LECTURE NOTES ON PARTNERSHIPS

Articles 1767-1867, NCC

STATUTORY DEFINITION - By a contract of partnership, two or more persons bind themselves to

contribute money, property or industry to a common fund with the intention of dividing the profits among
themselves.

Two or more persons may also form a partnership for the exercise of a profession. (Article 1767)

1. There can be no non-profit partnership

CHARACTERISTICS OF A CONTRACT OF PARTNERSHIP

1. Generally since it is a contract it is:

a. consensual perfected by consent

b. bilateral/multilateral entered into by two or more persons
c. nominate designated by a specific name
d. onerous contributions are given
e. principal its existence does not depend on the life of another contract
f. preparatory to carry into effect its purposes, other contracts have or may have to be entered
unto (1771-73)

2. There must be a contribution of money, property or industry to a common fund.

a. If industry is contributed, it must be physical or intellectual

b. A limited partner cannot contribute industry (Art. 1845). the value of industry increases over
time, hence it runs counter to the concept of a limited partnership.

3. The object and purpose must be lawful and it must be established for the common benefit or interests of
all partners. When an unlawful partnership is dissolved by judicial decree, the profits shall be confiscated in
favor the State, without prejudice to the application of the Revised Penal Code governing the confiscation of the
instrument and effects of a crime (Art. 1770).

a. Hence, it means that object/purpose must be within the commerce of man, not contrary to law,
morals, good customs, public order or public policy

b. When a partnership is formed for an unlawful purpose, the contract is void ab initio. No
partnership is actually formed.

c. Note that while Article 1409, NCC is the basis to hold it as void ab initio, there is no need for a
judicial decree to dissolve a partnership that does not exist. The provision applies to an instance where
unlawfulness is in dispute or occurs at a later stage.

4. There must be an intention to divide profits among the partners since it is for their benefit.

5. There must be AFFECTIO SOCIETIS desire to formulate an active union with and among people in
whom mutual confidence and trust exists.

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6. A juridical person is created, separate and distinct from that of the persons composing it, even in case of
failure to comply with the requirements of Article 1772 (Art. 1768)

a. The primary effects of having a juridical personality would be to allow it to acquire property,
which when so acquired in the partnership name can only be conveyed in the partnership name (Article 1774)
and it can sue and be sued under the partnership name.

b. The creation of a juridical person takes place even if there is no compliance with Article 1772
which requires every contract of partnership having a capital of PHP 3000.00 in money or property to appear in
a public instrument recorded with the SEC because failure does not affect liability to third persons. Purpose is to
set a condition for the issuance of a license.

c. However, no such personality will result if the articles (of societies or associations) are kept
secret among the members and anyone of the members may contract in his own name with third persons. They
are to be governed by the provisions on co-ownership (Article 1775)

OTHER CRITERIA TO DETERMINE PARTNERSHIP EXISTENCE

1. Except as provided in Article 1825 persons who are not partners as to each other are not partners as to
third persons.

a. Generally, if you are not partner there is no partnership except if you or an entity may be
considered as: PARTNER IN ESTOPPEL when a person represents himself by words spoken or written or by
conduct or consents to another representing him as a partner in an existing partnership to anyone, he is liable to
such persons to whom the representation is made if such person acted or gave credit to such or if the
representation is made in a public manner, he is liable to such persons whether the representation has or has not
been made and relied upon. The liability is like that of an actual partner if partnership liability results. If there is
no partnership liability he is liable pro-rata with other persons consenting to the contract or representation.

b. The DECEIVER IS A PARTNER BY ESTOPPEL. If a partnership exists and consents, there is a

partnership by estoppel

2. Co-ownership or co-possession does not by itself establish a partnership whether such co-owners or co-
possessors do or do not share in any of the profits made by the use of the property

a. Note the rulings in PASCUAL vs. COMMISSIONER (160 S 60) where a series of transactions
were considered ISOLATED TRANSACTIONS and did not result in a holding that there is a partnership and in
EVANGELISTA vs. COLLECTOR OF INTERNAL REVENUE (102 P 140) where a series of transactions were
considered as indicative of HABITUALITY WITH INTENT TO GAIN and resulted in a holding that there is a
partnership.

3. Sharing of gross returns does not of itself establish a partnership whether or not the persons sharing
them have a joint or common interest in any property from which they are derived.

a. Rules 2 and 3 DO NOT MEET THE CRITERIA THAT: there must be intention to create a
partnership; there is a common fund obtained from contributions; there is joint interest in the profits

4. However, receipt by a person of a share of the profits of a business is PRIMA FACIE evidence that he is
a partner EXCEPT:
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(a) debt by installment or otherwise creditor receives part of the profits of the business in settlement of his
credit
(b) wages of an employee or rent to a landlord employee receives wages depending on level of profit or a
fixed percentage thereof
(c) as an annuity to a widow or representative of a deceased partner in lieu of immediate dissolution, the
widow or representative will receive an annuity
(d) as interest on a loan, through the amount of the payment varies with the profits of the business- interest
payments are taken or paid out from the profits
(e) as consideration for the sale of goodwill or other property- payment is taken out of profits.

DISTINGUISHING A PARTNERSHIP FROM:

JOINT VENTURE

1. It has no firm name or separate personality, while a partnership has a firm name and is considered
separate and distinct from the partners composing it
2. Participants are free to transact separately in their own names and be individually liable therefore, while
in a partnership, partners cannot transact under their own names
3. Activity is usually limited to a single transaction though it may take a longer period to complete, while
in a partnership, there are several transactions of a certain kind. (Note: Tan Eng Kee vs. CA, 341 SCRA 740- a
joint venture appears to be a particular partnership due to the fact that a partnership can have for its object a
specific undertaking (Article 1783), the Supreme Court distinguished between a joint venture and a partnership
when it held that while a corporation cannot be a partner, it may enter into a joint venture)

VOLUNTARY ORGANIZATIONS

1. It has no juridical personality, while a partnership has juridical personality

2. It may be organized for any lawful purpose, while a partnership is always organized for profit
3. Contributions are collected to maintain the organization, while in a partnership, contributions go to
capital
4. There is individual liability, while in a partnership individual liability is not primary

CONJUGAL PARTNERSHIP OF GAINS

1. Arises by agreement between spouses, while a partnership is created by voluntary agreement of two or
more partners
2. Governed by law, while a partnership is primarily governed by the stipulations in the contract
3. Has no juridical personality, while a partnership has juridical personality
4. Commences upon marriage, while a partnership commences upon execution of the agreement, unless
otherwise stipulated
5. Shares of spouses in profits is equal, while in a partnership it is according to the agreement or in
proportion to contributions
6. Management generally is vested in both spouses, while in a partnership it is vested in all partners unless
they designate a managing partner
7. Purpose is to regulate property relations between spouses, while in a partnership it is to obtain profits
8. Share of a spouse cannot be disposed while in partnership, the interest of a partner may be disposed.

CO-OWNERSHIP

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1. It is created by law, while a partnership is created by contract
2. It has no juridical personality, while a partnership has juridical personality
3. Purpose is common enjoyment of a right/property, while in a partnership it is realization of profit
4. An agreement to keep a thing undivided in co-ownership for more than 10 years is not allowed (Article
494), while a partnership has no fixed duration
5. A co-owner may feely dispose of his interest, while a partner cannot freely dispose so as to make his
assignee a partner, unless consented to by all
6. A co-owner cannot generally represent a co-ownership, hence any judgment against a co-owner is not a
judgment against the co-ownership, while in a partnership, in the absence of a stipulation, a partner can
represent the partnership and a judgment so issued is generally one against the partnership
7. Death of a co-owner does not necessarily result in dissolution of the co-ownership, while death of a
partner results in dissolution of the partnership.

WHO CAN BECOME PARTNERS

1. Any person who is capacitated to enter into contracts

2. A married woman may enter into a contract of partnership but the consent of the other spouse is required
because it is an act of dominion or an encumbrance of community or conjugal property , unless court authority
is obtained.
3. A partnership in the absence of a prohibition. A corporation cannot enter into a contract of partnership as
it is contrary to public policy as it can be bound by its partners and not by an act of its BOARD as required by
Section 23 of the Corporation Code
5. Aliens can be partners subject to restrictions on ownership/leases and engaging in nationalized or
partially nationalized businesses.

IN WHAT FORMS MAY A CONTRACT OF PARTNERSHIP BE EXECUTED

A partnership may be constituted in any form except where immovable property or real rights are contributed, in
which case a public instrument is necessary (Article 1771)

In such a case, an inventory of the immovable property so contributed must be made and attached to the public
instrument. Failing in which, the contract of partnership is void. (Article 1773).

Note though that while partnerships with capital of PHP 3,000.00 or more are required to be in a public
instrument and duly registered with the SEC, non compliance shall not affect liability to third persons (Article
1772)

It is however required that the articles of partnership be written if what is to be constituted is a LIMITED
PARTNERSHIP (Article 1844)

WHAT ARE THE KINDS OF PARTNERSHIPS

1. As to object it is universal or particular

a. A particular partnership is one which has for its object a determinate thing, their use or fruits, or
specific undertakings, or the exercise of a profession or a vocation (Article 1783).

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 b. A universal partnership has two kinds. A universal partnership of ALL PRESENT PROPERTY or
OF PROFITS (Article 1777).

b.1 A Universal Partnership of All Present Property is one where all partners contribute ALL
PROPERTY which actually belong to them to a common fund with the intention of dividing the same as well
as all profits which they may acquire therewith (Article 1778).

b.2 All present property belonging to the partners at the time of constitution becomes the common
property of all partners as well as all the profits which they may acquire therewith. They can also stipulate on
the common enjoyment of any other profits from other sources BUT, property which the partners may
subsequently acquire by inheritance, legacy, or donation cannot be included in such stipulation except the fruits
thereof (Article 1779)

b.3 The property to be acquired by inheritance, legacy or donation cannot be the object of a
stipulation as (1) contracts regarding successional rights are not allowed. (2) Contributions must be determinate,
known and certain (3) since it implies a donation, future properties cannot be donated

b.4 A Universal Partnership of Profits is one where which is comprised of all that the partners may
acquire by their industry or work during the existence of the partnership (Article 1780). Hence, if not so
acquired by their industry or work, it does not pertain to the partnership

b.5 Movables or immovables which each of the partners possess at the time of the celebration of the
contract shall continue to pertain exclusively to each, only the usufruct shall pass.

b.6 If there is no specification of nature (presupposes a writing), the partnership shall be considered a
universal partnership of profits (Article 1781). The reason is because it is less onerous that a universal
partnership of all present property. If what is desired is that it be a universal partnership of all present property,
reformation under Article 1359 is the proper remedy.

PERSONS PROHIBITED FROM ENTERING INTO A UNIVERSAL PARTNERSHIP

Persons who are prohibited from giving each other donations or advantage like (a) husband and wife (b)
those guilty of adultery or concubinage (c) those guilty of the same criminal offense if the partnership was
entered into in consideration of the same. This prohibition exists because a universal partnership is virtually a
donation, thus persons should not be allowed to do indirectly what they cannot do directly.

OTHER KINDS OF PARTNERSHIPS

Partnerships may be distinguished as to Liability (General-Limited), Representation (Ordinary-Partnership by

Estoppel) and Duration (Partnership for a Specific Undertaking/With a Period- At Will)

WHEN DOES THE RELATIONSHIP AS PARTNERS BEGIN

It begins from the moment of the execution of the contract unless a different period is stipulated. Hence, there
can be no partnership if the intention is to create in the future.

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 a. Agreement to form a partnership does not create a partnership. If there are conditions to be
fulfilled or a certain period is to lapse or to arrive, the partnership is not formed even if one party without
waiting for the fulfillment of the condition or arrival of the term, has already advanced his contribution.

b. Also if they orally agree to form a partnership 1 year from today. It is merely an agreement to
form a partnership THERE IS NO PARTNERSHIP YET. ALSO, since it is orally constituted and is not a
partnership, the Statute of Frauds apply, hence it cannot be enforced (Article 1403, Par. 2-a). Note that it cannot
be obliged because the obligation is to DO not to GIVE, it is a personal act that cannot be compelled
(Woodhouse v. Halili L-4811-July 31,1953)

c. The rules are thus as follows: (1) If there is no contrary stipulation, the partnership commences to
have existence on the date of execution of the contract (2) If a contract states that it is to be effective at a
certain date, the partnership is to begin on the stipulated date. (3) If a contract states that contributions are still
to be given on a particular date. There is a partnership as they have bound themselves to contribute (4) If
contract states that we become partners on the date the contributions are given there is no partnership yet.

