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MANUEL S.

ENVERGA UNIVERSITY FOUNDATION


College of Law
Lucena City, Province of Quezon

A STUDY GUIDE ON AGENCY


TRUSTS, PARTNERSHIPS, JOINT VENTURES
AND CORPORATIONS

Atty. Jose Maria B. Duhaylongsod


TABLE OF CONTENTS
Table of Contents.................................................................................................................... i
Preliminary Matters ............................................................................................................. vii
Part One: Agency .................................................................................................................. xi
Section One ............................................................................................................................. 1
1. NATURE AND OBJECT OF AGENCY ....................................................................................................................1
1.1. Definition (Art. 1868) And Parties to a Contract of Agency ..................................................................... 1
1.2. Root and Objectives of Agency (Arts. 1317 and 1403[1]) .......................................................................... 1
1.3. Elements of the Contract of Agency.............................................................................................................. 1
1.3.1. Consent (Arts. 1317 and 1403[1]) ........................................................................................................................... 2
1.3.2. Subject Matter: Service - Execution of Juridical Acts in Behalf of Principal..................................................... 2
i) Consideration: Agency Presumed to Be for Compensation, Unless There Is Proof to the Contrary (Art.
1875) ........................................................................................................................................................................................ 2
ii) Unless There Is Proof to the Contrary (Art. 1875) ................................................................................................. 2
1.4. Essential Characteristics of Agency ................................................................................................................ 2
1.4.1. Nominate and Principal ............................................................................................................................................. 2
1.4.2. Unilateral and Primarily Onerous (Art. 1875) ....................................................................................................... 3
1.4.3. Consensual (Arts. 1869 and 1870)............................................................................................................................ 3
1.4.4. Preparatory, Representative and Derivative (Art. 1868) ....................................................................................... 3
1.4.5. Personal, Fiduciary and Revocable .......................................................................................................................... 4
1.5. Distinguished from Other Similar Contracts ................................................................................................ 5
1.5.1. From Employment Contract .................................................................................................................................... 5
1.5.2. From Contract for a Piece-of-Work ........................................................................................................................ 5
1.5.3. From Broker ................................................................................................................................................................ 5
1.5.4. From Sale ..................................................................................................................................................................... 7
Section Two ........................................................................................................................... 8
2. FORMS AND KINDS OF AGENCY ........................................................................................................................ 8
2.1. How Agency May Be Constituted (Art. 1869) .............................................................................................. 8
2.1.1. From Side of the Principal (Art. 1869) .................................................................................................................... 8
2.1.2. From Side of the Agent (Arts. 1870, 1871 and 1872) ........................................................................................... 8
2.1.3. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922) ....................................................... 8
2.2. Kinds of Agency ................................................................................................................................................ 9
2.2.1. Based on Business or Transactions Encompassed (Art. 1876) .......................................................................... 9
2.2.2. Whether It Covers Legal Matters ............................................................................................................................. 9
2.2.3. Whether It Covers Acts of Administration or Acts of Dominion: ―Powers of Attorney‖ ...........................10
2.2.4. Cases Where Special Powers of Attorney Are Necessary (Art. 1878) ..............................................................11
2.2.5. Notarized Power of Attorney .................................................................................................................................16
Section Three ........................................................................................................................ 18
3. POWERS AND OBLIGATIONS OF THE AGENT ................................................................................................... 18
3.1. General Obligation of Agent Who Accepts the Agency (Art. 1884) ...................................................... 18
3.1.1. Upon Acceptance of Appointment: Agent Is Bound to Carry on Agency to Its Completion and for the
Benefit of Principal .............................................................................................................................................................18
3.1.2. In Event of Death of Principal: Agent Must Finish Business Already Begun Should Delay Entail Any
Danger (Art. 1884) ..............................................................................................................................................................18
3.2. Obligation of Agent Who Declines Agency (Arts. 1885, 1929)............................................................... 19
3.2.1. Goods Are Forwarded to Him ...............................................................................................................................19
3.3. General Rule on Exercise of Power ............................................................................................................. 19
3.3.1. Agent Must Act ―Within the Scope of His Authority‖ (Art. 1881) ..................................................................19
3.3.2. Authority of Agent Not Deemed Exceeded If Performed in a Manner More Advantageous to Principal
(Art. 1882) ............................................................................................................................................................................19
3.3.3. Effects of Non-Ratified Acts Done by Agent in Excess of His Authority: Unenforceable, Not Void
(Arts. 1317, 1403 and 1898) ...............................................................................................................................................20
3.3.4. Consequences When Agent Acts in His Own Name (Art. 1883) .....................................................................20
3.4. Specific Obligation Rules for Agents ........................................................................................................... 22
3.4.1. No Obligation to Advance Funds (Art. 1886): ....................................................................................................22
3.4.2. Shall Carry Out Agency in Accordance with Principal‘s Instructions (Art. 1887) ..........................................22
3.4.3. Obligation Not Carry Out Agency If Execution Would Manifestly Result in Loss or Damage to Principal
(Art. 1888) ............................................................................................................................................................................22
3.4.4. Duty of Loyalty: Obligation in a Conflict of Interest Situation (Art. 1889) ....................................................23
3.4.5. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890) .................................................................23
3.4.6. Obligation of Agent to Render Account (Art. 1891) ..........................................................................................23
3.4.7. Liability of Agent for Interest (Art. 1896) .............................................................................................................24
3.4.8. Duty of Diligence: Agent Liable for Fraud and Negligence (Arts. 1884 and 1909) .......................................25
3.5. When Agent Appoints a Substitute (Art. 1892).......................................................................................... 25

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3.5.1. General Rule: Agent Must Act Himself, But May Appoint a Not-Prohibited Substitute .............................25
3.5.2. Effects When Agent Appoints a Substitute: .........................................................................................................25
3.5.3. All Acts of Substitute Appointed Against Principal‘s Prohibition Are Void (as Against the Principal) .....26
3.5.4. Rights of Principal Against Substitute (Art. 1893) ...............................................................................................26
3.6. Rule on Liability When Two or More Agents Appointed by the Same Principal................................. 26
3.6.1. Responsibility of Two or More Agents Not Solidary (Art. 1894) .....................................................................26
3.6.2. Where Two or More Agents Agree to Be Solidarily Bound (Art. 1895) ..........................................................27
3.7. Rule on Liability to Third Parties: Agent Not Bound to Third Party (Art. 1897) ................................ 27
3.7.1. Principal Is the One Bound ....................................................................................................................................27
3.7.2. Except When Agent: ................................................................................................................................................28
3.7.3. Agent Is Criminally Liable for Crime Committed in the Pursuit of the Agency ............................................30
3.7.4. Agent‘s Written Power of Attorney, Insofar as Concerns Third Persons, Governs on Questions Whether
Agent Acted Within Scope of Authority Even if it Exceeds Authority According to Understanding Between
Principal and Agent (Art. 1900) ........................................................................................................................................30
3.7.5. Third Person Cannot Set-up Facts of Agent‘s Exceeding Authority Where Principal Ratified or Signified
Willingness to Ratify Agent‘s Acts (Art. 1901) ...............................................................................................................32
3.8. Obligations of Commission Agents ............................................................................................................. 32
3.8.1. Commission Agent Responsible for Goods Received According to Terms and Conditions and as
Described in Consignment (Art. 1903) ............................................................................................................................32
3.8.2. Obligation in Handling Various Goods for Different Owners (Art. 1904): ....................................................32
3.8.3. He Cannot Sell on Credit Without Principal‘s Consent (Art. 1905); otherwise: Considered as Cash Sales32
3.8.4. When With Principal‘s Authority to Sell on Credit: (Art. 1906) ........................................................................32
3.8.5. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907) ...........................................32
3.8.6. Liability for Failure to Collect Principal‘s Credit When Due (Art. 1908) ........................................................32
Section Four .......................................................................................................................... 33
4. OBLIGATIONS OF THE PRINCIPAL .................................................................................................................. 33
4.1. Binding Effect on Principal of Contracts Made by the Agent ................................................................. 33
4.1.1. Must be done in the name of the Principal ..........................................................................................................33
4.1.2. When Done Within Agent‘s Scope of Authority: Principal Bound (Art. 1897) ..............................................33
4.1.3. When Done Outside of Agent‘s Authority: Principal Not Bound (Art. 1910) ...............................................33
4.1.4. Exceptions .................................................................................................................................................................34
4.2. Obligations of the Principal ........................................................................................................................... 38
4.2.1. Obligation to Pay Agent‘s Compensation (Art. 1875) ........................................................................................38
4.2.2. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912) .............................................38
4.2.3. Obligation to Indemnify Agent for Damages (Art. 1913) ..................................................................................38
4.2.4. Right to Retain Object of Agency in Pledge for Advances and Damages (Art. 1914)...................................39
4.3. Two or More Principals to Agent Appointed for Common Transactions (Art. 1915) ........................ 39
4.3.1. Obligation of the Principals Is Solidary Because of Their Common Interest .................................................39
4.3.2. Compare Art. 1894: Two or More Agents with One Principal – Agent‘s Obligation Is Solidary ................39
4.3.3. Right of Each Principal to Revoke Authority of Common Agent (Art. 1925) ...............................................39
4.4. Rights of Persons Who Contracted for Same Thing, One With Principal and the Other With Agent
(Art. 1916) ................................................................................................................................................................ 39
4.5. Liability of Principal and Agent to Third Persons Whose Contract Must Be Rejected Pursuant to
Art. 1916 (Art. 1917) .............................................................................................................................................. 39
4.6. Liability of Principal to Third Persons for Acts of the Agent‘s Employees .......................................... 39
Section Five........................................................................................................................... 40
5. EXTINGUISHMENT OF AGENCY ...................................................................................................................... 40
5.1. How and When Agency Extinguished (Art. 1919) .................................................................................... 40
5.1.1. By Principal‘s Revocation of Agency (Express or Implied) ...............................................................................40
5.1.2. By Agent‘s Withdrawal from Agency ....................................................................................................................40
5.1.3. By Death, Civil Interdiction, Insanity or Insolvency of the Principal or the Agent .......................................40
5.1.4. By Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency.........................................40
5.1.5. By the Accomplishment of the Object or Purpose of Agency ..........................................................................40
5.1.6. By the Expiration of the Period for Which Agency Was Constituted..............................................................40
5.2. Express Revocation: The Principal May Revoke an ―Agency at Will‖ ................................................... 40
5.2.1. In Which Case, Principal May Compel Agent to Return the Document Evidencing the Agency (Art.
1920) ......................................................................................................................................................................................40
5.2.2. Right of Either Two or More Principals to Revoke ............................................................................................40
5.3. Implied Revocation ......................................................................................................................................... 40
5.3.1. Appointment of New Agent for Same Business/Transaction (Art. 1923) ......................................................40
5.3.2. When Principal Directly Manages Business Entrusted to Agent (Art. 1924) ..................................................41
5.3.3. General Power of Attorney Is Revoked by a Special One Granted to Another Agent, As Regards the
Special Matter Involved in the Latter (Art. 1926) ..........................................................................................................41
5.4. Cases of Irrevocable Agencies (Art. 1927): ................................................................................................. 42
5.4.1. When a Bilateral Contract Depends on It.............................................................................................................42
5.4.2. When It Is the Means of Fulfilling an Obligation Already Contracted ............................................................42
5.4.3. Unjustified Removal of Managing Partner – Revocation Needs the Vote of Controlling Partners (Art.

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1800) ......................................................................................................................................................................................43
5.5. Effects of Revocation on Third Parties ....................................................................................................... 44
5.5.1. When It Affects Dealing with Specified Third Parties (Art. 1921) ...................................................................44
5.5.2. Revocation of Agent‘s General Powers Effective Against Third Persons (Art. 1922) ..................................44
5.6. Right of Agent to Withdraw (Resign) from Agency (Art. 1928) ............................................................. 45
5.6.1. By Giving Due Notice to Principal ........................................................................................................................45
5.6.2. Agent to Indemnify Principal Should Be Suffer Any Damage ..........................................................................45
5.6.3. Unless Withdrawal Is Due to Impossibility of Continuing Agency Without Grave Detriment to Agent ..45
5.6.4. Agent‘s Obligation to Act Even After Withdrawing From Agency (Art. 1929) .............................................45
5.7. Death of the Principal Extinguishes the Agency (Arts. 1919[3], 1931) .................................................. 45
5.7.1. When the Agency Continues Despite Death of Principal (Art. 1930):.............................................................46
5.7.2. Effect of Acts Done by Agent Without Knowledge of Principal‘s Death (Art. 1931) ..................................46
5.8. Death of the Agent Extinguishes the Agency............................................................................................. 46
5.8.1. Obligation of Agent‘s Heirs in Case of Agent‘s Death (Art. 1932): .................................................................46
Part Two: Trusts ...................................................................................................................47
Section Six............................................................................................................................. 48
6. NATURE AND CLASSIFICATION OF TRUSTS ................................................................................................... 48
6.1. Definition and Essential Characteristic of Trust (Art. 1440) ................................................................... 48
6.1.1. Based on Equity (Common-law) (Art. 1442) ......................................................................................................48
6.1.2. Distinguished from Agency ....................................................................................................................................48
6.2. Kinds of Trust: (a) Express Trusts; and (b) Implied Trusts (Art. 1441) ................................................ 49
Section Seven ........................................................................................................................ 50
7. EXPRESS TRUSTS ........................................................................................................................................... 50
7.1. Essence and Definition of Express Trusts .................................................................................................. 50
7.1.1. Essentially Contractual in Nature; Need No Particular Wordings (Art. 1444) ...............................................50
7.1.2. Based on Property Relationship, Where Legal Title Is Held By One, and the Equitable or Beneficial Title
Is Held by Another (65 Corpus Juris 212) ......................................................................................................................51
7.1.3. Unilateral and Primarily Onerous (can be Gratuitous) .......................................................................................51
7.1.4. Fiduciary .....................................................................................................................................................................51
7.2. Express Trust Must Be Proven ..................................................................................................................... 51
7.3. Kinds of Express Trust .................................................................................................................................. 52
7.3.1. Express Trust Involving Immovable (Art. 1443) ...............................................................................................52
7.3.2. Contractual/Intervivos Trust..................................................................................................................................53
7.3.3. Testamentary Trust ..................................................................................................................................................53
7.3.4. Pension or Retirement Trusts .................................................................................................................................53
7.3.5. Charitable Trusts.......................................................................................................................................................54
7.4. Parties to an Express Trust ............................................................................................................................ 54
7.4.1. The Trustor ...............................................................................................................................................................54
7.4.2. The Trustee ...............................................................................................................................................................54
7.4.3. Beneficiary (Arts. 1440 and 1446) .........................................................................................................................54
7.4.4. The Corpus or the Res .............................................................................................................................................55
7.5. How Express Trust Terminated ................................................................................................................... 55
7.5.1. Where the Trust Fails ...............................................................................................................................................55
7.5.2. Upon the Death of Trustee .....................................................................................................................................55
7.5.3. Generally Express Trusts Not Susceptible to Prescription ................................................................................55
Section Eight ........................................................................................................................ 57
8. IMPLIED TRUSTS............................................................................................................................................ 57
8.1. Listing of Implied Trusts Not Exclusive: Founded on Equity (Art. 1447)............................................ 57
8.1.1. Resulting Trusts ........................................................................................................................................................58
8.1.2. Constructive Trusts ..................................................................................................................................................58
8.1.3. Distinction Between Resulting Trust and Constructive Trust ...........................................................................59
8.1.4. How to Prove Implied Trust (Art. 1457) ..............................................................................................................60
8.1.5. Distinguished from Quasi-Contracts.....................................................................................................................60
8.2. Purchase of Property Where Beneficial Title in One Person, But Price Paid by Another Person (Art.
1448).......................................................................................................................................................................... 60
8.3. Purchase of Property Where Title Is Placed in the Name of Person Who Loaned the Purchase Price
(Art. 1450) – Equitable Mortgage ........................................................................................................................ 61
8.4. When Absolute Conveyance of Property Effected Only as a Means to Secure Performance of
Obligation of the Grantor (Art. 1454) – Equitable Mortgage ......................................................................... 61
8.5. Several Persons Jointly Purchase Property, Places Title In One of Them (Art. 1452) ....................... 61
8.6. Property Conveyed to Person Merely as Holder Thereof (Art. 1453)................................................... 61
8.7. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449) .......................... 62
8.8. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451). ......................................... 62
8.9. When Trust Fund Used to Purchase Property Which Is Registered in Trustee‘s Name (Art. 1455) 62
8.10. Constructive Trusts: When Property is Acquired Through Mistake or Fraud (Art. 1456) ............. 62

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8.10.1. Comparison and Contrast .....................................................................................................................................64
8.11. Does Implied Trust Prescribe or May It Be Defeated by Laches? ........................................................ 65
8.11.1. Recent Cases............................................................................................................................................................65
8.11.2. Old Cases .................................................................................................................................................................66
Part Three: Partnerships .......................................................................................................69
Section Nine ......................................................................................................................... 70
9. HISTORICAL BACKGROUND OF THE LAW ON PARTHERSHIPS ...................................................................... 70
9.1. Old Branches of Partnership Law ................................................................................................................ 70
9.1.1. Civil Partnerships: not pursued in mercantile manner, non-habitual or ―not pursued in the regular course
of business‖ ..........................................................................................................................................................................70
9.1.2. Commercial Partnerships: in pursuit of industry or commerce; characterized by habituality or ―in the
regular pursuit of business‖ ...............................................................................................................................................70
Section Ten ........................................................................................................................... 72
10. THE PARTNERSHIP IN GENERAL ................................................................................................................. 72
10.1. Nature and Attributes ................................................................................................................................... 72
10.1.1. Partnerships in General .........................................................................................................................................72
10.1.2. Essential Attributes Of The Partnership ............................................................................................................72
10.1.3. Securities and Exchange Commission .................................................................................................................73
10.2. Essential Elements of Partnerships ............................................................................................................ 73
10.2.1. Essential Elements and Purpose of the Partnership (as a Contract) ..............................................................73
10.2.2. Particular Rules on Testing Perfected Partnership (Art. 1769)........................................................................73
10.2.3. Essential Characteristics of the Contract of Partnership (Art. 1767) .............................................................76
10.2.4. The Partnership as a Juridical Person (Articles 44(3), 45, 1768 And 1784) .................................................77
10.3. Formalities Required For The Contract Of Partnership......................................................................... 78
10.3.1. Commencement and Form Required (Arts. 1771 and 1784) ...........................................................................78
10.3.2. Registration Requirements ....................................................................................................................................78
10.3.3. Legal Value of the Formal Requirements for Partnerships ..............................................................................79
10.3.4. Other Rules on the Constitution of a Partnership ............................................................................................80
Section Eleven ...................................................................................................................... 81
11. THE PARTNERSHIP AND THE PARTNERS ...................................................................................................... 81
11.1. Kinds of Partnerships ................................................................................................................................... 81
11.2. Compared with Other business media....................................................................................................... 81
11.3. Kinds of Partners .......................................................................................................................................... 83
11.3.1. General and Limited Partners...............................................................................................................................83
11.3.2. Industrial and Capitalist Partners .........................................................................................................................83
11.3.3. Ostensible, Nominal and Dormant Partners......................................................................................................83
11.3.4. Original and Incoming Partners ...........................................................................................................................83
11.3.5. Managing and Liquidating Partners .....................................................................................................................83
11.3.6. Retiring, Surviving and Continuing Partners ......................................................................................................83
11.4. Property Rights Of Partners ........................................................................................................................ 83
11.4.1. Rights to Specific Partnership Property (Arts. 1810 and 1811) .......................................................................83
11.4.2. Mutual Agency: Right to Participate in Management of the Partnership ......................................................83
11.4.3. Equity Interest In The Partnership Venture (Arts. 1810 and 1812) ..............................................................85
11.4.4. Other Proprietary Rights Of Partners .................................................................................................................85
11.5. Obligations Of Partners To The Partnership ........................................................................................... 85
11.5.1. Obligation to Contribute to the Common Fund (Arts. 1786) ........................................................................85
11.5.2. Recovery of Demandable Sums (Art. 1792) .......................................................................................................86
11.5.3. Receiving Partnership Credits (Art. 1793) ..........................................................................................................86
11.5.4. As to Third Persons Dealing with the Partnership ...........................................................................................86
11.6. Fiduciary Duties Of Partners....................................................................................................................... 86
11.6.1. Duty Of Diligence (Art. 1794)..............................................................................................................................86
11.6.2. Duty To Account (Art. 1807) ..............................................................................................................................86
11.6.3. Duty Of Loyalty......................................................................................................................................................86
11.7. Partners‘ Unlimited Liability ........................................................................................................................ 87
11.8. Relations and Dealings with Third Persons .............................................................................................. 87
Section Twelve ...................................................................................................................... 88
12. DISSOLUTION, WINDING UP AND TERMINATION ........................................................................................ 88
12.1. Nature and Effects of Dissolution ............................................................................................................. 88
12.1.1. Different from Termination .................................................................................................................................88
12.1.2. As to the Relationship of the Partners (Arts. 1828 and 1832) .........................................................................88
12.1.3. On the Partnership Itself (Art. 1829) .................................................................................................................88
12.1.4. On the Authority of the Partners (Arts. 1832, 1833 and 1834) .......................................................................88
12.1.5. On the Liabilities of the Partners (Art. 1835).....................................................................................................88
12.2. Types (Causes) of Dissolution (Arts. 1830 and 1840) ............................................................................ 89
12.2.1. Non-Judicial Dissolution (Arts. 1830, 1833, and 1840[1]) ...............................................................................89

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12.2.2. Judicial Dissolution (Arts. 1770 and 1831) ........................................................................................................90
12.3. Winding-up of the Partnership Business Enterprise ............................................................................... 90
12.3.1. Definition and Nature............................................................................................................................................90
12.3.2. Effects of Winding Up ..........................................................................................................................................90
Section Thirteen .................................................................................................................... 93
13. LIMITED PARTNERSHIPS ............................................................................................................................. 93
13.1. Origin, Concept and Purpose (Art. 1843) ................................................................................................ 93
13.2. Formation and Statutory Requirements .................................................................................................... 93
13.2.1. Requirements for Formation (Arts. 1844 and 1867) .........................................................................................93
13.2.2. Sworn Certificate of Limited Partnership Filed with SEC (Art. 1845)..........................................................93
13.2.3. Doctrine of Substantial Compliance (Art. 1844, last par.) ...............................................................................93
13.2.4. Effects of Failure to Comply with Registration Requirements .......................................................................93
13.2.5. Effects of False Statement in Certificate (Art. 1847) .......................................................................................94
13.2.6. Amendment of Certificate (Arts. 1864 and 1865) ............................................................................................94
13.3. Rights, Powers, Restrictions and Liabilities on Partners ......................................................................... 94
13.3.1. General Partner (Art. 1850) .................................................................................................................................94
13.3.2. Limited Partners at Formation (Arts. 1848, 1851, 1854) .................................................................................94
13.3.3. Limited Partners (Art. 1855) ................................................................................................................................94
13.3.4. Liability of One Believing Himself to Be Limited Partner (Art. 1852) ..........................................................94
13.3.5. General Partner Also as Limited Partner (Art. 1853) ......................................................................................94
13.4. Dissolution and Winding-Up ...................................................................................................................... 94
13.4.1. Causes Affecting the General Partner (Art. 1860)............................................................................................94
13.4.2. Causes Pertaining to the Limited Partner (Arts. 1861 and 1864) ....................................................................94
13.4.3. Dealings of Limited Partners with Partnership Affairs. ...................................................................................94
13.4.4. Application of a Creditor of Limited Partner (Art. 1862) ................................................................................94
13.4.5. Settlement of Accounts (Art. 1863) .....................................................................................................................94
Part Four: Joint Ventures ......................................................................................................95
Section Fourteen ................................................................................................................... 96
14. JOINT VENTURES ......................................................................................................................................... 96
14.1. Background .................................................................................................................................................... 96
14.2. Joint Ventures Are a Species of Partnership ............................................................................................. 96
14.3. Joint Venture Agreement (JVA) Must Be Construed and Enforced as a Contract Between and
Among Co-Venturers ............................................................................................................................................. 96
14.4. Types of Joint Venture Arrangements ....................................................................................................... 97
14.4.1. Informal or Contractual JV Arrangement Without a Separate Firm ..............................................................97
14.4.2. As a Form of Partnership to Pursue the Enterprise as a Firm ........................................................................97
14.4.3. Through a Joint Venture Corporation ................................................................................................................98
14.4.4. Revised Guidelines and Procedures for Entering into Joint Venture (JV) Agreement Between
Government and Private Entities Per Section 8 of E.O. 423 (NEDA Circular approved on 03 May 2013) .......98
14.5. Tax Recognition and Treatment of Joint Ventures ................................................................................. 99
Part Five: Corporations ....................................................................................................... 100
Section Fifteen .................................................................................................................... 101
15. HISTORICAL BACKGROUND.......................................................................................................................... 101
15.1. ......................................................................................................................................................................... 101
Section Sixteen .................................................................................................................... 102
16. KEY CONCEPTS ............................................................................................................................................ 102
16.1. Definition (Sec. 2; Articles 44(3), 45, 46, and 1775, Civil Code) ........................................................ 102
16.2. Four (4) Corporate Attributes Based on Section 2 ................................................................................ 102
16.2.1. ................................................................................................................................................................................. 102
16.3. ―Tri-Level Existence‖ of the Corporation .............................................................................................. 102
16.4. ―Tri-Level Relationships‖ Involved in a Corporate Setting ................................................................. 102
16.5. Theories on the Formation of Corporation ............................................................................................ 103
16.5.1. Theory of Concession ......................................................................................................................................... 103
16.5.2. Theory of Enterprise Entity............................................................................................................................... 103
16.6. Advantages and Disadvantages of Corporate Form .............................................................................. 103
16.6.1. Advantages ........................................................................................................................................................... 103
16.6.2. Disadvantages ...................................................................................................................................................... 105
16.7. Compared With Other Business Media ................................................................................................... 105
16.7.1. ................................................................................................................................................................................. 105
Section Seventeen ............................................................................................................... 107
17. NATURE AND ATTRIBUTES OF A CORPORATION ......................................................................................... 107
17.1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution) .................... 107
17.2. Corporation as a Person ............................................................................................................................. 107

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17.3. Practice of Profession ................................................................................................................................. 108
17.4. Liability for Torts ........................................................................................................................................ 108
17.5. Corporate Criminal Liability (Articles 102 and 103, Revised Penal Code) ....................................... 109
17.6. Recovery of Moral and Other Damages .................................................................................................. 110
17.7. Corporate Nationality ................................................................................................................................. 110
17.7.1. Generally: Under whose laws it is incorporated (Sec. 123) ........................................................................... 110
17.7.2. Exception: ―Test of Controlling Ownership‖ ................................................................................................. 110
17.7.2.1. Exploitation of Natural Resources (Sec. 140; Sec. 2, Art. XII, 1987 Constitution) ......................111
17.7.2.2. Ownership of Private Land (Sec. 7, Art. XII, 1987 Constitution) ...................................................111
17.7.2.3. Public Utilities (Sec. 11, Art. XII, Constitution) .................................................................................111
17.7.2.4. Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution) .....................................................................112
17.7.2.5. Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution) ....................................................112
17.7.3. War-Time Test. .................................................................................................................................................... 112
17.7.4. Investment Test as to ―Philippine Nationals‖ (Sec. 3[a] & [b], R.A. 7042, Foreign Investments Act of
1992) ................................................................................................................................................................................... 112
17.7.5. Grandfather Rule ................................................................................................................................................. 112
17.7.6. Special Classifications (Sec. 140) ....................................................................................................................... 112
Section Eighteen ................................................................................................................. 113
18. NATURE AND ATTRIBUTES OF A CORPORATION ......................................... ERROR! BOOKMARK NOT DEFINED.
18.1. ...................................................................................................................... Error! Bookmark not defined.
18.2. ...................................................................................................................... Error! Bookmark not defined.
19. SEPRATE JURIDICAL PERSONALITY AND PIERCING THE VEIL ..................................................................... 113
20. CLASSIFICATION OF CORPORATIONS .......................................................................................................... 113
21. ARTICLES OF INCORPORATION ................................................................................................................... 124
22. BY-LAWS ...................................................................................................................................................... 127
23. CORPORATE POWERS AND AUTHORITY ....................................................................................................... 127
24. DIRECTORS, TRUSTEES AND OFFICERS........................................................................................................ 127
25. RIGHTS OF STOCKHOLDERS AND MEMBERS ................................................................................................ 127
26. SHARES OF STOCK........................................................................................................................................ 127
27. CAPITAL STRUCTURE ................................................................................................................................... 127
28. ACQUISITIONS, MERGERS AND CONSOLIDATIONS ....................................................................................... 127
29. REHABILITATION AND INSOLVENCY........................................................................................................... 127
30. CORPORATE DISSOLUTION AND LIQUIDATION ........................................................................................... 127
31. CLOSE CORPORATIONS ................................................................................................................................ 127
32. NON-STOCK CORPORATIONS AND FOUNDATIONS....................................................................................... 127
33. FOREIGN CORPORATIONS ........................................................................................................................... 127
34. PENALTY PROVISIONS OF THE CODE .......................................................................................................... 127
35. MISCELLANEOUS ......................................................................................................................................... 127
36. CORPORATIONS .......................................................................................................................................... 127

vi MSEUF- LAW (1st Semester)


MSEUF-CBA (2nd Semester)
MANUEL S. ENVERGA UNIVERSITY FOUNDATION
College of Law
Lucena City, Province of Quezon

A Study Guide on Agency


Trusts and Partnerships
Atty. Jose Maria B. Duhaylongsod

PRELIMINARY MATTERS

COURSE DESCRIPTION:

This course presents an in-depth study of the nature, kinds, and effects of Agency, Trusts and
Partnerships as defined by the Civil Code of the Philippines, 1 but will also use other related legal
provisions and cases decided by the Supreme Court for a proper understanding of the foregoing
concepts and development of the skills to apply these in real-life scenarios. The lessons shall be
presented in the manner organized herein, which is designed to provide the students with an
overview of the relevant laws and the Philippine legal system aimed to guide them in the study of
principles relating to the subject matter, by exposing them to relevant primary and secondary
materials and facilitating discussions on the application of the foregoing upon actual or hypothetical
cases. Lastly, and perhaps most import of all, the subject matter is cumulative by nature; thus, each
lesson is necessarily integrated unto the next, culminating in a comprehensive final exam.

REFERENCES:

Mandatory:

Students are expected to have copies of Republic Act No. 386 (1950) otherwise known as ―Civil
Code of the Philippines‖ at all times during class. They are also required to have with them
respective copies the this Study Guide, the laws, cases and readings assigned herein, as well as other
material declared to be mandatory by the professor during the course. Copies of which may be
found online at the following sites:

Publisher Web Address


Supreme Court of the Philippines http://sc.judiciary.gov.ph/jurisprudence/
Arellano Law Foundation (Lawphil Project) http://www.lawphil.net/judjuris/judjuris.html
Chan Robles Virtual Law Library http://www.chanrobles.com/cralawscdecisions.htm
PhilippineLaw.info http://philippinelaw.info/jurisprudence/index.html
Securities and Exchange Commission http://www.sec.gov.ph/

These sites are not in any way exclusive. There are others, depending on the resourcefulness of


‘11 J.D., second honors, Ateneo Law School; ‘07 A.B. POS., Ateneo de Manila University
JMBD: Transcribed, encoded and edited by by the aforesaid. This is principally patterned, essentially based on and lifted
from the Outline of Chairman Cesar L. Villanueva (Governance Commission for Government Owned or Controlled
Corporations) in collaboration with Atty. Jose U. Cochingyan III [VILLANUEVA & COCHINGYAN SYLLABUS] as used in
the Ateneo Law School – the contents were partially rearranged and slightly edited to suit the students‘ needs for purely
educational purposes. Ultimately, while personal input has been added, this work is modelled to preserve the essence of
the original. For the purpose of making this a bit shorter and up to date, there are some areas which were rearranged and
paraphrased, while some of the examples, citations and illegible portions were entirely omitted. Other materials were also
incorporated to supplement the existing content. Note that this Study Guide is NOT FOR SALE, is meant purely for
educational purposes only and is legally sanctioned by the Intellectual Property Code, specifically under the FAIR USE
DOCTRINE. Absolutely no infringement is intended. Lastly, as the law is a discipline that is never static, this Study
Guide will always remain ―a work in progress.‖ See also VILLANUEVA, Cesar L., COMMERCIAL LAW REVIEW (2013) and
NON-CORPORATE MEDIA OF DOING BUSINESS: AGENCY, TRUSTS, PARTNERSHIPS & JOINT VENTURES (2011); cf DE
LEON, Hector S., COMMENTS AND CASES ON PARTNERSHIP, AGENCY AND TRUSTS.
1 REPUBLIC ACT NO. 386 ―The Civil Code of the Philippines‖ (1950)

JMBD: For ease of reference, unless otherwise specified, the provisions, designated as ―Art or Article,‖ herein cited
refer to the Civil Code of the Philippines.

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June 2015 (update October 2015)

students, which may be additional sources.

Optional:

The professor does not prescribe a single textbook; but should the students desire, they may use any
of the available literature on the subject to aid them in understanding the lessons. However, it
should be understood that the latter, as they are merely optional references, shall not be invoked as
basis for exemption from reading the mandatory ones.

BASICS ON STUDYING THE LAW:

First. Read the legal provision very well. Your goal is to be able to understand what it means
without resort to outside material.

In analyzing the legal provisions, two things are your primary concerns: a) Coverage; and, b)
Exemptions. You have to find out what the requirements are for the said law to be applicable on
one hand, and, on the other, the instances where, despite the presence of the requirements, the law
would not find application. For example:

―The right of the people, including those employed in the public and private sectors, to
form unions, associations, or societies for purposes not contrary to law shall not be
abridged.”2

What does this mean? Coverage and Exemption need the answers to the following: who, what,
when, where, how and why. Once you find out, then you have determined coverage. However, take
note that sometimes, you do not need to answer all of these in a single provision. There as instances
that because of the nature of the law as a whole, the questions are already answered, i.e., General
Banking Law – Who: Banks. Going back, as to ―who,‖ it is obvious that it is answered by the phrase
―people…including those employed public and private sectors‖ The remaining questions are
answered by ―right to form unions…not contrary to law shall not be abridged‖ But again, what do
these words even mean? This will be up to the student to discover.

Second. Read the cases on the matter. There are times when a legal provision may lead to more
than one interpretation. This is where disputes arise and these are decided by Judicial Bodies with
the Supreme Court at the apex. Once a case is ruled upon by the Supreme Court, it then becomes
part of the law of the land, which means that the interpretation made is the correct way the law
should be understood. Thus,

“Judicial decisions applying or interpreting the laws or the Constitution shall form a part
of the legal system of the Philippines.” 3

Third. Read the legal commentaries/annotations on the subject. However, this is optional only. The
said writings are merely aimed to complement your understanding and supplement your knowledge
on the matter. These books often cite cases decided by the Supreme Court in the course of
explaining the legal provisions. So, if your have done the second part of this guide, then this step will
become, at best, a validation of what you already know. The only time these readings will be able to
become truly useful is when the author annotates/comments on a disputable provision of law that
has yet to be challenged or invoked in court.

Fourth. Read the reviewers on the specific legal field. Again, this is optional. The value of these
books is that they often present requirements, requisites, conditions et cetera in a manner that is
broken down or enumerated already. This is because these books are exactly as their name suggests
– reviewers – meaning, the author presumes that you have already gone through the initial steps in
studying the law. The aim to simply aid the reader in memorization and recall.

2 PHIL. CONST. Art. III, sec. 8


3 CIVIL CODE, Article 8

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June 2015 (update October 2015)

Fifth. At the end of your study, you should be able to explain the provisions, with ease, to the
professor, your parents, the jeepney/tricycle driver and any other person who asks. Otherwise, you
need to go back to the first step and repeat the process until you are able to do so.

NATURE OF THIS STUDY GUIDE:

First. It must be emphasized that this merely guides the Students on what to read and how to read
them. This does not purport to be a comprehensive body of knowledge for the subject matter. And
in this regard, the Supreme Court has declared that:

“[a]n attorney-at-law is not expected to know all the law. For an honest mistake or error,
an attorney is not liable. Chief Justice Abbott said that, no attorney is bound to know all
the law; God forbid that it should be imagined that an attorney or a counsel, or even a
judge, is bound to know all the law.”4

What is important is that the students are pointed to the right direction, or at the very least, they are
guided on where to begin their study.

Second. We are studying the Law and Cases - not the books, nor the reviewers. Students therefore
are expected to have read and understood the Law and Cases to an extent that they will be able to
cite such when questioned by the professor. As mentioned, books and reviewers may be used to
complement or supplement their readings, but these will not be accepted as substitutes for the
mandatory references.

Third. The recitation and exam questions are generally not lifted from the examples in this study
guide. It cannot be overly emphasized that, these are meant to test the level of recall, knowledge and
understanding of the lessons, not to measure the ability to ―parrot‖ what is written. Again, the study
guide, as well as the principles herein espoused, are merely foundations and guideposts in the study
of law. Therefore, nobody should expect that recitation and exam questions be identical to those in
the study guide.

OTHER TIPS ON THE COURSE:

RECITATION:

Generally. Ordinarily, students will be called to recite at a maximum of four (4) times during the
semester: Twice prior to the Midterm Examination and another set before the Final Examination.
However, if the person currently reciting cannot answer satisfactorily, the professor reserves the
right to call upon those people who have already recited. As such, everybody is expected to have
read and comprehended all the assigned provisions and cases. Recitation does not involve merely
repeating what was read, as students are not expected to simply ―parrot‖ the readings. It must
involve a deeper understanding of the concepts which is gained through research, case analysis and
well-placed pertinent questions directed to the professor in the course of the discussions. As the
professor expects everyone to be ready to recite at all times, understanding must first come from the
students‘ own initiative. The lectures are only to complement any points which were initially unclear
and to supplement that which they already presumed to know.

Cases. Students have to keep in mind that decisions of the Supreme Court come as a result of the
exercise of judicial power, which ―includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the Government‖5 and ―[a] judgment or final order
determining the merits of the case shall be in writing personally and directly prepared by the judge,
stating clearly and distinctly the facts and the law on which it is based, signed by him, and filed with

4
Paguia v. Molina, A.C. No. 9881, 04 June 2014 see also Mendoza v. Mercado, A.M. No. 1484, 19 June 1980; In Re: The
Complaint Against Attorney Anacleto Filart, 27 September 1919
5 PHIL. CONST. Art. VIII, sec. 1

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the clerk of the court.‖6

As such, these are often, but not always, presented by the Ponente or the writer of the opinion of the
Court in a logical and concise manner. In the simplest of terms cases may be broken down as
follows:

Facts – Issue/s – Judgment and Ratio Decidendi

Given this, students must learn how to determine the ultimate facts in order to lay the basis for the
issues. This means that he or she must be able to narrate the chain of events that led to the filing of
the case and state the factual basis of the parties‘ legal positions. On the other hand, the issue/s
is/are the point/s of contention to be resolved or the legal question/s to be answered. It often starts
with ―whether or not‖ in the cases and it is from this point that the judgment is introduced. The
latter often presents the answer to the issue first and follows with the Ratio Decidendi, which is where
the legal bases of the answer are set forth.

ESSAY EXAMS:

Students must remember that answering questions does not only rely on the merit of the answer
itself, but is affected as well by the manner by which it is delivered – indeed, it is not just what you
say, but also how you say it.

In order to aid students, a simple formula is being adopted: Answer, Legal Basis, Application and
Conclusion or ALAC. Thus,

(A) No, petitioner is incorrect. Private respondent is a Filipino National.

(L) According to Sec. 123 of the corporation code, ―a foreign corporation is one formed, organized
or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country or state,‖ meaning if a corporation is
incorporated under the laws of the Philippines, then it is deemed a Filipino National.

(A) In the facts presented, the Corporation is a holder of a Certificate of Incorporation from the
Securities and Exchange Commission. Therefore, it is clear that private respondent was incorporated
under Philippine Law, more particularly, by virtue of the Corporation Code or Batas Blg. 68. The
presence of incorporators and subscribers of foreign descent is generally irrelevant to the nationality
of a juridical person such as a corporation. Absent and exeptional circustances, it does not matter
who had caused the incorporation - what is important is the exact place where it took place.

(C) Therefore, contrary to the assertions of petitioner and as proven by the facts presented, under
sec. 123 of the corporation code private respondent is clearly a Filipino National.

-- GOOD LUCK!! --

6 1997 RULES OF CIVIL PROCEDURE, Rule 36 sec. 1; see also PHIL. CONST. Art. VIII, sec. 14 (―No decision shall be
rendered by any court without expressing therein clearly and distinctly the facts and the law on which it is based.‖)

x MSEUF- LAW (1st Semester)


MSEUF-CBA (2nd Semester)
MANUEL S. ENVERGA UNIVERSITY FOUNDATION
College of Law
Lucena City, Province of Quezon

PART ONE: AGENCY

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SECTION ONE
“Agency is basically personal, representative, and derivative in nature. The authority of
the agent to act emanates from the powers granted to him by his principal; his act is the
act of the principal if done within the scope of the authority. Qui facit per alium facit se.
„He who acts through another acts himself.‟”7

1. NATURE AND OBJECT OF AGENCY

1.1. DEFINITION (ART. 1868) AND PARTIES TO A CONTRACT OF AGENCY

DEFINITION. Under Article 1868 of the Civil Code, a contract of agency is one whereby ―a person
binds himself to render some service or to do something in representation or on behalf of another,
with the consent or authority of the latter.‖ 8

PARTIES. The Spanish term for ―principal‖ is ―mandante‖; and among the terms used for ―agent‖ are
―mandatario‖, ―factor‖, ―attorney-in-fact‖, ―proxy‖, ―delegate‖ or ―representative.‖

1.2. ROOT AND OBJECTIVES OF AGENCY (ARTS. 1317 AND 1403[1])

REPRESENTATION IS THE OBJECTIVE. The right of inspection given to a stockholder under the
law can be exercised either by himself or by an attorney-in-fact, and either with or without the
attendance of the stockholder. This is in conformity with the general rule that what a man may do in
person he may do through another.9

SAME. The purpose of every contract of agency is the ability, by legal fiction, to extend the personality
of the principal through the facility of the agent; but the same can only be effected with the consent
of the principal.10

LEASE IS NOT AGENCY. Where a common carrier leases the trucks of another common carrier
there can be no contract of agency between them, for there is no representation by one with respect
to the other and neither was there any authority to represent the other by the terms of the
arrangements.11

1.3. ELEMENTS OF THE CONTRACT OF AGENCY

ELEMENTS OF AGENCY. The following are the essential elements of the contract of agency: a) Consent,
express or implied, of the parties to establish the relationship; b) Object, which is the execution of a
juridical act in relation to third parties; c) The agent acts as a representative and not for himself; and,
d) The agent acts within the scope of his authority. 12 READ: Rallos v. Felix Go Chan & Sons
Realty Corp., G.R. No. L-24332, 81 SCRA 251, 31 January 1978

Whether or not an agency has been created is determined by the fact that one is representing and
acting for another. The law makes no presumption of agency; proving its existence, nature and

7
Spouses Viloria v. Continental Airlines, Inc., G.R. No. 188288, 16 January 2012
8 See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Dominion Insurance Corp. v. Court of Appeals, 376
SCRA 239 (2002); Republic v. Evangelista, 466 SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006);
Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
9
Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919).
10
Orient Air Service & Hotel Representatives v. Court of Appeals, 197 SCRA 645 (1991).
11
Loadmasters Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011).
12 Reiterated in Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 (2000); Manila Memorial Park

Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584
(2007); Loadmasters Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011); Urban Bank, Inc. v. Pena,
659 418 (2011); Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011); Villoria v. Continental Airlines, Inc.,
663 SCRA 57 (2012).

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extent is incumbent upon the person alleging it. Urban Bank, Inc. v. Peña, 659 SCRA 418 (2011).

There is no principal-agent relationship between an establishment and the security guards assigned
by the security company to guard its premises because there is no power of representation. The
security guards are the employees of the security agency; consequently, the establishment cannot be
held liable for the negligence committed by the security guards causing loss to third parties. Mamaril
v. Boy Scouts of the Philippines, 688 SCRA 437 (2013).

1.3.1. Consent (Arts. 1317 and 1403[1])

The basis for agency is representation; on the part of the principal, there must be an actual intention
to appoint or an intention naturally inferable from his words or actions; and on the part of the agent,
there must be an intention to accept the appointment and act on it; in the absence of such intent,
there is no agency. Dominion Insurance Corp. v. CA, 376 SCRA 239 (2002).13

1.3.2. Subject Matter: Service - Execution of Juridical Acts in Behalf of Principal

It is clear from Art. 1868 that the basis of agency is representation. . . .One factor which most clearly
distinguishes agency from other legal concepts is control; one person - the agent - agrees to act under
the control or direction of another - the principal. Indeed, the very word "agency" has come to
connote control by the principal. Victorias Milling Co. v. CA, 333 SCRA 663 (2000).14

In an agent-principal relationship, the personality of the principal is extended through the facility of
the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all
acts which the latter would have him do. Such a relationship can only be effected with the consent
of the principal, which must not, in any way, be compelled by law or by any court. Litonjua, Jr. v.
Eternit Corp., 490 SCRA 204 (2006).

i) Consideration: Agency Presumed to Be for Compensation,


Unless There Is Proof to the Contrary (Art. 1875)

Old Civil Code: The service rendered by the agent was deemed to be gratuitous, apart from the
occupation of some of the house of the deceased by the plaintiff and his family; for if it were true
that the agent and the principal had an understanding to the effect that the agent was to receive
compensation aside from the use and occupation of the houses of the deceased, it cannot be
explained how the agent could have rendered services as he did for eight years without receiving and
claiming any compensation from the deceased. xAguña v. Larena, 57 Phil 630 (1932).

Prescinding from the principle that the terms of the contract of agency constituted the law between
the principal and the agent, then the mere fact that ―other agents‖ intervened in the consummation
of the sale and were paid their respective commissions could not vary the terms of the contract of
agency with the plaintiff of a 5% commission based on the selling price. De Castro v. Court of Appeals,
384 SCRA 607 (2002).

ii) Unless There Is Proof to the Contrary (Art. 1875)

1.4. ESSENTIAL CHARACTERISTICS OF AGENCY

1.4.1. Nominate and Principal

Act done by one person in behalf of another is in its essential nature one of agency – it will be an
agency whether the parties understood the exact nature of the relation or not. Doles v. Angeles, 492
SCRA 607 (2006).

13Urban Bank, Inc. v. Peña, 659 SCRA 418 (2011).


14Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005).

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Even when the Agreement provides that the agency manager is considered an independent
contractor and not an agent, nonetheless when the agency manager is expressly authorized to solicit
and remit offers to purchase interments spaces, it covers an agency arrangement since the agency
manager represented the interest of the memorial company. Manila Memorial Park Cemetery, Inc. v.
Linsangan, 443 SCRA 377 (2004).

1.4.2. Unilateral15 and Primarily Onerous (Art. 1875)

Agency is presumed to be for compensation. When an agent performs services for a principal at the
latter's request, the law will normally imply a promise on the part of the principal to pay for the
reasonable worth of those services; principal‘s intent to compensate the agent for services
performed will be inferred from the principal's request for the agent‘s service. Urban Bank, Inc. v.
Peña, 659 SCRA 418 (2011).

1.4.3. Consensual (Arts. 1869 and 1870)

An agency may be expressed or implied from the act of the principal, from his silence or lack of
action, or failure to repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

The basis for agency is representation. Where there is no showing that Brigida consented to the acts
of Deganos or authorized him to act on her behalf, much less with respect to the particular
transactions involved, then any attempt to foist liability on respondents-spouses through the
supposed agency relation with Deganos is groundless and ill-advised. It was grossly and inexcusably
negligent of petitioners to entrust to Deganos, not once or twice but on at least six occasions as
evidenced by six receipts, several pieces of jewelry of substantial value without requiring a written
authorization from his alleged principal. A person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. READ: Bordador v. Luz, G.R. No. 130148,
283 SCRA 374, 15 December 1997

The basis for agency is representation and a person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. A co-owner does not become an agent of
the other co-owners, and any exercise of an option to buy a piece of land transacted with one co-
owner does not bind the other co-owners of the land. The most prudent thing the purported buyer
should have done was to ascertain the extent of the authority said co-owner; being negligent in this
regard, he cannot seek relief on the basis of a supposed agency. Dizon v. CA, 302 SCRA 288 (1999).

1.4.4. Preparatory, Representative and Derivative (Art. 1868)

Agency is basically personal, representative, and derivative in nature. The authority of the agent to
act emanates from the powers granted to him by his principal; his act is the act of the principal if
done within the scope of the authority. Qui facit per alium facit per se. ―He who acts through another acts
himself.‖ READ: Rallos v. Felix Go Chan & Sons Realty Corp., G.R. No. L-24332, 81 SCRA
251, 31 January 1978.

The essence of agency being the representation of another, it is evident that the obligations
contracted are for and on behalf of the principal—the principal is liable for the acts of his agent
performed within the limits of his authority. Tan v. Engineering Services, 498 SCRA 93 (2006).
15 A unilateral contract has been defined as ―A contract in which one party makes a promise or undertakes a
performance.‖ Thus, it was observed that ―[M]any unilateral contacts are in reality gratuitous promises enforced for
good reason with no element of bargain.‖ [BLACK‘S LAW DICTIONARY 326 (1990)] It is perhaps in this sense that agency
is unilateral because it is the agent who undertakes the performance of the agency. However, one must not forget that
agency is still a contract with a bilateral character. Manresa explains: ―As regards whether the agency has a unilateral or
bilateral character, it is evident, in our considered opinion, from the point of view of the Code, that the totality of cases
involving agency will always be bilateral, not because, as one ordinarily supposes, there will be obligations exclusively for
the agent and rights exclusively for the principal. It is clear that at times it happens this way, but what is common in
agency with other contracts is the mutuality and the reciprocity that arises from the existence of an obligation against
another obligation, a right against another right.‖ 11 MANRESA. COMENTARIOS AL CODIGO CIVIL ESPAÑOL 443 (1950)

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In a situation where two agents enter into a contract of behalf of their principals, even if the
principals do not actually and personally know each other, such ignorance does not affect their
juridical standing as agents, especially since the very purpose of agency is to extent the personality of
the principal through the facility of the agent. Doles v. Angeles, 492 SCRA 607 (2006).

It is said that the underlying principle of the contract of agency is to accomplish results by using the
services of others—to do a great variety of things. Its aim is to extent the personality of the principal
or the party for whom another acts and from whom he or she derives the authority to act. Westmont
Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011).

PRINCIPLES FLOWING FROM AGENCY CHARACTERISTICS OF “PREPARATORY AND


REPRESENTATIVE” (ART. 1897). In an agency, the principal‘s personality is extended through the
facility of the agent—the agent, by legal fiction, becomes the principal, authorized to perform all acts
which the latter would have him do. Such a relationship can only be effected with the consent of the
principal, which must not, in any way, be compelled by law or by any court. The Agreement itself
between the parties states that ―either party may terminate the Agreement without cause by giving
the other 30 days‘ notice by letter, telegram or cable.‖ READ: Orient Air Services v. Court of
Appeals, G.R. No. 76931, 197 SCRA 645, 29 May 1991.16

SAME. It is said that the basis of agency is representation, that is, the agent acts for and on behalf of
the principal on matters within the scope of his authority and said acts have the same legal effect as
if they were personally executed by the principal. By this legal fiction, the actual or real absence of
the principal is converted into his legal or juridical presence – qui facit per alium facit per se. READ:
Eurotech Industrial Technologies, Inc. v. Cuizon, G.R. No. 167552, 521 SCRA 584, 23 April
2007.17

THE OTHER CONSEQUENCES OF THE “DOCTRINE OF REPRESENTATION.” Notice to the agent


should always be construed as notice binding on the principal, even when in fact the principal never
became aware thereof. Air France v. CA, 126 SCRA 448 (1983).

