arising from the said contract between his principal and another party. xAngeles v. PNR, 500 SCRA 444
(2006).27
Art. 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to the party
with whom he contracts; it is the principal who is liable on the contracts of the agent. Eurotech Industrial
Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).28
Since, as a rule, the agency, as a contract, is binding only between the contradicting parties, then only the
parties, as well as the third person who transacts with the parties themselves, may question the validity of the
agency or the violation of the terms and conditions found therein. xVillegas v. Lingan, 526 SCRA 63 (2007).
a. EXCEPT: When Agent Expressly Binds Himself (Art. 1897):
When the attorney-in-fact of the owner of a parcel of land acted within the scope of his authority by mortgaging
the property of the principal, the principal is bound by the mortgage, and cannot use the fact that the agent has
also bound himself personally to the debt. There is nothing in the law which prohibits an agent from binding
himself personally for the debt incurred in behalf of the principal. In fact the law recognizes such undertaking as
valid and binding on the agent. xTuason v. Orozco, 5 Phil 596 (1906).
Under Art. 1897, an agent who expressly binds himself to the contract entered into on behalf of the principal
becomes personally bound thereto . But the doctrine is not applicable viceversa, since everything agreed upon
by the principal to be binding on himself is not legally binding personally on the agent. Thus, when the previous
agent of the union bound itself personally liable on the contracts of the union, the new agent is not bound by the
assumption undertaken by original agent. xBenguet v. BCI Employees, 23 SCRA 465 (1968).
b. EXCEPT: When Agent Exceeds Authority Without Giving Notice of Limited Powers (Art. 1897) Only
the Agent Is Liable, Principal Is Not Liable Unless He Ratifies.
Under Art. 1897 when an agent acts in behalf of the principal, he cannot be held liable personally, except
when he acts outside the scope of his authority. Thus, a third party cannot generally sue on the contract seeking
both principal and agent to be liable thereon, for by suing the principal, the agent is deemed not to be personally
liable. On the other hand, if the agent is being sued on the basis that he acted outside the scope of his authority,
then it does not make sense to be also suing the principal who cannot be held liable for the acts of the agent
outside the scope of his authority. At any rate, Art. 1897 does not hold that in cases of excess of authority, both
the agent and the principal are liable to the other contracting party. xPhil. Products Co. v. Primateria Society
Anonyme, 15 SCRA 301 (1965).29
Where an agent defies the instructions of its principal in New York not to proceed with the sale due to non-
availability of carriage, it has acted without authority or against its principals instructions and holds itself
personally liable for the contract it entered into with the local company. National Power v. NAMARCO, 117
SCRA 789 (1982).

25Also E Macias & Co. v. Warner, Barnes & Co., 43 Phil 155 (1922).
26Ormoc Sugarcane Planters Assn. v. CA, 596 SCRA 630 (2009).
27Chua v. Total Office Products and Services, 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA 93 (2006); Chong v. CA, 527 SCRA 144 (2007);
Heirs of Eugenio Lopez, Sr. v. Querubin, 753 SCRA 371 (2015).
28Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
29Reiterated in Eurotech Industrial Technologies v. Cuizon, 521 SCRA 584 (2007).

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c. EXCEPT: When Agent Acts with Fraud or Negligence: Solidarily Bound with Principal
The rule relied upon by the agent to avoid the imposition of the liquidated damages provided for in the contract
of sale that every person dealing with an agent is put upon inquiry and must discover upon his peril the authority
of the agent would apply if the principal is sought to be held liable on the contract entered into by the agent. That
is not so in this case for it is the agent that it sought to be held liable on a contract 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.
xNAPOCOR v. NAMARCO, 117 SCRA 789, 800 (1982).
The practice in group insurance business, which is consistent with the jurisprudence thereon in the State of
California from whose laws our Insurance Code has been mainly patterned, is that the employer-policyholder
who takes out the insurance for its officers and employees, is the agent of the insurer who has authority to collect
the proceeds from the insurer. In this case, the insurer, through the negligence of its agent, allowed a purported
attorney-in-fact whose instrument does not clearly show such power to collect the proceeds, it was liable therefor
under the doctrine that the principal is bound by the misconduct of its agent. xPineda v. Court of Appeals, 226
SCRA 754 (1993).
Where lending bank required borrower to obtain a mortgage-redemption-insurance and deducted the
premiums thereto from the loan proceeds, it was wearing two hats, as a lender and as insurance agent. When it
turned out that the bank knew or ought to have known that borrower was not qualified at his age for MRI coverage
which prevented his insurance coverage at the time of the borrowers death, the bank was deemed to have been
an agent who acted beyond the scope of its authority. Under Art. 1897, if third person dealing with an agent is
unaware of the limits of the authority conferred by the principal and third person has been deceived by the non-
disclosure thereof by the agent, then the latter is liable for damages to him. The rule 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. DBP v. Court of Appeals, 231 SCRA 370 (1994).
Every principal is subject to liability for loss caused to another by the latters 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. xPahud v. CA, 597 SCRA 13 (2009).
d. Agent Is Criminally Liable for Crime Committed in the Pursuit of the Agency
The Law on Agency has no application in criminal cases, and no man can escape punishment when he
participates in the commission of a crime upon the ground that he simply acted as an agent of any party. xPeople
v. Chowdury, 325 SCRA 572 (2000).

10. Obligation Rules for Commission Agents: Sales on Consignment Arrangements


a. Commission Agent Responsible for Goods Received According to Terms and Conditions and as
Described in Consignment (Art. 1903)
EXCEPT: When Has Made Written Statement of Damage/Deterioration (Art. 1903)
In sale on consignment, as a form of agency, consignee-agent is relieved from his liability to return the goods
received from the consignor-principal when it is shown by preponderance of evidence in the civil case brought
that the goods were taken from the custody of the consignee by robbery, and no separate conviction of robbery
is necessary to avail of the exempting provisions under Art. 1174 for force majeure. xAustria v. Court of Appeals,
39 SCRA 527 (1971).
b. Agent Handling Various Goods for Different Owners (Art. 1904): He Must Distinguish Them by
Countermarks If Goods of Same Kind and Mark
PURPOSE: To Prevent Conflict of Interest Among Owners
COMPARE: Contracts of Deposit under Art. 1976: Depositary May Commingle Grain or Other Articles of
Similar Nature and Quality Ownership pro-rata
c. Commission Agent Cannot Sell on Credit Without Principals Consent (Art. 1905)
OTHERWISE: Considered as Cash Sales
Whether as an agency to sell or a contract of sale, liability of Green Valley is indubitable. Adopting Green
Valleys theory that the contract is an agency to sell, it is liable because it sold on credit without authority from its
principal. Under Art. 1905, without the express or implied consent of principal, commission agent cannot sell on
credit; should it do so principal may demand from him payment in cash. Green Valley v. IAC, 133 SCRA 697
(1984).

d. When With Principals Authority to Sell on Credit: (Art. 1906)


Inform the Principal with Statement of Buyers Names;
Effect of Non-Compliance Considered Cash Sale
e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907):
He Shall Bear the Risk of Collection
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He Shall Pay Principal the Proceeds on Same Terms Agreed with Purchaser
f. Liability for Failure to Collect Principals Credit When Due (Art. 1908)
Liability for Damages
Unless Due Diligence Proven

IV. OBLIGATIONS OF THE PRINCIPAL


1. OBLIGATIONS OF PRINCIPAL WITH THIRD PARTIES WITH WHOM THE AGENT CONTRACTS
a. The Principal Is Bound By the Contracts Entered Into by the Agent:
Entered Into in the Name of the Principal (Art. 1883)
Done Within Agents Scope of Authority (Art. 1897)
And Even When the Agent Acts with Negligence or Fraud (Art. 1909)
Where authorized agent failed to indicate in the mortgage that she was acting for and on behalf of her principal;
and the Real Estate Mortgage explicitly shows on its face that it was signed by agent in her own name and in her
own personal capacity. Thus, consistent with the law on agency, the principal cannot be bound by the acts of the
agent. The third-party bank has no one to blame but itself: Not only did it act with undue haste when it granted
and released the loan in less than three days, it also acted negligently in preparing the Real Estate Mortgage as
it failed to indicate that agent was signing it for and on behalf of principal. xBucton v. Rural Bank of El Salvador,
Inc., 717 SCRA 278 (2014).
Since the general rule is that the principal is bound by the acts of his agent in the scope of the agency,
therefore when the agent had full authority to make the tax returns and file them, together with the check
payments, with the Collector of Internal Revenue on behalf of the principal, then the effects of dishonesty of the
agent must be borne by the principal, not by an innocent third party who has dealt in good faith with the dishonest
agent. xLim Chai Seng v. Trinidad, 41 Phil. 544 (1921).
A person with whom an agent has contracted in the name of his principal, has a right of action against the
purported principal, even when the latter denies the authority of the agent, in which case the party suing has the
burden of proving the existence of the agency. If the agency relation is proved, then the principal shall be held
liable, and the agent who is made a party to the suit cannot be held personally liable. On the other hand, if the
agency relationship is not proven, it would be the agent who would become liable personally on the contract.
xNantes v. Madriguera, 42 Phil. 389 (1921).
As a general rule, the mismanagement of the business by his agents does not relieve said party-principal from
the responsibility that he had contracted with third persons. xCommercial Bank & Trust Co. v. Republic Armored
Car Services Corp., 8 SCRA 425 (1963).
Where petitioners had issued a check in payment of the judgment debt and made arrangements with the bank
to allow the encashment thereof, but check was dishonored by the bank which increased the amount of the
judgment debt, then the defense of petitioner that he cannot be held liable for the oversight of the bank is
untenable: Principal is responsible for the acts of the agent, done within the scope of his authority, and should
bear the damages caused upon third parties; petitioners remedy is recover from the bank.. If the fault or oversight
lies on the agent bank, petitioners are free to sue said bank for damages occasioned thereby. xLopez v. Alvendia,
12 SCRA 634 (1964).
Where principal issued the checks in full payment of the taxes due, but his agents had misapplied the check
proceeds, the principal would still be liable, because when a contract of agency exists, the agents acts bind his
principal, without prejudice to the latter seeking recourse against the agent in an appropriate civil or criminal
action. xDy Peh v. Collector of Internal Revenue, 28 SCRA 216 (1969).
When a third party admitted that she had contracted with the principal through a duly authorized agent, and
then sues both the principal and the agent on an alleged breach of that contract, and in fact later on dismisses
the suit insofar as the principal is concerned, there can be no cause of action against the agent. Since it is the
principal who should be answerable for the obligation arising from the agency, it is obvious that if a third person
waives his claims against the principal, he cannot assert them against the agent. xBedia v. White, 204 SCRA 273
(1991).
The fact that the agent defrauded the principal in not turning over the proceeds of the transactions to the latter
cannot in any way relieve or exonerate such principal from liability to the third persons who relied on his agents
authority. It is an equitable maxim that as between two innocent parties, the one who made it possible for the
wrong to be done should be the one to bear the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993).
Principal is not absolve from damages sustained by its buyer based on the fault primarily caused by its agent
in pointing to the wrong lot, since under Arts. 1909 and 1910, the liability of the principal for acts done by the
agent within the scope of his authority do not exclude those done negligently. Pleasantville Dev. v. Court of
Appeals, 253 SCRA 10 (1996).
b. Agents Written Power of Attorney, Insofar as Concerns Third Persons, Governs on Questions Whether
Agent Acted Within Scope of Authority Even if it Exceeds Authority According to Understanding
Between Principal and Agent (Art. 1900)

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As far as third persons are concerned, an act is deemed to have been performed within the scope of the
agents 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. xEugenio
v. Court of Appeals, 239 SCRA 207 (1994). CONSEQUENTLY:
Spouses Rabaja did not recklessly enter into a contract to sell with Gonzales. They required her presentation
of the power of attorney before they transacted with her principal. And when Gonzales presented the SPA to
Spouses Rabaja, the latter had no reason not to rely on it. Salvador v. Rabaja, 749 SCRA 654 (2015).
Where wife gave husband a power of attorney to loan and borrow money, and for such purpose to mortgage
her property, the resulting transactions are binding upon the wife regardless of what the husband may have
done with the loan proceeds. Bank of P.I. v. De Coster, 47 Phil 594 (1925).
Where memorial park company authorized its agent to solicit and remit offers to purchase internment spaces
obtained on forms provided therefore, then the terms of the offer to purchase, therefore, are contained in
such forms and, when signed by the buyer and an authorized officer of the company, becomes binding on
both the company and said buyer. Any arrangement, term or condition outside of those provided in the form
do not bind the principal, since the same were made obviously outside the agents authority. When the power
of the agent to sell are governed by the written form, it is beyond the authority of the agent as a fact that is
deemed known and accepted by the third person, to offer terms and conditions outside of those provided in
writing. Manila Memorial Park Cemetery v. Linsangan, 443 SCRA 377 (2004).
It is a settled rule that third 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 liable, to act with ordinary prudence and
reasonable diligence to ascertain (i) not only the fact of agency, (ii) but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon them to establish it. Harry Keeler v. Rodriguez,
4 Phil. 19 (1922).30 CONSEQUENTLY:
Where a bank accepted a letter of guarantee signed by a mere credit administrator on behalf of the finance
company, the burden was on the bank to satisfactorily prove that the credit administrator with whom they
transacted acted within the authority given to him by his principal. xBA Finance v. Court of Appeals, 211
SCRA 112 (1992).
When one knowingly deals with the sales representative of a car dealer company, it is incumbent upon such
person to know the extent of the sales representatives authority as an agent in respect of contracts to sell
the vehicles. Such person ought to know that he is dealing with an agent, normal business practice does not
warrant a sales representative to have power to enter into a valid and binding contract of sale for the
company. xToyota Shaw, Inc. v. CA, 244 SCRA 320 (1995).
Mere representation or declaration of one that he is authorized to act on behalf of another cannot of itself
serve as proof of his authority to act as agent or of the extent of his authority as agent. xYu Eng Cho v.
PANAM, 328 SCRA 717 (2000).
Burden of proof of the authority of the agent is not overcome when the agent himself 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. xLitonjua v. Fernandez, 427 SCRA 478 (2004).
That the person applying for the loan is other than the registered owner of the real property being mortgaged
should have already raised a red flag with the Bank and which should have induced it to make inquiries into
and confirm Santos authority to mortgage. A person who deliberately ignores a significant fact that could
create suspicion in an otherwise reasonable person is not an innocent purchaser for value. Bank of
Commerce v. San Pablo, Jr., 522 SCRA 713 (2007).
Undue haste in granting the loan without inquiring into the ownership of the subject properties being
mortgage, as well as the authority of the supposed agent to constitute the mortgages on behalf of the owners,
bank accepting the mortgage cannot be deemed a mortgagee in good faith. xSan Pedro v. Ong, 569 SCRA
767 (2008).
Ignorance of a person dealing with an agent as ofto the scope of the latters agents authority he is dealing
with is no excuse to such person and the fault cannot be thrown upon the principal. A person dealing with an
agent assumes the risk of lack of authority of the agent. He cannot charge the principal by relying upon the
agents assumption of authority that proves to be unfounded. The principal, on the other hand, may act on the
presumption that third persons dealing with his agent will not be negligent in failing to ascertain the extent of his
authority as well as the existence of his agency. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443
SCRA 377 (2004).

c. Principal Not Bound to Contracts Entered Into By Agent Outside of His Authority (Arts. 1898 and
1910),
(i) When Principal Ratifies, Expressly or Impliedly (Art. 1901)
Where a sale of land is effected through an agent who made misrepresentations to the buyer that the property
can be delivered physically to the buyer when in fact it was in adverse possession of third parties, the seller-
principal is bound for such misrepresentations and cannot insist that the contract is valid and enforceable; the

30
Also Strong v. Repide, 6 Phil. 680 (1906); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); Veloso v. La Urbana, 58 Phil. 681 (1933); Pineda v. CA, 226
SCRA 754 (1993); Bacaltos Coal Mines v. CA, 245 SCRA 460 (1995); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Escueta v. Lim, 512 SCRA 411 (2007);
Soriamont Steamship Agencies v. Sprint Transport Services, 592 SCRA 622 (2009).
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seller-principal cannot accept the benefits derived from such representations of the agent and at the same time
deny the responsibility for them. Gonzales v. Haberer, 47 Phil. 380 (1925).
In agency, ratification is the adoption/ or confirmation by the principal of an act performed on his behalf by
another without authoritythe substance of the doctrine is confirmation after conduct, amounting to a substitute
for a prior authority. For ratification to take place, it is required that the principal must have full knowledge at the
time of ratification of all the material facts and circumstances relating to the unauthorized act of the person who
assumed to act as agent; and that is such material facts were suppressed or unknown, there can be no valid
ratification. Nevertheless, this principle does not apply if the principals ignorance of the material facts and
circumstances was willful, or that the principal chooses to act in ignorance of the facts, there would still be
ratification.. Only the principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the principal
must have knowledge of the acts he is to ratify. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443
SCRA 377, 394 (2004).
Since the basis of agency is representation, then the question of whether an agency has been created is
ordinarily a question which may be established in the same way as any other fact, either by direct or circumstantial
evidence. Though that fact or extent of authority of the agents may not, as a general rule, be established from
the declarations of the agents alone, if one professes to act as agent for another, she may be estopped to deny
her agency both as against the asserted principal and the third persons interested in the transaction in which he
or he is engaged. xDoles v. Angeles, 492 SCRA 607 (2006).
Even when the agent exceeds 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 implied.
Ratification in agency is the adoption or confirmation by one person of an act performed on his behalf by another
without authority. Innocent third persons should not be prejudiced if the principal failed to adopt the needed
measures to prevent misrepresentation, much more so if the principal ratified his agents acts beyond the latters
authority. Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542 (2008).
Under Arts. 1898 and 1910, agents act done beyond the scope of authority may bind principal if he ratifies
them, whether expressly or tacitly. Only the principal, and not the agent, can ratify the unauthorized acts, which
the principal must have knowledge of. Thus, where the special power of attorney that an agent for the insurance
company provides clearly the limit of the entities to whom he can issue a surety bond, as well as the limit of the
amounts that it can cover, an insured who does not fall within such authority cannot claim good faith as to make
the surety issued outside of the scope of authority binding on the insurance company. xCountry Bankers
Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
(ii) Third Person Cannot Set-up Facts of Agents Exceeding Authority Where Principal Ratified or
Signified Willingness to Ratify Agents Acts (Art. 1901)
Principal Should Be the One to Question Agents Lack/Excess of Authority
Power of Attorney (Must) Be Required by Third Party (Art. 1902)
Private or Secret Orders of Principal Do Not Prejudice Third Persons Who Relied Upon Agents
Power of Attorney or Principals Instruction (Art. 1902)
In an expropriation proceeding, the State cannot raise the alleged lack of authority of the counsel of the owner
to bind his client in a compromise agreement because such lack of authority may be questioned only by the
principal or client. [Since it is within the right or prerogative of the principal to ratify even the unauthorized acts of
the agent]. xCommissioner of Public Highways v. San Diego, 31 SCRA 617 (1970)

(iii) Where Agent Acts in Excess of Authority, But the Principal Allowed Agent to Act as Though Agent
Had Full Powers (Art. 1911)
Doctrine of Apparent Authority
Where bank, by its acts and failure to act, has clearly clothed its manager with apparent authority to sell a
piece of land in the normal course of business, it is legally obliged to confirm the transaction by issuing a board
resolution to enable the buyers to register the property in their names. xRural Bank of Milaor v. Ocfemia, 325
SCRA 99 (2000).
The doctrine of apparent authority focuses on two factors: first the principals manifestations of the existence
of agency which need not be expressed, but may be general and implied; and second, is the reliance of third
persons upon the conduct of the principal or agent. Under the doctrine, the question in every case is whether
the principal has by his voluntary act placed the agent in such a situation that a person of ordinary prudence,
conversant with business usages and the nature of the particular business, is justified in presuming that such
agent has authority to perform the particular act in question. xProfessional Services, Inc. v. CA, 544 SCRA 170
(2008); 611 SCRA 282 (2010).
Easily discernible from the foregoing is that apparent authority is determined only by the acts of the principal
and not by the acts of the agent. The principal is, therefore, not responsible where the agents own conduct and
statements have created the apparent authority. xSargasso Construction & Dev. Corp. v. PPA, 623 SCRA 260
(2010).
There can be no apparent authority of an agent without acts or conduct on the part of the principal, which
must have been known and relied upon in good faith as a result of the exercise of reasonable prudence by a
third party claimant, and which must have produced a change of position to the third partys detriment. There is
no basis to apply the doctrine where there is no evidence showing manner by which the supposed principal,

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has clothed or held out its branch manager as having the power to enter into an agreement, as claimed by
petitioners. xBanate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010).
(ii) Agency by Estoppel
By opening of branch office with the appointment of its branch manager and honoring several surety bonds
issued in its behalf, insurance company induced the public to believe that its branch manager had authority to
issue such bonds. Insurance company was estopped from pleading against a regular customer thereof, that the
branch manager had no authority. xCentral Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159 (1971).
Even when agent of real estate company acts unlawfully and outside the scope of authority, the principal can
be held liable when by its own act it accepts without protest the proceeds of the sale of the agents which came
from double sales of the same lots, as when learning of the misdeed, it failed to take necessary steps to protect
the buyers and failed to prevent further wrong from being committed when it did not advertise the revocation of
the authority of the culprit agent. In such case the liabilities of both the principal and the agent is solidary.
xManila Remnants v. Court of Appeals, 191 SCRA 622 (1990).
For an agency by estoppel to exist, following must be proved: (1) principal manifested a representation of
the agents authority or knowingly allowed the agent to assume such authority; (2) third person, in good faith,
relied upon such representation; (3) relying upon such representation, such third person has changed his
position to his detriment. An agency by estoppel, which is similar to doctrine of apparent authority, requires
proof of reliance upon representations, which needs proof that the representations predated the action taken in
reliance. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).31
For one to successfully claim the benefit of estoppel on the ground that he has been misled by the
representations of another, he must show that he was not misled through his own want of reasonable care and
circumspection. xCountry Bankers Insurance v. Keppel Cebu Shipyard, 673 SCRA 427 (2012).