WHEN DOES A PARTNERSHIP END

Generally it ends on the expiration of the fixed term or the accomplishment of a particular undertaking. IF IT
DOES NOT END ON THE BASIS OF EITHER TWO
It becomes a PARTNERSHIP AT WILL (Article 1785)

a. There is also a partnership at will (1) when there is no term, express or implied hence, there is
an agreement that it will continue to exist as long as they will it to exist (2) Partners or such of them who have
so acted, habitually continues the business without settlement or liquidation of the partnership affairs. SUCH
ACT is prima facie evidence of the continuation of the partnership. Consequently, the rights and duties of the
partners remain the same as they were at such termination

WHAT HAPPENS WHEN PERSONS DECIDE AND DO FORM A PARTNERSHIP

The formation of a partnership gives rise to the following relationships: (1) The persons who have decided to
form the partnership become partners as to each other. Consequently, they now have to comply with their
obligations to be able to exercise their rights as partners (2) Relationship between the partner and the
partnership refers to the obligations of a partnership to the partner (3) Relationship between the partner and
third persons refers to the obligations of the partners to third persons (4) Relationship between the partnership
and third persons refers to the conduct of the business of the corporation

SPECIFIC OBLIGATIONS OF PARTNERS

1. DUTY TO CONTRIBUTE- Every partner is a debtor of the partnership for whatever he may have
promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific
and determinate things in some cases and in the same manner as the vendor may be found with respect to the
vendee. He shall also be liable for the fruits thereof from the time they should have been delivered without need
of demand (Article 1786).

a. Hence, after the execution of the contract, a partner must (1) deliver what he has promised to
contribute, no demand is necessary because time is of the essence as without the contribution the partnership
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cannot function (2). Deliver the fruits of the specific and determinate things that he promised to contribute , if
any, accruing from the time they must have been delivered (3) To warrant against eviction for the objects
already delivered. Eviction arises whenever by final judgment based on a right prior to the sale or an act
imputable to the partner. The partnership is deprived of the things contributed in whole or in part. This however
may be suppressed, increased or diminished by the partners.

b. The remedy if a partner fails to contribute is bring an action for collection because the defaulting
partner is a DEBTOR

c. Properties to be contributed are considered properties of the partner until ACTUAL or

CONSTRUCTIVE delivery has been had, it being the operative act to convey ownership

d. The specific rules that govern the contributions are: (1) If it consists of goods, they must be
appraised in the manner prescribed (a) in the articles of partnership (b) by experts chosen at current prices, with
charges for the account of the partnership (Article 1787). NOTHING HOWEVER PROHIBITS THE
PARTNERS FROM AGREEING ON THE VALUATION (2) If what is contributed is MONEY, a partner who
fails to contribute is liable for interest and damages from the time he should have complied (Article 1788) , the
same Article also applies to amounts that a partner may have converted to his own use (3) If what is contributed
is INDUSTRY, the partner/s so contributing cannot engage in any other business unless he is EXPRESSLY
allowed to do so by the capitalist partner/s. If he does so without consent, he (a) can be excluded from the firm
(b) the firm can avail of the benefits which he obtained, plus damages, if any (Article 1789). The article applies
whether or not there is competition as all his industry must be given to the partnership

d.1DISTINGUISHING BETWEEN CAPITALIST/INDUSTRIAL PARTNERS

CP IP
Contribution money or industry
Property

Prohibition as generally can cannot engage

to engaging in engage as long without consent
business no competition
(Article 1808)

Profits by agreement or a just and

pro-rata to equitable share
contribution there being no agreement

Losses stipulation or exempt as

agreement as to between partners profits if NONE- but
liable to
prorata 3rd persons
subject to
reimbursement (Article 1816)

e. Risk of loss is borne as follows: (1) Prior to delivery, it is borne by the partner (2) If what is
contributed is the use or fruits of specific or determinate things, it is borne by the partner/s who own them
NOT APPLICABLE TO A UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY, AT THE ONSET
PROPERTY BELONGS TO THE PARTNERSHIP (3) If things contributed is FUNGIBLE or cannot be kept
with deteriorating -risk of loss is borne by the partnership as ownership is transferred upon delivery otherwise

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use is impossible (4) If thing is contributed to be sold- partnership bears risk as it cannot be sold unless
ownership has passed to it (Article 1795)

f. Unless there is a contrary stipulation, a partner shall contribute an equal share to the capital of
the partnership. Consequently, there may be unequal contributions. If however, there is no proof as to the extent
of the contribution, the presumption is that they contributed equally (Article 1790)

g. A partner may also be obliged to contribute an additional amount, there being no stipulation to
the contrary, in case of an imminent loss. If he refuses (it must be deliberate) the partner is obliged to sell his
interest to the other partners. The REASON is that his apparent lack of interest should warrant that he leave the
partnership. The EXCEPTION is that it does not apply to an industrial partner/s because he has already given
his entire industry.

2. DUTY TO CREDIT TO THE FIRM PAYMENT MADE A DEBTOR WHO OWES HIM AND THE
FIRM AND TO SHARE HIS RECEIPT OF PARTNERSHIP CREDIT ALREADY COLLECTED

a. If a partner authorized to manage collects a demandable sum, which was owed to him in his own
name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be
applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own
credit only; but should he have given it for the account of the partnership credit, the amount shall be fully
applied to the latter.The provisions of this article are understood to be without prejudice to the right granted to
the debtor by article 1252, but only if the personal credit of the partner should be more onerous to him. (Article
1792)

1. The requisites for the application of the article are: (a) There are two debts from the same debtor
(b) Both debts are due and demandable (c) The collecting partner is a managing partner IF NOT THERE IS NO
BASIS FOR THE SUSPICION THAT THE PARTNER IS ACTING FOR HIS OWN BENEFIT. ALSO, HE
DOES NOT OCCUPY OR IS IN A POSITION TO GIVE PREFERENCE.

2. The rules of application are: (a) If the partner gives credit for the firm, it is the firms credit that
is extinguished (b) If partner gives receipt for his debt, the amount collected shall be applied in proportion
(c) By way of exception, the debtor may exercise the right of application if the debt to partner is more onerous
to him.

b. A partner receiving in whole or in part of his share of partnership credit, shall, if the other
partners have not collected their share and the debtor becomes insolvent, bring to the partnership capital what he
may have received even if he gave receipt for his share only (Article 1793)

1. The provision applies to any partner. If however, the firm is dissolved, the obligation does not
exist.

3. DUTY TO PAY FOR DAMAGES CAUSED BY HIS FAULT

a. Every partner is liable for damages suffered by the partnership through his fault. In so being
responsible, it cannot be compensated with the profits and benefits which he may have earned for them with his
industry. HOWEVER, courts may equitably lessen his responsibility if through the partners
EXTRAORDINARY efforts in other partnership activities, unusual PROFITS have been realized (Article
1794).

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 1. The damages cannot be offset because a partner has a duty to secure benefits. Since it is a duty
(it has to be done) compensation cannot take place as compensation presupposes two persons who are
reciprocally debtor and creditors of each other.

2. The obligation to pay damages also exists in relation to the liability arising from conversion of
amounts taken from partnership coffers and is computed from the time the partner converts it to his own use
(Article 1788).

4. OBLIGATION TO ACCOUNT FOR AND HOLD AS TRUSTEE ANY UNAUTHORIZED PROFITS

a. Every partner must account for any benefit and hold as trustee any profits derived by him without
consent of the others from any transaction connected with the formation, conduct or liquidation of the
partnership or from any use by him of partnership property without consent (Article 1807)

1. The reason for the obligation is that a partner has a fiduciary obligation not to abuse the trust and
confidence bestowed upon each other.

2. The article covers the period from formation to liquidation. Profits are unauthorized if they are
realized without the consent of the partnership.

5. OBLIGATION NOT TO ENGAGE IN BUSINESS

a. The obligation applies specifically to a capitalist partner who engages in a business similar to or
like the business the partnership is engaged in UNLESS (1) It is expressly stipulated that he can engage in
business (2) when other partners expressly or impliedly allow him to do so (3) partnership ceases to engage in
the competing business (4) participation in other business is that of a limited partner (Article 1808)

b. The EFFECT OF ENGAGING IN BUSINESS is that (1) he shall bring to the partnership all
profits he obtained (2) he shall bear all the losses, if any (3) he can also be ousted from the firm for loss of trust
and confidence

SPECIFIC RIGHTS OF A PARTNER

1. PROPERTY RIGHTS OF A PARTNER

a. The property rights of a partner are (1) right to specific partnership property (2) his right to his interest
(3) right to participate in management

b. A partners right to specific partnership property makes him a co-owner of all partnership
property (Article 1811). The incidents of such are: (1) partners, subject to provisions of law and any agreement
between partners has an EQUAL right with his co-partner to possess SPECIFIC PARTNERSHIP property for
PARTNERSHIP PURPOSES, but he has no right to possess them for any other purpose without the consent of
the partners (2) a partner cannot assign his rights to specific partnership property except in connection with an
assignment of rights of all the partners. Any assignment in violation is VOID as the value of the interest cannot
be determined until after liquidation. (3) a partners right is not subject to attachment or execution EXCEPT
on a claim against the partnership. Neither can the partners claim ( or the representatives of a deceased partner)
claim any right under homestead or exemption laws under Section 12, Rule 39 of the Rules of Court because it
is property of the partnership. It cannot be attached because to allow it would be to let the partner do what he
cannot do (assign it) directly (4) the right is not subject to legal support (Article 1811).
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 c. A partners interest consists of his share in the profits and surplus (Article 1812). Profit referring
to his share of the net income from business, surplus referring to his share of assets after settlement of debts and
liabilities.

c.1 A partners interest may be conveyed to another (Article 1813). The effects are (1) Partnership
may either remain, if it is the intention of the partners concerned not to withdraw on account of the change of
partners OR dissolved, but the mere conveyance does not by itself dissolve the partnership, hence there is a
need for action on the part of the partners as such constitutes a change in the relations of the partners as the
conveying partner shall cease to be associated in carrying on of business (2) Assignee does not become a
partner in the absence of any agreement to the contrary. Consequently, the assignor is still recognized as the
partner with the right to demand accounting and settlement (3) Assignee cannot interfere in management or
administration of partnership business or affairs (4) Assignee cannot demand information, accounting or
inspection of books

c.2 The rights of the assignee are (1) To receive whatever profits the assignor would have obtained.
He is not considered an outside creditor who is preferred, so he can have no better right than the assignor
partner (2) He can avail of the usual remedies in case of fraud- interfere in management, inspect books, require
information or accounting (3) In case of dissolution, he may demand an accounting but only from the date of the
last accounting (4) He may ask for annulment of the assignment if he has induced though any of the vices of
consent or that he has incapable of giving it.

c.3 A partners interest may also be charged (Article 1814). It applies without prejudice to Article
1827 giving preference to partnership creditors. The manner of charging is as follows: (1) due application with a
court of competent jurisdiction by a judgment creditor of a partner MOTION FOR EXECUTION (2) court
charges the interest of the debtor partner with the payment of the unsatisfied amount of the judgment debt plus
interest OR an order is given to the partnership/partners to refrain from paying the partner (c) the court may
appoint (then or later) a receiver for partners share of the profits or any money due or to fall due to him. The
receiver may perform all acts that the court may authorize him to do (d) the court may make all other orders,
directions, accounts and inquiries which the debtor may have made or which circumstances of the case require.

IF THE INTEREST IS SO CHARGED IT MAY BE REDEEMED (meaning the charge is extinguished)

BEFORE FORECLOSURE ( when subjected to a mortgage), OR IN CASE OF SALE UPON ORDER OF THE
COURT, IT MAY BE PURCHASED WITHOUT THEREBY CAUSING DISSOLUTION (partner may become
insolvent, which is a cause for dissolution) WITH: (1) with separate property by one or more of the partners
(2) With partnership property by one or more of the partners, with the consent of the partner/s whose interest
has not been charged or sold BUT nothing shall be held to deprive a partner of his right, if any, under
exemption laws as regards his interest IT HIS OWN PROPERTY

c.4 The DETERMINATION OF PROFIT/LOSS IS AS FOLLOWS: (1) In conformity with the

agreement and if only share of the profits have been agreed upon, it will be distributed in the same proportion
(2) In the absence of an agreement ,it shall be in proportion to what they may have contributed BUT FOR AN
INDUSTRIAL PARTNER (a) he is not liable for the net loss (b) he receives a just and equitable share of the
profits. In addition, if he contributes a sum, he receives a proportionate share of profits (3) they can agree to
entrust it to a third person not a partner. However, the designation can be impugned if it is manifestly
inequitable, except when (a) the aggrieved partner has began to execute the designation (b) the designation was
not impugned within three months from time he had knowledge. Note that a PARTNER BENEFITED CAN
IMPUGN as long as the designation is manifestly equitable. there being no distinction (Articles 1797, 1798). In
determining the share in profit or loss, note that any stipulation excluding one or more partners in the profit or
loss is void (Article 1799). An exception is the INDUSTRIAL PARTNER as stated in Article 1797.
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 d. Right to participate in management is exercised by becoming a managing partner or consenting
to the appointment of one or more of the partners as managing partners.

d.1 An appointment as managing partner can be done by means of a designation in (1) Articles of
Partnership- (a) it is generally irrevocable without just or lawful cause. If there is cause, the vote of the partners
holding controlling interest is necessary. If there is no cause, the vote of all, including the managing partner is
necessary, as it partakes of the nature of a change in the contract (b) He can perform all acts of administration.
In case of opposition, if he acts in good faith, he can proceed to act. If he is in bad faith he can ousted (2)
Subsequent to the Articles, in another instrument or orally- (a) it is revocable at any time, with or without cause,
as it is a mere delegation (b) He can perform all acts of administration. In case of opposition, he can be ousted if
he continues to act (Article 1800).

d.2 There can be TWO OR MORE MANAGERS: (a) If there is no designation and unanimity is not
required (1) each may execute acts of administration (2) any of the managers may oppose, if there is an
opposition majority governs. If there is a tie, it is to be resolved by the partner holding controlling interest as he
stands with the most to lose. NOTE not all partners can oppose, as those who have appointed cannot oppose as
they have stripped themselves of the right to participate in management by voting to appoint a managing
partner/s (Article 1801) (b) IF UNANIMITY IS REQUIRED: (1) neither of the managers may act without the
consent of the other (2) the concurrence of all shall be necessary for the validity of acts (3) the absence or
disability of one cannot be alleged to defeat the agreement EXCEPT if there is imminent danger of grave or
irreparable injury to the partnership but the requirement should be held to apply only to those acts that are not
routine or are undertaken casually in the regular course of business operations (Article 1802).

d.3 IF THERE ARE NO APPOINTED MANAGERS OR THE MANNER OF MANAGEMENT IS

NOT AGREED UPON : (1) all partners are considered agents of the partnership and any one of them can bind
the firm except when opposed. In such case, the provisions of Article 1801 will apply (2) none of the partners
may, without the consent of the others, make any important alteration on the immovable property of the
partnership even if it be USEFUL. If the refusal is manifestly prejudicial, court intervention may be sought
(Article 1803).