SAME. Art. 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally
liable to the party with whom he contracts; it is the principal who is liable on the contracts of the
agent. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

SAME. When an agent purchases the property in bad faith, the principal is deemed a purchaser in
bad faith. Caram, Jr. v. Laureta, 103 SCRA 7 (1981).

SAME. The basis for agency is representation and a person dealing with an agent is put upon inquiry
and must discover upon his peril the authority of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil
Co., Inc., 355 SCRA 559 (2001).

1.4.5. Personal, Fiduciary and Revocable

The relations of an agent to his principal are fiduciary and in regard to the property forming the
subject matter of the agency, he is estopped from acquiring or asserting a title adverse to that of the
principal. Severino v. Severino, 44 Phil. 343 (1923).

By reason of the personal, representative and derivative nature of agency, agency is extinguished by the
death of the principal or agent. Rallos v. Felix Go Chan & Sons Realty, 81 SCRA 251 (1978).

A contract of agency is generally revocable as it is a personal contract of representation based on


trust and confidence reposed by the principal on his agent. As the power of the agent to act depends
on the will and license of the principal he represents, the power of the agent ceases when the will or

16Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Villoria v. Continental Airlines, Inc., 663 SCRA 57 (2012).
17Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

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permission is withdrawn by the principal. Thus, generally, the agency may be revoked by the principal at will.
Republic v. Evangelista, 466 SCRA 544 (2005).

1.5. DISTINGUISHED FROM OTHER SIMILAR CONTRACTS

1.5.1. From Employment Contract

The relationship between the corporation which owns and operates a theatre, and the security guard
it hires to maintain the peace and order at the entrance of the theatre is not that of principal and
agent, because the principle of representation was in no way involved. The security guard was not
employed to represent the defendant corporation in its dealings with third parties; he was a mere
employee hired to perform a certain specific duty or task, that of acting as special guard and staying
at the main entrance of the movie house to stop gate crashers and to maintain peace and order
within the premises. Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954).

The concept of a single person having the dual role of agent and employee while doing the same
task is a novel one in our jurisprudence, which must be viewed with caution especially when it is
devoid of any jurisprudential support or precedent. All these, read without any clear
understanding of fine legal distinctions, appear to speak of control by the insurance company over
its agents. They are, however, controls aimed only at specific results in undertaking an insurance
agency, and are, in fact, parameters set by law in defining an insurance agency and the attendant
duties and responsibilities an insurance agent must observe and undertake. They do not reach the
level of control into the means and manner of doing an assigned task that invariably characterizes an
employment relationship as defined by labor law. Tongko v. The Manufacturers Life Insurance Co. (Phils.),
Inc., 640 SCRA 395 (2011).

1.5.2. From Contract for a Piece-of-Work

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

1.5.3. From Broker

The question as to what constitutes a sale so as to entitle a real estate broker to his commissions is
extensively annotated in the case of Lunney vs. Healey (Nebraska) 44 Law Rep. Ann. 593, and the long
line of authorities there cited support the following rule: ―The business of a real estate broker or
agent, generally, is only to find a purchaser, and the settled rule as stated by the courts is that, in the
absence of an express contract between broker and his principal, the implication generally is that the
broker becomes entitled to the usual commissions whenever he brings to his principal a party who is
able and willing to take the property and enter into a valid contract upon the terms then named by
the principal, although the particulars may be arranged and the matter negotiated and completed
between the principal and the purchaser directly.‖ Macondray & Co. v. Sellner, 33 Phil. 370 (1916).

―The duties and liability of a broker to his employer are essentially those which an agent owes to his
principal. Consequently, the decisive legal provisions on determining whether a broker is mandated
to give to the employer the propina or gift received from the buyer would be Articles 1891 and 1909
of the Civil Code.‖ READ: Domingo v. Domingo, G.R. No. L-30573, 42 SCRA 131, 29
October 1971.

In agencies to sell where the entitlement of the commission is subject to the successful

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consummation of the sale with the buyer located by the agent, said agent would still be entitled to
the commission on sales consummated after the expiration of his agency when the facts show that
the agent was the ―efficient procuring cause in bringing about the sale‖. Pratts v. Court of Appeals, 81
SCRA 360 (1978); READ: Manotok Bros., Inc. v. Court of Appeals, G.R. No. 94753, 221 SCRA
224, 07 April 1993.

A broker is one who is engaged, for others, on a commission, negotiating contracts relative to
property with the custody of which he has no concern; the negotiator between the other parties,
never acting in his own name but in the name of those who employed him. His occupation is to
bring the parties together, in matter of trade, commerce or navigation. Schmid and Oberly, Inc. v. RJL
Martinez, 166 SCRA 493 (1988).

Where the purported agent was orally given authority to ―follow up‖ the purchase of the fire truck
with the municipal government, there is no authority to sell nor has the purported agent been
empowered to make a sale in behalf of the seller. Guardex v. NLRC, 191 SCRA 487 (1990).

When the terms of the agency arrangement is to the effect that entitlement to the commission was
contingent on the purchase by a customer of a fire truck, the implicit condition being that the agent
would earn the commission if he was instrumental in bringing the sale about. Since the agent had
nothing to do with the sale of the fire truck, and is not therefore entitled to any commission at all.
Guardex v. NLRC, 191 SCRA 487 (1990).

An agent receives a commission upon the successful conclusion of a sale. On the other hand, a
broker earns his pay merely by bringing the buyer and the seller together, even if no sale is eventually
made. (Obiter – the issue was whether it was an independent distributor of BMW cars in the Philippines) xHahn v.
Court of Appeals, 266 SCRA 537 (1997).

Although the ultimate buyer was introduced by the broker to the seller, nonetheless the broker was
not entitled to receive the commission even with the consummation of the sale because the lapse of
the period of more than one (1) year and five (5) months between the expiration of broker‘s
authority to sell and the consummation of the sale to the buyer, is significant index of the broker‘s
non-participation in the really critical events leading tot he consummation of said sale. Broker was
not the efficient procuring cause in bringing about the sale and therefore not entitled to the
stipulated broker‘s commission. READ: Inland Realty v. Court of Appeals, G.R. No. 76969, 273
SCRA 70, 09 June 1997.

An agent receives a commission upon the successful conclusion of a sale. On the other hand, a broker
earns his pay merely by bringing the buyer and the seller together, even if no sale is eventually made. READ:
Tan v. Gullas, G.R. No. 143978, 393 SCRA 334, 03 December 2002.

In relation thereto, we have held that the term ―procuring cause‖ in describing a broker‘s activity,
refers to a cause originating a series of events which, without break in their continuity, result in the
accomplishment of the prime objective of the employment of the broker—producing a purchaser
ready, willing and able to buy on the owner‘s terms. To be regarded as the ―procuring cause‖ of a
sale as to be entitled to a commission, a broker‘s efforts must have been the foundation on which
the negotiations resulting in a sale began. READ: Medrano v. Court of Appeals, G.R. No. 150678,
452 SCRA 77, 18 February 2005.18

A real estate broker is one who negotiates the sale of real properties. His business, generally speaking,
is only to find a purchaser who is willing to buy the land upon terms fixed by the owner. He has no
authority to bind the principal by signing a contract of sale. Indeed, an authority to find a purchaser
of real property does not include an authority to sell. READ: Litonjua, Jr. v. Eternit Corp., G.R.
No. 144805, 490 SCRA 204, 08 June 2006.

Since brokerage relationship is necessary a contract for the employment of an agent, principles of

18Reiterated in Phil. Healthcare Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008).

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contract law also govern the broker-principal relationship. xAbacus Securities Corp. v. Ampil, 483
SCRA 315 (2006).

1.5.4. From Sale

When the agreement compels the purported agent to pay for the products received from the
purported principal within the stipulated period, even when there has been no sale thereof to the
public, the underlying relationship is not one of contract of agency to sell, but one of actual sale. A
true agent does not assume personal responsibility for the payment of the price of the object of the
agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he
receives them from the buyer. Consequently, since the underlying agreement is not an agency
agreement, it cannot be revoked except for cause. xQuiroga v. Parsons, 38 Phil 502 (1918).

When under the agreement the purported agent becomes responsible for any changes in the
acquisition cost of the object he has been authorized to purchase from a supplier in the United
States, the underlying agreement is not an contract of agency to buy, since a true agent does not bear
any risk relating to the subject matter or the price. Being a contract of sale and not agency, any
profits realized by the purported agent from discounts received from the American supplier
pertained to it with no obligation to account for it, much less to turn it over, to the purported
principal. Gonzalo Puyat v. Arco, 72 Phil. 402 (1941).

The primordial difference between a sale and an agency to sell is the transfer of ownership or title
over the property subject of the contract. In an agency, the principal retains ownership and control
over the property and the agent merely acts on the principal's behalf and under his instructions in
furtherance of the objectives for which the agency was established. On the other hand, the contract
is clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of
title, control and ownership in such a way that the recipient may do with the property as he pleases.
Spouses Viloria v. Continental Airlines, Inc., 663 SCRA 57 (2012).

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SECTION TWO
“There are some provisions of law which require certain formalities for particular
contracts: the first is when the form is required for the validity of the contract; the second is
when it is required to make the contract effective as against third parties; and the third is
when the form is required for the purpose of proving the existence of the contract. A
contract of agency to sell on commission basis does not belong to any of these three
categories, hence it is valid and enforceable in whatever form in may be entered into.
Consequently, when the agent signs her signature on any face of the receipt showing that
she receives the jewelry for her to sell on commission, she is bound to the obligations of an
agent. The exact position of the agent‟s signature in the receipt (in this case near the
description of the goods and not on top of her printed name) is immaterial.”19

2. FORMS AND KINDS OF AGENCY

2.1. HOW AGENCY MAY BE CONSTITUTED (ART. 1869)

2.1.1. From Side of the Principal (Art. 1869)

When the buyers-a-retro failed for several years to clear their title to the property purchased and
allowed the seller-a-retro to remain in possession in spite of the expiration of the period of
redemption, then the execution of the memorandum of repurchase by the buyers‘ son-in-law, which
stood unrepudiated for many years, constituted an implied agency under Article 1869 of the Civil
Code, from their silence or lack of action, or their failure to repudiate the agency. Conde v. Court of
Appeals, 119 SCRA 245 (1982).

Where the principal has acquiesced in the act of his agent for a long period of time, and has received
and appropriated to his own use the benefits result in from the acts of his agent, courts cannot
declare the acts of the agent null and void. Linan v. Puno, 31 Phil. 259 (1915).

2.1.2. From Side of the Agent (Arts. 1870, 1871 and 1872)

2.1.3. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)

NOTE: From the perspective of third parties (i.e., strangers or non-parties to the principal-agent
relationship), the following should be kept in mind: a) Agency Is Not Presumed to Exist; and, b)
Rule When Third Parties Given Notice of Agency.

AGENCY IS NOT PRESUMED TO EXIST. One who alleges the existent of an agency relationship
must prove such fact for the law does not make presumption of agency and proving its existence,
nature and extent is incumbent upon the person alleging it. Yun Kwan Byung v. PAGCOR, 608 SCRA
107 (2009); Nevada v. Casuga, 668 SCRA 441 (2012).

SAME. Persons dealing with an assumed agent are bound at their peril, and if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon them to prove it. Country Bankers
Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).20

RULE WHEN THIRD PARTIES GIVEN NOTICE OF AGENCY. When the owner of a hotel/café
business allows a person to use the title ―managing agent‖ and allows such person to take charge of
the business during his prolonged absence, performing the duties usually entrusted to managing
agent, then such owner is bound by the act of such person. ―One who clothes another apparent
authority as his agent, and holds him out to the public as such, can not be permitted to deny the
authority of such person to act as his agent, to the prejudice of innocent third parties dealing with
19
Lim v. Court of Appeals, 254 SCRA 170 (1996)
20Woodschild Holdings, Inc. v. Roxas Electric and Construction Co., Inc., 436 SCRA 235 (2004); Manila Memorial Park
Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004); Umipig v. People, 677 SCRA 53 (2012);Recio v. Heirs of the
Spouses Altamirano, 702 SCRA 137 (2013).

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such person in good faith and in the following pre-assumptions or deductions, which the law
expressly directs to be made from particular facts, are deemed conclusive.‖ Macke v. Camps, 7 Phil
522 (1907).

SAME. A long-standing client can recover from the defendant-principal the goods sent goods to sell
on commission to the former agent of the defendant, when no previous notice of the termination
of agency was given to said client. Having given client a special invitation to deal with such agent, it
was the duty of the defendant on the termination of the relationship of principal and agent to give
due and timely notice thereof to the client; and failing to do so, defendant-principal is responsible to
client for whatever goods may have been in good faith and without negligence sent to the agent
without knowledge, actual or constructive, of the termination of such relationship. READ: Rallos v.
Yangco, G.R. No. 6906, 20 Phil 269, 27 September 1911.

SAME. When the law firm has allowed for quite a period the messenger of another office to receive
mails and correspondence on their behalf, an implied agency had been duly constituted, specially
when there is no showing that counsel had objected to such practice or took step to put a stop to it.
Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001).

2.2. KINDS OF AGENCY

2.2.1. Based on Business or Transactions Encompassed (Art. 1876)

NOTE: Generally, an agent may be classified as either: a) universal; b) general; or, c) special.

TYPES OF AGENTS, GENERALLLY. An agent may be (1) universal; (2) general, or (3) special. A
UNIVERSAL AGENT is one authorized to do all acts for his principal which can lawfully be delegated
to an agent; such an agent may be said to have universal authority. A GENERAL AGENT is one
authorized to do all acts pertaining to a business of a certain kind or at a particular place, or all acts
pertaining to a business of a particular class or series. He has usually authority either expressly
conferred in general terms or in effect made general by the usages, customs or nature of the business
which he is authorized to transact. An agent, therefore, who is empowered to transact all the
business of his principal of a particular kind or in a particular place, would for this reason, be
ordinarily deemed a general agent. A SPECIAL AGENT is one authorized to do some particular act or
to act upon some particular occasion; he acts usually in accordance with specific instructions or
under limitations necessarily implied from the nature of the act to be done. Siasat v. IAC, 139 SCRA
238 (1985).

SPECIAL OR PARTICULAR AGENCY. The right of an agent to indorse commercial paper (check) is a
very responsible power and will not be lightly inferred. A salesman with authority to collect money
for his principal does not have the implied authority to indorse checks received in payment. Any
person taking checks made payable to a corporation which can act only by agents does so at his peril,
and must abide by the consequence if the agent who indorses the same is without authority. Insular
Drug v. PNB, 58 Phil. 684 (1933).

2.2.2. Whether It Covers Legal Matters

NOTE: Under circumstances involving settlement of legal matters, an agent may either be: a)
Attorney-at-Law; and, b) Attorney-in-Fact.

ATTORNEY-AT-LAW. Only the employee, not his counsel, can impugn the consideration of the
compromise as being unconscionable. The relation of attorney and client is in many respects one of
agency, and the general rules of agency apply to such relation—the circumstances of this case
indicate that the employee‘s counsel acted beyond the scope of his authority in questioning the
compromise agreement. Although a client has undoubtedly the right to compromise a suit without
the intervention of his lawyer, the same cannot be done to defraud the lawyer of the earned
attorney‘s fees. J-Phil Marine, Inc. v. NLRC, 561 SCRA 675 (2008).

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SAME. An attorney cannot, without a client‘s authorization, settle the action or subject matter of the
litigation even when he believes that such a settlement will best serve his client‘s interest. Philippine
Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722 (2000).

ATTORNEY-IN-FACT. The relationship of attorney and client is in many respects one of agency, and
the general rules of agency apply to such relation. The acts of an agent are deemed the acts of the
principal only if the agent acts within the scope of his authority. Thus, when the lawyer files an
opposition to the compromise agreement that has been validly entered into by his client, he is acting
beyond the scope of his authority. TJ-Phil. Marine, Inc. v. NLRC, 561 SCRA 675 (2008).

2.2.3. Whether It Covers Acts of Administration or Acts of Dominion: “Powers of


Attorney”

NOTE: The following must be taken into account under this heading: a) Form of Powers of
Attorney; b) General Power of Attorney (Art. 1877); c) Special Power of Attorney (At. 1878); and, d)
Express Power of Attorney Excludes Powers of Administration (e.g., General Power of Attorney).

FORM OF POWERS OF ATTORNEY. In a case involving authority to act in barangay conciliation


cases covering an ejectment for failure to pay rentals: ―A power of attorney is an instrument in
writing by which one person, as principal, appoints another as his agent and confers upon him the
authority to perform certain specified acts or kinds of acts on behalf of the principal. The written
authorization itself is the power of attorney, and this is clearly indicated by the fact that it has also
been called a ―letter of attorney.‖ Wee v. De Castro, 562 SCRA 695 (2008).

SAME. The Letter dated January 16, 1996 relied upon by the petitioners was signed by respondent
Fernandez alone, without any authority from the respondents-owners. There is no actuation of
respondent Fernandez in connection with her dealings with the petitioners. As such, said letter is not
binding on the respondents as owners of the subject properties. READ: Litonjua v. Fernandez,
G.R. No. 148116, 427 SCRA 478, 14 April 2004.

SAME. It is a general rule that a power of attorney must be strictly construed; the instrument will be
held to grant only those powers that are specified, and the agent may neither go beyond nor deviate
from the power of attorney. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).

GENERAL POWER OF ATTORNEY (ART. 1877). Agency couched in general terms comprises only
acts of administration, even if the principal should state that he withholds no power or that the
agent may execute such acts as he may consider appropriate, or even though the agency should
authorize a general and unlimited management. Yoshizaki v. Joy Training Center of Aurora, Inc., 702
SCRA 631 (2013).

SAME. We stress that the power of administration does not include acts of disposition or
encumbrance, which are acts of strict ownership. As such, an authority to dispose cannot proceed
from an authority to administer, and vice versa, for the two powers may only be exercised by an agent
by following the provisions on agency of the Civil Code (from Article 1876 to Article 1878). READ:
Aggabao v. Parulan Jr., G.R. No. 165803, 629 SCRA 562, 01 September 2010.

SPECIAL POWER OF ATTORNEY (ART. 1878). Although a ―Special Power of Attorney‖ was issued
by the insurance company to its agency manager, it wordings show that it sought only to establish an
agency that comprises all the business of the principal within the designated locality, but couched in
general terms, and consequently was limited only to acts of administration. A general power permits
the agent to do all acts for which the law does not require a special power. Thus, the acts
enumerated in or similar to those enumerated in the ―Special Power of Attorney‖ (i.e., really a
general power of attorney) did not require a special power of attorney, and could only cover acts of
administration. READ: Dominion Insurance Corp. v. Court of Appeals, G.R. No. 129919, 376
SCRA 239, 06 February 2002.

SAME. Even when the title given to a deed is as a ―General Power of Attorney,‖ but its operative

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clause contains an authority to sell, it constituted the requisite special power of attorney to sell a
piece of land. ―Thus, there was no need to execute a separate and special power of attorney since the
general power of attorney had expressly authorized the agent or attorney in fact the power to sell the
subject property. The special power of attorney can be included in the general power when it is
specified therein the act or transaction for which the special power is required.‖ READ: Veloso v.
Court of Appeals, G.R. No. 102737, 260 SCRA 593, 21 August 1996.

SAME. When an agent has been given general control and management of the business, he is
deemed to have power to employ such agents and employees as are usual and necessary in the
conduct of the business, and needs no special power of attorney for such purpose. Yu Chuck v. “Kong
Li Po,‖ 46 Phil. 608 (1924).

SAME. An attorney-in-fact empowered to pay the debts of the principal and employ legal counsel to
defend the principal‘s interest, has certainly the implied power to pay on behalf of the principal the
attorney‘s fees charged by the lawyer. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
A co-owner who is made an attorney-in-fact, with the same power and authority to deal with the
property which the principal might or could have had if personally present, may adopt the usual legal
means to accomplish the object, including acceptance of service and engaging of legal counsel to
preserve the ownership and possession of the principal‘s property. Government of PI v. Wagner, 54 Phil.
132 (1929).

SAME. Contracts of agency and general powers of attorney, must be interpreted in accordance with
the language used by the parties. The real intention of the parties is primarily to be determined from
the language used. The intention is to be gathered from the whole instrument. In case of doubt,
resort must be had to the situation, surroundings, and relations of the parties. Whenever it is
possible, effect is to be given to every word or clause used by the parties. It is to be presumed that
the parties said what they intended to say and that they used each word or clause with sole purpose,
and that purpose is, if possible, to be ascertained and enforced. If the contract be open to two
constructions, one of which would while the other would overthrow it, the former is to be chosen.
If by one construction the contract would be illegal, and by another equally permissible construction
would be lawful, the latter must be adopted. The acts of the parties will be presumed to be done in
conformity with and not contrary to the intent of the contract. The meaning of general words must
be construed with reference to the specific object to be accomplished and limited by the recitals
made in reference to such object. Linan v. Puno, 31 Phil. 259 (1915).

EXPRESS POWER OF ATTORNEY EXCLUDES POWERS OF ADMINISTRATION (E.G., GENERAL


POWER OF ATTORNEY). The instrument which grants to the agent the power ―To follow-up, ask,
demand, collect and receipt for my benefit indemnities or sum due me relative to the sinking of M.V.
NEMOS in the vicinity of El Jadida, Casablanca, Morocco on the evening of February 17, 1986,‖ is
a special power of attorney, excludes any intent to grant a general power of attorney or to constitute
a universal agency. Being special powers of attorney, they must be strictly construed. The instrument
cannot be read to give power to the attorney-in-fact ―to obtain, receive, receipt from‖ the insurance
company the proceeds arising from the death of the seaman-insured, especially when the
commercial practice for group insurance of this nature is that it is the employer-policyholder who
took out the policy who is empowered to collect the proceeds on behalf of the covered insured or
their beneficiaries. READ: Pineda v. Court of Appeals, G.R. No. 105562, 226 SCRA 754, 27
September 1993.

2.2.4. Cases Where Special Powers of Attorney Are Necessary (Art. 1878)

NOTE: Under the ART. 1878 OF THE CIVIL CODE, the following incidents require a SPECIAL
POWER OF ATTORNEY: a) To Make Payments ―As Are Not Usually Considered as Acts of
Administration;‖ b) To Effect Novations Which Put an End to Obligations Already in Existence at
the Time the Agency Was Constituted; c) To Compromise, To Submit Questions to Arbitration, To
Renounce the Right to Appeal from a Judgment, To Waive Objections to the Venue of an Action,
or To Abandon a Prescription Already Acquired; d) To Waive Any Obligation Gratuitously; e) To
Enter Into Any Contract by Which the Ownership of an Immovable Is Transmitted or Acquired

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Either Gratuitously or for a Valuable Consideration [see also i) Sale of a Piece of Land or Interest
Therein (Art. 1874); ia) Corporate Sale of Land; ii) Agents Cannot Buy Property of Principal Unless
Authorized (Art. 1491[2])]; f) To Lease Real Property for More Than One Year; g) To Create or
Convey Real Rights over Immovable Property; h) To Make Gifts; i) To Loan or Borrow Money; j)
To Bind the Principal to Render Some Service Without Compensation; k) To Bind the Principal in a
Contract of Partnership; l) To Obligate the Principal as a Guarantor or Surety; m) To Accept or
Repudiate an Inheritance; and, n) To Ratify or Recognize Obligations Contracted Before the Agency.

TO MAKE PAYMENTS “AS ARE NOT USUALLY CONSIDERED AS ACTS OF ADMINISTRATION.” In


the case of the area manager of an insurance company, it was held that the payment of claims is not
an act of administration, and that since the settlement of claims was not included among the acts
enumerated in the Special Power of Attorney issued by the insurance company, nor is of a character
similar to the acts enumerated therein, then a special power of attorney was required before such
area manager could settle the insurance claims of the insured. Consequently, the amounts paid by
the area manager to settle such claims cannot be reimbursed from the principal insurance company.
READ: Dominion Insurance Corp. v. Court of Appeals, G.R. No. 129919, 376 SCRA 239, 06
February 2002.

NOTE: The power to compromise excludes the power to submit to arbitration. It would also be
reasonable to conclude that the power to submit to arbitration does not carry with it the power to
compromise. (Art. 1880)

TO COMPROMISE, TO SUBMIT QUESTIONS TO ARBITRATION, TO RENOUNCE THE RIGHT TO


APPEAL FROM A JUDGMENT, TO WAIVE OBJECTIONS TO THE VENUE OF AN ACTION, OR TO
ABANDON A PRESCRIPTION ALREADY ACQUIRED. When an agent has been empowered to sell
hemp in a foreign country, that express power carries with it the implied power to make and enter
into the usual and customary contract for its sale, which sale contract may provide for settlement of
issues by arbitration. ―We are clearly of the opinion that the contract in question is valid and binding
upon the defendant [principal], and that authority to make and enter into it for and on behalf of the
defendant [principal], but as a matter of fact the contract was legally ratified and approved by the
subsequent acts and conducts of the defendant [principal].‖ Robinson Fleming v. Cruz, 49 Phil 42
(1926).

SAME. True, said counsel asserted that he had verbal authority to compromise the case. The Rules,
however, require, for attorneys to compromise the litigation of their clients, a ―special authority‖
(Section 23, Rule 138, Rules of Court). And while the same does not state that the special authority
be in writing, the court has every reason to expect, that, if not in writing, the same be duly
established by evidence other than the self-serving assertion of counsel himself that such authority
was verbally given to him. For, authority to compromise cannot lightly be presumed. READ:
Home Insurance Co. v. USL, G.R. L-25593, 21 SCRA 863, 15 November 1967.

UNDER THE OLD CIVIL CODE. The power to bring suit in order to collect sums of money
accruing in the ordinary course of business ―as properly belonging to the class of acts described in
article 1713 of the Civil Code as acts of ‗strict ownership‘. It seems rather to be something which is
necessarily a part of the mere administration of such a business as that described in the instrument
in question and only incidentally, if at all, involving a power to dispose of the title to property.‖ [In
any event, the provision to ―exact the payment of sums of money ―by legal means‖ was construed to
be express power to sue.] Germann v. Donaldson, 1 Phil 63 (1901).

TO ENTER INTO ANY CONTRACT BY WHICH THE OWNERSHIP OF AN IMMOVABLE IS


TRANSMITTED OR ACQUIRED EITHER GRATUITOUSLY OR FOR A VALUABLE CONSIDERATION.
According to the provisions of Article 1874 on Agency, when the sale of a piece of land or any
interest therein is made through an agent, the authority of the latter shall be in writing. Absent this
requirement, the sale shall be void. Also, under Article 1878, a special power of attorney is necessary
in order for an agent to enter into a contract by which the ownership of an immovable property is
transmitted or acquired, either gratuitously or for a valuable consideration. READ: Estate of Lino
Olaguer v. Ongjoco, G.R. No. 173312, 563 SCRA 373, 26 August 2008.

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SAME. Article 1878 provides that a special power of attorney is necessary to enter into any contract
by which the ownership of an immovable is transmitted or acquired either gratuitously or for a
valuable consideration, or to create or convey real rights over immovable property, or for any other
act of strict dominion. Any sale of real property by one purporting to be the agent of the registered
owner without any authority therefore in writing from the said owner is null and void; declarations
of the agent alone are generally insufficient to establish the fact or extent of her authority.‖ READ:
Litonjua v. Fernandez, G.R. No. 148116, 427 SCRA 478, 14 April 2004.

SAME. The power expressly conferred on the agent to sell ―for such price or amount‖ is broad
enough to cover the exchange contemplated in the Deed of Assignment and Conveyance between
the properties and the corresponding corporate shares in a corporation, with the latter replacing the
cash equivalent of the option money initially agreed to be paid by the said corporation under the
Memorandum of Agreement. A special power of attorney to sell is sufficient to enable the agent to
make a binding commitment under the Deed of Assignment and Conveyance. Hernandez-Nievera v.
Hernandez, 642 SCRA 646 (2011).

SAME. SALE OF A PIECE OF LAND OR INTEREST THEREIN (ART. 1874). [Article 1874 and Aritcle
1875 (5) explicitly require a written authority when the sale of a piece of land is through an agent,
whether the sale is gratuitously or for a valuable consideration. Absent such authority in writing, the
sale is null and void. … In the case at bar, it is undisputed that the sale of the subject lots to Spouses
Bautista was void. Based on the records, Nasino had no written authority from Spouses Jalandoni to
sell the subject lots. The testimony of Eliseo that Nasino was empowered by a special power of
attorney to sell the subject lots was bereft of merit as the alleged special power attorney was neither
presented in court nor was it referred to in the deeds of absolute sale. Bare allegations,
unsubstantiated by evidence, are not equivalent to proof under the Rules of Court. READ:
Bautista v. Spouses Jalandoni, G.R. No. 171464, 27 November 2013

SAME. SAME. Where the nephew in his own name sold a parcel of land with a masonry house
constructed thereon to the company, when in fact it was property owned by the uncle, but in the
estafa case filed by the company against the nephew, the uncle swore under oath that he had
authorized his nephew to sell the property, the uncle can be compelled in the civil action to execute
the deed of sale covering the property. ―It having been proven at the trial that he gave his consent to
the said sale, it follows that the defendant conferred verbal, or at least implied, power of agency
upon his nephew Duran, who accepted it in the same way by selling the said property. The principal
must therefore fulfill all the obligations contracted by the agent, who acted within the scope of his
authority. (Arts. 1709, 1710 and 1727) READ: Gutierrez Hermanos v. Orense, G.R. No. L-9188,
28 Phil. 572, 04 December 1914.

SAME. SAME. When no particular formality is required by law, rules or regulation, then the principal
may appoint his agent in any form which might suit his convenience or that of the agent, in this case
a letter addressed to the agent requesting him to file a protest in behalf of the principal with the
Collector of Customs against the appraisement of the merchandise imported into the country by the
principal. Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).

SAME. SAME. A power of attorney to convey real property need not be in a public document, it
need only be in writing, since a private document is competent to create, transmit, modify, or
extinguish a right in real property. Jimenez v. Rabot, 38 Phil 378 (1918).
Under Sec. 335 of the Code of Civil Procedure, an agreement for the leasing for a longer period than
one year, or for the sale of real property, or of an interest therein, is invalid if made by the agent
unless the authority of the agent be in writing and subscribed by the party sought to be charged. Rio
y Olabbarrieta v.Yutec, 49 Phil 276 (1926).

SAME. SAME. The express mandate required by Article 1874 to enable an appointee of an agency
couched in general terms to sell must be one that expressly mentions a sale of a piece of land or that
includes a sale as a necessary ingredient of the act mentioned. The power of attorney need not
contain a specific description of the land to be sold, such that giving the agent the power to sell ―any

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or all tracts, lots, or parcels‖ of land belonging to the principal is adequate. Domingo v. Domingo, 42
SCRA 131 (1971).

SAME. SAME. Where the special power of attorney primarily empowered the agent of the
corporation to bring an ejectment case against the occupant and also ―to compromise . . . so far as it
shall protect the rights and interest of the corporation in the aforementioned lots,‖ and that the
agent did execute a compromise in the legal proceedings filed which sold the lots to the occupant,
the compromise agreement is void for the power to sale by way of compromise could not be
implied to protect the interests of the principal to secure possession of the properties. READ:
Cosmic Lumber v. Court of Appeals, G.R. No. 114311, 265 SCRA 168, 29 November 1996.

SAME. SAME. Article 1878 provides that in the sale of a parcel of land or any interest therein made
through an agent, a special power of attorney is essential; Article 1874 provides that such authority
must be in writing, otherwise the sale shall be void.‖ READ: Pineda v. Court of Appeals, G.R.
No. 127094, 376 SCRA 222, 06 February 2002.

SAME. SAME. Agency may be oral unless the law requires a specific form. However, to create or
convey real rights over immovable property, a special power of attorney is necessary. Thus, when a
sale of a piece of land or any portion thereof is through an agent, the authority of the latter shall be
in writing, otherwise, the sale shall be void. READ: Litonjua, Jr. v. Eternit Corp., G.R. No.
144805, 490 SCRA 204, 08 June 2006.21

SAME. SAME. Under Article 1878 of the Civil Code, a special power of attorney is necessary for an
agent to enter into a contract by which the ownership of an immovable property is transmitted or
acquired, either gratuitously or for a valuable consideration. Absence of a written authority to sell a
piece of land is ipso jure void, precisely to protect the interest of an unsuspecting owner from being
prejudiced by the unwarranted act of another. READ: Pahud v. Court of Appeals, G.R. No.
160346, 597 SCRA 13, 25 August 2009.

SAME. SAME. In sales involving real property or any interest therein, a written authority in favor of
the agent is necessary, otherwise the sale is void. As a general rule, a contract of agency may be oral.
However, it must be written when the law requires a specific form. Specifically, Article 1874 of the
Civil Code provides that the contract of agency must be written for the validity of the sale of a piece
of land or any interest therein. Otherwise, the sale shall be void. A related provision, Article 1878 of
the Civil Code, states that special powers of attorney are necessary to convey real rights over
immovable properties. READ: Yoshizaki v. Joy Training Center of Aurora, Inc., G.R. No.
174978, 702 SCRA 631, 31 July 2013).22

SAME. SAME. CORPORATE SALE OF LAND. When the sale of a piece of land or any interest therein
is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void.
The same situation applies when the sale of corporate piece of land is pursued through an officer
without written authority. READ: City-Lite Realty Corp. v. Court of Appeals, G.R. No. 138639,
325 SCRA 385, 10 February 2000.

SAME. SAME. SAME. When the corporation‘s primary purpose is to market, distribute, export and
import merchandise, the sale of land is not within the actual or apparent authority of the corporation
acting through its officers, much less when acting through the treasurer. Likewise, Arts. 1874 and
1878 require that when land is sold through an agent, the agent‘s authority must be in writing,
otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998).23

SAME. AGENTS CANNOT BUY PROPERTY OF PRINCIPAL UNLESS AUTHORIZED (ART. 1491[2]).

21
CLV: Notice that the article does not declare the agency to be void, but the resulting contract of sale effected by the
agent. Is the agency itself void?
22Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. v. Pajo-Reyes, 632 SCRA 400 (2010); Recio v. Heirs of

the Spouses Altamirano, 702 SCRA 137 (2013);


23AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev.

Corp., 414 SCRA 190 (2003).

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The prohibition against agents purchasing property in their hands for sale or management is,
however, clearly, not absolute. When so authorized by the principal, the agent is not disqualified
from purchasing the property he holds under a contract of agency to sell. Olaguer v. Purugganan, Jr.,
515 SCRA 460 (2007).

TO LEASE REAL PROPERTY FOR MORE THAN ONE YEAR. The lease of real property for more
than one year is considered not merely an act of administration but an act of strict dominion or of
ownership. A special power of attorney is thus necessary for its execution through an agent. Shopper‟s
Paradise Realty v. Roque, 419 SCRA 93 (2004).

SAME. Where the lease contract involves the lease of real property for a period of more than one
year, and it was entered into by the agent of the lessor and not the lessor herself, in such a case,
Article 1878 of the Civil Code requires that the agent be armed with a special power of attorney to
lease the premises. Consequently, the provisions of the contract of lease, including the grant therein
of an option to purchase to the lessee, would be unenforceable. Vda. De Chua v. IAC, 229 SCRA 99
(1994).

SAME. When the attorney-in-fact was empowered by his principal to make an assignment of credits,
rights, and interests, in payment of debts for professional serviced rendered by laws, and the hiring
of lawyers to take charge of any actions necessary or expedient for the interests of his principal, and
to defend suits brought against the principal, such powers necessarily implies the authority to pay for
the professional services thus engaged, which includes assignment of the judgment secured for the
principal in settlement of outstanding professional fees. Municipal Council of Iloilo v. Evangelista, 55 Phil.
290 (1930).

TO LOAN OR BORROW MONEY. A special power of attorney is necessary for an agent to borrow
money, unless it be urgent and indispensable for the preservation of the things which are under
administration. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).24 EXCEPT: The agent
may borrow money when it s urgent and indispensable for the preservation of the things which are
under administration. NOTE: Power to Sell Excludes Power to Mortgage and Vice Versa (Art.
1879)

SAME. It is a general rule in the law agency that, in order to bind the principal by a mortgage on real
property executed by an agent, it must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. Gozun v. Mercado 511 SCRA 305 (2006).

SAME. A power of attorney, like any other instrument, is to be construed according to the natural
import of its language; and the authority which the principal has conferred upon his agent is not to
be extended by implication beyond the natural and ordinary significance of the terms in which that
authority has been given. The attorney has only such authority as the principal has chosen to confer
upon him, and one dealing with him must ascertain at his own risk whether his acts will bind the
principal. Thus, where the power of attorney which vested the agent with authority ―for me and in
my name to sign, seal and execute, and as my act and deed, delivery any lease, any other deed for
conveying any real or personal property‖ or ―any other deed for the conveying of any real or
personal property,‖ it does not carry with it or imply that the agent for and on behalf of his principal
has the power to execute a promissory note or a mortgage to secure its payment. National Bank v.
Tan Ong Sze, 53 Phil. 451 (1929).

SAME. Where the power of attorney executed by the principal authorized the agent ―By means of a
mortgage of my real property, to borrow and lend sums in cash, at such interest and for such
periods and conditions as he may deem property and to collect or to pay the principal and interest
thereon when due,‖ while it did not authorize the agent to execute deeds of sale with right of
repurchase over the property of the principal, nonetheless would validate the main contract of loan
entered into with the deed of sale with right of repurchase constituting merely an equitable mortgage,
both contracts of which were within the scope of authority of the agent. Rodriguez v. Pamintuan and

24Gozun v. Mercado 511 SCRA 305 (2006).

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De Jesus, 37 Phil 876 (1918).

SAME. An SPA to mortgage real estate is limited to such authority to mortgage and does not bind
the grantor personally to other obligations contracted by the grantee (in this case the personal loan
obtained by the agent in his own name from the PNB) in the absence of any ratification or other
similar act that would estop the grantor from questioning or disowning such other obligations
contracted by the grantee. PNB v. Sta. Maria, 29 SCRA 303 (1969).

SAME. In other words, the power to mortgage does not include the power to obtain loans, especially
when the grantors allege that they had no benefit at all from the proceeds of the loan taken by the
agent in his own name from the bank. ―It is not unusual in family and business circles that one
would allow his property or an undivided share in real estate to be mortgaged by another as security,
either as an accommodation or for valuable consideration, but the grant of such authority does not
extend to assuming personal liability, much less solidary liability, for any loan secured by the grantee
in the absence of express authority so given by the grantor.‖ PNB v. Sta. Maria, 29 SCRA 303, 310
(1969).

SAME. The wife may not be held liable for the payment of the mortgage debt contracted by the
husband, where the power of attorney given to the husband was limited to a grant of authority to
mortgage land titled in the wife‘s name. De Villa v. Fabricante, 105 Phil. 672 (1959).

TO OBLIGATE THE PRINCIPAL AS A GUARANTOR OR SURETY. Where a power of attorney is


executed primarily to enable the attorney-in-fact, as manager of a mercantile business, to conduct its
affairs for and on behalf of the principal, who is the owner of the business, and to this end the
attorney-in-fact is authorized to execute contracts relating to the principal‘s property [―act and deed
delivery, any lease, or any other deed for the conveying any real or personal property‖ and ―act and
deed delivery, any lease, release, bargain, sale, assignment, conveyance or assurance, or any other
deed for the conveying any real or personal property‖] , such power will not be interpreted as giving
the attorney-in-fact power to bind the principal by a contract of independent guaranty or surety
unconnected with the conduct of the mercantile business. General words contained in such power
will not be interpreted to extend power to the making of a contract of suretyship, but will be limited,
under the well-know rule of construction indicated in the express in ejusdem generis, as applying to
matters similar to those particularly mentioned. Director v. Sing Juco, 53 Phil 205 (1929).

SAME. Our law mandates an agent to act within the scope of his authority (Art. 1881), which is what
appears in the written terms of the power of attorney granted upon him (Art. 1900) Under Article
1878(11) of the Civil Code, a special power of attorney is necessary to obligate the principal as a
guarantor or surety. Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

TO RATIFY OR RECOGNIZE OBLIGATIONS CONTRACTED BEFORE THE AGENCY. Where a wife


gave her husband a power of attorney ―to loan and borrow money‖ and to mortgage her property,
that fact does not carry with it or imply that he has a legal right to sign her name to a promissory
note which would make her liable for the payment of a pre-existing debt of the husband or that of
his firm, for which she was not previously liable, or to mortgage her property to secure the pre-
existing debt. B.P.I. v. De Coster, 47 Phil 594 (1925).

SAME. Where the power granted to substituted attorney-in-fact was to the end that the principal-
seller may be able to collect the balance of the selling price of the printing establishment sold, such
substitute agent had no power to enter into new sales arrangements with the buyer, or to novate the
terms of the original sale. Villa v. Garcia Bosque, 49 Phil 126 (1926).

2.2.5. Notarized Power of Attorney

NATURE AND EFFECT OF NOTARIZATION. A notarized power of attorney carries with it the
evidentiary weight conferred upon it with respect to its due exectuion. Velso v. Court of Appeals, 260
SCRA 593 (1996).

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SAME. When a special power of attorney is duly notarized, the notarial acknowledgment is prima facie
evidence of the fact of its due execution—a buyer has every reason to rely on a person‘s authority to
sell a particular property owned by a corporation on the basis of a notarized board resolution—
undeniably the buyer is an innocent purchaser for value in good faith. St. Mary‟s Farm, Inc. v. Prima
Real Properties, Inc., 560 SCRA 704 (2008).

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SECTION THREE
“When an agent in executing the orders and commissions of his principal carries out the
instructions he has received from his principal, and does not appear to have exceeded his
authority or to have acted with negligence, deceit or fraud, he cannot be held responsible for
the failure of his principal to accomplish the object of the agency. Agents, although they act
in representation of the principal, are not guarantors for the success of the business
enterprise they are asked to manage.”25

3. POWERS AND OBLIGATIONS OF THE AGENT

3.1. GENERAL OBLIGATION OF AGENT WHO ACCEPTS THE AGENCY (ART. 1884)

3.1.1. Upon Acceptance of Appointment: Agent Is Bound to Carry on Agency to Its


Completion and for the Benefit of Principal

OTHERWISE: Agent Will Be Liable for Damages which Through His Non-Performance the
Principal May Suffer Damages

3.1.2. In Event of Death of Principal: Agent Must Finish Business Already Begun
Should Delay Entail Any Danger (Art. 1884)

HOWEVER: Please see Art. 1919(3) which states that Death ipso facto extinguishes Agency

DUTY OF AGENT. In construing the original version of Article 1884 (Article 1718 of the old Civil
Code), the Supreme Court held that the burden is on the person who seeks to make an agent liable
to show that the losses and damage caused were occasioned by the fault or negligence of the agent;
mere allegation without substantiation is not enough to make the agent personally liable. Heredia v.
Salina, 10 Phil 157 (1908).

SAME. Where the holder of an exclusive and irrevocable power of attorney to make collections,
failed to collect the sums due to the principal and thereby allowed the allotted funds to be exhausted
by other creditors, such agent has failed to act with the care of a good father of a family required
under Article 1887 and became personally liable for the damages which the principal may suffer
through his non-performance. PNB v. Manila Surety, 14 SCRA 776 (1965).

SAME. Under Article 267 of the Code of Commerce which declared that no agent shall purchase for
himself or for another that which he has been ordered to sell, then a sale by a broker to himself
without the consent of the principal would be void and ineffectual whether the broker has been
guilty of fraudulent conduct or not. Consequently, such broker is not entitled to receive any
commission under the contract, much less any reimbursement of expenses incurred in pursuing and
closing such sales. The same prohibition is now contained in Article 1491(1) of the Civil Code.
Barton v. Leyte Asphalt, 46 Phil 938 (1924).

SAME. When the finance company executes a mortgage contract that contains a provision that in the
event of accident or loss, it shall make a proper claim against the insurance company, was in effect
an agency relation, and that under Article 1884, the finance company was bound by its acceptance to
carry out the agency, and in spite of the instructions of the borrowers to make such claims instead
insisted on having the vehicle repaired but eventually resulting in loss of the insurance coverage, the
finance company had breached its duty of diligence, and must assume the damages suffered by the
borrowers, and consequently can no longer collect on the balance of the mortgage loan secured
thereby. READ: BA Finance v. Court of Appeals, G.R. No. 82040, 201 SCRA 157, 27 August
1991.

SAME. The well-settled rule is that an agent is also responsible for any negligence in the performance
25
Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).

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of its function (Art. 1909) and is liable for the damages which the principal may suffer by reason of
its negligent act. (Art. 1884). READ: British Airways v. Court of Appeals, G.R. No. 121824, 285
SCRA 450, 29 January 1998.

3.2. OBLIGATION OF AGENT WHO DECLINES AGENCY (ARTS. 1885, 1929)

3.2.1. Goods Are Forwarded to Him

NOTE: Here, the agent must observe diligence of a good father of a family in custody and
preservation of goods until new agent appointed; however, in Art. 1929, which outlines the
obligation of an agent who withdraws form an agency, states that he (the former agent) must
continue to act until principal takes necessary steps to meet situation.

3.3. GENERAL RULE ON EXERCISE OF POWER

3.3.1. Agent Must Act “Within the Scope of His Authority” (Art. 1881)

NOTE: For purposes of this heading, take note of the following: a) Meaning of ―Performance
Within the Scope of Authority‖ (Art. 1900); and, b) He May Perform Acts Conducive to
Accomplishment of Agency Purpose.

MEANING OF “PERFORMANCE WITHIN THE SCOPE OF AUTHORITY” (ART. 1900). Under Art.
1881 the agent must act within the scope of his authority to bind his principal. So long as the agent
has authority, express or implied, the principal is bound by the acts of the agent on his behalf,
whether or not the third person dealing with the agent believes that the agent has actual authority.
Thus, all signatories in a contract should be clothed with authority to bind the parties they represent.
Sargasso Construction & Dev. Corp. v. PPA, 623 SCRA 260 (2010).

HE MAY PERFORM ACTS CONDUCIVE TO ACCOMPLISHMENT OF AGENCY PURPOSE. Art. 1881


provides that ―the agent must act within the scope of his authority.‖ Pursuant to the authority given
by the principal, the agent is granted the right ―to affect the legal relations of his principal by the
performance of acts effectuated in accordance with the principal's manifestation of consent.‖ Pacific
Rehouse Corp. v. EIB Securities, Inc., 633 SCRA 214 (2010). COMPARE: Art. 1887 – Agent Must Follow
Instructions of the Principal

3.3.2. Authority of Agent Not Deemed Exceeded If Performed in a Manner More


Advantageous to Principal (Art. 1882)

COMPARE: Agent Should Not Act If It Would Manifestly Result in Loss or Damage to Principal
(Art. 1888).

AUTHORITY OF AGENT NOT DEEMED EXCEEDED IF PERFORMED IN A MANNER MORE


ADVANTAGEOUS TO PRINCIPAL (ART. 1882). Article 1882 of the Civil Code provides that the
limits of an agent‘s authority shall not be considered exceeded should it have been performed in a
manner advantageous to the principal than that specified by him. Olaguer v. Purugganan, Jr., 515 SCRA
460 (2007).

SAME. Admissions obtained by the agent from the adverse party prior to the formal amendment of
the complaint that included the principal as a party to the suit, can be availed of by the principal
―since an agent may do such acts as may be conducive to the accomplishment of the purpose of the
agency, admissions secured by the agent within the scope of the agency ought to favor the principal.
This has to be the rule, for the act or declarations of an agent of the party within the scope of the
agency and during its existence are considered and treated in turn as declarations, acts and
representations of his principal and may be given in evidence against such party‖ Bay View Hotel v.
Ker & Co., 116 SCRA 327 (1982).

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3.3.3. Effects of Non-Ratified Acts Done by Agent in Excess of His Authority:
Unenforceable, Not Void (Arts. 1317, 1403 and 1898)

EFFECTS OF NON-RATIFIED ACTS DONE BY AGENT IN EXCESS OF HIS AUTHORITY:


UNENFORCEABLE, NOT VOID (ARTS. 1317, 1403 AND 1898). When money is received as a deposit
by an agent, and that money is turned over by the agent to the principal, with notice that it is the
money of the depositor, the principal is bound to deliver to the depositor, even if his agent was not
authorized to receive such deposit. [There has, in effect, ratification of the unauthorized act of the
agent, thereby binding the principal]. Cason v. Rickards, 5 Phil 639 (1906).

SAME. When the administrator enters into a contract that is outside of the scope of authority, the
contract would nevertheless not be an absolute nullity, but simply voidable [unenforceable] at the
instance of the parties who had been improperly represented, and only such parties can assert the
nullity of said contracts as to them. Zayco v. Serra, 49 Phil 985 (1925).

SAME. Under Article 1898, the acts of an agent beyond the scope of his authority do not bind the
principal, unless the latter ratifies the same expressly or impliedly. Furthermore, when the third
person . . . knows that the agent was acting beyond his power or authority, the principal cannot be
held liable for the acts of the agent. If the said third person is aware of the limits of the authority, he
is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to
secure the principal‘s ratification. READ: Cervantes v. Court of Appeals, G.R. No. 125138, 304
SCRA 25, 02 March 1999; Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001).

SAME. Even when the agent, in this case the attorney-at-law who represented the client in forging a
compromise agreement, has exceeded his authority in inserting penalty clause, the status of the said
clause is not void but merely voidable, i.e., capable of being ratified. Indeed, the client‘s failure to
question the inclusion of the penalty in the judicial compromise despite several opportunities to do
so and with the representation of new counsel, was tantamount to ratification. Hence, the client is
stopped from assailing the validity thereof. READ: Borja, Sr. v. Sulyap, Inc., G.R. No. 150718,
399 SCRA 601, 26 March 2003.

SAME. Contracts entered in the name of another person by one who has been given no authority or
legal representation or who has acted beyond his powers are classified as unauthorized contracts and
are unenforceable, unless they are ratified. READ: Gozun v. Mercado, G.R. No. 167812, 511
SCRA 305, 19 December 2006.

3.3.4. Consequences When Agent Acts in His Own Name (Art. 1883)

NOTE: Under Art. 1883, the following principles must be noted: a) Principal Has No Right
Against Third Person If Agent Acts in His Own Name; b) Agent Is Directly Bound to Third Person
as If the Transaction Were His Own; and, c) Provisions Are Without Prejudice to Actions Between
Principal and Agent.26

PRINCIPAL HAS NO RIGHT AGAINST THIRD PERSON IF AGENT ACTS IN HIS OWN NAME.
Article 1717 of the old Civil Code provides that ―When an agent acts in his own name, the principal
shall have no action against the persons with whom the agent has contracted, nor the said persons
against the principal.‖ Article 246 of the Code of Commerce provides that ―When an agent transacts
business in his own name, it shall not be necessary for him to state who is the principal, and he shall
be directly liable as if the business were for his own account, to the persons with whom he transacts
the same, said person not having any right of action against the principal, nor the latter against the
former, the liabilities of the principal and the agent to each other always reserved.‖ It being
established by a preponderance of the evidence that the agent acted in his own name in selling the
merchandise to the defendants, and that the defendants fully believed that they were dealing with the
said agent, without any knowledge of the fact that he was the agent of the plaintiffs, and having paid
him in full for the merchandise purchased, they are not liable to the plaintiffs, for said merchandise.