2. Rights of Persons Who Contracted for Same Thing, One With Principal and the Other With Agent
(Art. 1916):
That of Prior Date Is Preferred
If a Double Sale Situation Art. 1544 Governs
IN WHICH CASE: the Liability to Third Person Whose Contract Must Be Rejected Shall Be as Follows:
(Art. 1917):
If Agent in Good Faith Principal Liable
If Agent in Bad Faith Agent Alone Liable

3. Liability of Principal to Third Persons for Acts of the Agents Employees


That the employee of the airline companys agent has committed a tort is not sufficient to hold the airline
company liablethere is no vinculum juris between the airline company and its agent's employees and the
contractual relationship between the airline company and its agent does not operate to create a juridical tie between
the airline company and its agents employees. Article 2180 of the Civil Code does not make the principal
vicariously liable for the tort committed by its agents employees and the principal-agency relationship per se does
not make the principal a party to such tort; hence, the need to prove the principals own fault or negligence.
xSpouses Viloria v. Continental Airlines, Inc., 663 SCRA 57 (2012).
COMPARE: With regard to the delivery of the petroleum, Villaruz was acting as the agent of petitioner Petron: for a
fee, he delivered the petroleum products on its behalf; and notably, Petron even imposed a penalty clause in
instances when there was a violation of the hauling contract, wherein it may impose a penalty ranging from a
written warning to the termination of the contract. Therefore, as far as the dealer was concerned with regard to the
terms of the dealership contract, acts of Villaruz and his employees are also acts of Petron. xPetron Corp. v.
Spouses Cesar Jovero & Erma F. Cudilla, 663 SCRA 172 (2012).

4. OBLIGATIONS OF THE PRINCIPAL WITHIN THE AGENCY ARRANGEMENT


a. Obligation to Pay Agents Compensation (Art. 1875)
b. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912)
(1) Agent Has Right to Reimbursement for Expenses Advanced Including Interest from the Day It Was
Advanced
COMPARE: Where Agent Consents and Is Bound to Advance the Sums as Stipulated (Art. 1886)
(2) Where Principle Not Liable to Agent for Expenses Incurred (Art. 1918)
Where BMW periodically inspected the service centers to see to it that BMW standards were maintained.
Indeed, it would seem from BMW's letter to Hahn that it was for Hahn's alleged failure to maintain BMW
standards that BMW was terminating Hahn's dealership. The fact that Hahn invested his own money to put up
these service centers and showrooms does not necessarily prove that he is not an agent of BMW. For as
already noted, there are facts in the record which suggest that BMW exercised control over Hahn's activities
as a dealer and made regular inspections of Hahn's premises to enforce compliance with BMW standards and
specifications. Hahn v. Court of Appeals, 266 SCRA 537 (1997).

31Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009).


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However, while Agency Law prohibits the area manager from obtaining reimbursement, his right to recover
may still be justified under the general law on obligations and contracts, particularly Article 1236 of the Civil
Code on payment by a third party of the obligation of the debtor, allows recovery only insofar as the payment
has been beneficial to the debtor. Thus, to the extent that the obligation of the insurance company has been
extinguished, the area manager may demand for reimbursement from his principal. To rule otherwise would
result in unjust enrichment of petitioner. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239
(2002).
c. Obligation to Indemnify Agent for Damages Sustained in Pursuing Agency (Art. 1913)
COMPARE: Liability for Damages for Non-Performance of Agency (Art. 1884)
When copra purchased by a company from another company is by way of sale rather than an agency to
purchase, the former is not liable to reimburse the latter for expenses incurred by the latter in maintaining it
purchasing organization intact over a period during which the actual buying of copra was suspended.
xAlbaladejo y Cia. v. PRC, 45 Phil 556 (1923).
d. Agents Right to Retain Object as Pledge for Advances and Damages (Art. 1914)
(1) Agent Bound to Deliver to Principal Everything Received, Even If Not Due the Principal (Art. 1891).
(2) Thing Pledged May Be Sold Only After Demand of Amount Due (Art. 2122):
Public auction to take place within one (1) month after demand
Debtor may demand return of not sold within this period

3. Two or More Principals Appoint Agent for Common Transactions (Art. 1915)
a. Obligation of the Principals Is Solidary Because of Their Common Interest
COMPARE: Two or More Agents with One Principal Agents Obligation NOT Solidary, unless
otherwise expressed. (Art. 1894)
b. Any of the Principal May Validly Revoke Agents Authority (Art. 1925)
When the law expressly provides for solidarity of the obligation, as in the liability of co-principals in a contract
of agency, each obligor may be compelled to pay the entire obligation. The agent may recover the whole
compensation from any one of the co-principals, as in this case. xDe Castro v. Court of Appeals, 384 SCRA 607
(2002).

V. EXTINGUISHMENT OF AGENCY
1. How and When Agency Extinguished (Art. 1919)
a. By Principals Revocation (Express or Implied) of the Agency
b. By Agents Withdrawal from the Agency
c. By Death, Civil Interdiction, Insanity or Insolvency of the Principal or the Agent
d. By Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency
e. By the Accomplishment of the Object or Purpose of the Agency
f. By the Expiration of the Period for Which Agency Was Constituted

2. EXPRESS REVOCATION: The Principal May Revoke an Agency at Will


a. In Which Case, Principal May Compel Agent to Return the Document Evidencing the Agency (Art. 1920)
b. In Case of Multiple Principals, Any of the Principals Can Revoke the Authority of Their Common
Agent, Without the Consent of the Others (Art. 1925)
Obligation of Several Principals to a Common Agent Is Solidary (Art. 1915)
c. Rulings on Power of Principal to Revoke the Agency
Revocation Based on Breach of Trust: Art. 300 of the Code of Commerce expressly authorizes a merchant to
discharge his employee or agent for fraud or breach of trust, or engaging in any commercial transaction for their
own account without the express knowledge and permission of the principal. xBarretto v. Santa Marina, 26 Phil
440 (1913); xManila Trading v. Manila Trading Laborers Assn., 83 Phil 297 (1949).
Where no time for continuance of the agency is fixed by the terms, principal is at liberty to terminate it at will,
subject only to the requirements of good faith. xDaon v. Brimo, 42 Phil 133 (1921); xBarretto v. Santa Marina,
26 Phil 440 (1913).
Revocation of a special power of attorney, although embodied in a private writing is valid and binding between
the parties. Phil. National Bank v. IAC, 189 SCRA 680 (1990).
When the terms of the agency contract allowed the agent to dispose of, sell, cede, transfer and convey until
all the subject property as subdivided is fully disposed of, the agency is one with a period and it is not
extinguished until all the lots have been disposed of. Consequently, if the contract is terminated by the principal
before all the subdivision lots has been disposed of, there is a breach for which the principal would be liable for
damages. xDialosa v. Court of Appeals, 130 SCRA 350 (1984).
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We set aside the portion of the decision reinstating Orient Air as general sales agent of American Air, even
when the revocation was done without proper cause, for courts are without authority to reinstate an agency
arrangement that has been revoked or terminated by the principal. xOrient Air Services v. Court of Appeals, 197
SCRA 645, 656 (1991).

3. IMPLIED REVOCATION
a. Appointment of New Agent for Same Business/Transaction (Art. 1923)
Impliedly Revoked as to Agent Only
As to Third Persons, Notice to Them Is Necessary (Art. 1922)
In litigation, the fact that a second attorney enters an appearance on behalf of a litigant does not authorize a
presumption that the authority of the first attorney has been withdrawn. xAznar v. Morris, 3 Phil. 636 (1904).
Where the father first gave a power of attorney over the business to his son, and subsequently to the mother,
without evidence showing that the son was informed of the power of attorney to the mother, the transaction
effected by the son pursuant to his power of attorney, was valid and binding. xGarcia v. De Manzano, 39 Phil 577
(1919).

b. Principal Directly Manages Business Entrusted to Agent (Art. 1924)


If the purpose of the principal in dealing directly with the purchaser and himself effecting the sale of the
principals property is to avoid payment of his agents commission, the implied revocation is deemed made in bad
faith and cannot be sanctioned without according to the agent the commission which is due him. xInfante v.
Cunanan, 93 Phil 693 (1953).
Where purported agent was given only authority to follow up the purchase of fire truck with municipal
government, there was no authority to sell nor was he empowered to make a sale for and in behalf of the seller.
But even if purported agent is considered to have been constituted as an agent to sell the fire truck, such agency
would have been deemed revoked upon resumption of direct negotiations between seller-principal and the
municipality, the purported agent having in the meantime abandoned all efforts to secure the deal in the sellers
behalf. xGuardex v. NLRC, 191 SCRA 487 (1990).
The act of contractor, who, after executing an SPA in favor another 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. New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824 (1960). 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 agents commission. CMS Logging v. Court of
Appeals, 211 SCRA 374 (1992).
c. General Power of Attorney Is Revoked by a Special One Granted to Another Agent, As Regards the
Special Matter Involved in the Latter (Art. 1926)
A special power of attorney giving the son the authority to sell the principals properties is deemed revoked by
a subsequent general power of attorney that does not give such power to the son, and any sale effected thereafter
by the son in the name of the father would be void. Dy Buncio and Co. v. Ong Guan Ca, 60 Phil 696 (1934).

4. CASES OF IRREVOCABLE AGENCIES (Art. 1927): Agency Coupled with Interest


a. When a Bilateral Contract Depends Upon the Continued Existence of the Agency
An exception to the revocability of a contract of agency is when it is coupled with interest, i.e., if a bilateral
contract depends upon the agency. The reason for its irrevocability is because the agency becomes part of
another obligation or agreement. It is not solely the rights of the principal but also that of the agent and third
persons which are affected. Republic v. Evangelista, 466 SCRA 544 (2005).
b. When It Is the Means of Fulfilling an Obligation Already Contracted
Unlike simple SPAs, an agency coupled with interests cannot be revoked at will, since it had been created for
the mutual interest of the agent and the principal. It appears that Lina Sevilla is a bona fide travel agent herself,
and had acquired an interest in the business entrusted to her: she had assumed a personal obligation for the
operation thereof, holding herself solidarily liable for the payment of rentals; she used her own name in pursuing
the business, after Tourist World had stopped further operations. Her interest, obviously, is not limited to the
commissions she earned as a result of her business transactions, but one that extends to the very subject matter
of the power of management delegated to her. It is an agency that cannot be revoked at the pleasure of the
principal. Sevilla v. Court of Appeals, 160 SCRA 171 (1988).
In the insurance business, the most difficult and frustrating period is the solicitation and persuasion of the
prospective clients to buy insurance policies. Normally, agents would encounter much embarrassment,
difficulties, and oftentimes frustrations in the solicitation and procurement of the insurance policies. To sell
policies, an agent exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money.
Therefore, the respondents cannot state that the agency relationship between Valenzuela and Philamgen is not
coupled with interest. There may be cases in which an agent has been induced to assume a responsibility or
incur a liability, in reliance upon the continuance of the authority under such circumstances that, if the authority
be withdrawn, the agent will be exposed to personal loss or liability. Furthermore, there is an exception to the
principle that an agency is revocable at will and that is when the agency has been given not only for the interest
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of the principal but for the interest of third persons or for the mutual interest of the principal and the agent. In
these cases, it is evident that the agency ceases to be freely revocable by the sole will of the principal.
Valenzuela v. Court of Appeals, 191 SCRA 1 (1990).
Relationship between NASUTRA/SRA and PNB when the former constituted the latter as its attorney-in-fact
is not a simpIe agency, because NASUTRA/SRA has assigned and practically surrendered its rights in favor of
PNB for a substantial consideration. To reiterate, NASUTRA/SRA executed promissory notes in favor of PNB
every time it availed of the credit line. The agency established is one coupled with interest which cannot be
revoked at will by any of the parties. National Sugar Trading v. PNB, 396 SCRA 528 (2003).
There is no question that the SPA executed is a contract of agency coupled with interest. . . [But] in this case,
we agree with the CA that although the revocation was done in bad faith, respondents did not act in a wanton,
fraudulent, reckless, oppressive or malevolent manner. They revoked the SPA because they were not satisfied
with the amount of the loan approved. Thus, petitioners are not entitled to exemplary damages. Ching v. Bantolo,
687 SCRA 134 (2012). Indeed, even an agency coupled with interest may indeed be revoked on the ground of
fraud committed by the agent, which is really an act of rescission, the same must be clearly be proven. xBacaling
v. Muya, 380 SCRA 714 (2002).
c. Unjustified Removal of a Managing Partner Revocation Needs the Vote of Controlling Partners (Art.
1800)
A power of attorney coupled with interest in a partnership can be revoked for a just cause, such as when the
attorney-in-fact betrays the interest of the principal. The irrevocability of the power of attorney may not be used
to shield the perpetration of acts in bad faith, breach of confidence, or betrayal of trust, by the agent for that would
to authorizing the agent to commit frauds against the principal. xColeongco v. Claparols, 10 SCRA 577 (1964).

5. Effects of Revocation on Third Parties


a. Agency Created With Reference to Specified Third Parties, Revocation Affects Such Third Parties
Only When So Notified (Art. 1921)
Where principal had revoked agents power to handle the business, but such revocation was not conveyed to
a long-standing client to whom the agent had been specifically endorsed in the past by the principal, the
revocation was not deemed effective as to such client and the contracts entered into by agent for the principal
after the revocation would still be valid and binding against the principal. Rallos v. Yangco, 20 Phil 269
(1911).32
Where the lands principal owner executes an SPA giving agent the power to mortgage the same, even when
there has been a revocation thereof, but the same has not been made known to third parties, then those who
receive a mortgage on the properties in good faith will be protected pursuant to principle embodied in Art. 1921
that if an agency has been entrusted for the purpose of contracting with specified persons, its revocation shall
not prejudice the latter if they were not given notice. Lustan v. CA, 266 SCRA 663 (1997).
b. Revocation of Agents General Powers Effective Against Third Persons (Art. 1922)
Refers to Agency Created to Deal with the General Public
Revocation Will Not Prejudice Third Persons Who Deal with the Agent in Good Faith and Without
Knowledge of Revocation
However Notice of Revocation in a Newspaper of General Circulation Is Sufficient Warning
While Art. 1358 requires that the contracts involving real property must appear in a proper document, a
revocation of a special power of attorney to mortgage a parcel of land, embodied in a private writing, is valid and
binding between the parties, such requirement of Article 1358 being only for the convenience of the parties and
to make the contract effective as against third persons. xPNB v. Intermediate Appellate Court, 189 SCRA 680
(1990).
In a case covering a power of attorney to deal with the general public, the fact that the revocation was
advertised in a newspaper of general circulation would be sufficient warning to third persons. xRammani v. Court
of Appeals, 196 SCRA 731 (1991).

6. Right of Agent to Withdraw from Agency (Art. 1928)


By Giving Due Notice to Principal
Agent to Indemnify Principal Should He Suffer Any Damage
UNLESS: Withdrawal Is Due to Impossibility of Continuing Agency Without Grave Detriment to Agent
Even If Agent Withdraws from the Agency for a Valid Reason, He Must Continue to Act Until the
Principal Has Had Reasonable Opportunity to Take Necessary Steps to Meet the Situation (Art. 1929)
When agent informs principal by letter that for reasons of health and medical treatment he will depart from the
place where the said property is situated, turns property over to a third party, renders accounts of its revenues
up to the date on which he ceases to hold his position and transmits to his principal a general statement which
summarizes and embraces all the balances of his accounts since he began the administration to the date of the
termination of his trust, and asked his principal to execute a power of attorney in due form in favor of and transmit
the same to another person who took charge of the administration of the said property, said agent had expressly

32Reiterated in Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).


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and definitely renounced his agency and that such agency was duly terminated. xDela Pena v. Hidalgo, 16 Phil
450 (1910).
Where agent institutes an action against his principal for the recovery of the balance in his favor resulting from
the liquidation of the accounts between them arising from the agency, and renders a final account, is equivalent
to an express renunciation of the agency, and terminates the juridical relation between them. The subsequent
purchase by the former agent of the principals usufruct rights in a public auction therefore was valid, since no
fiduciary relationship existed between them at that point. xValera v. Velasco, 51 Phil 695 (1928).

7. Death of the Principal Extinguishes the Agency (Arts. 1919[3], 1931)


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. xRallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).
Death of a client divests his lawyer of authority to represent him as counsel. xLavina v. Court of Appeals, 171
SCRA 691 (1988).33
a. When the Agency Continues Despite Death of Principal (Art. 1930):
If It Was Constituted for Common Interest of Principal and Agent; or
In Favor of Third Person Who Accepted Stipulation in His Favor.
It is an agency coupled with interest when a power of attorney is constituted in real estate mortgage pursuant
to the requirement of Act No. 3135, which would empower the mortgagee upon the default of the mortgagor to
payment the principal obligation, to effect the sale of the mortgage property through extrajudicial foreclosure. The
death of the principal-debtor did not extinguished the power of the Bank to sell the property at a public sale; the
power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by
the agent but is primarily an authority conferred upon the mortgagee for the latters own protection. Perez v.
PNB, 17 SCRA 833 (1966).34
Agency is extinguished by principals death; exception is when 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.
xSasaba v. Vda. De Te, 594 SCRA 410 (2009).
b. Acts Done by Agent Without Knowledge of Principals Death (Art. 1931): Acts Are Valid Provided:
Agent Does Not Know of Death or Other Cause of Extinguishment of Agency;
Third Persons Must Also Be in Good Faith (Not Aware of Death or Other Cause).
Under Art. 1931, we must uphold the validity of the sale of the land effected by the agent only after the death
of the principal, when no evidence was adduced to show that at the time of sale both the agent and the buyers
were unaware of the death of the principal. xBauson v. Panuyas, 105 Phil 795 (1959); xHerrera v. Uy Kim Guan,
1 SCRA 406 (1961).

8. Death of the Agent Extinguishes the Agency (Art. 1932): Obligation of Agents Heirs in Case of
Agents Death:
Notify Principal
Adopt Measures as Circumstances Demand in Principals Interest
A contract of management entered into by the Municipality with a private individual which authorizes the latter
to sell forest products is one of agency, and it extinguished by the death of the agent, and his rights and obligations
arising from the contract of agency are not transmittable to his heirs. xTerrado v. Court of Appeals, 131 SCRA
373 (1984).

B. BUSINESS TRUSTS
I. NATURE AND CLASSIFICATION OF TRUSTS
1. Definition and Essential Characteristic of Trust (Art. 1440)
A trust is a fiduciary relationship with respect to property which involves the existence of equitable duties
imposed upon the holder of the title to the property to deal with it for the benefit of another.35 Its characteristics
are: (a) it is a relationship; (b) it is a relationship of fiduciary character; (c) It is a relationship with respect to
property, not one involving merely personal duties; (d) it involves the existence of equitable duties imposed upon
the holder of the title to the property to deal with it for the benefit of another; and (e) it arises as a result of a
manifestation of intention to create the relationship. Morales v. Court of Appeals, 274 SCRA 282 (1997).

33
Also Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952).
34Superseded
Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad, 104 Phil. 648 (1958).
35Also
Huang v. CA, 236 SCRA 429 (1994); Rizal Surety & Insurance Co. v. CA, 261 SCRA 69 (1996); Tala Realty Services v. Banco Filipino Savings Bank, 392
SCRA 506 (2002); DBP v. COA, 422 SCRA 459 (2004); Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009); Metropolitan Bank v. Board of
Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 360 (2010); PNB v. Aznar, 649 SCRA 214 (2011); Torbela v. Rosario, 661 SCRA 633
(2011); Estate of Margarita D. Cabacungan v. Laigo, 655 SCRA 366 (2011); Advent Capital and Finance Corp. v. Alcantara, 664 SCRA 224 (2012); Goyanko v.
UCPB, 690 SCRA 79 (2013).
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a. Trusts Are Based on Equity Principles (Common-law) (Art. 1442)
As the law of trusts has been much more frequently applied in England and in the United States than in Spain,
we may draw freely upon American precedents in determining the effect of the testamentary trust here under
consideration, especially so as the trusts known to American and English equity jurisprudence are derived from
the fidei commissa of the Roman law and are based entirely upon Civil Law principles. xGovernment v. Abadilla,
46 Phil. 642 (1924).36
Article 1442 incorporates a large part of the American law on trusts, and thereby the Philippine legal system
will be amplified and will be rendered more suited to a just and equitable solution of many questions. Report of
the Code Commission, at p. 60.
b. Distinguished from Agency
(1) While both trust and agency relationships are fiduciary in nature; agency is essentially revocable, while a
trust contract is essentially obligatory in its terms and period, and can only be rescinded based on breach
of trust.
(2) Trustee takes legal or naked title to the subject matter of trust, and acts on his own business discretion;
agent possesses property under agency for and in the name of the owner and must act upon instructions
of the owner;
(3) Trustee enters into contracts pursuant to the trust in his own name as legal or naked title holder, while
agent enters into contract in the name of the principal; and
(4) Trustee is liable directly and may be sued, albeit in his trust capacity; while agent cannot be sued since it
is the principal that must be held liable on the suit.
An investment management account, where the written instrument provides that bank shall purchase debt
securities on behalf of client and will handle the accounts in accordance with clients instructions, creates a
principal-agent relationship, and not a trust relationship nor an ordinary bank deposit account. Consequently,
under Art. 1910, the client assumed all obligations or inherent risks entailed by transactions emanating from the
arrangement, and the bank may be held liable as an agent, only when it exceeds its authority, or acts with fraud,
negligence or bad faith. Principals are solely obliged to observe the solemnity of the transaction entered into by
the agent on their behalf, absent any proof that the latter acted beyond its authority, and concomitant to this
obligation is that the principal also assumes the risks that may arise from the transaction. Panlilio v. Citibank,
539 SCRA 69 (2007).