2. A PARTNER HAS A RIGHT TO ASSOCIATE

a. A partner is allowed to associate another person with him in his share, but the associate cannot be
admitted into the partnership without the consent of all the partners, even if the one having an associate is the
managing partner (Article 1804)

b. An ASSOCIATE just shares in the NET PROFITS as it does not constitute and an assignment of
interest

3. INSPECT BOOKS AND RECORDS, REQUIRE INFORMATION

a. Partnership books shall be kept subject to any agreement between the partners at the principal
place of business of the partnership and any partner shall at any reasonable hour have access to and may inspect
or copy them (Article 1805). Reasonable hour refers to any hour during a business day throughout the year not
just any day which the managing partner may arbitrarily set.

b. Partners are obligated to render on demand, true and full information of all things affecting the
partnership to any partner or legal representative of a deceased partner or any partner under a legal disability
(Article 1806)
11
4. RIGHT TO A FORMAL ACCOUNT

a. A partner has the right to a formal account if (1) He is wrongfully excluded from the partnership
business or possession of its property by the other partners (2) If the right exists under the terms of the
agreement (3) As provided in Article 1807 if a partner derives unauthorized profits (4) Whenever circumstances
render it just and reasonable, like when a traveling partner returns (Article 1806).

THIS RIGHT IS TO BE EXERCISED ONLY IF ANY OF THE CIRCUMSTANCES ARE PRESENT BY

WHICH THERE IS ACCESS TO BOOKS ALREADY

5. RIGHT TO DISSOLVE THE PARTNERSHIP

a. A Partner has an absolute right to cause the dissolution of the partnership for any reason (Article
1830) subject to the liability for damages (Article 1837) and loss of the right to participate in winding up
(Article 1836)

OBLIGATIONS OF THE PARTNERSHIP TO THE PARTNERS

Upon the creation of the partnership, the partnership shall be responsible for: (a) all amounts that a
partner may have disbursed on behalf of the partnership and for the corresponding interest from the time the
expenses were made (b) answer to each partner for obligations he may have entered into good faith in the
interest of the partnership business and for risks in the consequence of management (Article 1796), and (c) in
relation to Articles 1804 and 1805, it must allow an associate and maintain books and records.

OBLIGATIONS OF PARTNERSHIP AND OF THE PARTNERS WITH REGARDS TO THIRD

PERSONS

1. OPERATE UNDER A FIRM NAME

a. Every partnership must operate under a firm name which may or may not include the name of
one or more partners. Those not being partners who include their names in the partnership name shall be
subject to the liability of a partner.

1. Note the use of the phrase: may or may not include the name of one or more partners indicates
that not all partners are required to have their names appear in the firm name if it were otherwise, all should
have been utilized.

2. If a person allows his name to be utilized in the firm name but he is not a partner, all liabilities of
a partner will be imposed on him.

3. If it is a limited partnership, the LIMITED PARTNERS NAME SHOULD NOT APPEAR

(Article 1846) unless he has the same name as a general partner or prior to his becoming a limited partner the
business was carried out under a name in which his surname appeared.

RELEVANCE so third persons may know who they are dealing with IT IS THE NAME OF THE
JUDICIAL ENTITY THAT IS CREATED UPON EXECUTION OF THE CONTRACT/ARTICLES OF

12
PARTNERSHIP. Note that if in the course of its business operations it changes its name, it retains all its rights
under the old name

2. LIABILITY OF PARTNERSHIP AND PARTNERS

a. All partners including industrial ones are liable pro-rata with all their property, after all
partnership assets are exhausted, FOR: (a) contracts entered into in the name of the partnership and for its
account under its signature by a person authorized to act for the partnership. Note that , any partner may enter
into a separate obligation to perform a partnership contract under Article 1796 those entered into in good faith
(Article 1816).

1. THIS LIABILITY REFERS TO THAT INCURRED IN FAVOR OF 3 RD PERSONS, hence, an

industrial partner is not exempt.

2. A withdrawing partner is not liable for those contracted after his withdrawal. Subsequent to
withdrawal, he is not liable as it is presumed that the partnership has taken all liabilities into account before
allowing withdrawal.

3. Any stipulation against the liability laid down shall be void, except as among partners (Article
1817).

a. Note that the partners can therefore agree as to the extent of their liabilities, but such will not
affect third persons.

b. Thus, it is possible for a capitalist partner to be exempt from liability. YES, if liability will extend
only to the contribution, the provisions of Article 1799 stipulation excluding a partner from profit or less is not
violated.

4. THE LIABILITY WILL APPLY when the act of the partner is considered as APPARENTLY
CARRYING ON IN THE USUAL WAY THE BUSINESS OF THE PARTNERSHIP as every partner is an
agent of the partnership for the purpose of its business and every act, including the execution in the partnership
name of any instrument binds the partnership EXCEPT WHEN: (a) partner so acting has in fact no authority to
act for the partnership in the particular matter, and (b) person with whom he deals has knowledge of the fact that
he has no such authority.

ANY OTHER ACT NOT APPARENTLY FOR THE CARRYING ON OF THE BUSINESS OF THE
PARTNERSHIP DOES NOT BIND UNLESS AUTHORIZED BY THE PARTNERS

Usual way depends on the nature of the partnership business and if it is essential or reasonably necessary to
the furtherance of partnership business

5. THE LIABILITY WILL NOT APPLY OR THE PARTNERSHIP IS NOT BOUND WHEN:
(a) partner has no authority and it is known to third person with whom he contracts (b) act is not apparently
carrying on in the usual way the business of the partnership (c) acts are the following EXCEPT WHEN
AUTHORIZED BY ALL OR THE BUSINESS IS ABANDONED, ONE OR MORE BUT LESS THAN ALL
OF THE PARTNERS HAVE NO AUTHORITY TO (1) Assign property in trust for creditors or on assignees
promise to pay debts of the partnership (2) dispose of the goodwill (3) do any act which makes it impossible to
carry on the ordinary business of the partnership (4) confess judgment (5) enter into a compromise concerning
a partnership claim or liability (6) submit a partnership claim or liability to arbitration (7) renounce a

13
partnership claim (d) no act with the partner in contravention of a restriction or authority shall bind the firm to
persons having knowledge of the restriction

b. As regards dealings regarding immovables, the rules are as follows:

1. If property is in the partnership name, any partner may convey it in the partnership name. It is
recoverable unless Article 1818 applies or the grantee or person claiming through such grantee has conveyed the
property to a holder for value without knowledge that the partner so conveying has exceeded his authority
TITLE PASSES

2. If property is in partnership name is conveyed by a partner in his own name EQUITABLE

TITLE PASSES provided it is one within the authority of a partner under Article 1818. If not applicable, no
interest will pass. The remedy of the buyer is reformation of the contract.

3. If property is in the name of one or more of the partners but not all and the records do not
disclose the right of the partnership, the partners named may convey title but it may be recovered if the partners
act does not bind as provided by Article 1818 unless the purchaser or his assignee is a holder for value without
knowledge

4. If property is in the name of one or more or all or a third person in trust, a conveyance executed
by a partner in the partnership name or his own name passes equitable interest, provided the act is within the
authority of the partner as laid down in Article 1818.

5. When all partners are named as owners, a conveyance executed by all passes all rights to the
property

c. In enforcing the liability of the partnership and the partners, note that:

1. An admission or representation made by any partner convening parnership attains within the
scope of his authority in accordance with this title is evidence against the partnership (Article 1820). Note
that IT MUST CONCERN PARTNERSHIP AFFAIRS and IT MUST BE WITHIN THE SCOPE OF HIS
AUTHORITY.

2. (a) Admissions made before dissolution are binding only if the partners has authority to act on
the matter (b) Admissions made after dissolution are binding only if necessary to wind up the affairs/business as
dissolution terminates all authority to act (c) Admissions made after one ceases to be partner are not binding
(d) Previous admission after one ceases to be a partner, if made within scope of authority of the partner and
during its existence is binding provided existence if partnership is proven by other evidence.

3. NOTICE (a) to a partner relating to partnership affairs (b) knowledge of a partner acting on a
particular matter (he is managing partner or assigned a particular task) acquired WHILE A PARTNER OR
THEN PRESENT TO HIS MIND (c) Knowledge of a partner (ACQUIRED WHILE ALREADY A PARTNER)
who reasonably (so situated as to be able to give notice) could and should have communicated it to the acting
partner, shall operate as notice to or knowledge of the partnership EXCEPT, in case of fraud on the partnership
committed by or with the consent of the partner (Article 1821).

d. The partnership is liable to the same extent as the partner acting or omitting to act for loss or
injury to any person, not a partner, or any penalty incurred for (1) Wrongful act, or (2) Omission in the ordinary
course of business or with the authority of his co-partners (Article 1822). This extends to liability for TORTS
14
and INJURIES TO EMPLOYEES. The is NOT LIABLE though for (1) wrongful act or omission which was not
done within the scope of the partnership business (2) act or omission is not wrongful (3) although wrongful,
partner is not held liable (4) act is committed after the firm is dissolved and was not in connection with the
process of winding up

e. The partnership is also bound to make good the loss arising from (1) a partner misapplying
money or property received from third person while acting within the scope of his apparent authority. There is
NO LIABILITY if without authority ( Apparent Authority is that which appears to a third person as the basis for
the partner to accept money or property) (2) where the partnership in the course of its business receives money
or property from a third person and the money or property so received is misapplied by any partner while in the
custody of the partnership (Article 1823)

1. Under Article 1824, all partners are solidarily liable with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823. Hence, the partner or firm can be held liable.

f. If the partnership/partner consents to a representation made by a person by words, spoken or

written, by conduct that he is a A PARTNER IN AN EXISTING PARTNERSHIP OR AS A PARTNER WITH
ONE OR MORE PERSONS NOT PARTNERS, it/they will be liable to any such persons upon whom the
representation was made who on the faith of which has given credit to the actual or apparent partnership. If the
representation was made or consented to its being made in public manner, there is liability even if the
representation has not been made directly or communicated to the person giving credit or with the knowledge
of the apparent partner making the representation or consenting to its being made (Article 1825). WHEN A
PERSON IS THUS REPRESENTED TO BE A PARTNER IN AN: existing partnership or with one or more
persons not partners, he (person making representation) is an agent of the person consenting to such
representation to find them to the same extent or in the same manner as though he were a partner in fact which
respect to persons who rely on the representation.

ARE PERSONS WHO BECOME PARTNERS AFTER INCURRING LIABILITIES LIABLE FOR
THEM

A person admitted as a partner into an existing partnership is liable for all obligators of the partnership arising
before his admission as though he was a partner at the time they were incurred, except that the liability shall be
satisfied out of partnership property only unless there is a contrary stipulation (Article 1826). It is so because, a
person who enters into a partnership is presumed to have exercised the reasonable diligence to verify the status
of its affairs. In effect, a new firm is created and should not affect partnership creditors as per Article 1840
which provides that the creditors of the old firm are still the creditors of the new firm continuing the business.

WHAT IS THE PREFERENCE ENJOYED BY PARTNERSHIP CREDITORS

Creditors of the partnership are preferred as regards partnership property, ALTHOUGH it is without prejudice to
the right of private creditors of each partner to ask for the attachment and public sale of the share with the
partner in partnership assets.

DISSOLUTION AND WINDING UP

DISSOLUTION DEFINED
15
Is the charge in the relation of the partners caused by a partner ceasing to be associated with the carrying on of
the business as distinguished from winding up (Article 1828). It designates the point in time when the partners
cease to carry on the business together. The partnership is not considered terminated, as it continues until all or
the winding up of partnership affairs is completed (Article 1829). This is the process of WINDING UP or the
settlement of affairs after dissolution.

EFFECT ON OBLIGATIONS

Those that are validly contracted have to be paid and cannot be avoided. Obligations that are new CANNOT BE
CONTRACTED unless it is essential to winding up partnership business.