26
See discussions below on breach by agent of his duty of loyalty.

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This is true whether the transaction is covered by the provisions of the Civil Code or by the provisions
of the Commercial Code. Lim Tiu v. Ruiz & Rementeria, 15 Phil. 367, 370 (1910).

SAME. When an agent acts in his own name, the principal has no right of action against the persons
with whom the agent has contracted, or such persons against the principal. In such case, the agent is
directly liable to the person with whom he has contracted, as if the transactions were his own. Smith
Bell v. Sotelo Matti, 44 Phil. 874 (1922).

SAME. Even when the agent has a special power of attorney to mortgage the property of the
principal, when such agent nevertheless executed the real estate mortgage in his own name, then it is
not valid and binding on the principal pursuant to the provisions of Article 1883 of the Civil Code.
Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925); Rural Bank of Bombon v. Court of Appeals,
212 SCRA 25 (1992).

SAME. Under Article 1883 of the Civil Code, if an agent acts in his own name, the principal has no
right of action against the persons with whom the agent has contracted; neither have such persons
against the principal. In such case the agent is the one directly bound in favor of the person with
whom he has contracted, as if the transaction were his own, except when the contract involves
things belonging to the principal. Since the principals have caused their agent to enter into a charter
party in his own name and without disclosing that he acts for any principal, then such principals
have no standing to sue upon any issue or cause of action arising from said charter party. Marimperio
Compania Naviera, S.A. v. Court of Appeals, 156 SCRA 368 (1987).

AGENT IS DIRECTLY BOUND TO THIRD PERSON AS IF THE TRANSACTION WERE HIS OWN.
When the agent executes a contract in his personal capacity, the fact that he is described in the
contract as the agent of the principal and the properties mortgaged pertain to the principal, may not
be taken to mean that he enters into the contract in the name of the principal. A mortgage on real
property of the principal not made and signed in the name of the principal is not valid as to the
principal. National Bank v. Palma Gil, 55 Phil. 639 (1931); National Bank v. Agudelo, 58 Phil 655 (1933).

SAME. A party who signs a bill of exchange as an agent (as the President of the company), but failed
to disclose his principal becomes personally liable for the drafts he accepted, even when he did so
expressly as an agent. Section 20 of the Negotiable Instruments Law says provides expressly that
when an agent signs in an representative capacity, but does not indicate or disclose his principal
would incur personal liability on the bill of exchange. Phil. Bank of Commerce v. Aruego, 102 SCRA 530
(1981).

EXCEPTION: When Contract Involves Things Belonging to Principal

SAME. EXCEPTION. Even when the agent has written authority to convey real property,
nevertheless when the deed of sale was executed by the agent in her own name without showing the
capacity in which she acted, although the act was doubtless irregular, the deed operated to bind the
principal who had authorized the sale. Jimenez v. Rabot, 38 Phil. 378 (1918).

SAME. EXCEPTION. Where the plaintiffs appointed the defendant to purchase a vessel and giving
him money for that purpose, but the agent purchased the boat and placed it in his own name, he has
breached his fiduciary obligation and is obliged to transfer the same to the plaintiffs, or the plaintiffs
have a right to be subrogated. According to the exception under Art. 1717 of the old Civil Code
(when things belonging to the principal are dealt with) the agent is bound to the principal although he does
not assume the character of such agent and appears acting in his own name. The money with which the launch
was bought having come from the plaintiff, the exception established in Art. 1717 is applicable to
the instant case. Sy-Juco v. Sy-Juco, 40 Phil. 634 (1920).

SAME. EXCEPTION. Where a co-owner transfers the entirety of the mining claim to the buyer,
where the buyer knew that it included the one-half share pro-indiviso of the other co-owner, then the
transaction may be considered as one where the disposing co-owner acted as agent of the other co-
owner. Consequently, under Article 1883 of the Civil Code, such other co-owner may sue the person

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with whom the agent dealt with in his (agent‘s) own name, when the transaction involves things
belong to the principal. Goldstar v. Lim, 25 SCRA 597 (1968).

SAME. EXCEPTION. When a commission agent enters into a shipping contract in his own name to
transport the grains of NFA on a vessel owned by a shipping company, NFA cannot claim it is not
liable to the shipping company under Article 1883 when things belong to the principal are dealt with,
the agent is bound to the principal although he does not assume the character of such agent and
appears acting in his own name. In other words, the agent‘ apparent representation yields to the
principal‘s true representation and that, in reality and in effect, the contract must be considered as
entered into between the principal and the third person Corollarily, if the principal can be obliged to
perform his duties under the contract, then it can also demand the enforcement of its rights arising
from the contract. NFA v. IAC, 184 SCRA 166 (1990).

3.4. SPECIFIC OBLIGATION RULES FOR AGENTS

3.4.1. No Obligation to Advance Funds (Art. 1886):

NOTE: It is Principal‘s obligation to advance the funds, but Principal to pay interest on advances
made by Agent from day he advances the money (Art. 1912).

EXCEPTIONS: a) If Stipulated in the Agency Agreement; and, b) Where principal is insolvent


(See Art. 1919[3]: Insolvency extinguishes an agency).

3.4.2. Shall Carry Out Agency in Accordance with Principal‟s Instructions (Art. 1887)

IF AGENT FOLLOWED INSTRUCTIONS, PRINCIPAL CANNOT SET-UP AGENT‟S IGNORANCE OR


CIRCUMSTANCE WHICH PRINCIPAL WAS/OUGHT TO HAVE BEEN AWARE OF (ART. 1899).
Pursuant to the instructions of the principals, the agent purchased a piece of land in their names and
in the sums given to him by the principal, and that after the fact of purchase the principals had
ratified the transaction and even received profits arising from the investment in the land, but that
eventually a defect in the title to the land arose, the said principals cannot recover their lost
investment from the agent. ―There is nothing in the record which would indicate that the defendant
failed to exercise reasonable care and diligence in the performance of his duty as such agent, or that
he undertook to guarantee the vendor‘s title to the land purchased by direction of the plaintiffs.‖
Nepomuceno v. Heredia, 7 Phil 563 (1907).

SAME. When an agent in executing the orders and commissions of his principal carries out the
instructions he has received from his principal, and does not appear to have exceeded his authority
or to have acted with negligence, deceit or fraud, he cannot be held responsible for the failure of his
principal to accomplish the object of the agency. Agents, although they act in representation of the
principal, are not guarantors for the success of the business enterprise they are asked to manage.
Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).

3.4.3. Obligation Not Carry Out Agency If Execution Would Manifestly Result in
Loss or Damage to Principal (Art. 1888)

OBLIGATION NOT CARRY OUT AGENCY IF EXECUTION WOULD MANIFESTLY RESULT IN LOSS
OR DAMAGE TO PRINCIPAL (ART. 1888). While it is true that an agent who acts for a revealed
principal in the making of a contract does not become personally bound to the other party in the
sense that an action can ordinarily be maintained upon such contract directly against the agent, yet
that rule does not control when the agent cannot intercept and appropriate the thing which the
principal is bound to deliver, and thereby make the performance of the principal impossible. The
agent in any event must be precluded from doing any positive act that could prevent performance
on the part of his principal, otherwise the agent becomes liable also on the contract. National Bank v.
Welsh Fairchild, 44 Phil 780 (1923).

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3.4.4. Duty of Loyalty: Obligation in a Conflict of Interest Situation (Art. 1889)

NOTE: Under the agent‘s duty of loyalty, the following principles must also be taken into account:
a) The agent shall be liable to the principal for damages sustained by the latter where in case of
conflict of interest situation, and agent preferred his own interest; and, b) Agent prohibited from
buying property entrusted to him for administration or sale without principal‘s consent (Art.
1491[2]).

DUTY OF LOYALTY. An agent cannot represent both himself and his principal in a transaction
involving the shifting to another person of the agent‘s liability for a debt to the principal. Aboitiz v.
De Silva, 45 Phil 883 (1924).

SAME. The director/general manager of the corporation, who also was the majority stockholder, and
was designated to be the main negotiator for the company with the Government for the sale of its
large tract of land, having special knowledge of commercial information that would increase the
value of the shares in relation to the sale of the parcels of land to the Government, can be treated
legally as being an agent of the stockholders of the company, with a fiduciary obligation to reveal to
the other stockholders such special information before proceeding to purchase from the other
stockholders their shares of stock. If such director obtains the purchase of the shares of a
stockholder without having disclosed important facts or to render the appropriate report on the
expected increase in value of the company, there was fraud committed for which the director shall
be liable for the earnings earned against the stockholder on the sale of shares. Strong v. Guiterrez
Repide, 41 Phil. 947 (1909).

SAME. A confidential employee who, knowing that his principal was negotiating with the owner of
some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife,
commits an act of disloyalty and infidelity to his principal, whereby he becomes liable, among other
things, for the damages caused, which meant to transfer the property back to the principal under the
terms and conditions offered to the original owner. Sing Juco and Sing Bengco v. Sunyantong and Llorente,
43 Phil 589 (1922).

SAME. Where an uncle who was acting as agent or administrator of property belonging to a niece
had procured a Torrens title in his own name to said property, he is deemed to be a trustee, and he
must surrender the property to the niece and transfer title to her. The relations of an agent to his
principal are fiduciary and in regard to the property forming the subject-matter of the agency, he is
estopped from acquiring or asserting a title adverse to that of the principal. Consequently, an action
in personam will lie against an agent to compel him to return or retransfer to his principal, or the
latter‘s estate, the real property committed to his custody as such agent and also to execute the
necessary documents of conveyance to effect such retransfer. Severino v. Severino, 44 Phil. 343 (1923).

3.4.5. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890)

NOTE: If the agent is: a) empowered to borrow money, he may be the lender at current interest;
and, b) empowered to lend money at interest, he cannot borrow without principal‘s consent.

POWER TO BORROW MONEY AND MORTGAGE PROPERTY. When power granted to agent was
only to borrow money and mortgage principal‘s property to secure the loan, it cannot be interpreted
to include the authority to mortgage the properties to support the agent‘s personal loans and use the
proceeds thereof for his own benefit. The lender who lends money to the agent knowing that is was
for personal purpose and not for the principal‘s account, is a mortgagee in bad faith and cannot
foreclose on the mortgage thus constituted. Hodges v. Salas and Salas, 63 Phil. 567 (1936).

3.4.6. Obligation of Agent to Render Account (Art. 1891)

NOTE: Under the obligation thus stated, the following principles must be taken into account: a)
Agent Must Render Account to Principal; b) Deliver to Principal Whatever Is Received by Virtue of
Agency; c) Obligation Arises and Becomes Demandable at Agency‘s End; and, d) Stipulation

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Exempting Agent from Obligation to Render an Accounting Is Void.

AGENT MUST RENDER ACCOUNT TO PRINCIPAL. An administrator of an estate was made liable
under Article 1720 (now Art. 1891) for failure to render an account of his administration to the heirs,
unless the heirs consented thereto or are estopped by having accepted the correctness of his account
previously rendered. Ojinaga v. Estate of Perez, 9 Phil 185 (1907).

SAME. As a necessary consequence of such breach of trust, an agent must then forfeit his right to
the commission and must return the part of the commission he received from his principal. READ:
Domingo v. Domingo, G.R. No. L-30573, 42 SCRA 131, 29 October 1971.

SAME. Petitioner was the administrator of respondent's properties for 18 years, and four letters
within 18 years can hardly be considered as sufficient to keep the principal informed and updated of
the condition and status of the latter's properties. READ: Sazon v. Vasquez-Menancio, G.R. No.
192085, 666 SCRA 707, 22 February 2012.

DELIVER TO PRINCIPAL WHATEVER IS RECEIVED BY VIRTUE OF AGENCY. Why include those


not due the principal? Because legally, it is the principal who receives them and therefore agent has
to account for them: The possession of an agent of the money or property of his principal is termed
―juridical possession‖ which means a possession which gives the transferee a right over the thing
which the transferee may set up even against the owner. Chua-Burce v. Court of Appeals, 331 SCRA 1
(2000). Consequently: a) An insurance agent may be convicted of estafa for his failure to deliver
sums of money paid to him as an insurance agent for the account of his employer. Where nothing to
the contrary appears, the provisions of article 1720 of the Civil Code impose upon an agent the
obligation to deliver to his principal all funds collected on his account. U.S. v. Kiene, 7 Phil 736
(1907); b) A travelling sales agent who misappropriated or failed to return to his principal the
proceeds of the things or goods he was commissioned or authorized to sell, is liable for estafa.
Guzman v. Court of Appeals, 99 Phil. 703 (1956; and, c) Whereas, a bank teller or cash custodian,
being merely an employee of the bank, cannot be held liable for estafa, but rather for theft. Chua-
Burce v. Court of Appeals, 331 SCRA 1 (2000).

SAME. The relation of an agent to his principal is fiduciary and it is elementary that in regard to
property subject matter of the agency, an agent is estopped from acquiring or asserting a title
adverse to that of the principal—a position analogous to that of a trustee—he cannot, consistently
with the principles of good faith, be allowed to create in himself an interest in opposition to that of
his principal or cestui que trust. READ: Hernandez v. Hernandez, G.R. No. 158576, 645 SCRA
24, 09 March 2011.

STIPULATION EXEMPTING AGENT FROM OBLIGATION TO RENDER AN ACCOUNTING IS VOID.


―When accounts of the agent to the principal are once approved by the principal, the latter has no
right to ask afterwards for a revision of the same or for a detailed account of the business, unless he
can show that there was fraud, deceit, error or mistake in the approval of the accounts—facts not
proven in this case.‖ Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491, 505 (1915), quoting from Pastor v.
Nicasio, 6 Phil. 152 (1906).

3.4.7. Liability of Agent for Interest (Art. 1896)

NOTE: The agent is liable for interest: a) On Sums He Applied to His Own Use (from the Time
He Used Them; and, b) On Sums Owing the Principal (from the Time Agency Is Extinguished).

LIABILITY FOR INTEREST. As to the interest imposed in the judgment on the amounts received by
the agent which were not turned over to the principal, ―it is sufficient to cite article 1724 of the Civil
Code, which provides that an agent shall be liable for interest upon any sums he may have applied to
his own use, from the day on which he did so, and upon those which he still owes, after the
expiration of the agency, from the time of his default.‖ Mendezonna v. Vda. De Goitia, 54 Phil 557
(1930).

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SAME. The successor-in-interest of the principal is not entitled to collect interest from the agent of
the father for sums loaned to and collected by the agent from various persons for the deceased
principal. In all the aforementioned transactions, the defendant acted in his capacity as attorney-in-
fact of the deceased father, and there being no evidence showing that he converted the money
entrusted to him to his own use, he is not liable for interest thereon, in accordance with the
provisions of article 1724 of the Civil Code. De Borja v. De Borja, 58 Phil 811 (1933).

3.4.8. Duty of Diligence: Agent Liable for Fraud and Negligence (Arts. 1884 and
1909)

WHAT SHALL AGGRAVATE OR MITIGATE LIABILITY ARISING OUT OF NEGLIGENCE –


WHETHER AGENCY WAS FOR A COMPENSATION OR WAS GRATUITOUS. Where the agent by
means of misrepresentation of the condition of the market induces his principal to sell to him the
property consigned to his custody at a price less than that for which he has already contracted to sell
part of it, and who thereafter disposes of the whole at an advance, is liable to principal for the
difference. Such conduct on the part of the agent constituted fraud, entitling the principal to annul
the contract of sale. Although commission earned by the agent on the fraudulent sale may be
disallowed, nonetheless commission earned from other transactions which were not tainted with
fraud should be allowed the agent. Cadwallader v. Smith Bell, 7 Phil. 461 (1907).

SAME. In consignment of goods for sale, as a form of agency, the consignee-agent is relieved from
his liability to return the goods received from the consignor-principal when it is shown by
preponderance of evidence in the civil case brought that the goods were taken from the custody of
the consignee by robbery, and no separate conviction of robbery is necessary to avail of the
exempting provisions under Article 1174 for force majeure. Austria v. Court of Appeals, 39 SCRA 527
(1971).

SAME. In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems
to be suggesting that as a mere agent it cannot be liable to the principal; this is not exactly true. On
the contrary, Article 1909 clearly provides that‖ the agent is responsible not only for fraud, but also
for negligence. Metrobank v. Court of Appeals, 194 SCRA 169 (1991).

SAME. When an agent is involved in the perpetration of fraud upon his principal for his extrinsic
benefit, he is not really acting for the principal but is really acting for himself, entirely outside the
scope of his agency – the basic tenets of agency rest on the highest consideration of justice, equity
and fairplay, and an agent will not be permitted to pervert his authority to his own personal
advantage. READ: Cosmic Lumber v. Court of Appeals, G.R. No. 114311, 265 SCRA 168, 29
November 1996.

SAME. The well-settled rule is that an agent is also responsible for any negligence in the performance
of its function (Art. 1909) and is liable for the damages which the principal may suffer by reason of
its negligent act. (Art. 1884). READ: British Airways v. Court of Appeals, G.R. No. 121824, 285
SCRA 450, 29 January 1998.

3.5. WHEN AGENT APPOINTS A SUBSTITUTE (ART. 1892)

3.5.1. General Rule: Agent Must Act Himself, But May Appoint a Not-Prohibited
Substitute

POWER OF SUBSTITUTION. Under the terms of Art. 1892, when a special power of attorney to sell
a piece of land does not contain a clear prohibition against the agent in appointing a substitute, the
appointment by the agent of a substitute to execute the contract is within the limits of the authority
given by the principle, although the agent then would have to be responsible for the acts of the sub-
agent. READ: Escueta v. Lim, G.R. No. 137162, 512 SCRA 411, 24 January 2007.

3.5.2. Effects When Agent Appoints a Substitute:

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NOTE: He Is Responsible for Acts of Substitute when: a) He was not given power to appoint one;
or, b) He was given such power without designating the person and substitute is notoriously
incompetent or insolvent.

LIABILITY OF A SUBAGENT. A subagent cannot be held at greater liability that the main agent, and
when the subagent has not received any special instructions from the agent to insure the object of
the agency, the subagent cannot be held liable for the loss of the thing from fire, which is merely
force majeure. International Films (China) v. Lyric Film, 63 Phil. 778 (1936).

3.5.3. All Acts of Substitute Appointed Against Principal‟s Prohibition Are Void (as
Against the Principal)

SUBSTITUTION IN VIOLATION OF PROHIBITION. The law on agency in our jurisdiction allows the
appointment by an agent of a substitute or sub-agent in the absence of an express agreement to the
contrary between the agent and the principal. Therefore, an agent who receives jewelry for sale or
return cannot be charged with estafa for there was no misappropriation when she delivered the
jewelry to a sub-agent under the sale terms which the agent received it, but a client of the sub-agent
absconded with them and could no longer be recovered. The appointment of a sub-agent and
delivery of the jewelry, in the absence of a prohibition, does not amount to conversion or
misappropriation as to constitute estafa; but the agent remains civilly liable for the value of the
jewelry to the principal. READ: Serona v. Court of Appeals, G.R. No. 130423, 392 SCRA 35, 18
November 2002.27

SAME. The legal maxim potestas delegate non delegare potest; a power once delegated cannot be re-
delegated, while applied primarily in political law to the exercise of legislative power, is a principle of
agency — for another, a re-delegation of the agency would be detrimental to the principal as the
second agent has no privity of contract with the former. (?) Baltazar v. Ombudsman 510 SCRA 74
(2006).

SAME. In a situation where the special power of attorney to sell a piece of land contains a
prohibition to appoint a substitute, but nevertheless the agent appoints a substitute who executes the
deed of sale in name of the principal, while it may be true that the agent may have acted outside the
scope of his authority, that did not make the sale void, but merely unenforceable under the second
paragraph of Article 1317 of the Civil Code. And only the principal denied the sale, his acceptance
of the proceeds thereof are tantamount to ratification thereof. READ: Escueta v. Lim, G.R. No.
137162, 512 SCRA 411, 24 January 2007

3.5.4. Rights of Principal Against Substitute (Art. 1893)

RESPONSIBILITY OF SUBSTITUTE TO PRINCIPAL. The principal is liable upon a sub-agency


contract entered into by its selling agent in the name of the principal, where it appears that the
general agent was clothed with such broad powers as to justify the interference that he was
authorized to execute contracts of this kind, and it not appearing from the record what limitations, if
any, were placed upon his powers to ace for his principal, and more so when the principal had
previously acknowledged the transactions of the subagent. Del Rosario v. La Badenia, 33 Phil. 316
(1916).

3.6. RULE ON LIABILITY WHEN TWO OR MORE AGENTS APPOINTED BY THE SAME
PRINCIPAL

3.6.1. Responsibility of Two or More Agents Not Solidary (Art. 1894)

COMPARE: Two principals with common agent - Each Principal Solidarily Liable (Art. 1915)

27This reiterates the ruling in People v. Nepomuceno, CA 46 O.G. 6128 (1949); Lim v. Court of Appeals, 271 SCRA 12
(1997); People v. Trinidad, CA 53 O.G. 732 (1956).

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APPOINTMENT OF MULTIPLE AGENTS. When two letters of attorney are issued simultaneously to
two different attorneys-in-fact, but covering the same powers shows that it was not the principal‘s
intention that they should act jointly in order to make their acts valid; the separate act of one of the
attorney-in-fact, even when not consented to by the other attorney in fact, is valid and binding on
the principal, especially the principal did not only repudiate the act done, but continued to retain the
said attorney-in-fact. READ: Municipal Council of Iloilo v. Evangelista, G.R. No. L-32977, 55
Phil. 290, 17 November 1930.

3.6.2. Where Two or More Agents Agree to Be Solidarily Bound (Art. 1895)

3.7. RULE ON LIABILITY TO THIRD PARTIES: AGENT NOT BOUND TO THIRD PARTY (ART.
1897)

RULE ON LIABILITY TO THIRD PARTIES: AGENT NOT BOUND TO THIRD PARTY (ART. 1897).
The settlement/adjustment agent in the Philippines of a New York insurance company is no
different from any other agent from the point of view of his responsibility: whenever he adjusts or
settles a claim, he does it in behalf of his principal, and his action is binding not upon himself but
upon his principal, and the agent does not assume any personal liability, and he cannot be sued on
his own right; the recourse of the insured is to press his claim against the principal. Salonga v. Warner
Barnes, 88 Phil 125 (1951).

SAME. In the same manner, a resident agent, as a representative of the foreign insurance company, is
tasked only to receive legal processes on behalf of its principal and not to answer personally for the
any insurance claims. Smith Bell v. Court of Appeals, 267 SCRA 530 (1997).

3.7.1. Principal Is the One Bound

SAME. PRINCIPAL IS THE ONE BOUND. An insurance agent who acts for fully disclosed foreign
insurance companies cannot be made personally liable for the claims arising from the contracts of
insurance made on behalf of the principals. E Macias & Co. v. Warner, Barnes & Co., 43 Phil 155
(1922).

SAME. SAME. A promissory note and two mortgages executed by the agent for and on behalf of his
principal, in accordance with a power of attorney executed by the principal in favor of the agent, are
valid, and as provided by article 1727 of the Civil Code, the principal must fulfill the obligations
contracted by the agent. National Bank v. Palma Gil, 55 Phil. 639 (1931).

SAME. SAME. When the buyer of shares of stock, pursuant to the terms of the deed of sale, effects
payment of part of the purchase price to one of the seller‘s creditors, then there is no subrogation
that takes place, as the buyer then merely acts as an agent of the seller effecting payment of money
that was due to the seller in favor of a third-party creditor. READ: Chemphil Export v. Court of
Appeals, G.R. Nos. 112438-39, 251 SCRA 217, 12 December 1995.

SAME. SAME. Agents who have been authorized to sell parcels of land cannot claim personal
damages in the nature of unrealized commission by reason of the act of the buyer is refusing to
proceed with the sale. The rendering of such service did not make them parties to the contracts of
sale executed in behalf of the latter. Since a contract may be violated only by the parties thereto as
against each other, the real parties-in-interest, either as plaintiff or defendant, in an action upon that
contract must, generally, either be parties to said contract. READ: Uy v. Court of Appeals, G.R.
No. 120465, 314 SCRA 69, 09 September 1999.28

SAME. SAME. A person acting as a mere representative of another acquires no rights whatsoever,
nor does he incur any liabilities arising from the said contract between his principal and another
party. READ: Angeles v. PNR, G.R. No. 150128, 500 SCRA 444, 31 August 2006.29

28Ormoc Sugarcane Planters‘ Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009). Ormoc Sugarcane
Planters‘ Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009).
29Chua v. Total Office Products and Services (Topros), Inc., 471 SCRA 500 (2005); Tan v. Engineering Services, 498

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SAME. SAME. Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not
personally liable to the party with whom he contracts. Eurotech Industrial Technologies, Inc. v. Cuizon, 521
SCRA 584 (2007).

SAME. SAME. Since, as a rule, the agency, as a contract, is binding only between the contradicting
parties, then only the parties, as well as the third person who transacts with the parties themselves,
may question the validity of the agency or the violation of the terms and conditions found therein.
Villegas v. Lingan, 526 SCRA 63 (2007).

SAME. SAME. Every principal is subject to liability for loss caused to another by the latter‘s reliance
upon a deceitful representation by an agent in the course of his employment (1) if the representation
is authorized; (2) if it is within the implied authority of the agent to make for the principal; or (3) if it
is apparently authorized, regardless of whether the agent was authorized by him or not to make the
representation. Pahud v. CA, 597 SCRA 13 (2009).

3.7.2. Except When Agent:

NOTE: That the agent is personally bound if he: a) expressly binds himself; b) exceeds the scope of
his authority without giving notice of his limited powers; and, c) acts with fraud or negligence.

SAME. EXCEPT WHEN THE AGENT EXPRESSLY BOUND HIMSELF. When the attorney-in-fact of
the owner of a parcel of land acted within the scope of his authority by mortgaging the property of
the principal, the principal is bound by the mortgage, and cannot use the fact that the agent has also
bound himself personally to the debt. There is nothing in the law which prohibits an agent from
binding himself personally for the debt incurred in behalf of the principal. In fact the law recognizes
such undertaking as valid and binding on the agent. Tuason v. Orozco, 5 Phil 596 (1906).

SAME. SAME. Under Article 1897, when the agent expressly binds himself to the contract entered
into on behalf of the principal, then he become personally bound thereto to the same extent as the
principle. But the doctrine is not applicable vice–versa, since everything agreed upon by the principal
to be binding on himself is not legally binding personally on the agent. Thus when the previous
agent of the union bound itself personally liable on the contracts of the union, the new agent is need
deemed bound by the assumption undertaken by the original agent. Benguet v. BCI Employees, 23
SCRA 465 (1968).

SAME. EXCEPT WHEN THE AGENT EXCEEDS HIS AUTHORITY WITHOUT GIVING NOTICE OF
LIMITED POWERS. Under Article 1897 when an agent acts in behalf of the principal, he cannot be
held liable personally, except when he acts outside the scope of his authority, or even when acting
within the scope of his authority, he expressly binds himself personally liable to the contract entered
into in the name of the principal. Therefore, a third party cannot generally sue on the contract
seeking both the principal and the agent to be liable thereon, for by suing the principal on the
contract, the agent is deemed not to be personally liable. On the other hand, if the agent is being
sued on the basis that he acted outside the scope of his authority, then it does not make sense to be
also suing the principal who cannot be held liable for the acts of the agent outside the scope of his
authority. At any rate, Article 1897 does not hold that in cases of excess of authority, both the agent
and the principal are liable to the other contracting party. Phil. Products Co. v. Primateria Society
Anonyme, 15 SCRA 301 (1965).

SAME. SAME. Where an agent defies the instructions of its principal in New York not to proceed
with the sale due to non-availability of carriage, it has acted without authority or against its
principal‘s instructions and holds itself personally liable for the contract it entered into with the local
company. READ: National Power Corporation v. NAMERCO, G.R. Nos. L-33819 & L-33897,
117 SCRA 789, 23 October 1982.

SCRA 93 (2006); Chong v. Court of Appeals, 527 SCRA 144 (2007).

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SAME. SAME. The special power to approve loans does not carry with it the power to bind the
principal to a contract of guaranty even to the extent of the amount for which a loan could have
been granted by the agent. ―Guaranty is not presumed, it must be expressed and cannot be extended
beyond its specified limits (Director v. Sing Juco, 53 Phil. 205. In one case, where it appears that a
wife gave her husband power of attorney to loan money, this Court ruled that such fact did not
authorized him to make her liable as a surety for the payment of the debt of a third person. READ:
BA Finance v. Court of Appeals, G.R. No. 94566, 211 SCRA 112, 03 July 1992.

SAME. SAME. Article 1897 declares that the principal is liable in cases when the agent acted within
the bounds of his authority; under this, the agent is completely absolved of any liability. The second
part of the said provision presents the situations when the agent himself becomes liable to a third
party when he expressly binds himself or he exceeds the limits of his authority without giving notice
of his powers to the third person. However, it must be pointed out that in case of excess of
authority by the agent, like what petitioner claims exists here, the law does not say that a third
person can recover from both the principal and the agent. It is well to state here that Article 1897
upon which petitioner anchors its claim does not hold that in case of excess of authority, both the
agent and the principal are liable to the other contracting party. Eurotech Industrial Technologies, Inc. v.
Cuizon, 521 SCRA 584 (2007).

SAME. EXCEPT WHEN THE AGENT ACTS WITH FRAUD OR NEGLIGENCE. ―The rule relied upon
by the [agent to avoid the imposition of the liquidated damages provided for in the contract of sale]
that every person dealing with an agent is put upon inquiry and must discover upon his peril the
authority of the agent would apply in this case if the principal is sought to be held liable on the
contract entered into by the agent. That is not so in this case. Here, it is the agent that it sought to
be held liable on a contract of sale which was expressly repudiated by the principal because the agent
took chances, it exceed its authority, and, in effect, it acted in its own name..‖ National Power v.
NAMARCO, 117 SCRA 789, 800 (1982).

SAME. SAME. The practice in group insurance business, which is consistent with the jurisprudence
thereon in the State of California from whose laws our Insurance Code has been mainly patterned, is
that the employer-policyholder who takes out the insurance for its officers and employees, is the
agent of the insurer who has authority to collect the proceeds from the insurer. In this case, the
insurer, through the negligence of its agent, allowed a purported attorney-in-fact whose instrument
does not clearly show such power to collect the proceeds, it was liable therefor under the doctrine
that the principal is bound by the misconduct of its agent.. READ: Pineda v. Court of Appeals,
G.R. No. 105562, 226 SCRA 754, 27 September 1993.

SAME. SAME. When the bank in extending a loan required the principal borrower to obtain a
mortgage-redemption-insurance and deducted the premiums pertaining thereto from the loan
proceeds, it was wearing two hats, as a lender and as insurance agent. And when it turned out that
the bank knew or ought to have known that the principal borrower was not qualified at his age for
MRI coverage which prevented his insurance coverage from being made by the insurance company
at the time of the borrower‘s death, the bank was deemed to have been an agent who acted beyond
the scope of its authority. Under Article 1897, the agent who acts as such is not personally liable to
the party with whom he contracts, unless he exceeds the limits of his authority without giving such
party sufficient notice of his powers. If the third person dealing with an agent is unaware of the
limits of the authority conferred by the principal on the agent and he (third person) has been
deceived by the non-disclosure thereof by the agent, then the latter is liable for damages to him. The
rule that the agent is liable when he acts without authority is founded upon the supposition that
there has been some wrong or omission on his part either in misrepresenting, or in affirming, or
concealing the authority under which he assumes to act. Inasmuch as the non-disclosure of the
limits of the agency carries with it the implication that a deception was perpetrated on the
unsuspecting client, the provisions of Articles 19, 20 and 21 of the Civil Code come into play.
READ: DBP v. Court of Appeals, G.R. No. L-109937, 231 SCRA 370, 21 March 1994.

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3.7.3. Agent Is Criminally Liable for Crime Committed in the Pursuit of the Agency

CRIMINAL LIABILITY. The Law on Agency has no application in criminal cases, and no man can
escape punishment when he participates in the commission of a crime upon the ground that he
simply acted as an agent of any party. People v. Chowdury, 325 SCRA 572 (2000).

3.7.4. Agent‟s Written Power of Attorney, Insofar as Concerns Third Persons,


Governs on Questions Whether Agent Acted Within Scope of Authority Even if
it Exceeds Authority According to Understanding Between Principal and Agent
(Art. 1900)

AGENT‟S WRITTEN POWER OF ATTORNEY, INSOFAR AS CONCERNS THIRD PERSONS,


GOVERNS ON QUESTIONS WHETHER AGENT ACTED WITHIN SCOPE OF AUTHORITY EVEN IF
IT EXCEEDS AUTHORITY ACCORDING TO UNDERSTANDING BETWEEN PRINCIPAL AND AGENT
(ART. 1900). Where wife gave husband a power of attorney ―to loan and borrow money,‖ and for
such purpose to mortgage her property, and where the husband signed his wife‘s name to a note and
gave a mortgage on her property to secure the note and the amount of the loan was actually paid to
husband in money at the time the note and mortgage were executed, the transaction is binding upon
the wife under her power of attorney, regardless of what the husband may have done with the
money which he obtained on the loan. Bank of P.I. v. De Coster, 47 Phil 594 (1925).

SAME. It is a settled rule that persons dealing with an assumed agent, whether the assumed agency
be a general or special one are bound at their peril if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it. Harry Keeler v. Rodriguez, 4 Phil. 19).
Hence, when the bank accepted a letter of guarantee signed by a mere credit administrator on behalf
of the finance company, the burden was on the bank to satisfactorily prove that the credit
administrator with whom they transacted acted within the authority given to him by his principal.
READ: BA Finance v. Court of Appeals, G.R. No. 94566, 211 SCRA 112, 03 July 1992

SAME. As far as third persons are concerned, an act is deemed to have been performed within the
scope of the agent‘s authority, if such is within the terms of the power of attorney, as written, even if
the agent has in fact exceeded the limits of his authority according to an understanding between the
principal and his agent. READ: Eugenio v. Court of Appeals, G.R. No. 103737, 239 SCRA 207,
15 December 1994.

SAME. When one knowingly deals with the sales representative of a car dealership company, one
must realize that one is dealing with a mere agent, and it is incumbent upon such person to act with
ordinary prudence and reasonable diligence to know the extent of the sales representative‘s authority
as an agent in respect of contracts to sell the vehicles. A person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent. [Normal business practice does
not warrant a sales representative to have power to enter into a valid and binding contract of sale for
the company.] READ: Toyota Shaw, Inc. v. Court of Appeals, G.R. No. L-116650, 244 SCRA
320, 23 October 1995.

SAME. Every person dealing with an agent is put upon inquiry and must discover upon his peril the
authority of the agent. If he does not make such inquiry, he is chargeable with knowledge of the
agent‘s authority, and his ignorance of that authority will not be any excuse. Persons dealing with an
assumed agent, whether the assumed agency be a general or special one, are bound at their peril, if
they would hold the principal, to ascertain not only the fact of the agency but also the nature and
extent of the authority, and in case either is controverted, the burden of proof is upon them to
establish it. READ: Bacaltos Coal Mines v. Court of Appeals, G.R. No. 114091, 245 SCRA 460,
29 June 1995.30

30Citing Pineda v. Court of Appeals, 226 SCRA 754 (1993); Veloso v. La Urbana, 58 Phil. 681 (1933); Harry E. Keller
Electric Co. v. Rodriguez, 44 Phil. 19 (1922); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); and Strong v. Repide,
6 Phil. 680 (1906).

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SAME. The fact that one is dealing with an agent, whether the agency be general or special, should
be a danger signal. The mere representation or declaration of one that he is authorized to act on
behalf of another cannot of itself serve as proof of his authority to act as agent or of the extent of
his authority as agent. READ: Yu Eng Cho v. PANAM, G.R. No. 123560, 328 SCRA 717, 27
March 2000.

SAME. ―The settled rule is that persons dealing with an assumed agent are bound at their peril, and if
they would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to prove it.
In this case, respondent Fernandez specifically denied that she was authorized by the respondents-
owners to sell the properties, both in her answer to the complaint and when she testified. READ:
Litonjua v. Fernandez, G.R. No. 148116, 427 SCRA 478, 14 April 2004

SAME. The ignorance of a person dealing with an agent as to the scope of the latter‘s authority is no
excuse to such person and the fault cannot be thrown upon the principal. A person dealing with an
agent assumes the risk of lack of authority of the agent. He cannot charge the principal by relying
upon the agent‘s assumption of authority that proves to be unfounded. The principal, on the other
hand, may act on the presumption that third persons dealing with his agent will not be negligent in
failing to ascertain the extent of his authority as well as the existence of his agency. READ: Manila
Memorial Park Cemetery, Inc. v. Linsangan, G.R. No. 151319, 443 SCRA 377, 22 November
2004.

SAME. A person dealing with a known agent is not authorized, under any circumstances, blindly to
trust the agents; statements as to the extent of his powers; such person must not act negligently but
must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of
his authority. The settled rule is that, persons dealing with an assumed agent are bound at their peril,
and if they would hold the principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the burden of proof is upon them
to prove it. In this case, the petitioners failed to discharge their burden; hence, petitioners are not
entitled to damages from respondent EC. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006);
Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592 SCRA 622 (2009).

SAME. When dealing with an assumed agent, a third party should ascertain not only the fact of
agency, but also the nature and extent of his authority. Escueta v. Lim, 512 SCRA 411 (2007).

SAME. The Bank clearly failed to observe the required degree of caution in ascertaining the
genuineness and extent of the authority of Santos to mortgage the subject property. It should not
have simply relied on the face of the documents submitted by Santos, as its undertaking to lend a
considerable amount of money require of it a greater degree of diligence. That the person applying
for the loan is other than the registered owner of the real property being mortgaged should have
already raised a red flag and which should have induced the Bank to make inquiries into and confirm
Santos‘ authority to mortgage. A person who deliberately ignores a significant fact that could create
suspicion in an otherwise reasonable person is not an innocent purchaser for value. Bank of Commerce
v. San Pablo, Jr., 522 SCRA 713 (2007).

SAME. The Court has stressed time and again that every person dealing with an agent is put upon
inquiry, and must discover upon his peril the authority of the agent, and this is especially true where
the ac of the agent is of unusual nature. If a person makes no inquiry, he is chargeable with
knowledge of the agent‘s authority, and his ignorance of that authority will not be any excuse. Thus,
the undue haste in granting the loan without inquiring into the ownership of the subject properties
being mortgage, as well as the authority of the supposed agent to constitute the mortgages on behalf
of the owners, bank accepting the mortgage cannot be deemed a mortgagee in good faith. San Pedro v.
Ong, 569 SCRA 767 (2008).

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3.7.5. Third Person Cannot Set-up Facts of Agent‟s Exceeding Authority Where
Principal Ratified or Signified Willingness to Ratify Agent‟s Acts (Art. 1901)

NOTE: Under this heading, remember that: a) Principal Should Be the One to Question Agent‘s
Lack/Excess of Authority; b) Power of Attorney (Must) Be Required by Third Party (Art. 1902); and,
c) Private or Secret Orders of Principal Do Not Prejudice Third Persons Who Relied Upon Agent‘s
Power of Attorney or Principal‘s Instruction (Art. 1902).

PRIVATE OR SECRET ORDERS OF PRINCIPAL DO NOT PREJUDICE THIRD PERSONS WHO


RELIED UPON AGENT‟S POWER OF ATTORNEY OR PRINCIPAL‟S INSTRUCTION (ART. 1902). In
an expropriation proceeding, the State cannot raise the alleged lack of authority of the counsel of the
owner to bind his client in a compromise agreement because such lack of authority may be
questioned only by the principal or client. [Since it is within the right or prerogative of the principal
to ratify even the unauthorized acts of the agent]. Commissioner of Public Highways v. San Diego, 31
SCRA 617 (1970).

3.8. OBLIGATIONS OF COMMISSION AGENTS

3.8.1. Commission Agent Responsible for Goods Received According to Terms and
Conditions and as Described in Consignment (Art. 1903)

EXCEPT: When Has Made Written Statement of Damage/Deterioration (Art. 1903)

3.8.2. Obligation in Handling Various Goods for Different Owners (Art. 1904):

NOTE: The agent has the obligation to Distinguish Them by Countermarks If Goods of Same
Kind and Mark in order to To Prevent Conflict of Interest Among Owners. BUT SEE: Art. 1976
(Contract of Deposit) – Depositary May Commingle Grain or Other Articles of Similar Nature and
Quality – ownership pro-rata.

3.8.3. He Cannot Sell on Credit Without Principal‟s Consent (Art. 1905); otherwise:
Considered as Cash Sales

HE CANNOT SELL ON CREDIT WITHOUT PRINCIPAL‟S CONSENT (ART. 1905); OTHERWISE:


CONSIDERED AS CASH SALES. Whether viewed as an agency to sell or as a contract of sale, the
liability of Green Valley is indubitable. Adopting Green Valley‘s theory that the contract is an agency
to sell, it is liable because it sold on credit without authority from its principal.‖ Under Article 1905,
it is provided that the commission agent cannot, without the express or implied consent of the
principal, sell on credit, and should it do so the principal may demand from him payment in cash.
READ: Green Valley v. IAC, G.R. No. L-49395, 133 SCRA 697, 26 December 1984.

3.8.4. When With Principal‟s Authority to Sell on Credit: (Art. 1906)

NOTE: Under this heading the agent must inform the Principal with Statement of Buyer‘s Names
OTHERWISE (Effect of Non-Compliance) it will be Considered as a Cash Sale

3.8.5. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907)

NOTE: Under this heading, the agent shall: a) Bear the Risk of Collection; and, b) Pay Principal the
Proceeds of Sale on Same Terms Agreed with Purchaser.

3.8.6. Liability for Failure to Collect Principal‟s Credit When Due (Art. 1908)

NOTE: Under this heading, the agent shall be liable for damages UNLESS due diligence is proven.

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SECTION FOUR
“In investment management account, where the written instrument provides that the bank
shall purchase debt securities on behalf of the client and will handle the accounts in
accordance with the instructions of the client, creates a principal-agent relationship, and
not a trust relationship or an ordinary bank deposit account. Consequently, under Article
1910, the client assumed all obligations or inherent risks entailed by transactions
emanating from the arrangement, and the bank may be held liable, as an agent, only
when it exceeds its authority, or acts with fraud, negligence or bad faith. Principals are
solely obliged to observe the solemnity of the transaction entered into by the agent on their
behalf, absent any proof that the latter acted beyond its authority, and concomitant to this
obligation is that the principal also assumes the risks that may arise from the
transaction.”31

4. OBLIGATIONS OF THE PRINCIPAL

4.1. BINDING EFFECT ON PRINCIPAL OF CONTRACTS MADE BY THE AGENT

4.1.1. Must be done in the name of the Principal

Similarly, in this case, the authorized agent failed to indicate in the mortgage that she was acting for
and on behalf of her principal. The Real Estate Mortgage, explicitly shows on its face, that it was
signed by Concepcion in her own name and in her own personal capacity. In fact, there is nothing in
the document to show that she was acting or signing as an agent of petitioner. Thus, consistent with
the law on agency and established jurisprudence, petitioner cannot be bound by the acts of
Concepcion. … At this point, we find it significant to mention that respondent bank has no one to
blame but itself. Not only did it act with undue haste when it granted and released the loan in less
than three days, it also acted negligently in preparing the Real Estate Mortgage as it failed to indicate
that Concepcion was signing it for and on behalf of petitioner. We need not belabor that the words
"as attorney-in-fact of," "as agent of," or "for and on behalf of," are vital in order for the principal to
be bound by the acts of his agent. Without these words, any mortgage, although signed by the agent,
cannot bind the principal as it is considered to have been signed by the agent in his personal capacity.
READ: Bucton v. Rural Bank of El Salvador, Inc., G.R. No. 179625, 24 February 2014.

4.1.2. When Done Within Agent‟s Scope of Authority: Principal Bound (Art. 1897)

In investment management account, where the written instrument provides that the bank shall
purchase debt securities on behalf of the client and will handle the accounts in accordance with the
instructions of the client, creates a principal-agent relationship, and not a trust relationship or an
ordinary bank deposit account. Consequently, under Article 1910, the client assumed all obligations
or inherent risks entailed by transactions emanating from the arrangement, and the bank may be
held liable, as an agent, only when it exceeds its authority, or acts with fraud, negligence or bad faith.
Principals are solely obliged to observe the solemnity of the transaction entered into by the agent on
their behalf, absent any proof that the latter acted beyond its authority, and concomitant to this
obligation is that the principal also assumes the risks that may arise from the transaction. READ:
Panlilio v. Citibank, G.R. No. 156335, 539 SCRA 69, 28 November 2007.

4.1.3. When Done Outside of Agent‟s Authority: Principal Not Bound (Art. 1910)

Where the memorial park company has authorized its agent to solicit and remit offers to purchase
internment spaces obtained on forms provided by the company, then the terms of the offer to
purchase, therefore, are contained in such forms and, when signed by the buyer and an authorized
officer of the company, becomes binding on both the company and said buyer. And the fact that the
buyer and the agent had an agreement different from that contained in the forms accepted does not
bind the company, since the same were made obviously outside the agent‘s authority. When the

31
Panlilio v. Citibank,, 539 SCRA 69 (2007).

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power of the agent to sell are governed by the written form, it is beyond the authority of the agent as
a fact that is deemed known and accepted by the third person, to offer terms and conditions outside
of those provided in writing. READ: Manila Memorial Park Cemetery v. Linsangan, G.R. No.
151319, 443 SCRA 377, 22 November 2004.

4.1.4. Exceptions

NOTE: These are: a) When Principal Ratifies, Expressly or Impliedly (Art. 1901); and, b) Where
Agent Acts in Excess of Authority, Where the Principal Allowed Agent to Act as Though Agent
Had Full Powers (Art. 1911): i) Exception to the Rule that Obligations Are Presumed to Be Joint; ii)
Doctrine of Apparent Authority; and, iii) Agency by Estoppel.

WHEN PRINCIPAL RATIFIES, EXPRESSLY OR IMPLIEDLY (ART. 1901). Since the general rule is
that the principal is bound by the acts of his agent in the scope of the agency, therefore when the
agent had full authority to make the tax returns and file them, together with the check payments,
with the Collector of Internal Revenue on behalf of the principal, then the effects of dishonesty of
the agent must be borne by the principal, not by an innocent third party who has dealt with the
dishonest agent in good faith. Lim Chai Seng v. Trinidad, 41 Phil. 544 (1921).

SAME. A person with whom an agent has contracted in the name of his principal, has a right of
action against the purported principal, even when the latter denies the commission or authority of
the agent, in which case the party suing has the burden of proving the existence of the agency
notwithstanding the purported principal‘s denial thereof. If the agency relation is proved, then the
principal shall be held liable, and the agent who is made a party to the suit cannot be held personally
liable. On the other hand, if the agency relationship is not proven, it would be the agent who would
become liable personally on the contract entered into. Nantes v. Madriguera, 42 Phil. 389 (1921).

SAME. Where a sale of land is effected through an agent who made misrepresentations to the buyer
that the property can be delivered physically to the control of the buyer when in fact it was in
adverse possession of third parties, the seller-principal is bound for such misrepresentations and
cannot insist that the contract is valid and enforceable; the seller-principal cannot accept the benefits
derived from such representations of the agent and at the same time deny the responsibility for them.
Gonzales v. Haberer, 47 Phil. 380 (1925).

SAME. When an agent has been empowered to sell hemp in a foreign country, that express power
carries with it the implied power to make and enter into the usual and customary contract for its sale,
which sale contract may provide for settlement of issues by arbitration. ―We are clearly of the
opinion that the contract in question is valid and binding upon the defendant [principal], and that
authority to make and enter into it for and on behalf of the defendant [principal], but as a matter of
fact the contract was legally ratified and approved by the subsequent acts and conducts of the
defendant [principal]. Robinson, Fleming and Co. v. Cruz, 49 Phil. 42 (1926).

SAME. The authority to sell any kind of realty that ―might belong‖ to the principal was held to
include also such as the principal might afterwards have during the time it was in force. Katigbak v.
Tai Hing Co., 52 Phil. 622 (1928).

SAME. The registered owner who placed in the hands of another an executed document of transfer
of the registered land, was held to have effectively represented to a third party that the holder of
such document is authorized to deal with the property. Blondeau v. Nano,. 61 Phil. 625 (1935);
Domingo v. Robles, 453 SCRA 812 (2005).

SAME. When the principal has duly empowered his agent to enter into a contract of mortgage over
his property as well as a contract of surety, but the agent only entered into a contract of mortgage,
no inference from the power of attorney can be made to make the principal liable as a surety,
because under the law, a surety must be express and cannot be presumed. Wise and Co. v. Tanglao, 63
Phil. 372 (1936).

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SAME. When bank officers, acting as agent, had not only gone against the instructions, rules and
regulations of the bank in releasing loans to numerous borrowers who were qualified, then such
bank officers are liable personally for the losses sustained by the bank. The fact that the bank had
also filed suits against the borrowers to recover the amounts given does not amount to ratification
of the acts done by the bank officers. PNB v. Bagamaspad, 89 Phil. 365 (1951).

SAME. As a general rule, the mismanagement of the business of a party by his agents does not
relieve said party from the responsibility that he had contracted with third persons. Commercial Bank
& Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).

SAME. Pursuant to the terms of the judgment, petitioners had issued a check in payment of the
judgment debt and made arrangements with the bank for the latter to allow the encashment thereof;
but the check was dishonored by the bank which increased the amount of the judgment debt. When
the petitioner sought not to be made liable for the alleged ―oversight‖ of the bank, the Court denied
such defense on the ground that ―The principal is responsible for the acts of the agent, done within
the scope of his authority, and should bear the damages caused upon third parties. If the fault or
oversight lies on the agent bank, the petitioners are free to sue said bank for damages occasioned
thereby.‖ Lopez v. Alvendia, 12 SCRA 634 (1964).

SAME. Where the principal issued the checks in full payment of the taxes due, but his agents had
misapplied the check proceeds, it was held that the principal would still be liable, because when a
contract of agency exists, the agent‘s acts bind his principal, without prejudice to the latter seeking
recourse against the agent in an appropriate civil or criminal action. Dy Peh v. Collector of Internal
Revenue, 28 SCRA 216 (1969).

SAME. Under the principle that knowledge of the agent is considered knowledge by the principle,
the Court ruled that the spouses cannot defend by contending lack of knowledge of the rules upon
which they received their tickets from the airline company since the evidence bore out that their
travel agent, who handled their travel arrangements, was duly informed by proper representatives of
the airline company. Air France v. Court of Appeals, 126 SCRA 448 (1983).

SAME. When a third party admitted in her written correspondence that she had contracted with the
principal through an duly authorized agent, and then sues both the principal and the agent on an
alleged breach of that contract, and in fact later on dismisses the suit insofar as the principal is
concerned, there can be no cause of action against the agent. Since it is the principal who should be
answerable for the obligation arising from the agency, it is obvious that if a third person waives his
claims against the principal, he cannot assert them against the agent. Bedia v. White, 204 SCRA 273
(1991).

SAME. The fact that the agent defrauded the principal in not turning over the proceeds of the
transactions to the latter cannot in any way relieve or exonerate such principal from liability to the
third persons who relied on his agent‘s authority. It is an equitable maxim that as between two
innocent parties, the one who made it possible for the wrong to be done should be the one to bear
the resulting loss. READ: Cuison v. Court of Appeals, G.R. No. 88539, 227 SCRA 391, 26
October 1993.