2. Kinds of Trusts: (a) Express Trusts, and (b) Implied Trusts (Art. 1441)
Ramos v. Ramos, 61 SCRA 284, 298 (1974): Express trusts are those which are created by the direct and
positive acts of the parties, by some writing or deed, or will, or by words either expressly or impliedly evincing an
intention to create a trust.37
Implied trusts are those which, without being expressed, are deducible from the nature of the transactions as
matters of intent, or which are superinduced on the transaction by operation of law as matters of equity,
independently of the particular intention of the parties. They are ordinarily subdivided into resulting and
constructive trusts (89 C.J.S. 722).38
A resulting trust is is raised or created by the act or construction of law, but in its more restricted sense it is a
trust raised by implication of law and presumed always to have been contemplated by the parties, the intention
as to which is to be found in the nature of their transaction, but not expressed in the deed or instrument of
conveyance (89 C.J.S. 725). Arts. 1448 to 1455 are examples of resulting trusts.39
In a restricted sense, a constructive trust is a trust not created by any words, either expressly or implied
evincing a direct intention to create a trust, but by the construction of equity in order to satisfy the demands of
justice. It does not arise by agreement or intention but by operation of law. If a person obtains legal title to
property by fraud or concealment, courts of equity will impress upon the title a so-called constructive trust in favor
of the defrauded party. Constructive trust is not a trust in the technical sense.40
Trust is the right to beneficial enjoyment of property, legal title to which is vested in another. It is a fiduciary
relationship that obliges trustee to deal with the property for the benefit of the beneficiary. Express trust is created
by intention of the trustor or of the parties, while implied trust comes into being by operation of law. xTorbela v.
Rosario, 661 SCRA 633 (2011).41

II. EXPRESS TRUSTS


1. Essence and Definition of Express Trusts (Art. 1440)

36Reiterated in Miguel v. CA, 29 SCRA 760 (1969); Spouses Rosario v. CA, 310 SCRA 464 (1999).
37Reiterated in Spouses Rosario v. CA, 310 SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242 (2007); Pealber v. Ramos, 577 SCRA 509 (2009); DBP v. COA,

422 SCRA 459 (2004).


38Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. CA, 280 SCRA 271 (1997); Policarpio v. CA, 269 SCRA 344 (1997); Spouses Rosario v. CA, 310

SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242 (2007); Pealber v. Ramos, 577 SCRA 509 (2009).
39Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to satisfy the demands of justice and

prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or hold the legal right to property which
he ought not, in equity and good conscience, to hold. Spouses Rosario v. CA, 310 SCRA 464 (1999).
40
Reiterated in Guy v. CA, 539 SCRA 584 (2007).
41Vda. De Esconde v. CA, 253 SCRA 66 (1996); Spouses Rosario v. CA, 310 SCRA 464 (1999); DBP v. COA, 422 SCRA 459 (2004); Metropolitan Bank v. Board

of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350 (2010).
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Where the shares of stock in an operating family company are placed by the parents-controlling stockholders
in the name of a holding company expressly for the benefit of their three daughters, an express trust is duly
constituted pursuant to the terms of Art. 1440. Guy v. Court of Appeals, 539 SCRA 584 (2007).
2. Essentially Contractual in Nature; Need No Particular Wordings (Art. 1444)
For, technical or particular forms of words or phrases are not essential to the manifestation of intention to
create a trust or to the establishment thereof. Nor would the use of some such words as trust or trustee
essential to the constitution of a trust; conversely, the mere fact that such terms were employed would not
necessarily prove an intention to create a trust. What is important is whether the trustor manifested an intention
to create the kind of relationship which in law is known as a trust. It is important that the trustor should know that
the relationship which intents to create is called a trust, and whether or not he knows the precise characteristics
of the relationship which is called a trust. Here, that trust is effective as against defendants and in favor of the
beneficiary thereof, plaintiff Victoria Julio, who accepted it in the document itself. Julio v. Dalandan, 21 SCRA
543 (1967).42
Express trusts are created by direct and positive acts of the parties, by some writing or deed, or will, or by
words either expressly or implied evincing an intention to create a trust. Under Art. 1444 No particular words are
required for the creation of an express trust, it being sufficient that a trust is clearly intended. The Affidavit of
Epifanio is in the nature of a trust agreement. Epifanio affirmed the lot brought in his name was co-owned by him,
as one of the heirs of Jose, and his uncle Tranquilino. And by agreement, each of them has been in possession
of half of the property. Their arrangement was corroborated by the subdivision plan prepared by Engr. Bunagan
and approved by Jose P. Dans, Acting Director of Lands. Heirs of Tranquilino Labiste v. Heirs of Jose
Labiste, 587 SCRA 417 (2009).
The creation of an express trust must be manifested with reasonable certainty and cannot be inferred from
loose and vague declarations or from ambiguous circumstances susceptible of other interpretations. No such
reasonable certitude in the creation of an express trust obtains in the case at bar. In fact, a careful scrutiny of the
plain and ordinary meaning of the terms used in the Minutes does not offer any indication that the parties thereto
intended that Aznar, et al., become beneficiaries under an express trust and that RISCO serve as trustor. PNB
v. Aznar, 649 SCRA 214 (2011).43
In Tamayo v. Callejo, 46 SCRA 27 (1972), the Court recognized that a trust may have a constructive or implied
nature in the beginning, but the registered owners subsequent express acknowledgement in a public document
of a previous sale of the property to another party, had the effect of imparting to the aforementioned trust the
nature of an express trust. Torbela v. Spouses Rosario, 661 SCRA 633 (2011).
It is possible to create a trust without using the word "trust" or "trustee." Conversely, the mere fact that these
words are used does not necessarily indicate an intention to create a trust. The question in each case is whether
the trustor manifested an intention to create the kind of relationship which to lawyers is known as trust. It is
immaterial whether or not he knows that the relationship which he intends to create is called a trust, and whether
or not he knows the precise characteristics of the relationship which is called a trust. Go v. Estate of Felisa
Tamio de Buenaventura, 763 SCRA 632 (2015).
a. Express Trust Cannot Be Proven by Parol Evidence (Art. 1443)
As a rule, however, the burden of proving the existence of a trust is on the party asserting its existence, and
such proof must be clear and satisfactorily show the existence of the trust and its elements. xMorales v. Court of
Appeals, 274 SCRA 282 (1997).44
We find it clear that the plaintiffs alleged an express trust over an immovable, especially since it is alleged that
the trustor expressly told the defendants of his intention to establish the trust. Such a situation definitely falls
under Art. 1443, and cannot be proven by parol evidence. xCuaycong v. Cuaycong, 21 SCRA 1192 (1967).45
A trust must be proven by clear, satisfactory, and convincing evidence; it cannot rest on vague and uncertain
evidence or on loose, equivocal or indefinite declarations De Leon v. Peckson, 62 O.G. 994.46
b. Ultimately Existence of Express Trust Requires That Legal Title Is Held By One, and the Equitable or
Beneficial Title Is Held by Another (65 CORPUS JURIS 212)
Trust, in its technical sense, is a right of property, real or personal, held by one party for the benefit of another
it is a fiduciary relationship with respect to property, subjecting the person holding the same to the obligation of
dealing with the property for the benefit of another person. xGuy v. Court of Appeals, 539 SCRA 584 (2007).
What distinguishes a trust from other relations is the separation of legal title and equitable ownership of the
propertylegal title is vested in the fiduciary while equitable ownership is vested in a cestui que trust. The
petitioner alleged that the tax declaration of the land was transferred to the name of Crispulo without her consent.
Had it been her intention to create a trust and make Crispulo her trustee, she would not have made an issue out
of this because in a trust agreement, legal title is vested in the trustee. Trustee would necessarily have the right
to transfer the tax declaration in his name and to pay the taxes on the propertythese acts would be treated as
beneficial to the cestui qui trust and would not amount to an adverse possession. Express trust must be proven
by some writing or deed. In this case, the only evidence to support the claim that an express trust existed between

42Also Lorenzo v. Posadas, 64 Phil. 353 (1937); Torbela v. Rosario, 661 SCRA 633 (2011); Goyanko v. UCPB, 690 SCRA 79 (2013).
43Medina
Formatted: English (United States)
v. CA, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corp. v. Alcantara, 664 SCRA 224 (2012).
44
Reiterated Caezo v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing, 538 SCRA 42 (2008).
45Also Pascual v. Meneses, 20 SCRA 219 (1967); Ramos v. Ramos, 61 SCRA 284 (1974).
46Reiterated in Ringor v. Ringor, 436 SCRA 484 (2004); Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013).

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the petitioner and her father was the self-serving testimony of the petitioner. Bare allegations do not constitute
evidence adequate to support a conclusion. Caezo v. Rojas, 538 SCRA 242, 255 (2007).

2. Other Essential Characteristics of Express Trusts


a. Unilateral and Primarily Onerous (But Can Be Gratuitous)
b. Fiduciary
The juridical concept of a trust, which in a broad sense involves, arises from, or is the result of, a fiduciary
relation between the trustee and the cestui que trust as regards certain propertyreal, personal, funds or money,
or choses in actionmust not be confused with an action for specific performance. Thus, when claimants to
several parcels of land withdraw their claims in court relying on the assurance and promise of Yulo made in open
court that he would convey the lots claimed after the proceedings had terminated, then a trust or a fiduciary
relation between them arose, or resulted therefrom, or was created thereby. A trustee cannot invoke the statute
of limitations to bar the action and defeat the rights of the cestuis que trustent. Pacheco v. Arro, 85 Phil. 505
(1950).47

3. Parties and Elements of an Express Trust


Elements for an express trust are: (1) a trustor or settlor who executes the instrument creating the trust; (2) a
trustee, who is the person expressly designated to carry out the trust; (3) the trust res, consisting of duly identified
and definite real properties; and (4) the cestui que trust, or beneficiaries whose identity must be clear.
Furthermore, there must be a present and complete disposition of the trust property, notwithstanding that the
enjoyment in the beneficiary will take place in the future. It is essential, too, that the purpose be an active one to
prevent trust from being executed into a legal estate or interest, and one that is not in contravention of some
prohibition of statute or rule of public policy. Rizal Surety & Insurance v. Court of Appeals, 261 SCRA 69
(1996).48
a. The Trustor. A person who establishes a trust is called the trustor.49
b. The Trustee. One in whom confidence is reposed is known as the trustee.50
Trustee Must Have Legal Capacity to Accept the Trust.
Failure of Trustee to Assume the Position (Art. 1445).
Obligations of the Trustee (Rule 98, Rules of Court).
Generally, Trustee Does Not Assume Personal Liability on the Trust as to Properties Outside of the
Trust Estate When a trustee enters into a contract that gives rise to liability, there must be clear indication
that he enters into the contract as trustee, so that he would be liable individually only to the extent of the
trust properties: In other words, when the transaction at hand could have been entered into by a trustee
either as such or in its individual capacity, then it must be clearly indicated that the liabilities arising
therefrom shall be chargeable to the trust estate, otherwise they are due from the trustee in his personal
capacity. xTan Senguan and Co. v. Phil. Trust Co., 58 Phil. 700 (1933).
Trustee Generally Entitled to Receive Compensation for His Services. xLorenzo v. Pasadas, 64 Phil.
353 (1937).
c. The Beneficiary (Arts. 1440 and 1446). Person for whose benefit the trust has been created is referred to
as the beneficiary.51
In order that a trust may become effective there must, of course be a trustee and a cestui que trust. The
existence of an equivalent designated position in the testamentary trust to act as trustee In regard to private
trusts it is not always necessary the the cestui que trust should be named, or even be in esse at the time the trust
is created in his favor. Thus a devise a father in trust for accumulation for his children lawfully begotten at the
time of his death has been held to be good although the father had no children at the time of the vesting of the
funds in him as trustee. In charitable trusts such as the one here under discussion, the rule is still further relaxed.
Government v. Abadilla, 46 Phil. 642 (1924).
Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of donations.
Cristobal v. Gomez, 50 Phil. 810 (1927).
A person is considered as a beneficiary of a trust if there is a manifest intention to give such a person the
beneficial interest over the trust properties. Here, the trust agreement plainly confer the status of beneficiary to
the planholders, not to Legacy. The categorical declaration in the agreement that Legacy bound itself to provide
for the sound, prudent and efficient management and administration of such portion of the collection for the
benefit and account of the planholders, through LBP (as the trustee) indicates that the intention of the trustor is
to make the planholders the beneficiaries of the trust properties, and not Legacy, which is left without any iota of
interest in the trust fund. This is consistent with the nature of a trust arrangement, whereby there is a separation
of interests in the subject matter of the trust, the beneficiary having an equitable interest, and the trustee having
an interest which is normally legal interest. SEC v. Laigo, G.R. No. 188639. 02 Sept 2015.

47Reiterated in Ramos v. Ramos, 61 SCRA 284 (1974); Pealber v. Ramos, 577 SCRA 509 (2009).
48AlsoFilipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Caezo v. Rojas, 538 SCRA 242 (2007); Goyanko v. UCPB, 690 SCRA 79 (2013).
49
DBP v. COA, 422 SCRA 459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).
50DBP v. COA, 422 SCRA459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).
51DBP v. COA, 422 SCRA459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).

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d. The Corpus, Res, or Trust Estate
Where DBP establishes a pension trust for its officers and employees and appoints trustees for the fund
whereby the trust agreement transferred legal title over the income and properties of the fund, the principal and
income of the fund constitute the res or subject matter of the trust. Since the trust agreement established the fund
precisely so that it would eventually be sufficient to pay for the retirement benefits of DBP officers and employees,
then the income and profits thereof cannot be booked by DBP as its own, and DBP cannot be directed by COA
to treat such income as it own. DBP v. COA, 422 SCRA 459 (2004).
A trust by operation of law is the right to the beneficial enjoyment of a property whose legal title is vested in
another. A property between two parties, one having the rightful ownership and property owned by one party is
separate and distinct from that which has been registered in anothers name. Chu, Jr. vs. Caparas, 696 SCRA
325 (2013).

4. Kinds of Express Trust


a. Express Trust Involving Immovable (Art. 1443)
A person who has held legal title to land, coupled with possession and beneficial use of the property for more
than ten years, will not be declared to have been holding such title as trustee for himself and his brothers and
sisters upon doubtful oral proof tending to show a recognition by such owner of the alleged rights of his brother
and sisters to share in the produce of the land. [Ergo: The requirement that express trust over immovable must
be in writing should be added as being governed by the Statute of Frauds.] Gamboa v. Gamboa, 52 Phil. 503
(1928).
Express trust over real property cannot be constituted when nothing in writing was presented to prove it; but
it may be proved as an implied trust. Ty v. Ty, 553 SCRA 306 (2008).
In accordance with Art. 1443, when an express trust concerns an immovable property or any interest therein,
the same may not be proved by parol or oral evidence. However, when the oppositors failed to timely object when
the petitioner tried to prove by parol evidence the existence of an express trust over immovable, there is deemed
to be a waiver since Art. 1443 is in the nature of a statute of frauds. Pealber v. Ramos, 577 SCRA 509
(2009).
b. Contractual versus Intervivos Trusts
c. Charitable Trusts
d. Testamentary Trust
A testamentary trust is created by a provision in the will whereby the testator directs the creation of a trust for
the benefit of a secondary school to be established in the town of Tayabas, naming as trustee the ayutamiento
or if there be no ayutamiento, then the civil governor of the Province of Tayabas. xGovernment of P.I. v. Abadilla,
46 Phil. 642 (1924).
Although the will did not use the words trust or trustee, the intention to create one is clear since testator
ordered therein that certain properties be kept together undisposed during a fixed period, for a stated purpose.
No particular or technical words are required to create a testamentary trust; hence, probate court exercised sound
judgment in appointing a trustee to carry the proivisions into effect. xLorenzo v. Pasadas, 64 Phil. 353 (1937).
e. Pension or Retirement Trusts
A foundation existing for the purpose of holding title to, and administering, the tax-exempt Employees Trust
Fund established for the benefit of the employees, has the personality to claim tax refunds due the Employers
Trust Fund. xMiguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).
Employees trust or benefit plans are intended to provide economic assistance to employees upon the
occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. They give
security against certain hazards to which members of the Plan may be exposed. They are independent and
additional sources of protection for the working group and established for their exclusive benefit and for no other
purpose. The provident and retirement fund of the employees cannot be used by the trustee-bank to pay for the
obligations of the employer corporation. xMetropolitan Bank v. Board of Trustees of Riverside Mills Corp.
Provident and Retirement Fund, 630 SCRA 350 (2010); CIR v. Court of Appeals, 207 SCRA 487 (1992).

5. Termination of Express Trusts


a. Where the Trust Fails
Under an ordinary devise of land in trust, the trustee holds the legal title and the cestui que trust the beneficial
title and the natural heirs of the testator who are neither trustees nor cestuis que trustent have no remaining
interest in the land devised except the right to the reversion in the event the devise should fail, or the trust for
other reasons terminate. xGovernment v. Abadilla, 46 Phil. 642 (1924).
b. Upon the Death of Trustee
Assuming that such a [trust] relation existed, it terminated upon Crispulos death in 1978. A trust terminates
upon the death of the trustee where the trust is personal to the trustee in the sense that the trustor intended no
other person to administer it. If Crispulo was indeed appointed as trustee of the property, it cannot be said that
such appointment was intended to be conveyed to the respondent or any of Crispulos other heirs. Hence, after
Crispulos death, the respondent had no right to retain possession of the property. At such point, a constructive
trust would be created over the property by operation of law. Where one mistakenly retains property which
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rightfully belongs to another, a constructive trust is the proper remedial devise to correct the situation. Caezo
v. Rojas, 538 SCRA 242 (2007).

III. IMPLIED TRUSTS


1. Listing of Implied Trusts Not Exclusive: FOUNDED ON EQUITY (Art. 1447)
The concept of implied trusts is that from the facts and circumstances of a given case (i.e., the structure of the
transactions that vest title to property) the existence of a trust relationship is inferred in order to effect the
presumed (in this case it is even expressed) intention of the parties (i.e., resulting trust) or to satisfy the demands
of justice or to protect against fraud (i.e., constructive trusts). Padilla v. Court of Appeals, 53 SCRA 168
(1973).
Although an implied trust arising from mortgage contracts is not among those enumerated, Art. 1147 of Civil
Code provides that such listing does not exclude others established by general law on trust. Under the general
principles on trust, equity converts the holder of a property right as trustee for the benefit of another if the
circumstances of its acquisition makes the holder ineligible in x x x good conscience [to] hold and enjoy [it].52 As
implied trusts are remedies against unjust enrichment, the only problem of great importance in constructive trusts
is whether in the numerous and varying factual situations presented there is a wrongful holding of property and
hence, a threatened unjust enrichment of the defendant.53 Juan v. Yap, Sr., 646 SCRA 753 (2011).
a. Distinctions Between Resulting Trusts and Constructive Trusts
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines
the equitable title or interest and are presumed always to have been contemplated by the parties. They arise from
the nature of circumstances of the consideration involved in a transaction whereby one person thereby becomes
invested with legal title but is obliged in equity to hold his legal title for the benefit of another. On the other hand,
constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent
unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence,
obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. Lopez
v. Court of Appeals, 574 SCRA 26 (2008).54
b. How to Prove Implied Trusts (Art. 1457)
The burden of proving the existence of a trust is on the party asserting its existence, and such proof must be
clear and satisfactorily show the existence of the trust and its elements. While implied trusts may be proven by
oral evidence, the evidence must be trustworthy and received by the courts with extreme caution, and should not
be made to rest on loose, equivocal or indefinite declarations. Trustworthy evidence is required because oral
evidence can easily be fabricated. Heirs of Narvasa, Sr. v. Imbornal, 732 SCRA 171 (2014).
An implied trust in order to be recognized must measure up to the yardstick that a trust must be proven by
clear, satisfactory and convincing evidence, and cannot rest on vague and uncertain evidence or on loose,
equivocal or indefinite declarations. Salao v. Salao, 70 SCRA 65 (1976). Consequently:
Existence of public records other than the Torrens title indicating a proper description of the land, and not
the technical description thereof, and clearly indicating the intention to create a trust, is considered
sufficient proof to support the claim of the cestui que trust. xMunicipality of Victorias v. CA, 149 SCRA 32
(1987).
An affidavit of the fact of resulting trust against contrary affidavits, as well as the transfer certificates of title
and tax declarations to the contrary, do not support clearly the existence of trust. xBooc v. Five Start
Marketing Co., Inc., 538 SCRA 42 (2007).55
In order to establish an implied trust in real property by parol evidence, the proof should be as fully
convincing as if the acts giving rise to the trust obligation are proven by an authentic document. In the
present case, there was no evidence of any transaction between the petitioner and her father from which
it can be inferred that a resulting trust was intended. Caezo v. Rojas, 538 SCRA 242 (2007).
c. Distinguished from Quasi-Contracts The Civil Code incorporated constructive trusts, on top of quasi-
contracts, both of which embody the principle of equity above strict legalism. PNB v. Court of Appeals,
217 SCRA 347 (1993).

2. RESULTING TRUSTS
Resulting trusts are species of implied trust that are presumed always to have been contemplated by the
parties intention, which can be found in the nature of their transaction although not expressed in a deed or
instrument of conveyance; they are based on the equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest. xOssorio Pension Foundation v. Court of Appeals, 621 SCRA 606
(2010).56

52Roa, Jr. v. CA, 123 SCRA 3 (1983).