CAUSES OF DISSOLUTION

a. Without violation of the agreement of the partners (1) by the termination of the definite term or
undertaking specified in the agreement (2) by the express will of the partner who must act in good faith when no
particular term or undertaking is specified (dissolution of a partnership at will) Here, good faith must attend the
dissolution and that adequate notice is given to all partners (3)by express will of all partners who have not
assigned their interest or suffered then to be charged for their separate debts, either before or after termination of
the term or particular undertaking. Here, there must be an express desire to dissolve which is manifested orally,
written or by words or acts indicating an intention to dissolved and with unanimity of the concerned partners (4)
expulsion in good faith in accordance with such power conferred by agreement of the partners

b. In contravention of the agreement of the partners where circumstances do not permit a

dissolution under any provision of this article, by express will of any partner at any time. This refers to the
INDEFEASIBLE right of a partner to cause dissolution but this action is not without SANCTION as there is
liability for damages ( Article1837) and loss of right to participate in winding up ( Article 1836)

c. By any event which makes it unlawful for the business of the partnership to be carried on or for
the members to carry it on in the partnership. NOTE under Article 1770, if business is unlawful from the
beginning there is nothing to dissolve

d. When a specific thing, which a partner had promised to contribute perishes before delivery. In
any case by the loss, when the partner who contributed it had reserved ownership having just transferred use or
enjoyment. BUT, dissolution does not result through loss if it occurs after the partnership has acquired
ownership. BUT NO DISSOLUTION OCCURS IF (1) partners agree to substitute (2) thing contributed is
generic

e Death of a partner means that the partnership continues to liquidation, but a stipulation allowing
a substitute is allowable. If the partnership continues, the partnership so continuing the business is to be
regarded as a new partnership

f. Insolvency of the partner or the partnership. A judicial decree is not necessary as the fact that
assets are less than liabilities is sufficient

g. Civil Interdiction as it results in incapacity to enter into contract

h. By decree of the court in cases where Article 1831 applies upon application by a partner or by
one acting in his behalf in the following cases: (1) partner has been declared insane in a judicial proceeding or is
16
shown to be of unsound mind. An action for dissolution at which time is insanity is proven is allowed (2) a
partner in anyway becomes incapable of performing his part of the partnership contract. This refers to any
inability that will render a partner incapable (3) a partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business. This encompasses failure to act in the appropriate manner for the
benefit of the partnership or negligent actions. (4) a partenr willfully or persistently commits a breach of the
partnership agreement or otherwise conducts himself in matters relating to the partnership business that it is not
reasonably practicable to carry on the business of the partnership with him. Examples: fraud or misuse of
partnership assets (5) the partnership can only be carried on at a loss (6) other circumstances that will render
dissolution equitable. As opposed to prevailing situation, dissolution is preferred (7) on application of the
purchaser of a partners interest under Articles 1813 and1814 (a) after termination of period or expiration of a
particular undertaking, or (2) at any time, if the partnership is one at will when the interest was assigned or
charged. IN THESE INSTANCES, dissolution comes into being upon finality of judgment in cases where
judicial intervention is had.

WHAT HAPPENS WHEN THERE IS DISSOLUTION

Dissolution terminates all authority of a partner to act for the partnership. This means that the general agency
between partners is automatically terminated. The partners cannot create any new obligation for the partnership
and partners are NOT LIABLE FOR LIABILITIES EXCEPT (1) as between partners ( meaning they must
contribute) (a) The act is necessary to wind up partnership affairs (b) It is necessary to complete transactions
began but not then finished (Article 1832) (c) When the dissolution is by act, insolvency or death (AID) of a
partner (each partner is liable to his co-partners for his share of liability as if the partnership had not been
dissolved UNLESS (1) dissolution be by act, the partner acting for the partnership had knowledge of the
dissolution (2) dissolution being by death or insolvency, the partner acting had knowledge or notice of the death
or insolvency (Article 1833).

a. WITH RESPECT TO OTHERS or persons not partners, a partner can bind the partnership (1) In
any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution (2)
Any act which would bind the partnership if dissolution had not taken place, PROVIDED, the other party to the
transaction (a) had extended credit (previous creditor) to the partnership prior to dissolution and had no
knowledge or notice of dissolution (b)
though no credit (new creditor) is extended had nevertheless known of the partnership prior to dissolution, and
having no knowledge or notice of dissolution, the fact of dissolution not having been advertised in a newspaper
of general circulation in the place (each place where the partnership conducts its business if more than 1) at
which partnership business is carried out (Article 1834) BUT in both instances, the liability of a partner under
the provision shall be satisfied out of partnership assets alone if such partner prior to dissolution is (1) unknown
as a partner to the person with whom the contract is made (2) so far unknown or inactive in partnership affairs
that the business reputation of the partnership could not be said to have been in any degree due to his connection
with it. (THE OBJECT IS TO PREVENT FRAUD ON OTHER PARTNERS) Example: Known partner with no
means to pay will use the others to settle their share of liability.

BUT UNDER THE FOLLOWING, the partnership is not bound when (1) the partnership is dissolved because it
is unlawful to carry on the business except when the act is appropriate for winding up (2) the partner acting has
become insolvent (3) where the partner has no authority to wind-up partnership affairs (must be in connection
with the process of winding-up) except by a transaction with one who must be connection with (a) extends
credit prior to dissolution and had no knowledge or notice of his want of authority (b) had not extended credit
prior to dissolution and having no knowledge or notice of the want of authority, the fact of his want of authority
has not been advertised in a newspaper of general circulation in the place of business

17
LASTLY, nothing in Article 1834 shall affect the liability of any person under Article 1825 if any person who
after dissolution represents himself or consents to another representing himself as a partner in a partnership
engaged in carrying on the business. MEANS if a stranger represents himself AFTER DISSOLUTION to be a
partner although he is not one, is still liable as a partner by estoppel.

WHEN IS A PARTNER CONSIDERED AS HAVING NO LIABILITY

Under Article 1835, the dissolution of the partnership does not of itself discharge the liabilities of any partner.
The DISCHARGE is effective only upon agreement to such effect between the partner, creditor and the
person or partnership continuing the business, if any. The agreement can be one that is orally constituted as it
can be inferred from the course of the dealing between the creditor having knowledge of the dissolution and the
person or partnership continuing the business

The individual property of a deceased partner shall be liable for partnership obligations incurred while a partner,
but subject to prior payment of his separate debts.

RIGHTS OF PARTNERS UPON DISSOLUTION

1. The partners can participate in the process of winding up (collating assets paying creditors, delivering
and distributing profit/surplus) the affairs of the partnership as long as (a) they have not wrongfully dissolved
the partnership (b) he is the legal representative of the last surviving partner, not insolvent, or (c) any partner,
his legal representative or assignee, upon cause, may obtain winding up from the court (Article 1836) BUT a
designation as contained in the ARTICLES or a subsequent agreement is binding.

2. (a) If dissolution is caused in any manner other than in contravention of the agreement , a partner or
person claiming rights under them and UNLESS OTHERWISE AGREED, shall have the right to have
PARTNERSHIP PROPERTY APPLIED TO DISCHARGE LIABILITIES AND THE SURPLUS applied to pay
in cash the NET amount owing to respective partners (b) if it be through EXPULSION, and the partner expelled
is discharged from all partnership liabilities either by payment or agreement (Article 1835) he shall receive in
cash the net amount due him (c) If the dissolution be in contravention of the agreement, a partner who has not
caused dissolution shall have the right to - LIQUIDATION, PAYMENT, DAMAGES FOR BREACH OF
AGREEMENT. They can also continue the business in the SAME NAME either by themselves or with others
during the agreed term of the partnership and possess partnership property PROVIDED - they secure payment
by bond approved by the court or pay to the partner who has wrongfully caused dissolution, the value of his
interest less damages and in the like manner indemnify him for present or future liabilities BUT for ascertaining
the interest, the value of the GOODWILL is not to be included as consequence of his action/bad faith. The
partner who has caused dissolution is entitled to (a) if the business is not continued, he is entitled to liquidation
and payment but subject to payment of damages (b) if the business is continued, he has the right against partners
or those claiming rights under them in respect to their interest, to have his interest in the partnership LESS
damage ascertained and paid to him in cash and be released from all existing liabilities. If payment cannot be
made, to secure it by bond (Article 1837).

NOTE: That in the enforcement of their rights, a right to an account accrues against winding-up
partners/surviving partners/persons or partnership continuing the business at the DATE OF DISSOLUTION in
the absence of a contrary stipulation (Article 1842)

18
3. If the partnership is dissolved on account of the exercise of the right to rescind (properly annulment as
fraud or misrepresentation are not grounds for rescission) the partnership contract on the ground of fraud or
misrepresentation, without prejudice to his other rights shall have the following rights: (a) lien or right of
retention of the surplus, after paying partnership liabilities for the sum paid by him to purchase interest or
capital or advances contributed (b) to stand, after all liabilities to third persons are paid or satisfied, in place of
creditors for any payment made by him in respect to partnership liabilities (c) to be indemnified by the person
guilty of fraud or misrepresentation against all debts or liabilities of the partnership

RULES TO SETTLE ACCOUNTS AFTER DISSOLUTION SUBJECT TO ANY AGREEMENT TO THE

CONTRARY

Note though that any agreement must give way to the preferred right of partnership creditors EXCEPT when it
involves property of deceased partner used to pay liabilities, in which case his separate creditors are preferred.

(1) partnership ASSETS are partnership property, contribution of partners necessary to pay liabilities (2)
ORDER OF PAYMENT of liabilities partnership creditors, partners other than for capital/profit, partner
capital, then partner profits (3) APPLICATION OF ASSETS shall be partnership properties, followed by
contributions to settle liabilities (4) partners must contribute as provided by Article 1797 (proportion of
profit/loss) the amount necessary to satisfy liabilities in accordance with the agreement or pro-rata (5) an
assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce
contributions in items 1 to 4 (6) any partner or legal representative shall have the right to enforce contributions
specified in item 4 to the extent of what he has paid in excess of his share (7) the individual property of a
deceased partner is liable for the contribution in item 4 SUBJECT to the condition that the liabilities where
incurred while a partner and that his separate debts are paid (Note: Art. 1835) (8) when partnership property
and individual properties are in the possession of the court for distribution- partnership property- partnership
creditors are preferred, individual property- individual creditors are preferred IN BOTH INSTANCES saving
the right of liens for secured creditors (9) when a partner is insolvent or his estate is insolvent, claims against
his property shall rank as follows: separate creditors, then partnership creditors, then partnership contributions
(Article 1839)

PREFERENCES OF PARTNERSHIP CREDITORS

Note that partnership creditors have the right to have their credits preferred in payment and that creditors do not
lose their preferred rights upon dissolution as they are also considered as creditors of the partnership/person
continuing the business in the following instances:

1. A new partner is admitted into an existing partnership, or when any partner retires and assigns (or the
representative of the deceased partner assigns) his right to partnership property to two or more partners/one or
more of the partners/ one or more third persons, if business is continued without liquidation of the partnership
affairs
2. All but one partner retires or assigns (or the representative of the deceased partner assigns) their rights in
partnership property to the remaining partner without liquidation of partnership affairs, either alone or with
others
3. Partner retires/dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and
2 of this article with the consent of the retired partners or the representative of the deceased partner but without
assignment of his right to partnership property
4. All partners or their representatives assign their rights to partnership property to one or more third
persons who promise to pay debts and continue the business of the dissolved partnership
19
5. When a partner wrongfully dissolves the partnership and the remaining partners continue the business
under Article 1837, 2nd paragraph either alone or with others and without liquidation of the partnership affairs
6. A partner is expelled and the remaining partners continue the business either alone or with others
without liquidation of partnership affairs.

NOTE: ABSENCE OF LIQUIDATION

THE LIABILITY OF A THIRD PERSON BECOMING A PARTNER in the partnership continuing the business
under this article shall be satisfied out of partnership property only, unless there is a stipulation to the contrary.

PREFERENCE is also given to creditors of the dissolved partnership as against creditors of a retiring/deceased
partner or his representative to any claim which the retiring/deceased partner may have against the person
partnership continuing the business on account of said partners interest or on account of any consideration
promised for such interest or for his right to partnership property. MEANING that is a partner retires/dies, his
claim for the payment of his interest cannot defeat the preference of partnership creditors.

NOTHING in Article 1840 shall be held to modify any right of creditors to set aside any assignment on the
ground of fraud.

The use of a person or partnership continuing the business of the PARTNERSHIP NAME or THE NAME of a
deceased partner as part thereof, shall NOT BY ITSELF make the individual property of the deceased partner
liable for any debts contracted by such person or partnership. This constitutes an exception to Article 1815 as
the situation presupposes dissolution and business is continued under any of the above-mentioned instances.

When any partner DIES/RETIRES, and the business is continued under Article 1840 or Paragraph 2 of
Article 1837 (partners who do not cause dissolution) without settlement of accounts as between him/his estate
and the person/partnership continuing the business, the partner or his legal representative shall have the right to
(1) to have the value of his interest at the date of dissolution ascertained and he shall receive as an ordinary
creditor an amount equal to the value of his interest, with interest OR at his/legal representatives OPTION the
profits attributable to the use of his right in the property in lieu of his interest PROVIDED that partnership
creditors are nevertheless preferred (Article 1841)

LIMITED PARTNERSHIPS

DEFINED

Is one formed by two or more persons under the provisions of Article 1844 having as members one or more
general partners and one or more limited partners. The limited partners as such shall not be bound by the
obligators of the partnership (Article 1843)

1. If all want to be limited partners, the remedy is to form a corporation

2. The existence of a general partner is the assurance to creditors that if partnership property be
insufficient, their credits may still be satisfied out of personal property of the general partner. ALSO for
management purposes and to enable and encourage persons with capital not desiring to engage in a particular
business to invest and become partners with those possessed with business skill and to enjoy profits without
liability as a general partner.