SAME. On the basis of the general principle that ―the principal is responsible for the acts of the
agent, done within the scope of his authority, and should bear the damage caused to third persons,‖
the principal cannot absolve itself from the damages sustained by its buyer on the premise that the
fault was primarily caused by its agent in pointing to the wrong lot, since the agent ―was acting
within its authority as the sole real estate representative [of the principal-seller] when it made the
delivery to‖ the buyer, although ―[i]n acting within its scope of authority, [the agent] was, however,
negligent,‖ since it is negligence that is the basis of principal‘s liability since under Arts. 1909 and
1910, the liability of the principal for acts done by the agent within the scope of his authority do not
exclude those done negligently. READ: Pleasantville Dev. v. Court of Appeals, G.R. No. 79688,
253 SCRA 10, 01 February 1996.

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SAME. When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset (piece of land) in the normal course of business, it is legally obliged
to confirm the transaction by issuing a board resolution to enable the buyers to register the property
in their names. Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000).

SAME. ―Ratification in agency is the adoption or confirmation by one person of an act performed
on his behalf by another without authority. The substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority. Ordinarily, the principal must have full
knowledge at the time of ratification of all the material facts and circumstances relating to the
unauthorized act of the person who assumed to act as agent. Thus, if material facts were suppressed
or unknown, there can be no valid ratification and this regardless of the purpose or lack thereof in
concealing such facts and regardless of the parties between whom the question of ratification may
arise. Nevertheless, this principle does not apply if the principal‘s ignorance of the material facts and
circumstances was willful, or that the principal chooses to act in ignorance of the facts. However, in
the absence of circumstances putting a reasonably prudent man on inquiry, ratification cannot be
implied as against the principal who is ignorant of the facts.‖ Thus, the acts of an agent beyond the
scope of his authority do not bind the principal, unless he ratifies them, expressly or impliedly. Only
the principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the principal
must have knowledge of the acts he is to ratify.‖ READ: Manila Memorial Park Cemetery v.
Linsangan, G.R. No. 151319, 443 SCRA 377, 22 November 2004

SAME. Since the basis of agency is representation, then the question of whether an agency has been
created is ordinarily a question which may be established in the same way as any other fact, either by
direct or circumstantial evidence. Though that fact or extent of authority of the agents may not, as a
general rules, be established from the declarations of the agents alone, if one professes to act as
agent for another, she may be estopped to deny her agency both as against the asserted principal and
the third persons interested in the transaction in which he or he is engaged. Doles v. Angeles, 492
SCRA 607 (2006).

SAME. The general rule is that the principal is responsible for the acts of its agent done within the
scope of its authority, and should bear the damage caused to third persons. When the agent exceeds
his authority, the agent becomes personally liable for the damage. But even when the agent exceeds
his authority, the principal is still solidarily liable together with the agent if the principal allowed the
agent to act as though the agent had full powers. In other words, the acts of an agent beyond the
scope of his authority do not bind the principal, unless the principal ratifies them, expressly or
implied. Ratification in agency is the adoption or confirmation by one person of an act performed
on his behalf by another without authority.‖ READ: Filipinas Life Assurance Co. v. Pedroso,
G.R. No. 159489, 543 SCRA 542, 04 February 2008.

SAME. Under Article 1898 and 1910, an agent‘s act, even if done beyond the scope of his authority,
may bind the principal if he ratifies them, whether expressly or tacitly. It must be stressed though
that only the principal, and not the agent, can ratify the unauthorized acts, which the principal must
have knowledge of. Thus, where the special power of attorney that an agent for the insurance
company provides clearly the limit of the entities to whom he can issue a surety bond, as well as the
limit of the amounts that it can cover, an insured who does not fall within such authority cannot
claim good faith as to make the surety issued outside of the scope of authority binding on the
principal insurance company. Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427
(2012).

WHERE AGENT ACTS IN EXCESS OF AUTHORITY, WHERE THE PRINCIPAL ALLOWED AGENT
TO ACT AS THOUGH AGENT HAD FULL POWERS (ART. 1911). DOCTRINE OF APPARENT
AUTHORITY. The doctrine of apparent authority focuses on two factors, first the principal‘s
manifestations of the existence of agency which need not be expressed, but may be general and
implied, and second is the reliance of third persons upon the conduct of the principal or agent.
Under the doctrine, the question in every case is whether the principal has by his voluntary act
placed the agent in such a situation that a person of ordinary prudence, conversant with business
usages and the nature of the particular business, is justified in presuming that such agent has

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authority to perform the particular act in question. Professional Services, Inc. v. CA, 544 SCRA 170
(2008); 611 SCRA 282 (2010).

SAME. SAME. Easily discernible from the foregoing is that apparent authority is determined only by
the acts of the principal and not by the acts of the agent. The principal is, therefore, not responsible
where the agent‘s own conduct and statements have created the apparent authority. Sargasso
Construction & Dev. Corp. v. PPA, 623 SCRA 260 (2010).

SAME. SAME. There can be no apparent authority of an agent without acts or conduct on the part of
the principal, which must have been known and relied upon in good faith as a result of the exercise
of reasonable prudence by a third party claimant, and which must have produced a change of
position to the third party‘s detriment. Therefore, there is no basis for the courts to apply the
doctrine where there is no evidence showing the manner by which the supposed principal, has
―clothed‖ or ―held out‖ its branch manager as having the power to enter into an agreement, as
claimed by petitioners. Banate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010).

SAME. AGENCY BY ESTOPPEL. By the opening of branch office with the appointment of its branch
manager and honoring several surety bonds issued in its behalf, the insurance company induced the
public to believe that its branch manager had authority to issue such bonds. As a consequence, the
insurance company was estopped from pleading, particularly against a regular customer thereof, that
the branch manager had no authority. Central Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159
(1971).

SAME. SAME. Even when the agent of the real estate company acts unlawfully and outside the scope
of authority, the principal can be held liable when by its own act it accepts without protest the
proceeds of the sale of the agents which came from double sales of the same lots, as when learning
of the misdeed, it failed to take necessary steps to protect the buyers and failed to prevent further
wrong from being committed when it did not advertise the revocation of the authority of the culprit
agent. In such case the liabilities of both the principal and the agent is solidary. READ: Manila
Remnant Co., Inc. v. Court of Appeals, G.R. No. 82978, 191 SCRA 622, 22 November 1990.

SAME. SAME. For an agency by estoppel to exist, the following must be established: (1) the principal
manifested a representation of the agent‘s authority or knowingly allowed the agent to assume such
authority; (2) the third person, in good faith, relied upon such representation; (3) relying upon such
representation, such third person has changed his position to his detriment. An agency by estoppel,
which is similar to the doctrine of apparent authority, requires proof of reliance upon the
representations, and that, in turn, needs proof that the representations predated the action taken in
reliance. READ: Litonjua, Jr. v. Eternit Corp., G.R. No. 144805, 490 SCRA 204, 08 June 2006.

SAME. SAME. For one to successfully claim the benefit of estoppel on the ground that he has been
misled by the representations of another, he must show that he was not misled through his own
want of reasonable care and circumspection. Country Bankers Insurance Corporation v. Keppel Cebu
Shipyard, 673 SCRA 427 (2012).

SAME. SAME. Innocent third persons should not be prejudiced if the principal failed to adopt the
needed measures to prevent misrepresentation, much more so if the principal ratified his agent‘s acts
beyond the latter‘s authority. Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542 (2008).

SAME. SAME. The law makes no presumption of agency and proving its existence, nature and extent
is incumbent upon the person alleging its existence, nature and extent is incumbent upon the person
alleging it. An agency by estoppel, which is similar to the doctrine of apparent authority requires the
proof of reliance upon the representation, and that, in turn, needs proof that the representations
predated the action taken in reliance. Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009).

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4.2. OBLIGATIONS OF THE PRINCIPAL

4.2.1. Obligation to Pay Agent‟s Compensation (Art. 1875)

Although the sale of the object of the agency to sell was perfected three days after the expiration of
the agency period, the agent would still be entitled to receive the commission stipulated based on the
doctrine held in Prats v. Court of Appeals, 81 SCRA 360 (1978), that when the agent was the efficient
procuring cause in bringing about the sale that the agent was entitled to compensation. In the earlier
case of Reyes v. Manaoat, 8 C.A. Rep. 2d 368 (1965), this Court ruled that when there is a close,
proximate and causal connection between the agent's efforts and labor and the principal's sale of his
property, the agent is entitled to a commission. READ: Manotok Bros. Inc. v. CA, G.R. No.
94753, 221 SCRA 224, 07 April 1993.

Although the ultimate buyer was introduced by the agent to the principal during the term of the
agency, nevertheless, the lapse of the period of more than one year and five months between the
expiration of petitioners' authority to sell and the consummation of the sale, cannot authorize
compelling the principal to pay the stipulated broker‘s fee, since the agent was no longer entitled
thereto. The Court takes into strong consideration that utter lack of evidence of the agent showing
any further involvement in the negotiations between principal and buyer during that period and in
the subsequent processing of the documents pertinent to said sale. The broker was not the efficient
procuring cause in bringing about the sale in question, and are therefore not entitled to the
stipulated broker‘s commission. Inland Realty v. Court of Appeals, 273 SCRA 70 (1997).

4.2.2. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912)

NOTE: The following must be taken into consideration under this heading: a) Agent Has Right to
Reimbursement for Expenses Advanced Including Interest from the Day It Was Advanced; b)
Compare: Where Agent Consents and Is Bound to Advance the Sums as Stipulated (Art. 1886); and,
c) Where Principle Not Liable to Agent for Expenses Incurred (Art. 1918).

OBLIGATION TO ADVANCE SUMS REQUESTED FOR EXECUTION OF AGENCY (ART. 1912).


WHERE PRINCIPAL NOT LIABLE TO AGENT FOR EXPENSES INCURRED (ART. 1918). According
to Hahn, BMW periodically inspected the service centers to see to it that BMW standards were
maintained. Indeed, it would seem from BMW's letter to Hahn that it was for Hahn's alleged failure
to maintain BMW standards that BMW was terminating Hahn's dealership. The fact that Hahn
invested his own money to put up these service centers and showrooms does not necessarily prove
that he is not an agent of BMW. For as already noted, there are facts in the record which suggest
that BMW exercised control over Hahn's activities as a dealer and made regular inspections of
Hahn's premises to enforce compliance with BMW standards and specifications. READ: Hahn v.
Court of Appeals, G.R. No. 113074, 266 SCRA 537, 22 January 1997.

SAME. SAME. However, while the law on agency prohibits the area manager from obtaining
reimbursement, his right to recover may still be justified under the general law on obligations and
contracts, particularly Article 1236 of the Civil Code on payment by a third party of the obligation of
the debtor, allows recovery ―only insofar as the payment has been beneficial to the debtor.‖ Thus, to
the extent that the obligation of the insurance company has been extinguished, the area manager
may demand for reimbursement from his principal. To rule otherwise would result in unjust
enrichment of petitioner. READ: Dominion Insurance Corp. v. Court of Appeals, G.R. No.
129919, 376 SCRA 239, 06 February 2002.

4.2.3. Obligation to Indemnify Agent for Damages (Art. 1913)

COMPARE: This needs to be analyzed alongside the Liability for Damages for Non-Performance
of Agency (Art. 1884)

When the purchase by one company of the copra of another company is by way of contract of
purchase rather than an agency to purchase, the former is not liable to reimburse the latter for

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expenses incurred by the latter in maintaining it purchasing organization intact over a period during
which the actual buying of copra was suspended. READ: Albaladejo y Cia v. PRC, G.R. no. L-
20726, 45 Phil 556, 20 December 1923.

4.2.4. Right to Retain Object of Agency in Pledge for Advances and Damages (Art.
1914)

NOTE: Take note of the following under this heading: a) Agent Bound to deliver to principal
everything he received even if not due the principal (Art. 1891); and, b) Thing Pledged May Be Sold
Only After Demand of Amount Due (Art. 2122) where: i) Public auction to take place within one
(1) month after demand; and, ii) Debtor may demand return of not sold within this period.

4.3. TWO OR MORE PRINCIPALS TO AGENT APPOINTED FOR COMMON TRANSACTIONS


(ART. 1915)

4.3.1. Obligation of the Principals Is Solidary Because of Their Common Interest

When the law expressly provides for solidarity of the obligation, as in the liability of co-principals in
a contract of agency, each obligor may be compelled to pay the entire obligation. The agent may
recover the whole compensation from any one of the co-principals, as in this case. READ: De
Castro v. Court of Appeals, G.R. No. 115838, 384 SCRA 607, 18 July 2002.

4.3.2. Compare Art. 1894: Two or More Agents with One Principal – Agent‟s
Obligation Is Solidary

4.3.3. Right of Each Principal to Revoke Authority of Common Agent (Art. 1925)

4.4. RIGHTS
OF PERSONS WHO CONTRACTED FOR SAME THING, ONE WITH PRINCIPAL
AND THE OTHER WITH AGENT (ART. 1916)

NOTE: The rules laid down are: a) That of Prior Date Is Preferred; or, b) if a Double Sale
Situation (Art. 1544)

4.5. LIABILITY OF PRINCIPAL AND AGENT TO THIRD PERSONS WHOSE CONTRACT MUST
BE REJECTED PURSUANT TO ART. 1916 (ART. 1917)

NOTE: Under this heading, consider the following: a) If Agent in Good Faith: Principal Liable; or,
b) if Agent in Bad Faith: Agent alone Liable.

4.6. LIABILITY OF PRINCIPAL TO THIRD PERSONS FOR ACTS OF THE AGENT‟S EMPLOYEES

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

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SECTION FIVE
“His death is an irreversible fact that throws an entirely new bearing on the legal
controversy at hand. For essentially, the contract of management and administration
between the Municipality and Lacuesta is one of agency whereby a person binds himself to
render some service or to do something in representation or on behalf of another, with the
consent or authority of the latter. (Article 1868, New Civil Code). Here in the case at
bar, Lacuesta bound himself as Manager-Administrator of the Bayambang Fishing &
Hunting Park and Municipal Watershed to render service or perform duties and
responsibilities in representation or on behalf of the Municipality of Bayambang, with the
consent or authority of the latter pursuant to Ordinance No. 8. Under Article 1919,
New Civil Code, agency is extinguished by the death of the agent. His rights and
obligations arising from the contract are not transmittable to his heirs.”32

5. EXTINGUISHMENT OF AGENCY

5.1. HOW AND WHEN AGENCY EXTINGUISHED (ART. 1919)

5.1.1. By Principal‟s Revocation of Agency (Express or Implied)

5.1.2. By Agent‟s Withdrawal from Agency

5.1.3. By Death, Civil Interdiction, Insanity or Insolvency of the Principal or the


Agent

5.1.4. By Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency

5.1.5. By the Accomplishment of the Object or Purpose of Agency

5.1.6. By the Expiration of the Period for Which Agency Was Constituted

5.2. EXPRESS REVOCATION: THE PRINCIPAL MAY REVOKE AN “AGENCY AT WILL”

5.2.1. In Which Case, Principal May Compel Agent to Return the Document
Evidencing the Agency (Art. 1920)

Where no time for the continuance of the agency is fixed by the terms, the principal is at liberty to
terminate it at will subject only to the requirements of good faith. Dañon v. Brimo, 42 Phil 133 (1921).

5.2.2. Right of Either Two or More Principals to Revoke

NOTE: Under this heading, the following must be taken into consideration: a) Obligation of
Several Principals to a Common Agent Is Solidary (Art. 1915); and, b) Any of the Principals Can
Revoke the Authority of Their Common Agent, Without the Consent of the Other(s) (Art. 1925).

5.3. IMPLIED REVOCATION

5.3.1. Appointment of New Agent for Same Business/Transaction (Art. 1923)

NOTE: Under this heading, the following must be taken into consideration: a) Impliedly Revoked
as to Agent Only; and, b) As to Third Persons, Notice to Them Is Necessary (Art. 1922).

APPOINTMENT OF NEW AGENT FOR SAME BUSINESS/TRANSACTION (ART. 1923). AS TO


THIRD PERSONS, NOTICE TO THEM IS NECESSARY (ART. 1922). In litigation, the fact that a
second attorney enters an appearance on behalf of a litigant does not authorize a presumption that
the authority of the first attorney has been withdrawn. Aznar v. Morris, 3 Phil. 636 (1904).

32
Terrado v. Court of Appeals, G.R. No. 58794, 24 August 1984.

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SAME. SAME. Where the father first gave a power of attorney over the business to his son, and
subsequently to the mother, the Court held that without evidence showing that the son was
informed of the issuance of the power of attorney to the mother, the transaction effected by the son
pursuant to his power of attorney, was valid and binding. READ: Garcia v. De Manzano, G.R.
No. L-13414, 39 Phil 577, 04 February 1919.

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

If the purpose of the principal in dealing directly with the purchaser and himself effecting the sale of
the principal‘s property is to avoid payment of his agent‘s commission, the implied revocation is
deemed made in bad faith and cannot be sanctioned without according to the agent the commission
which is due him. Infante v. Cunanan, 93 Phil 693 (1953).

The act of a contractor, who, after executing powers of attorney in favor of another empowering the
latter to collect whatever amounts may be due to him from the Government, and thereafter
demanded and collected from the Government the money the collection of which he entrusted to
his attorney-in-fact, constituted revocation of the agency. New Manila Co. v. Republic, 107 Phil 824
(1960).

The revocation of a special power of attorney, although embodied in a private writing is valid and
binding between the parties. PNB v. IAC, 189 SCRA 680 (1990).

Where purported agent was given only authority to ―follow up‖ the purchase of fire truck with
municipal government, there was no authority to sell nor was he empowered to make a sale for and
in behalf of the seller. But even if the purported agent is considered to have been constituted as an
agent to sell the fire truck, such agency would have been deemed revoked upon the resumption of
direct negotiations between the seller and the municipality, the purported agent having in the
meantime abandoned all efforts (if indeed any were exerted) to secure the deal in the seller‘s behalf.
Guardex v. NLRC, 191 SCRA 487 (1990).

Principal may revoke, express or impliedly, a contract of agency at will, and may be availed of even if
the period fixed in the contract of agency has not yet expired. As the principal has this absolute right
to revoke the agency, the agent can not object thereto; neither may he claim damages arising from
such revocation, unless it is shown that such was done in order to evade the payment of agent‘s
commission. The act of a contractor, who, after executing powers of attorney in favor another
empowering the latter to collect whatever amounts may be due to him from the Government, and
thereafter demanded and collected from the government the money the collection of which he
entrusted to his attorney-in-fact, constituted revocation of the agency in favor of the attorney-in-fact.
New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824 (1960); READ: CMS Logging
v. Court of Appeals, G.R. No. 41420, 211 SCRA 374, 10 July 1992.

Damages are generally not awarded to the agent for the revocation of the agency, and the case at bar
is not one falling under the exception mentioned, which is to evade the payment of the agent‘s
commission. READ: CMS Logging v. Court of Appeals, G.R. No. 41420, 211 SCRA 374, 10
July 1992

5.3.3. General Power of Attorney Is Revoked by a Special One Granted to Another


Agent, As Regards the Special Matter Involved in the Latter (Art. 1926)

Even though a period is stipulated during which the agent is to hold his position in the mercantile
establishment, yet the latter may, for any of the special reasons specified in Art. 300 of the Code of
Commerce, dismiss such agent or employee even before the termination of the period. Barretto v.
Santa Marina, 26 Phil 440 (1913).

A special power of attorney giving the son the authority to sell the principals properties is deemed
revoked by a subsequent general power of attorney that does not give such power to the son, and

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any sale effected thereafter by the son in the name of the father would be void. READ: Dy Buncio
& Co. v. Ong Guan Ca, G.R. No. 40681, 60 Phil 696, 02 October 1934.

It is now well-settled that a principal may discharge or dismiss his agent for just cause for
malfeasance or misfeasance in the performance of his duties. The provisions of article 300 of the
Code of Commerce expressly authorizes a merchant to discharge his employee or agent for fraud or
breach of trust, or engaging in any commercial transaction for their own account without the
express knowledge and permission of the principal. Manila Trading v. Manila Trading Laborers Assn., 83
Phil 297 (1949).

When the terms of the agency contract allowed the agent ―to dispose of, sell, cede, transfer and
convey x x x until all the subject property as subdivided is fully disposed of,‖ the agency is one with
a period and it is not extinguished until all the lots have been disposed of. Consequently, if the
contract is terminated by the principal before all the lots in the subdivision has been disposed of,
there is a breach of contract for which the principal would be liable for damages. Dialosa v. Court of
Appeals, 130 SCRA 350 (1984).

When the revocation of the agency was effected by the principal primarily because of the refusal of
the agent to share fifty percent of the commissions earned under the contract of agency, such
revocation was done in bad faith, and for which the principal can be held liable for damages
including the payment of full commissions earned by the agent at the time of the revocation of the
agency. Valenzuela v. Court of Appeals, 191 SCRA 1 (1990).

Courts are without authority to reinstate an agency arrangement that has been revoked or terminated
by the principal. ―In an agent-principal relationship, the personality of the principal is extended
through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal,
authorized to perform all acts which the latter would have him do. Such a relationship can only be
effected with the consent of the principal, which must not, in any way, be compelled by law or by
any court. The Agreement itself between the parties states that ―either party may terminate the
Agreement without cause by giving the other 30 days‘ notice by letter, telegram or cable.‖ (emphasis
supplied) We, therefore, set aside the portion of the ruling of the respondent appellate court
reinstating Orient Air as general sales agent of American Air.‖ Orient Air Services v. Court of Appeals,
197 SCRA 645, 656 (1991).

5.4. CASES OF IRREVOCABLE AGENCIES (ART. 1927):

5.4.1. When a Bilateral Contract Depends on It

An exception to the revocability of a contract of agency is when it is coupled with interest, i.e., if a
bilateral contract depends upon the agency. The reason for its irrevocability is because the agency
becomes part of another obligation or agreement. It is not solely the rights of the principal but also
that of the agent and third persons which are affected. Hence, the law provides that in such cases,
the agency cannot be revoked at the sole will of the principal. READ: Republic v. Evangelista,
G.R. No. 156015, 466 SCRA 544, 11 August 2005.

Agency is extinguished by death of the principal; the only exception where the agency shall remain
in full force after the death of the principal is when if it has been constituted in the common interest
of the latter and of the agent, or in the interest of a third person who has accepted the stipulation in
his favor. Sasaba v. Vda. De Te, 594 SCRA 410 (2009).

5.4.2. When It Is the Means of Fulfilling an Obligation Already Contracted

Unlike simple grants of a power of attorney, the agency that we hereby declare to be compatible
with the intent of the parties cannot be revoked at will. The reason is that it is one coupled with an
interest, the agency having been created for the mutual interest of the agent and the principal. It
appears that Lina Sevilla is a bona fide travel agent herself, and as such, she had acquired an interest
in the business entrusted to her. Moreover, she had assumed a personal obligation for the operation

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thereof, holding herself solidarily liable for the payment of rentals. She continued the business, using
her own name, after Tourist World had stopped further operations. Her interest, obviously, is not
limited to the commissions she earned as a result of her business transactions, but one that extends
to the very subject matter of the power of management delegated to her. It is an agency that cannot
be revoked at the pleasure of the principal. READ: Sevilla v. Court of Appeals, G.R. Nos. 41182-
83, 160 SCRA 171, 16 April 1988.

SAME. AGENCY COUPLED WITH INTEREST. ―In the insurance business . . . , the most difficult and
frustrating period is the solicitation and persuasion of the prospective clients to buy insurance
policies. Normally, agents would encounter much embarrassment, difficulties, and oftentimes
frustrations in the solicitation and procurement of the insurance policies. To sell policies, an agent
exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money. . .
Therefore, the respondents cannot state that the agency relationship between Valenzuela and
Philamgen is not coupled with interest. ―There may be cases in which an agent has been induced to
assume a responsibility or incur a liability, in reliance upon the continuance of the authority under
such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or
liability. . . . Furthermore, there is an exception to the principle that an agency is revocable at will
and that is when the agency has been given not only for the interest of the principal but for the
interest of third persons or for the mutual interest of the principal and the agent. In these cases, it is
evident that the agency ceases to be freely revocable by the sole will of the principal. READ:
Valenzuela v. Court of Appeals, G.R. No. 83122, 191 SCRA 1, 19 October 1990.

Also, the relationship between NASUTRA/SRA and PNB when the former constituted the latter as
its attorney-in-fact is not a simpIe agency. NASUTRA/SRA has assigned and practically surrendered
its rights in favor of PNB for a substantial consideration. To reiterate, NASUTRA/SRA executed
promissory notes in favor of PNB every time it availed of the credit line. The agency established
between the parties is one coupled with interest which cannot be revoked or cancelled at will by any
of the parties.‖ READ: National Sugar Trading v. Philippine National Bank, G.R. No. 151218,
396 SCRA 528, 28 January 2003.

There is no question that the SPA executed by respondents in favor of petitioners is a contract of
agency coupled with interest. . . .[But] in this case, we agree with the CA that although the
revocation was done in bad faith, respondents did not act in a wanton, fraudulent, reckless,
oppressive or malevolent manner. They revoked the SPA because they were not satisfied with the
amount of the loan approved. Thus, petitioners are not entitled to exemplary damages. READ:
Ching v. Bantolo, G.R. No. 177086, 687 SCRA 134, 05 December 2012.

Even an agency coupled with interest may indeed be revoked on the ground of fraud committed by
the agent, which is really an act of rescission, the same must be clearly be proven. Bacaling v. Muya,
380 SCRA 714 (2002).

5.4.3. Unjustified Removal of Managing Partner – Revocation Needs the Vote of


Controlling Partners (Art. 1800)

―. . . it must not be forgotten that a power of attorney although coupled with interest in a
partnership can be revoked for a just cause, such as when the attorney-in-fact betrays the interest of
the principal, as happened in this case. It is not open to serious doubt that the irrevocability of the
power of attorney may not be used to shield the perpetration of acts in bad faith, breach of
confidence, or betrayal of trust, by the agent for that would amount to holding that a power coupled
with an interest authorizes the agent to commit frauds against the principal.‖ READ: Coleongco v.
Claparols, L-18616, 10 SCRA 577, 31 March 1964.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both
principal and agent. In this case, the non-revocation or non-withdrawal under paragraph 5(c) [of the
―Power of Attorney‖] applies to the advances made by petitioner [agent] who is supposedly the
agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that

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the parties‘ relation under the agreement is one of agency coupled with an interest and not a
partnership. Philex Mining Corp. v. CIR, 551 SCRA 428 (2008).

5.5. EFFECTS OF REVOCATION ON THIRD PARTIES

5.5.1. When It Affects Dealing with Specified Third Parties (Art. 1921)

NOTE: Under this heading, the following must be taken into consideration: a) Refers to an Agency
Created by Principal to Deal with Specified Third Persons; and, b) For Revocation to Prejudice
Them, Notice Is Needed.

COMPARE: Effect of Special Notice or Public Advertisement re: Appointment and Revocation of
Agent (Art. 1873).

WHEN IT AFFECTS DEALING WITH SPECIFIED THIRD PARTIES (ART. 1921). COMPARE: EFFECT
OF SPECIAL NOTICE OR PUBLIC ADVERTISEMENT RE: APPOINTMENT AND REVOCATION OF
AGENT (ART. 1873). Where principal had expressly revoked the agent‘s power to handle the
business, but such revocation was not conveyed to a long-standing client to whom the agent had
been specifically endorsed in the past by the principal, the revocation was not deemed effective as to
such client and the contracts entered into by the agent in the name of the principal after the
revocation would still be valid and binding against the principal. READ: Rallos v. Yangco, G.R.
No. 6906, 20 Phil 269, 27 September 1911.

SAME. SAME. In a case covering a power of attorney to deal with the general public, the fact that the
revocation was advertised in a newspaper of general circulation would be sufficient warning to third
persons. Rammani v. Court of Appeals, 196 SCRA 731 (1991).

5.5.2. Revocation of Agent‟s General Powers Effective Against Third Persons (Art.
1922)

NOTE: Under this heading, the following must be taken into consideration: a) Refers to Agency
Created to Deal with the General Public; b) Revocation Will not Prejudice Third Persons Who Deal
with the Agent in Good Faith and Without Knowledge of Revocation; and, c) However Notice of
Revocation in a Newspaper of General Circulation Is Sufficient Warning.

Where a principal has been engaged, through his agent, in a series of purchase and sell transactions
with a merchant, and purported suspended the agent without informing the merchant, the
suspension of the agent could not work to the detriment of the merchant, thus: ‖There is no
convincing proof in the record that the orders given by the plaintiff to its agent (Gutierrez) had ever
been communicated to the defendant. The defendant had a perfect right to believe, until otherwise
informed, that the agent of the plaintiff, in his purchase of abaca and other effects, was still
representing the plaintiff in said transactions.‖ The Court also found anomalous the position taken
by the principal whereby he was willing to ratify the acts of the agent in selling goods to the
merchant, but unwilling to ratify the agent‘s acts in purchasing goods from the same merchant. Cia.
Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).

While Art. 1358 of Civil Code requires that the contracts involving real property must appear in a
proper document, a revocation of a special power of attorney to mortgage a parcel of land,
embodied in a private writing, is valid and binding between the parties, such requirement of Article
1358 being only for the convenience of the parties and to make the contract effective as against third
persons. PNB v. IAC, 189 SCRA 680 (1990).

When the principal owner of land executes a special power of attorney giving her agent the power to
mortgage the same, even when there has been a revocation thereof, but the same has not been made
known to third parties, then those who receive a mortgage on the properties in good faith will be
protected in their contract, for under Art. 1921 of the Civil Code, if an agency has been entrusted
for the purpose of contracting with specified persons, its revocation shall not prejudice the latter if

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they were not given notice thereof. READ: Lustan v. CA, G.R. No. 111924, 266 SCRA 663, 27
January 1997.

5.6. RIGHT OF AGENT TO WITHDRAW (RESIGN) FROM AGENCY (ART. 1928)

5.6.1. By Giving Due Notice to Principal

5.6.2. Agent to Indemnify Principal Should Be Suffer Any Damage

5.6.3. Unless Withdrawal Is Due to Impossibility of Continuing Agency Without


Grave Detriment to Agent

When the agent and administrator of property informs his principal by letter that for reasons of
health and medical treatment he is about to depart from the place where he is executing his trust and
wherein the said property is situated, and abandons the property, turns it over to a third party,
renders accounts of its revenues up to the date on which he ceases to hold his position and
transmits to his principal a general statement which summarizes and embraces all the balances of his
accounts since he began the administration to the date of the termination of his trust, and, without
stating when he may return to take charge of the administration of the said property, asks his
principal to execute a power of attorney in due form in favor of and transmit the same to another
person who took charge of the administration of the said property, it is but reasonable and just to
conclude that the said agent had expressly and definitely renounced his agency and that such agency
was duly terminated, in accordance with the provisions of article 1732 (now Arts. 1919 and 1928) of
the Civil Code. Dela Pena v. Hidalgo, 16 Phil 450 (1910).

The fact that an agent institutes an action against his principal for the recovery of the balance in his
favor resulting from the liquidation of the accounts between them arising from the agency, and
renders a final account of his operations, is equivalent to an express renunciation of the agency, and
terminates the juridical relation between them. The subsequent purchase by the former agent of the
principal‘s usufruct rights in a public auction therefore was valid, since no fiduciary relationship
existed between them at that point. Valera v. Velasco, 51 Phil 695 (1928).

5.6.4. Agent‟s Obligation to Act Even After Withdrawing From Agency (Art. 1929)

NOTE: Under this heading, the following must be taken into consideration: a) Even If Agent
Withdraws from the Agency for a Valid Reason, He Must Continue to Act; and, b) Until Principal
has had reasonable opportunity to Take Necessary Steps to Meet Situation.

COMPARE: The effects when the Agent Declines the Agency (Art. 1885).

5.7. DEATH OF THE PRINCIPAL EXTINGUISHES THE AGENCY (ARTS. 1919[3], 1931)

The time during which the agent may hold his position is indefinite or undertermined, when no
period has been fixed in his commission and so long as the confidence reposed in him by the
principal exist; but as soon as this confidence disappears the principal has a right to revoke the
power he conferred upon the agent, especially when the latter has resigned his position for good
reasons. Barretto v. Santa Marina, 26 Phil 440 (1913).

Even though a period is stipulated during which the agent is to hold his position in the service of the
owner or head of a mercantile establishment, yet the latter may, for any of the special reason
specified in article 300 of the Code of commerce, dismiss such agent even before the termination of
the period. Barretto v. Santa Marina, 26 Phil. 440 (1913).

By reason of the very nature of the relationship between principal and agent, agency is extinguished
by the death of the principal or the agent. This is the law in this jurisdiction. Rallos v. Felix Go Chan
& Sons Realty Corp., 81 SCRA 251 (1978).

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Death of a client divests his lawyer of authority to represent him as counsel, since a dead client has
no personality and cannot be represented by an attorney. Lavina v. CA, 171 SCRA 691 (1988).33

5.7.1. When the Agency Continues Despite Death of Principal (Art. 1930):

NOTE: Under this heading the following must be taken into consideration: a) If It Was Constituted
for Common Interest of Principal and Agent; or, b) In Favor of Third Person Who Accepted
Stipulation in His Favor.

An example of an agency coupled with interest is when a power of attorney is constituted in a


contract of real estate mortgage pursuant to the requirement of Act No. 3135, which would
empower the mortgagee upon the default of the mortgagor to payment the principal obligation, to
effect the sale of the mortgage property through extrajudicial foreclosure. ―The argument that
foreclosure by the Bank under its power of sale is barred upon death of the debtor, because agency
is extinguished by the death of the principal, under . . . Article 1919 of the Civil Code neglects to
take into account that the power to foreclose is not an ordinary agency that contemplates exclusively
the representation of the principal by the agent but is primarily an authority conferred upon the
mortgagee for the latter‘s own protection. It is, in fact, an ancillary stipulation supported by the same
causa or consideration for the mortgage and forms an essential and inseparable part of that bilateral
agreement. READ: Perez v. PNB, G.R. No. 21813, 17 SCRA 833, 30 July 1966. Superseded the rule
laid down in Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad, 104 Phil. 648 (1958).

Agency is extinguished by the death of the principal. The only exception where the agency shall
remain in full force and effect even after the death of the principal is when if it has been constituted
in the common interest of the latter and of the agent, or in the interest of a third person who has
accepted the stipulation in his favor. Sasaba v. Vda. De Te, 594 SCRA 410 (2009).

5.7.2. Effect of Acts Done by Agent Without Knowledge of Principal‟s Death (Art.
1931)

Acts Are Valid Provided: a) Agent Does Not Know of Death or Other Cause of Extinguishment of
Agency; and, b) Third Person Dealing with Agent Must Also Be in Good Faith (Not Aware of
Death or Other Cause).

Under Article 1931 of the Civil Code, we must uphold the validity of the sale of the land effected by
the agent only after the death of the principal, when no evidence was adduced to show that at the
time of sale both the agent and the buyers were unaware of the death of the principal. Buason v.
Panuyas, 105 Phil 795 (1959); Herrera v. Uy Kim Guan, 1 SCRA 406 (1961).

5.8. DEATH OF THE AGENT EXTINGUISHES THE AGENCY

5.8.1. Obligation of Agent‟s Heirs in Case of Agent‟s Death (Art. 1932):

NOTE: Consider that when: a) the agent dies, the agent‘s heirs must: i) Notify Principal; and, ii)
Adopt Measures as Circumstances Demand in Principal‘s Interest; but when b) the Principal Dies:
the Law Is Silent on Whether His Heirs Have Any Obligation to Notify the Agent

The contract of agency establishes a purely personal relationship between the principal and the agent,
such that the agency is extinguished by the death of the agent, and his rights and obligations arising
from the contract of agency are not transmittable to his heirs. READ: Terrado v. Court of
Appeals, G.R. No. 58794, 131 SCRA 373, 24 August 1984.

33Also Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952).

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College of Business and Accountancy
Lucena City, Province of Quezon

PART TWO: TRUSTS

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SECTION SIX
―The question in each case is whether the trustor manifested an intention to create the
kind of relationship which to lawyers is known as trust. It is immaterial whether or not
he knows that the relationship which he intends to create is called a trust, and whether or
not he knows the precise characteristics of the relationship which is called a trust .‖34

6. NATURE AND CLASSIFICATION OF TRUSTS

READ: ABAD SANTOS, Vicente. Trusts: A Fertile Field for Philippine Jurisprudence. 25 PLJ
520 (1950)35

6.1. DEFINITION AND ESSENTIAL CHARACTERISTIC OF TRUST (ART. 1440)

A trust is a ―fiduciary relationship with respect to property which involves the existence of equitable
duties imposed upon the holder of the title to the property to deal with it for the benefit of
another.‖ DBP v. COA, 422 SCRA 459 (2004).36

A trust is the legal relationship between one person having an equitable ownership in property and
another person owning the legal title to such property, the equitable ownership of the former
entitling him to the performance of certain duties and the exercise of certain powers by the latter.
The characteristics of a trust are: (a) it is a relationship; (b) it is a relationship of fiduciary character;
(c) It is a relationship with respect to property, not one involving merely personal duties; (d) it
involves the existence of equitable duties imposed upon the holder of the title to the property to
deal with it for the benefit of another; and (e) it arises as a result of a manifestation of intention to
create the relationship. READ: Morales v. Court of Appeals, G.R. No. 117228, 274 SCRA 282,
19 July 1997.

In its technical legal sense, a trust is defined as the right, enforceable solely in equity, to the
beneficial enjoyment of property, the legal title to which is vested in another; but the word ―trust‖ is
frequently employed to indicate duties, relations, responsibilities which are not strictly technical
trusts. READ: Pealber v. Ramos, G.R. No. 178645, 577 SCRA 509, 30 January 2009.

6.1.1. Based on Equity (Common-law) (Art. 1442)

Article 1442 incorporates a large part of the American law on trusts, and thereby the Philippine legal
system will be amplified and will be rendered more suited to a just and equitable solution of many
questions. Report of the Code Commission, at p. 60.

As the law of trusts has been much more frequently applied in England and in the United States
than it has in Spain, we may draw freely upon American precedents in determining the effect of the
testamentary trust here under consideration, especially so as the trusts known to American and
English equity jurisprudence are derived from the fidei commissa of the Roman law and are based
entirely upon Civil Law principles. Government v. Abadilla, 46 Phil. 642 (1924).37

6.1.2. Distinguished from Agency

TRUSTS V. AGENCY. a) While both trust and agency relationships are fiduciary in nature; agency is
34
Torbela et al. v. Spouses Rosario and Banco Filipino Savings and Mortgage Bank, G.R. No. 140553, 07 December
2011
35
available at http://plj.upd.edu.ph/trust-a-fertile-field-for-philippine-jurisprudence/
36Also Huang v. Court of Appeals, 236 SCRA 429 (1994); Tala Realty Services Corp. v. Banco Filipino Savings and

Mortgage Bank, 392 SCRA 506 (2002); Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009);
Advent Capital and Finance Corporation v. Alcantara, 664 SCRA 224 (2012).
37Reiterated in Miguel v. Court of Appeals, 29 SCRA 760 (1969); Spouses Rosario v. Court of Appeals, 310 SCRA 464

(1999).

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essentially revocable, while a trust contract is essentially obligatory in its terms and period, and can
only be rescinded based on breach of trust.; b) Trustee takes legal or naked title to the subject matter
of trust, and acts on his own business discretion; agent possesses property under agency for and in
the name of the owner and must act upon instructions of the owner; c) Trustee enters into contracts
pursuant to the trust in his own name as legal or naked title holder, while agent enters into contract
in the name of the principal; and, d) Trustee is liable directly and may be sued, albeit in his trust
capacity; while agent cannot be sued since it is the principal that must be held liable on the suit.

6.2. KINDS OF TRUST: (A) EXPRESS TRUSTS; AND (B) IMPLIED TRUSTS (ART. 1441)

Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another.
It is a fiduciary relationship that obliges the trustee to deal with the property for the benefit of the
beneficiary. Trust relations between parties may either be express or implied. An express trust is
created by the intention of the trustor or of the parties, while an implied trust comes into being by
operation of law. Torbela v. Rosario, 661 SCRA 633 (2011).38

38Vda.De Esconde v. CA, 253 SCRA 66 (1996); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); DBP v.
COA, 422 SCRA 459 (2004); Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement
Fund, 630 SCRA 350 (2010).

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SECTION SEVEN
“Express trusts are those which are created by the direct and positive acts of the parties,
by some writing or deed, or will, or by words either expressly or impliedly evincing an
intention to create a trust.” 39

7. EXPRESS TRUSTS

7.1. ESSENCE AND DEFINITION OF EXPRESS TRUSTS

―Express trusts are those created by the direct and positive acts of the parties, by some writing or
deed or will or by words evidencing an intention to create a trust. . . .We find it clear that the
plaintiffs alleged an express trust over an immovable, especially since it is alleged that the trustor
expressly told the defendants of his intention to establish the trust. Such a situation definitely falls
under Article 1443 of the Civil Code,‖ and cannot be proven by parol evidence. Cuaycong v. Cuaycong,
21 SCRA 1192 (1967).

In Tamayo v. Callejo, the Court recognized that a trust may have a constructive or implied nature in
the beginning, but the registered owner's subsequent express acknowledgement in a public
document of a previous sale of the property to another party, had the effect of imparting to the
aforementioned trust the nature of an express trust. READ: Torbela v. Spouses Rosario, G.R.
No. 140528, 661 SCRA 633, 07 December 2011.

7.1.1. Essentially Contractual in Nature; Need No Particular Wordings (Art. 1444)

For, technical or particular forms of words or phrases are not essential to the manifestation of
intention to create a trust or to the establishment thereof. Nor would the use of some such words as
―trust‖ or ―trustee‖ essential to the constitution of a trust as we have held in Lorenzo v. Posadas, 64
Phil. 453, 368. Conversely, the mere fact that the word ―trust‖ or ―trustee‖ was employed would not
necessarily prove an intention to create a trust. What is important is whether the trustor manifested
an intention to create the kind of relationship which in law is known as a trust. It is important that
the trustor should know that the relationship ―which intents to create is called a trust, and whether
or not he knows the precise characteristics of the relationship which is called a trust. Here, that trust
is effective as against defendants and in favor of the beneficiary thereof, plaintiff Victoria Julio, who
accepted it in the document itself.‖ READ: Julio v. Dalandan, G.R. No. L-19012, 21 SCRA 543,
30 October 1967.

Although no particular words are required for the creation of an express trust, a clear intention to
create a trust must be shown, and the proof of fiduciary relationship must be clear and convincing.
The creation of an express trust must be manifested with reasonable certainty and cannot be
inferred from loose and vague declarations or from ambiguous circumstances susceptible of other
interpretations. READ: Caezo v. Rojas, G.R. No. 148788, 538 SCRA 242, 23 November 2007.40

In other words, the creation of an express trust must be manifested with reasonable certainty and
cannot be inferred from loose and vague declarations or from ambiguous circumstances susceptible
of other interpretations. No such reasonable certitude in the creation of an express trust obtains in
the case at bar. In fact, a careful scrutiny of the plain and ordinary meaning of the terms used in the
Minutes does not offer any indication that the parties thereto intended that Aznar, et al., become
beneficiaries under an express trust and that RISCO serve as trustor. READ: PNB v. Aznar, G.R.
No. 171805, 649 SCRA 214, 30 May 2011.

39 Ramos v. Ramos, 61 SCRA 284, 298 (1974) citing (89 C.J.S. 722; Reiterated in Spouses Rosario v. Court of Appeals,
310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v. Ramos, 577 SCRA 509 (2009); DBP v. COA,
DBP v. COA, 422 SCRA 459 (2004).
40 Medina v. Court of Appeals, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corporation v. Alcantara, 664

SCRA 224 (2012).

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Express trusts are created by direct and positive acts of the parties, by some writing or deed, or will,
or by words either expressly or implied evincing an intention to create a trust. Under Article 1444 of
the Civil Code, ―[n]o particular words are required for the creation of an express trust, it being
sufficient that a trust is clearly intended.‖ The Affidavit of Epifanio is in the nature of a trust
agreement. Epifanio affirmed the lot brought in his name was co-owned by him, as one of the heirs
of Jose, and his uncle Tranquilino. And by agreement, each of them has been in possession of half
of the property. Their arrangement was corroborated by the subdivision plan prepared by Engr.
Bunagan and approved by Jose P. Dans, Acting Director of Lands. READ: Heirs of Tranquilino
Labiste v. Heirs of Jose Labiste, G.R. No. 162033, 587 SCRA 417, 08 May 2009.

Under Article 1444 of the Civil Code, ―[n]o particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended.‖ It is possible to create a trust without
using the word ―trust‖ or ―trustee‖. Conversely, the mere fact that these words are used does not
necessarily indicate an intention to create a trust. Torbela v. Rosario, 661 SCRA 633 (2011).

7.1.2. Based on Property Relationship, Where Legal Title Is Held By One, and the
Equitable or Beneficial Title Is Held by Another (65 Corpus Juris 212)

A trust is a legal relationship between one person having an equitable ownership of the property and
another person owning the legal title to such property, the equitable ownership of the former
entitling him to the performance of certain duties and the exercise of certain powers by the latter.
―What distinguishes a trust from other relations is the separation of legal title and equitable
ownership of the property. In a trust relation, legal title is vested in the fiduciary while equitable
ownership is vested in a cestui que trust. The petitioner alleged in her complaint that the tax
declaration of the land was transferred to the name of Crispulo without her consent. Had it been her
intention to create a trust and make Crispulo her trustee, she would not have made an issue out of
this because in a trust agreement, legal title is vested in the trustee. The trustee would necessarily
have the right to transfer the tax declaration in his name and to pay the taxes on the property. These
acts would be treated as beneficial to the cestui qui trust and would not amount to an adverse
possession.‖ READ: Caezo v. Rojas, G.R. No. 148788, 538 SCRA 242, 23 November 2007

Trust, in its technical sense, is a right of property, real or personal, held by one party for the benefit
of another – it is a fiduciary relationship with respect to property, subjecting the person holding the
same to the obligation of dealing with the property for the benefit of another person. Guy v. Court of
Appeals, 539 SCRA 584 (2007).

7.1.3. Unilateral and Primarily Onerous (can be Gratuitous)

7.1.4. Fiduciary

The juridical concept of a trust, which in a broad sense involves, arises from, or is the result of, a
fiduciary relation between the trustee and the cestui que trust as regards certain property—real,
personal, funds or money, or choses in action—must not be confused with an action for specific
performance. Thus, when claimants to several parcels of land withdraw their claims in court relying
on the assurance and promise of Yulo made in open court that he would convey the lots claimed
after the proceedings had terminated, then ―a trust or a fiduciary relation between them arose, or
resulted therefrom, or was created thereby.‖ A trustee cannot invoke the statute of limitations to bar
the action and defeat the rights of the cestuis que trustent. READ: Pacheco v. Arro, G.R. No. L-
48090, 85 Phil. 505, 16 February 1950.41

7.2. EXPRESS TRUST MUST BE PROVEN

A trust must be proven by clear, satisfactory, and convincing evidence; it cannot rest on vague and
uncertain evidence or on loose, equivocal or indefinite declarations (De Leon v. Peckson, 62 O.G. 994).
As already noted, an express trust cannot be proven by parol evidence (Pascual v. Menses, 20 SCRA

41Reiterated in Ramos v. Ramos, 61 SCRA 284 (1974); Peñalber v. Ramos, 577 SCRA 509 (2009).

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219 (1967); Cuaycong v. Cuaycong, 21 SCRA 1192 (1967). Ramos v. Ramos, 61 SCRA 284 (1974).
As a rule, however, the burden of proving the existence of a trust is on the party asserting its
existence, and such proof must be clear and satisfactorily show the existence of the trust and its
elements. Morales v. Court of Appeals, 274 SCRA 282 (1997).42

―What is crucial is the intention to create a trust. While oftentimes the intention is manifested by the
trustor in express or explicit language, such intention may be manifested by inference from what the
trust has said or done, from the nature of the transaction, or from the circumstances surrounding
the creation of the purported trust. However, an inference of the intention to create a trust, made
from language, conduct or circumstances, must be made with reasonable certainty. It cannot rest on
vague, uncertain or indefinite declarations. An inference of intention to create a trust, predicated
only on circumstances, can be made only where they admit of no other interpretation.‖ Ringor v.
Ringor, 436 SCRA 484 (2004).43

Requirements Before an Express Trust Will be Recognized: ―Basically, these elements include a competent
trustor and trustee, an ascertainable trust res, and sufficiently certain beneficiaries. xxx each of the
above elements is required to be established, and, if any one of them is missing, it is fatal to the
trusts. Furthermore, there must be a present and complete disposition of the trust property,
notwithstanding that the enjoyment in the beneficiary will take place in the future. It is essential, too,
that the purpose be an active one to prevent trust from being executed into a legal estate or interest,
and one that is not in contravention of some prohibition of statute or rule of public policy. There
must also be some power of administration other than a mere duty to perform a contract although
the contract is for a third-party beneficiary. A declaration of terms is essential, and these must be
state with reasonable certainty in order that the trustee may administer, and that the court, if called
upon so to do, may enforce, the trust. READ: Rizal Surety & Insurance Co. v. Court of Appeals,
G.R. No. 96727, 261 SCRA 69, 28 August 1996.

Under these standards, we hold that no express trust was created. First, while an ascertainable trust
res and sufficiently certain beneficiaries may exist, a competent trustor and trustee do not. Second,
UCPB, as trustee of the ACCOUNT, was never under any equitable duty to deal with or given any
power of administration over it. On the contrary, it was PALII that undertook the duty to hold the
title to the ACCOUNT for the benefit of the HEIRS. Third, PALII, as the trustor, did not have the
right to the beneficial enjoyment of the ACCOUNT. Finally, the terms by which UCPB is to
administer the ACCOUNT was not shown with reasonable certainty. While we agree with the
petitioner that a trust's beneficiaries need not be particularly identified for a trust to exist, the intention
to create an express trust must first be firmly established, along with the other elements laid
above; absent these, no express trust exists. READ: Goyanko v. UCPB, G.R. No. 179096, 690
SCRA 79, 06 February 2013.

7.3. KINDS OF EXPRESS TRUST

7.3.1. Express Trust Involving Immovable (Art. 1443)

A person who has held legal title to land, coupled with possession and beneficial use of the property
for more than ten years, will not be declared to have been holding such title as trustee for himself
and his brothers and sisters upon doubtful oral proof tending to show a recognition by such owner
of the alleged rights of his brother and sisters to share in the produce of the land. [Ergo: The
requirement that express trust over immovable must be in writing should be added as being
governed by the Statute of Frauds.] READ: Gamboa v. Gamboa, G.R. No. L-29556, 52 Phil. 503,
22 December 1928.

―In one case [Ringor v. Ringor, 436 SCRA 484 (2004)], the Court allowed oral testimony to prove the
existence of a trust, which had been partially performed. It was stressed therein that what is
important is that there should be an intention to create a trust.‖ Even when the purported trust res is
unregistered land, ―The existence of express trusts concerning real property may not be established
42Reiterated Cañezo v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing Co., Inc., 538 SCRA 42 (2008).
43Reiterated in Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013).

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by parol evidence. [Art. 1443]. It must be proven by some writing or deed. In this case, the only
evidence to support the claim that an express trust existed between the petitioner and her father was
the self-serving testimony of the petitioner. Bare allegations do not constitute evidence adequate to
support a conclusion. They are not equivalent to proof under the Rules of Court. Cañezo v. Rojas, 538
SCRA 242 (2007).

An express trust over real property cannot be constituted when nothing in writing was presented to
prove it; but it may be proved as an implied trust. READ: Ty v. Ty, G.R. No. 165696, 553 SCRA
306, 30 April 2008.