53Heirs of Moreno v. Mactan-Cebu Int.l Airport Authority, 413 SCRA 5023 (2003).
54Also Aznar Brothers Realty Co. v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. CA, 310 SCRA 464 (1999); Estate of Margarita D. Cabacungan, v. Laigo,
655 SCRA 366 (2011).
55Also Tigno v. CA, 280 SCRA 262 (1997); Morales v. CA, 274 SCRA 282 (1997).
56Caezo v. Rojas, 538 SCRA 242 (2007).

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Resulting trusts arise from nature or circumstances of consideration involved in a transaction whereby one
person thereby becomes invested with full legal title but is obligated in equity to hold his title for the benefit of
another. xRosario v. CA, 310 SCRA 464 (1999).
In an resulting trust, the beneficiarys cause of action arises when the trustee repudiates the trust, not when
the trust was created. Paringit v. Bajit, 631 SCRA 584 (2010).

a. Purchase of Property Where Beneficial Title in One Person, But Price Paid
by Another Person (Art. 1448)
RATIONALE: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho Jan Jing, 19
Phil. 202 (1911).
EXCEPTION: Although the father was the source of the funds in the purchase of a parcel of land which was
titled in the name of his son, no implied trust is deemed to have been established since under Art. 1448, if the
person to whom the title is conveyed is the child of the one paying the price of the sale, no trust is implied by law,
and instead a donation is disputably presumed in favor of the child. The successors of the deceased father had
not shown that no such donation was intended. Ty v. Ty, 553 SCRA 306 (2008).
While the share was bought by Sime Darby and placed under the name of Mendoza, his title is only limited to
the usufruct, or the use and enjoyment of the clubs facilities and privileges while employed with the company. In
Thomson v. Court of Appeals, 298 SCRA 280 (1998), we held that a trust arises in favor of one who pays the
purchase price of a property in the name of another, because of the presumption that he who pays for a thing
intends a beneficial interest for himself. While Sime Darby paid for the purchase of the club share, Mendoza was
given the legal title. Thus, a resulting trust is presumed as a matter of law. The burden shifts to the transferee to
show otherwise. Sime Darby Pilipinas, Inc. v. Mendoza, 699 SCRA 290 (2013).

b. Purchase of Property Where Title Is Placed in the Name of Person Who Loaned the
Purchase Price (Art. 1450) Equitable Mortgage
Resulting trust under Art. 1450 presupposes a situation where a person, using his own funds, buys property
on behalf of another, who in the meantime may not have the funds to purchase ittitle to the property is for the
time being placed in the name of the trustee, the person who pays for it, until he is reimbursed by the beneficiary,
the person for whom the trustee bought the land. It is only after the beneficiary reimburses the trustee of the
purchase price that the former can compel conveyance of the property from the latter. Paringit v. Bajit, 631
SCRA 584 (2010).

c. When Absolute Conveyance of Property Effected Only as a Means to Secure Performance of


Obligation of the Grantor (Art. 1454) Equitable Mortgage
When a deed of sale a retro was really intended to cover a loan made by the purported seller from the
purported buyer, then the doctrines upheld in Uy Aloc vs. Cho Jan Ling, 19 Phil. 202, Camacho v. Municipality of
Baliaug, 28 Phil. 46, and Severino v. Severino, 44 Phil., 343, are applicable in the instant case in the sense that
the defendants only hold the certificate of transfer in trust for the plaintiffs as to the portion of the lot containing
1,300 coconut trees, and therefore, said defendants are bound to execute a deed in favor of the plaintiffs
transferring said portion to them. De Ocampo v. Zaporteza, 53 Phil. 442 (1929).

d. Several Persons Jointly Purchase Property, Places Title In One of Them


(Art. 1452)
Decedent had married legitimately three successive times without liquidation of conjugal partnerships formed
during the first and second marriages. The only male issue managed to convince his co-heirs that he should act
as administrator of the decedents estate, but instead obtained a certificate of title in his own name to the valuable
piece of property of the estate. Held: Where the son, through fraud was able to secure a title in his own name to
the exclusion of his co-heirs who equally have the right to a share of the land covered by the title, an implied trust
was created in favor of said co-heirs, and that said son was deemed to merely hold the property for their and his
benefit. xGonzales v. Jimenez, Sr., 13 SCRA 73 (1964).
Law expressly allows a first co-owner of a parcel of land to register his proportionate share in the name of his
second co-owner in whose name the entire land is registeredthe second co-owner serves as a legal trustee of
the first co-owner insofar as the proportionate share of the first co-owner is concerned. Article 1452 expressly
authorizes a person to purchase a property with his own money and to take conveyance in the name of another.
xMiguel J. Ossorio Pension Foundation, v. Court of Appeals, 621 SCRA 606 (2010).
e. Property Conveyed to a Person Merely as Holder Thereof (Art. 1453)
Where real property is taken by a person under an agreement to hold it for, or convey it to another, a resulting
trust arises in favor of the intended beneficiary, which is enforceable even when the agreement is not in writing;
is not an express trust which requires that it be in writing to be enforceable. xMartinez v. Grao, 42 Phil. 35 (1921).
Where original purchaser of the immovable property had sold all his interest thereto to his brother who
reimbursed him all amounts previously, but continued to pay the balance of the installments in the name of the
original buyer with understanding that upon full payment the title would be transferred to the buyer, am implied
trust had been constituted. Heirs of Emilio Candelaria v. Romero, 109 Phil. 500 (1960).
Art. 1453 would apply if the person conveying the property did not expressly state that he was establishing
the trust, unlike the case at bar where he was alleged to have expressed such intent. Consequently, lower court
did not err in dismissing the complaint, on the ground that since complaint sought to recover an express trust
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over immovables, under Art. 1443 the same may not be proved by parol evidence. xCuaycong v. Cuaycong, 21
SCRA 1192 (1967).
Where a lot was taken by a person under an agreement to hold it for, or convey it to another or to the grantor,
a resulting or implied trust arises in favor of the person for whose benefit the property was intended. xRosario v.
Court of Appeals, 310 SCRA 464 (1999).

f. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449)
Where father donates a piece of land in the name of the daughter but with verbal notice that the other half
would be held by her for the benefit of a younger brother, coupled with a deed of waiver subsequently executed
by the daughter that she held the land for the common benefit of her brother, created an implied trust in favor of
the brother under Art. 1449. Adaza v. Court of Appeals, 171 SCRA 369 (1989). [Express trust?]

g. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451)
When the eldest sibling had registered land inherited from the parents in his name, he was acting in a trust
capacity and as representative of all his brothers and sisters. As a consequence he is now holding the registered
title thereto in a trust capacity, and it is proper for the court to declare that the other siblings are entitled to their
several pro rata shares. xSeverino v. Severino, 44 Phil. 343 (1923); xCastro v. Castro, 57 Phil. 675 (1932).
In a situation where a Chinese resident had caused land to be placed in the name of the trustee who was
bound to hold the same for the benefit of the trustor and his family in the event of death, the application of the
doctrine of implied trust under Art. 1451 by the heirs of the trustor cannot be upheld. This contention must fail
because the prohibition against an alien from owning lands of the public domain is absolute and not even an
implied trust can be permitted to arise on equity consideration. xTing Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).

3. CONSTRUCTIVE TRUSTS
a. General Doctrines for Constructive Trusts
Constructive trust is a rule of equity, independent of the particular intentions of the parties. Paringit v. Bajit,
631 SCRA 584 (2010). Therefore, in constructive trusts there is neither promise nor fiduciary relations; the
trustee does not recognize any trust, with no intent to hold property for the beneficiary. Diaz v. Gorricho and
Aguado, 103 Phil. 261 (1958).57
A constructive trust (trust ex maleficio, trust ex delicto, trust de son tort, an involuntary trust) is a trust by
operation of law which arises contrary to intention and in invitum, against one who, by fraud, actual or constructive,
by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice,
concealment, or questionable means, or who in any way against equity and good conscience, has obtained or
holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. xSumaoang
v. Judge, RTC, Br. XXXI, Buimba, Nueva Ecija, 215 SCRA 136 (1992).58
Constructive trusts are fictions of equity that courts use as devices to remedy any situation in which the holder
of the legal title, the purported trustee, may not, in good conscience, retain the beneficial interest. xVda. de
Ouano v. Republic, 642 SCRA 384 (2011).
This Court recognized unconventional implied trusts in contracts involving the purchase of housing units by
officers of tenants associations in breach of their obligations,59 the partitioning of realty contrary to the terms of a
compromise agreement,60 and the execution of a sales contract indicating a buyer distinct from the provider of
the purchase money.61 In all these cases, the formal holders of title were deemed trustees obliged to transfer title
to the beneficiaries in whose favor the trusts were deemed created. We see no reason to bar the recognition of
the same obligation in a mortgage contract meeting the standards for the creation of an implied trust. xJuan v.
Yap, Sr., 646 SCRA 753 (2011).

b. When Fiduciary Uses Funds or Property Held in Trust to Purchase Property Which
Is Registered in Fiduciarys Name (Art. 1455)
A confidential employee who, knowing that his principal was negotiating with the owner of some land for the
purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an act of disloyalty and
infidelity to his principal, and is liable for damage. The reparation of the damage must consist in respecting the
contract which was about to be concluded, and transferring the said land for the same price and upon the same
terms as those on which the purchase was made for the land sold to the wife of said employee passed to them
as what might be regarded as equitable trust, by virtue of which the thing thus acquired by an employee is deemed
to have been acquired not for his own benefit or that of any other person but for his principal and held in trust for
the latter. Sing Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil. 589 (1922).
A verbal assertion of a partner that partnership funds were used to purchase real properties registered solely
in the name of the other partners-spouses, without further evidence, does not overcome the Torrens title issued
showing exclusive ownership in the name of the partners-spouses, but cannot also be used to establish an implied
trust over said properties in favor of the alleging partner. xJarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

57Reiterated in Carantes v. CA, 76 SCRA 514 (1977); Marcado v. Espinocilla, 664 SCRA 724 (2012).
58Also Roa, Jr. v. CA, 123 SCRA 3 (1983).
59
Policarpio v. CA, 269 SCRA 344 (1997); Arlequi v. CA, 378 SCRA 322 (2002).
60Roa, Jr. v. CA, 123 SCRA 3 (1983).
61Tigno v. CA, 280 SCRA 262 (1997).

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c. When Property Acquired Through Mistake or Fraud (Art. 1456)
Old Civil Code Rulings: Where a mother and her minor daughter inherited a large tract of land, and had it
applied for cadastral survey, but title was issued only in the name of the mother, courts of equity will impress
upon the title, a condition which is generally in a broad sense termed constructive trust in favor of the defrauded
party, but use of the word trust in this sense is not technically accurate. Gayondato v. Treasurer, 49 Phil.
244 (1926).
When an agent, taking advantage of the illiteracy of the principal, claims for himself the property which he was
designated to claim for the principal and manages to have it registered in his own name and became part of his
estate when the agent died, the estate is in equity bound to execute the deed of conveyance of the lot to the
cestui que trust. The courts have therefore shielded fiduciary relations against every manner of chicanery or
detestable designed cloaked by legal technicalities. Torrens system was never calculated to foment betrayal in
the performance of a trust. xEscobar v. Locsin, 74 Phil. 86 (1943).62
New Civil Code Rulings: Under Art. 1456 principle of constructive trust, registration of property by one person
in his name, whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would justify an action for reconveyance
within a period of 10 years from registration. In the action for reconveyance, the decree of registration is respected
as incontrovertible, and what is sought instead is the transfer of the property wrongfully or erroneously registered
in anothers name to its rightful owner or to one with a better right. Pasio v. Monterroyo, 560 SCRA 739
(2008).63
Where testator expressed in notarial will that she wished to constitute a trust fund for her paraphernal
properties, to be administered by her husband, and that two-thirds (2/3) of the income from rentals over theses
properties were to answer for the education of deserving but needy honor students, while one-third (1/3) was to
shoulder the expenses and fees of the administrator; but that eventually in the probate of the will the properties
were adjudicated to the husband as sole heir, then a constructive trust has been constituted under Art. 1456 in
favor of beneficiaries of the Fideicomiso. xLopez v. Court of Appeals, 574 SCRA 26 (2008).64
The rule that a fraudulently acquired free patent may only be assailed by the government in an action for
reversion pursuant to the Public Land Act is not without exception: where plaintiff-claimant seeks direct
reconveyance from defendant of public land unlawfully and in breach of trust titled by him, on the principle of
enforcement of a constructive trust. xHortizuela v. Tagufa, 751 SCRA 371 (2015).
The conveyance made by seller of a property acquired through pactum commisorium is void, and thus not
vest title to the buyer. Such a situation falls squarely under Art. 1456, where the buyer is deemed to have acquired
the property by mistake or through ineffectual transfer. xHome Guaranty Corp. v. La Savoje Dev. Corp., 748
SCRA 312 (2015).

4. DO EXPRESS OR IMPLIED TRUST PRESCRIBE OR BE DEFEATED BY LACHES?


a. SUMMARY OF RULINGS FOR EXPRESS TRUSTS:
GENERAL RULE: Express trusts are generally imprescriptible: the express undertaking to hold title for the benefit
of the beneficiary disables the trustee from acquiring for himself the property committed to his management or
custody.65
The beneficiarys alleged delay in seeking recovery of the property is directly attributable to the trustee who
undertakes to hold the property for the former; trustees possession is, therefore, not adverse to the beneficiary,
until and unless the latter is made aware that the trust has been repudiated. xDiaz v. Gorricho and Aguado, 103
Phil. 261 (1958).66
EXCEPTION: For acquisitive prescription to bar the action of the beneficiary against the trustee, it must be shown
that:67
(1) Trustee has performed unequivocal acts of repudiation amounting to an ouster of cestui que trust.
(2) Such positive acts of repudiation have been made known to the cestui que trust.
(3) Evidence is clear and conclusive: a clear repudiation of the trust duly communicated to the beneficiary A
trustee who obtains a Torrens title over the property held in trust by him for another cannot repudiate the
trust by relying on the registration. The rule requires a clear repudiation of the trust duly communicated to
the beneficiary. The only act that can be construed as repudiation was when respondents filed the petition

62Reiterated in Pacheco v. Arro, 85 Phil. 505.


63Also Ruiz v. CA, 79 SCRA 525 (1977); Heirs of Tanak Pangaaran Patiwayon v. Martinez, 142 SCRA 252 (1986); Municipality of Victorias v. CA, 149 SCRA 32

(1987); Mendizabel v. Apao, 482 SCRA 587 (2006); Heirs of Tabia v. CA, 516 SCRA 431 (2007); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007);
Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007); Leoveras v. Valdez, 652 SCRA 61 (2011); PNB v. Jumamoy, 655 SCRA 54 (2011); Toledo v.
CA, 765 SCRA 104 (2015).
64Also Vda. De Esconde v. CA, 253 SCRA 66 (1996); Iglesia Filipina Independiente v. Heirs of Taeza, 715 SCRA 138 (2014).
65A trustee cannot acquire by prescription the ownership of property entrusted to him (Palma v. Cristobal, 77 Phil. 712); an action to compel a trustee to convey

property registered in his name in trust for the benefit of the cestui qui trust does not prescribe (Manalang v. Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil. 810);
the defense of prescription cannot be set up in an action to recover property held by a person in trust for the benefit of another (Sevilla v. Delos Angeles, 97 Phil.
875); property held in trust can be recovered by the beneficiary regardless of the lapse of time (Marabilles v. Quito, 100 Phil. 64; Bancairen v. Diones, 98 Phil. 122,
Juan v. Zuiga, 4 SCRA 1221; Vda de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962). Ramos v. Ramos, 61 SCRA 284, 299 (1974).
66Laguna v. Levantino, 71 Phil. 566 (1941); Sumira v. Vistan, 74 Phil. 138 (1943); Golfeo v. CA, 12 SCRA 199 (1964); Caladiao v. Santos, 10 SCRA 691, (1964);

Torbela v. Rosario, 661 SCRA 633 (2011).


67Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Caezo v. Rojas, 538 SCRA 242 (2007); Heirs of Tranquilino Labiste v. Heirs of Jose Labiste,

587 SCRA 417 (2009).


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for reconstitution seeking registration only in his name. xHeirs of Tranquilino Labiste v. Heirs of Jose Labiste,
587 SCRA 417 (2009).68
(4) 10 years have lapsed since the point of repudiation. xEscay v. Court of Appeals, 61 SCRA 369 (1974).
HOWEVER: Though prescription does not run between the trustee and cestui que trust as long as the trust relations
subsist, it runs between against the trustee and in favor of a third person who holds actual, open, public, and
continuous possession adverse to the trust, of land for over 10 years. xGovernment v. Abadilla, 46 Phil. 642
(1924).
b. SUMMARY OF RULINGS FOR RESULTING TRUSTS:
GENERAL RULE: As a rule, implied resulting trusts do not prescribe except when the trustee repudiates the trust.
Further, the action to reconvey does not prescribe so long as the property stands in the name of the trustee. To
allow prescription would be tantamount to allowing a trustee to acquire title against his principal and true owner.
Tong v. Go Tiat Kun, 722 SCRA 623 (2014).
The rule of imprescriptibility of the action to recover property held in trust may apply to resulting trusts as long
as the trustee has not repudiated the trust. The continuous recognition of a resulting trust, therefore, precludes
any defense of laches in a suit to declare and enforce the trust. After all, the beneficiary in a resulting trust may,
without prejudice to his right to enforce the trust, prefer the trust to persist and demand no conveyance from the
trustee. xHeirs of Candelaria v. Romero, 109 Phil. 500 (1960).69
A co-ownership is a form of trust, with each owner being a trustee for each other. Mere actual possession by
one will not give rise to the inference that the possession was adverse because a co-owner is, after all, entitled
to possession of the property. Thus, as a rule, prescription does not run in favor of a co-heir or co-owner as long
as he expressly or impliedly recognizes the co-ownership; and he cannot acquire by prescription the share of the
other co-owners, absent a clear repudiation of the co-ownership. An action to demand partition among co-owners
is imprescriptible, and each co-owner may demand at any time the partition of the common property. Heirs of
Yambao v. Heirs of Yambao, G.R. No. 194260, 13 April 13, 2016.

EXCEPTION: In resulting trusts, acquisitive prescription run in favor of the trustee only when he repudiates
expressly the trusts and makes known such repudiation to the beneficiary, and there is a lapse of 10 years from:
(1) Notice of repudiation served upon the beneficiary;70
(2) Registration of title in name of trustee, when such registration is equivalent to a clear act of repudiation said
notice of repudiation:71
Such as registration by one of the co-owners of title in his sole name in fraud of the other co-owners
(which makes it a class of constructive trust).72
c. SUMMARY OF RULINGS FOR CONSTRUCTIVE TRUSTS:
GENERAL RULE: In constructive trusts, laches constitutes a bar to actions to enforce the trust, without need of
prior repudiation,73 and that acquisitive prescription runs in favor of the trustee after 10 years from the registration
of title in trustees name.74
In constructive trusts, there is neither promise nor fiduciary relation; the so-called trustee does not recognize any
trust and has no intent to hold for the beneficiary; therefore, the beneficiary is not justified in delaying action to
recover his property; it is his fault if he delays; hence, he may be estopped by his own laches.75
EXCEPTIONS: The acquisitive prescription of 10 years upon registration of title does not apply to favor the trustee
in the following cases:
(1) Where Trustee Recognizes the Rights of Cestui Que Trust. Prescription may not apply by mere registration of
the title in the name of the trustee, where the trustee formally recognized the beneficial right of the cestui que trust.
xGeronimo and Isidro v. Nava and Aquino, 105 Phil. 145 (1959); xAdaza v. Court of Appeals, 171 SCRA 369
(1989).
(2) When the Cestui Que Trust Is a Minor. When the act of repudiation of the trustee was effected at the time the
cestui que trust was still a minor, then such act does not prejudice the latter: We are unable to see how a minor
with whom another is in trust relation can be prejudiced by repudiation of the trustee addressed to him by the
person who is subject to the trust obligation.. xCastro v. Castro, 57 Phil. 675 (1932).

68Reiterated in Torbela v. Rosario, 661 SCRA 633 (2011)


69Martinez v. Grao, 42 Phil. 35 (1921); Buencamino v. Matias, 16 SCRA 849 (1966)]. Ramos v. Ramos, 61 SCRA 284 (1974).
70Castro v. Echarri, 20 Phil. 23; Bargayo v. Camumot, 40 Phil. 857 (1920); Ramos v. Ramos, 45 Phil. 362 (1923); Varsity Hills v. Navarro, 43 SCRA 503 (1972).
71
Caezo v. Rojas, 538 SCRA 242 (2007).
72Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962); Castrillo v. CA, 10 SCRA 549 (1964); Lopez v. Gonzaga, 10 SCRA 167 (1974); Gerona v. De Guzman,

11 SCRA 153 (1964); Mariano v. Judge De Vega, 148 SCRA 342 (1987); Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013).
73Boaga v. Soler, 11 Phil. 651; Claridad v. Henares, 97 Phil. 973; Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959); Candelaria v. Romero, 109 Phil. 500

(1960); De Pasion v. De Pasion, 112 Phil. 403; J.M. Tuazon & Co. v. Mandanagal, 4 SCRA 84 (1962); Alzona v. Capunitan, 4 SCRA 450 (1962); Vda. De Jacinto v.
Vda. De Jacinto, 5 SCRA 371 (1962); Gerona v. De Guzman, 11 SCRA 153 (1964); Gonzales v. Jimenez, 13 SCRA 80 (1965); Fabian v. Fabian, 22 SCRA 231
(1968); Bueno v. Reyes, 27 SCRA 1179 (1969); Ramos v. Ramos, 61 SCRA 284 (1974); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
74Boaga v. Soler, 2 SCRA 755 (1961); J. M. Tuason & Co., Inc. v. Magdangal, 4 SCRA 123 (1962); Alzona v. Capunitan, 4 SCRA 450 (1962); Gonzales v.