STATUTORY REQUIREMENTS

20
The members must sign and swear to a certificate stating the following (a) NAME of the partnership, adding
LTD. If not appended it is presumed to be a general partnership. Under Article 1846, the name of a limited
partner must not appear unless (1) it is also the name of a general partner (2) Prior to the time when he became
a limited partner, the business has been carried under name carrying his surname. If a limited partner name
appears, he is liable as general partner to partnership creditors who extend credit without actual knowledge that
he is not a general partner (b) CHARACTER OF THE BUSINESS (c) LOCATION OF THE PRINCIPAL
BUSINESS (d) NAME AND RESIDENCE OF EACH MEMBER, GENERAL AND LIMITED PARTNERS
BEING RESPECTIVELY DESIGNATED. Note that under Article 1853, a person can be both a general partner
or limited partner at the same time provided such fact is stated in the certificate. As such, he shall have the
rights and powers of a general partner and be subject to all restrictions EXCEPT that with respect to his
contribution he shall have the right against all other members which he would have if he were not also a general
partner. MEANS that if he is held answerable by third persons, he is entitled to recover what he has paid from
general partner. ALSO, he would have preference in the distribution of partnership assets to the extent of his
contribution (e) TERM FOR WHICH THE PARTNERSHIP IS TO EXIST. There can be no limited partnership
as will as Paragraph 9, Article 1864 states that there is need to amend the certificate when no time for
dissolution is fixed, if not done, there is liability for a false statement under Article 1847 (f) AMOUNT OF
CASH, DESCRIPTION OF AND AGREED VALUE OF THE PROPERTY CONTRIBUTED BY A LIMITED
PARTNER. Note the prohibition on industry.

If services are contributed, the limited partner is an industrial partner and the value of service that he
contributes increases, thus it runs counter to the concept of limited (Article 1845) ( g) additional
contributions to be given by limited partners, the time or event at which they will be made (h) the time if
agreed, when the contribution of a limited partner will be returned (i) the share of profits or other compensation
by way of income which a limited partner will receive by reason of his contribution (j) the right, if given of a
limited partner to substitute an assignee as contributor in his place and its terms and conditions (k) the right if
given of the partners to admit other limited partner NOTE- admission becomes effective upon the filing of an
amendment to the original certificate (Article 1849) as there is a need to designate who the limited partners are.
If there is no amendment there is a false statement (l) the right if given of one or more limited partners to
priority over other limited partners to their contribution, compensation by way of income and the nature of such
priority. Under Article 1855, if not contained, the presumption is that they stand on equal footing (m) the right
if given, of the remaining general partner to continue the business on the Death,Retirement, Insolvency, Insanity
or Civil Interdiction of a general partner (n) the right if given, of a limited partner to demand and receive
property other than cash in return of his contribution

Said certificate or articles must be filed for the record with the SEC.

NOTE THAT (1) It must be duly sworn to as one who suffers loss by reliance on a statement may hold a party
who knew the statement to be false at (a) the time it is signed (b) subsequently, but within a sufficient time
before the statement is relied upon, to enable him to CANCEL or AMEND or to file a Petition for its
CANCELLATION/AMENDMENT under Article 1865 may bring an action for damages (Article 1847) (2) If
not filed with the SEC, it is presumed to be a general partnership, but the liability as a General Partner applies to
third persons as between them the limited liability stays (3) Substantial compliance in GOOD FAITH gives rise
to the formation of a limited partnership but the absence of the following will bar it (a) Certificate is not sworn
to as it is necessary to impress upon the partners that the contents of the Articles are true and correct so that
third persons are not misled (b) Its articles are not registered (c) The identity of Limited Partners is not
disclosed

If a limited partnership is formed under the law effective prior to the NCC (Code of Commerce/old Civil Code),
it may become a limited partnership under the New Civil Code by complying with Article 1844. Further, it
must set forth the (a) amount of original contribution of each limited partner and time contribution was made (b)
21
that the property of the partnership exceeds the amount sufficient to discharge liabilities to persons not claiming
as General Partners or Limited Partners by an amount greater than the sum of the contributions of Limited
Partners. If they dont do anything, they continue to be governed by old law under which they were formed
(Article 1867).

WHAT ARE RIGHTS, POWERS, RESTRICTIONS AND LIABILITIES OF PARTNERS

1. A General Partner has the (a) Right and power to control the affairs of the partnership, as such he is the
sole person who can act for the partnership in consideration of his personal liability for debts without limitation
(b) Except with the written consent or ratification of the specific act by all Limited Partners, he cannot perform
the following (because they are acts of dominion and cannot be considered essential or in the ordinary course of
business) (1) do any act in contravention of the agreement, this refers to other business (2) do any act that would
make it impossible to carry on the ordinary business of the partnership (3) confess judgment (4) possess
partnerhsip property or assign rights to specific partnership property other than for partnership purpose (5)
admit a person as a General Partner (6) admit a Limited Partner unless expressly allowed in the certificate (7)
continue the partnership with partnership property on the DRIII of a General Partner unless allowed in the
certificate (Article 1850). In the same manner as a limited partner, he shall also have the right to (1) have
partnership books kept at the principal place of business of the partnership, and at a reasonable hour, to inspect
and copy them (2) have on demand, true and full information of all things affecting the partnership, and a
formal account of partnership affairs whenever circumstances render it just and equitable, and (3) have
dissolution and winding up by decree of the court (Article 1851)

2. A Limited Partner on the other hand, is (a) Not bound by partnership obligations unless he (1)
participates in management under Article 1848 (2) allows his name to be used under Article 1846 (3) he is also a
general partner under Article 1853 and (4) he is liable under Article 1852 when he contributes capital to a
business erroneously believing that he has become a limited partner is not by reason of such exercise of his
rights as a limited partner, a general partner with the person or partnership carrying on the business or is bound
by their obligations PROVIDED That on ascertaining the mistake, he promptly renounces his interest in the
profits of the business or compensation by way of income and creditors are not prejudiced. MEANING- that
since he has not been designated as a limited partner, he appears as a general partner. Hence, he is so liable
unless he renounces. Note though that this provision is without prejudice to Article 1848. MEANING: that if
the limited partner has already participated in management, he cannot avail of the provisions of Article 1852 to
limit his liability by renouncing. If the exceptions DO NOT APPLY, a limited partner is liable only up to the
extent of his contributions. (b) a limited partner also has the rights prescribed under Article 1851 as discussed,
and in addition, the right to receive a share of the profits or other compensation by way of income, and to the
return of contributions as per Article 1856 and 1857.

WHEN IS A LIMITED PARTNER ENTITLED TO RECEIVE HIS SHARE OF THE PROFITS OR

COMPENSATION BY WAY OF INCOME

A limited partner is entitled to his share of the profits/compensation by way of income on the date stipulated in
the certificate. Said amounts may come from the property of the partnership or that of the general partner.
PROVIDED, that after payment, partnership assets are in excess of liabilities except liability to both limited and
general partners for their contributions (Article 1856)

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WHEN ARE CONTRIBUTIONS SUPPOSE TO BE RETURNED

The contributions of a limited partner as coming from partnership property or that of a general partner cannot be
returned UNLESS (a) all partnership liabilities except liabilities to (contributions of) general or limited
partners, have been paid or assets set aside to satisfy them (b) the consent of all members is had unless return
has been rightfully demanded. IT IS RIGHTFULLY DEMANDED: (1) on the dissolution of the partnership (2)
when the date stated in the certificate for its return has arrived (3) when 6 months written notice has been given
to all members, if no time is stipulated for return or dissolution. (c) Certificate is amended or cancelled to reflect
withdrawal or reduction.

HOW PAID a limited partner, in the absence of a contrary stipulation or the consent of all members, shall,
irrespective of the nature of his contribution, have the right to demand and receive CASH in return for his
contribution

IN ADDITION a limited partner has the right to have the partnership dissolved and its affairs wound-up when
(1) he rightfully but unsuccessfully demands the return of his contribution (2) other liabilities have not been
paid or partnership property is insufficient for their payment AND the limited partner is or would otherwise be
entitled to the return of his contribution (Article 1857)

RIGHT TO TRANSACT BUSINESS WITH THE PARTNERSHIP

A limited partner may (1) Loan money to the partnership, OR (2) transact other business with the partnership
and (3) unless he is also a general partner, receive on account of resulting claims against the partnership,
together with general creditors, a pro-rata share or assets (NOTE THAT WHEN HE TRANSACTS BUSINESS,
the limited partner is treated as a non-member creditor) BUT INSOFAR AS CLAIMS AGAINST THE
PARTNERSHIP HE CANNOT: (1) receive or hold as collateral any partnership property, OR (2) receive from
a general partner or the partnership, any PAYMENT, CONVEYANCE, OR RELEASE FROM LIABIITY, if at
that time, the assets of the partnership are not sufficient to discharge liabilities to persons not claiming as
general or limited partners. HENCE, the receiving of collateral, security, payment or conveyance or release , in
violation of the provision is FRAUD on creditors of the partnership (Article 1854).

RIGHT TO ASSIGN INTEREST

A limited partners interest is assignable. The effects of an assignment is to (a) constitute the assignee as a
Substituted Limited Partner (SLP). This occurs when the assignee is admitted to all the rights of a limited
partner who has died (See Article 1861 giving the executor or administrator of the deceased partner the right to
exercise all rights as a limited partner to settle his estate and such power as the deceased had to constitute an
assignee as a SLP) or has assigned his interest in the partnership (the assignor partner must have the right to
constitute the assignee as a SLP). As a consequence, he has all the rights of a limited partner and is subject to all
liabilities and restrictions on the ASSIGNOR EXCEPT, those which he was ignorant of at the time he became a
limited partner and which could not be ascertained from the certificate. BUT, the ASSIGNOR is not released
from liability under Articles 1847 (False statements) and 1858, The EFFECTIVITY IS ON AMENDMENT OF
CERTIFICATE, OR (b) he is a mere assignee. As such he has no right to require information or an account/s of
partnership transactions or to inspect the books. HE HAS RIGHT TO (1) receive his share of profits or
compensation by way of income OR the return of contribution, to which the assignor would otherwise be
entitled. HE CAN BECOME A SLP, if (a) all the members consent OR (b) the assignor is given the right by or
in the certificate to constitute him as a SLP. It is possible that if ASSIGNOR does not desire, the assignee cannot
be a SLP (Article 1859).
23
BUT, the constitution of the assignee as a SLP becomes effective only, in both cases WHEN THE
CERTIFICATE IS AMENDED. Note: If no consent is given, DISSOLUTION MAY TAKE PLACE

WHILE THE INTEREST IS ASSIGNABLE, IT MAY ALSO BE CHARGED. The procedures is as follows:
(a)due application of a court of competent jurisdiction but exemption laws apply (b) court may then appoint a
receiver, make any orders, directions or inquiries. IN THE IMPLEMENTATION OF THE CHARGING
ORDER, the (a) the limited partner cannot interpose that prior resort has been had to other remedies as it is not
deemed exclusive (b) the interest may be redeemed with the separate property of any general partner but not
with partnership property (as it constitutes an untimely return of contribution and gives a limited partner a
concession that is inconsistent with limited liability). Dissolution may result by the express will if the members
whose interest have not been charged (Article 1862)

A LIMITED PARTNER ALSO HAS THE RIGHT NOT TO BE IMPLEADED AS A PARTY TO AN ACTION
AS contributor unless he is a general partner cannot be a proper party in a proceeding by or against the
partnership except when the object is to enforce the limited partner right against or liability of the partnership
(Article 1866).

WHAT ARE THE LIABILITIES OF LIMITED PARTNERS

A limited partner is liable to the partnership for (1) the difference between his contribution as actually made
and that stated in the certificate as having been made (2) the unpaid contribution which he agreed in the
certificate to make in the future, at the time and on the conditions stated in the certificate. HE ALSO HOLDS
AS TRUSTEE (1) specific property stated in the certificate as contributed but has not been contributed or was
wrongfully returned (2) money or other property wrongfully paid or conveyed to him on account of his
contribution.

THE LIABILITIES OF A LIMITED PARTNER may be WAIVED or COMPROMISED with the consent of all
members, but the waiver or compromise shall not affect creditors who extend credit or whose claim arose after
the filing and before a cancellation or amendment of the certificate, to enforce such liabilities.

A limited partner is also liable, if he has rightfully received the return in whole or in part of his contribution, to
the partnership for any sum, not in excess of what he received, with interest, necessary to discharge liabilities to
all creditors who extend credit or whose claim arose before such return (Article 1858). This applies to all
transactions validly incurred but not considered at the time the return is made

DISSOLUTION

The grounds/causes for dissolution as provided for by Articles 1830 and 1831 apply. The additional grounds are
those provided for under Article 1857 (when the limited partner rightfully demands for return of contributions
but is unsuccessful, or, there is non-payment of liabilities) and Article 1860, upon the DRIII of a general
partner, which as a rule dissolves the partnership UNLESS, the business is continued by the remaining general
partner under (a) right granted in the certificate , OR (b) consent of all members is obtained

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THE ORDER OF SETTLING ACCOUNTS IS: (1) creditors in the order provided for by law, except those
owing general or limited partners by way of contribution (2) those owned to limited partners in respect to their
share of profits and other compensation by way of income on their contribution (3) limited partners
contributions (4) general partner other than for capital or profits (5) general partners profits (6) general
partners capital. Subject to agreements, a limited partner shares in proportion to his contribution (Article 1863).

WHEN MUST THE CERTIFICATE BE CANCELLED OR AMENDED

The certificate is to be cancelled when the partnership is to be dissolved or limited partners cease to be such. It
is to be amended when: (1)change in name, character of the partnership or contribution of a limited partner (2)
a person is substituted as a limited partner (3) an additional limited partner is admitted (4) a person is admitted
as a general partner (5) a general partner DRIII and business is continued (6) there is a change in the character
of the business (7) there is a false or erroneous statement contained in the certificate (8) there is a change in
time for dissolution or return of contribution (9) the time for dissolution or return of contribution is fixed (10)
the members desire a change in order to accurately represent their agreement (Article 1864).