In accordance with Article 1443, when an express trust concerns an immovable property or any
interest therein, the same may not be proved by parol or oral evidence. However, when the
oppositors failed to timely object when the petitioner tried to prove by parol evidence the existence
of an express trust over immovable, there is deemed to be a waiver since Article 1443 ―is in the
nature of a statute of frauds. The term statute of frauds is descriptive of statutes which require
certain classes of contracts in writing. The statute does not deprive the parties of the right to
contract with respect to the matters therein involved, but merely regulates the formalities of the
contract necessary to render it enforceable. The effect of non-compliance is simply that no action
can be proved unless the requirement is complied with. Oral evidence of the contract will be
excluded upon timely objection. But if the parties to the action, during the trial, make no objection
to the admissibility of the oral evidence to support the contract covered by the statute, and thereby
permit such contract to be proved orally, it will be just as binding upon the parties as if it had been
reduced to writing.‖ READ: Pealber v. Ramos, G.R. No. 178645, 577 SCRA 509, 30 January
2009.

7.3.2. Contractual/Intervivos Trust

7.3.3. Testamentary Trust

A testamentary trust was created by a provision in the will whereby the testator proposed to create
trust for the benefit of a secondary school to be established in the town of Tayabas, naming as
trustee the ayutamineto of the town or if there be no ayutamiento, then the civil governor of the
Province of Tayabas. Government of P.I. v. Abadilla, 46 Phil. 642 (1924).

Although the will executed by the testator did not use the words ―trust‖ or ―trustee‖, but the
intention to create one is clear since he ordered in his will that certain of his properties be kept
together undisposed during a fixed period, for a stated purpose. No particular or technical words are
required to create a testamentary trust. (69 C.J., p. 711.) Hence, the probate court certainly exercised
sound judgment in appointing a trustee to carry into effect the provisions of the will. Lorenzo v.
Pasadas, 64 Phil. 353 (1937).

7.3.4. Pension or Retirement Trusts

A foundation existing for the purpose of holding title to, and administering, the tax-exempt
Employees‘ Trust Fund established for the benefit of the employees, has the personality to claim tax
refunds due the Employers‖ Trust Fund. Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals,
621 SCRA 606 (2010).

Employees‘ trust or benefit plans are intended to provide economic assistance to employees upon
the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability.
They give security against certain hazards to which members of the Plan may be exposed. They are
independent and additional sources of protection for the working group and established for their
exclusive benefit and for no other purpose. The provident and retirement fund of the employees
cannot be used by the trustee-bank to pay for the obligations of the employer corporation.
Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350
(2010), citing Commissioner of Internal Revenue v. Court of Appeals, 207 SCRA 487 (1992).

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7.3.5. Charitable Trusts

7.4. PARTIES TO AN EXPRESS TRUST

As a rule, however, the burden of proving the existence of a trust is on the party asserting its
existence, and such proof must be clear and satisfactorily show the existence of the trust and its
elements. The presence of the following elements must be proved: (1) a trustor or settlor who
executes the instrument creating the trust; (2) a trustee, who is the person expressly designated to
carry out the trust; (3) the trust res, consisting of duly identified and definite real properties; and (4)
the cestui que trust, or beneficiaries whose identity must be clear. Filipinas Port Services, Inc. v. Go., 518
SCRA 453 (2007).44

7.4.1. The Trustor

A person who establishes a trust is called the ―trustor‖. DBP v. COA, 422 SCRA459 (2004); Peñalber v.
Ramos, 577 SCRA 509 (2009).

7.4.2. The Trustee

One in whom confidence is reposed is known as the ―trustee‖. DBP v. COA, 422 SCRA459 (2004);
Peñalber v. Ramos, 577 SCRA 509 (2009).

NOTE: The following must taken into consideration: a) Trustee Must Have Legal Capacity to
Accept the Trust; b) Failure of Trustee to Assume the Position (Art. 1445); c) Obligations of the
Trustee (Rule 98, Rules of Court); d) Generally, Trustee Does Not Assume Personal Liability on the
Trust as to Properties Outside of the Trust Estate; and, e) Trustee Generally Entitled to Receive a
Fair Compensation for His Services. Lorenzo v. Pasadas, 64 Phil. 353 (1937), citing Barney v. Saunders, 16
How. 535; 14 Law. Ed. 1047.

GENERALLY, TRUSTEE DOES NOT ASSUME PERSONAL LIABILITY ON THE TRUST AS TO


PROPERTIES OUTSIDE OF THE TRUST ESTATE. There is an implication by the Supreme Court that
when a trustee enters into a contract that gives rise to liability, but there is no clear indication that he
enters into the contract as trustee, then the trustee would be held individually liable on the liability
arising from the contract: ―But even if the contract had been authorized by the trust indenture, the
Philippine Trust Company in its individual capacity would still be responsible for the contract as
there was no express stipulation that the trust estate and not the trustee should be held liable on the
contract in question. In other words, when the transaction at hand could have been entered into by a
trustee either as such or in its individual capacity, then it must be clearly indicated that the liabilities
arising therefrom shall be chargeable to the trust estate, otherwise they are due from the trustee in
his personal capacity. READ: Tan Senguan & Co. v. Phil. Trust Co., G.R. No. L-38810, 58 Phil.
700, 06 November 1933.

7.4.3. Beneficiary (Arts. 1440 and 1446)

The person for whose benefit the trust has been created is referred to as the ―beneficiary‖. DBP v.
COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).

In order that a trust may become effective there must, of course be a trustee and a cestui que trust. The
existence of an equivalent designated position in the testamentary trust to act as trustee (i.e., the Civil
Governor of Tayabas) complies with the requirement of a trustee. ―In regard to private trusts it is
not always necessary the the cestui que trust should be named, or even be in esse at the time the trust is
created in his favor. Thus a devise a father in trust for accumulation for his children lawfully
begotten at the time of his death has been held to be good although the father had no children at the
time of the vesting of the funds in him as trustee. In charitable trusts such as the one here under
discussion, the rule is still further relaxed. READ: Government v. Abadilla, G.R. No. L-21334, 46

44Cañezo v. Rojas, 538 SCRA 242 (2007).

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Phil. 642, 10 December 1924.

Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of
donations. READ: Cristobal v. Gomez, G.R. No. L-27014, 50 Phil. 810, 05 October 1927.

7.4.4. The Corpus or the Res

Where DBP establishes a pension trust for its officers and employees and appoints trustees for the
fund whereby the trust agreement transferred legal title over the income and properties of the fund,
then the principal and the income of the fund together constitute the res or subject matter of the
trust. Since the trust agreement established the fund precisely so that it would eventually be
sufficient to pay for the retirement benefits of DBP officers and employees, then the income and
profits thereof cannot be booked by DBP as its own, and DBP cannot be directed by COA to treat
such income as it own. READ: DBP v. COA, G.R. No. 144516, 422 SCRA 459, 11 February 2004.

7.5. HOW EXPRESS TRUST TERMINATED

7.5.1. Where the Trust Fails

Under an ordinary devise of land in trust, the trustee holds the legal title and the cestui que trust the
beneficial title and the natural heirs of the testator who are neither trustees nor cestuis que trustent have
no remaining interest in the land devised except the right to the reversion in the event the devise
should fail, or the trust for other reasons terminate. Government v. Abadilla, 46 Phil. 642 (1924).

7.5.2. Upon the Death of Trustee

Assuming that such a [trust] relation existed, it terminated upon Crispulo‘s death in 1978. A trust
terminates upon the death of the trustee where the trust is personal to the trustee in the sense that
the trustor intended no other person to administer it. If Crispulo was indeed appointed as trustee of
the property, it cannot be said that such appointment was intended to be conveyed to the
respondent or any of Crispulo‘s other heirs. Hence, after Crispulo‘s death, the respondent had no
right to retain possession of the property. At such point, a constructive trust would be created over
the property by operation of law. Where one mistakenly retains property which rightfully belongs to
another, a constructive trust is the proper remedial devise to correct the situation. READ: Caezo v.
Rojas, G.R. No. 148788, 538 SCRA 242, 23 November 2007

7.5.3. Generally Express Trusts Not Susceptible to Prescription

To apply the 10-year prescriptive period, which would bar a beneficiary's action to recover in an
express trust, the repudiation of the trust must be proven by clear and convincing evidence and
made known to the beneficiary. The express trust disables the trustee from acquiring for his own
benefit the property committed to his management or custody, at least while he does not openly
repudiate the trust, and makes such repudiation known to the beneficiary or cestui que trust. For this
reason, the old Code of Civil Procedure (Act 190) declared that the rules on adverse possession do
not apply to "continuing and subsisting" (i.e., unrepudiated) trusts. In an express trust, the delay of
the beneficiary is directly attributable to the trustee who undertakes to hold the property for the
former, or who is linked to the beneficiary by confidential or fiduciary relations. The trustee's
possession is, therefore, not adverse to the beneficiary, until and unless the latter is made aware that
the trust has been repudiated. READ: Torbela v. Spouses Rosario, G.R. No. 140528, 661 SCRA
633, 07 December 2011.

When there exists an express trust, prescription and laches will run only from the time the express
trust is repudiated. The Court has held that for acquisitive prescription to bar the action of the
beneficiary against the trustee in an express trust for the recovery of the property held in trust it
must be shown that: (a) the trustee has performed unequivocal acts of repudiation amounting to an
ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the cestui
que trust; and (c) the evidence thereon is clear and conclusive. READ: Heirs of Tranquilino

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Labiste v. Heirs of Jose Labiste, G.R. No. 162033, 587 SCRA 417, 08 May 2009.45

A trustee who obtains a Torrens title over the property held in trust by him for another cannot
repudiate the trust by relying on the registration. The rule requires a clear repudiation of the trust
duly communicated to the beneficiary. The only act that can be construed as repudiation was when
respondents filed the petition for reconstitution seeking registration only in his name. READ: Heirs
of Tranquilino Labiste v. Heirs of Jose Labiste, G.R. No. 162033, 587 SCRA 417, 08 May 2009.

THE OLD RULES ON PRESCRIPTION OF TRUSTS: There is a rule that a trustee cannot acquire by
prescription the ownership of property entrusted to him (Palma v. Cristobal, 77 Phil. 712), or that an
action to compel a trustee to convey property registered in his name in trust for the benefit of the
cestui qui trust does not prescribe (Manalang v. Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil. 810), or
that the defense of prescription cannot be set up in an action to recover property held by a person in
trust for the benefit of another (Sevilla v. Delos Angeles, 97 Phil. 875), or that property held in trust can
be recovered by the beneficiary regardless of the lapse of time (Marabilles v. Quito, 100 Phil. 64;
Bancairen v. Diones, 98 Phil. 122, Juan v. Zuñiga, 4 SCRA 1221; Vda de Jacinto v. Vda. de Jacinto, 5 SCRA
370 (1962). See Tamayo v. Calljo, 147 Phil. 31, 317). ¶ The [foregoing] rule applies squarely to express
trusts. The basis of the rule is that the possession of a trustee is not adverse. Not being adverse, he
does not acquire by prescription the property held in trust. Thus, section 38 of Act 190 provides that
the law of prescription does not apply ―in the case of a continuing and subsisting trust‖ (Diaz v.
Gorricho and Aguado, 103 Phil. 261 (1958); Laguna v. Levantino, 71 Phil. 566; Sumira v. Vistan, 74 Phil.
138; Golfeo v. Court of Appeals, 12 SCRA 199; Caladiao v. Santos, 10 SCRA 691). Ramos v. Ramos, 61
SCRA 284, 299 (1974).

45 Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Cañezo v. Rojas, 538 SCRA 242 (2007).

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SECTION EIGHT
“An implied trust arising from mortgage contracts is not among the trust
relationships the Civil Code enumerates. The Code itself provides, however, that
such listing „does not exclude others established by general law on trust x x x.‟
Under the general principles on trust, equity converts the holder of a property irght
as trustee for the benefit of another if the circumstances of its acquisition makes
the holder ineligible “in x x x good conscience [to] hold and enjoy [it].‟ As
implied trusts are remedies against unjust enrichment, the „only problem of great
importance in the field of constructive trusts is whether in the numerous and
varying factual situations presented x x x there is a wrongful holding of property
and hence, a threatened unjust enrichment of the defendant.‟”46

8. IMPLIED TRUSTS

8.1. LISTING OF IMPLIED TRUSTS NOT EXCLUSIVE: FOUNDED ON EQUITY (ART. 1447).

The concept of implied trusts is that from the facts and circumstances of a given case the existence
of a trust relationship is inferred in order to effect the presumed (in this case it is even expressed)
intention of the parties or to satisfy the demands of justice or to protect against fraud. Padilla v. Court
of Appeals, 53 SCRA 168 (1973).

―Implied trusts are those which, without being expressed, are deducible from the nature of the
transactions as matters of intent, or which are superinduced on the transaction by operation of law as
matters of equity, independently of the particular intention of the parties.‖ They are ordinarily
subdivided into resulting and constructive trusts (89 C.J.S. 722). READ: Ramos v. Ramos, G.R.
L-19872, 61 SCRA 284, 298, 03 December 1974.47

Implied trust is a rule of equity, independent of the particular intention of the parties. Paringit v. Bajit,
631 SCRA 584 (2010).

In an implied trust, the beneficiary‗s cause of action arises when the trustee repudiates the trust, not
when the trust was created. Paringit v. Bajit, 631 SCRA 584 (2010).

Implied trust under Article 1450 of the Civil Code presupposes a situation where a person, using his
own funds, buys property on behalf of another, who in the meantime may not have the funds to
purchase it—title to the property is for the time being placed in the name of the trustee, the person
who pays for it, until he is reimbursed by the beneficiary, the person for whom the trustee bought
the land. Paringit v. Bajit, 631 SCRA 584 (2010).

An implied trust arising from mortgage contracts is not among the trust relationships the Civil Code
enumerates. The Code itself provides, however, that such listing ―does not exclude others
established by general law on trust x x x.‖ [Art. 1147, Civil Code] Under the general principles on
trust, equity converts the holder of a property irght as trustee for the benefit of another if the
circumstances of its acquisition makes the holder ineligible ―in x x x good conscience [to] hold and
enjoy [it].‖48 As implied trusts are remedies against unjust enrichment, the ―only problem of great
importance in the field of constructive trusts is whether in the numerous and varying factual
situations presented x x x there is a wrongful holding of property and hence, a threatened unjust
enrichment of the defendant.‖49 Juan v. Yap, Sr., 646 SCRA 753 (2011).

46Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983) and Juan v. Yap, Sr., 646 SCRA 753 (2011) (citations omitted)
47Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. Court of Appeals, 280 SCRA 271 (1997); Policarpio v.
Court of Appeals, 269 SCRA 344 (1997); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Cañezo v. Rojas,
538 SCRA 242 (2007); Peñalber v. Ramos, 577 SCRA 509 (2009).
48Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).
49Heirs of Moreno v. Mactan-Cebu Int.‘l Airport Authority, 413 SCRA 5023 (2003).

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Applying these principles, this Court recognized unconventional implied trusts in contracts
involving the purchase of housing units by officers of tenants‘ associations in breach of their
obligations,50 the partitioning of realty contrary to the terms of a compromise agreement,51 and the
execution of a sales contract indicating a buyer distinct from the provider of the purchase money. 52
In all these cases, the formal holders of title were deemed trustees obliged to transfer title to the
beneficiaries in whose favor the trusts were deemed created. We see no reason to bar the recognition
of the same obligation in a mortgage contract meeting the standards for the creation of an implied
trust. Juan v. Yap, Sr., 646 SCRA 753 (2011).

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. Philippine National Bank v. Jumamoy, 655 SCRA 54 (2011).

8.1.1. Resulting Trusts

A resulting trust is based on the equitable doctrine that valuable consideration and not legal title
determines the equitable interest and is presumed to have been contemplated by the parties. Miguel J.
Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).

The rule of imprescriptibility of an action to recover property held in trust may possible apply to a
resulting trust as long as the trustee has not repudiated the trust. ―A resulting trust is broadly defined
as a trust which is raised or created by the act or construction of law, but in its more restricted sense
it is a trust raised by implication of law and presumed always to have been contemplated by the parties, the
intention as to which is to be found in the nature of their transaction, but not expressed in the deed
or instrument of conveyance‖ (89 C.J.S. 725). Examples of resulting trusts are found in article[s]
1448 to 1445 of the Civil Code. READ: Ramos v. Ramos, G.R. L-19872, 61 SCRA 284, 298, 03
December 1974.53

Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest and are presumed always to have been contemplated by the
parties. They arise from the nature or circumstances of the consideration involved in a transaction
whereby one person thereby becomes invested with legal title but is obligated in equity to hold his
title for the benefit of another. Spouses Rosario v. CA, 310 SCRA 464 (1999).

―A resulting trust is a species of implied trust that is presumed always to have been contemplated by
the parties, the intention as to which can be found in the nature of their transaction although not
expressed in a deed or instrument of conveyance. A resulting trust is based on the equitable doctrine
that it is the more valuable consideration than the legal title that determines the equitable interests in
property.‖ READ: Caezo v. Rojas, G.R. No. 148788, 538 SCRA 242, 23 November 2007.

8.1.2. Constructive Trusts

On the other hand, a constructive trust is a trust ―raised by construction of law, or arising by
operation of law‖. In a more restricted sense and as contradistinguished from a resulting trust, a
constructive trust is ―a trust not created by any words, either expressly or implied evincing a direct
intention to create a trust, but by the construction of equity in order to satisfy the demands of justice. It does
not arise by agreement or intention but by operation of law.‖ ―If a person obtains legal title to
property by fraud or concealment, courts of equity will impress upon the title a so-called
constructive trust in favor of the defrauded party.‖ A constructive trust is not a trust in the technical

50Policarpio v. Court of Appeals, 269 SCRA 344 (1997); Arlequi v. Court of Appeals, 378 SCRA 322 (2002).
51Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).
52Tigno v. Court of Appeals, 280 SCRA 262 (1997).
53Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order

to satisfy the demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by
fraud, duress or abuse of confidence, obtains or hold the legal right to property which he ought not, in equity and good
conscience, to hold. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).

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sense. READ: Ramos v. Ramos, G.R. L-19872, 61 SCRA 284, 298, 03 December 1974.54

In constructive trusts there is neither promise nor fiduciary relations; the so-called trustee does not
recognize any trust and has no intent to hold the property for the beneficiary. READ: Diaz v.
Gorricho and Aguado, G.R. No. L-11229, 103 Phil. 261, 29 March 1958).55

A constructive trust, otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son tort,
an involuntary trust, or an implied trust, is a trust by operation of law which arises contrary to
intention and in invitum, against one who, by fruad, actual or constructive, by duress or abuse of
confidence, by commission of wrong, or by any form of unconcscionable conduct, artifice,
concealment, or questionable means, or who in any way against equity and good conscience, either
has obtained or holds the legal right to property which he ought not, in equity and good conscience,
hold and enjoy. It is raised by equity to satisfy the demands of justice. Sumaoang v. Judge, RTC, Br.
XXXI, Buimba, Nueva Ecija, 215 SCRA 136 (1992).56

A constructive trust is one created not by any word or phrase, either expressly or impliedly, evincing
a direct intention to create a trust, but one which arises in order to satisfy the demands of justice. It
does not come about by agreement or intention but in the main by operation of law, construed as
against one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property
which he ought not, in equity and good conscience, to hold. READ: Caezo v. Rojas, G.R. No.
148788, 538 SCRA 242, 23 November 2007.

Under the principle of constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of constructive trust for the real owner, which would justify an action for
reconveyance. Pasiño v. Monterroyo, 560 SCRA 739 (2008).

Constructive trusts are fictions of equity that courts use as devices to remedy any situation in which
the holder of the legal title, MCIAA in this case, may not, in good conscience, retain the beneficial
interest. READ: Vda. de Ouano v. Republic of the Philippines, G.R. No. 168770, 642 SCRA
384, 09 February 2011.

The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate
share in the name of his co-owner (second co-owner) in whose name the entire land is registered—
the second co-owner serves as a legal trustee of the first co-owner insofar as the proportionate share
of the first co-owner is concerned. Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 621
SCRA 606 (2010).

Article 1452 of the Civil Code expressly authorizes a person to purchase a property with his own
money and to take conveyance in the name of another. Miguel J. Ossorio Pension Foundation, Inc. v. Court
of Appeals, 621 SCRA 606 (2010).

In a constructive trust, there is neither a promise nor any fiduciary relation to speak of and the so-
called trustee neither accepts any trust nor intends holding the property for the beneficiary. Marcado v.
Espinocilla, 664 SCRA 724 (2012).

8.1.3. Distinction Between Resulting Trust and Constructive Trust

Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest and are presumed always to have been contemplated by the
parties. They arise from the nature of circumstances of the consideration involved in a transaction
whereby one person thereby becomes invested with legal title but is obliged in equity to hold his
legal title for the benefit of another. On the other hand, constructive trusts are created by the
construction of equity in order to satisfy the demands of justice and prevent unjust enrichment.

54Reiteratedin Guy v. Court of Appeals, 539 SCRA 584 (2007).


55Reiteratedin Carantes v. Court of Appeals, 76 SCRA 514 (1977).
56Also Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).

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They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or
holds the legal right to property which he ought not, in equity and good conscience, to hold.
READ: Lopez v. Court of Appeals, G.R. No. 157784, 574 SCRA 26, 16 December 2008.57

8.1.4. How to Prove Implied Trust (Art. 1457)

An implied trust in order to be recognized must measure up to the yardstick that a trust must be
proven by clear, satisfactory and convincing evidence, and cannot rest on vague and uncertain
evidence or on loose, equivocal or indefinite declarations. READ: Salao v. Salao, G.R. No. L-
26699, 70 SCRA 65, 16 March 1976.

The existence of public records other than the Torrens title indicating a proper description of the
land, and not the technical description thereof, and clearly indicating the intention to create a trust,
was considered sufficient proof to support the claim of the cestui que trust. READ: Municipality of
Victorias v. CA, G.R. No. L-31189, 149 SCRA 32, 31 March 1987.

As a rule, the burden of proving the existence of a trust is on the party asserting its existence and
such proof must be clear and satisfactorily show the existence of the trust and its elements. [An
affidavit of the fact of resulting trust against contrary affidavits, as well as the transfer certificates of
title and tax declarations to the contrary, do not support clearly the existence of trust] Booc v. Five
Start Marketing Co., Inc., 538 SCRA 42 (2007).58

While implied trust may be proved by oral evidence, the evidence must be trustworthy and received
by the courts with extreme caution, and should not be made to rest on loose, equivocal or indefinite
declarations. Trustworthy evidence is required because oral evidence can easily be fabricated. In
order to establish an implied trust in real property by parol evidence, the proof should be as fully
convincing as if the acts giving rise to the trust obligation are proven by an authentic document. An
implied trust, in fine, cannot be established upon vague and inconclusive proof. In the present case,
there was no evidence of any transaction between the petitioner and her father form which it can be
inferred that a resulting trust was intended.‖ (at p. 256) READ: Caezo v. Rojas, G.R. No. 148788,
538 SCRA 242, 23 November 2007.

8.1.5. Distinguished from Quasi-Contracts

Our present Civil Code incorporated implied trust, which includes constructive trusts, on top of
quasi-contracts, both of which embody the principle of equity above strict legalism.‖ READ: PNB
v. Court of Appeals, G.R. No. 97995, 217 SCRA 347, 21 January 1993.

8.2. PURCHASE OF PROPERTY WHERE BENEFICIAL TITLE IN ONE PERSON, BUT PRICE
PAID BY ANOTHER PERSON (ART. 1448)

REASON: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho Jan Jing,
19 Phil. 202 (1911).

Although it may have been proven that the father was the source of the funds in the purchase of a
parcel of land which was titled in the name of his son, no implied trust is deemed to have been
established since under Article 1448 of the Civil Code, if the person to whom the title is conveyed is
the child of the one paying the price of the sale, no trust is implied by law, and instead a donation is
disputably presumed in favor of the child. The successors of the deceased father had not shown that
no such donation was intended. READ: Ty v. Ty, G.R. No. 165696, 553 SCRA 306, 30 April
2008.

While the share was bought by Sime Darby and placed under the name of Mendoza, his title is only

57Also Aznar Brothers Realty Company v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. Court of Appeals, 310
SCRA 464 (1999); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
58Also Tigno v. Court of Appeals, 280 SCRA 262 (1997); Morales v. Court of Appeals, 274 SCRA 282 (1997).

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limited to the usufruct, or the use and enjoyment of the club‘s facilities and privileges while
employed with the company. In Thomson v. Court of Appeals, 298 SCRA 280 (1998), we held that a
trust arises in favor of one who pays the purchase price of a property in the name of another,
because of the presumption that he who pays for a thing intends a beneficial interest for himself.
While Sime Darby paid for the purchase price of the club share, Mendoza was given the legal title.
Thus, a resulting trust is presumed as a matter of law. The burden shifts to the transferee to show
otherwise. READ: Sime Darby Pilipinas, Inc. v. Mendoza, G.R. No. 202247, 699 SCRA 290 19
June 2013.

8.3. PURCHASE OF PROPERTY WHERE TITLE IS PLACED IN THE NAME OF PERSON WHO
LOANED THE PURCHASE PRICE (ART. 1450) – EQUITABLE MORTGAGE

Implied trust under Article 1450 presupposes a situation where a person, using his own funds, buys
property on behalf of another, who in the meantime may not have the funds to purchase it. Title to
the property is for the time being placed in the name of the trustee, the person who pays for it, until
he is reimbursed by the beneficiary, the person for whom the trustee bought the land. It is only after
the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance
of the property from the latter. READ: Paringit v. Bajit, G.R. No. 181844, 631 SCRA 584, 29
September 2010.

8.4. WHEN ABSOLUTE CONVEYANCE OF PROPERTY EFFECTED ONLY AS A MEANS TO


SECURE PERFORMANCE OF OBLIGATION OF THE GRANTOR (ART. 1454) – EQUITABLE
MORTGAGE

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

8.5. SEVERAL PERSONS JOINTLY PURCHASE PROPERTY, PLACES TITLE IN ONE OF THEM
(ART. 1452)

8.6. PROPERTY CONVEYED TO PERSON MERELY AS HOLDER THEREOF (ART. 1453)

Where real property is taken by a person under an agreement to hold it for, or convey it to another
or the grantor, a resulting or implied trust arises in favor of the person for whose benefit the
property was intended. Such implied trust is enforceable even when the agreement is not in writing,
and is not an express trust which requires that it be in writing to be enforceable. This rule, which has
been incorporated in the new Civil Code in Art. 1453 thereof, is founded upon equity. Martinez v.
Graño, 42 Phil. 35 (1921).

Where the original purchaser of the immovable property had sold all his interest thereto to his
brother who reimbursed him all amounts previously, but continued to pay the balance of the
installments in the name of the original buyer with understanding that upon full payment the title
would be transferred to the buyer, am implied trust had been constituted. READ: Heirs of Emilio
Candelaria v. Romero, G.R. No. L-12149, 109 Phil. 500, 30 September 1960.

The Court denied the application of the provisions of Article 1453 to establish an implied trust . . .
Said arguments are untenable, even considering the whole complaint. The intention of the trustor to
establish the alleged trust may be seen in paragraphs 5 and 6. Article 1453 would apply if the person
conveying the property did not expressly state that he was establishing the trust, unlike the case at
bar where he was alleged to have expressed such intent. Consequently, the lower court did not err in
dismissing the complaint,‖ (at p. 1198) on the ground that since the complaint sought to recover an
express trust over immovables, then under Article 1443 of the Civil Code, the same may not be

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proved by parol evidence. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).

Where a lot was taken by a person under an agreement to hold it for, or convey it to another or to
the grantor, a resulting or implied trust arises in favor of the person for whose benefit the property
was intended. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).

8.7. DONATION OF PROPERTY TO A DONEE WHO SHALL HAVE NO BENEFICIAL TITLE


(ART. 1449)

Where the father donates a piece of land in the name of the daughter but with verbal notice that the
other half would be held by her for the benefit of a younger brother, coupled with a deed of waiver
later on executed by the daughter that she held the land for the common benefit of her brother,
created an implied trust in favor of the brother under Article 1449 of the Civil Code. READ: Adaza
v. Court of Appeals, G.R. No. 47354, 171 SCRA 369, 21 March 1989.

8.8. LAND PASSES BY SUCCESSION BUT HEIR PLACES TITLE IN A TRUSTEE (ART. 1451).

When the eldest sibling in the family had registered land inherited from the parents in his name, he
was acting in a trust capacity and as representative of all his brothers and sisters. As a consequence
he is now holding the registered title thereto in a trust capacity, and it is proper for the court to
declare that the plaintiffs are entitled to their several pro rata shares, notwithstanding the fact that the
certificate of registration is in the name of the defendant alone, in accordance with the doctrine held
in Severino v. Severino, 44 Phil. 343 (1923). Castro v. Castro, 57 Phil. 675 (1932).

In a situation where a Chinese resident had caused land to be placed in the name of the trustee who
was bound to hold the same for the benefit of the trustor and his family in the event of death, the
application of the doctrine of implied trust under Article 1451 by the heirs of the trustor cannot be
upheld. ―This contention must fail because the prohibition against an alien from owning lands of the
public domain is absolute and not even an implied trust can be permitted to arise on equity
consideration.‖ Ting Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).

8.9. WHEN TRUST FUND USED TO PURCHASE PROPERTY WHICH IS REGISTERED IN


TRUSTEE‟S NAME (ART. 1455)

A confidential employee who, knowing that his principal was negotiating with the owner of some
land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits
an act of disloyalty and infidelity to his principal, and is liable for damage. The reparation of the
damage must consist in respecting the contract which was about to be concluded, and transferring
the said land for the same price and upon the same terms as those on which the purchase was made
for the land sold to the wife of said employee passed to them as what might be regarded as equitable
trust, by virtue of which the thing thus acquired by an employee is deemed to have been acquired
not for his own benefit or that of any other person but for his principal and held in trust for the
latter. READ: Sing Juco and Sing Bengco v. Sunyantong and Llorente, G.R. No. L-17131, 43
Phil. 589, 30 June 1922.

An mere verbal assertion of a partner that partnership funds were used to purchase real properties
registered solely in the name of the other partners-spouses, without further evidence, do not
overcome the Torrens title issued showing exclusive ownership in the name of the partners-spouses,
but cannot also be used to establish an implied trust over said properties in favor of the alleging
partner. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

8.10. CONSTRUCTIVE TRUSTS: WHEN PROPERTY IS ACQUIRED THROUGH MISTAKE OR


FRAUD (ART. 1456)

In the present case, however, respondents' predecessor-in-interest, Bernardino Taeza, had already
obtained a transfer certificate of title in his name over the property in question. Since the person
supposedly transferring ownership was not authorized to do so, the property had evidently been

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acquired by mistake. In Vda. de Esconde v. Court of Appeals, the Court affirmed the trial court's
ruling that the applicable provision of law in such cases is Article 1456 of the Civil Code which
states that "[i]f 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." READ: Iglesia Filipina Independiente v. Heirs of Taeza, G.R. No. 179597, 03
February 2014.

We also see no trust, express or implied, created between the petitioners and the spouses Perez over
the subject property. A trust by operation of law is the right to the beneficial enjoyment of a
property whose legal title is vested in another. A property between two parties, one having the
rightful ownership and property owned by one party is separate and distinct from that which has
been registered in another‘s name. READ: Chu, Jr. vs. Caparas, G.R. No. 175428, 696 SCRA 325,
15 April 2013.

By fraudulently causing the transfer of the registration of title over the disputed property in his name,
the petitioner holds the title to this disputed property in trust for the benefit of the respondent as
the true owner; registration does not vest title but merely confirms or records title already existing
and vested. Leoveras v. Valdez, 652 SCRA 61 (2011).

Co-heirs or co-owners cannot acquire by acquisitive prescription the share of the other co-heirs or
co-owners absent a clear repudiation of the co ownership. In addition, when Hilaria and Felipa
registered the lot in their names to the exclusion of Emilia, an implied trust was created by force of
law and the two of them were considered a trustee of the respondent's undivided share. As trustees,
they cannot be permitted to repudiate the trust by relying on the registration. Figuracion v. Figuracion-
Gerilla, 690 SCRA 495 (2013).

The decedent during his lifetime had married legitimately three successive times, but without
liquidation of the conjugal partnerships formed during the first and second marriages. The only male
issue managed to convince his co-heirs that he should act as administrator of the properties left by
the decedent, but instead obtained a certificate of title in his own name to the valuable piece of
property of the estate. Held: Where the son, through fraud was able to secure a title in his own name
to the exclusion of his co-heirs who equally have the right to a share of the land covered by the title,
an implied trust was created in favor of said co-heirs, and that said son was deemed to merely hold
the property for their and his benefit. Gonzales v. Jimenez, Sr., 13 SCRA 73 (1964).

The rules are well-settled that when a person through fraud succeeds in registering the property in
his name, the law creates what is called a ―constructive or implied trust‖ in favor of the defrauded
party and grants the latter the right o recover the property fraudulently registered within a period of
ten years. (See Ruiz v. Court of Appeals, 79 SCRA 525).‖ Heirs of Tanak Pangaaran Patiwayon v. Martinez,
142 SCRA 252 (1986).

Where the land is decreed in the name of a person through fraud or mistake, such person is by
operation of law [Article 1456] considered a trustee of an implied trust for the benefit of the persons
from whom the property comes. The beneficiary shall have the right to enforce the trust,
notwithstanding the irrevocability of the Torrens title and the trustee and his successors-in-interest
are bound to execute the deed of reconveyance. (Pacheco v. Arro, 85 Phil. 505; Escobar v. Locsin, 74
Phil. 86).‖ Municipality of Victorias v. Court of Appeals, 149 SCRA 32 (1987).

When property is registered in one person, but who expressly acknowledged that the right of his
siblings thereto, it is a situation of an implied trust covered under Article 1456 of the Civil Code,
which states that ―if property is acquired through mistake or fraud, the person obtaining it is, by
force of law, considered a trustee of an implied trust for the benefit of the person from whom the
property comes.‖ It is well settled that an action for reconveyance of real property to enforce an
implied trust prescribes in ten year, the period reckoned from the issuance of the adverse title to the
property which operates as a constructive notice. Gonzales v. Intermediate Appellate Court, 204
SCRA106 (1991).

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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. Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007).

Where the shares of stock in an operating family company are placed by the parents-controlling
stockholders in the name of a holding company expressly for the benefit of their three daughters, an
express trust is duly constituted pursuant to the terms of Article 1440 of the Civil Code. Guy v. Court
of Appeals, 539 SCRA 584 (2007).

―An action for reconveyance respects the decree of registration as incontrovertible but seeks the
transfer of property, which has been wrongfully or erroneously registered in other person‘s names,
to its rightful and legal owners, or to those who claim to have a better right. There is no special
ground for an action for reconveyance. It is enough that the aggrieved party has a legal claim on the
property superior to that of the registered owner and that the property has not yet passed to the
hands of an innocent purchaser for value.‖ ―These cases may also be considered as actions to
remove cloud on one‘s title as they are intended to procure the cancellation of an instrument
constituting a claim on petitioners‘ alleged title which was used to injure or vex them in the
enjoyment of their alleged title.‖ Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007).

Under the principle of constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would justify an action for
reconveyance. (Citing Heirs of Tabia v. Court of Appeals, 516 SCRA 431 [2007]) In the action for
reconveyance, the decree of registration is respected as incontrovertible but what is sought instead is
the transfer of the property wrongfully or erroneously registered in another‘s name to its rightful
owner or to one with a better right. (Ibid) If the registration of the land is fraudulent, the person in
whose name the land is registered holds it as a mere trustee, and the real owner is entitled to file an
action for reconveyance of the property. (citing Mendizabel v. Apao, 482 SCRA 587 [2006]) (at p. 751)
READ: Pasio v. Monterroyo, G.R. No. 159494, 560 SCRA 739, 31 July 2008.

When the respondents are able to establish that they have a better right to the parcel of land since
they had long been in possession of the property in the concept of owners, by themselves and
through their predecessors-in-interest, then despite the irrevocability of the Torrens titles issued in
the names of the petitioners and even if they are already the registered owners under the Torrens
system, the petitioners may still be compelled under the law to reconvey the property to respondents.
READ: Pasio v. Monterroyo, G.R. No. 159494, 560 SCRA 739, 31 July 2008

Where in her notarial will the testator ―expressed that she wished to constitute a trust fund for her
paraphernal properties, denominated as Fideicomiso de Juliana Lopez Manzano (Fideicomiso), to be
administered by her husband. . . Two-thirds (2/3) of the income from rentals over theses properties
were to answer for the education of deserving but needy honor students, while one-third (1/3) was
to shoulder the expenses and fees of the administrator,‖ but that eventually in the probate of the will
the properties were adjudicated to the husband as sole heir, the Court ruled that ―On the premise
that the disputed properties are the paraphernal properties of Juliana which should have been
included in the Fideiocomiso, their registration in the name of Jose would be erroneous and Jose‘s
possession would be that of a trustee in an implied trust . . . [which from] the factual milieu of this
case is provided in Article 1456 of the Civil Code. . . . The apparent mistake in the adjudication of
the disputed properties to Jose created mere implied trust of the constructive variety in favor of the
beneficiaries of the Fideicomiso.‖ Lopez v. Court of Appeals, 574 SCRA 26 (2008).

8.10.1. Comparison and Contrast

Where a mother and her minor daughter inherited a large tract of land, and had it applied for
cadastral survey, but title was issued only in the name of the mother, courts of equity will impress
upon the title, a condition which is generally in a broad sense termed ―constructive trust‖ in favor of
the defrauded party, but the use of the word ―trust‖ in this sense is not technically accurate and is
not the kind of trust. READ: Gayondato v. Treasurer, G.R. No. L-24597, 49 Phil. 244, 25

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August 1926.

When a designated agent, taking advantage of the illiteracy of the principal, claims for himself the
property which he was designated to claim for the principal and manages to have it registered in his
own name and became part of his estate when the agent died, the estate is in equity bound to
execute the deed of conveyance of the lot to the cestui que trust. A trust—such as that which was
created between the plaintiff and Domingo Sumangil—is sacred and inviolable. The Courts have
therefore shielded fiduciary relations against every manner of chicanery or detestable designed
cloaked by legal technicalities. The Torrens system was never calculated to foment betrayal in the
performance of a trust. READ: Escobar v. Locsin, G.R. No. L-48309, 74 Phil. 86, 30 January
1943.59

Even in the absence of fraud in obtaining registration or even after the lease of one year after the
issuance of a decree of registration, a co-owner of land who applied for and secured its adjudication
and registration in his name knowing that it had not been allotted to him in the partition, may be
compelled to convey the same to whoever received it in the apportionment, so long as no innocent
third party had acquired rights therein, in the meantime for a valuable consideration. ―Indeed, any
rule to the contrary would sanction one‘s enrichment at the expense of another. Public policy
demands that a person guilty of fraud or, at least, of breach of trust, should not be allowed to use a
Torrens title as a shield against the consequences of his wrongdoing.‖ Vda. de Jacinto v. Vda. de Jacinto,
5 SCRA 370 (1962).

Lastly, the claim of the heirs of Pedro Jacinto that the latter had acquired ownership of the property
in litigation by prescription, is likewise untenable. As we had recently held in Juan v. Zuñiga, 4 SCRA
1221 (1962), an action to enforce a trust is imprescriptible. Consequently, a coheir who, through
fraud, succeeds in obtaining a certificate of title in his name to the prejudice of his coheirs, is
deemed to hold the land in trust for the latter, and the action by them to recover the property does
not prescribe.‖ Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962).

Where the children of the decedent by his second marriage have taken over properties of the estate,
excluding therefrom grandchildren of the decedent by his first marriage, the situation is one that is
governed by the rules of co-ownership under Article 494 of the Civil Code which provides that no
prescription shall run in favor of a co-owner or co-heir against his co-owners or co-heirs so long as
he expressly or impliedly recognizes the co-ownership. In view of a clear repudiation of the co-
ownership duly communicated to the co-heirs, no prescription occurred and the filing of the action
for partition and delivery of possession covering their corresponding shares 28 years after the death
of the decedent was not filed out of time. Mariano v. Judge De Vega, 148 SCRA 342 (1987).

8.11. DOES IMPLIED TRUST PRESCRIBE OR MAY IT BE DEFEATED BY LACHES?

8.11.1. Recent Cases

The trustor-beneficiary is not estopped from proving its ownership over the property held in trust
by the trustee when the purpose is not to contest the disposition of encumbrance of the property in
favor of an innocent third-party purchaser for value. The Torrens system was not established to
foreclose a trustor or beneficiary from proving its ownership of a property titled in the name of
another person when the rights of an innocent purchaser or lienholder are not involved. Miguel J.
Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).

An action for reconveyance based on an implied trust prescribes in ten years, the reckoning point of
which is the date of registration of the deed or the date of issuance of the certificate of title over the
property. Brito, Sr. v. Dianala, 638 SCRA 529 (2011). Except: When the plaintiff is in possession of the
subject property, the action, being in effect that of quieting of title to the property, does not
prescribe. Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2011).

59Reiterated in Municipality of Victorias v. Court of Appeals, 149 SCRA 32 (1987).

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An action for reconveyance based on implied trust prescribed in 10 years as it is an obligation
created by law, to be counted from the date of issuance of the Torrens title over the property. This
rule, however, applies only when the plaintiff or the person enforcing the trust is not in possession
of the property. Philippine National Bank v. Jumamoy, 655 SCRA 54 (2011).

Unrepudiated written express trust is imprescriptible. Express trusts prescribe in 10 years from the
repudiation of the trust. To apply the 10-year prescriptive period, which would bar a beneficiay‘s
action to recover in an express trust, the repudiation of the trust must be proven by clear and
convincing evidence and made known to the beneficiary. Torbela v. Rosario, 661 SCRA 633 (2011).

8.11.2. Old Cases

It is settled that an action for reconveyance based on a constructive implied trust prescribes in 10
years. Yet not like in the case of a resulting implied trust and an express trust, prescription
supervenes in a constructive implied trust even if the trustee does not repudiate the relationship. In
other words, repudiation of said trust is not a condition precedent to the running of the prescriptive
period. Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).

When the registered owner, be he the patentee or his successor-in-interest to whom the free patent
was transferred, knew that the parcel of land described in the patent and in the Torrens title
belonged to another, who together with his predecessors-in-interest had been in possession thereof,
and if the patentee and his successor-in-interest were never in possession thereof, the true owner
may bring an action to have the ownership of or title to the land judicially settled. Such aggrieved
party may still file an action for reconveyance based on implied or constructive trust, which
prescribes in 10 year from the date of the issuance of the certificate of title over the property,
provided that the property has not been acquired by an innocent purchaser for value. READ:
Cavile v. Litania-Hong, G.R. No. 179540, 581 SCRA 408, 13 March 2009.

The Court has held that for acquisitive prescription to bar the action of the beneficiary against the
trustee in an express trust for the recovery of the property held in trust it must be shown that: (a) the
trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust;
(b) such positive acts of repudiation have been made known to the cestui que trust, and (c) the
evidence thereon is clear and conclusive. The rule requires a clear repudiation of the trust duly
communicated to the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417
(2009).

… there is but one instance when prescription cannot be invoked in an action for reconveyance,
that is, when the plaintiff is in possession of the land to be reconveyed. In Heirs of Pomposa
Saludares, this Court explained that the Court in a series of cases, has permitted the filing of an
action for reconveyance despite the lapse of more than ten (10) years from the issuance of title to
the land and declared that said action, when based on fraud, is imprescriptible as long as the land has
not passed to an innocent buyer for value. But in all those cases, the common factual backdrop was
that the registered owners were never in possession of the disputed property. The exception was
based on the theory that registration proceedings could not be used as a shield for fraud or for
enriching a person at the expense of another. In Alfredo v. Borras, the Court ruled that prescription
does not run against the plaintiff in actual possession of the disputed land because such plaintiff has
a right to wait until his possession is disturbed or his title is questioned before initiating an action to
vindicate his right. His undisturbed possession gives him the continuing right to seek the aid of a
court of equity to determine the nature of the adverse claim of a third party and its effect on his title.
READ: Estrella Tiongco Yared v. Jose Tiongco, G.R. No. 161360, 659 SCRA 545, 19 October
2011.

"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." An action for reconveyance based on implied trust prescribes in 10 years as it is an
obligation created by law, to be counted from the date of issuance of the Torrens title over the
property. This rule, however, applies only when the plaintiff or the person enforcing the trust is not

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in possession of the property. … there is no prescription when in an action for reconveyance, the
claimant is in actual possession of the property because this in effect is an action for quieting of title.
READ: PNB v. Jumamoy, G.R. No. 169901, 655 SCRA 54, 03 August 2011.

Moreover, the prescriptive period applies only if there is an actual need to reconvey the property as
when the plaintiff is not in possession thereof. Otherwise, if the plaintiff is in possession of the
property, prescription does not commence to run against him. Thus, when an action for
reconveyance is nonetheless filed, it would be in the nature of a suit for quieting of title, an action
that is imprescriptible. Brito v. Dianala, 638 SCRA 529 (2010).

When the plaintiff in such action is not in possession of the subject property, the action prescribes
in 10 years from the date of registration of the deed or the date of the issuance of the certificate of
title over the property. When the plaintiff is in possession of the subject property, the action, being
in effect that of quieting of title to the property, does not prescribe. In the case at bar, petitioners are
not in possession of the subject property. If it were to be considered as that of enforcing an implied
trust, should have therefore been filed within 10n years from the issuance of TCT on December 22,
1969. The case was, however, filed on August 20, 1998, which was way beyond the prescriptive
period. Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010).

PRESCRIPTION CANNOT APPLY WHEN TITLE OF TRUSTEE VOID DUE TO FORGERY. It is well
settled that an action for reconveyance of real property to enforce an implied trust prescribes in ten
year, the period reckoned from the issuance of the adverse title to the property which operates as a
constructive notice. Gonzales v. Intermediate Appellate Court, 204 SCRA 106 (1991).

As previously stated, the rule that a trustee cannot, by prescription, acquire ownership over property
entrusted to him until and unless he repudiates the trust, applies to express trust and resulting
implied trusts, However, in constructive trusts, prescription may supervene even if the trustee does not repudiate the
relationship. Necessarily, repudiation of the said trust is not a condition precedent to the running of
the prescriptive period. A constructive trust, unlike an express trust, does not emanate from, or
generate a fiduciary relation. While in an express trust, a beneficiary and a trustee are linked by
confidential or fiduciary relations, in a constructive trust, there is neither a promise nor any fiduciary
relation to speak of and the so-called trustee neither accepts any trust nor intends holding the
property for the beneficiary. The relation of trustee and cestui que trust does not in fact exist, and the
holding of a constructive trust is for the trustee himself, and therefore, at all times adverse. Cañezo v.
Rojas, 538 SCRA 242 (2007).

An action for the reconveyance of a parcel of land based on implied or constructive trust prescribes
in 10 years, the point of reference being the date of registration of the deed or the date of the
issuance of the certificate of title of the property. Without an OCT, the date from whence the
prescriptive period could be reckoned is unknown and it could not be determined if indeed the
period had already lapsed or not. Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007).

An aggrieved party may file an action for reconveyance based on implied or constructive trust,
which prescribes in ten years from the date of issuance of the certificate of title over the property
provided that the property has not been acquired by an innocent purchaser for value. Khemani v.
Heirs of Anastacio Trinidad, 540 SCRA 83 (2007).

Where the facts deemed admitted showed that the signature of the petitioners, being forced heirs, in
the extrajudicial settlement with sale has been forged, and although title to the land had been
registered in the name of the buyer, the contract is void, and the action to seek the declaration of
nullity is imprescriptible under Art. 1410, and is not to be governed by the principles of implied trust.
Macababbad v. Masirag, 576 SCRA 70 (2009).

CLOSE RELATIONSHIP AND CONTINUED RECOGNITION OF TRUST RELATIONSHIP. On the


other hand, laches, being rooted in equity, is not always to be applied strictly in a way that would
obliterate an otherwise valid claim especially between blood relatives. The existence of a confidential
relationship based upon consanguinity is an important circumstance for consideration; hence, the

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doctrine is not to be applied mechanically as between near relatives. Estate of Margarita D. Cabacungan,
v. Laigo, 655 SCRA 366 (2011).

The doctrine of laches (here, 19 years from the time the Deed of Donation was executed by the
father in the name of the sister, but for the equal benefit of the brother) is not to be applied
mechanically as between near relatives which would tend to excuse what otherwise may be
considered a long delay in taking action. Moreover, continued recognition of the existence of the
trust, in this case by letters written by the sister to the brother, recognizing the trust relationship,
precludes the defense of laches. Adaza v. CA, 171 SCRA 369 (1989).

68 MSEUF- LAW (1st Semester)


MSEUF-CBA (2nd Semester)
MANUEL S. ENVERGA UNIVERSITY FOUNDATION
College of Business and Accountancy
Lucena Ctiy, Province of Quezon

PART THREE: PARTNERSHIPS

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SECTION NINE 60

“Distinguishing between civil and commercial partnerships was critical under the
old set-up because it determined the applicable rules for registration, personal
liability of members, and the rights and manner of dissolution.”61

9. HISTORICAL BACKGROUND OF THE LAW ON PARTHERSHIPS

9.1. OLD BRANCHES OF PARTNERSHIP LAW

9.1.1. Civil Partnerships: not pursued in mercantile manner, non-habitual or “not


pursued in the regular course of business”

9.1.2. Commercial Partnerships: in pursuit of industry or commerce; characterized by


habituality or “in the regular pursuit of business”

COMMERCIAL PARTNERSHIPS WERE DEEMED TO BE, AND SUBJECT TO CODE OF COMMERCE


PROVISIONS FOR, MERCHANTS. A commercial partnership is distinguished from a civil one by the
object to which it is devoted and not by the manner with which it is organized. A commercial
partnership has for its object the pursuit of industry or commerce, and is then a ―merchant‖ that
must be governed by, and comply with the registration requirements of, the Code of Commerce to
lawfully come into existence; it cannot choose to be organized under the Civil Code to make it a civil
partnership. Prautch v. Hernandez, 1 Phil. 705 (1903).

SAME. ―We are inclined to the belief that the respective codes, Civil and Commercial, have adopted
a complete system for the organization, control, continuance, liabilities, dissolutions, and juristic
personalities of associations organized under each. . . . that associations organized under the
different codes are governed by the provisions of the respective codes.‖ Compañia Agricola de
Ultramar v. Reyes, 4 Phil. 2 (1904).

SAME. A commercial partnership that fails to register its articles in the mercantile registry under Art.
119 of the Code of Commerce, does not become a juridical person with a personality distinct from
those of the individuals who composed it. Hung-Man-Yoc v.Kieng-Chiong-Seng, 6 Phil. 498 (1906);
Bourns v. Carman, 7 Phil. 117 (1906); Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907). THEREFORE: a) It
cannot maintain an action in its name. Prautch v. Hernandez, 1 Phil. 705 (1903); b) Neither in the name
of one nor more of the members on behalf of his associates; nevertheless the individual members
may sue jointly as individuals, and persons dealing with them in their joint capacity will not be
permitted to deny their right to do so. Prautch v. Jones, 8 Phil. 1 (1907); Ang Seng Quen v. Te Chico, 12
Phil. 547 (1909) ; and, c) Without a separate juridical personality, what was applicable was Art. 120
which made ―persons in charge of the management of the association‖ liable for the debts incurred
by such ―partnership de facto‖. Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906).