Jimenez, 13 SCRA 80 (1965); Cuaycong v. Cuaycong, 21 SCRA 1192 (1967); Varsity Hills v. Navarro, 43 SCRA 503 (1972); Escay v. CA, 61 SCRA 369 (1974);
Carantes v. CA, 76 SCRA 514 (1977); Gonzales v. Intermediate Appellate Court, 204 SCRA 106 (1991); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401
(2007); Cavile v. Litania-Hong, 581 SCRA 408 (2009); Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010).
75Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958); Caezo v. Rojas, 538 SCRA 242 (2007).

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(3) When Cestui Que Trust Is a Close Relation. The existence of a confidential relationship based upon
consanguinity is an important circumstance for consideration; hence, laches being rooted in equity, is not to be
applied mechanically as between near relatives. xAdaza v. Court of Appeals, 171 SCRA 369 (1989).76
(4) Where Cestui Que Trust Is in Possession of the Trust Property. Prescriptive period applies only if there is an
actual need to reconvey the property, as when plaintiff is not in possession; if plaintiff is in possession, prescription
does not commence to run. When an action for reconveyance is nonetheless filed, it would be in the nature of a
suit for quieting of title, an action that is imprescriptible. xBrito v. Dianala, 638 SCRA 529 (2010).77
(5) Where Title of the Trustee Is Void. Where signatures of the petitioners, being forced heirs, in the extrajudicial
settlement with sale have been forged, and although title to the land had been registered in the name of the buyer,
contract is void, and action to seek the declaration of nullity is imprescriptible. xMacababbad v. Masirag, 576
SCRA 70 (2009).78
(6) Where Property Is in the Hands of an Innocent Purchaser. Aggrieved party may no longer file an action for
reconveyance based on a constructive trust, when the property has been acquired by an innocent purchaser
for value. xKhoemani v. Heirs of Anastacio Trinidad, 540 SCRA 83 (2007).79

oOoMID-TERM EXAMINATION COVERAGEoOo

C. PARTNERSHIPS
I. X HISTORICAL BACKGROUND
1. Old Branches of Partnership Law
Civil Partnerships - Not pursued in mercantile manner, non-habitual or not pursued in the regular course of
business
Commercial Partnerships - in pursuit of industry or commerce; characterized by habituality or pursuit in the
regular course of business
Distinguishing between civil and commercial partnerships was critical in the old set-up because it determined
the applicable rules for registration, personal liability of members, and rights and manner of dissolution. Compaia
Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).

a. Commercial Partnerships Were Deemed to Be, and Subject to Code of


Commerce Provisions for, Merchants
A commercial partnership is distinguished from a civil one by the object to which it is devoted and not by the
manner with which it is organized. A commercial partnership has for its object the pursuit of industry or commerce,
and is then a merchant that must be governed by, and comply with the registration requirements of, the Code
of Commerce to lawfully come into existence; it cannot choose to be organized under the Civil Code to make it a
civil partnership. Prautch v. Hernandez, 1 Phil. 705 (1903).
CONTRA: We are inclined to the belief that the respective codes, Civil and Commercial, have adopted a
complete system for the organization, control, continuance, liabilities, dissolutions, and juristic personalities of
associations organized under each. . . . that associations organized under the different codes are governed by
the provisions of the respective codes. Compaia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).
A commercial partnership that fails to register in the mercantile registry under Art. 119 of Code of Commerce,
does not become a juridical person with a personality distinct from those of the individuals who composed it.
Hung-Man-Yoc v.Kieng-Chiong-Seng, 6 Phil. 498 (1906); Bourns v. Carman, 7 Phil. 117 (1906); Ang Seng Quen
v. Te Chico, 7 Phil. 541 (1907).
CONSEQUENTLY:
It cannot maintain an action in its name, Prautch v. Hernandez, 1 Phil. 705 (1903); neither in the name of one or more
of the members on behalf of the associates; nevertheless the individual members may sue jointly as individuals, and
persons dealing with them in their joint capacity will not be permitted to deny their right to do so. Prautch v. Jones, 8
Phil. 1 (1907); Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909).
Without a separate juridical personality, what was applicable was Art. 120 which made persons in charge of the
management of the association liable for the debts incurred by such partnership de facto. Kwong-Wo-Sing v. Kieng-
Chiong-Seng, 6 Phil. 498 (1906).

b. Registration Key for Commercial Partnerships Coming into Existence (Arts. 118-119, Code of
Commerce); While Mere Consent Perfected the Civil Partnership

76Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).


77Reiterated in Armamento v. Guererro, 96 SCRA 178 (1980); Gonzales v. IAC, 204 SCRA106 (1991); Heirs of Domingo Valientes v. Ramas, 638 SCRA 444

(2010); PNB v. Jumamoy, 655 SCRA 54 (2011); Tiongco Yared v. Tiongco, 659 SCRA 545 (2011), Zuiga-Santos v. Santos-Gran, 738 SCRA 33 (2014); Toledo v.
CA, 765 SCRA 104 (2015).
78Also Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959).
79Cavile v. Litania-Hong, 581 SCRA 408 (2009).

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A laundry business is a civil partnership governed by the Civil Code, and it exist validly even when no formal
partnership agreement was entered into and registered, and the obligations of the partners for partnership debts
would be pro rata. Dietrich v. Freeman, 18 Phil. 341 (1911).

c. On Partnership Debts: Commercial Partners Were Solidarily Liable, Albeit Subsidiarily; While Civil
Partners Were Primarily But Only Jointly Liable
In a civil partnership, each member is bound to pay his pro rata share of the partnership debts. Co-Pitco v.
Yulo, 8 Phil. 544 (1907).
In a commercial partnership, although partners are only subsidiarily liable (i.e., benefit of excussion) they are
liable solidarily. Viuda de Chan Diaco v. Peng, 53 Phil. 906 (1928).
Both partnership and the partners may be joined in one action, but the private property of the partners cannot
be taken in payment of the partnership debts until the partnership property has been exhausted. La Compaia
Maritima v. Muoz, 9 Phil. 326 (1907).
Partners right of excussion is deemed satisfied where the judgment debts remain unsatisfied after exhaustion
of partnership assets, De los Reyes v. Lukban, 35 Phil. 757 (1916); PNB v. Lo, 50 Phil. 802 (1927).

II. NATURE AND ATTRIBUTES OF THE PARTNERSHIP


1. Definition of Partnership (Art. 1767)
Since a partnership requires the meeting of minds to contribute to a common fund with the intention of dividing
the profits from the common fund formed, necessarily an Acknowledgment of Participating Capital issued by
managing partners in favor of silent partners can only cover business enterprises specifically enumerated in said
document and cannot be construed to include all other businesses and properties registered in the separate
names of the managing partners. xJarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

2. TRI-LEVEL EXISTENCE/LEGAL RELATIONSHIPS IN A PARTNERSHIP SETTING


a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771 and 1784)
b. SEPARATE JURIDICAL PERSONALITY (Art. 1768)
c. UNDERLYING BUSINESS ENTERPRISE AS THE PRIMARY OBJECTIVE
When original partners sell their equity interests, the original juridical person was extinguished and the new
set of partners constituted a new partnership arrangement with a new juridical personality. Yet the underlying
business enterprise remained the same between the two sets of investors and the succession of liability rule
pertaining to the underlying business enterprise must be respected. Yu v. NLRC, 224 SCRA 75 (1993).

3. ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP


a. IT IS FIRST AND FOREMOST A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771, 1784)
b. GRANTED A SEPARATE JURIDICAL PERSONALITY (Arts. 44[3], 1768, 1774)
c. BOUNDED BY THE ATTRIBUTE OF DELECTUS PERSONAE
Assignment of Share Does NOT Make Assignee Partner (Arts. 1804, 1813)
The right to choose with whom to associate himself is the very foundation and essence of the partnership. Its
continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partners
capability to give it, and the absence of a cause for dissolution provided by the law itself. Ortega v. Court of
Appeals, 245 SCRA 529 (1995).
d. BOUNDED BY ATTRIBUTE OF MUTUAL AGENCY (Arts. 1803[1], 1818, 1819, 1821 to 1823)
e. PARTNERS ARE UNLIMITEDLY LIABLE (Arts. 1816, 1817, 1824, 1839[4] and [7])

4. KINDS OF PARTNERSHIPS
a. As to Object (Art. 1776, 1st par.)
i. Universal Partnership (Arts. 1777 to 1782)
- Deemed a Universal Partnership of Profits when articles do not specify the partnerships
nature. (Art. 1781)
- Persons who are prohibited from giving each other any donation or advantage cannot enter
into a universal partnership. (Art. 1782)
ii. Particular Partnership (Art. 1783)
Usefulness of Such Distinction? Lyons v. Rosenstock, 56 Phil. 632 (1932).
b. As to Duration (Art. 1785)
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i. Partnership with Fixed Term
ii. Partnership for a Particular Undertaking
iii. Partnership at Will
c. As to the Nature of the Liabilities of Partners
i. General Partnership (Art. 1776, 2nd par.)
ii. Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867)

5. COMPARED WITH OTHER MEDIA OF DOING BUSINESS


a. Co-Ownership (Arts. 484 to 486)
Article 1769 of Civil Code, which lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership, means that aside from the circumstance of profit, the presence of other elements
constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical
personality different from that of the individual partners, and the freedom to transfer or assign any interest in the
property by one with the consent of the others. xJarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).
b. Sole Proprietorship
A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the
owner of the enterprise. Only natural or juridical persons or entities authorized by law may be parties to a civil
action and every action must be prosecuted and defended in the name of the real parties-in-interest. xEjercito v.
M.R. Vargas Construction, 551 SCRA 97 (2008).
c. Agency
Agent cannot escape an estafa charge for conversion of principals funds by claiming that he had become a
partner when the books of accounts for the business showed that the amount was charged to him since the same
was merely a method of keeping an account of the business, so that the parties would know how much money
had been invested and what the condition thereof was at any particular time. xU.S. v. Muhn, 6 Phil. 164 (1906).
Just because an agent has made personal advances for the expenses of the business venture under his
administration does not make him a partner of his principal. xBinglangawa v. Constantino, 109 Phil. 168 (1960).
d. Business Trust
e. Corporations
f. Cooperatives

III. PARTNERSHIP AS PRIMARILY A CONTRACTUAL RELATIONSHIP


1. ESSENTIAL ELEMENTS AND PURPOSE OF THE PARTNERSHIP
a. CONSENT: Partnership Must Necessarily Arise from a Contractual Relationship.
Persons Who Are Not Partners to One Another Are Not Partners as to Third Persons (Art.
1769[1])
EXCEPT: Partnership by Estoppel (Art. 1825)

b. SUBJECT MATTER: Partners Undertake to Jointly Pursue a Business Enterprise (Art. 1767), through
their Agreements/Intentions to: (i) Contribute to a Common Fund; and (ii) Divide the Profits and Losses.
EXCEPT: A Professional Partnership
Partnership Must Be Established for Common Benefit of the Parties (Art. 1770)
The obtaining of profit or gain from the business to be carried on is the very reason for the existence of
a partnership; it is the element that distinguishes the partnership from voluntary religious or social
organizations. xFernandez v. De la Rosa, 1 Phil. 671 (1903).
An agreement to operate a cockpit, where one contributes his services and the other to provide the capital,
the profits to be divided between them, constitutes a partnership. The performance of services in connection
with the business and that defendant not only rendered an accounting of the business and paid him his share
of the profits, were competent proof to establish the partnership. xDuterte v. Rallos, 2 Phil. 509 (1903).
Where the society is not constituted for the purpose of gain, it does not fall within this article of the Civil
Code [on partnerships]. Such an organization is fully covered by the Law of Associations of 1887, but that law
was never extended to the Philippine Islands. xCouncil of Red Men v. Veterans Army, 7 Phil. 685 (1907).

c. CONSIDERATION: Undertakings to Contribute Money, Property or Industry to a Common Fund (Art.


1767)
d Rules on Determining Perfected Partnership (Art. 1769)
The issue as to whether there is a partnership between the parties is a factual matter. xAlicbusan v. Court of
Appeals, 269 SCRA 336 (1997).

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Although a partnership cannot be established by general reputation, rumor, or hearsay, nonetheless, a verbal
partnership is valid and may be proven by competent evidence, and intention of the parties to form a partnership
may be gathered from the facts and ascertained from their language and conduct. xKiel v. Estate of P.S. Sabert,
46 Phil. 193 (1924).
When facts proven show that purported partner never furnished the P20,000 capital, nor rendered any help or
intervention in the management of the purported partnership business, much less demanded an accounting of its
affairs and its earnings, there was never intended a real partnership despite the articles of partnership executed.
All that the purported partner did was to receive her share of P3,000 a month, and was in accordance with the
original letter of defendant (Exh. A), which shows that both parties considered themselves as lessor-lessee
under a contract of lease. Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959).
When family members lease out to SHELL a family lot for the establishment of a gasoline station, and invested
the advanced rentals and deposits to allow one of their members to use the amounts as the registered dealer of
SHELL under its of one station, one dealer policy, and that the registered dealer had accounted for the
operations to the other members of the family, there was a partnership formed, for which the registered dealer
can be compelled to execute the covering articles of partnership, for accounting and distribution of the shares in
profits of the other partners. Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988).

(i) Co-Ownership or Co-Possession Does Not Itself Establish a


Partnership, Even When Profits Are Shared
Mere co-ownership or co-possession of property does not necessarily constitute the co-owners or co-
possessors are partners in the absence of express or implied meeting of minds to enter into a partnership.
xNavarro v. Court of Appeals, 222 SCRA 675 (1993).
When land is purchased with funds contributed by the parties and thereafter divided equally among them,
there was no partnershipit was a mere joint acquisition of land, and there was no agreement to pursue a
business undertaking. xGallemet v. Tabilaran, 20 Phil. 241 (1911).
When fifteen people contributed money to buy a sweepstakes ticket with the intention to divide the prize, and
in fact the ticket won third prize, a partnership was constituted. xGatchalian v. Collector of Internal Revenue, 67
Phil. 666 (1939).
First element of an agreement to contribute money, property or industry to a common fund, is undoubtedly
present for petitioners have agreed to, and did, contribute money and property to a common fund. Second
element of intent to divide the profits among themselves, was present when the facts showed that their purpose
was to engage in real estate transactions for monetary gain and then divide the same among themselves,
displaying the character of habituality peculiar to business transactions engaged in for purposes of gain.
Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957).
Where father and son purchased lot and building and had it administered with the original purpose of dividing
the net income from the property, a partnership was constituted. xReyes v. CIR, 24 SCRA 198 (1968).
When after partition of the estate, heirs agreed to retain the properties and income into common enterprise
and divide profits in proportion to their shares in the inheritance, co-ownership was converted into a partnership.
Oa v. CIR, 45 SCRA 74 (1972).
When four brothers and sisters acquired lots with the original purpose to divide the lots for residential purposes,
and later 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. xObillos, Jr. v. CIR, 139 SCRA 436 (1985).
In contrast with Evangelista, when the only facts proven was the existence of co-ownership between the
parties covering two isolated purchase of parcels of land and the sharing of profits on the subsequent sales
thereof, there can be no deduction that an unregistered partnership has been constituted to make it separately
liable for corporate income tax: the transactions were isolated, the parcels purchased were not managed or even
leased out. Pascual v. CIR, 166 SCRA 560 (1988).
(ii) Sharing in the Gross Return of a Business Does Not Create Partnership
An exclusive agent mandated to develop a parcel of land and entitled to receive a 20% commission on the
gross sales, cannot claim to be a partner to the venture simply on the basis that he had made personal advances
for the expenses incurred in the development and administration of the property, since the amounts were never
considered contributions into the business. xBiglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).
(iii) Receipt by a Person of a Share of the Profits of a Business
Despite agreement that Bastida was to receive 35% of the profit from the business of mixing and distributing
fertilizer registered in the name of Menzi & Co., there was never any contract of partnership constituted on the
following key elements: (a) there was never any common fund created between the parties, since the entire
business as well as the expenses and disbursements for operating it were entirely for the account of Menzi &
Co.; (b) there was no provision in the agreement for reimbursing Menzi & Co. in case there should be no profits
at the end of the year; and (c) the fertilizer business was just one of the many lines of business of Menzi & Co.,
and there were no separate books and no separate bank accounts kept for that particular line of business. The
arrangement was one of employment. Bastida v. Menzi and Co., 58 Phil. 188 (1933).

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Where there is no written partnership agreement, nor proof that the claimant received a share in the profits,
nor that he had any participation with the running of the business, then no partnership claim can be sustained.
xSy v. Court of Appeals, 398 SCRA 301 (2003); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).
Although the Olivas were mere creditors, not partners, the Antons agreed to compensate them for the risks
they had taken. The Olivas gave the loans with no security and they were to be paid such loans only if the stores
made profits. Had the business suffered loses and could not pay what it owed, the Olivas would have ultimately
assumed those loses just by themselves. Still there was nothing illegal or immoral about this compensation
scheme. Anton v. Oliva, 647 SCRA 506 (2011).
(iv) When Entitlement to Net Profits Does Not Create Presumption of Partnership:
As Installment Payments of Debt or Interest Thereof
There is no partnership where a loan was obtained to purchase a venture under the condition that the
lender would receive part of the profits of the business in lieu of interest. xPastor v. Gaspar, 2 Phil. 592
(1903).
A creditor of a business cannot recover his claim against a person who gave personal guarantees to
some other obligations of the business enterprise and who is without any right to participate in the profits
and cannot be deemed a partner in the business enterprise, since the essence of partnership is that the
partners share in the profits and losses. xTocao v. Court of Appeals, 365 SCRA 463 (2001).
As Wages of an Employee
Manager of the partnership would naturally have some degree of control over the business operations
and maintenance, but the fact that he had received 50% of the net profits does not conclusively establish
that he was a partnerArt. 1769(4) is explicit that no inference of being a partner shall be drawn if such
profits were received in payment as wages of an employee. xSardane v. CA, 167 SCRA 524 (1988); xFortis
v Gutierrez Hermanos, 6 Phil. 100 (1906).
The payroll of the company indicating that the brother was listed as an employee receiving only wages
from the company militates against his claim of being a partner. xHeirs of Tang Eng Kee v. CA, 341 SCRA
740 (2000).
The fact that in their articles the parties agreed to divide the profits of a lending business in a stipulated
proportion shows a partnership exists, even when the other parties to the agreement were given separate
compensations as bookkeeper and credit investigator. xSantos v. Reyes, 368 SCRA 261 (2001).
As Rent Payments to a Landlord
As Annuity to a Widow or Representative of Deceased Partner
Consideration of Sale of Goodwill or Other Property

2. ESSENTIAL CHARACTERISTICS OF THE CONTRACT OF PARTNERSHIP (Art. 1767)


a. Nominate and Principal
b. Consensual
Action to compel a party to execute the contract of partnership to enforce the terms by which an enterprise
had been constituted is an enforcement of an obligation to do, which is contrary to policy against involuntary
servitude. Woodhouse v. Halili, 93 Phil. 526 (1953).
BUT SEE: There was indeed a partnership formed among themselves, for which the registered dealer can be
compelled to execute the covering articles of partnership, for accounting and distribution of the shares in profits
of the other partners. Estanislao, Jr. v. CA, 160 SCRA 830 (1988).
c. Onerous and Commutative
A partnership is deemed constituted among parties who agree to borrow money to pursue a business and to
divide the profits that may arise therefrom, even if it is shown that they have not contributed to any capital of their
own to a common fund. Their contribution may be in the form of credit or industry, not necessarily cash or fixed
assets. Being partners, they are liable for debts incurred by or on behalf of the partnership. Lim Tong Lim v.
Phil. Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
d. Bilateral and Reciprocal
e. Preparatory and Progressive
If the contract contains the elements of common fund and joint interest in the profits, the partnership relation
results, and the law fixes the incidents of this relation if the parties fail to do so. It is of no importance that the
parties have failed to reach an agreement with respect to the minor details of contractthese details pertain to
the accidental and not to the essential part of the contract of partnership. Fernandez v. Dela Rosa, 1 Phil. 671
(1902).

IV. PARTNERSHIP AS A JURIDICAL PERSON (Arts. 44(3), 45, 1768 and 1784)
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1. CONSEQUENCES OF PARTNERSHIP BEING A JURIDICAL PERSON:
a. Entity Has Legal Capacity to Enter into Contracts and Incur Obligations (Art. 46)
b. It May Acquire Properties in Its Own Name (Arts. 46 and 1774)
c. It May Sue and Be Sued in Its Firm Name (Art. 46)
In a bankruptcy proceeding against a partnership, since it is a separate juridical person one partner is not
entitled to be made a party as an individual separate from the firm; yet precisely because it is a juridical person,
there can be proper service to the firm of court notices upon service to any partner found within the jurisdiction of
the court. xHSBC v. Jurado & Co., 2 Phil. 671 (1903).
Death of a partner does not constitute a ground for dismissal of the suit against the partnership, since the
partnership has a separate juridical personality. xNgo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947); xWahl
v. Donaldson Sim & Co., 5 Phil. 11 (1905).
The universal practice in the Philippine Islands since American occupation, to treat partnerships as juridical
entities and to permit them to sue and be sued in the name of the company, the summons being served solely
on the managing agent or other official of the company. xVargas & Co. v. Chan, 29 Phil. 446 (1915).
A partnership may sue and be sued in its name, and when it has a designated managing partner, he may
execute all acts of administration including the right to sue debtors of the partnership. xTai Tong Chuache & Co.
v. Insurance Commission, 158 SCRA 366 (1988).
d. It Would Have Domicile: Place Where Legal Representation Is Established or Where It Exercises Its
Principal Functions (Art. 51)
e. It Is Taxed as a Corporate Taxpayer. xTan v. Del Rosario, 237 SCRA 234 (1994).
f. It May Be Declared Insolvent Even If the Partners Are Not. xCampos Rueda & Co. v. Pacific Commercial &
Co., 44 Phil. 916 (1923).
In view of the separate juridical personality of the partnership, the partners cannot be sued personally under
a contract entered into in the name of the partnership, unless it is shown that the legal fiction is being used for a
fraudulent, unfair or illegal purpose, or when partnership assets have been exhausted to make partners personally
liable for partnership debts as provided in Art. 1816. xAguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).
g. Partnership Is a Person Entitled to Constitutional Rights A partnership beingng a person before the law
is entitled to the constitutional right:
To due process and equal protection. cf xSmith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); xBache &
Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971).
Against unreasonable searches and seizures. cf xStonehill v. Diokno, 20 SCRA 383 (1967).
Partnership obtains its personality from the State and therefore not entitled to the constitutional right against
self-incrimination. cf xBataan Shipyard & Engineering Co. v. PCGG, 150 SCRA 181 (1987).