ANY WRITING TO AMEND SHALL (1) conform to Article 1844 and as far as necessary must set forth clearly
the change in the agreement/certificate (2) it must be signed and sworn to by all members, and if amendment is
to add a partner (he must sign) or if it pertains to a SLP (assigning partner and substitute must sign). IF IT IS TO
BE CANCELLED, it should be signed by all partners.

A person desiring cancellation or amendment may petition the court to order cancellation/amendment if the
person designated refuses to execute the writing. If found meritorious, the court will order the SEC to cause
cancellation or amendment

THE CERTIFICATE IS AMENDED OR CANCELLED WHEN (1) The writing in compliance with Articles
1864 and 1865 is filed with the SEC, and (2) IF COURT ACTION IS INITIATED, a copy of the ORDER of the
court must be filed also. The Amended certificate then takes the place of the original certificate. NOTE: that the
SEC has discretion to pass upon compliance with Article 1844.

AGENCY

Civil Law; Agency; The right of a broker to his commission for finding a suitable buyer for the sellers
property even though the seller himself consummated the sale with the buyer recognized by the Court. In
Macondary & /co. v. Sellner, the court recognized the right of the broker to his commission for finding a
suitable buyer for the sellers property even though the seller himself consummated the sale with the buyer. The
court held that it would be in the height of injustice to permit the principal to terminate the contract of agency to
the prejudice of the broker when he had already reaped the benefits of the brokers efforts.

Same; Same; The sellers withdrawal in bal faith of the brokers authority cannot unjustly deprive the
brokers of their commission as the sellers duly constituted agents. In Infante v. Cunanan, et al., the Court
upheld the right of the brokers to their commission although the seller revoked their authority to act in his
behalf after they found a buyer for his properties and negotiated the sale directly with the buyer whom he met
through the brokers effort. The Court ruled that the sellers withdrawal in bad faith of the brokers authority
cannot unjustly deprive the brokers of their commissions as the sellers duly constituted agents.

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 Same; Same; Agency Coupled with an Interest; An agency is deemed as one coupled with an interest
where it is established for the mutual benefit of the principal and of third persons, and it cannot be revoked by
the principal so long as the interest of the agent or of a third person subsists. Under Article 1927 of the Civil
Code, an agency cannot be revoked if a bilateral contract depends upon it, or if it is the means of fulfilling an
obligation already contracted, or if a partner is appointed manager of a partnership in the contract of partnership
and his removal from the management is unjustifiable. Stated differently, an agency is deemed as one coupled
with an interest where it is established for the mutual benefit of the principal and of the agent, of for the interest
of the principal and of third persons, and it cannot be revoked by the principal so long as the interest of the
agent or of a third person subsists. In an agency coupled with an interest, the agents interest must be in the
subject matter of the power conferred and not merely an interest in the exercise of the power because it entitles
him to compensation. When an agents interest is confined to earning his agreed compensation, the agency is
not one coupled with an interest, since an agents interest in obtaining his compensation as such agent is an
ordinary incident of the agency relationship. [1]

Nature, Forms and Kinds of Agency

STATUTORY DEFINITION

By a contract of agency, a person binds himself to render some service or do something in representation or in
behalf of another, with the consent or authority of the latter (Article 1868)

Note that by going by the definition, agency includes relationships like master-servant, employer, employees or
lessor independent contractor, such is however is INCORRECT as agency pertains to the performance of a
judicial act (one that binds a person to an obligation) in the performance of which discretion may be exercised,
while in the other relationship what is done in behalf of the other is purely ministerial.

ANOTHER DEFINITION it is a relationship by which two parties whereby one party called the PRINCIPAL,
authorizes another, called the AGENT to act for and in his behalf.

WHAT ARE THE ESSENTIAL REQUISITES OF A CONTRACT OF AGENCY

1. There is consent, express or implied of the parties to establish the relationship

2. The object is the execution of a juridical act in relation to a third person
3. The agent acts as a representative and not for himself
4. The agent acts within the scope of his authority

PARTIES TO A CONTRACT OF AGENCY

1. Principal one who has permitted or directed another to act for his benefit and subject to his direction
and control. He is the one whom the agent represents and from whom he derives authority. He is the one
primarily concerned with the contract

CAPACITY WISE he must be able to give legally effective consent and the act to be performed must be
delegable (whether or not the act can be done by the person himself. If YES it is delegable EXCEPT if it is
strictly personal. Example: swear under oath, execute a will or exercise a profession.

PRINCIPALS can be natural or artificial/juridical persons, foreigners/aliens.

26
2. Agent he who act or stands for another, usually he is given full or partial discretion, at times he acts
under a specific command.

CAPACITY WISE, he must have the capacity to bind himself to the principal, with third persons, it is not
necessary as it is the principal who is bound, he assumes no personal liability

NATURE OF A CONTRACT OF AGENCY

It is a fiduciary relationship, as a consequence of which: (a) no acquisitive prescription exists in favor of the
agent as his possession is in the capacity as agent not owner (b)agent cannot deny the title of the principal
(c)agent cannot represent conflicting interests (d) agent is obligated to render and give proper information and
full disclosure

MANNER OF CONSTITUTION OF A CONTRACT OF AGENCY

A contract of agency can be constituted EXPRESSLY or IMPLIED from the acts of the principal, silence, lack
of action or failure to repudiate and in all cases knowing that the other person is acting on his behalf without
authority (Article 1869), IN SUCH CASES, burden of proof is on the party claiming or alleging agency. There
is no presumed agency except under Art. 1803 as between partners when the manner of management has not
been agreed upon and when lawyers appear before the court.

AS TO FORM

A contract of agency can be orally constituted unless the law requires it to be written. The law requires it to be
written under Articles 1874 (sale of land or any interest shall be in writing, otherwise the sale is void) Article
1878 (when a special power of attorney is required) and in relation thereto, Articles 1879 and 1880

HOW IS IT PERFECTED

A contract of agency is perfected by ACCEPTANCE, which can be express or implied from acts that carry out
the agency or silence or inaction according to circumstances (Article 1870 It can also be implied between
persons present when the principal delivers his power of attorney to the agent who receives it without
objection such is prima facie proof of acceptance (Article 1871) AND as between persons who are absent it
cannot be implied from the silence of the agent EXCEPT: (1) if the principal transmits his power of attorney to
the agent who receives it without objection (2)when the principal entrusts to him by letter or telegram, a power
of attorney with request to the business in which he is habitually engaged in as an agent and he did not reply to
the letter or telegram (Article 1872)

AS TO THIRD PERSONS it is perfected when a person specifically informs another or states by public
advertisement that he has given a power of attorney to a third person, the latter becomes an agent insofar as (a)
person to whom specific information is given, (b) anyone if it be by public advertisement (Article 1873).
The power of attorney shall remain in full force until notice of rescission is made in the manner notice of
constitution is given, or by actual knowledge, such is sufficient to make rescission effective.

27
IN RELATION TO ART. 1873 - if the principal leads another to believe that a certain person is his agent but it
is not in fact true and such representation is acted upon that creates an AGENCY BY ESTOPPEL. Note
however that such can also be created by the supposed agent.

DISTINGUSIHING BETWEEN Agency by Estoppel and Implied Agency. In the former, the agent is not a true
agent, the supposed principal or agent is the one liable always depending upon who gave rise to the agency by
estoppel. In the latter, the agent is true agent and it is the principal who is liable.

AGENCY IS PRESUMED TO BE FOR COMPENSATION UNLESS THERE IS PROOF TO THE

CONTRARY

When there is no compensation mentioned, there is still a contract of agency. The absence or presence of
compensation not being a necessary or essential requirement (Article 1875). Neither does the agent have to
prove that the agency is for compensation.

KINDS OF AGENCY

Agency is either General (when it comprises all of the business of the principal) or Special (when it comprises
one or more specific transactions). Consequently, if one is appointed as a General Agent, he shall be authorized
to conduct a series of transactions Involving continuity of service. If one is appointed as a Special Agent , he
shall be authorized to conduct a single/series of transactions not involving continuity of service (Article 1876)

HOW CONSTRUED

If it is couched in general terms, it only comprises of acts of administration, even if the principal should state
that he withholds no power or that the agent may execute such acts as he may deem appropriate or even if
agency should authorize a general or unlimited management (Article 1876). Acts of administration are those
that are necessary in the day to day affairs of the business of the principal.

CONSEQUENTLY, IF WHAT IS TO BE PERFORMED IS NOT AN ACT OF ADMINSTRATION, A

SPECIAL POWER OF ATTORNEY IS REQUIRED IN THE FOLLOWING INSTANCES: (1) to make
payments as not usually considered acts of administration (2) to effect novations which put an end to obligations
already in existence at the time the agency was constituted (3) to compromise submit questions to arbitration, to
renounce the right to appeal, to waive objections to venue or to abandon prescription already acquired (4) to
waive any obligation gratuitously (5) to enter into a contract by which ownership over an immovable is
transmitted or acquired gratuitously or for valuable consideration (6) to make gifts, except customary ones for
charity or those made to employees in the business managed by the agent (7) to loan or borrow money, unless
the latter act be urgent and indispensable for the preservation of the things which are under administration (8) to
lease real property to another for a period exceeding one year (9) to bind the principal to render service without
compensation (10) to bind the principal in a contract of partnership (11) to obligate the principal as a guarantor
or surety (12) to create real rights or convey real rights over immovable property (13) to accept or repudiate an
inheritance (14) to ratify obligations contracted before the agency (15) any other act of strict dominion (Article
1878)

There is need for a Special Power of Attorney to give the agent a clear mandate specifically authorizing the
performance of an act as the acts are classified as (a) acts of strict dominion or ownership (b) gratuitous
contracts, or (c) contracts where personal trust or confidence is of the essence. If an act of the agent requires a
special power of attorney, its absence renders the contract unenforceable. Note: A GENERAL POWER OF
ATTORNEY CONTAINING AUTHORIZATION FOR ACTS WHICH REQUIRES A SPECIAL POWER OF
ATTORNEY IS ALLOWED (Veloso vs. CA , 260 SCRA 593).
28
In relation to Article 1878, note that (1) a special power of attorney to sell excludes the power to mortgage, and
a special power of attorney to mortgage does not include the power to sell (Article 1879) as the real object is to
dispose of the property, if however the power given is to raise money for which an agent may sell property or
avail of all other means then a mortgage would be valid (2) a special power of attorney to compromise does
not authorize submission to arbitration. The principal trusts the judgment of the agent but not the judgment of
the arbitrator.

RULES THAT GOVERN THE PERFORMANCE BY THE AGENT OF THE AGENCY

There being a contract of agency, the general obligations and scope of power of the agent are:

(a) He must act within the scope of his authority (Article 1881). He may do such acts as may be conducive
to the accomplishment of the purpose of the agency. AUTHORITY DEFINED- The right of the agent to effect
legal relations with his principal by the performance of acts effectuated by and in accordance with the
principals manifestation of consent. KINDS OF AUTHORITY (a) Express the authority is clearly defined
and is spelled out in terms that the agent fully understands what is to be done (b) Implied only the general
nature of the authority is defined, but is deemed to include acts necessary to accomplish the purpose (c) General
the agents discretion is complete (d) Special particular instructions are given (e) Apparent- when the agent
or a third person is led to believe by the principal that he is an agent. AUTHORITY AS DISTINGUISHED
FROM POWER- authority may be considered as the cause while power is the effect. Authority given by the
principal to the agent is the one that empowers the agent, who can now act.

(b) The limits of an agents authority shall not be considered exceeded should it have been performed in a
manner more advantageous to the principal than that specified by him (Article 1882). The conditions of the
agency can be improved, but not made worse. The agent cannot be said to have exceeded the scope of his
authority because it is presumed that if it were the principal so acting, he would have followed the more
advantageous course. CLEARLY, IT IS POSSIBLE THAT THE POWER OF THE AGENT BE BROADER
THAN THE PRINCIPAL it should be characterized by the fact that it is more advantageous to the principal.

IF AN AGENT IS CONSTRAINED TO ACT BEYOND THE AUTHORITY GIVEN HIM. IT CAN BE

JUSTIFIED IF IT IS CONSIDERED AN AGENCY BY NECESSITY. This refers to the concept that the agents
authority is correspondingly enlarged to cope with the necessities or exigencies of the moment BUT THIS
SHOULD ALWAYS PRE-SUPPOSE THAT AN AGENCY IS ALREADY IN EXISTENCE. The conditions are
(1) real existence of an emergency (2) inability to communicate with the principal (3) exercise of additional
authority is for principals protection (4) he adopts family reasonable means, premises duly considered, and (5)
authority ceases the moment the emergency no longer demands it

(c) If an agent acts in his own name, the principal has no right of action against the persons with whom the
agent contracted, neither have such persons against the principal. In such is the case, the agent is directly
responsible to the persons with whom he contracted as if the transaction has his own except when the contract
involves things belonging to the principal. It is also without prejudice to actions between the principal and the
agent. (Article 1883). This is an AGENCY WITH AN UNDISCLOSED PRINCIPAL. This will apply only
when there is a contract of agency as the agent here WAS AUTHORIZED BUT ACTED IN HIS OWN NAME,
as opposed to an agency by estoppel. Here the agent is liable alone as the fact of representation disappears
insofar as the third person and the principal.
Applying 1881
In this four instances the effects are:
1. Acts in principals behalf of authority valid principal is bound
2. Agent acts with authority but in his behalf valid principal is not bound except if 1882 applies
29
3. Agent without authority but in behalf of the principal unenforceable but principal can ratify.