REGISTRATION WAS THE KEY ELEMENT FOR COMMERCIAL PARTNERSHIPS (ARTS. 118-119,
CODE OF COMMERCE) COMING INTO EXISTENCE/BECOMING JURIDICAL PERSONS; WHILE IT
WAS MERE PERFECTION OF THE CONTRACT FOR CIVIL PARTNERSHIPS. A partnership business
that is in laundry is a civil partnership and governed by the provisions of the Civil Code, and it
existed validly even when no formal partnership agreement was entered into and registered, and
thereby the obligations of the partners for partnership debts would be pro rata. Dietrich v. Freeman, 18
Phil. 341 (1911).

FOR PARTNERSHIP DEBTS, COMMERCIAL PARTNERS WERE SOLIDARILY LIABLE, ALBEIT


SUBSIDIARILY, WHILE CIVIL PARTNERS WERE PRIMARILY BUT ONLY JOINTLY LIABLE. THUS: a)

60
Primarily based and taken from VILLANUEVA & COCHINGYAN SYLLABUS - the contents were partially rearranged and
slightly edited to suit the students‘ needs for purely educational purposes.
61
Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).

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In a civil partnership, each member is not bound to pay all the debts of the concern, but simply his
pro rata share, Co-Pitco v. Yulo, 8 Phil. 544 (1907); while, b) In a commercial partnership, although the
partners are only subsidiarily liable (i.e., they enjoy the benefit of excussion) they are liable solidarily,
Viuda de Chan Diaco v. Peng, 53 Phil. 906 (1928); both the partnership and the partners may be joined
in one action, but the private property of the partners cannot be taken in payment of the partnership
debts until the common property of the firm has been exhausted. La Compañia Maritima v. Muñoz, 9
Phil. 326 (1907); and their right of excussion is deemed already satisfied where at the time the judgment
is executed against the partnership they are unable to show that there are still partnership assets, or
when a writ of execution against the partnership has been returned not fully satisfied, De los Reyes v.
Lukban, 35 Phil. 757 (1916); PNB v. Lo, 50 Phil. 802 (1927).

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SECTION TEN
“By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the
profits among themselves. Two or more persons may also form a partnership for
the exercise of a profession.”62

10. THE PARTNERSHIP IN GENERAL

10.1. NATURE AND ATTRIBUTES

10.1.1. Partnerships in General

STATUTORY DEFINITION. By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form a partnership for the exercise of a
profession.63

PARTNERSHIPS ARE CONTRACTUAL IN NATURE. Since by definition a partnership requires the


meeting of minds to contribute to a common fund with the intention of dividing the profits from
the common fund formed, necessarily an ―Acknowledgment of Participating Capital‖ issued by the
managing partners in favor of the silent partners can only cover the business enterprises specifically
enumerated in said document and cannot be construed to include all other businesses and properties
registered solely in the separate names of the managing partners.64

UNDERLYING BUSINESS ENTERPRISE IS THE PRIMARY OBJECTIVE. When the original partners
sell their equity interest in the company, the original juridical person was extinguished and the new
set of partners constituted a new partnership arrangement with a new juridical personality. Yet the
underlying business enterprise remained the same between the two sets of investors and succession
of liability rules pertaining to the underlying business enterprise must be respected. READ: Yu v.
NLRC, 224 SCRA 75 (1993).

10.1.2. Essential Attributes Of The Partnership

ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP. As a legal concept, a partnership has the


following attributes: a) Primarily A Contractual Relationship (Arts. 1767, 1771, 1784); b)
Informal/Consensual/Weak Juridical Personality (Arts. 44[3], 1768, 1774); c) Delectus Personae; d)
Mutual Agency (Arts. 1803[1], 1818, 1819, 1821 To 1823); and, e) Unlimited Liability For Partners
(Arts. 1816, 1817, 1824, 1839[4] And [7]).

DELECTUS PERSONAE. ASSIGNMENT OF A PARTNER OF HIS SHARE DOES NOT MAKE


ASSIGNEE A PARTNER (ARTS. 1804, 1813). The birth and life of a partnership at will is predicated
on the mutual desire and consent of the partners. The right to choose with whom a person wishes to
associate himself is the very foundation and essence of that partnership. Its continued existence is, in
turn, dependent on the constancy of that mutual resolve, along with each partner‘s capability to give,
it, and the absence of a cause for dissolution provided by the law itself. READ: Ortega v. Court of
Appeals, 245 SCRA 529 (1995).

SAME. LIMITS. ―An unjustified dissolution by a partner can subject him to action for damages
because by the mutual agency that arises in a partnership, the doctrine of delectus personae allows
the partners to have the power, although not necessarily the right, to dissolve the partnership.‖
READ: Tocao v. Court of Appeals, 342 SCRA 20 (2000).

62
CIVIL CODE, Art. 1767 et seq.
63
CIVIL CODE, Art. 1767 et seq.
64
Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010)

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10.1.3. Securities and Exchange Commission

SEC JURISDICTION ON PARTNERSHIP MATTERS.65 The SEC has jurisdiction over partnerships
under the following provisions: a) Sections 5 and 6, Pres. Decree No. 902-A; b) Section 5.1 of the
Securities Regulation Code (R.A. No. 8799); and, c) Interim Rules of Procedure for Intra-Corporate
Disputes.66

10.2. ESSENTIAL ELEMENTS OF PARTNERSHIPS

10.2.1. Essential Elements and Purpose of the Partnership (as a Contract)

ESSENTIAL ELEMENTS AND PURPOSE OF THE PARTNERSHIP (AS A CONTRACT). Under this
heading, the following must be considered: a) Consent; b) Subject Matter (―Object‖); and, c)
Consideration (―Cause‖) or the Undertaking to Contribute Money, Property or Industry to a
Common Fund

CONSENT. PARTNERSHIP MUST NECESSARILY ARISE FROM A CONTRACTUAL RELATIONSHIP.


Therefore, GENERALLY: Persons who are not partners to one another are not partners as to third
persons (Art. 1769[1]); EXCEPT: Partnership by estoppel (Art. 1825).

SUBJECT MATTER (“OBJECT”). PRINCIPLES ON SUBJECT MATTER. GENERALLY: ―partners seek


the joint pursuit of a business venture or business enterprise‖ as clearly indicated by: a) an agreement
to contribute to a common fund; and, b) agreement or intention to divide the profits and losses;
EXCEPT: when the venture is classified as a joint pursuit of a profession done through a
professional partnership. Thus: a) A partnership must be established for the common benefit or
interest of the parties (Art. 1770); and, b) A stipulation excluding a partner from participation in the
profits and losses is void (Art. 1799).

SAME. RAISON „D ETRE OF A PARTNERSHIP. ―The obtaining of profit or gain from the business to
be carried on‖ is the very reason for the existence of a partnership; it is the element that
distinguishes the contract of partnership from voluntary religious or social organizations.67

SAME. SUBJECT MATTER AS COMPETENT PROOF OF PARTNERSHIP. An agreement between two


persons to operate a cockpit, by which one is to contribute his services and the other to provide the
capital, the profits to be divided between them, constitutes a partnership. The performance of
services in connection with the business and that defendant not only rendered an accounting of the
business and paid him his share of the profits, were competent proof to establish the partnership.
Duterte v. Rallos, 2 Phil. 509 (1903).

SAME. SUBJECT MATTER AS COMPETENT PROOF OF NON-PARTNERSHIP Where the society is


not constituted for the purpose of gain, it does not fall within this article of the Civil Code [on
partnerships]. Such an organization is fully covered by the Law of Associations of 1887, but that law
was never extended to the Philippine Islands.68

10.2.2. Particular Rules on Testing Perfected Partnership (Art. 1769)

HOW TO PROVE A PARTNERSHIP. Although the existence of a partnership cannot be established


by general reputation, rumor, or hearsay, nonetheless, a verbal partnership is valid and may be
proven by competent evidence, and the intention of the parties, to form a partnership may be
gathered from the facts and ascertained from their language and conduct, and once so established

65
See sec.gov.ph
66
A.M. No. 01-2-04-SC, 13 March 2001 Re: INTERIM RULES OF PROCEDURE GOVERNING INTRACORPORATE
CONTROVERSIES UNDER R.A. NO. 8799
67
Fernandez v. De la Rosa, 1 Phil. 671 (1903)
68
Council of Red Men v. Veterans Army, 7 Phil. 685 (1907).

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should be given effect.69

EXISTENCE OF PARTNERSHIP IS A QUESTION OF FACT. The issue as to whether there is a


partnership between the parties is a factual matter.70

CO-OWNERSHIP CAN BECOME A PARTNERSHIP. When members of the same family lease out to
SHELL a family commercial lot for the establishment of a gasoline station, and invested the
advanced rentals and deposits to allow one of their members to use the amounts as the registered
dealer of SHELL under the latter‘s policy of ―one station, one dealer,‖ and that the registered dealer
had accounted for the operations to the other members of the family, there was indeed a partnership
formed among themselves, for which the registered dealer can be compelled to execute the covering
articles of partnership, for accounting and distribution of the shares in profits of the other partners.
READ: Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988).

FIXED SHARE IN INCOME IS NOT NECESSARILY A PARTNERSHIP. When facts proven show that
purported partner never furnished the supposed P20,000 capital, nor rendered any help or
intervention in the management of the purported partnership business, much less demanded an
accounting of its affairs and its earnings, there was never intended a real partnership despite the
articles of partnership executed. All that the purported partner did was to receive her share of
P3,000 a month, which can not be interpreted in any manner than a payment for the use of the
premises which she had leased from the owners, and was in accordance with the original letter of
defendant (Exh. ―A‖), which shows that both parties considered themselves as lessor-lessee under a
contract of lease. READ: Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959).

CO-OWNERSHIP OR CO-POSSESSION DOES NOT ITSELF ESTABLISH A PARTNERSHIP, EVEN


WHEN PROFITS ARE SHARED. When land is purchased with the funds contributed by the parties
and thereafter divided equally among them, there could not have been formed a partnership.71

SWEEPSTAKES WINNINGS MAY BE SUBJECT TO CORPORATE INCOME TAX. When fifteen people
contributed money to buy a sweepstakes ticket with the intention to divide the prize which they may
win, and in fact the ticket won third prize, they formed a partnership, which was subject to tax as a
corporate taxpayer.72

AGREEMENT TO ENGAGE IN BUSINESS FOR MONETARY GAIN AND DIVISION OF THE SAME IS
THE ESSENCE OF PARTNESHIPS. The first element of ―an agreement to contribute money, property
or industry to a common fund,‖ is undoubtedly present in the case at bar, for, admittedly, petitioners
have agreed to, and did, contribute money and property to a common fund. The issue remains as to
the second element of ―intent to divide the profits among themselves.‖ Upon consideration of all
the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same among themselves. ―In
other words one cannot but perceive a character of habituality peculiar to business transactions
engaged in for purposes of gain.‖ READ: Evangelista v. Collector of Internal Revenue, 102 Phil.
140 (1957).

AGREEMENT TO ENGAGE IN BUSINESS FOR MONETARY GAIN AND DIVISION OF THE SAME IS
THE ESSENCE OF PARTNESHIPS. Where father and son purchased lot and building and had it
administered with the original purpose of dividing the net income from the property, then a
partnership was constituted.73

CO-OWNERSHIP CAN BECOME A PARTNERSHIP. When the heirs agreed after partition of the
estate, to use common properties and income as a common fund with the intention of making profit

69
Kiel v. Estate of P.S. Sabert, 46 Phil. 193 (1924)
70
Alicbusan v. Court of Appeals, 269 SCRA 336 (1997).
71
Gallemet v. Tabilaran, 20 Phil. 241 (1911).
72
Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939).
73
Reyes v. Commissioner of Internal Revenue, 24 SCRA 198 (1968).

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for them in proportion to their shares in the inheritance, the co-ownership was converted into a
partnership. READ: Oña v. Commissioner of Internal Revenue, 45 SCRA 74 (1972).

INCIDENTAL DIVISION OF PROFIT DOES NOT CREATE A PARTNERSHIP. When four brothers
and sisters acquired lots from their purpose with the original purpose to divide the lots for
residential purposes, and later they found it not feasible to build their residences on the lots because
of the high cost of construction, then they had no choice but to resell the same to dissolve the co-
ownership. The division of the profit was merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had to be terminated sooner or later.74

SAME. In contrast with Evangelista, when the only facts proven was the existence of co-ownership
between the parties covering two isolated purchase of parcels of land and the sharing of profits on
the subsequent sales thereof, there can be no deduction that an unregistered partnership has been
constituted to make it separately liable for corporate income tax: the transactions were isolated, the
parcels purchased were not managed or even leased out. ―The sharing of returns does not in itself
establish a partnership whether or not the persons sharing therein have joint or common right of
interest in the property. There must be clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to transfer or
assign the whole property.‖ READ: Pascual v. Commissioner of Internal Revenue, 166 SCRA
560 (1988).

CO-OWNERSHIP OR CO-POSSESSION DOES NOT ITSELF ESTABLISH A PARTNERSHIP, EVEN


WHEN PROFITS ARE SHARED. Mere co-ownership or co-possession of property does not
necessarily constitute the co-owners or co-possessors are partners in the absence of an agreement to
enter into a partnership.75

SHARING OF GROSS RETURN DOES NOT CREATE PARTNERSHIP: An exclusive agent to develop
a parcel of land who is entitled to receive a 20% commission on the gross sales, cannot claim to be a
partner to the venture simply on the basis that he had made personal ―advances‖ for the expenses
incurred in the development and administration of the property, since the amounts were never
considered contributions into the business.76

RECEIPT BY A PERSON OF A SHARE OF THE PROFITS OF A BUSINESS. Despite the agreement that
Bastida was to receive 35% of the profit from the business of mixing and distributing fertilizer
registered in the name of Menzi & Co., there was never any contract of partnership constituted
between them based on the following key elements: (a) there was never any common fund created
between the parties, since the entire business as well as the expenses and disbursements for
operating it were entirely for the account of Menzi & Co.; (b) there was no provision in the
agreement for reimbursing Menzi & Co. in case there should be no profits at the end of the year;
and (c) the fertilizer business was just one of the many lines of business of Menzi & Co., and there
were no separate books and no separate bank accounts kept for that particular line of business. The
arrangement was deemed to be one of employment, with Bastida contributing his services to
manage the particular line of business of Menzi & Co. READ: Bastida v. Menzi and Co., 58 Phil.
188 (1933).

EXISTENCE OF PARTNERSHIP IS A QUESTION OF FACT. Where there is no written partnership


agreement, nor proof that the claimant received a share in the profits, nor that he had any
participating with respect to the running of the business, then no partnership claim can be
sustained.77

SHARING OF GROSS RETURN DOES NOT CREATE PARTNERSHIP. Although the Olivas were
mere creditors, not partners, the Antons agreed to compensate them for the risks they had taken.

74
Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436 (1985).
75
Navarro v. Court of Appeals, 222 SCRA 675 (1993).
76
Biglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).
77
Sy v. Court of Appeals, 398 SCRA 301 (2003); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).

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The Olivas gave the loans with no security and they were to be paid such loans only if the stores
made profits. Had the business suffered loses and could not pay what it owed, the Olivas would
have ultimately assumed those loses just by themselves. Still there was nothing illegal or immoral
about this compensation scheme. READ: Anton v. Oliva, 647 SCRA 506 (2011).

WHEN RECEIPT OF PROFITS DOES NOT CREATE PRESUMPTION OF PARTNERSHIP. 78 AS


INSTALLMENT PAYMENTS OF DEBT OR INTEREST THEREOF. There is no partnership formed
when a loan was obtained to purchase a venture under the condition that the lender would receive
part of the profits of the business in lieu of interest.79

SAME. A creditor of a business enterprise cannot recover his claim against a person who gave
personal guarantees to some other obligations of the business enterprise and who is without any
right to participate in the profits and cannot be deemed a partner in the business enterprise, since
the essence of partnership is that the partners share in the profits and losses. READ: Tocao v.
Court of Appeals, 365 SCRA 463 (2001).

SAME. AS WAGES OF AN EMPLOYEE. A manager of the partnership would naturally have some
degree of control over the business operations and maintenance. The fact that he had received 50%
of the net profits does not conclusively establish that he was a partner—Art. 1769(4) is explicit that
while the receipt by a person of a share of the profits of a business is prima facie evidence that he is
a partner in the business, no such inference shall be drawn if such profits were received in payment
as wages of an employee. Furthermore, herein petitioner had no voice in the management of the
affairs of the partnership.80

SAME. The payroll of the company indicating that the brother was listed as an employee receiving
only wages from the company militates against his claim of being a partner.81

SAME. The fact that in their articles the parties agreed to divide the profits of a lending business in a
stipulated proportion shows a partnership exists, even when the other parties to the agreement were
given separate compensations as bookkeeper and credit investigator.82

10.2.3. Essential Characteristics of the Contract of Partnership (Art. 1767)

ESSENTIAL CHARACTERISTICS OF THE CONTRACT OF PARTNERSHIP (ART. 1767). Under this


heading, the essential characteristic of a partnership are: a) Nominate and Principal; b) Consensual;
c) Onerous and Commutative; d) Bilateral and Reciprocal; and, e) Preparatory and Progressive.

NOMINATE AND PRINCIPAL. THE LAW FIXES THE RIGHTS AND OBLIGATIONS OF THE
CONTRACTING PARTIES. If the contract contains the elements of ―common fund‖ and ―joint
interest in the profits,‖ the partnership relation results, and the law fixes the incidents of this relation
if the parties fail to do so. It is of no importance that the parties have failed to reach an agreement
with respect to the minor details of contract—these details pertain to the accidental and not to the
essential part of the contract of partnership. READ: Fernandez v. Dela Rosa, 1 Phil. 671 (1902).

SAME. PARTNERSHIP MUST HAVE A LAWFUL OBJECT OR PURPOSE (ART. 1770). The contract of
partnership to divide the fishpond between the parties after the administrative agency shall have
approved the arrangement became illegal under the Fisheries Act. ―As such, it cannot be made
subject to any suspensive condition the fulfillment of which could allegedly make the ultimate
undertaking therein a demandable obligation. It is an elementary rule in law that a partnership
cannot be formed for an illegal purpose or one contrary to public policy and that where the object

78
Other instances include: a) As Rent Payments to a Landlord; b) As Annuity To A Widow Or Representative Of
Deceased Partner; and, c) Consideration Of Sale Of Goodwill Or Other Property.
79
Pastor v. Gaspar, 2 Phil. 592 (1903).
80
Sardane v. CA, 167 SCRA 524 (1988); Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906).
81
Heirs of Tang Eng Kee v. CA, 341 SCRA 740 (2000).
82
Santos v. Reyes, 368 SCRA 261 (2001).

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of a partnership is the prosecution of an illegal business or one which is contrary to public policy,
the partnership is void.83

SAME. SAME. Under Art. 1666 of the old Civil Code, an action to declare a partnership as an
unlawful partnership does not require that the charitable institution to which the partnership funds
shall be turned over should be included as a party in the suit, because no charitable institution is
necessary for the determination of the rights of the parties, who are partners in the unlawful
partnership: ―The action which may arise from said article, in the case of an unlawful partnership, is
that for the recovery of the amounts paid in by the members from those in charge of the
administration of said partnership, and it is not necessary for the said partners to based their action
on the existence of the partnership, but on the fact of having contributed some money to the
partnership capital.‖84

CONSENSUAL. PARTNERSHIPS INVOLVE PERSONAL OBLIGATIONS. BEFORE: Action to compel a


party to execute the contract of partnership to enforce the terms by which an enterprise had been
constituted is an enforcement of an obligation to do, which is contrary to public policy against
involuntary servitude. READ: Woodhouse v. Halili, 93 Phil. 526 (1953). BUT SEE: There was
indeed a partnership formed among themselves, for which the registered dealer can be compelled to
execute the covering articles of partnership, for accounting and distribution of the shares in profits
of the other partners. READ: Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988).

ONEROUS AND COMMUTATIVE. A PARTNERSHIP DOES NOT INVOLVE GRATUITY NOR


MATHEMATICAL EQUIVALENCE. A partnership may be deemed to exist among parties who agree
to borrow money to pursue a business and to divide the profits and losses that may arise therefrom,
even if it is shown that they have not contributed to any capital of their own to a ―common fund.‖
Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets.
Being partners, they are liable for debts incurred by or on behalf of the partnership. The liability for
a contract entered into on behalf of an unincorporated association or ostensible corporation may lie
in a person who may not have directly transacted on its behalf, but reaped benefits from that
contract.85

10.2.4. The Partnership as a Juridical Person (Articles 44(3), 45, 1768 And 1784)

CONSEQUENCES OF JURIDICAL PERSONALITY. Under this heading, the grant of separate juridical
personality entails several characteristics as granted by law, such as: a) Legal Capacity to Enter into
Contracts and Incur Obligations (Art. 46); b) May Acquire Properties in Its Own Name (Arts. 46
and 1774); c) Has Domicile: Place where their legal representation is established or where they
exercise their principal functions (Art. 51); d) Taxable as a Corporate Taxpayer; e) May Be Declared
Insolvent Even If Its Partners Are Not; and, f) Is a Person Entitled to Constitutional Rights.
HOWEVER, TAKE NOTE that there are provisions in the Civil Code which tend to CONTRAVENE
the grant of separate juridical personality; thus, CONTRARY TO THE NATURE OF A SEPARATE
JURIDICAL PERSON, a in a partnership: a) Partners Are Co-owners of Partnership Properties (Arts.
1811); b) Partners May Individually Dispose of Real Property of the Partnership Even When in
Partnership Name (Art. 1819); and, c) Partners Are Personally Liable for Partnership Debts After
Exhaustion of Partnership Assets ((Arts. 1816, 1817, 1824, 1839[4] and [7])

MAY SUE AND BE SUED IN ITS FIRM NAME. In a bankruptcy proceeding against a general partner,
since the partnership is a separate juridical person one partner is not entitled to be made a party as
an individual separate from the firm; and, yet precisely because a partnership is a juridical person,
there can be proper service to the firm of court notices upon service to any partner of the
partnership found within the jurisdiction of the court.86

83
Deluao v. Casteel, 29 SCRA 350 (1969).
84
Arbes v. Polistico, 53 Phil. 489 (1929).
85
Lim Tong Lim v. Phil. Fishing Gear Industries, Inc., 317 SCRA 728, 731 (1999).
86
Hongkong Bank v. Jurado & Co., 2 Phil. 671 (1903).

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SAME. The death of a partner does not constitute a ground for dismissal of the suit against the
partnership, since the partnership has a separate juridical personality.87

SAME. ―[I]t has been the universal practice in the Philippine Islands since American occupation, and
was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as
legal or juridical entities and to permit them to sue and be sued in the name of the company, the
summons being served solely on the managing agent or other official of the company by the section
of the Code of Civil Procedure.‖88

SAME. A partnership may sue and be sued in its name or by its duly authorized representative, and
when it has a designated managing partner, he may execute all acts of administration including the
right to sue debtors of the partnership.89

TAXABLE AS A CORPORATE TAXPAYER. READ: Tan v. Del Rosario, 237 SCRA 234 (1994)

MAY BE DECLARED INSOLVENT EVEN IF ITS PARTNERS ARE NOT. A limited partnership that
commits acts of insolvency may be the subject of an involuntary petition for insolvency, even when
its general partners are very much still solvent. This is on the basis that a limited partnership has a
separate juridical personality from its partners.90

SAME. In view of the separate juridical personality possessed by the partnership, the partners cannot
be sued personally under a contract entered into in the name of the partnership, unless it is shown
that the legal fiction is being used for a fraudulent, unfair or illegal purpose, or when partnership
assets have been exhausted to make partners personally liable for partnership debts as provided in
Art. 1816.91

A PARTNERSHIP IS A PERSON ENTITLED TO CONSTITUTIONAL RIGHTS. A partnership being a


person before the law is entitled to constitutional right to due process and equal protection. 92

SAME. A partnership being a person before the law is entitled to the constitutional right against
unreasonable searches and seizures.93

SAME. A partnership obtains its personality from the State and therefore not entitled to the
constitutional right against self-incrimination.94

10.3. FORMALITIES REQUIRED FOR THE CONTRACT OF PARTNERSHIP

10.3.1. Commencement and Form Required (Arts. 1771 and 1784)

10.3.2. Registration Requirements

ACCORDING TO THE OLD CIVIL CODE AND CODE OF COMMERCE. Third parties without
knowledge of the existence of the partnership who deal with the property still registered in the name
of one of the partners have a right to expect full effectivity of such transaction on the property, in
spite of the protestation of the other partners and perhaps even the partnership creditors.95

WHEN CAPITAL IS P3,000 OR MORE (ART. 1772). The agreement to the contribution to a common

87
Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947); Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905)
88
Vargas & Co. v. Chan, 29 Phil. 446 (1915).
89
Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988).
90
Campos Rueda & Co. v. Pacific Commercial & Co., 44 Phil. 916 (1923).
91
Aguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).
92
cf Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971).
93
cf Stonehill v. Diokno, 20 SCRA 383 (1967).
94
cf Bataan Shipyard & Engineering Co. v. PCGG, 150 SCRA 181 (1987).
95
Borja v. Addison, 44 Phil. 895 (1922)

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fund and the division of profits and losses would bring about the existence of a partnership. Mere
failure to register the contract of partnership with the SEC does not invalidate a contract that has
the essential requisites of partnership – a partnership may exist even if the partners do not use the
words ―partner‖ or ―partnership‖. •Angeles v. Secretary of Justice, 465 SCRA 106 (2005).; An
unregistered contract of partnership is valid as among the partners, so long as it has the essential
requisites, because the main purpose of registration is to give notice to third parties. The failure to
register the contract does not affect the liability of the partnership and of the partners to third
persons, and that neither does such failure affect the partnership‘s juridical personality; and it can be
assumed that the members themselves knew of the contents of their contract. READ: Ma v.
Fernandez, Jr., 625 SCRA 566 (2010).

WHEN IMMOVABLE PROPERTY CONTRIBUTED (ARTS. 1771 AND 1773). The execution of a
written agreement was not necessary in order to give efficacy to the verbal contract of partnership as
a civil contract, the contributions of the partners not having been in the form of immovables or
rights therein. The special provision cited, requiring the execution of a public writing in the single
case mentioned and dispensing with all formal requirements in other cases, renders inapplicable to
this species of contract the general provisions of Art. 1280 of the old Civil Code. READ:
Fernandez v. Dela Rosa, 1 Phil. 671 (1902).

SAME. When the articles of partnership provide that the venture is established ―to operate a
fishpond,‖ it does not necessarily mean that immovable properties or real rights have been
contributed into the partnership which would trigger the operation of Article 1773.96

SAME. Failure to prepare an inventory of the immovable property is contributed, in spite of Art.
1773 declaring the partnership void, would not render the partnership void when: (a) No third-party
is involved since Art. 1773 was intended for the protection of third-parties; and (b) the partners have
made a claim on the partnership agreement which is deemed binding between them as any other
contract. READ: Torres v. Court of Appeals, 320 SCRA 428 (1999).

SAME. While the sale of land appearing in a private deed is binding between the parties, it cannot be
considered binding on third persons if it is not embodied in a public instrument and recorded in the
Registry of Deeds. When it comes to contributions of real estate to a partnership, especially when it
covers registered land, then the peremptory provisions of the Property Registration Decree (P.D.
1459) will prevail as to who has a better claim, right or lien on the property, since ―registration in
good faith and for value,‖ is the operative rule under the Torrens system.97

SAME. An instrument purporting to be the contract of partnership/joint venture, which is unsigned


and undated, and does not meet the public instrumentation requirements exacted under Article 1771
of the Civil Code, and not even registrable with the SEC as called for under Article 1772, and which
also does not meet the inventory requirement under Article 1773 since the claims involve
contributions of immovable properties, does not warrant a finding that a contract of partnership or
joint venture exist.98

10.3.3. Legal Value of the Formal Requirements for Partnerships

FORMAL REQUIREMENTS ARE PRIMARILY REMEDIAL OR EVIDENTIARY IN USEFULNESS. An


oral partnership is valid and binding between the parties, even if the amount of capital contributed is
in excess of the sum of 1,500 pesetas. The provisions of law requiring a contract to be is a particular
form should be understood to grant to the parties the remedy to compel that the form mandated by
law be complied with, but does not prevent them from claiming under an oral contract which is
otherwise valid without first seeking compliance with such form.99

96
Agad v. Mabato, 23 SCRA 1223 (1968).
97
Secuya v. Vda. de Selma, 326 SCRA 244 (2000).
98
Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005).
99
Thunga Chui v. Que Bentec, 2 Phil. 561 (1903); Magalona v. Pesayco, 59 Phil. 453 (1934).

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SAME. Registration of the partnership is the best evidence to prove the existence of the partnership
among the partners.100

SAME. When there has been duly registered articles of partnership, and subsequently the original
partners accept an industrial partner but do not register a new partnership, and thereafter the
industrial partner retires from the business, and the original partners continue under the same set-up
as the original partnership, then although the second partnership was dissolved with the withdrawal
of the industrial partner, there resulted a reversion back into the original partnership under the terms
of the registered articles of partnership. There is not constituted a new partnership at will. READ:
Rojas v. Maglana, 192 SCRA 110 (1990).

10.3.4. Other Rules on the Constitution of a Partnership

OTHER RULES. Apart from the foresaid, take note of the effects of the following: a) When Articles
Kept Secret Among Members (Art. 1775); and, b) Rules on Partnership Name (Art. 1815; SEC
Memo Circular No. 5, s. 2008).101

INCLUSION OF NAMES OF ALL PARTNERS. The requirement under the Code of Commerce that
the partnership name contain the names of all the partners, is meant to protect from fraud the
public dealing with the partnership; it cannot be invoked by the partners to allege the non-existence
of the partnership.102

RETENTION OF DECEASED PARTNER‟S NAME. GENERALLY: The contention that the last
paragraph of Art. 1840 of Civil Code regulating the continuation of the business of the partnership
name, or the name of a deceased part as part thereof, allows a partnership from continuing its
business under a firm name which includes the name of a deceased partner has been denied when it
comes to a law partnership on the following grounds: (a) it contravenes the provision of Arts. 1815
and 1825, which impose liability on a person whose name is included in the firm name, which
cannot cover a deceased person who can no longer be subject to any liability; (b) public relations
value of the use of an old firm name can tend to create undue advantages and disadvantages in the
practice of the profession; (c) Art. 1840 covers dissolution and winding up scenarios and cannot be
taken to mean to cover firms that are intended as going concerns, and cover more commercial
partnerships; and (d) when it comes to other professions, there is legislative authority for them to
use in their firm names those of deceased partners. 103 ; BUT SEE: RULE 3.02, CODE OF
PROFESSIONAL RESPONSIBILITY. The continued use of the name of a deceased partner is
permissible provided that the firm indicates in all its communications that said partner is deceased.

100
Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).
101
See amendments introduced by SEC Memo Circular No. 8 series of 2012
102
Jo Chung Cang v. Pacific Comm‘ Co., 45 Phil. 142 (1923); PNB v. Lo, 50 Phil. 802 (1927).
103
In the Matter of the Petition for Authority to Continue Using Firm Names, etc., 92 SCRA 1 (1979).

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SECTION ELEVEN
“Article 1769 of Civil Code, which lays down the rule for determining when a
transaction should be deemed a partnership or a co-ownership, that those who
agree to form a co-ownership share or do not share any profits made by the use of
the property held in common does not convert their venture into a partnership; or
the sharing of the gross returns does not of itself establish a partnership whether or
not the persons sharing therein have a joint or common right or interest in the
property. This means that aside from the circumstance of profit, the presence of
other elements constituting partnership is necessary, such as the clear intent to form
a partnership, the existence of a juridical personality different from that of the
individual partners, and the freedom to transfer or assign any interest in the
property by one with the consent of the others.”104

11. THE PARTNERSHIP AND THE PARTNERS

11.1. KINDS OF PARTNERSHIPS

CLASSIFICATION. Partnerships May Be Classified according to: a) object; b) duration; or c) extent of


liability.

OBJECT (ART. 1776, 1ST PAR.). According to this classification, a partnership may be: a) Universal;
or, b) Particular.

UNIVERSAL PARTNERSHIP (ARTS. 1777 TO 1782). TAKE NOTE: a) Deemed a ―Universal


Partnership of Profits‖ when articles do not specify the partnership‘s nature. (Art. 1781); and, b) -
Persons who are prohibited from giving each other any donation or advantage cannot enter into a
universal partnership. (Art. 1782)

PARTICULAR PARTNERSHIP (ART. 1783). The usefulness of the distinguishing between universal
and particular partnerships. READ: Lyons v. Rosenstock, 56 Phil. 632 (1932).

DURATION (ART. 1785). According to this classification, a partnership may be: a) with a fixed term;
b) for a particular undertaking; or, c) at will.

LIABILITIES. According to this classification, partnership may be a: a) General Partnership (Art.


1776, 2nd par.); or, b) Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867).

11.2. COMPARED WITH OTHER BUSINESS MEDIA

CO-OWNERSHIP105 DOES NOT NECESSARILY IMPLY A PARTNERSHIP. Article 1769 of Civil Code,
which lays down the rule for determining when a transaction should be deemed a partnership or a
co-ownership, that those who agree to form a co-ownership share or do not share any profits made
by the use of the property held in common does not convert their venture into a partnership; or the
sharing of the gross returns does not of itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. This means that aside from
the circumstance of profit, the presence of other elements constituting partnership is necessary, such
as the clear intent to form a partnership, the existence of a juridical personality different from that of
the individual partners, and the freedom to transfer or assign any interest in the property by one
with the consent of the others.106

SOLE PROPRIETORSHIP HAS NO JURIDICAL PERSONALITY. A sole proprietorship does not


possess a juridical personality separate and distinct from the personality of the owner of the

104
Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010)
105
CIVIL CODE, Arts. 484 - 486
106
Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010)

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enterprise. The law does not vest a separate legal personality on the sole proprietorship or empower
it to file or defend an action in court. Only natural or juridical persons or entities authorized by law
may be parties to a civil action and every action must be prosecuted and defended in the name of
the real parties-in-interest.107

AGENCY108 IS ONLY AN ASPECT OF PARTNERSHIP. Agent cannot escape liabilities of estafa for
conversion of the funds given to him by his principal by claiming that he had become a partner
when the books of accounts kept for the business showed that the amount was charged to him since
the same was ―merely a method of keeping an account of the business, so that the parties would
know how much money had been invested and what the condition thereof was at any particular
time.‖109

SAME. Just because a duly appointed agent has made personal advances for the expenses of the
business venture that he had been designated to administer, does not make him a partner of his
principal.110

TRUSTS, DEFINED. Trust is the legal relationship between one person who has equitable ownership
of a property and another who owns the legal title to the property.111 The trustor is the one who
establishes the trust; the beneficiary, the person for whose benefit the trust was created; and the
trustee, the one in whom, by conferment of a legal title, confidence has been reposed as regards the
property of the beneficiary.112 The principles of the general law of trusts, insofar as they are not in
conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby
adopted.113

CORPORATIONS.114 A corporation is an artificial being created by operation of law, having the right
of succession and the powers, attributes and properties expressly authorized by law or incident to its
existence. 115 ON POSSIBLITY OF INCORPORATORS OF FAILED CORPORATION BECOMING
PARTNERS: GENERALLY, READ: Pioneer Insurance v. Court of Appeals, 175 SCRA 668
(1989); HOWEVER, READ: Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317
SCRA 728 (1999).

COOPERATIVES116 STATUTORY DEFINITION. A cooperative is an autonomous and duly registered


association of persons, with a common bond of interest, who have voluntarily joined together to
achieve their social, economic, and cultural needs and aspirations by making equitable contributions
to the capital required, patronizing their products and services and accepting a fair share of the risks
and benefits of the undertaking in accordance with universally accepted cooperative principles.117

107
Ejercito v. M.R. Vargas Construction, 551 SCRA 97 (2008).
108
CIVIL CODE, Art. 1868 (―By the contract of agency a person binds himself to render some service or to do something
in representation or on behalf of another, with the consent or authority of the latter.‖)
109
U.S. v. Muhn, 6 Phil. 164 (1906)
110
Binglangawa v. Constantino, 109 Phil. 168 (1960)
111
Sps. Oco v. Limbaring, G.R. No. 161298, 31 January 2006 citing Cuenco v. Manguerra, 440 SCRA 252, 262, October
13, 2004; Spouses Rosario v. Court of Appeals, 369 Phil. 729, 740-741, July 19, 1999; Morales v. Court of Appeals, 274
SCRA 282, 297, June 19, 1997; Buan Vda. de Esconde v. Court of Appeals, 323 Phil. 81, 88-89, February 1, 1996. See
Tolentino, IV Commentaries and Jurisprudence on the Civil Code of the Philippines 669 (1991).
112
CIVIL CODE, Art. 1441
113
CIVIL CODE, Art. 1442
114
see CORP. CODE discussions under Part Three
115
CORP. CODE, section 2
116
Republic Act No. 6938 as amended by Republic Act No. 9520 (2009) or the ―Philippine Cooperative Code of 2008‖
see ART. 144 (―Transitory Provisions.- (1) All cooperatives registered and confirmed with the Authority under Republic
Act No. 6938 and Republic Act No. 6939, are hereby deemed registered under this code, and a new certificate of
registration shall be issued by the authority: Provided, That such cooperative shall submit to the nearest office of the
authority a copy of their certificate of registration or certificate of confirmation, the articles of cooperation, their bylaws,
and their latest audited financial statement within one (1) year from the effectivity of this code, otherwise the shall be
deemed cancelled motu proprio.‖) [hereinafter, ―NEW COOP CODE‖]
117
NEW COOP CODE, Art. 3

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11.3. KINDS OF PARTNERS

11.3.1. General and Limited Partners

11.3.2. Industrial and Capitalist Partners

11.3.3. Ostensible, Nominal and Dormant Partners

11.3.4. Original and Incoming Partners

11.3.5. Managing and Liquidating Partners

11.3.6. Retiring, Surviving and Continuing Partners

11.4. PROPERTY RIGHTS OF PARTNERS

PROPERTY RIGHTS OF THE PARTNERS. Under this heading, take note of the following rights of
the partners: a) Rights to Specific Partnership Property (Arts. 1810 and 1811); b) Mutual Agency:
Right to Participate in Management of the Partnership; c) Equity Interest In The Partnership
Venture (Arts. 1810 and 1812); and, d) Other Proprietary Rights Of Partners.

11.4.1. Rights to Specific Partnership Property (Arts. 1810 and 1811)

RIGHTS TO SPECIFIC PARTNERSHIP PROPERTY. These have the following characteristics: a) Equal
Right to Possess, But for Partnership Purpose Only;118 b) Non-Assignable (Art. 1811[2]); c) Not
Subject to Attachment or Execution or to Legal Support (Art. 1811[3]); and, Remedy of Partner‘s
Separate Creditors (Art. 1814).

11.4.2. Mutual Agency: Right to Participate in Management of the Partnership

RULES ON PARTNERS‟ MUTUAL AGENCY. GENERALLY: The Rules on Agency is found in Arts.
1803[1] and 1818; BUT TAKE NOTE OF: a) Acts Requiring Unanimous Consent (Art. 1818); b)
Required Consent in Making Alterations on Immovable Property (Art. 1803[2]); c) When There Is
Designation of Manager or Management Prerogatives (Arts. 1800 to 1802); d), Specified Powers of
the Partners, which are: i) a partner can dispose of partnership property even when in partnership
name (Art. 1819);119 ii) an admission or representation made by any partner concerning partnership
affairs is evidence against the partnership (Art. 1820); iii) Notice to any partner of any matter relating
to partnership affairs is notice to the partnership (Art. 1821); iv) Wrongful act or omission of any
partner acting for partnership affairs makes the partnership liable (Art. 1822); and, v) Partnership
bound to make good losses for acts or misapplications of partners (Art. 1823); and, e) Full
Information and Accounting to Other Partners (Art. 1806).

GENERAL RULE ON AGENCY (ARTS. 1803[1] AND 1818). In the ordinary course of business, a
partner has authority to purchase goods,120 to hire employees of the partnership;121 as well as dismiss
them.122

SAME. When partnership real property had been mortgaged and foreclosed, the redemption by any
of the partners, even when using his separate funds, does not allow such redemption to be in his
sole favor‖ under the general principle of law under Art. 1818 that a partner is an agent of the
partnership. Under Art. 1807, every partner becomes a trustee for his copartner with regard to any
benefits or profits derived from his act as a partner.123
118
U.S. v. Clarin, 17 Phil. 84 (1910); People v. Alegre, 48 O.G. 5341 (1952); Celino v. CA, 163 SCRA 97 (1988).
119
Goquiolay v. Sycip, 9 SCRA 663 [1969]
120
Smith, Bell & Co. v. Aznar, 40 O.G. 1882 [1941]
121
Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 [1908]
122
Martinez v. Cordoba & Conde, 5 Phil. 545 [1906]
123
Catalan v. Gatchalian, 105 Phil. 1270 (1959).

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SAME. The stipulation in the articles of partnership that the two managing partners may contract
and sign in the name of the partnership with the consent of the other, undoubtedly creates an
obligation between the two partners, which consists in asking the other‘s consent before contracting
for the partnership. This obligation of course is not imposed upon a third person who contracts
with the partnership. Neither is it necessary for the third person to ascertaining if the managing
partner with whom he contracts has previously obtained the consent of the other. A third person
may and has a right to presume that the partner with whom he contracts has, in the ordinary and
natural course of business, the consent of his copartner; for otherwise he would not enter into the
contract. The third person would naturally not presume that the partner with whom he enters into
the transaction is violating the articles of partnership, but on the contrary, is acting in accordance
therewith. READ: Litton v. Hil & Ceron, 67 Phil. 509 (1935).

SAME. In a transaction within the ordinary course of the partnership business effected by the
industrial partner without the consent of the capitalist partner, the provisions in the articles of
partnership that the industrial partner ―shall manage, operate and direct the affairs, businesses and
activities of the partnership,‖ constitute sufficient authority to make such transaction binding against
the partnership, as against another provision of the articles by which the industrial partner is
authorized ―To make, sign, seal, execute and deliver contracts . . upon terms and conditions
acceptable to him duly approved in writing by the capitalist partner.124

SAME. In spite of the provision of Article 129 of the Code of Commerce to the effect that ―If the
management of the general partnership has not been limited by special agreement to any of the
members, all shall have the power to take part in the direction and management of the common
business, and the members present shall come to an agreement for all contracts or obligations which
may concern the association,‖ such obligation is one imposed by law on the partners among
themselves, that does not necessarily affect the validity of the acts of a partner, while acting within
the scope of the ordinary course of business of the partnership, as regards third persons without
notice. The latter may rightfully assume that the contracting partner was duly authorized to contract
for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of
his co-partners. The regular course of business procedure does not require that each time a third
person contracts with one of the managing partners, he should inquire as to the latter's authority to
do so, or that he should first ascertain whether or not the other partners had given their consent
thereto. READ: Goquiolay v. Sycip, 108 Phil. 947 (1960).

SAME. A presumption exists that each partner is an authorized agent for the firm and that he has
authority to bind it in carrying on the partnership transaction.125

SAME. GENERALLY: None of the partners and the partnership itself cannot be held liable for estafa
when they fail or refuse to return the contributions or share in profits of the partner;126 BUT: When
partner receives funds from another partner for a particular purpose and he misappropriate it, then
the receiving partner is liable for estafa.127

SPECIFIED POWERS OF PARTNERS. In a partnership: a) a partner can dispose of partnership


property even when in partnership name (Art. 1819); 128 b) an admission or representation made by
any partner concerning partnership affairs is evidence against the partnership (Art. 1820); c) Notice
to any partner of any matter relating to partnership affairs is notice to the partnership (Art. 1821); d)
Wrongful act or omission of any partner acting for partnership affairs makes the partnership liable
(Art. 1822); and, e) Partnership bound to make good losses for acts or misapplications of partners
(Art. 1823).

124
Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941)
125
Muñasque v. Court of Appeals, 139 SCRA 533 (1985)
126
U.S. v. Clarin, 17 Phil. 84 (1910).
127
. Liwanag v. Court of Appeals, 281 SCRA 225 (1997).
128
Goquiolay v. Sycip, 9 SCRA 663 [1969]

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11.4.3. Equity Interest In The Partnership Venture (Arts. 1810 and 1812)

EQUITY INTEREST IN THE VENTURE. These include: a) Participation in Profits and Losses, which
implies that: i) A Stipulation Excluding a Partner from Any Share in the Profits or Losses Is Void
(Art. 1799); ii) Distribution of Profits and Losses (Art. 1797); and, iii) When Third-Party Designated
to Share (Art. 1798); b) Right to Dispose of Such Interest (Art. 1813); and, c) Right of Partner‘s
Creditors to Execute Upon It (Art. 1814).

DISTRIBUTION OF PROFITS AND LOSSES (ART. 1797). In a partnership arrangement, when the
agreement to pay a high commission to one of the partners was in anticipation of large profits being
made from the venture, but that eventually the venture sustained losses, then there is no legal basis
to demand for the payment of the commissions since the essence of the partnership is the sharing of
profits and losses. READ: Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).

SAME. Art. 1797 covers the distribution of losses among the partners in the settlement of
partnership affairs and does not cover the obligations of partners to third persons which is covered
by Article 1816.129

RIGHT TO DISPOSE OF SUCH INTEREST (ART. 1813). Any partner may transfer his interest and his
assignee may demand an accounting from the remaining partners and a third person into whose
hands the partnership property has passed in satisfaction of the firm‘s debt.130

11.4.4. Other Proprietary Rights Of Partners

OTHER PROPRIETARY RIGHTS. These include: a) Right to Reimbursement for Advances and
Indemnification for Risks (Arts. 1795 and 1796); b) Access to Partnership Books and Records (Art.
1805); c) Right to Formal Accounting (Art. 1809); d) Right to Dissolve the Partnership (Art. 1830[2]).

RIGHT TO REIMBURSEMENT FOR ADVANCES AND INDEMNIFICATION FOR RISKS (ARTS. 1795
AND 1796). The rule is inapplicable where no money other than that contributed as capital is
involved.131

RIGHT TO FORMAL ACCOUNTING (ART. 1809). A partner‘s right to accounting for partnership
properties that are within the custody or control of the other partners shall apply only when there is
proof that such properties, registered in the individual names of the other partners, have been
acquired from the use of partnership funds, thus: ―Accordingly, the defendants have no obligation
to account to anyone for such acquisitions in the absence of clear proof that they had violated the
trust of [one of the partners] during the existence of the partnership.‖132

RIGHT TO DISSOLVE THE PARTNERSHIP (ART. 1830[2]). Even in a partnership not at will, a
partner can unilaterally dissolve the partnership by a notice of dissolution, which in effect is a notice
of withdrawal. Under Art.1830(2), even if there is a specified term, one partner can cause its
dissolution by expressly withdrawing even before the expiration of the period, with or without
justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing
partner is liable for damages but in no case can he be compelled to remain in the firm. With his
withdrawal, the number of members is decreased, hence, the dissolution. READ: Rojas v.
Maglana, 192 SCRA 110 (1990).

11.5. OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP

11.5.1. Obligation to Contribute to the Common Fund (Arts. 1786)

129
Ramnani v. Court of Appeals, 196 SCRA 731 (1991)
130
Jackson v. Blum, 1 Phil. 4 (1901).
131
Martinez v. Ong Pong Co., 14 Phil. 726 (1910).
132
Lim Tanhu v. Ramolete, 66 SCRA 425 (1975).

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OBLIGATION TO THE COMMON FUND. These are outlined in the foregoing provisions and
depending on the nature of what is to be contributed: a) When Sum of Money (Arts. 1786 and
1788); b) When Property – In General (Art. 1795) Who Bears Risk of Loss for Determinate Thing?
(Art.1830[4]); c) When Contribution in Goods (Arts. 1787 and 1795); d When Real Property (Arts.
1772 and 1773); e) When in Service (Arts. 1789); f) Presumption as to Percentage of Capital (Art.
1790); and, g) Additional Contribution, in Case of Imminent Loss (Art. 1791).

OBLIGATION TO THE COMMON FUND. ―Credit‖, such as a promissory note or other evidence of
obligation, or even goodwill, may be validly contributed into the partnership.133

SAME. When a partner fails to pay his promised contribution, he becomes indebted to it for the
remainder of what is due, with interest and any damages occasioned thereby, but it does not
authorize the other partners to seek rescission of the partnership contract under Article 1191 of
Civil Code, since the remedies are provided for in particular under now Arts. 1786 to 1788 of Civil
Code.134

SAME. A partner who promises to contribute to a partnership becomes a promissory debtor of the
partnership, including liability for interests and damages caused for failure to pay, and which
amounts may be deducted upon dissolution of the partnership from his share in the profits and net
assets.135

11.5.2. Recovery of Demandable Sums (Art. 1792)

11.5.3. Receiving Partnership Credits (Art. 1793)

11.5.4. As to Third Persons Dealing with the Partnership

11.6. FIDUCIARY DUTIES OF PARTNERS

11.6.1. Duty Of Diligence (Art. 1794)

11.6.2. Duty To Account (Art. 1807)

11.6.3. Duty Of Loyalty

DUTY OF LOYALTY. This entails the following: a) Capitalist Partners Cannot Engage for Their Own
Account in Similar Partnership Business (Art. 1808); b) Industrial Partner Cannot Engage in Any
Form of Business (Art. 1789); and, c) Partners in General Cannot Engage in Competitive Business.

SAME. When the partnership has been terminated, the former partners are no longer prohibited in
pursuing the same business as that for which the partnership was constituted. 136

SAME. When partnership real property had been mortgage and foreclosed, the redemption by any of
the partners, even when using his separate funds, does not allow such redemption to be in his sole
favor.137

SAME. An industrial partner is not deemed to have violated his fiduciary duties to the other partners
by having delivered on the particular service required of her and devoting her time serving in the
judiciary which is not considered to be engaged in an activity for profit. READ: Evangelista & Co.
v. Abad Santos, 51 SCRA 416 (1973).

SAME. Former partners have no obligation to account on how they acquired properties in their

133
City of Manila v. Cumbe, 13 Phil. 677 (1909).
134
Sancho v. Lizarraga, 55 Phil. 601 (1931).
135
Rojas v. Maglana, 192 SCRA 110 (1990).
136
Halon v. Haussermann, 40 Phil. 796 (1920).
137
Catalan v. Gatchalian, 105 Phil. 1270 (1959); Director of Lands v. Lope Alba, L-11648, 22 April 1959, 105 Phil. 2171

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names, when such acquisition were effected long after the partnership had been automatically
dissolved as a result of the death of the primary managing partner, especially in the absence of clear
proof that they had violated the trust of managing partner during the existence of the partnership.138

SAME. When a partner engages in a separate business enterprise that is competitive with that of the
partnership, the other partner‘s withdrawal from the partnership becomes thereby justified and for
which the latter cannot be held liable for damages. 139

11.7. PARTNERS‟ UNLIMITED LIABILITY

PARTNERS‟ UNLIMITED LIABILITY. Under this heading, take note of the following: A) Partners
Liable Pro-Rata with Their Separate Properties After Partnership Assets Have Been Exhausted, for
All Partnership Debts. (Art. 1816) and Any Stipulation Against Personal Liability of Partners for
Partnership Debts Is Void, Except as Among Themselves (Art. 1817); B) All Partners Liable
Solidarily with Partnership for Everything Chargeable to the Partnership When Caused By: a)
Wrongful Act or Omission of Any Partner: i) Acting in the Ordinary Course of Business of the
Partnership; or, ii) with Authority from the Other Partners; and, b) Partner‘s Act or Misapplication
of Properties. (Art. 1824); C) Newly Admitted Partner into an Existing Partnership Is Liable Only
Out of Partnership Property Shares and Contributions, for All the Obligations of the Partnership
Arising Before His Admission (Art. 1826); D) Partnership Creditors Are Preferred to Those of Each
of the Partners as Regards the Partnership Property (Art. 1827).