2. Provisions Contravening the Attribute of Separate Juridical Personality


a. Partners Are Co-owners of Partnership Properties (Arts. 1811)
b. Partners May Individually Dispose of Real Property of the Partnership Even When in Partnership Name
(Art. 1819)
c. Partners Are Personally Liable for Partnership Debts After Exhaustion of Partnership Assets (Arts.
1816, 1817, 1824, 1839[4] and [7])

V. FORMALITIES REQUIRED FOR THE CONTRACT OF PARTNERSHIP


1. A Partnership Begins from the Moment of Meeting of the Minds to Pursue a Business Jointly;
UNLESS: It Is Otherwise Stipulated (Art. 1784)

2. FORMALITIES REQUIRED:
a. GENERAL RULE: Being Consensual in Character, a Partnership May Be Constituted in Any Form (Art.
1771)
Old Civil Code and Code of Commerce: Third parties without knowledge of the partnerships existence, who
deal with the property registered in the name of one partner have a right to expect effectivity of such transaction
on the property, in spite of the protest of other partners and partnership creditors. xBorja v. Addison, 44 Phil. 895
(1922).
b. EXCEPT: When Capital Coxntribution Is P3,000 or More:
Must Appear in a Public Instrument; and
Registered with the SEC.
BUT: Failure to Comply with Requirements Shall Not Affect the Liability of the Partnership and Its
Members to Third Persons (Art. 1784)

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When the articles of partnership provide that the venture is established to operate a fishpond, it does not
necessarily mean that immovable properties or real rights have been contributed into the partnership which would
trigger the operation of Article 1773. Agad v. Mabato, 23 SCRA 1223 (1968).
Failure to prepare an inventory of the immovable property contributed, in spite of Art. 1773 declaring the
partnership void, would not render the partnership void when: (a) No third-party is involved since Art. 1773 was
intended for the protection of third-parties; and (b) the partners have made a claim on the partnership agreement
which is deemed binding between them as any other contract. xTorres v. Court of Appeals, 320 SCRA 428 (1999).
While the sale of land appearing in a private deed is binding between the parties, it cannot be considered
binding on third persons if it is not embodied in a public instrument and recorded in the Registry of Deeds. When
it comes to contributions of real estate to a partnership, especially when it covers registered land, then the
peremptory provisions of the Property Registration Decree (P.D. 1459) will prevail as to who has a better claim,
right or lien on the property, since registration in good faith and for value, is the operative rule under the Torrens
system. xSecuya v. Vda. de Selma, 326 SCRA 244 (2000).

c. EXCEPT: Where Immovable Property or Real Rights Are Contributed


Must Be In a Public Instrument (Art. 1771)
Would Be Void If Inventory of the Property Is Not Made, Signed by the Partiers and Attached
to the Public Instrument (Art. 1773)
Failure to register the partnership with the SEC does not invalidate a contract that has the essential requisites
of partnership agreement to contribute to a common fund and the division of profits and losses would bring
about the existence of a partnership. A partnership may exist even if the partners do not use the words partner
or partnership. Angeles v. Secretary of Justice, 465 SCRA 106 (2005).
Unregistered partnership having all the essential requisites is valid as among the partners, because the main
purpose of registration is to give notice to third parties. The failure to register does not affect the liability of the
partnership and of the partners to third persons, much less that of its juridical personality; it can be assumed that
the members themselves knew of the contents of their contract. Ma v. Fernandez, Jr., 625 SCRA 566 (2010).
d. Legal Value of the Formal Requirements for Partnerships
An oral partnership is valid and binding between the parties, even if the amount of capital contributed is in
excess of the sum of 1,500 pesetas. The provisions of law requiring a contract to be is a particular form should
be understood to grant to the parties the remedy to compel that the form mandated by law be complied with, but
does not prevent them from claiming under an oral contract which is otherwise valid without first seeking
compliance with such form. xThunga Chui v. Que Bentec, 2 Phil. 561 (1903); xMagalona v. Pesayco, 59 Phil.
453 (1934).
Registration of the partnership is the best evidence to prove the existence of the partnership among the
partners. xHeirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000); xHeirs of Jose Lim v. Lim, 614
SCRA 141 (2010).
When there has been duly registered articles of partnership, and subsequently the original partners accept an
industrial partner but do not register a new partnership, and thereafter the industrial partner retires from the
business, and the original partners continue under the same set-up as the original partnership, then although the
second partnership was dissolved with the withdrawal of the industrial partner, there resulted a reversion back
into the original partnership under the terms of the registered articles of partnership. There is not constituted a
new partnership at will. Rojas v. Maglana, 192 SCRA 110 (1990).
An instrument purporting to be the contract of partnership which is unsigned and undated, does not meet the
public instrumentation requirements exacted under Article 1771, not even registrable with the SEC as called for
under Article 1772, and which also does not meet the inventory requirement under Article 1773 since the claims
involve contributions of immovable properties, does not warrant a finding that a contract of partnership or joint
venture exist. Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005).

3. xWhen Corporate Venture Fails to Formally Incorporate, Do the Incorporators Become


Partners?
Cases: Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
Lim Tong Lim v. Philippine Fishing Gear Industries, 317 SCRA 728 (1999).

4. OTHER RULES ON THE CONSTITUTION OF A PARTNERSHIP


a. A Partnership Must Have a Lawful Object or Purpose (Art. 1770)
The action which may arise under Art. 1666 of old Civil Code in the case of an unlawful partnership, is that for
the recovery of the amounts paid in by the members from those in charge of the administration of said partnership,
and it is not necessary for the said partners to base their action on the existence of the partnership, but on the
fact of having contributed some money to the partnership capital. xArbes v. Polistico, 53 Phil. 489 (1929).
The contract of partnership to divide the fishpond between the parties after the administrative agency shall
have approved the arrangement became illegal under the Fisheries Act. It is an elementary rule in law that a
partnership cannot be formed for an illegal purpose or one contrary to public policy and that where the object of
a partnership is the prosecution of an illegal business or one which is contrary to public policy, the partnership is
void. xDeluao v. Casteel, 29 SCRA 350 (1969).
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b. When Articles Kept Secret Among Members and One Member May Contract in His Own Name (Art.
1775):
Shall Have No Separate Juridical Personality
Shall Be Governed by the Provisions Relating to Co-Ownership
c. Rules on Partnership Name (Art. 1815):
Every Partnership Must Operate Under a Firm Name
Which May or May Not Include the Name of One or More of the Partners
A Person Who Allows His Name to Be in the Firm Name Shall Be Subject to the Liability of a Partner
The Use by the Person or Partnership Continuing the Partnership Business of the Partnership
Name, or the Name of a Decease Partner (Art. 1840, last par.): Shall Not of Itself Make the Individual
Property of the Deceased Partner Liable for Any Debts Contracted by Such Person or Partnership.
The requirement under the Code of Commerce that the partnership name contain the names of all the partners,
is meant to protect from fraud the public dealing with the partnership; it cannot be invoked by the partners to
allege partnerships non-existence. xJo Chung Cang v. Pacific Comml Co., 45 Phil. 142 (1923); xPNB v. Lo, 50
Phil. 802 (1927).

d. RULE 3.02, Code of Professional Responsibility: The continued use of the name of a deceased partner
in a professional partnership is permissible, provided that the firm indicates in all its communications
that said partner is deceased.
The contention that Art. 1840 regulating the use of partnership name allows a partnership from continuing its
business under a firm name which includes the name of a deceased partner has been denied when it comes to a
law partnership on the following grounds: (a) it contravenes the provision of Arts. 1815 and 1825, which impose
liability on a person whose name is included in the firm name, which cannot cover a deceased person who can no
longer be subject to any liability; (b) 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; (c) Art. 1840 covers dissolution and winding up
scenarios and cannot be taken to mean to cover firms that are intended as going concerns, and cover more
commercial partnerships; and (d) when it comes to other professions, there is legislative authority for them to use
in their firm names those of deceased partners. xIn the Matter of the Petition for Authority to Continue Using Firm
Names, 92 SCRA 1 (1979).

VI. RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTNERS


1. Kinds of Partners
(a) Industrial and Capitalist Partners
(b) Ostensible, Nominal and Dormant Partners
(c) Original and Incoming Partners
(d) Managing and Liquidating Partners
(e) General and Limited Partners
(f) Retiring, Surviving and Continuing Partners

2. PROPERTY RIGHTS OF PARTNERS


a. CO-OWNERSHIP RIGHTS to Specific Partnership Properties (Arts. 1810 and 1811)
Equal Right to Possess, But for Partnership Purpose Only. xCelino v. Court of Appeals, 163 SCRA 97
(1988).
Non-Assignable (Art. 1811[2])
Not Subject to Attachment/Execution by Partners Separate Creditors nor For a Partners Legal
Support Obligations (Art. 1811[3])

b. MUTUAL AGENCY: Right to Participate in Management of the Partnership


(i) General Rule on Agency
All Partners Shall Be Considered Agents and Whatever Any One of Them May Do Alone Shall
Bind the Partnership (Arts. 1803[1])
Every Partner Is an Agent of the Partnership for Apparently Carrying On in the Usual Way the
Business of the Partnership (Art. 1818)
Partnership Shall Answer to Each Partner for the Obligation a Partner May Have Contracted in
Good Faith in the Interest of the Partnership Business, and the Risks in Consequence of Its
Management (Art. 1796)
(ii) Other Powers or Rights Relating to Mutual Agency:
Can Dispose of Partnership Property Even When in Partnership Name (Art. 1819)

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Admission or Representation Made by Any Partner Concerning Partnership Affairs Is Evidence
Against the Partnership (Art. 1820)
Notice to Any Partner Relating to Partnership Affairs Is Notice to the Partnership (Art. 1821)
Wrongful Act or omission of Any Partner Acting for Partnership Affairs Makes the partnership
liable (Art. 1822)
Partnership Bound to Make Good Losses for Acts or Misapplications of Partners (Art. 1823)
(iii) Acts Requiring Unanimous Consent (Art. 1818)
(iv) Consent Required in Making Alterations on Immovable Property (Art. 1803[2])
(v) When There Is Designation of Manager (Arts. 1800 to 1802)
In the ordinary course of business, a partner has authority to purchase goods, xSmith, Bell & Co. v. Aznar,
40 O.G. 1882 (1941); to hire employees for the partnership, xGarcia Ron v. La Compania de Minas de Batau,
12 Phil. 130 (1908); as well as dismiss them, xMartinez v. Cordoba & Conde, 5 Phil. 545 (1906).
The stipulation in the articles of partnership that the two managing partners may contract and sign in the
name of the partnership with the consent of the other creates an obligation between the two partners, which
consists in asking the others consent before contracting for the partnership. This obligation of course is not
imposed upon a third person who contracts with the partnership. A third person has a right to presume that
the partner with whom he contracts has, in the ordinary and natural course of business, the consent of his
copartner Third person would naturally not presume that the partner with whom he enters into the transaction
is violating the articles of partnership, but on the contrary, is acting in accordance therewith. Litton v. Hil &
Ceron, 67 Phil. 509 (1935).
In a transaction within the ordinary course of the partnership business effected by the industrial partner
without the consent of the capitalist partner, the provisions in the articles of partnership that the industrial
partner shall manage, operate and direct the affairs, businesses and activities of the partnership, constitute
sufficient authority to make such transaction binding against the partnership, as against another provision of
the articles by which the industrial partner is authorized To make, sign, seal, execute and deliver contracts .
. upon terms and conditions acceptable to him duly approved in writing by the capitalist partner. xSmith, Bell
& Co. v. Aznar, 40 O.G. 1881 (1941).
When partnership real property had been mortgaged and foreclosed, the redemption by any of the partners,
even when using his separate funds, does not allow such redemption to be in his sole favor, under the general
principle of law under Art. 1818 that a partner is an agent of the partnership. Under Art. 1807, every partner
becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partner.
xCatalan v. Gatchalian, 105 Phil. 1270 (1959).
In spite of the provision of Art. 129 of Code of Commerce 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, such obligation is imposed by law among
the partners, that does not necessarily affect the validity of the acts of a partner, while acting in the ordinary
course of business of the partnership, as regards third persons without notice. The latter may rightfully assume
that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore,
he would not ordinarily act to the prejudice of his co-partners. Goquiolay v. Sycip, 108 Phil. 947 (1960).
A partner is presumed to be an authorized agent for the firm to bind it in carrying on the partnership
transaction. xMuasque v. Court of Appeals, 139 SCRA 533 (1985).

c. EQUITY RIGHTS: Right to Shares in Profits and Losses (Arts. 1810 and 1812)
VOID: Stipulation Excluding Partner from Sharing in Profits or Losses (Art. 1799)
(i) Participation in Profits and Losses (Art. 1797):
Distributed in Accordance with Stipulation
If Share In Profits Only Stipulated, Share in the Losses Shall Be the Same
If No Stipulation on Sharing, Partners Share Profits and Losses in Proportion to their Capital
Contributions
In the Absence of Stipulation, an Industrial Partner Shall Receive Such Share in the Profits As
May Be Just and Equitable under the Circumstances.
(ii) Third-Party May Be Designated to Determine Profit-Loss Sharing (Art. 1798)
Determination by Designated Third-Party May Be Impugned Only When Manifestly Inequitable
But Such Right to Impugn Is Lost:
When Partnership Has Began to Execute the Third Party Decision; or
3 Months Have Lapsed from Knowledge of Such Decision.
In a partnership arrangement, when the agreement to pay a high commission to one of the partners was in
anticipation of large profits being made from the venture, but that eventually the venture sustained losses,

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then there is no legal basis to demand for the payment of the commissions since the essence of the partnership
is the sharing of profits and losses. Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).
Art. 1797 covers the distribution of losses among the partners in the settlement of partnership affairs and
does not cover the obligations of partners to third persons which is covered by Art. 1816. Ramnani v. Court
of Appeals, 196 SCRA 731 (1991).
d. Conveyance By Partner of His Whole Partnership Interest DOES NOT (Art. 1813):
Dissolve the Partnership
Entitle the Assignee During the Term of the Partnership to Interfere with Management or
Administration of Partnership Business
Entitle the Assignee to Require Information or an Accounting of Partnership Matters, Much Less to
Inspect Partnership Books
Merely Entitles Assignee to Receive Profits to Which Assignor Is Entitled To
Any partner may transfer his interest and his assignee may demand an accounting from the remaining partners
and a third person into whose hands the partnership property has passed in satisfaction of the firms debt.
xJackson v. Blum, 1 Phil. 4 (1901).
e. Other Proprietary Rights of Partners
(i) Right to Inspect Partnership Books and Records (Art. 1805)
(ii) Right to Full Information (Art. 1806)
(iii) Right to Formal Accounting (Art. 1809) Partners right to accounting for partnership properties in the
custody of the other partners shall apply only when there is proof that such properties, registered in the
individual names of the other partners, have been acquired from the use of partnership funds, thus:
Accordingly, the defendants have no obligation to account to anyone for such acquisitions in the absence
of clear proof that they had violated the trust of [one of the partners] during the existence of the
partnership. xLim Tanhu v. Ramolete, 66 SCRA 425 (1975).
(iv) Right to Reimbursement for Advances (Art. 1796) The rule is inapplicable where no money other
than what was contributed as capital is involved. xMartinez v. Ong Pong Co., 14 Phil. 726 (1910).
(v) DELECTUS PERSONAE: Right to Dissolve the Partnership (Art. 1830[2]) Even in a partnership not at
will, a partner can unilaterally dissolve the partnership by a notice of dissolution, which in effect is a notice
of withdrawal. Under Art.1830(2), 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. Rojas v. Maglana, 192 SCRA 110 (1990).

3. OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP


a. OBLIGATION TO CONTRIBUTE TO THE COMMON FUND:
Every Partner Is a Debtor of the Partnership for Whatever He Has Promised to Contribute (Art. 1786)
Unless There Is a Stipulation to the Contrary, the Partners Shall Contribute Equal Shares to the
Partnership Capital (Art. 1790)
When a partner fails to pay his promised contribution, he becomes indebted to it for the remainder of what is
due, with interest and any damages occasioned thereby, but it does not authorize the other partners to seek
rescission of the partnership contract under Article 1191, since the remedies are provided for in particular under
now Arts. 1786 to 1788. xSancho v. Lizarraga, 55 Phil. 601 (1931).
A partner who promises to contribute to a partnership becomes a promissory debtor of the partnership,
including liability for interests and damages caused for failure to pay, and which amounts may be deducted upon
dissolution of the partnership from his share in the profits and net assets. Rojas v. Maglana, 192 SCRA 110
(1990).80
b. When Bound to Contribute Money: Liable to the Partnership for Interest and Damages from the Time
Contribution Became Due (Art. 1788)
c. When Bound to Contribute Property:
(i) When Property Contributed Is Specific/Determinate (Art. 1786):
Bound to the Warranty Against Eviction

80Reiterated in Moran, Jr. v. CA, 133 SCRA 88 (1984).


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Liable for the Fruits Thereof from the Time They Should Have Been Delivered, Without Need of
Demand
(ii) When Property Contributed Are Fungible/Cannot Be Kept Without Deterioration:
Risk of Loss Shall Be Borne by the Partnership
(iii) When Contribution in Goods:
Must Be Appraised to Establish Value; Subsequent Change of Value for the Partnerships
Account (Arts. 1787 and 1795)
(iv) When Real Property Contributed:
Inventory of Immovable Property Must Be Made and Attached to Articles of Partnership
Registered with SEC (Arts. 1772 and 1773)
Credit, such as a promissory note or other evidence of obligation, or even goodwill, may be validly contributed
into the partnership. xCity of Manila v. Cumbe, 13 Phil. 677 (1909).
d. Additional Contribution in Case of Imminent Loss (Art. 1791): Unless Otherwise Agreed, Partner Who
Refuses to Contribute Additional Capital, Except an Industrial Partner, to Save the Venture, Shall Be
Obliged to Sell His Interest to Other Partners

4. FIDUCIARY DUTIES OF PARTNERS


a. DUTY OF DILIGENCE: Each Partner Is Responsible to the Partnership for Damages Suffered By It Through
His Fault (Art. 1794)
Partner at Fault Cannot Compensate Such Damages with the Profits and Benefits Which He May
Have Earned for the Partnership from His Industry
However, the Courts May Equitably Lessen If Partners Extraordinary Efforts in Other Activities of
the Partnership, Unusual Profits Have Been Realized
b. DUTY TO ACCOUNT: Every Partner Must Account for Any Benefit, and Hold as Trustee Any Profits Derived
by Him Without the Consent of Other Partners from Any Transaction Connected with the Formation,
Conduct, or Liquidation of the Partnership or From Any Use by Him of Its Property (Arts. 1807 and
1809)
c. DUTY OF LOYALTY:
(i) On Recovery of Demandable Sum (Art. 1792):
Received for Partners Account: Share Proportionately With Partnership
Received for Partnership Account: All for to the Partnerships Account
(ii) On Receiving Partnership Credits (Art. 1793):
Partner Receiving Capital When Others Have Not, Obliged to Bring Sum to the Partnership
Capital in the Event Partnership Becomes Insolvent
(iii) Partners in General Cannot Engage in Competitive Business:
Capitalist Partners Cannot Engage for Their Own Account in Similar Partnership
Business (Art. 1808)
Industrial Partner Cannot Engage in Any Form of Business (Art. 1789)
When the partnership has been terminated, the former partners are no longer prohibited in pursuing the same
business as that for which the partnership was constituted. xHalon v. Haussermann, 40 Phil. 796 (1920).
When mortgaged partnership real property had been foreclosed, redemption by any of the partners, even
when using his separate funds, does not allow such redemption to be in his sole favor, since under Art. 1818 that
a partner is an agent of the partnership, and under Art. 1807, every partner becomes a trustee for his copartner
with regard to any benefits or profits derived from his act as a partner. xCatalan v. Gatchalian, 105 Phil. 1270
(1959).81
An industrial partner is not deemed to have violated his fiduciary duties to the other partners by having
delivered on the particular service required of her and devoting her time serving in the judiciary which is not
considered to be engaged in an activity for profit. Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973).
Former partners have no obligation to account on how they acquired properties in their names, when such
acquisition were effected long after the partnership had been dissolved, especially in the absence of clear proof
that they had violated the trust of managing partner during the existence of the partnership. xLim Tanhu v.
Remolete, 66 SCRA 425 (1975).
When a partner engages in a separate business enterprise that is competitive with that of the partnership, the
other partners withdrawal becomes thereby justified and for which the latter cannot be held liable for damages.
Rojas v. Maglana, 192 SCRA 110 (1990).

81Director of Lands v. Lope Alba, 105 Phil. 2171 (1959).