Art. 1403 paragraph I

Those entered into in the name of another person by one who has given a authority or legal
representative or who has cited beyond his powers.

4. Agent without authority in his behalf valid provided at the time of delivery he can deliver

OBLIGATIONS OF THE AGENT

I. CARRY OUT THE AGENCY
Art. 1884 the agent is bound by his acceptance to carry out the agency IF HE DOES NOT he is
liable through non-performance for damages that may be sustained by his principal.

He must also finish business already began on the death of the principal should delay en__ any damages

PLS. NOTE: That if he carries ___ the agency in good faith and in accordance with is authority but damages
still result. He is not liable.

BUT under Art. 1888 the agent shall not carry out the agency if its execution would manifestly result in loss
or DAMAGE

Manifestly execution will definitely damage the principal

If the AGENT DECLINES (or Art. 1870, 71, or 72 does not apply)

A. Observe the diligence of a good father of the family in the custody and preservation of the goods forwarded
to him.

UNTIL:
the principal shall have appointed an agent, or
the principal shall have as soon as practicable taken charge of the goods
If the AGENT exercises the require diligence loss ___ have to be borne by the OWNER/PRINCIPAL
IF HE ACCEPTS Art. 1887
The agent in the execution shall act.
a. in accordance with the instructions of the principal
(Instructions as opposed to authority are the specific acts to be undertaken to carry out the agency)

IN SO GIVING INSTRUCTIONS the principal must make his terms clear and _________, if it be
susceptible to two meanings, adoption in good family does not cause liability for loss in constituting the
instructions they shall be construed as a plain non acquainted with the object and attending reasonably to the
language used, has in fact construed.

b. IN DEFAULT OF INSTRUCTIONS he shall do all that a good father of the family will do as required by
the nature of the business.
(That which an ordinary prudent man would exercise as regards his own property)
he must careful agent is responsible not also fraud, but also for negligence which shall be judged with more or
less ___ by costs depending or whether agency was or was not for compensation.

IN ADDITION, IN CARRYING OUT THE AGENCY

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 Art. 1886 if there be a stipulation that the agent shall advance the necessary funds, he shall be found to
do so except of the principal is insolvent.
- this applies whether the agency is gratuitous or onerous.
- if _____ the agent (Art. 1918) (see 1912 ALSO)
- actual in contravention of being authority unless he avails himself of the benefits.
- expenses are due to his __
- incurred the expenses with knowledge that an unfavorable result will ensure
- or, it is stipulated that expenses are to be ___ by him
- when even if he (AGENT) advances the amount no right for a reimbursement exists

II. AGENT SHOULD NOT REPRESENT __

Art. 1889 the AGENT is liable for damages, if there is a conflict between his interests and that of the
principal he should prefer his own.

III. IF HE IS AUTHORIZED TO LEND OR BORROW MONEY (1890)

- if he is authorized to borrow, he may be the lender at the current rate
- if he has been authorized to lend money at interest, he cannot borrow it without the consent of the
principal as there is a damages that the interest of the principal will be jeopardized

IV. OBLIGATION TO RENDER AN ACCOUNT OF HIS TRANSACTIONS

- DELIVER TO THE PRINCIPAL WHATEVER HE MAY HAVE RECEIVED BY VIRTUE OF THE
AGENCY, EVEN IF IT IS NOT OWING TO THE PRINCIPAL

Any stipulation exempting him from rendering an accounting is void.

- Failure to account or return without justifiable reason shall be ground for prosecution under Art. 315 par
1 (6) of the RPL for estafa

V. NATURE OF LIABILITY OF THE AGENT TO THE PRINCIPAL

Art. 1894 the responsibility of two or more agents, even though they have been appointed.
Simultaneously, is NOT SOLIDARY, if solidarily has not been expressly agreed upon.
Liability is joint.
But Art. 1895 if solidarily has been agreed upon each of the agents is responsible for the non-
fulfillment of the agency and for the ___ and negligence of his __ agents except in the latter case the agent acted
beyond the scope of their authority.
If the co-agent __ beyond the scope of his authority no liability is imposed on the other agent.
Principal can sue either agent without prejudice to any action/s for recovery between them.

IN ADDITION
Art. 1896 of the agent
Has:
converted and applied ___ to his own use, or
ones __ after the agency is extinguished

HE IS LIABLE FOR INTEREST ON THE SAID AMOUNTS WITHOUT PRESU___ TO A PROSECUTION

FOR ESTAFA IF SO WARRANTY

CAN THE AGENT APPOINT A SUBSTITUTE

31
 Art. 1892 The agent is allowed to appoint a substitute of the principal has not prohibited from doing
so, but if he does appoint, the agent shall be responsible for all the acts of the substitute if:
a. he has not given the power to appoint one
b. he was given the power to appoint but without designating the person and the person appointed was
notoriously incompetent or insolvent
ALSO, all the acts of the substitute shall be void if it is counter to the principals prohibition to
appoints.
Article 1893 in cases where there is no power to appoint or the person appointed is incompetent or
insolvent. The principal may bring an action against the substitute with regards to the obligation which has
been contracted under substitution.
Execution on the Rule of pri__
Art. 1311 contracts take effect between the parties only

INSOFAR AS LIABILITIES TO THIRD PERSONS

Article 1897 agent is not personally liable to the party with whom he contracts UNLESS
a. He expressly binds himself in which case the principal is still liable.
b. He exceeds the __ of his authority without giving such party sufficient notice of his powers but if party is
aware then he is estopped from claiming otherwise

Art. 1898 if the agent contracts in the name of the principal exceeding the scope of his
authority AND the principal does not ratify the contract is VOID, if the party is aware of the __ of the power
granted by the principal.
If the agent undertook to secure ratification and it is not given, the agent is liable even if the third party
is aware or unaware.

REQUISITES FOR VALID RATIFICATION

1. contract is one which would have been valid or legal had the agent been authorized;
2. principal must be existing and legally competent at the __ of ratification;
3. contract must purport to be in the principals behalf;
4. same formalities required for ratification as original authorization;
5. principal must have full knowledge of the facts;

Art. 1899 if the duly authorized agent acts in accordance with the order of the principal the principal
cannot set up the ignorance of the agent as to circumstances whereof he himself was on ought to have been
aware.
e.g. agent was to adopt to a situation that is foreseen
principal cannot say __ in attribute to agent if he was aware

RULES COVERING THIRD PERSONS

Art. 1900 they can consider an act performed by the agent to be within the scope of granted authority,
if it is within the terms of the WRITTEN POWER OF ATTORNEY, even if in fact it has been exceeded
according to an understanding between the principal and agent.
Art. 1900 has no application of the agency is not written

ON THE OTHER HAND under Art. 1901- a third person cannot set up the fact that the agent has
exceeded his power of the principal has:
a. ratified the act or
b. has expressed a willingness to ratify
c. to ensure that the agent acts with his authority

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Art. 1902 a second person has the right and the agent the obligation to:
a. require/present the power of attorney or
b. require/present the instructions

If there are private or secret orders or instructions, third parties will not be prejudiced if they have relied
on what has been shown to them.

Art. 1903 1908 Commission Agent

Agent is a broker or a penchant who has the option with actions in his own name or that of the principal
for which purpose goods are placed in his ___ of __, engaged in purchase and sale of proposed property.

Art. 1903 he shall be responsible for the goods received by him in the terms and conditions and as described
in the consignment unless upon receiving them he should make a written statement of the damage and
deterioration.

Art. 1904 if he handles goods of the same kind and work, which belong to different owners, he should
distinguish then by countermarks and designate the merchandise belonging to each principal.

3. He cannot sell the goods on credit without the express or implied consent of the principal. If he sells on
credit, the principal can demand cash but the agent shall be entitled to any benefit or interest (BUT PRINCIPAL
CAN RATIFY SALE). If he sells on credit with the authority of the principal, he shall inform the principal with
a statement of the names of the buyers. Should he fail, the sale shall be deemed to have been made in cash
insofar as the principal is concerned THIS IS TO PREVENT AGENT FROM SAYING THAT A CASH SALE
WAS ON CREDIT (Articles 1905 and 1906).

4. If the agent is entitled to a GUARANTEE COMMISSION (in addition to the ordinary commission) he
shall bear the risk of collection and shall pay the principal the proceeds of the sale on the terms agreed upon
with the purchaser (Article 1907). Here the INSOLVENCY OF THE DEBTOR IS NOT A DEFENSE.

5. If the commission agent does not collect the credits of his principal when they become due and
demandable, he is liable for damages unless he proves he exercised due diligence (Article 1908).

OBLIGATIONS OF THE PRINCIPAL

1. TO COMPLY comply with all obligations that the agent may have contracted WITHIN THE SCOPE OF
HIS AUTHORITY. As for any obligation contracted when his power is exceeded, the principal is not bound
EXCEPT if he RATIFIES expressly or tacitly (Article 1910). If the agent exceeded his authority the principal is
SOLIDARILY LIABLE with the agent IF HE ALLOWED the latter to act as if he had full powers (Article
1911).

2. TO ADVANCE , IF THE AGENT REQUIRES, the SUMS necessary to execute the agency. If it is not
advanced, the principal must reimburse the agent even if the business or undertaking was unsuccessful
PROVIDED, the agent is free from any fault or negligence, to include INTEREST form the day on which the
advance is made (Article 1912).

NOTE: That under Article 1918 the principal is not liable for expenses incurred by the agent in (4) instances:
(a) Agent acted in contravention of the principals instructions, unless he chooses to avail himself with the
33
benefits (b) Expenses are due to the agents fault (c) When they are incurred by the agent with knowledge that
an unfavorable result would ensue, if the principal not aware thereof (d) When it has been stipulated that the
agent would bear the expense or that the latter would only be allowed a certain sum.

3. TO INDEMNIFY the agent for damages which the execution of the agency may have caused the agent,
who is without fault or negligence (Article 1913).

To enforce payment of the sums due under Paragraphs (2) and (3), the agent may retain in PLEDGE the things
which are the object of the agency until the principal effects reimbursement and payment of the indemnity. This
is an EXCEPTION TO THE DUTY TO DELIVER UNDER ARTICLE 1891.

WHAT IS NATURE OF THE LIABILITY OF THE PRINCIPAL IN CASES WHERE 2 OR MORE PERSONS
HAVE APPOINTED AN AGENT FOR A COMMON TRANSACTION OR UNDERTAKING

The liability of the principal IS SOLIDARY for all consequences of the agency (Article 1915)

WHAT HAPPENS WHEN TWO PERSONS CONTRACT REGARDS THE SAME THING, ONE WITH THE
PRINCIPAL, THE OTHER WITH THE AGENT

When 2 persons contract with regards the same thing, one of them with the agent, the other with the principal
and the 2 contracts are incompatible with each other. THAT OF THE PRIOR DATE PREFERRED, unless Art.
1544 applies: MOVABLES first to take possession in good faith, IMMOVABLE first in good faith records it
in the registry of property. NO INSCRIPTION first having possession in good faith, and in its absence, person
who presents the oldest title, provided there is good faith (Article 1916).

If the agent acted in good faith, the principal must be held for damages suffered by the person whose contract is
rejected (Article 1917). If he is in bad faith, he alone shall be responsible

WHAT ARE THE MODES OF EXTINGUISHING THE CONTRACT OF AGENCY

The contract of agency is extinguished by (a) Revocation (b) Withdrawal of the agent (c) Death, civil
interdiction, insanity or insolvency of the agent (d) Dissolution of the firm or corporation entrusted with or
accepting the agency (e) Accomplishment of the object or purpose of the agency (f) Expiration of the period for
with the agency was constituted (Article 1918)

Other known causes are termination by mutual consent, novation, loss of the subject matter, outbreak of war if
inconsistent with agency.

REVOCATION

(1) Revocation is undertaken by the principal at will and he may compel the agent to return the document
evidencing the agency. It may be done (a) EXPRESSLY, or (b) IMPLIEDLY (Article 1920)

(2) Implied revocation takes place when: (a) a new agent is appointed for the same business or transaction
which becomes effective on the day notice thereof was given without prejudice to Articles 1921 and 1922
(Article 1923), (b) when the principal directly manages the business entrusted to the agent by dealing directly
with third persons (Article 1924), and (c) grant to another agent of a special power of attorney revokes a
general power of attorney as regards the special matter involved in the special power of attorney (Article 1926).
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WHO CAN REVOKE IF THERE ARE TWO OR MORE PRINCIPALS

If two or more principals have granted a power of attorney for a common transaction, any one of them may
revoke without the consent of the others (Article 1925). This is due to their solidary liability.

EFFECTIVITY OF REVOCATION

In ALL INSTANCES, the revocation is effective only when: (1) Notice has been given to specified persons, in
cases where the agency has been entrusted for the purpose of contracting with third persons (Article 1921), OR
(2) If the agent had general powers, revocation will not prejudice third persons who acted in good faith and
without knowledge of the revocation. Notice of the revocation in a newspaper of general circulation is
sufficient warning to third persons. (Article 1922)

WHEN THERE CAN BE NO REVOCATION

(1) It is coupled with interest, but a mere statement that it is coupled with an interest is not sufficient
INTEREST IN THE SUBJECT MATER IS REQUIRED

(2) In cases mentioned under Article 1927 (a) when a bilateral contract depends on the agency.
Example: A buys a parcel of land from B by installment. To pay balance, A appoints C to sell another property
if he cannot pay the balance and deliver the proceeds to B. (b) if the agency is a means of fulfilling an
obligation already contracted. Example: In a contract of loan with a mortgage. If the mortgagor is unable to pay,
the mortgagee is constituted as the mortgagors attorney in fact to sell the property given as security upon
foreclosure(c) a partner is appointed as a managing partner and his removal is unjustified under Article 1800

(3) When there is a waiver by the principal as to revocation

(4) When the principal is obliged not to revoke

(5) Revocation is undertaken in bad faith. Here there is actual revocation but third parties will not be
prejudiced.