PARTNERS‟ PRO-RATA LIABILITY FOR PARTNERSHIP DEBTS. READ: Island Sales, Inc. v.
United Pioneers General Construction Co., 65 SCRA 554 [1975]).

SAME. Any Stipulation Against Personal Liability of Partners for Partnership Debts Is Void, Except
as Among Themselves (Art. 1817).

11.8. RELATIONS AND DEALINGS WITH THIRD PERSONS

REPRESENTATION AS A PARTNER TO THIRD PARTIES. According to Art. 1825 ―[w]hen a person,


by words spoken or written or by conduct, represents himself, or consents to another representing
him to anyone, as a partner in an existing partnership or with one or more persons not actual
partners, he is liable to any such persons to whom such representation has been made, who has, on
the faith of such representation, given credit to the actual or apparent partnership, and if he has
made such representation or consented to its being made in a public manner he is liable to such
person, whether the representation has or has not been made or communicated to such person so
giving credit by or with the knowledge of the apparent partner making the representation or
consenting to its being made: (1) When a partnership liability results, he is liable as though he were
an actual member of the partnership; (2) When no partnership liability results, he is liable pro rata
with the other persons, if any, so consenting to the contract or representation as to incur liability,
otherwise separately.When a person has been thus represented to be a partner in an existing
partnership, or with one or more persons not actual partners, he is an agent of the persons
consenting to such representation to bind them to the same extent and in the same manner as
though he were a partner in fact, with respect to persons who rely upon the representation. When all
the members of the existing partnership consent to the representation, a partnership act or
obligation results; but in all other cases it is the joint act or obligation of the person acting and the
persons consenting to the representation.‖

138
Lim Tanhu v. Remolete, 66 SCRA 425 (1975).
139
Rojas v. Maglana, 192 SCRA 110 (1990).

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SECTION TWELVE
“„Winding-up‟ as „the process of settling business affairs after dissolution,‟ and it
cites as examples of winding-up process, the following: „Examples of winding up:
the paying of previous obligations; the collecting of assets previously demandable;
even new business if needed to wind up, as the contracting with a demolition
company for the demolition of the garage used in a „used car‟ partnership.‟”140

12. DISSOLUTION, WINDING UP AND TERMINATION

12.1. NATURE AND EFFECTS OF DISSOLUTION

12.1.1. Different from Termination

DEFINITION. ―Termination‖ of a partnership is the ―point in time after all the partnership affairs
have been wound up.‖ READ: Idos v. Court of Appeals, 296 SCRA 194 (1998).

DISSOLUTION OF THE PARTNERSHIP. Under this heading, take note of the following aspects: a) As
to the Relationship of the Partners (Arts. 1828 and 1832); b) On the Partnership Itself (Art. 1829);
c) On the Authority of the Partners (Arts. 1832, 1833 and 1834); and, d) On the Liabilities of the
Partners (Art. 1835).

12.1.2. As to the Relationship of the Partners (Arts. 1828 and 1832)

PARTNERSHIP MUST SATISFY THE INDIVIDUAL CLAIMS, NOT THE INDIVIDUAL PARTNERS.
Since a partnership has a separate juridical personality, then upon its dissolution, the withdrawing
partners have no cause of action to demand the return of their equity from the other partners; it is
the partnership that must refund the equity of the retiring partners. In other words, it can only pay
out of what it has in its coffers, which consists of all its assets. However, before the partners can be
paid their shares, the creditors of the partnership must first be compensated; whatever is left
thereafter becomes available for the payment of the partners‘ shares. READ: Villareal v. Ramirez,
406 SCRA 145 (2003).

12.1.3. On the Partnership Itself (Art. 1829)

PARTNERSHIP IMPLEADED. An action to dissolve the partnership and for the appointment of a
receiver for the purpose must include the partnership since it is entitled to be heard ―in matters
affecting its existence as well as the appointment of a receiver.‖ READ: Claudio v. Zandueta, 64
Phil. 812 (1937).

12.1.4. On the Authority of the Partners (Arts. 1832, 1833 and 1834)

12.1.5. On the Liabilities of the Partners (Art. 1835)

POST DISSOLUTION LIABILITIES OF PARTNERS. Upon Dissolution of the Partnership, Partners


Shall Contribute the Amounts Necessary to Satisfy the Partnership Liabilities. (Art. 1839[4] and [7]).

PARTNERSHIP MAY BE INSOLVENT EVEN IF PARTNERS ARE NOT. A partnership guilty of an act
of insolvency may be proceeded against and declared bankrupt in insolvency proceedings despite the
solvency of each of the partners composing it.141

140
Idos v. Court of Appeals, 296 SCRA 194 (1998).
141
Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1922).

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12.2. TYPES (CAUSES) OF DISSOLUTION (ARTS. 1830 AND 1840)

12.2.1. Non-Judicial Dissolution (Arts. 1830, 1833, and 1840[1])

NON-JUDICIAL DISSOLUTION. These may be classified into: a) Without Violation of the


Partnership Agreement, which are: i) Expiration of Term or Undertaking; ii) By the Express Will of
a Partner in a Partnership at Will; iii) Mutual Assent of the Partners; iv) Expulsion of a Partner
Pursuant to an Agreement Granting Such Right; b) In Contravention of Agreement (Arts. 1826 and
1830[2]); and, c) By Operation of Law (Art. 1830): i) Supervening Illegality; ii) Loss of Specific
Thing Contributed; iii) Death, Insolvency or Civil Interdiction of a Partner.

WITHOUT VIOLATIONS OF PARTNERSHIP AGREEMENT, CHANGE IN MEMBERSHIP. The legal


effect of the changes in the membership of the partnership would be the dissolution of the old
partnership. Yu v. NLRC, 224 SCRA 75 (1993).

SAME. When a new member is accepted into an existing partnership, legally there has been a
dissolution of the old and a formation of a new partnership.142

IN CONTRAVENTION OF AGREEMENT, NATURE OF. A mere falling out or misunderstanding


among the partners does not convert the partnership into a sham organization, since the partnership
exists and is dissolved under the law. READ: Muñaque v. Court of Appeals, 139 SCRA 533, 540
(1985); READ: Tocao v. Court of Appeals, 342 SCRA 20, 37 (2000).

SAME. Partners who effect a dissolution by his withdrawal in contravention of an agreement renders
himself liable for damages which may be deducted from his partnership account, and he loses his
right to wind-up.143

BY OPERATION OF LAW (ART. 1830), NATURE. Absence of any clear stipulation, the acceptance
back of part of the contribution by the partner does not necessarily mean his withdrawal from, or
dissolution of, the partnership.144

DISSOLUTION BY DEATH. The death of one of the partners dissolves the partnership, but that the
liquidation of its affairs is by law entrusted not to the executors of the deceased partner, but to the
surviving partners or to the liquidators appointed by them.145

SAME. A particular partnership is dissolved by the death of one of its partners there being no
stipulation in the contract of partnership of its subsistence after the death of a partner, and it thereby
attains the status of a partnership in liquidation, and only the rights inherited by the heirs of the
deceased partner were those resulting from the said liquidation and nothing more. If there would be
a continuation of the partnership a clear agreement on meeting of the minds must be made,
otherwise, a new partnership arrangement cannot be presumed to have arisen among the heirs and
the remaining partners.146

SAME. In equity, surviving partners are treated as trustees of the representatives of the deceased
partner, in regard to the interest of the deceased partner in the firm. As a consequence of this
trusteeship, surviving partners are held in their dealings with the firm assets and the representatives
of the deceased to that nicety of dealing and that strictness of accountability required of and incident
to the position of one occupying a confidential relation. It is the duty of surviving partners to render
an account of the performance of their trust to the personal representatives of the deceased partner,
and to pay over to them the share of such deceased member in the surplus of firm property,

142
Ellingson v. Wals, O‘Connor & Barneson, 104 P. 2d 507 (1940)
143
Rojas v. Maglana, 192 SCRA 110 (1990).
144
Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
145
Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905); Guidote v. Borja, 53 Phil. 900 (1928).
146
Bearneza v. Dequilla, 43 Phil. 237 (1922).

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whether it consists of real or personal assets.147

12.2.2. Judicial Dissolution (Arts. 1770 and 1831)

JUDICIAL DISSOLUTION, GROUNDS. The courts can dissolve a partnership without formal
application when ―the continuation of the partnership has become inequitable.‖148

SAME. Sustaining of losses is valid basis to dissolve the partnership.149

SAME. From the foregoing provision, it is evident that ―(t)he transfer by a partner of his partnership
interest does not make the assignee of such interest a partner of the firm, nor entitle the assignee to
interfere in the management of the partnership business or to receive anything except the assignee's
profits. The assignment does not purport to transfer an interest in the partnership, but only a future
contingent right to a portion of the ultimate residue as the assignor may become entitled to receive
by virtue of his proportionate interest in the capital." READ: Realubit v. Jaso, 658 SCRA 146
(2011).

12.3. WINDING-UP OF THE PARTNERSHIP BUSINESS ENTERPRISE

12.3.1. Definition and Nature

DEFINITION AND NATURE. ―Winding-up‖ as ―the process of settling business affairs after
dissolution,‖ and it cites as examples of winding-up process, the following: ―Examples of winding
up: the paying of previous obligations; the collecting of assets previously demandable; even new
business if needed to wind up, as the contracting with a demolition company for the demolition of
the garage used in a ‗used car‘ partnership.‖150

SAME. Although the dissolution of a partnership is caused by any partner withdrawing from the
partnership, nonetheless the partnership is not terminated but continuous until the winding up of
the business.151

SAME. The legal personality of an expiring partnership persists for the limited purpose of winding-
up and closing its affairs.152

12.3.2. Effects of Winding Up

EFFECTS OF WINDING UP. Under this heading, take note of the following: a) Binding Authority of
Partners After Dissolution (Art. 1834); b) Who Has Authority to Wind-Up (Art. 1836); c)
Discharge of Liabilities (Arts. 1835 and 1837); d) When There is Fraud or Misrepresentation (Art.
1838); e) Manner of Settling Accounts Among the Partners (Art. 1839); f) Claims of Creditors (Art.
1840); g) Effect on Deceased or Retiring Partner When Partnership Business Continued After
Dissolution (Art. 1841); h) Right to Receiving Proper Account for Partnership Interest (Art. 1842);
i) Right to Continue Business When Partnership Wrongfully Dissolved (Art. 1837[2])

MANNER OF SETTLING ACCOUNTS AMONG THE PARTNERS (ART. 1839) AND ACTUAL
SETTLEMENT OF ACCOUNTS. As a general rule, when a partner retires or withdraws from the
partnership, he is entitled to the payment of what may be due him after liquidation. But no
liquidation is necessary where there was already a settlement or an agreement as to what the retiring
partner shall receive, and the latter was in fact reimbursed pursuant to the agreement. 153

147
Guidote v. Borja, 53 Phil. 900 (1928).
148
Fue Leung v. IAC, 169 SCRA 746 (1989).
149
Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).
150
Idos v. Court of Appeals, 296 SCRA 194 (1998).
151
Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
152
Yu v. NLRC, 224 SCRA 75 (1993).
153
Bonnevie v. Hernandez, 95 Phil. 175 (1954).

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SAME. The managing partner cannot be held personally liable for the payment of partners‘ shares,
for he does not hold them except as a manager, of, or trustee for, the partnership. It is the
partnership that must refund their shares to the retiring partners.154

SAME. A partner‘s share cannot be returned without first dissolving and liquidating the partnership,
for the return is dependent on the discharge of the creditors, whose claims enjoy preference over
those of the partners; and it is self-evident that all members of the partnership are interested in his
assets and business, and are entitled to be heard in the matter of the firm‘s liquidation and the
distribution of its property.155

SAME. The right to accounting does not prescribe during the life of the partnership, and that
prescription begins to run only upon the dissolution of the partnership and final accounting is
done.156

SAME. It is wrong to presume that the total capital contribution in a partnership is equivalent to the
gross assets to be distributed to the partners at the time of dissolution of the partnership. We cannot
sustain the underlying idea that the capital contribution at the beginning of the partnership remains
intact, unimpaired and available for distribution or return to the partners. Such idea is speculative,
conjectural and totally without factual or legal support. Generally, in the pursuit of a partnership
business, its capital is either increased by profits earned or decreased by losses sustained; it does not
remain static and unaffected by the changing fortunes of the business. When partners venture into
business together, they should have prepared for the fact that their investment would either grow or
shrink. READ: Villareal v. Ramirez, 406 SCRA 145 (2003).

CREDITOR CLAIMS (ART. 1840). Failure of a partner to have published her withdrawal from the
partnership, and her agreeing to have the remaining partners proceed with running the partnership
business instead of insisting on the liquidation of the partnership, will not relieve such withdrawing
partner from her liability to the partnership creditors. Even if the withdrawing partner acted in good
faith, this cannot overcome the position of partnership creditors who also acted in good faith,
without knowledge of her withdrawal from the partnership. Thus, when the partnership executes a
chattel mortgage over its properties in favor of a withdrawing partner, and the withdrawal was not
published to bind the partnership creditors, and in fact the partnership itself was not dissolved but
allowed to be operated as a going concern by the remaining partners, the partnership creditors have
standing to seek the annulment of the chattel mortgage for having been entered into adverse to their
interests.157

SAME. When new partners continue the same partnership business which has been dissolved by the
withdrawal of its original partners, the new partnership is liable for the existing liabilities of the
business enterprise even when they were incurred under the old partnership arrangement, as clearly
governed under the provisions of Article 1840 of the Civil Code. However, the new partnership is
not compelled to retain the services of the managers and employees of the old partnership and may
choose their personnel.158

EFFECT ON DECEASED OR RETIRING PARTNER WHEN PARTNERSHIP BUSINESS CONTINUED


AFTER DISSOLUTION (ART. 1841) AND RIGHT OF EXPELLED PARTNER (ART. 1835). According
to the Civil Code: ―[t]he dissolution of the partnership does not of itself discharge the existing
liability of any partner. A partner is discharged from any existing liability upon dissolution of the
partnership by an agreement to that effect between himself, the partnership creditor and the person
or partnership continuing the business; and such agreement may be inferred from the course of
dealing between the creditor having knowledge of the dissolution and the person or partnership

154
Magdusa v. Albaran, 5 SCRA 511 (1962).
155
Magdusa v. Albaran, 5 SCRA 511 (1962).
156
Fue Leung v. IAC, 169 SCRA 746 (1989).
157
Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
158
Yu v. NLRC, 224 SCRA 75 (1993).

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continuing the business. The individual property of a deceased partner shall be liable for all
obligations of the partnership incurred while he was a partner, but subject to the prior payment of
his separate debts.‖

RIGHT TO RECEIVING PROPER ACCOUNT FOR PARTNERSHIP INTEREST (ART. 1842) AND
PRESCRIPTION OF RIGHT TO ACCOUNTING. The right to accounting does not prescribe during the
life of the partnership, and that prescription begins to run only upon the dissolution of the
partnership and final accounting is done.159

159
Fue Leung v. IAC, 169 SCRA 746 (1989).

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SECTION THIRTEEN
“A limited partnership is one formed by two or more persons under the provisions
of the following article, having as members one or more general partners and one or
more limited partners. The limited partners as such shall not be bound by the
obligations of the partnership.”160

13. LIMITED PARTNERSHIPS

13.1. ORIGIN, CONCEPT AND PURPOSE (ART. 1843)

READ: SHAPIRO, Ronald M., The Need for Limited Partnership Reform: A Revised
Uniform Act. 37 Md. L. Rev. 544 (1978) available at:
http://digitalcommons.law.umaryland.edu/mlr/vol37/iss3/5

13.2. FORMATION AND STATUTORY REQUIREMENTS

13.2.1. Requirements for Formation (Arts. 1844 and 1867)

LIMITED PARTNERSHIP IS NOT A UNIVERSAL PARTNERSHIP. Prohibition against formation of a


universal partnership among spouses does not apply when the partners entered into a limited
partnership, the man being the general partner and the woman being the limited partner, and a year
later the two get married. READ: Commissioner of Internal Revenue v. Suter, 27 SCRA 152
(1969).

13.2.2. Sworn Certificate of Limited Partnership Filed with SEC (Art. 1845)

FORMAL REQUIREMENTS AND SUBSTANTIVE EFFECTS THEREOF. The Civil Code requires: a)
Partnership Name Added the word ―Limited‖: i) Name of the limited partner cannot appear in the
partnership name (Art. 1846); b) Character and Location of Business; c) On the Partners: i) Name
and residence of each general and limited partners being respectively designated; ii)
Amount/description of contributions, and details of future contributions if any to be made by
limited partners, and when contributions returned; iii) Shares of profits, and compensation by way of
income of limited partners; iv) Right of substitution or assignment by limited partners; v) Admission
of additional limited partners; vi) Priority rights over other limited partners; vii) Right of remaining
general partners to continue business upon death, retirement, civil interdiction, insanity or
insolvency of a general partner; and, viii) Right of limited partners to demand/receive property other
than cash in return for his contribution.

13.2.3. Doctrine of Substantial Compliance (Art. 1844, last par.)

CONSEQUENCES OF DEFECTS IN FORMAL REQUIREMENTS. Substantial, rather than strict,


compliance in good faith with the legal requirements is all that is necessary for the formation of a
limited partnership; otherwise, when there is not even substantial compliance, the partnership
becomes a general partnership as far as third persons are concerned. READ: Jo Chung Cang v.
Pacific Commercial Co., 45 Phil. 142 (1923).

13.2.4. Effects of Failure to Comply with Registration Requirements

FAILURE TO REGISTER. A limited partnership that does not comply with the registration
requirements shall be treated as a general partnership in which all the members are liable for
partnership debts.161

160
CIVIL CODE, Art. 1843
161
Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

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13.2.5. Effects of False Statement in Certificate (Art. 1847)

13.2.6. Amendment of Certificate (Arts. 1864 and 1865)

13.3. RIGHTS, POWERS, RESTRICTIONS AND LIABILITIES ON PARTNERS

13.3.1. General Partner (Art. 1850)162

13.3.2. Limited Partners at Formation (Arts. 1848, 1851, 1854)

NATURE OF CONTRIBUTIONS TO THE FUND BY LIMITED PARTNERS. According to the Civil


Code: a) Contributions May Be Cash/Property But Not Services (Art. 1845); and, there may be, b)
Priority Agreements between and among themselves.

13.3.3. Limited Partners (Art. 1855)

PRINCIPLES APPLICABLE TO LIMITED PARTNERS. These are: a) Stipulation on Profits and


Compensation (Art. 1856). READ: Horn v. Builder Supply Company of Longview, 401 S.W. d.
(1966); b) Stipulation on When Contribution Received (Art. 1857); c) Liabilities to the Partnership
(Art. 1858): i) Additional Limited Partners (Art. 1849); d) ―Assignability‖ of Rights (Art. 1859); e)
No Standing to Sue for Partnership (Art. 1866.).

SAME. Limited partners have a right to be informed and to formal accounting.163

SAME. Limited partner may loan money to the partnership.164

13.3.4. Liability of One Believing Himself to Be Limited Partner (Art. 1852)165

13.3.5. General Partner Also as Limited Partner (Art. 1853)

13.4. DISSOLUTION AND WINDING-UP

13.4.1. Causes Affecting the General Partner (Art. 1860)

13.4.2. Causes Pertaining to the Limited Partner (Arts. 1861 and 1864)166

13.4.3. Dealings of Limited Partners with Partnership Affairs.167

13.4.4. Application of a Creditor of Limited Partner (Art. 1862)

13.4.5. Settlement of Accounts (Art. 1863)

SETTLEMENT OF ACCOUNTS. Creditors preferred over limited partners.168

162
Allen v. Steinberg, 223 A. d 240 (1966); Mist Properties, Inc. v. Fitzsimmons Realty Co., 228 N.Y.S. d 406 (1962).
163
Riviera Conbress Associates v. Yassky, 25 A.D. d 21, 268 N.Y.S. d. 854 (1966).
164
Hughes v. Dash, 309 F.d (1962); A.T.E. Financial Services, Inc. v. Corson, 268 A. d 73 (1970).
165
Vidricksen v. Grover, 363 F. d 372 (1966); Giles v. Vette, 263 U.S. 553, 68 L..Ed. 441 (1924); Gilman Paint &
Varnish Co. v. Legum, 80 A.d 906 (1961).
166
Holzman v. De Escamilla, 195 P. d 833 (1948).
167
Plasteel Products Corp v. Helman, 271 F. d 354 (1959); Weil v. Diversified Properties, 319 F.Supp. 778 (1970);
Silvola v. Rowlett, 272 P.d. 287 (1954).
168
Nexsen v. New York Stock Exchange, 261 N.Y.S. 780 (1965); Chalmers v. Weed, 25 N.Y.S. d. 195 (1941)

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MANUEL S. ENVERGA UNIVERSITY FOUNDATION
College of Business and Accountancy
Lucena Ctiy, Province of Quezon

PART FOUR: JOINT VENTURES

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SECTION FOURTEEN
“In the Philippines, the prevailing school of though is that a joint venture is a
species of partnership.”169

14. JOINT VENTURES170

14.1. BACKGROUND

READ: JAEGER, Walter H.E., Partnership or Joint Venture. 37 Notre Dame L. Rev. 138
(1961) available at: http://scholarship.law.nd.edu/ndlr/vol37/iss2/3
READ: JAEGER, Walter H.E., Joint Ventures: Origin, Nature and Development. 09 Am. U. L.
Rev. 01 (1960) available at http://www.aulawreview.org/pdfs/9/9-1/jaeger.pdf
READ: JAEGER, Walter H.E., Joint Ventures: Membership, Types and Termination. 09 Am.
U. L. Rev. 111 (1960) available at http://aulawreview.org/pdfs/9/9-2/jaeger2.pdf

14.2. JOINT VENTURES ARE A SPECIES OF PARTNERSHIP

JVS AS PARTNERSHIPS. When a Contract of Lease mandates contribution into the venture on the
part of the purported lessee, and makes the lessee participate not only in the revenues generated
from the venture, and in fact absorb most of the risks involved therein, then a joint venture
arrangement has really been constituted between the purported lessor and lessee, since under the
Law on Partnership, whenever there is an agreement to contribute money, property or industry to a
common fund, with an agreement to share the profits and losses therein, then a partnership arises.
READ: Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).

SAME. In the Philippines, the prevailing school of though is that a joint venture is a species of
partnership. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000)

SAME. When the purported primary venturer in a consortium (which is an association of


corporation bound in a joint venture arrangement) declares unilaterally that the other four members
are part of a consortium, but there is no affirmation from any of the other members, nor is there a
showing of a community of interest, a sharing of risks, profits and losses in the project bidded for,
then there is really no joint venture constituted among them, lacking the essential elements of what
makes a partnership. READ: Information Technology Foundation of the Philippines v.
COMELEC, 419 SCRA 141 (2004)

SAME. Generally understood to mean an organization formed for some temporary purpose, a joint
venture is likened to a particular partnership or one which "has for its object determinate things,
their use or fruits, or a specific undertaking, or the exercise of a profession or vocation." The rule is
settled that joint ventures are governed by the law on partnerships which are, in turn, based on
mutual agency or delectus personae. READ: Realubit v. Jaso, 658 SCRA 146 (2011)

14.3. JOINT VENTURE AGREEMENT (JVA) MUST BE CONSTRUED AND ENFORCED AS A


CONTRACT BETWEEN AND AMONG CO-VENTURERS

JVA AS A CONTRACT. When a ―Joint Venture Agreement‖ has been executed among the co-
venturers covering the terms for the development of a subdivision project, the contributions of the
co-venturers and the manner of distribution of the profits, a partnership has been duly constituted
under Art. 1767 of Civil Code, and although no inventory was prepared covering the parcels of land
contributed to the venture, much less was a certificate of registrations filed with the SEC, the
partnership was not void because (a) Art. 1773 is intended for the protection of the partnership

169
Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000)
170
Primarily based and lifted from VILLANUEVA & COCHINGYAN SYLLABUS - the contents were partially rearranged and
slightly edited to suit the students‘ needs for purely educational purposes.

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creditors and cannot be invoked when the issue is between and among the partners; and (b) the
alleged nullity of the partnership will not prevent courts from considering the JVA as an ordinary
contract form which the parties rights and obligations to each other may be inferred and enforced.
READ: Torres v. Court of Appeals, 320 SCRA 428 (1999)

14.4. TYPES OF JOINT VENTURE ARRANGEMENTS

14.4.1. Informal or Contractual JV Arrangement Without a Separate Firm171

JVS OTHER THAN PARTNERSHIPS OR CORPORATIONS. When the principal and the agent have
entered into a power of attorney covering a construction project, with the principal contributing
thereto his contractor‘s license and expertise, while the agent would provide and secure the needed
funds for labor, materials and services, deal with the suppliers and sub-contractors; and in general
and together with the principal, oversee the effective implementation of the project, for which the
principal would receive as his share 3% of the project cost while the rest of the profits shall go to
the agent, the parties have in effect entered into a partnership, and the revocation of the powers of
management of the agent is deemed a breach of the contract. READ: Mendoza v. Paule, 579
SCRA 349 (2009)

SAME. Although the parties executed the instrument as a ―Power of Attorney‖ and referred to
themselves as ―Principal‖ and ―Manager‖, the contractual relationship created was not that of
Agency or Management Contract. ―A examination of the ‗Power of Attorney‘ reveals that a
partnership or joint venture was indeed intended by the parties. Under a contract of partnership, two
or more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves. While a corporation, like petitioner,
cannot generally enter into a contract of partnership unless authorized by law or its charter, it has
been held that it may enter into a joint venture which is akin to a particular partnership relationship:
x x x Perusal of the agreement denominated as the ‗Power of Attorney‘ indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.
READ: Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008).

SAME. In an informal joint venture arrangement, because no separate firm or business enterprise has
been constituted as to the dealing public, then the effects of the attributes of ―mutual agency‖ and
―unlimited liability‖ are not made to apply with respect to creditors. READ: Traveño v. Bobongon
Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (2009)

14.4.2. As a Form of Partnership to Pursue the Enterprise as a Firm

JV AS PARTNERSHIPS. Even when the wording of the instrument does not clearly provide for an
option, and not a obligation, on the part of one of the co-venturers to make contributions into the
business enterprise, will not detract from the legal fact that they constituted a partnership between
themselves. ―The wording of the parties‘ agreement as to petitioner‘s contribution to the common
fund does not detract from the fact that petitioner transferred its funds and property to the project
as specified in paragraph 5, thus rendering effective the other stipulations of the contract,
particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances until
termination of the parties‘ business relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions acquired an obligatory nature as soon
as petitioner had chosen to exercise the option.‖ READ: Philex Mining Corp. v. Commissioner
of Internal Revenue, 551 SCRA 428 (2008)

SAME. A joint venture being a form of partnership, it is to be governed by the Law on Partnerships.
In the JVA, the parties agreed on a 50-50 ratio on the proceeds of the project, although they did not
provide for the splitting of losses, which therefore puts into application Art. 1797: the same ratio

171
see SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976; SEC Opinion, 29 February 1980; SEC Opinion, 03
Sept. 1984

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applies in splitting the obligation-loss of the joint venture. The appellate court's decision must be
modified, however, there being a joint venture, there is no need for Gotesco to reimburse Marsman
Drysdale for ―50% of the aggregate sum due‖ to PGI since not allowing Marsman Drysdale to
recover from Gotesco what it paid to PGI would not only be contrary to the law on partnership on
division of losses but would partake of a clear case of unjust enrichment at Gotesco's expense.
READ: Marsman Drysdale Land, Inc. v. Philippine Geoanalytics, Inc., 622 SCRA 281 (2010).

SAME. A joint venture is considered in this jurisdiction as a form of partnership and is, accordingly,
governed by the law of partnerships. Under Art. 1824 of Civil Code, all partners are solidarily liable
with the partnership for everything chargeable to the partnership, including loss or injury caused to a
third person or penalties incurred due to any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-partners. Whether
innocent or guilty, all the partners are solidarily liable with the partnership itself. READ: J. Tiosejo
Investment Corp. v. Ang, 630 SCRA 334 (2010).

14.4.3. Through a Joint Venture Corporation

JVS AS CORPORATIONS. The manner of nomination of the members of the Board of Directors
provided in the Joint Venture Agreement must be made effective and reconciled with the statutory
provision on cumulative voting made applicable by the Corporation Code to stock corporations.
READ: Aurbach v. Sanitary Wares Mnfg. Corp., 180 SCRA 130 (1989).

SAME. A right of first refusal agreed to by the Government in the Joint Venture Agreement entered
into with its co-venturer must be made to apply and be binding to the Government and the bidder
at a public bidding held on the shares of the joint venture corporation constituted pursuant to the
agreement. READ: JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003).

14.4.4. Revised Guidelines and Procedures for Entering into Joint Venture (JV)
Agreement Between Government and Private Entities Per Section 8 of E.O.
423172 (NEDA Circular approved on 03 May 2013)

DEFINITION OF “JOINT VENTURE” - 5.7 JOINT VENTURE (JV). An arrangement whereby a


private sector entity or a group of private sector entities on one hand, and a Government Entity or a
group of Government Entities on the other hand, contribute money/capital, services, assets
(including equipment, land, intellectual property or anything of value), or a combination of any or all
of the foregoing to undertake an investment activity. The investment activity shall be for the
purpose of accomplishing a specific goal with the end view of facilitating private sector initiative in a
particular industry or sector, and eventually transfer the activity to either the private sector under
competitive market conditions or to the government. The JV involves a community or pooling of
interests in the performance of the investment activity, and each party shall have the right to direct
and govern the policies in connection therewith with the intention to share both profits and, risks
and losses subject to agreement by the parties. A JV may be a Contractual JV or a Corporate JV (JV
Company).

DEFINITION OF “CONTRACTUAL JV” - 5.3 CONTRACTUAL JV. A legal and binding agreement
under which the JV Partners shall perform the primary functions and obligations under the JV
Agreement without forming a JV Company.

DEFINITION OF “JV COMPANY” – 5.8 JV COMPANY. A stock corporation incorporated and


registered in accordance with the provisions of Batas Pambansa Bilang 68, otherwise known as the
Corporation Code of the Philippines, as amended, and based on the prevailing rules and regulations
of the Securities and Exchange Commission (SEC) of which fifty percent (50%) or less of the
outstanding capital stock is owned by the government. The JV Company shall be registered by the
JV partners that shall perform the primary functions and obligations of the JV as stipulated under

172
available at http://www.neda.gov.ph/references/Guidelines/2013%20Revised%20JV%20Guidelines.pdf

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the JV Agreement. The JV Company shall possess the characteristics stipulated under these
Guidelines.

14.5. TAX RECOGNITION AND TREATMENT OF JOINT VENTURES

TAXATION. Under Sec. 22 (B) of the National Internal Revenue Code: ―[t]he
term ―corporation‖ shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but does
not include general professional partnerships and a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service contract with the
Government. 'General professional partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.‖ THEREFORE, GENERALLY, Joint Ventures, like Partnerships are
treated as Corporate Taxpayers EXCEPT FOR JV Consortium Undertaking Construction Projects or
Engaging in Petroleum, Coal, Geothermal and Other Energy Operations Pursuant to an Operating
or Consortium Agreement under a Service Contract with the Government, Shall Not Be Taxed
Separately as a Corporate Taxpayer.

99 MSEUF-LAW/CBA
MANUEL S. ENVERGA UNIVERSITY FOUNDATION
College of Business and Accountancy
College of Law
Lucena Ctiy, Province of Quezon

PART FIVE: CORPORATIONS

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SECTION FIFTEEN
“Philippine Corporate Law comes from the U.S. common law system. Although
we have a Corporation Code that provides for statutory principles, Corporate Law
is essentially, and continues to be, the product of commercial developments, much of
which can be expected to happen in the world of commerce, and some expressed
jurisprudential rules that try to apply and adopt corporate principles into the
changing concepts and mechanism of the commercial world.”173

15. HISTORICAL BACKGROUND

15.1.

PHILIPPINE CORPORATE LAW (A-SORT-OF CODIFICATION OF AMERICAN CORPORATE LAW).


When attention was drawn to the fact that there was no entity in Spanish law exactly corresponding
to the notion of a ―corporation‖ in English and American law, the then Philippine Commission
enacted the Corporation Law (Act No. 1459), which took effect 01 April 1906, to introduce the
American corporation into the Philippines as the standard commercial entity and to hasten the day
when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of codification
of American Corporate Law.174 Thereafter, the Corporation Code (Batas Blg. 68) took effect on 01
May 1980, adopting various corporate doctrines enunciated by the Supreme Court under the old
Corporation Law; clarified the obligations of corporate directors and officers; expressed in statutory
language established principles and doctrines; and provided for a chapter on close corporations.175

PROPER TREATMENT OF PHILIPPINE CORPORATE LAW. Philippine Corporate Law comes from
the U.S. common law system. Although we have a Corporation Code that provides for statutory
principles, Corporate Law is essentially, and continues to be, the product of commercial
developments, much of which can be expected to happen in the world of commerce, and some
expressed jurisprudential rules that try to apply and adopt corporate principles into the changing
concepts and mechanism of the commercial world.176

173
VILLANUEVA & DY SYLLABUS, p
174
Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933)
175Corporation Code applies even to corporations organized under the old Corporation Law. Castillo v. Balinghasay, 440

SCRA 442 (2004).


176
VILLANUEVA & DY SYLLABUS, p

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SECTION SIXTEEN
“A corporation is an artificial being created by operation of law, and invested by
law upon its coming into existence with a personality separate and distinct from
the persons composing it, as well as from any other legal entity to which it may be
related.”177

16. KEY CONCEPTS

16.1. DEFINITION (SEC. 2; ARTICLES 44(3), 45, 46, AND 1775, CIVIL CODE)

CORPORATION CODE, SEC. 2.

16.2. FOUR (4) CORPORATE ATTRIBUTES BASED ON SECTION 2

16.2.1.

FOUR (4) CORPORATE ATTRIBUTES BASED ON DEFINTION. These are: a) Artificial Being: it has
juridical capacity to contract and enter into transactions; b) Creature of the Law: it is created by
operation of law; c) Strong Juridical Personality: it has a right of succession; and, d) Creature of
Limited Powers: it has only such powers, attributes and properties as are expressly authorized by law
or incident to its existence.178

POWERS ARE EXPRESS, IMPLIED OR INCIDENTAL. A corporation has no powers except for the
powers which are expressly conferred on it by the Corporation Code, found in its charter, and those
that are implied by or are incidental to its existence. It exercises its powers through its Board of
Directors and/or its duly authorized officers and agents.179

16.3. “TRI-LEVEL EXISTENCE” OF THE CORPORATION

A CORPORATION MAY BE VIEWED AS AN ENTITY FROM DIFFERENT PERSPECTIVES. A


Corporation may be considered as a/an: a) aggregation of assets and resources; b) business
enterprise or economic unit; or, c) Juridical entity.

16.4. “TRI-LEVEL RELATIONSHIPS” INVOLVED IN A CORPORATE SETTING

RELATIONSHIPS IN THE CORPORATE SETTING. These are: a) JURIDICAL ENTITY LEVEL which is
concerned with the aspects of the State-corporation relationship; b) INTRA-CORPORATE LEVEL
which considers that the corporate setting is at once a contractual relationship on another four (4)
levels: i) Between the corporation and its agents/representatives to act in the real world, such as its
directors and officers, which is governed also by the Law on Agency; ii) Between the corporation
and its shareholders or members; iii) Between the shareholders and the corporate directors, trustees
and officers; and, iv) Between and among the shareholders in a common venture; and, c) EXTRA-
CORPORATE LEVEL which views the relationship between the corporation and third-parties or
―outsiders‖, essentially governed by Contract Law and Labor Law: i) between the corporation and
its employees, governed by Labor Laws; ii) Between the corporation and those it contracts and
transact with, governed by Contract Laws; and, iii) Between the corporation and the publics it affects
with its enterprise, governed essentially by Torts or Quasi-Delict Laws.

177
PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); Construction & Dev. Corp. of the Phils. v. Cuenca, 466
SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
178
CORP CODE, Sec. 2
179Pascual and Santos, Inc. v. The Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438 (2004); De
Liano v. Court of Appeals, 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434
SCRA 27 (2004); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006); Cebu Bionic Builders
Supply, Inc. v. DBP, 635 SCRA 13 (2010).

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16.5. THEORIES ON THE FORMATION OF CORPORATION

16.5.1. Theory of Concession

THEORY OF CONCESSION. READ: Tayag v. Benguet Consolidated, 26 SCRA 242 [1968].

NOT A RIGHT, MERELY A STATUTORY PRIVILEGE. To organize a corporation that could claim a
juridical personality of its own and transact business as such, is not a matter of absolute right but a
privilege which may be enjoyed only under such terms as the State may deem necessary to impose. 180
―It is a basic postulate that before a corporation may acquire juridical personality, the State must give
its consent either in the form of a special law or a general enabling act,‖ and the procedure and
conditions provided under the law for the acquisition of such juridical personality must be complied
with. Although the statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to such an
association . . . nevertheless, the failure to comply with the statutory procedure and conditions does
not warrant a finding that such association acquired a separate juridical personality, even when it
adopts sets of constitution and by-laws.181

GOVERNMENT INSTRUMENTALITY IS NOT A CORPORATION. When the law vests in a government


instrumentality corporate powers, the instrumentality does not become necessarily a corporation.
Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers. 182

THE CORPORATION CODE IS THE GENERAL LAW FOR ALL CORPORATIONS. All corporations, big
or small, must abide by the provisions of the Corporation Code, and even a simple family
corporation cannot claim an exemption nor can it have rules and practices other than those
established by law.183

16.5.2. Theory of Enterprise Entity

THEORY OF ENTERPRISE ENTITY.184 A corporation is but an association of individuals, allowed to


transact under an assumed corporate name, and with a distinct legal personality. In organizing itself
as a collective body, it waives no constitutional immunities and perquisites appropriate to such a
body.185 READ: BERLE, 47 COL. L. REV. 343 [1947]

SEPARATE PERSONALITY NOT FOR INJUSTICE NOR INEQUITY. Corporations are composed of
natural persons and their separate corporate personality is not a shield for the commission of
injustice and inequity, such as to avoid the execution of the property of a sister company. 186.

16.6. ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM

16.6.1. Advantages

ADVANTAGES OF CORPORATE FORM. The advantages are: a) Strong and Solemn Juridical
Personality; b) Centralized Management; c) Limited Liability for investors and officers; and, d) free
transferability of units of ownership (shares) for investors.

STRONG AND SOLEMN JURIDICAL PERSON. ―A corporation is an entity separate and distinct from
its stockholders. While not in fact and in reality a person, the law treats the corporation as though it

180
cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962)
181
Int‘l Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000)
182
MIAA v. Court of Appeals, 495 SCRA 591 (2006)
183
Torres v. Court of Appeals, 278 SCRA 793 (1997)
184
see Berle, 47 Col. L. Rev. 343 [1947]
185
PSE v. Court of Appeals, 281 SCRA 232 (1997)
186
Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988)

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were a person by process of fiction or by regarding it as an artificial person distinct and separate
from its individual stockholders.‖187

SAME. TRANSFER OF CORPORATE PROPERTY TO SHAREHOLDERS IS NOT A PARTITION OF CO-


OWNERSHIP. The transfer of the corporate assets to the stockholders is not in the nature of a
partition among co-owners but is a conveyance from one party to another. READ: Stockholders of
F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).

FINANCIAL DISTRESS IS NOT A GROUND FOR EXECUTION PENDING APPEAL. Execution pending
appeal may be allowed when ―the prevailing party is already of advanced age and in danger of
extinction,‖ but not in this case where the winning party is a corporation. ―[A] juridical entity‘s
existence cannot be likened to a natural person—its precarious financial condition is not by itself a
compelling circumstance warranting immediate execution and does not outweigh the long standing
general policy of enforcing only final and executory judgment.‖ 188

CENTRALIZED MANAGEMENT. As can be gleaned from Sec. 23 of Corporation Code ―It is the
board of directors or trustees which exercises almost all the corporate powers in a corporation.‖ 189
Thus, the exercise of corporate powers of the corporation rest in the Board of Directors save in
those instances where the Corporation Code requires stockholders‘ approval for certain specific
acts.190

LIMITED LIABILITY TO INVESTORS AND OFFICERS. One of the advantages of the corporation is
the limitation of an investor‘s liability to the amount of investment, which flows from the legal
theory that a corporate entity is separate and distinct from its stockholders.191

SAME. It is hornbook law that corporate personality is a shield against personal liability of its
officers—a corporate officer and his spouse cannot be made personally liable under a trust receipt
where he entered into and signed the contract clearly in his official capacity.192

SAME. Obligations incurred by the corporation acting through its directors, officers and employees,
are its sole liabilities.193

QUALIFICATION ON THE RULE OF LIMITED LIABILITY. Where the creditor of the corporation
sues not only the company but also all stockholders to reach their unpaid subscription which appear
to be the only visible assets of the company, then the controlling doctrine is that ―a stockholder is
personally liable for the financial obligations of the corporation to the extent of his unpaid
subscription.‖194

FREE TRANSFERABILITY OF UNITS OF OWNERSHIP (SHARES) FOR INVESTORS. It is the inherent


right of the stockholder to dispose of his shares of stock (which he owns as any other property of
his) anytime he so desires.195 Take note that the authority granted to corporations to regulate the
transfer of its stock does not empower the corporation to restrict the right of a stockholder to
transfer his shares, but merely authorizes the adoption of regulations as to the formalities and
procedure to be followed in effecting transfer.196

187
Remo, Jr. v. IAC, 172 SCRA 405 (1989)
188
Manacop v. Equitable PCIBank, 468 SCRA 256 (2005)
189
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003)
190
Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002).
191
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 (1998)
192
Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).
193
Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001).
194
Halley v. Printwell, Inc. 649 SCRA 116 (2011).
195
Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001)
196
Thomson v. Court of Appeals, 298 SCRA 280 (1998)

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16.6.2. Disadvantages

DISADVANTAGES OF THE CORPORATE FORM. These are: a) Abuse of corporate management


(breach of trust); b) Abuse of limited liability feature; c) High cost of maintenance of the corporate
medium; and, d) Double taxation.

DOUBLE TAXATION. Generally, dividends received by individuals from domestic corporations are
subject to final 10% tax for income earned on or after 01 January 1998. 197 However, Inter-corporate
dividends between domestic corporations, however, are not subject to any income tax.198 Note also:
there is re-imposition of the 10% ―improperly accumulated earnings tax‖ for holding companies.199

16.7. COMPARED WITH OTHER BUSINESS MEDIA

16.7.1.

SOLE PROPRIETORSHIPS. A sole proprietorship is not vested with juridical personality to file or
defend an action. READ: Excellent Quality Apparel, Inc. v. Win Multiple-Rich Builders, Inc.,
578 SCRA 272 (2009).

PARTNERSHIPS AND OTHER ASSOCIATIONS. 200 Can a defective attempt to form a corporation
result at least in a partnership? READ: Pioneer Insurance v. Court of Appeals, 175 SCRA 668
(1989); READ and COMPARE: Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.,
317 SCRA 728 (1999).

JOINT VENTURES. A Joint venture is an association of persons or companies jointly undertaking some
commercial enterprise; generally all contribute assets and share risks. It requires a community of
interest in the performance of the subject matter, a right to direct and govern the policy in
connection therewith, and duty, which may be altered by agreement to share both in profit and
losses.201.

COOPERATIVES. 202 Cooperatives are established to provide a strong social and economic
organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian
reforms.203.

BUSINESS TRUSTS. Trust is the legal relationship between one person who has equitable ownership
of a property and another who owns the legal title to the property.204 The trustor is the one who
establishes the trust; the beneficiary, the person for whose benefit the trust was created; and the
trustee, the one in whom, by conferment of a legal title, confidence has been reposed as regards the
property of the beneficiary.205 The principles of the general law of trusts, insofar as they are not in
conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby
197
NIRC, Sec. 24(B)(2)
198
NIRC, Sec. 27(D)(4)
199
NIRC, Sec. 29
200
CIVIL CODE, Arts. 1768 and 1775
201
Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994)
202
R.A. No. 6938, Art. 3; see Amendeds by Republic Act No. 9520 (2009) or the ―Philippine Cooperative Code of 2008‖
see ART. 144 (―Transitory Provisions.- (1) All cooperatives registered and confirmed with the Authority under Republic
Act No. 6938 and Republic Act No. 6939, are hereby deemed registered under this code, and a new certificate of
registration shall be issued by the authority: Provided, That such cooperative shall submit to the nearest office of the
authority a copy of their certificate of registration or certificate of confirmation, the articles of cooperation, their bylaws,
and their latest audited financial statement within one (1) year from the effectivity of this code, otherwise the shall be
deemed cancelled motu proprio.‖)
203
Corpuz v. Grospe, 333 SCRA 425 (2000)
204
Sps. Oco v. Limbaring, G.R. No. 161298, 31 January 2006 citing Cuenco v. Manguerra, 440 SCRA 252, 262, October
13, 2004; Spouses Rosario v. Court of Appeals, 369 Phil. 729, 740-741, July 19, 1999; Morales v. Court of Appeals, 274
SCRA 282, 297, June 19, 1997; Buan Vda. de Esconde v. Court of Appeals, 323 Phil. 81, 88-89, February 1, 1996. See
Tolentino, IV Commentaries and Jurisprudence on the Civil Code of the Philippines 669 (1991).
205
CIVIL CODE, Art. 1441

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adopted.206

SOCIEDADES ANÓNIMAS. A sociedad anónima was considered a commercial partnership ―where upon
the execution of the public instrument in which its articles of agreement appear, and the
contribution of funds and personal property, becomes a juridical person—an artificial being,
invisible, intangible, and existing only in contemplation of law—with power to hold, buy, and sell
property, and to sue and be sued—a corporation—not a general copartnership nor a limited
copartnership . . . The inscribing of its articles of agreement in the commercial register was not
necessary to make it a juridical person; such inscription only operated to show that it partook of the
form of a commercial corporation.‖ 207 . These were introduced in Philippine jurisdiction on 01
December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the
Spanish Code of Commerce. Those articles contained the features of limited liability and centralized
management granted to a juridical entity. But they were more similar to the English joint stock
companies than the modern commercial corporations.208 BUT NOTE that the Corporation Law
recognizes the difference between sociedades anónimas and corporations and will not apply legal
provisions pertaining to the latter to the former.209

CUENTAS EN PARTICIPACION. A cuentas en participacion is an accidental partnership constituted in a


manner that its existence was only known to those who had an interest in the same, there being no
mutual agreement between the partners, and without a corporate name indicating to the public in
some way that there were other people besides the one who ostensibly managed and conducted the
business, governed under Article 239 of the Code of Commerce. Those who contract with the
person under whose name the business of such partnership of cuentas en participacion is conducted,
shall have only a right of action against such person and not against the other persons interested,
and the latter, on the other hand, shall have no right of action against third person who contracted
with the manager unless such manager formally transfers his right to them.210

206
CIVIL CODE, Art. 1442
207
Mead v. McCullough, 21 Phil. 95 (1911)
208
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956)
209
Phil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965)
210
Bourns v. Carman, 7 Phil. 117 (1906).

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SECTION SEVENTEEN
“A corporation is but an association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate for such body. Its property cannot be taken without compensation;
can only be proceeded against by due process of law; and is protected against unlawful
discrimination.”211

17. NATURE AND ATTRIBUTES OF A CORPORATION

17.1. NATURE OF POWER TO CREATE A CORPORATION (SEC. 16, ARTICLE XII, 1987
CONSTITUTION)

LIMITATION ON ISSUANCE OF LEGISLATIVE CHARTERS. The Constitution explicitly prohibits the


regulation by special laws of private corporations, except for government-owned or controlled
corporations (GOCCs).212 Congress cannot enact a law creating a private corporation with a special
charter, and it follows that Congress can create corporations with special charters only if such are
GOCCs.213 As such, P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on
the formation of a private corporation by special legislative act which is not a GOCC, since NDC
was merely required to extend a loan to the new corporation, and the new stocks of the corporation
were to be issued to the old investors and stockholders of the insolvent Agrix upon proof of their
claims against the abolished corporation.214

CURIOUS CASE OF THE PHILIPPINE NATIONAL RED CROSS (PNRC). PNRC which was
constituted under a special law, is not a GOCC because it is not by its charter owned by the
Government, although it is intended to do public functions, it is owned by the private sector.
Consequently, the PNRC Charter, insofar as it creates the PNRC as a private corporation and grants
it corporate powers, is void for being unconstitutional. The other provisions of the PNRC Charter
remain valid as they can be considered as a recognition by the State that the unincorporated PNRC
is the local National Society of the International Red Cross and Red Crescent Movement, and thus
entitled to the benefits, exemptions and privileges set forth in the PNRC Charter. READ: Liban v.
Gordon, 593 SCRA 68 (2009).

17.2. CORPORATION AS A PERSON

A CORPORATION OS CONSIDERED A “PERSON” UNDER THE LAW. This being the case, it is
entitled to: a) Due Process and Equal Protection; and, b) right against Unreasonable Searches and
Seizure; but NOT to a) the Privilege Against Self incrimination.

DUE PROCESS AND EQUAL PROTECTION. The due process clause is universal in its application to
all persons, and covers private corporations within the scope of the guaranty insofar as their
properties are concerned.215

UNREASONABLE SEARCHES AND SEIZURE. A corporation is protected by the constitutional


guarantee against unreasonable searches and seizures, but its officers have no cause of action to
assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of
each of them in said corporation because the corporation has a personality distinct and separate
from those of said officers.216 A corporation is but an association of individuals under an assumed
name and with a distinct legal entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate for such body. Its property cannot be taken without

211
Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971)
212
Veterans Federation of the Philippines v. Reyes, 483 SCRA 526 (2006)
213
Feliciano v. Commission on Audit, 419 SCRA 363 (2004)
214
NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990)
215
Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920)
216
Stonehill v. Diokno, 20 SCRA 383 (1967)

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compensation; can only be proceeded against by due process of law; and is protected against
unlawful discrimination.217

NOT ENTITLED TO PRIVILEGE AGAINST SELF INCRIMINATION. ―It is elementary that the right
against self-incrimination has no application to juridical persons.‖218 While an individual may lawfully
refuse to answer incriminating questions unless protected by an immunity statute, it does not follow
that a corporation, vested with special privileges and franchises, may refuse to show its hand when
charged with an abuse of such privilege.219

17.3. PRACTICE OF PROFESSION

PROFESSIONAL PRACTICE BY CORPORATIONS. Generally, corporations cannot engage in the


practice of a profession since they lack the moral and technical competence required by the PRC;220
however, a corporation may be registered and licensed for the practice of architecture under R.A.
No. 9266 or ―The Architecture Act of 2004.221

NOT PRACTICE OF PROFESSION. A corporation engaged in the selling of eyeglasses and which hires
optometrists is not engaged in the practice of optometry.222

17.4. LIABILITY FOR TORTS

ANY PERSON, NATURAL OR JURIDICAL, MAY BE HELD LIABLE FOR TORTS. A corporation is civilly
liable in the same manner as natural persons for torts, because the rules governing the liability of a
principal for a tort committed by an agent are the same whether the principal be a natural person or
a corporation, and whether the agent be a natural or artificial person. That a principal is liable for
every tort which he expressly directs or authorizes, is just as true of a corporation as a natural
person.223

PRINCIPAL‟S LIABILITY FOR ACTS OF THE AGENT. A ―corporate tort‖ consists in the violation of a
right given or the omission of a duty imposed by law; a breach of a legal duty. The failure of the
corporate employer to comply with the duty under the Labor Code to grant separation pay to
employees in case of cessation of operations constitutes tort and its stockholder who was actively
engaged in the management or operation of the business should be held personally liable. 224;

HOSPITAL‟S LIABILITY TOWARDS PATIENTS. While in theory a hospital as a juridical entity cannot
practice medicine, in reality it utilizes doctors, surgeons and medical practitioners in the conduct of
its business of facilitating medical and surgical treatment. Within that reality, three legal relationships
crisscross: (1) between the hospital and the doctor practicing within its premises; (2) between the
hospital and the patient being treated or examined within its premises; and (3) between the patient
and the doctor. Regardless of its relationship with the doctor, the hospital may be held directly liable

217
Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971)
218
Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987)
219 Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S.