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5. PARTNERS SUBJECT TO UNLIMITED LIABILITY FOR PARTNERSHIP DEBTS
a. Partners Liable Pro-Rata with Their Separate Properties After Partnership Assets Have Been
Exhausted, for All Partnership Debts (Art. 1816)
Any Stipulation Against Personal Liability of Partners, Even Industrial Partners, for Partnership
Debts Is Void, Except as Among Themselves (Art. 1817)
The meaning of pro rata to determine the unlimited liability of partners in a general partnership means that
they shall equally divide among themselves the partnership debts remaining after exhaustion of partnership
assets. xCo-Pitco v. Yulo, 8 Phil 544 (1907); xIsland Sales v. United Pioneers General Construction Co., 65
SCRA 554 (1975).
Art. 1816 provides: clearly states that: First, partners' obligation with respect to the partnership liabilities is
subsidiary in nature, in that the partnersthey shall only be liable with their property after all the partnership
assets have been exhausted. Resort to the properties of a partner may be made only after efforts in exhausting
partnership assets have failed or that such partnership assets are insufficient to cover the entire obligation.
Second, that the partners' obligation to third persons with respect to the partnership liability is pro rata or joint,
i.e., liable only for the payment of only a proportionate part of the debt. The jJoint liability of the partners is a
defense that can be raised by a partner impleaded in a complaint against the partnership. Guy v. Gacott, G.R.
No. 206147, 13 Jan. 2016.

b. All Partners Solidarily Liable with Partnership (Art. 1824) for Everything Chargeable to the Partnership
When Caused By:
Wrongful Act or Omission of Any Partner Acting
In the Partnerships Ordinary Course of Business; or
With Authority from the Other Partners (Art. 1822)
Partners Act or Misapplication of Properties of Third Parties
Where Partner Receives Property Acting With Apparent Authority; or
Partnership Received Property in the Ordinary Course of Business (Art. 1823)
Partners are solidarily liable for employees workmens compensation claims. xLiwanag and Reyes v.
Workmens Compensation Commission, 105 Phil. 741 (1959).
c. Newly Admitted Partner into an Existing Partnership Is Liable Only Out of Partnership Property Shares
and Contributions, for All the Obligations of the Partnership Arising Before His Admission (Art. 1826)
d. Partnership Creditors Have Preference Over the Personal Creditors of Each of the Partners as Regards
the Partnership Property (Art. 1827)
Remedy of Partners Separate Creditors (Art. 1814): May Apply with the Courts That Entered the
Judgment Debt
To Charge the Debtors Equity Interests for the Payment from His Share in the Profits or Any Other
Money Due from the Partnership
Which Interest Charged May Be Redeemed at Any Time Before Foreclosure by the Other Partners
or the Partnership Itself
6. Liability Rules When Non-Partner Represents Himself to Third Parties as a Partner in an Existing
Partnership (Art. 1825):
a. Liable to Third Parties Who Act in Good Faith
When Partnership Liability Results, He Is Liable as Though He Were an Actual Member of the
Partnership
When No Partnership Liability Results, Liable Pro Rata with the Other Persons, If Any, So
Consenting to the Contract or Representation as to Incur Liability, Otherwise Separately
b. When It Is the Firm That Has Made Such Representation, He Is an Agent and May Bind the Representers
to the Same Extent as Though He Were in Fact a Partner

VII. DISSOLUTION, WINDING-UP, AND TERMINATION OF PARTNERSHIP


1. TYPES AND CAUSES OF DISSOLUTION
a. NON-JUDICIAL DISSOLUTION (i.e., Ipso Jure Dissolution) (Arts. 1830, 1833, and 1840[1])
(i) Without Violation of the Partnership Agreement (Without Breach):
Expiration of the Partnership Term or Achievement of Undertaking
By the Express Will of a Partner Acting in Good Faith in a Partnership at Will
Mutual Assent of the Partners to Dissolve or Accept a New Partner
Expulsion of a Partner Pursuant to an Agreement Granting Such Right
The legal effect of the changes in the membership of the partnership would be the dissolution of the old
partnership. Yu v. NLRC, 224 SCRA 75 (1993).
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(ii) In Contravention of Agreement (Art. 1830[2]): Where the Circumstances Do Not Permit a
Dissolution Under Any Other Provision, By the Express Will of Any Partner at Any Time
A mere falling out or misunderstanding among the partners does not convert the partnership into a sham
organization, since the partnership exists and is dissolved under the law. Muasque v. Court of Appeals,
139 SCRA 533, 540 (1985).
Partner who effect a dissolution by his withdrawal in contravention of an agreement renders himself liable
for damages which may be deducted from his partnership account, and he loses his right to wind-up. Rojas
v. Maglana, 192 SCRA 110 (1990).
An unjustified dissolution by a partner can subject him to action for damages because by the mutual
agency that arises in a partnership, the doctrine of delectus personae allows the partners to have the power,
although not necessarily the right, to dissolve the partnership. Tocao v. Court of Appeals, 342 SCRA 20
(2000)

(iii) By Operation of Law (Art. 1830)


Supervening Illegality of the Partnership Business
Loss of Specific Thing Contributed
Death, Insolvency or Civil Interdiction of a Partner
Absence of any clear stipulation, the acceptance back of part of the contribution by the partner does not
necessarily mean his withdrawal from, or dissolution of, the partnership. Fernandez v. Dela Rosa, 1 Phil. 671
(1902).
The death of a partner dissolves the partnership, but the liquidation of its affairs is by law entrusted not to
the executors of the deceased partner, but to the surviving partners or to the liquidators appointed by them.
xWahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).
A partnership is dissolved by the a partners death of one of its partners there being no stipulation in the
contract of partnership contract of its subsistence after the death of a partnerto the contrary, and it thereby
attains the status of a partnership in liquidation, and only the rights inherited by the heirs of the deceased
partner were those resulting from the said liquidation and nothing more. If there would be a continuation of the
partnership a clear agreement on meeting of the minds must be made, otherwise, a new partnership
arrangement cannot be presumed to have arisen among the heirs and the remaining partners. xBearneza v.
Dequilla, 43 Phil. 237 (1922).
In equity, surviving partners are treated as trustees in regard to the interest of the deceased partner in the
firm, and it is their duty to render an account of the performance of their trust to the personal representatives
of the deceased partner, and to pay over to them the share of such deceased member in the surplus of firm
property, whether it consists of real or personal assets. xGuidote v. Borja, 53 Phil. 900 (1928).

b. BY JUDICIAL DECREE OF DISSOLUTION:


(i) A Partnership With an Unlawful Object or Purpose May Be Dissolved by Judicial Decree, and the
Profit Confiscated in Favor of the State (Art. 1770)
(ii) By the Decree of a Court on Application By or For a Partner (Art. 1831):
Partner Declared Insane in Any Judicial Proceeding or Shown to Be of Unsound Mind
Partner Becomes in Any Other Way Incapable of Performing His Contract
A Partner Has Been Guilty of Such Conduct as Tends to Affect Prejudicially the Carrying on of
the Partnership Business
A Partner Willfully or Persistently Commits a Breach of the Agreement That It Is Not Reasonably
Practicable to Carry-on the Partnership Business with Him
When Partnership Business Can Only Be Carried-on at a Loss
Other Circumstances That Render a Dissolution Equitable
Assignee of Partners Interest May Seek Court Order:
Upon Termination of the Specified Term or the Particular Undertaking of the Partnership; or
At Any Time in a Partnership at Will
Sustaining of losses is valid basis to dissolve the partnership. xMoran, Jr. v. Court of Appeals, 133 SCRA 88
(1984).
Courts can dissolve a partnership without formal application when the continuation of the partnership has
become inequitable. xFue Leung v. IAC, 169 SCRA 746 (1989).

2. OPTIONS ARISING BY REASON OF DISSOLUTION:


a. When Dissolution Is Without Contravention of Partnership Agreement: Each Partner May Demand for
the Winding-Up of the Partnership (Art. 1837):
Partnership Properties Applied to Discharge Liabilities, and Surplus Applied to Pay in Cash the Net
Amount Owing to the Respective Partners

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b. When Dissolution Caused by Bona Fide Expulsion of a Partner Who Is Discharged from Partnership
Liabilities (Art. 1837):
Expelled Partner Shall Receive in Cash Only the Net Amount Due Him, i.e., Less Damages
Partnership Business Continues with the Remaining Partners
c. When Dissolution Is in Contravention of Partnership Agreement:
Each Non-Breaching Partner Shall Have the Right To (Art. 1837):
Liquidate the Partnership (i.e., Have Partnership Properties Applied to Discharge Liabilities and
Receive His Share of the Surplus
Recover Damages Against Each Breaching Partner
All Breaching Partners Are Limited (Art. 1837):
If Partnership Business Not Continued: To Receive Their Net Share in the Surplus After Payment
of All Liabilities
If Partnership Business Continued: To Have Net Value of Their Interests Ascertained (Which
Shall Not Include Goodwill) and Paid to Them in Cash or Payment Is Secured by a Bond, and to
Be Released from All Existing Partnership Liabilities
All Non-Breaching Partners, If They All Desire, May Continue the Business:
Provided They Secure the Payment by Bond or Pay to Any Breaching Partner the Value of His
Interest, Net the Damages, and Indemnity Him Against All Present or Future Partnership
Liabilities (Art. 1837)
A New Partnership Is Thereby Constituted Among the Continuing Partners
d. When Dissolution is By Operation of Law:
When a Partner Retires or Dies and Business Is Continued Without Settlement of Accounts, Such
Partner or His Representative Shall Against Such Person or Partnership (Art. 1841):
Have the Value of His Interest the Dissolution Ascertained
Receive as an Ordinary Creditor an Amount Equal to the Value of His Interest
Option to Receive Interest on Such Value or the Profits Attributable to the Use of His Right in the
Property of the Dissolved Partnership
BUT: Partnership Creditors Have Priority Over Partners Separate Creditors
A partnership guilty of an act of insolvency may be proceeded against and declared bankrupt in insolvency
proceedings despite the solvency of each of the partners composing it. xCampos Rueda & Co. v. Pacific
Commercial Co., 44 Phil. 916 (1922).

e. When There is Fraud or Misrepresentation (Art. 1838):


Where the Partnership Contract Is Rescinded on the Ground of Fraud or Misrepresentation of One
of the Parties, Party Rescinding Is Entitled, After Payment of All Partnership Liabilities to Third
Persons, To:
Lien or Right of Retention of Surplus of the Remaining Partnership Property for Any Sum Paid
by Him for Purchase of an Interest in the Partnership and for Any Capital or Advances
Contributed by Him
Stand in Place of the Creditors of the Partnership for Any Payments Made by Him in Respect of
Partnership Liabilities
Be Indemnified by Person Guilty of Fraud or Making the Representation Against All Debts and
Liabilities of the Partnership
Failure of a partner to have published her withdrawal, and her agreeing to have remaining partners proceed
with running the partnership business instead of insisting on the liquidation of the partnership, will not relieve such
withdrawing partner from her liability to the partnership creditors. Even if withdrawing partner acted in good faith,
this cannot overcome the position of partnership creditors who also acted in good faith, without knowledge of her
withdrawal from the partnership. Thus, when the partnership executes a chattel mortgage over its properties in
favor of a withdrawing partner, and the withdrawal was not published to bind the partnership creditors, and in fact
the partnership itself was not dissolved but allowed to be operated as a going concern by the remaining partners,
the partnership creditors have standing to seek the annulment of the chattel mortgage for having been entered
into adverse to their interests. Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
When new partners continue the partnership business which has been dissolved by the withdrawal of its
original partners, the new partnership is liable for the existing liabilities of the business enterprise even when they
were incurred under the old partnership arrangement, as clearly governed under the provisions of Article 1840 of
the Civil Code. However, new partnership is not compelled to retain the services of managers and employees of
the old partnership and may choose their personnel. xYu v. NLRC, 224 SCRA 75 (1993).
The action that lies with partner who furnished the capital for the recovery of his money is not a criminal action
for estafa, but a civil one arising from the partnership contract for a liquidation of the partnership and a levy on its
assets if there should be any. xU.S. v. Clarin, 17 Phil. 84 (1910).
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BUT: When an individual has been deceived by fraud to invest in a venture for which there was never intention
on the part of the receiving party to invest it for the particular purpose for which it was invested the receiving
partner is liable for estafa. Celino v. Court of Appeals, 163 SCRA 97 (1988); xLiwanag v. Court of Appeals, 281
SCRA 225 (1997).

3. NATURE AND EFFECTS OF DISSOLUTION:


a. As Between and Among the Partners:
Dissolution Is the Change in the Relationship of the Partners Caused by Any Partner Ceasing to Be
Associated in Carrying On the Partnership (Arts. 1828)
It Terminates All Authority of Any Partner to Act for the Partnership, Except as May Be Necessary
to Windup Partnership Affairs (Art. 1832)
In the Absence of Any Agreement to the Contrary, the Right to an Accounting of His Interest Shall
Accrue to Any Partner (or His Representative) as Against the Winding-up Partners, or the Surviving
Partners, or the Person or Partnership Continuing the Business (Art. 1842)
Right to accounting does not prescribe during the life of the partnership, and that prescription begins to run
only upon the dissolution of the partnership and final accounting is done. xFue Leung v. IAC, 169 SCRA 746
(1989).
b. On the Partnership Itself:
Partnership Continues Only For Purposes of Winding-up (Art. 1829)
EXCEPT: When the Non-Breaching Partners Choose to Continue the Partnership Business Under a
New Partnership
An action to dissolve the partnership and for the appointment of a receiver must include the partnership since
it is entitled to be heard in matters affecting its existence as well as the appointment of a receiver. xClaudio v.
Zandueta, 64 Phil. 812 (1937).
Although the dissolution of a partnership is caused by any partner withdrawing from the partnership, the
partnership is not terminated but continuous until the winding up of the business. xSingson v. Isabela Sawmill,
88 SCRA 623 (1979).
The legal personality of an expiring partnership persists for the limited purpose of winding-up and closing its
affairs. xYu v. NLRC, 224 SCRA 75 (1993).
c. On the Authority of the Partners:
Terminates All Partners Authority to Bind the Partnership, Except for Winding-up of Partnership
Affairs (Art. 1832)
A Partner Can Still Bind the Partnership (Art. 1834):
By Any Act or Contract Appropriate for Winding-up Partnership Affairs
By Non-Winding-up Contracts When Third Party Had Extended Credit to the Partnership in Good
Faith (Not Having Knowledge or Notice of Dissolution)
But Unknown Partners Not Liable to Such Creditors with their Separate Properties.
Where Dissolution Is Caused by Act, Death or Insolvency of Partner (Art. 1833): Each Partner Is
Liable to Co-Partners for His Share of Any Liability Created by Any Partner Acting for Partnership
as If Partnership Had Not Been Dissolved
UNLESS: Partner Acting Had Knowledge of the Dissolution or Noitce of the Death or Insolvency of
Another Partners
Partner Acting Had Knowledge of the Dissolution; or
Partner Acting Had Knowledge or Notice of the Death or Insolvency of Another Partner
d. On the Existing Liabilities of the Partners (Art. 1834):
Dissolution Itself Does Not Discharge Existing Liability of Any Partner
EXCEPT: When Partner Is Discharged By Reason of an Express Agreement Between the Continuing
Partners and the Creditors

4. WINDING-UP AND TERMINATION OF THE PARTNERSHIP BUSINESS ENTERPRISE


Winding-up is the process of settling business affairs after dissolution, which includes the paying of previous
obligations; the collecting of assets previously demandable; even new business if needed to wind up, as the
contracting with a demolition company for the demolition of the garage used in a used car partnership.
Termination is the point in time after all the partnership affairs have been wound up. Idos v. Court of
Appeals, 296 SCRA 194 (1998).
a. Partners Authority Would Only Be for Purposes of Winding-Up (Art. 1834)
b. Authority to Wind-Up (Art. 1836): Only the Partners Who Have Not Wrongfully Dissolved the
Partnership or the Legal Representative of the Last Surviving Partner

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c. Upon Dissolution (Art. 1839[4] and [7]): Partners Shall Contribute Amounts Necessary to Satisfy
Partnership Debts Not Covered by Partnership Assets
HOWEVER: Separate Creditors of Deceased Partner Shall Have Priority Over His Separate Properties
(Art. 1835)
d. SETTLEMENT OF LIABILITIES AND PARTNERSHIP CLAIMS (Art. 1839):
Partnership Assets Covers Partnership Properties and Partners Required Contributions under the
Unlimited Liability Rule
Partnership Liabilities Shall Be Paid in the Following Order of Payment:
Those Owing to Creditors Other Than the Partners
Those Owing to Partners Other Than for Capital and Profits
Those Owing to Partners in Respect of Capital
Those Owing to Partners in Respect of Profits
When a partner withdraws from the partnership, he is entitled to the payment of what may be due him after
liquidation. But no liquidation is necessary where there was already a settlement or an agreement as to what the
retiring partner shall receive, and the latter was in fact reimbursed pursuant to the agreement. xBonnevie v.
Hernandez, 95 Phil. 175 (1954).
Managing partner is not personally liable for payment of partners shares. It is the partnership that must refund
the shares of retiring partners, which cannot be returned without first dissolving and liquidating the partnership,
for the return is dependent on the discharge of the creditors, whose claims enjoy preference over those of the
partners. All partners are interested in his assets and business, and are entitled to be heard in the matter of the
firms liquidation and the distribution of its property. xMagdusa v. Albaran, 5 SCRA 511 (1962).
Since a partnership has a separate juridical personality, then upon its dissolution, the withdrawing partners
have no cause of action to demand the return of their equity from the other partners; it is the partnership that
must refund the equity of the retiring partners. However, before the partners can be paid their shares, the
partnership creditors of the partnership must first be compensated; whatever is left thereafter becomes available
for the payment of the partners shares. Villareal v. Ramirez, 406 SCRA 145 (2003).
It is wrong to presume that capital contributions at the beginning of the partnership remains intact, unimpaired
and available for distribution or return to the partners, or that the total capital contribution in a partnership is
equivalent to the gross assets to be distributed to the partners at the time of dissolution of the partnership. In the
pursuit of a partnership business, its capital is either increased by profits earned or decreased by losses
sustained; it does not remain static and unaffected by the changing fortunes of the business. When partners
venture into business together, they should have prepared for the fact that their investment would either grow or
shrink. Villareal v. Ramirez, 406 SCRA 145 (2003).

VIII. LIMITED PARTNERSHIPS


1. BACKGROUND AND DEFINITION
a. Origin, Concept and Purpose
See excerpts from Ames v. Downing, N.Y. Surr. Cit. reproduced in BAUTISTA, TREATISE ON PHILIPPINE
PARTNERSHIP LAW , 1995 ed., at pp. 336-227.
Civil Code provisions on Limited Partnership were taken from Uniform Limited Partnership Act. See
TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol V., 1992 ed., at pp. 382-395.
Prohibition against formation of a universal partnership among between spouses does not apply when the
partners entered into a limited partnership, the man being the general partner and the woman being the limited
partner, and a year later the two get married. Commissioner of Internal RevenueCIR v. Suter, 27 SCRA 152
(1969).
b. DEFINITION (Art. 1843): A Limited Partnership Is One That Is:
Formed By At Least One General Partner and At Least One Limited Partner
Who Shall Sign and Swear to the Articles of Limited Partnership (Certificate)
Which Certificate Must Be Registered with the SEC
A limited partnership that does not comply with the registration requirements shall be treated as a general
partnership in which all the members are liable for partnership debts. Jo Chung Cang v. Pacific Commercial
Co., 45 Phil. 142 (1923).

2. FORMATION AND STATUTORY REQUIREMENTS (Art. 1844)


a. Contents of the Articles of Limited Partnership (the Certificate)
Partnership Name, Add the Word Limited
Name of the Limited Partner Cannot Appear in Partnership Name (Art. 1846)
Character and Location of Business

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Term of Existence of the Partnership
On the Partners:
Name and Residence of Each General and Limited Partners, and Their Designation as Such
Being Specifically Delineated
Amount/Description of Contributions, and Details of Future Contributions, If Any, to Be Made by
Limited Partners.
Right of Limited Partners to Demand/Receive Partnership Property Other Than Cash in Return
for His Contribution
Shares of Profits, and Compensation by Way of Income of Limited Partners
Priority Rights Among the Limited Partners
Right of Substitution or Assignment by Limited Partners
Admission of Additional Limited Partners
Right to Continue the Business by the Remaining General Partners Upon Death, Retirement,
Civil Interdiction, Insanity or Insolvency of General Partner
b. Substantial Compliance (Art. 1844): Limited Partnership Is Formed If There Has Been Substantial
Compliance in Good Faith With Requirements Mandated by Law
Substantial, rather than strict, compliance in good faith with the legal requirements is all that is necessary for
the formation of a limited partnership; otherwise, when there is not even substantial compliance, the partnership
becomes a general partnership as far as third persons are concerned. Jo Chung Cang v. Pacific Commercial
Co., 45 Phil. 142 (1923).
This case was still under the Code of Commerce which required that one of the surnames of the general
partner is required to be in the name of the partnership. NOW, however, it is no longer required that the name of
the general partner appear in the name. (Article 1846)
In order to determine what kind of partnership is formed, the intent of the partners has to be ascertained. Even
though the partners complied with the formal requirements to constitute a limited partnership, it is not a limited
partnership because one of the requirements of a limited partnership is the designation of who the limited partners
are. Even the name of the corporation did not indicate the name of the limited partners. In short, this was not
substantial compliance. So the partnership here was actually a general partnership.
Its required in a general partnership that at least one general partner is named. In this case, even though they
did not comply with the requirement
c. Effects of False Statement in Certificate (Art. 1847): One Who Suffers Loss By Reliance on Such
Statement May Hold Liable Any Party to the Certificate Who Knew the Statement to Be False.
d. Cancellation or Amendment of Certificate (Arts. 1864 and 1865):
The Certificate Must Be Cancelled When:
Partnership Is Dissolved
There Cease to Be Limited Partners
Certificate Must Be Amended When (Art. 1849):
Change in: Firm Name, in Character of the Partnership Business, in the Period, or a Time Is Fixed
for Its Dissolution;
Change in: Amount or Character of Contributions of Limited Partners, in Time for Return of a
Contribution
An Additional Limited Partner and/or General Partners Is Admitted (Art. 1849), or a Person Is
Substituted as a Limited Partners
A General Partner Retires, Dies, Becomes Insolvent or Insane, or Is Under Civil Interdiction and
the Business Is Continued
There Is aA False or Erroneous Statement in Certificate or to Make a Change in Any Other
Statement in Order It Shall Accurately Represent Their Agreement.