WITHDRAWAL

It is the agent who may withdraw from the agency by giving notice to the principal BUT if the principal suffers
any damage due to the withdrawal, the agent must indemnify him UNLESS the basis of withdrawal is
impossibility of carrying or continuing the agency without grave detriment to himself (Article 1928).
HOWEVER, despite notice and withdrawal for a valid reason, the agent must continue to act until the principal
has had reasonable opportunity to take necessary steps to need the situation (Article 1929). THIS IS TO
PREVENT DAMAGE TO THE PRINCIPAL

DEATH OF THE PRINCIPAL OR THE AGENT

(1) As a general rule, the death of the principal extinguishes the agency but if NOT SO if it has been
constituted in: (a) COMMON INTEREST OF THE PRINCIPAL AND AGENT. Example: A borrows from B
and entrusts an item to B, which he can sell if the debt is not paid, the agency shall remain even if A should die.
The common interest being the payment of the loan. (b) THE INTEREST OF A THIRD PERSON WHO HAS
ACCEPTED THE STIPULATION IN HIS FAVOR. Example: A sells property to B and appoints B as his agent
to pay C from the proceeds of the sale. The agency will exist even if A dies (Article 1930)
35
(2) Anything done by the agent without knowledge of the death of the principal or any other cause that will
extinguish the agency, is valid and shall be fully effective with respect to third persons who may have
contracted with him in good faith (Article 1931).

(3) If the AGENT DIES, it extinguishes the contract of agency. Consequently (a) his heirs must notify the
principal, and (b) adopt measures as the circumstances may demand in the interest of the principal (Article
1932). When notice is impossible, consignment is the remedy.

notesrsr.busorgn.pc3

TRUST
WHAT IS A TRUST - It is a fiduciary relationship concerning property which obliges the person holding it to
deal with the property for the benefit of another. From the beneficiarys viewpoint, it is the right to beneficial
enjoyment of property, the legal title over which is vested in another

WHAT ARE THE CHARACTERISTICS OF A TRUST

The characteristics of a trust are (1) it is a fiduciary relationship (2) it is created by law or by agreement (Article
1441) (3) legal title is held by one, while equitable/beneficial title is held by another

DISTINGUISHED FROM OTHER LEGAL RELATIONSHIPS

1. From Guardianship/Executorship, a trustee has legal title, not so for a guardian/executor

2. From a stipulation pour autri ((a stipulation in a contract in favor of a person not a party to the contract,
the parties thereto not being under any legal obligation to grant a benefit), (a) a trust exists because of a legal
provision or a contract, a stipulation pour autri arises only in case of contracts (b) a trust refers to specific
property only, a stipulation pour autri can refer to both specific things or other things.

IS CO-OWNERSHIP A TRUST

36
In the cases of Sotto vs. Teves (86 SCRA 154) and Castrillo vs. CA (10 SCRA 549), the Supreme Court held
that a co-ownership is a form of trust, with each co-owner being a trustee for each of the others, thus he may
not any act prejudicial to the interest of his co-owners and an agreement to preserve property in co-ownership
is an express trust.

WHO ARE THE PARTIES TO A TRUST

The parties to a trust are (1) Trustor the person who establishes the trust (2) Trustee the person in whom
confidence is reposed as regards property for the benefit of another person (3) Beneficiary the person for
whose benefit the trust has been created. He is the cestui que trust. IS POSSIBLE TO HAVE 2 PARTIES
ONLY, if the beneficiary and trustor are one and the same (Article 1440).

WHAT ARE THE ELEMENTS OF A TRUST

The elements of a trust are: (1) Parties (2) Trust property (trust estate or subject matter of the trust)

KINDS OF TRUSTS

The kinds of trusts are: (1) EXPRESS one created by the direct and positive acts of the parties by writing
deed, will or by words evidencing an intention to create a trust. It is shown by the intention of the trustor or the
parties. No particular form is required (2) IMPLIED one created by operation of law. The KINDS OF
IMPLIED TRUSTS ARE (1) Resulting trust where a person makes or causes to be made a disposition of
property under circumstances which raise an inference that he does not intend the person holding or taking the
property to have beneficial interest. (Article 1448) (2) Constructive trust imposed where a person holding title
to property is subject to an equitable duty to convey to another on the ground that he could be unjustly enriched
if he were permitted to retain it (Art. 1447-1456). AS DISTINGUISHED FROM SOLUTIO INDEBITI where
something is received when there is no right to demand it or is unduly delivered through mistake or there is a
payment by reason of mistake in the construction or application of a doubtful or difficult question of law,
TITLE DOES NOT PASS, IN A CONSTRUCTIVE TRUST, TITLE PASSES.

APPLICATION OF LAWS

Note that the principles of the general law of trusts, insofar as they are not inconsistent with the Civil Code, the
Code of Commerce, the Rules of Court and special laws are hereby adopted (Article 1442). We may also draw
freely from United States or United Kingdom precedents.

FORM OF EXPRESS TRUSTS

No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly
intended (Article 1444). Consequently, an express trust is created by the direct and positive acts of the parties as
manifested by some writing or deed or will, or by words evidencing an intention to create a trust.
BUT no express trust concerning an immovable or any interest therein may be proven by parol evidence
(Article 1443) HOWEVER, if the trust be IMPLIED, it can be proven by parol evidence (Article 1457)

PAROL EVIDENCE if terms of an agreement has been reduced to writing, it is considered as containing all
such terms, thus, as between parties and their successors no terms other than the writing is allowed, EXCEPT
37
(a) mistake is of fact (b) mistake is common or mutual to both, and (c) evidence of the mistake is clear and
convincing

HENCE, as far as express trusts are concerned, there is no specified form. The trust may be constituted orally or
in written form, HOWEVER, (1) if an express trust is over an immovable it must be written to be enforceable
BUT ONLY FOR ENFORCEABILITY NOT FOR VALIDITY as the law does not so preclude the creation of
an express trust orally. This article can thus be considered as part of the statute of frauds (2) by implication, if
the subject is a movable, it may be constituted orally and if so, it is valid and enforceable

REQUISITES OF AN EXPRESS TRUST

The requisites of an express trust are:

(1) a competent trustor one who is capacitated to convey property

(2) a competent trustee one who can hold property and enter into contract.
NOTE: no trust shall fail because the trustee appointed declines the designation, unless the contrary appears in
the instrument creating the trust (Article 1445).
This applies even if trust is already subsisting or the trustee becomes incapacitated. The REASON being
that to permit it to fail would render nugatory or negate the trustors intention to create a trust. The primary
consideration being the dispositon of beneficial interest not the appointment of trustee. CONSEQUENTLY, a
court will have to appoint a trustee unless the terms of the document provide for the appointment of a
successor.

(3) a competent beneficiary one who is capacitated to receive gratuitously from the trustor (Note those
who cannot be donees and those who cannot be a legatee or devisee-Articles 739, 1027, 1028, NCC).
NOTE that the beneficiary is required to accept the trust to make the trust effective (Article 1446). The
acceptance may be EXPRESS OR IMPLIED OR PRESUMED only if no onerous condition is imposed on the
beneficiary, except if there is proof to the contrary or he did not accept

(4) Ascertainable trust res

(5)There must be present a clear and complete disposition of property ( Mindanao Development
Authority vs. CA 113 SCRA 429)

HOW IS A TRUST ADMINISTERED

A trust is to be administered in accordance with the provisions of Rule 98 of the Rules of Court, which requires
the trustee to (1) file a bond (2) render a true and clear account (3) make an inventory (4) manage and dispose of
the estate faithfully in accordance with the law and the terms of the trust agreement.

HOW ARE EXPRESS TRUSTS ENDED

An express trust is ended by (1) mutual agreement (2) expiration of the term (3) fulfillment or a resolutory
condition which extinguishes the obligation (4) recission or annulment (5) loss of the subject matter (6) order
of the court (7) merger (8) accomplishment of the purpose

38
EXAMPLES OF IMPLIED TRUSTS

The enumeration of implied trusts does not exclude those established by general law but the limitation laid
down in Article 1442 that it not be contrary to the Civil Code, Code of Commerce, Rules of Court, and Special
Laws shall be applicable ( Article 1447).

1. RESULTING TRUSTS

a. When property is sold and the legal estate is granted to one party but the price is paid by another for the
purpose of having beneficial interest over the property. Example: A buys property from B, but title is put in Cs
name. HOWEVER, if the title is conveyed to a child legitimate or illegitimate of the one paying the price, no
trust is implied, it being disputably presumed, that there is a gift in favor of the child (Article 1448). ALSO, a
document expressing a different intent does not create a trust. Example: A pays for a lot but title is put in Bs
name. If A is shown to have paid because he is paying B, there is no TRUST

b. When a donation is made to a person but it appears that although legal estate is transmitted to donee, he
nevertheless is either to have no beneficial interest or only part thereof (Article 1449). Example: Blind Trusts

c. When land passes by succession to any person and he causes legal title to be put in the name of another,
a trust is established by implication of law for the benefit of the true owner (Article 1451).

d. If two or more persons agree to purchase property and by common consent, legal title is taken in the
name of one if them for the benefit of all, a trust is created by force of law in favor of the others in proportion
to the interest of each requisites (Article 1452). Requisites are: (1) two or more agree to purchase (2) there is
consent that one should take title in his name (Nito vs. CA, 225 SCRA 251)

e. When property is conveyed to a person in RELIANCE upon his declared intention to held it
for, or transfer it to another, or the grantor, there is an implied trust in favor of the person whose
benefit is contemplated (Article 1453).

2. CONSTRUCTIVE TRUSTS

a. If the price of the property is loaned or paid by one person for the benefit of another and the conveyance
is made to the lender or payor to secure the payment of a debt, a trust arises by operation of law or favor of the
person to whom the money is loaned or for whom it is paid (Article 1450).

39
b. If an absolute conveyance is made in order to secure the performance of an obligation of the grantor
toward the grantee, a trust by virtue of law is established. If fulfillment of the obligation is offered by the
grantor when it becomes due, he may demand reconveyance of the property to him (Article 1454).

c. When any trustee, guardian or other person holding a fiduciary relationship uses trusts funds for the
purchase of property and causes the conveyance to be made to him, a trust is established by operation of law in
favor of the person to whom the funds belong (Article 1455).

d. If property is acquired through mistake or fraud, the person obtaining it is by force of law considered a
trustee of an implied trust for the benefit of the person from whom the property comes (Article 1456). If what is
concerned is the acquisition by fraud of an immovable, it cannot be acquired by prescription under Article1133.
As far as movables, if possessed through a crime, they can never be acquired through prescription by the
offender

CAN TRUSTEE ACQUIRE PROPERTY SUBJECT OF THE TRUST BY PRESCRIPTION

The trustee cannot acquire the property subject of the trust by prescription unless the trust has been repudiated.
The requisites of repudiation are: (1) the trustee has performed unequivocal acts amounting to the ouster of the
cestui que trust (2) the acts of repudiation are made known to the cestui que trust (3) the evidence of repudiation
are clear and conclusive (VALDEZ vs. OLARGA , 51 SCRA 571)

RELATED JURISPRUDENCE

1. An action for reconveyance of a parcel of land based on an implied/constructive trust prescribes in 10

years from registration of the deed/issuance of title. This applies only when the person seeking reconveyance is
not in actual possession as the action for reconveyance is actually an action to quiet title which does not
prescribe. (SEE: HEIRS OF OLVIGA vs. CA 227 SCRA 330, VDA DE CABRERA vs. CA 267 SCRA
339, MANANGAN vs. CA, G.R. 115794, June 10, 1999)

2. A resulting trust is imprescriptable unless repudiated (OLACO vs CO CHO CHIL, 220 SCRA 656)

3. A buyer at auction sale to enforce a widows obligation holds the share of the other heirs in trust ( NOEL
vs. CA 240 SCRA 78)

4. Prescriptive period of 10 years from repudiation runs from the moment possession becomes adverse
( HUANG vs. CA 236 SCRA 420). Reconveyance of registered land based on an implied trust is 10 years
(ARMAMENTO vs. CB, 96 SCRA 178)

5. An action for reconveyance based on an implied or constructive trust prescribes in ten years from the
alleged fraudulent registration or date of issuance of a certificate of title (Crisostomo v. Garcia, Jr. 481 SCRA
402) See Pascual v CA, 409 SCRA 105, See also Sps. Alfredo v Sps. Borras, 404 SCRA 145

Resulting trust is presumed to have been contemplated by the parties, the intention as to which is to be found in
the nature of their transaction but not expressed in the deed itself. A constructive trust is created, not by any
word evincing a direct intention to create a trust, but by operation of law in order to satisfy the demands of
justice and to prevent unjust enrichment.

40
An implied trust was created in favor of respondent when petitioners transferred the properties to their names in
violation of the trust placed in them as overseers. (Bejoc vs. Cabreros, 464 SCRA 78)

[1]
Lim v Saban, 447 SCRA 232

legal title to mean registered ownership and equitable title to mean beneficial ownership.

41