694 (1944).
220
ULEP v. The Legal Clinic, 223 SCRA 378 (1993)
221
R.A. No. 9266, Sec. 37 (―x x x However, a firm, company, partnership, corporation or association may be registered
or licensed as such for the practice of architecture under the following conditions: (a) Only Filipino citizens properly
registered and licensed as architects under this Act may, among themselves, or together with allied technical
professionals, form and obtain registration as a firm, company, partnership, association or corporation for the practice of
architecture; (b) Registered and licensed architects shall compose at least seventy-five percent (75%) of the owners,
shareholders, members incorporators, directors, executive officers, as the case may be; (c) Individual members of such
firm, partnership association or corporation shall be responsible for their individual and collective acts as an entity and as
provided by law; (d) Such firm, partnership, association or corporation shall be registered with the Securities and
Exchange Commission and Board.‖)
222
Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical
Company, 381 SCRA 293 (2002)
223
PNB v. Court of Appeals, 83 SCRA 237 (1978)
224
Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997)

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to the patient for its own negligence or failure to follow established standard of conduct to which it
should conform as a corporation. READ: Professional Services, Inc. v. Court of Appeals, 611
SCRA 282 (2010).

17.5. CORPORATE CRIMINAL LIABILITY (ARTICLES 102 AND 103, REVISED PENAL CODE)

RULES ON CRIMINAL LIABILITY. READ: West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914);
READ: People v. Tan Boon Kong, 54 Phil. 607 (1930); READ: Sia v. Court of Appeals, 121
SCRA 655 (1983); however, take note, the Trust Receipts Law recognizes the impossibility of
imposing the penalty of imprisonment on a corporation, hence, if the entrustee is a corporation, the
law makes the officers or employees or other persons responsible for the offense liable to suffer the
penalty of imprisonment.225

NO CRIMINAL SUIT CAN LIE AGAINST A CORPORATION.226 However: a corporation can be a real-
party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages
incurred by the corporation for the criminal proceedings brought against its officer. 227

CORPORATE PENAL STATUTE INJUNCTIONS EXTEND TO THE INDIVIDUALS EXERCISING


CONTROL. When a criminal statute forbids the corporation itself from doing an act, the prohibition
extends to the Board of Directors, and to each director separately and individually.228 The existence
of the corporate entity does not shield from prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit the crime. The corporation obviously acts, and can
act, only by and through its human agents, and it is their conduct which the law must deter. The
employee or agent of a corporation engaged in unlawful business naturally aids and abets in the
carrying on of such business and will be prosecuted as principal if, with knowledge of the business,
its purpose and effect, he consciously contributes his efforts to its conduct and promotion [illegal
recruitment in this case], however slight his contribution may be. 229 However: Apart from its
sweeping allegation that respondents misappropriated or converted its money placements, petitioner
failed to establish the particular role or actual participation of each respondent in the criminal act;
neither was it shown that they assented to its commission. It is basic that only corporate officers
shown to have participated in the alleged anomalous acts may be held criminally liable.230

CRIMINAL LIABLITY, DISTINCTION ON IMPRISONMENT AND FINES. If the crime is committed by


a corporation, the directors, officers, employees or other officers thereof responsible for the offense
shall be charged and penalized for the crime, precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as
penalty, a corporation may be prosecuted and, if found guilty, may be fined. READ: Ching v.
Secretary of Justice, 481 SCRA 602 (2006). When a criminal statute designates an act of a
corporation or a crime and prescribes punishment therefor, it creates a criminal offense which,
otherwise, would not exist and such can be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not create an offense for which a
corporation may be punished. On the other hand, if the statute, defines a crime that may be
committed by a corporation but prescribes the penalty therefor to be suffered by the officers,
directors, or employees of such corporation or other persons responsible for the offense, only such
individuals will suffer such penalty. Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves individually guilty of the crime. READ:
Ching v. Secretary of Justice, 481 SCRA 602 (2006); READ and COMPARE: Consolidated
Bank v. Court of Appeals, 356 SCRA 671 (2003).

225
Ong v. Court of Appeals, 401 SCRA 6478 (2003)
226
Times, Inc. v. Reyes, 39 SCRA 303 (1971)
227
Cometa v. Court of Appeals, 301 SCRA 459 (1999)
228
People v. Concepcion, 44 Phil. 129 (1922).
229
The Executive Secretary v. Court of Appeals, 429 SCRA 81 (2004)
230
Cruzvale, Inc. v. Eduque, 589 SCRA 534, 546 (2009)

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ABOVE RULE ON CRIMINAL LIABILITY IS QUALIFIED AS TO STOCKHOLDERS WHO ARE MERE


INVESTORS. The ―owners‖ of a corporate organization are its stockholders and they are to be
distinguished from its directors and officers. Stockholders, being basically investors in the
corporation, and with the management of its business generally vested in the Board of Directors,
cannot be held liable for the criminal offense committed on behalf of the corporation, unless they
personally took part in the same.231

17.6. RECOVERY OF MORAL AND OTHER DAMAGES

CONFLICTING RULES ON RECOVERY OF DAMAGES. GENERALLY: A corporation, being an


artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety,
wounded feelings, moral shock or social humiliation which are basis for moral damages under Art.
2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched,
may be a ground for the award of moral damages. 232 HOWEVER: The statement in People v. Manero
and Mambulao Lumber Co. v. PNB, that a corporation may recover moral damages if it ―has a good
reputation that is debased, resulting in social humiliation‖ is an obiter dictum. Recovery of a
corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear
proof of malice or bad faith.233 NONETHELESS: Likewise, an educational corporation‘s claim for
moral damages arising from libel falls under Article 2219(7) of the Civil Code, which expressly
authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation,
and does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical
person can validly complain for libel or any other form of defamation and claim for moral
damages.234

SAME. PREVAILING RULE ON DAMAGES. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, emotions nor senses; therefore, it cannot
experience physical suffering and mental anguish. Mental suffering can be experienced only by one
having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot
be suffered by an artificial person.235

17.7. CORPORATE NATIONALITY

17.7.1. Generally: Under whose laws it is incorporated (Sec. 123)

17.7.2. Exception: “Test of Controlling Ownership”

“TEST OF CONTROLLING OWNERSHIP.” The 1987 Constitution ―provides for the Filipinization of
public utilities by requiring that any form of authorization for the operation of public utilities should
be granted only to ‗citizens of the Philippines or to corporation or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such citizens.‘ The
evident purpose of the citizenship requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest. This specific provision explicitly reserves to
Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to ―conserve and develop our patrimony‖ and to ensure a ―a self-reliant and
independent national economy effectively controlled by Filipinos.‖ We rule that the term ―capital‖
in Sec. 11, Art. XII of the Constitution refers only to shares of stock entitled to vote in the election

231
Espiritu v. Petron Corp., 605 SCRA 245 (2009)
232
Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579
(1998)
233
ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999)
234
Filipinas Broadcasting Network v. Ago Medical and Educational Center, 448 SCRA 413 (2005)
235 Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602

(1994); Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of
Appeals, 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001); Flight Attendants and
Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008); Employees Union of Bayer Phils.
V. Bayer Philippines, Inc., 636 SCRA 473 (2010).

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of directors, and thus in the present case only to common shares, and also preferred shares that are
entitled to vote, and not the total outstanding capital stock comprising both common and non-
voting preferred shares. READ: Gamboa v. Teves, 652 SCRA 690 (2011); READ: Heirs of
Gamboa v. Teves, G.R. No. 176579, 09 October 2012.

17.7.2.1. Exploitation of Natural Resources (Sec. 140; Sec. 2, Art. XII, 1987
Constitution)

17.7.2.2. Ownership of Private Land (Sec. 7, Art. XII, 1987 Constitution)

OWNERSHIP OF PRIVATE LAND. Radstock, a foreign corporation with unknown owners whose
nationalities are also unknown, is not qualified to own land in the Philippines, and therefore also
disqualified to own the rights to ownership of lands in the Philippines—it is basic that an assignor or
seller cannot assign or sell something he does not own at the time the ownership, or the rights to the
ownership, are to be transferred to the assignee or buyer. The assignment by PNCC of the real
properties to a nominee to be designated by Radstock is a circumvention of the constitutional
prohibition against a private foreign corporation owning lands in the Philippines. READ: Strategic
Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).

UNINCORPORATED RELIGIOUS ORGANIZATION. The registration of the donation of land to an


unincorporated religious organization, whose trustees are foreigners, would violate constitutional
prohibition and the refusal would not be in violation of the freedom of religion clause. The fact that
the religious association ―has no capital stock does not suffice to escape the constitutional inhibition,
since it is admitted that its members are of foreign nationality. . . and the spirit of the Constitution
demands that in the absence of capital stock, the controlling membership should be composed of
Filipino citizens.‖ READ: Register of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955).
BUT: READ: Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the
Register of Deeds of Davao, 102 Phil. 596 (1957).

ONLY CAPACITY TO OWN LAND IS AFFECTED. If the foreign shareholdings in a landholding


corporation exceed 40%, it is not the foreign stockholders‘ ownership of the shares which is
adversely affected by the capacity of the corporation to own land—that is, the corporation becomes
disqualified to own land. 236

PROHIBITION IS ON OWNERSHIP OF LANDS ONLY. The prohibition in the Constitution applies


only to ownership of land; it does not extend to immovable or real property as defined under Article
415 of the Civil Code. Otherwise, we would have a strange situation where the ownership of
immovable property such as trees, plants and growing fruit attached to the land would be limited to
Filipinos and Filipino corporations only.237

17.7.2.3. Public Utilities (Sec. 11, Art. XII, Constitution)

PRIMARY V. SECONDARY FRANCHISE. The primary franchise, that is, the right to exist as such, is
vested in the individuals who compose the corporation and not in the corporation itself and cannot
be conveyed in the absence of a legislative authority so to do. The special or secondary franchises
are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power
granted to a corporation to dispose of its property, except such special or secondary franchises as
are charged with a public use.238

SAME. The nationality test for public utilities applies not at the time of the grant of the primary
franchise that makes a corporation a juridical person, but at the grant of the secondary franchise that
authorizes the corporation to engage in a nationalized industry. READ: People v. Quasha, 93 Phil.
333 (1953).

236
J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005)
237
J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005)
238
J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964)

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OWNERSHIP OF FACILITIES, NOT WITHIN “OPERATION” OF PUBLIC UTILITY. The Constitution


requires a franchise for the operation of a public utility; however, it does not require a franchise
before one can own the facilities needed to operate a public utility so long as it does not operate
them to serve the public. There is a clear distinction between ―operation‖ of a public utility and the
ownership of the facilities and equipment used to serve the public. READ: Tatad v.Garcia, Jr., 243
SCRA 436 (1995).

17.7.2.4. Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)239

17.7.2.5. Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)

17.7.3. War-Time Test.240

17.7.4. Investment Test as to “Philippine Nationals” (Sec. 3[a] & [b], R.A. 7042,
Foreign Investments Act of 1992)

PHILIPPINE NATIONALS. Under Sec. 3 of the FIA ‘91, a corporation organized under the laws of
the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines, is considered a Philippine National. READ: Unchuan v.
Lozada, 585 SCRA 421 (2009).

17.7.5. Grandfather Rule241

UP TO WHAT LEVEL DO YOU APPLY THE GRANDFATHER RULE? READ: Palting v. San Jose
Petroleum Inc., 18 SCRA 924 (1966).

17.7.6. Special Classifications (Sec. 140)

239
SEE: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2, P.D. 576; SEC Opinion, 24
March 1983; DOJ Opinion 163, s. 1973; SEC Opinion, 15 July 1991, XXV SEC Quarterly Bulletin, (No. 4 - December,
1991), at p. 31. SEE ALSO: Cable Industry. ―Cable TV operations shall be governed by E.O. No. 205 (s.1987). If
CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications
entity.‖ (NTC Memo Circular No. 8-9-95); Cable TV is ―a form of mass media which must, therefore, be owned and
managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino
citizens pursuant to the mandate of the Constitution.‖ (DOJ Opinion No. 95, s. 1999, citing Allied Broadcasting, Inc. v.
Federal Communications Commission, 435 F.2d 70).
240
Haw Pia v. China Banking Corp., 80 Phil. 604 (1948); Filipinas Compania de Seguros v. Christern, Huenefeld & Co.,
Inc., 89 Phil. 54 (1951); Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952)
241
SEE: (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November 1989, XXIV SEC Quarterly
Bulletin (No. 1- March 1990); SEC Opinion, 14 December 1989, XXIV SEC Quarterly Bulletin (No. 2 -June 1990)
BUT SEE: SEC-OGC Opinion No. 10-31, dated 09 December 2010, addressed to Mr. Leonardo A. Civil, Chairman of
the Board of Co-O Small Scale Miners Association, Inc., penned by General Counsel Vernette G. Umali-Paco

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SECTION EIGHTEEN

18. SEPRATE JURIDICAL PERSONALITY AND PIERCING THE VEIL OF


CORPORATE FICTION

18.1. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT


242
FROM ITS STOCKHOLDERS OR MEMBERS.

18.1.1. Importance of Main Doctrine

IMPORTANCE OF MAIN DOCTRINE. A corporation, upon coming into existence, is invested by law
with a personality separate and distinct from those persons composing it as well as from any other
legal entity to which it may be related, with the following consequences: (a) This separate and
distinct personality is, however, merely a fiction created by law for conveyance and to promote the
―ends of justice.‖243 (b) The first consequence of the doctrine of legal entity of the separate personality
of the corporation may not be made to answer for acts and liabilities of its stockholders or those of
legal entities to which it may be connected or vice versa.244

18.2. APPLICATION

18.2.1. Majority Equity Ownership and Interlocking Directorship

MAJORITY EQUITY OWNERSHIP AND INTERLOCKING DIRECTORSHIP. GENERALLY: Mere


ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality.245 A corporate defendant against whom a writ of possession has been issued, cannot use
the fact that it has obtained controlling equities in the corporate plaintiffs to suspend enforcement
of the writ, for they are separate juridical persons, and thus their separate business and proprietary
interests remain.246 Ownership of a majority of capital stock and the fact that majority of directors of
a corporation are the directors of another corporation creates no employer-employee relationship
with the latter‘s employees. READ: DBP v. NLRC, 186 SCRA 841 (1990).247

FRAUD OR PUBLIC POLICY CONSIDERATIONS MUST BE PRESENT TO INVOKE EXCEPTION.


Having interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.248
However, mere substantial identity of incorporators of two corporations does not necessarily imply
fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and
convincing evidence to show that the corporate personalities were used to perpetuate fraud, or
circumvent the law, the corporations are to be rightly treated as distinct and separate from each

242
CORP. CODE, Sec. 2; CIVIL CODE, Arti. 44; Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 [2005]
243 LBP v. Court of Appeals, 364 SCRA 375 (2001); Martinez v. Court of Appeals, 438 SCRA 139 (2004); Prudential
Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Siain
Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009).
244 General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); McLeod v. NLRC, 512 SCRA 222

(2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA
598 (2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009).
245 Sunio v. NLRC , 127 SCRA 390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v.

Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996); Manila Hotel
Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); EDSA Shangri-
La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Association (PEA-PTGWO) v.
NLRC, 581 SCRA 598 (2009).
246
Silverio, Jr. v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005)
247 Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Philippines v. Ong, 491

SCRA 581 (2006); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita,
Inc. v. Presidential Agrarian Reform Council, 660 SCRA 525 (2011).
248 Velarde v. Lopez, 419 SCRA 422 (2004); Also Sesbreno v. Court of Appeals, 222 SCRA 466 (1993); ―G‖ Holdings,

Inc. v. National Mines and Allied Workers Union Local, 103 (NAMAWU), 604 SCRA 73 (2010).

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other.249

18.2.2. Corporate Officers

CORPORATE OFFICERS. Being an officer or stockholder of a corporation does not by itself make
one‘s property also that of the corporation, and vice-versa, for they are separate entities, and that
shareholders who are officers are in no legal sense the owners of corporate property which is owned
by the corporation as a distinct legal person.250 The mere fact that one is President does not render
the property he owns the property of the corporation, since the president, as an individual, and the
corporation are separate entities.251 It is hornbook law that corporate personality is a shield against
personal liability of its officers—a corporate officer and his spouse cannot be made personally liable
under a trust receipt where he entered into and signed the contract clearly in his official capacity. 252

CORPORATE LIABILITY NOT IMPUTABLE TO THE OFFICERS, VICE VERSA. The President of the
corporation which becomes liable for the accident caused by its truck driver cannot be held
solidarily liable for the judgment obligation arising from quasi-delict, since the fact alone of being
President is not sufficient to hold him solidarily liable for the liabilities adjudged against the
corporation and its employee.253 When the compulsory counterclaim filed against corporate officers
for their alleged fraudulent act indicate that such corporate officers are indispensable parties in the
litigation, the original inclusion of the corporation in the suit does not thereby allow the denial of a
specific counter-claim being filed to make the corporate officers personally liable. A corporation has
a legal personality entirely separate and distinct from that of its officers and cannot act for and on
their behalf, without being so authorized.254

18.2.3. Dealings Between Corporation and Stockholders

DEALINGS BETWEEN CORPORATION AND STOCKHOLDERS. The fact that the majority
stockholder had used his own money to pay part of the loan of the corporation cannot be used as
the basis to pierce: ―It is understandable that a shareholder would want to help his corporation and
in the process, assure that his stakes in the said corporation are secured.‖ x x x Use of a controlling
stockholder‘s initials in the corporate name is not sufficient reason to pierce, since by that practice
alone does it mean that the said corporation is merely a dummy of the individual stockholder,
provided such act is lawful.255 Just because two foreign companies came from the same country and
closely worked together on certain projects would the conclusion arise that one was the conduit of
the other, thus piercing the veil of corporate fiction.256

SELLING SHARES WILL NOT MAKE THE SELLER PERSONALLY LIABLE. The mere fact that a
stockholder sells his shares of stock in the corporation during the pendency of a collection case
against the corporation, does not make such stockholder personally liable for the corporate debt,
since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right
of the stockholder to dispose of his shares of stock anytime he so desires. READ: Remo, Jr. v.
IAC, 172 SCRA 405 (1989).257

18.2.4. Other Areas of Application

THE PROPERTIES OF THE CORPORATION. The creation by DBP as the mother company of the

249
Laguio v. NLRC, 262 SCRA 715 (1996)
250 Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991); Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008);
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).
251
Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001)
252 Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust Corp. v.

Court of Appeals, 356 SCRA 671 (2001).


253
Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004)
254
Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004)
255
LBP v. Court of Appeals, 364 SCRA 375 (2001)
256
Marubeni Corp. v. Lirag, 362 SCRA 620 (2001)
257 PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001)

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three mining corporations to manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value, does not indicate fraud or wrongdoing and will not
constitute application of the piercing doctrine.258

PRIVILEGES ENJOYED. The tax exemption clause in the charter of a corporation cannot be
extended to nor enjoyed even by the controlling stockholders.259

OBLIGATIONS AND DEBTS. Corporate debt or credit is not the debt or credit of the stockholder
nor is the stockholder's debt or credit that of the corporation. 260 A corporation has no legal standing
to file a suit for recovery of certain parcels of land owned by its members in their individual capacity,
even when the corporation is organized for the benefit of the members.261 Stockholders have no
personality to intervene in a collection case covering the loans of the corporation since the interest
of shareholders in corporate property is purely inchoate.262 The majority stockholder cannot be held
personality liable for the attorney‘s fees charged by a lawyer for representing the corporation. 263 The
obligations of a stockholder in one corporation cannot be offset from the obligation of the
stockholder in a second corporation, since the corporation has a separate juridical personality. 264

18.3. PIERCING THE VEIL OF CORPORATE FICTION

18.3.1. Source of the Doctrine

LANDMARK CASE ON PIERCING. READ: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed.
247 (1905).

WHEN PIERCING IS AVAILABLE. The notion of corporate entity will be pierced or disregarded and
the individuals composing it will be treated as identical if the corporate entity is being used as a cloak
or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a
business conduit for the sole benefit of the stockholders.265 GENERALLY: a corporation will be
looked upon as a legal entity, unless and until sufficient reason to the contrary appears. EXCEPT:
When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons. Also, the corporate
entity may be disregarded in the interest of justice in such cases as fraud that may work inequities
among members of the corporation internally, involving no rights of the public or third persons. In
both instances, there must have been fraud and proof of it. For the separate juridical personality of a
corporation to be disregarded, the wrong-doing must be clearly and convincingly established. It
cannot be presumed.266 THEREFORE: The legal fiction of separate corporate existence is not at
all times invincible and the same may be pierced when employed as a means to perpetrate a fraud,
confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise
blatant violation of the prohibition against forum-shopping. While it is settled that the piercing of
the corporate veil has to be done with caution, this corporate fiction may be disregarded when
necessary in the interest of justice.267 BUT SEE Piercing is not allowed unless the remedy sought is
to make the officer or another corporation pecuniarily liable for corporate debts. (?) READ:
Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992)

258
DBP v. Court of Appeals, 363 SCRA 307 (2001)
259
Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936)
260
Traders Royal Bank v. CA, 177 SCRA 789 (1989)
261
Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976)
262
Saw v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999)
263
Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993)
264
CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997)
265 Gochan v. Young, 354 SCRA 207 (2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307

(2001); Velarde v. Lopez, 419 SCRA 422 (2004); R & E Transport, Inc. v. Latag, 422 SCRA 698 (2004);.Secosa v. Heirs
of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. Court of Appeals, 438 SCRA 139 (2004); McLeod v.
NLRC, 512 SCRA 222 (2007); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009)
266
Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006)
267
Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002)

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18.3.2. Application

OBJECTIVES AND EFFECT OF THE APPLICATION OF THE DOCTRINE. Under the doctrine of
―piercing the veil of corporate fiction,‖ the courts look at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a group, disregarding the separate
juridical personality of the corporation unifying the group. READ: Traders Royal Bank v. Court
of Appeals, 269 SCRA 15 (1997).268

PROPER APPLICATION OF PIERCING. Another formulation of this doctrine is that when two (2)
business enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entitled and treat them as identical or one and the same.269 The attempt to
make the security agencies appear as two separate entities, when in reality they were but one, was a
devise to defeat the law [i.e., in this case to avoid liabilities under labor laws] and should not be
permitted; 270 or where, the fraud was committed by petitioners to the prejudice of respondent
bank.271

PIERCING CANNOT BE INVOKED THE OTHER WAY AROUND. ―The rationale behind piercing a
corporation‘s identity in a given case is to remove the barrier between the corporation from the
persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate
personality as a shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or person responsible for an alleged corporate act, the situation
has been reversed. It is the petitioner as a corporation which is being ordered to answer for the
personal liability of certain individual directors, officers and incorporators concerned. Hence, it
appears to us that the doctrine has been turned upside down because of its erroneous invocation.‖
READ: Francisco Motors Corp. v CA, 309 SCRA 72 (1999).

APPLICABLE TO “THIRD-PARTIES.” That respondents are not stockholders of the sister


corporations does not make them non-parties to this case, since it is alleged that the sister
corporations are mere alter egos of the directors-petitioners, and that the sister corporations
acquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners‘
fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the individuals
composing it will be treated as identical if the corporate entity is being used as a cloak or cover for
fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit
for the sole benefit of the stockholders. READ: Gochan v. Young, 354 SCRA 207 (2001).

18.3.3. Piercing as an Equitable Remedy

PIERCING AS AN EQUITABLE REMEDY. The doctrine of piercing the corporate veil is an equitable
doctrine developed to address situations where the separate corporate personality of a corporation is
abused or used for wrongful purposes. READ: PNB v. Ritratto Group, Inc., 362 SCRA 216
(2001). Thus, Piercing should be understood as: a) A remedy of last resort; b) Available only to
prevent fraud; c) Not Applicable to Theorizing or to Advance/Create New Rights or Interest; d)
Must be based only on clear evidence; e) A power belonging exclusively to the Court; and, f) Having
the effect of Res Judicata.

REMEDY OF LAST RESORT AND ONLY TO PREVENT FRAUD. Piercing the corporate veil is remedy
of last resort and is not available when other remedies are still available. READ: Umali v. Court of
Appeals, 189 SCRA 529 (1990). Piercing doctrine is meant to prevent fraud, and cannot be
employed when the net result would be to perpetrate fraud or a wrong.272 The theory of corporate

268 Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009)
269 General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Marques v. Far East Bank and
Trust Co., 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012)
270
Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006)
271
Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005)
272
Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952)

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entity was not meant to promote unfair objectives or otherwise, nor to shield them.273

PIERCING DOCTRINE NOT APPLICABLE TO THEORIZING OR TO ADVANCE/CREATE NEW


RIGHTS OR INTEREST. GENERALLY: Piercing of the veil of corporate fiction is not allowed
when it is resorted under a theory of co-ownership to justify continued use and possession by
stockholders of corporate properties. READ: Boyer-Roxas v. Court of Appeals, 211 SCRA 470
(1992). BUT SEE: Where clear evidence presented support the fact that a corporation‘s affiliates
have received large amounts which became the consideration for the company execution of a real
estate mortgage over its properties, then the piercing doctrine shall be applied to support the fact
that the real estate mortgage was valid and supported by proper consideration. READ: Siain
Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009).

WHEN NOT APPLICABLE. The piercing cannot be availed of in order to dislodge from SEC‘s
jurisdiction a petition for suspension of payments filed under P.D. 902-A, on the ground that the
petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning
corporate debtor: ―doctrine only applies when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime.‖274 Application of the piercing of the
subsidiary company to merge it with the holding company cannot be allowed to support a theory of
set-off or compensation, there being no allegation much less any proof of fraud. 275 An employee
who has officially retired from the company and availed of her retirement benefit, but who
continued to be employed as a consultant with affiliate companies, cannot employ piercing in order
to treat her stint with the affiliate companies as part of her employment with the main company she
retired from—there is no fraud or employment of unfair shielding.276

PIERCING MUST BE BASED UPON CLEAR EVIDENCE, OTHERWISE IT CANNOT BE INVOKED. To


disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing
cannot be presumed and must be clearly and convincingly established. Application of the doctrine of
piercing the corporate veil should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction was misused to such an extent
that injustice, fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an
injustice that was never unintended may result from an erroneous application.277

SAME. The organization of the corporation at the time when the relationship between the
landowner and the developer were still cordial cannot be used as a basis to hold the corporation
liable later on for the obligations of the landowner to the developer under the mere allegation that
the corporation is being used to evade the performance of obligation by one of its major
stockholders.278 In this case, the Court finds that the Remington failed to discharge its burden of
proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the corporate veil.279

SAME. Neither has it been alleged or proven that Merryland is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency conduit or adjunct of
Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is
not justification for disregarding their separate personalities, absent any showing that Merryland was
purposely used as a shield to defraud creditors and third persons of their rights. 280

273
Villanueva v. Adre, 172 SCRA 876 (1989)
274
Union Bank v. Court of Appeals, 290 SCRA 198 (1998)
275
Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007)
276
Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009)
277 PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); General Credit Corp. v. Alsons Dev. and

Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598
(2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011).
278
Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999)
279 DBP v. Court of Appeals, 363 SCRA 307 (2001); Also McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva,

526 SCRA 73 (2007).


280Francisco v. Mejia, 362 SCRA 738 (2001); Also Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Int‘l

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SAME. The mere assertion by a Filipino litigant against the existence of a ―tandem‖ between two
Japanese corporations cannot be the basis for piercing, which can only be applied by showing
wrongdoing by clear and convincing evidence.281

BURDEN OF PROOF. The party seeking to pierce has the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate personality rule. The question of
whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the party who
alleges it.282

POWER OF THE COURT. Piercing is a power belonging to the court and cannot be assumed
improvidently by a sheriff.283.

PIERCING HAS RES JUDICATA EFFECT. Application of the doctrine to a particular case does not
deny the corporation of legal personality for any and all purposes, but only for the particular
transaction or instance, or the particular obligation for which the doctrine was applied.284

18.3.4. Classification of Piercing Cases285

CLASSIFICATION OF PIERCING CASES. Authorities are agreed on at least three (3) basic areas where
piercing the veil, with which the law covers and isolates the corporation from any other legal entity
to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the
corporation is used as vehicle for the evasion of existing obligation; 2) fraud cases or when the
corporate entity is used to justify wrong, protect fraud, or defend a crime; or 3) alter ego cases, where
the corporation is merely a farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation. READ: General
Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).286

APPLICATION IN GENERAL. This Court pierced the corporate veil to ward off a judgment credit, to
avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for
a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair
objectives to cover up an otherwise blatant violation of the prohibition against forum shopping.
Only is these and similar instances may the veil be pierced and disregarded.287.

SUMMARY OF PROBATIVE FACTORS. The absence of these elements prevents piercing the
corporate veil.288 READ: Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).289

DISTINCTION BETWEEN FRAUD PIERCING AND ALTER-EGO PIERCING. READ: Lipat v.

Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).


281
Marubeni Corp. v. Lirag, 362 SCRA 620 (2001)
282 PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); Also Concept Builders, Inc. v. NLRC, 257

SCRA 149 (1996); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA
617 (2002).
283
Cruz v. Dalisay, 152 SCRA 482 (1987); D.R. CATC Services v. Ramos, 477 SCRA 18 (2005)
284 Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil.

198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).


285
VILLANUEVA, Commercial Law Review (2013), p. 612 et seq.
286citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed), at p. 576. Also Pantranco Employees Association (PEA-

PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010);
Sarona v. NLRC, 663 SCRA 394 (2012).
287
PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002)
288 Lim v. Court of Appeals, 323 SCRA 102 (200); Child Learning Center, Inc. v. Tagorio, 475 SCRA 236 (2005);

General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce v. Equitable PCI Bank, Inc.,
516 SCRA 231 (2007).
289 PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); Jardine Davies, Inc. v.

JRB Realty, Inc., 463 SCRA 555 (2005); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598
(2009).

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Pacific Banking Corp., 402 SCRA 339 (2003).

18.3.5.

18.4. DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING)

18.4.1. Juridical Personality cannot be invoked to defeat public convenience

18.4.1.1. Confuse Legitimate Issues

TO CONFUSE LEGITIMATE ISSUES. READ: Telephone Engineering and Service Co., Inc. V.
WCC, 104 SCRA 354 (1981).

18.4.1.2. Raise Legal Technicalities

TO RAISE LEGAL TECHNICALITIES. One cannot evade civil liability by incorporating properties or
the business.290 READ: Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).

OTHER INSTANCES OF PIERCING APPLICATION. When used to avoid a contractual commitment


against a non-competition clause. READ: Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).
Where a debtor registers his residence to a family corporation in exchange of shares of stock and
continues to live therein, then the separate juridical personality may be disregarded. 291 Where
corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or
confuse the legitimate issues (as in this case where the actions of management of the two
corporations created confusion as to the proper employer of claimants), it would be discarded and
the two corporations would be merged as one.292 The corporate veil cannot be used to shield an
otherwise blatant violation of the prohibition against forum-shopping. Where the corporation itself
has not been remiss in vigorously prosecuting or defending corporate causes and in using and
applying remedies available to it, then shareholders, whether suing as the majority in direct actions
or as the minority in a derivative suit, cannot be allowed to pursue the same claims 293.

18.4.1.3. Thinly Capitalized Corporations

THINLY-CAPITALIZED CORPORATIONS. READ: McConnel v. CA, 1 SCRA 722 (1961).

LACK OF FINANCIAL CAPACITY. The DOJ Resolution explicitly identified the false pretense,
fraudulent act or fraudulent means perpetrated upon the investing public who were made to believe
that ASBHI had the financial capacity to repay the loans it enticed petitioners to extend, despite the
fact that ―it had an authorized capital stock of only P500,000.00 and paid up capital of only
P125,000.00),‖ with the deficient capitalization evidenced by its articles of incorporation, the
treasurer‘s affidavit, the audited financial statements. ―Moreover, respondent‘s argument assumes
that there is legal obligation on the part of petitioners to undertake an investigation of ASBHI
before agreeing to provide the loans. There is no such obligation. It is unfair to expect a person to
procure every available public record concerning an applicant for credit to satisfy himself of the
latter‘s financial standing. At least, that is not the way an average person takes care of his
concerns.‖294

SAME. Where the corporation was under the control of its stockholders who ran-up quite a high
obligation with the printing company knowing fully well that their corporation was not in a position
to pay for the accounts, and where in fact they personally benefited from the operations of the
company to which they never paid their subscription in full, would constitute piercing of the veil to
290Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962); Also Mendoza and Yotoko v. Banco Real Dev. Bank, 470
SCRA 86 (2005).
291
PBCom v. CA, 195 SCRA 567 (1991)
292
Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999)
293
First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996)
294
Gabionza v. Court of Appeals, 565 SCRA 38 (2008)

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allow the creditor to be able to collect what otherwise were debts owed by the company which has
no visible assets and has ceased all operations. READ: Halley v. Printwell, Inc. 649 SCRA 116
(2011).

18.4.1.4. The Case for Tax Avoidance

AVOIDANCE OR MINIMIZATION OF TAXES. READ: Yutivo Sons Hardware v. Court of Tax


Appeals 1 SCRA 160 (1961)295

LEGITIMATE TAX AVOIDANCE IS NOT A GROUND TO PIERCE. Use of nominees to constitute the
corporation for the benefit of the controlling stockholder who sought to avoid payment of taxes. 296
The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is
to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to
the corporations: ―With regard to their claim that [the companies] Ellice and Margo were meant to
be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a
taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by
means which the law permits, cannot be doubted.‖ 297 The mere existence of parent-subsidiary
relations, or the fact that one corporation is affiliated with another corporation does not justify
piercing based on serving public convenience.298

18.5. FRAUD CASES

When the legal fiction of the separate corporate personality is abused, such as when the same is used
for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. READ:
Francisco v. Mejia, 362 SCRA 738 (2001).

FRAUD MAY BE A GROUND FOR PIERCING. The general rule is that obligations incurred by a
corporation, acting through its directors, officers or employees, are its sole liabilities. However, there
would be piercing of the veil when the corporation is used by any of them as a cloak or cover for
fraud or illegality or injustice. Here, the fraud was committed by petitioners to the prejudice of
respondent bank.299 Fraud and bad faith on the part of certain corporate officers or stockholders
may warrant the piercing of the veil of corporate fiction so that the said individual may not seek
refuge therein, but may be held individually and personally liable for his or her actions. 300
HOWEVER mere allegation of fraud or bad faith, without evidence supporting such claims cannot
warrant the piercing of the corporate veil.301

18.5.1. Acts by Controlling Shareholder

The fact that a corporation owns all of the stocks of another corporation, taken alone, is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a
subsidiary‘s separate existence shall be respected, and the liability of the parent corporation, as well
as the subsidiary shall be confined to those arising in their respective business. A corporation has a
separate personality distinct from its stockholders and from other corporations to which it may be
conducted — a legal fiction created by law for convenience and to prevent injustice.302

ILLUSTRATION OF CASES WHERE PIERCING WAS APPLIED. Where a stockholder, who has absolute
control over the business and affairs of the corporation, entered into a contract with another
295
Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961)
296
Marvel Building v. David, 9 Phil. 376 (1951)
297
Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)
298 Comm. of Internal Revenue v. Norton and Harrison, 11 SCRA 704 (1954); Tomas Lao Construction v. NLRC, 278

SCRA 716 (1997). Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011)
299
Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005)
300
Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004)
301
DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001)
302 Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007); Marques v. Far East Bank and Trust Co., 639 SCRA 312

(2011).

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corporation through fraud and false representations, such stockholder shall be liable solidarily with
co-defendant corporation even when the contract sued upon was entered into on behalf of the
corporation. READ: Namarco v. Associated Finance Co., 19 SCRA 962 (1967). Where the
corporation is used as a means to appropriate a property by fraud which property was later resold to
the controlling stockholders, then piercing should be allowed.303

18.5.2. Tax Evasion or Fraud

CORPORATE PERSONALITY CANNOT BE USED FOR TAX EVASION. In a number of cases, the Court
has shredded the veil of corporate identity and ruled that where a corporation is merely an adjunct,
business conduit or alter ego of another corporation or when they practice fraud on internal revenue
laws, the fiction of their separate and distinct corporate identities shall be disregarded, and both
entities treated as one taxable person, subject to assessment for the same taxable transaction. 304

18.5.3. Guiding Principles in Fraud Cases

GUIDING PRINCIPLES IN FRAUD CASES. Take note: a) There must have been fraud or an evil
motive in the affected transaction, and the mere proof of control of the corporation by itself would
not authorize piercing; b) The corporate fiction is used as a means to commit the fraud or avoid the
consequences thereof; and, c) The main action should seek for the enforcement of pecuniary claims
pertaining to the corporation against corporate officers or stockholders.

SAME. Respondent corporations may be engaged in the same business or even share the same
address, or have interlocking incorporators, directors or officers, in the absence of fraud or other
public policy consideration, does not warrant piercing the veil of corporate fiction. 305 HOWEVER:
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate
personality. The substantial identity of the incorporators of two or more corporations does not
imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard
the said separate juridical personality of a corporation, the wrongdoing must be proven clearly and
convincingly.306

18.5.4.

18.6. ALTER EGO CASES

18.6.1. Using Corporation as Conduit or Alter Ego

A corporation has a personality separate and distinct from the persons composing it, as well as from
any other legal entity to which it may be related. Equally well-settled is the principle that the
corporate mask may be removed or the corporate veil pierced when the corporation is just an alter
ego of a person or of another corporation.307

APPLICATION AND EFFECTS. Where the capital stock is owned by one person and it functions only
for the benefit of such individual owner, the corporation and the individual should be deemed the
same. READ: Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923). When corporation is
merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and
distinct corporation entities should be disregarded.308 The fictive veil of corporate personality holds
lesser sway for subsidiary corporations whose shares are wholly if not almost wholly owned by its
303
Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000)
304
Commissioner of Internal Revenue v. Menguito, 565 SCRA 461 (2008)
305
McLeod v. NLRC, 512 SCRA 222 (2007), quoting from Indophil Textile Mill Workers Union v. Calica, 205 SCRA
697 (1992), and Del Rosario v. NLRC, 187 SCRA 777 (1990)
306
Martinez v. Court of Appeals, 438 SCRA 130 (2004)
307
Sarona v. NLRC, 663 SCRA 394 (2012)
308 Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988); General Credit Corp. v. Alsons Dev. and Investment Corp.,

513 SCRA 225 (2007).

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parent company. The structural and systems overlap inherent in parent and subsidiary relations often
render the subsidiary as mere local branch, agency or adjunct of the foreign parent. Thus, when the
foreign parent company leased a large parcel of land purposely for the benefit of its subsidiary,
which took over possession of the leased premises, the subsidiary was a mere alter ego of ESSO
Eastern.309 HOWEVER: The fact that a corporation owns all of the stocks of another corporation,
taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiary‘s separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary shall be confined to those arising in their respective business. A
corporation has a separate personality distinct from its stockholders and from other corporations to
which it may be conducted — a legal fiction created by law for convenience and to prevent
injustice.310

18.6.2. Mixing-up Operations; Disrespect to the Corporate Entity

Employment of same workers; single place of business, etc., may indicate alter ego situation.
READ: La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953);
READ: Shoemart v. NLRC, 225 SCRA 311 (1993).

THE RULE IS STILL TO UPHOLD THE SEPARATE PERSONALITY. The fact that two corporations
may be sister companies, and that they may be sharing personnel and resources, without more, is
insufficient to prove that their separate corporate personalities are being used to defeat public
convenience, justify wrong, protect fraud, or defend crime. READ: Padilla v. Court of Appeals,
370 SCRA 208 (2001). BUT: Where two business enterprises are owned, conducted, and controlled
by the same parties, both law and equity will, when necessary to protect the rights of third persons,
disregard the legal fiction that two corporations are distinct entities and treat them as identical. 311
Mixing of personal accounts with corporate bank deposit accounts.312

18.6.3. Guiding Principles in Alter-Ego Cases

GENERALLY: Doctrine applies even in the absence of evil intent, because of the direct violation
of a central corporate law principle of separating ownership from management; Doctrine in such
cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be
expected to be bound by the separate juridical entity; Piercing in alter ego cases may prevail even
when no monetary claims are sought to be enforced against the stockholders or officers of the
corporation. HOWEVER: The mere existence of a parent-subsidiary relationship between two
corporation, or that one corporation is affiliated with another company does not by itself allow the
application of the alter-ego piercing doctrine.313A subsidiary corporation has an independent and
separate juridical personality, distinct from that of its parent company, hence, any claim or suit
against the latter does not bind the former and vice-versa.314 If used to perform legitimate functions,
a subsidiary‘s separate existence shall be respected, and the liability of the parent corporation as well
as the subsidiary will be confined to those arising in their respective businesses. Even when the
parent corporation agreed to the terms to support a standby credit agreement in favor of the
subsidiary, does not mean that its personality has merged with that of the subsidiary. 315

18.7. PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE

18.7.1. Need to Bring a New Case Against the Officer 316

309
Mariano v. Petron Corp., 610 SCRA 487 (2010)
310
Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007)
311
Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992)
312
Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969)
313
Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990)
314
Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005)
315
MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002)
316
McConnel v. CA, 1 SCRA 723 (1961)

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ADDITIONAL DEFENDANT MUST BE SUMMONED. A suit against individual shareholders is not a
suit against the corporation. Failure to implead the corporations as defendants and merely annexing
a list of such corporations to the complaints is a violation of due process for it would in effect be
disregarding their distinct and separate personality without a hearing. 317 Although both lower courts
found sufficient basis for the conclusion that PKA and Phoenix Omega were one and the same, and
the former is merely a conduit of the other the Supreme Court held void the application of a writ of
execution on a judgment held only against PKA, since the RTC obtained no jurisdiction over the
person of Phoenix Omega which was never summoned as formal party to the case. The general
principle is that no person shall be affected by any proceedings to which he is a stranger, and
strangers to a case are not bound by the judgment rendered by the court. READ: Padilla v. Court
of Appeals, 370 SCRA 208 (2001). 318

18.7.2. When corporate officers are sued in their official capacity when the
corporation was not made a party, the corporation is not denied due process. 319

We suggest as much in Arcilla v. Court of Appeals, (215 SCRA 120 [1992]), an appellate proceedings
involving petitioner Arcilla‘s bid to avoid the adverse CA decision on argument that he is not
personally liable for the amount adjudged since the same constitutes a corporate liability which
nevertheless cannot be enforced against the corporation which has not been impleaded as a party
below.320
18.7.3.
Provided that evidential basis has been adduced during trial to apply the
piercing doctrine. 321

READ: Jacinto v. Court of Appeals, 198 SCRA 211 (1991).322

317
PCGG v. Sandiganbayan, 365 SCRA 538 (2001)
318
Also Violago v. BA Finance Corp., 559 SCRA 69 (2008)
319
Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965)
320
Violago v. BA Finance Corp., 559 SCRA 69 (2008).
321 Arcilla v. Court of Appeals, 215 SCRA 120 (1992).
322 Arcilla v. Court of Appeals, 215 SCRA 120 (1992).

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SECTION NINETEEN

19. CLASSIFICATION OF CORPORATIONS

19.1. IN RELATION TO THE STATE

19.1.1. Public Corporation (Sec. 3, Act No. 1459)

CORPORATIONS MAY BE PUBLIC OR PRIVATE. Public corporations are those formed or organized
for the government of a portion of the state. Private corporations are those formed for some private
purpose, benefit, aim, or end, as distinguished from public corporations, which have for their
purpose the general good and welfare. Private corporations are divided into stock corporations and
nonstock corporations. Corporations which have a capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of the surplus profits
on the basis of the shares held are stock corporations. All other private corporations are nonstock
corporations.323

19.1.2. Quasi-public Corporation324

19.1.3. Private Corporation (Sec. 3, Act 1459)

Government‘s majority shares does not make an entity a public corporation.325

COA JURISDICTION.326 But being a GOCC makes it liable for laws and provisions applicable to the
Government or its entities and subject to the control of the Government. 327 Although Boy Scouts of
the Philippines does not receive any monetary or financial subsidy from the Government, and its
funds and assets are not considered government in nature and not subject to audit by the COA, the
fact that it received a special charter from the government, that its governing board are appointed by
the Government, and that its purpose are of public character, for they pertain to the educational,
civic and social development of the youth which constitute a very substantial and important part of
the nation, it is not a public corporation in the same sense that municipal corporation or local
governments are public corporation since its does not govern a portion of the state, but it also does
not have proprietary functions in the same sense that the functions or activities of government-
owned or controlled corporations, is may still be considered as such, or under the 1987
Administrative Code as an instrumentality of the Government, and it employees are subject to the
Civil Service Law.328

TEST TO DETERMINE APPLICABILITY OF LABOR CODE OR CIVIL SERVICE LAWS. The doctrine that
employees of GOCCs, whether created by special law or formed as subsidiaries under the general
corporation law are governed by the Civil Service Law and not by the Labor Code, has been
supplanted by the 1987 Constitution. The present doctrine in determining whether a GOCC is
subject to the Civil Service Law is the manner of its creation, such that government corporations created
by special charter are subject the Civil Service Law, while those incorporated under the general
corporation law are governed by the Labor Code. 329 THE RULE: A corporation is created by
operation of law under the Corporation Code while a government corporation is normally created

323
ACT NO. 1459, Sec. 3
324
Marilao Water Consumers Asso. v. IAC, 201 SCRA 437 (1991)
325
National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924)
326
PHIL. CONST., Sec. 2, par. D, Art. IX
327
Cervantes v. Auditor General, 91 Phil. 359 (1952)
328
Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991)
329
PNOC-Energy Dev. Corp. v. NLRC, 201 SCRA 487 (1991); Davao City Water District v. Civil Service Commission,
201 SCRA 593 (1991)

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by special law referred to often as a charter. 330 The test to determine whether a corporation is
government owned or controlled, or private in nature is simple. Is it created by its own charter for
the exercise of a public function, or by incorporation under the general corporation law? Those with
special charters are government corporations subject to its provisions, and its employees are under
the jurisdiction of the Civil Service Commission, and are compulsory members of the GSIS.331 Water
districts can validly exists as corporate entities under PD 198, and provided they are government-
owned or controlled, and their board of directors and other personnel are government employees
subject to civil service laws and anti-graft laws.332

GOCCS HAVE SEPARATE PERSONALITIES FROM THE GOVERNMENT, AND THE CONSEQUENCES
THEREOF. Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of
the government, and the intervention in a transaction of the Office of the President through the
Executive Secretary does not change the independent existence of a government entity as it deals
with another government entity.333 While public benefit and public welfare may be attributable to the
operation of the Bases Conversion and Development Authority (BCDA), yet it is certain that the
functions it performs are basically proprietary in nature—the promotion of economic and social
development of Central Luzon, particularly, and the country‘s goal for enhancement. Therefore, the
rule that prescription does not run against the State will not apply to BCDA, it being said that when
title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are
in the same category as ordinary persons.334

SUPPLETORY APPLICATION OF CORP. CODE AS THE GENERAL LAW ON CORPORATIONS. Sec. 31


of Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been
organized by special charters since Sec. 4 of Corporation Code renders the provisions
supplementarily applicable to all corporations, including those with special or individual charters,
such as cooperatives organized under P.D. 269, so long as those provisions are not inconsistent with
such charters.335

INSTRUMENTALITIES ARE NOT GOCCS. A government-owned or controlled corporation must be


organized as a stock or non-stock corporation. The MIAA is not a government-owned or controlled
corporation because it is not constituted of capital divided into shares of stock, and neither is it a
nonstock corporation because it has no members. MIAA is a government instrumentality vested
with corporate powers to perform efficiently its government functions. 336

THE CURIOUS CASE OF THE PHILIPPINE NATIONAL RED CROSS. Senator Gordon had not
violated the provisions of Sec. 13, Art. VI of the Constitution, when he accepted chairmanship of
the PNRC, as the latter is not a government office nor a GOCC. Although PNRC has its special
charter, the Chairman of PNRC is not appointed by the President or any member of the Executive
Branch. Although Camporendodo v. NLRC had ruled that PNRC is GOCC because it is constituted
under a special charter, it failed to consider the definition of a GOCC as provided under Sec. 2(13)
of the Administrative Code of 1987, which requires that a GOCC to be such must be owned by the
government, and in the case of a stock corporation, at least a majority of its capital stock must be
owned by the government.337.

330
Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994)
331
Camparedondo v. NLRC, 312 SCRA 47 (1999)
332
Feliciano v. COA, 419 SCRA 363 (2004)
333
PUP v. Court of Appeals, 368 SCRA 691 (2001)
334
Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001)
335
Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992)
336
Manila International Airport Authority v. Court of Appeals, 495 SCRA 591 (2006)
337
Liban v. Gordon, 593 SCRA 68 (2009)

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19.2. AS TO PLACE OF INCORPORATION

19.2.1. Domestic Corporation

19.2.2. Foreign Corporation (Sec. 123)

19.3. AS TO PURPOSE OF INCORPORATION

19.3.1. Municipal Corporation

19.3.2. Religious Corporation (Secs. 109 and 116)

Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive
upon the civil tribunals, then a church member who is expelled from the membership by the church
authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in
the civil courts.338

19.3.3. Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)

19.3.4. Charitable, Scientific or Vocational Corporations

19.3.5. Business Corporation

19.4. AS TO NUMBER OF MEMBERS

19.4.1. Aggregate Corporation

19.4.2. Corporation Sole (Secs. 110 to 115; Roman Catholic Apostolic Administrator of
Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596
[1957]).

CURRENT CONTROLLING DOCTRINAL PRONOUNCEMENT. The doctrine in Republic v. Villanueva,


114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984), that a corporation sole is
disqualified to acquire/hold alienable lands of the public domain, because of the constitutional
prohibition qualifying only individuals to acquire land and the provision under the Public Land Act
which applied only to Filipino citizens or natural persons, has been expressly overturned in Director
of Land v. IAC, 146 SCRA 509 (1986).339

19.5. AS TO LEGAL STATUS

19.5.1. De Jure Corporation

19.5.2. De Facto Corporation (Sec. 20)

19.5.3. Corporation by Estoppel (Sec. 21)

19.6. AS TO EXISTENCE OF SHARES (SECS. 3 AND 5)

19.6.1. Stock Corporation

19.6.2. Non-Stock Corporation

338
Long v. Basa, 366 SCRA 113 (2001)
Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).
339

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SECTION TWENTY

20. ARTICLES OF INCORPORATION

20.1.

20.2.

20.3.

21. BY-LAWS

22. CORPORATE POWERS AND AUTHORITY

23. DIRECTORS, TRUSTEES AND OFFICERS

24. RIGHTS OF STOCKHOLDERS AND MEMBERS

25. SHARES OF STOCK

26. CAPITAL STRUCTURE

27. ACQUISITIONS, MERGERS AND CONSOLIDATIONS

28. REHABILITATION AND INSOLVENCY

29. CORPORATE DISSOLUTION AND LIQUIDATION

30. CLOSE CORPORATIONS

31. NON-STOCK CORPORATIONS AND FOUNDATIONS

32. FOREIGN CORPORATIONS

33. PENALTY PROVISIONS OF THE CODE

34. MISCELLANEOUS

35. CORPORATIONS

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