3. GENERAL PARTNERS (Art. 1850)


a. General Partners Have the Rights and Powers and Be Subject to All the Restrictions and Liabilities of
a Partnership Without Limited Partners.
b. HOWEVER: a General Partner Shall Have Authority to Do the Following Only With the Written Consent
or Ratification of the Limited Partners:
Do Any Act in Contravention of the Certificate
Do Any Act Which Would MakeMaking It Impossible to Carry on the PartnershipOrdinary Business
of the Partnership
Confess a Judgment Against the Partnership

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Possess Partnership Property or Assign Their Rights for Other Than Partnership Purpose
Admit a New General Partner
Admit a New Limited Partner, Unless the Right to Do So Is Given in the Certificate
COMPARE: Art. 1818
c. General Partner May Also Be a Limited Partner (Art. 1853):
Provided Such Fact Shall Be Stated in the Certificate
He Shall Have All the Rights/ and Powers, and Be Subject to All the Restrictions of a General Partner
EXCEPT: In Respect to His Contribution, He Shall Have the Rights Against the Other Members Which
He Wwould Have Had If He Wwere Not Also a General Partner

4. LIMITED PARTNERS
a. He May Contribute Money or Property, But Never Service (Art. 1845)
b. Shall Not Be Liable As Such to the Obligations of the Partnership (Art. 1843); EXCEPT:
When He Allows His Surname to Be Part of the Partnership Name (Art. 1846)
He Takes Part in the Control of the Partnership Business (Art. 1848)
c. He Shall Have the Same Right as a General Partner to (Art. 1851):
Have Partnership Books Kept at Principal Place of Business, and to Inspect and/or Copy Them at
Reasonable Hours
Have on Demand True and Full Information of Things Affecting the Partnership
A Formal Account of Partnership Affairs
Have the Dissolution and Winding-up by Judicial Decree
d. He May Loan Money to, and Transact Business with, the Partnership and Receive on Account of the
Resulting Claims Against the Partnership, with General Creditors
But He Cannot in Respect to Such Claims Receive or Hold a Collateral Security on Partnership
Assets;
Nor a Payment, Conveyance or Release When Assets of the Partnership Not Sufficient to Cover All
Liabilities to Third Parties. (Art. 1854)
e. He Shall Have Priority of Settlement of Their Claims as Agreed Upon Them or as Provided in the
Certificate.
In the Absence of Agreement or Provision in the Certificate, Limited Partners Shall Stand Upon
Equal Footing (Art. 1855)
f. He May Receive the Stipulated Share in the Profits and/or Compensation By Way of Income, Provided
That After Such Payment the Partnership Assets Are Sufficient to Cover Liabilities to Third Parties
(Art. 1856)
g. He Has the Right to Demand Return of His Contribution (Art. 1857):
When the Date Specified in the Certificate for Its Return Has Arrived
On Dissolution of the Partnership
If No Time Is Specified in the Certificate for the Return of the Contribution or for the Dissolution of
the Partnership: After He Has Given Six 6 Months Written Notice in Writing to All Other Members
h. He Shall Not Receive Any Part of His Contribution Until (Art. 1857):
All Liabilities to Third Parties Have Been Paid or There Remains Property of the Partnership
Sufficient to Pay;
Such Return Is With Consent of All Members, or Return Is Rightfully Demanded;
Certificate Is Cancelled or Amended.
i. He Is Not Liable for the Partnership Debts Beyond His Contribution (Art. 1858);
EXCEPT:
For the Difference Between His Contribution as Actually Made and That Stated in the Certificate as
Having Been Made
For Any Unpaid Contribution Which He Agreed in the Certificate in the Future
A Limited Partner Holds as Trustee for Partnership
Specific Property Stated in the Certificate as Contributed by Him, But Which Was Not
Contributed or Wrongfully Returned
Money or Other Property Wrongfully Paid or Conveyed to Him on Account of His Contribution
j. Limited Partners Right to Assign Their Rights or Substitute Another (Art. 1859):
A Limited Partners Interest Is Assignable
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A Substituted Limited Partner Is a Person Admitted to All the Rights of a Limited Partner Who
Dies or Has Assigned His Interest
Assignee Shall Have the Right to Become a Substituted Limited Partner Only If:
All the Members Consent; OR
Assignor Gives Assignee Such Right under the Terms of the Certificate
AND the Certificate Is Appropriately Amended
Substituted Limited Partner Has All the Rights and Powers, and Is Subject to All the Restrictions
and Liabilities of Assignor, Except Those Liabilities of Which He Was Ignorant and Which Could
Not Be Ascertained from the Certificate
Substitution Does Not Release Assignor From Partnership Liabilities For:
False Statements in the Certificate (Art. 1847)
The Difference or What Is Due From Him for His Contributions (Art. 1858)
An Assignee Who Is Not Substituted Limited Partner Has Only One Right: To Receive the Share of
the Profits or the Return of the Contribution Which the Assignor Was Entitled To
k. Application of a Creditor of Limited Partner (Art. 1862): A Limited Partners Creditors May Apply With
the Courts To:
Charge His Partnership Interests with Payment of Unsatisfied Amount of Such Claims, Appoint a
Receiver, and Make All Other Orders Which May Be Appropriate
Interest May Be Redeemed With Separate Property of Any General Partner, But Not Partnership
Property
l. Limited Partner Is Not a Proper Party to Proceedings By or Against the Partnership
EXCEPT: Where Object Is to Enforce a His Right Against or Liability to the Partnership (Art. 1866)
m. A Person Who Has Contributed to the Capital of a Business Conduced as a Partnership, Believing that
He Has Become a Limited Partner:
Is Not a General Partner By Reason of Exercise of Such Rights, a General Partner; PROVIDED : On
Ascertaining Mistake, He Promptly Renounces His Interest in the Profits of the Business or Other
Compensation by Way of Income
EXCEPT: When He Allows His Surname to Be Part of the Firm Name (Art. 1852)

4. DISSOLUTION AND WINDING UP


a. Causes Affecting the General Partners (Art. 1860):
Death, Insolvency, Civil Interdiction, Insanity or Retirement, of a General Partner Dissolves the
Partnership
UNLESS: Business Is Continued by Remaining General Partners
Under a Right To Do So in the Certificate; OR
With the Consent of All Members
b. Causes Pertaining to the Limited Partner:
Death of a Limited Partner Does Not Dissolved the Partnership
BUT: Executor/Administrator Shall Step-in for Purposes of Settling His Estate, Including the
Power to Constitute an Assignee (Arts. 1861 and 1864)
When There Cease to Be Limited Partners, the Partnership Is Dissolved and the Certificate Must Be
Cancelled (Art. 1864)
A Limited Partner May Demand Dissolution and Winding-up When (Art. 1857):
He Rightfully But Unsuccessfully Demands Return of His Contribution; OR
Liabilities to Third Parties Have Not Be Paid, or Partnership Property Insufficient for Their
Payment, But Limited Partner Would Otherwise Be Entitled to the Return of His Contribution
c. Order of Settlement of Accounts (Art. 1863):
Those to Creditors, Including Limited Partners Claims of Limited Partners Other Than for
Contributions and Share in the Profits
Those to Limited Partners as Shares in Profits/Compensation by Way of Income
Those to Limited Partners in Respect to Their Contributions
Those to General Partners Other Than for Capital and Profits
Those to General Partners In Respect to Profits
Those to General Partners in Respect to Capital

IX. SEC JURISDICTION ON PARTNERSHIP MATTERS


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1. Secs. 5 and 6, Pres. Decree No. 902-A
2. Section 5.1 of the Securities Regulation Code (R.A. No. 8799)
3. Interim Rules of Procedure for Intra-Corporate Disputes

D. JOINT VENTURES
I. JOINT VENTURES ARE SPECIES OF PARTNERSHIP

Laws being applied are the laws on partnership


The prevailing school of though in the Philippines is that joint ventures are speciesare species of partnership,
and issues arising are to be resolved under the Law on Partnerships. xHeirs of Tan Eng Kee v. Court of Appeals, 341
SCRA 740 (2000).82
Generally understood to mean an organization formed for some temporary purpose, a joint venture is likened to
a particular partnership, or one which has for its object determinate things, their use or fruits, or a specific undertaking,
or the exercise of a profession or vocation. Joint ventures are governed by the law on partnerships which are, in turn,
based on mutual agency or delectus personae. Applying therefore Art. 1813 of the Civil Code, 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
assignee's profits. Realubit v. Jaso, 658 SCRA 146 (2011).

When a partner transfers his interest to an assignee, such assignee does not become a partner

A joint venture is a species of a partnership. It is a particular partnership a partnership created for a


particular purpose so in case of conflict, you go to the rules on partnership

II. TYPES OF JOINT VENTURE ARRANGEMENTS


1. INFORMAL OR CONTRACTUAL JV ARRANGEMENT WITHOUT A SEPARATE FIRM
(SEC Opinion, 22 Dec. 1966; SEC Opinion, 29 Feb.1980; SEC Opinion, 03 Sept. 1984)
Just an agreement between 2 corporations but those 2 businesses retain their names and identify. They dont want to
assign a separate juridical personality for that business
Petitioners claim that the CA did not erred in decreeing the close characteristics of partnerships and joint
venture agreements., There is also no merit in the assertion and further assert that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital involved is more
PhP3,000, so that there is no evidence of written agreement to form a partnership between petitioners and MBMI,
no partnership was created. We disagree. A partnership is defined as two or more persons who bind themselves
to contribute money, property, or industry to a common fund with the intention of dividing the profits among
themselves. On the other hand, joint ventures have been deemed to be akin to partnerships since it is difficult
to distinguish between joint ventures and partnerships. Narra Nickel Mining and Dev. Corp. v. Redmont
Consolidated Mines Corp., 722 SCRA 382 (2014).
If you read a joint venture, youre governed by partnership rules so youre still under Philippine rule. Thus, you
still need to comply with the foreign ownership.
Contract of Lease violates PCSOs charter which prohibits it to hold and conduct charity sweepstakes races,
lotteries and other similar activities, in collaboration, association or joint venture with any other party, because
it mandates lessee to contribute resources into the venture and to manage and operate directly the facilities, and
makes lessee participate not only in the revenues generated from the venture, and in fact absorb most of the
risks involved therein. A JVA has really been constituted between purported lessor and lessee, since under the
Law on Partnership, whenever there is an agreement to contribute money, property or industry to a common
fund, with an agreement to share the profits and losses, then a partnership arises. Kilosbayan, Inc. v.
Guingona, Jr., 232 SCRA 110 (1994).
Take note of the definition of Joint Venture in this case which is being used by Congress.
When the purported primary co-venturer in a consortium (which is an association of corporation bound in a
joint venture arrangement) declares unilaterally that the other four members are part of a consortium, but there
is no affirmation from any of the other members, nor is there a showing through a formal joint venture agreement
of a community of interest, a sharing of risks, profits and losses in the project bidded for, then there is really no
joint venture constituted among them, lacking the essential elements of what makes a partnership. Information
Technology Foundation v. COMELEC, 419 SCRA 141 (2004).

There was no agreement between the firms that they were going to form a JV or consortium

82Reiterated in Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006).
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a. JVAs Must Be Construed and Enforced as Contracts Among Co-Venturers
When a Joint Venture Agreement has been executed among the co-venturers coversing the terms for the
development of a subdivision project, the contributions of the co-venturers and the manner of distribution of the
profits, a partnership has been duly constituted under Art. 1767 of Civil Code, and although no inventory was
prepared covering the parcels of land contributed to the venture, much less was a certificate of registrations filed
with the SEC, the partnership was not void because: (a) Art. 1773 is intended for the protection of the partnership
creditors and cannot be invoked when the issue is between and among the partners; and (b) the alleged nullity
of the partnership will not prevent courts from considering the JVA as an ordinary contract form which the parties
rights and obligations to each other should be inferred and enforced. Torres v. Court of Appeals, 320 SCRA
428 (1999).

Joint ventures are treated like informal partnerships. Even though the agreement between the parties as a JV,
what applies under the Civil Code are rules for partnership. But this is only for an INFORMAL JOINT VENTURE.

Although parties executed the instrument as a Power of Attorney and referred to themselves as Principal
and Manager, it reveals that a partnership or joint venture was indeed intended by the parties. Perusal of the
agreement indicates that the parties had intended to create a partnership and establish a common fund for the
purpose. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income
of the mine. While a corporation, like petitioner, cannot generally enter into a contract of partnership unless
authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular
partnership relationship. Philex Mining Corp. v. Commissioner of Internal RevenueCIR, 551 SCRA 428
(2008).

This was really an informal JV because it had no name or created a separate name for the JV.

When principal and agent have entered into a Power of Attorney covering a construction project, with the
principal contributing thereto his contractors license and expertise, while the agent 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 the principal, oversee the effective implementation of the project, for which the principal would
receive as his share 3% of the project cost while the rest of the profits shall go to the agent, the parties have in
effect entered into a partnership, and the revocation of the powers of management of the agent is deemed a
breach of the contract. Mendoza v. Paule, 579 SCRA 349 (2009).

JV are created for specific purposes only (commercial). In a JV, the court only imposes a JV when all the elements of a partnership are in
place. Check the purpose. For a partnership, its an ONGOING BUSINESS but for a JV, the purpose is VERY LIMITED only for a
PARTICULAR transaction (and the other parties are actually allowed to do other businesses)

A JVA is like a particular partnership

In an informal joint venture arrangement, because no separate firm or business enterprise has been
constituted as to the dealing public, then the effects of the attributes of mutual agency and unlimited liability
are not made to apply with respect to creditors.Traveo v. Bobongon Banana Growers Multi-Purpose
Cooperative, 598 SCRA 27 (2009). [See contrary ruling in Bastida v. Menzi and Co., 58 Phil. 188 [1933])
When you have an informal JV agreement, no separate firm or entity was created and therefore, the doctrine on mutual
agency and delectus personae DO NOT APPLY, which is inimical to the concept of GENERAL PARTNERSHIP. This is why
JVA can be a way to circumvent labor laws.

2. FORMAL JV ARRANGEMENT: A FORM OF PARTNERSHIP WITH A FIRM ESTABLISHED


Individually, theyre still different people, but they created a name amongst themselves

Even whenThe fact that the wording of the instrument does not clearly provide for an option, and not an
obligation, on the part of one of the co-venturers to make contributions into the business enterprise, will not detract
from the legal fact that they constituted a partnership between themselves: The wording of the parties
agreement as to petitioners contribution to the common fund does not detract from the fact that
petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from
withdrawing the advances until termination of the parties business relations. As can be seen, petitioner
became bound by its contributions once the transfers were made. The contributions acquired an
obligatory nature as soon as petitioner had chosen to exercise the option. Philex Mining Corp. v.
Commissioner of Internal Revenue, 551 SCRA 428 (2008).
A joint venture is governed by the Law on Partnerships. Parties in the JVA, theHere, the JVA parties agreed
on a 50-50 ratio on the proceeds of the project, although they did not provide for the splitting of losses, which
therefore puts into application Art. 1797: the same ratio applies in splitting the obligation-loss of the joint venture.
The appellate courts decision must be modified, however, there being a joint venture, there is no need for

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Gotesco to reimburse Marsman Drysdale for 50% of the aggregate sum due to PGI since not 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 Gotesco's expense. Marsman
Drysdale Land, Inc. v. Philippine Geoanalytics, Inc., 622 SCRA 281 (2010).

A joint venture is a partnership and governed by the Law of Partnerships. Art. 1824 provides all partners
solidarily liable with the partnership due to 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. Whether innocent or guilty, all
the partners are solidarily liable with the partnership itself. J. Tiosejo Investment Corp. v. Ang, 630 SCRA
334 (2010).
A true JV agreement was crafted by the parties indicating terms of the JV and they intended a separate
personality with the JV (partners maintain separate entities). This case is a clear example of a formal JV.

3. THROUGH A JOINT VENTURE CORPORATION

Purpose of a JV corporation is for THAT purpose only


Generally, the rules on Corporation Law apply. But the JV Agreement takes precedence over the Corporate
Code

The manner of nomination of the members of the Board of Directors provided in the Joint Venture Agreement
must be made effective and reconciled with the statutory provision on cumulative voting made applicable by the
Corporation Code to stock corporations. Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130
(1989).
Characteristics of Corporation
JVC is usually a CLOSED corporation under Corporation Law
1. Stockholders are not more than 20
2. Theres a RfR between stockholders
3. Not registered under PSE

When a corporation has been organized under the terms of a JVA, the right of first refusal provided therein
constitutes a legal means by which the corporate venture would include the delectus personae characteristic
within the JV arrangement, which allows the co-venturers-stockholders the ability to prevent equity interests from
being transferred to third parties. The JVAs right of first refusal must be made to apply and be binding to the
Government and the bidder at a public bidding held on the shares of the JV corporation constituted pursuant to
the JVA. JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003).
Joint venture is an association of companies jointly undertaking a commercial endeavor, with all contributing
assets and sharing risks, profits, and losses. It is hardly distinguishable from a partnership considering that their
elements are similar and, thus, generally governed by the law on partnership. Under JV Agreement, PNCC
contributes its franchise, while the partner contributes the financing both necessary for the
construction, maintenance, and operation of the toll facilities. PNCC did not thereby lease, transfer, grant
the usufruct of, sell, or assign its franchise or other rights or privileges. This remains true even though the
partnership acquires a distinct and separate personality from that of the joint venturers or leads to the formation
of a joint venturenew company that is the product of such joint venture, such as PSC and SOMCO in this case.
Hontiveros-Baraquel v. Toll Regulatory Board, 751 SCRA 271 (2015).
A verbal JVA to incorporate a company that would hold parties shares and serve as the business vehicle for
their food enterprise, is valid and bindinga valid agreement, even though it be verbal in character. JVA created
between them reciprocal obligations that must be performed in order to fully consummate the contract and
achieve the purpose for which it was entered into. In these lights, the JVA is deemed extinguished through
rescission under Article 1192 in relation with Article 1191 of the Civil Code. Dueas must therefore return
the P5 Million that Fong initially contributed since rescission requires mutual restitution. After rescission, the
parties must go back to their original status before they entered into the agreement. Fong v. Dueas,
757 SCRA 412 (2015).

III. SPECIAL JOINT VENTURE DEFINITIONS AND CONCEPTS


1. Revised Guidelines for Entering into Joint Venture (JV) Agreement Between Government and Private
Entities Per Section 8 of E.O. 42383 (NEDA Circular approved on 03 May 2013)
(i) 5.7 Joint Venture (JV). An arrangement whereby a private sector entity or a group of private sector entities on
one hand, and a Government Entity or a group of Government Entities on the other hand, contribute
money/capital, services, assets (including equipment, land, intellectual property or anything of value), or a
combination of any or all of the foregoing to undertake an investment activity. The investment activity shall be
for the purpose of accomplishing a specific goal with the end view of facilitating private sector initiative in a
particular industry or sector, and eventually transfer the activity to either the private sector under competitive

83
http://www.neda.gov.ph/references/Guidelines/RevisedGuidelines.pdf
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market conditions or to the government. The JV involves a community or pooling of interests in the performance
of the investment activity, and each party shall have the right to direct and govern the policies in connection
therewith with the intention to share both profits and, risks and losses subject to agreement by the parties. A JV
may be a Contractual JV or a Corporate JV (JV Company).
(ii) 5.3 Contractual JV. A legal and binding agreement under which the JV Partners shall perform the primary
functions and obligations under the JVA without forming a JV Company.
(iii) 5.8 JV Company. A stock corporation incorporated and registered in accordance with the provisions of
the Corporation Code of the Philippines, and based on the prevailing rules and regulations of the
Securities and Exchange Commission (SEC) of which fifty percent (50%) or less of the outstanding
capital stock is owned by the government. The JV Company shall be registered by the JV partners that shall
perform the primary functions and obligations of the JV as stipulated under the JV Agreement. The JV Company
shall possess the characteristics stipulated under these Guidelines.
2. Regulating Combinations in Restraint of Trade and Unfair Competition: Rules and Regulations to
Implement Rep. Act No. 10667 (Philippine Competition Act)
Rule 2(i): Joint venture refers to a business arrangement whereby an entity or group of entities contribute capital,
services, assets, or a combination of any or all of the foregoing, to undertake an investment activity or a specific
project, where each entity shall have the right to direct and govern the policies in connection therewith, with the
intention to share both profits and risks and losses subject to agreement by the entities.

IV. TAX RECOGNITION AND TREATMENT OF JOINT VENTURES


1. Generally, a Joint Venture, Like a Partnership Is Treated as Corporate Taxpayer.
2. A JV Consortium Undertaking Construction Projects or Engaging in Petroleum, Coal, Geothermal and
Other Energy Operations Pursuant to an Operating or Consortium Agreement under a Service Contract
with the Government, Shall Not Be Taxed Separately as a Corporate Taxpayer. (Sec. 22(B), NIRC of 1997)

oOo

ATP&JV Outline 20165


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