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ATENEO DE MANILA LAW SCHOOL

AGENCY & TRUSTS, PARTNERSHIPS &


& JOINT VENTURES1
FIRST SEMESTER, SY 2016-17

A.

DEAN CESAR L. VILLANUEVA


ATTY. JOSE U. COCHINGYAN III
ATTY. TERESA V. TIANSAY

LAW ON AGENCY

I.

NATURE AND OBJECT OF AGENCY

1.

Definition of Agency; Parties in an Agency Relationship (Art. 1868)


Under Article 1868, a contract of agency is one whereby a person binds himself to render
some service or to do something in representation or on behalf of another, with the consent
or authority of the latter.
Spanish term for principal is mandante; and among the terms used for agent are
mandatario, factor, broker, attorney-in-fact, proxy, delegate or representative.

2.

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


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

3.

Elements of the Contract of Agency


Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978):
(a) Consent, express or implied, of the parties to establish the relationship;
(b) Object, which is the Execution of Juridical Acts in Relation to Third Parties;
(c) Agent acts as a representative and not for himself; and
(d) Agent acts within the scope of his authority.2
a. CONSENT (Arts. 1317 and 1403[1])
The basis for agency is representation; there must be an actual intention on principals
part to appoint, or an intention naturally inferable from his words or actions; on agents partx,
there must also be an intention to accept the appointment and act on it; in the absence of
such intent, there is no agency. xDominion Insurance Corp. v. CA, 376 SCRA 239 (2002).3
In agency, principals personality is extended through the facility of the agent, who by legal
fiction becomes the principal, authorized to perform all acts which latter would have him do.
Such a relationship can only be effected with principals consent, which must not, in any way,
be compelled by law or by any court. xLitonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
b. SUBJECT MATTER: Service Execution of Juridical Acts in Behalf of
Principal and Within the Scope of Authority
It is clear from Art. 1868 that the basis of agency is representation. One factor which most
clearly distinguishes agency from other legal concepts is control: the agent agrees to act
under the control or direction of the principal; indeed, the very word agency has come to
connote control by the principal. xVictorias Milling Co. v. CA, 333 SCRA 663 (2000).4
No contract of agency exists where a common carrier leases the trucks of another carrier,
for there is no power of representation by one with respect to the other and neither was there

1Unless

otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines.

2Reiterated in Yu Eng Cho v. Pan American World Airways, 328 SCRA 717 (2000); Manila Memorial Park v. Linsangan, 443 SCRA 377
(2004); Eurotech Industrial Technologies v. Cuizon, 521 SCRA 584 (2007); Loadmasters Customs Services v. Glodel Brokerage Corp.,
639 SCRA 69 (2011); Urban Bank v. Pena, 659 418 (2011); Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011); Villoria v.
Continental Airlines, 663 SCRA 57 (2012); Jusayan v. Sombilla, 746 SCRA 437 (2015).
3Urban

Bank v. Pea, 659 SCRA 418 (2011).

4Amon

Trading Corp. v. CA, 477 SCRA 552 (2005).

any authority to represent the other by the terms of the arrangements. xLoadmasters
Customs Services v. Glodel Brokerage Corp., 639 SCRA 69 (2011).
c. CONSIDERATION: Agency Presumed to Be for Compensation,
Unless There Is Proof to the Contrary (Art. 1875)
Old Civil Code: Service rendered by the agent was deemed to be gratuitous; if it were true
that agent and principal had an understanding that the agent was to receive compensation
aside from the use and occupation of the houses of the deceased, it cannot be explained
how the agent could have rendered services for eight years without receiving and claiming
any compensation from the deceased. xAgua v. Larena, 57 Phil 630 (1932).
Prescinding from the obligatory force of agency, the fact that other agents intervened in
the consummation of the sale and were paid their respective commissions could not vary the
terms of the agency with the plaintiff-agent who remains entitled to a 5% commission based
on the selling price. xDe Castro v. Court of Appeals, 384 SCRA 607 (2002).

4.

ESSENTIAL CHARACTERISTICS OF AGENCY


a. Nominate and Principal
Acts done by one person in behalf of another who authorized such acts is the essential
nature one of agencyit will be an agency whether or not parties understood the exact
nature of the relation. Also, the fact that two agents enter into a contract of behalf of their
principals, even if principals do not actually and personally know each other, does not affect
their juridical standing as agents, since the very purpose of agency is to extend principals
personality of through the facility of the agent. xDoles v. Angeles, 492 SCRA 607 (2006).
Even when the Agreement provides that the manager shall be considered an independent
contractor and not an agent, nonetheless since the manager is expressly authorized to solicit
and remit offers to purchase interments spaces, it covers an agency arrangement. xManila
Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).
b. Unilateral5 and Primarily Onerous (Art. 1875)
Agency is presumed to be for compensation; when agent performs services for principal
at latters request, principals intent to compensate the agent will be inferred from the
principal's request for the agents service. xUrban Bank v. Pea, 659 SCRA 418 (2011).
c. Consensual (Arts. 1869 and 1870)
In Agency, principals personality is extended through the facility of the agentwho, by
legal fiction, becomes the principal, authorized to perform all acts which the latter would have
him do. Such a relationship can only be effected with the consent of the principal, which must
not, in any way, be compelled by law or by any court. Orient Air Services v. Court of
Appeals, 197 SCRA 645 (1991).6
An agency may be expressed or implied from the principals act, from his silence or lack of
action, or failure to repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
d. Personal, Representative and Derivative (Art. 1868)
Agency is basically personal, representative, and derivative in nature. The authority of the
agent emanates from the powers granted to him by his principal; his act is the act of the
principal if done within the scope of the authority. Qui facit per alium facit per se. He who
acts through another acts himself. Consequently, agency is extinguished by the death of the
principal or agent. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).
Basis for agency is representation, and therefore every person dealing with an agent is
put upon inquiry and must discover upon his peril the authority of the agent. xSafic Alcan &
Cie. v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). CONSEQUENTLY:
Where there is no showing that Brigida consented to or authorized the acts of
Deganos, any attempt to foist liability on her through the supposed agency relation with
Deganos is groundless. It was grossly negligent of petitioners to entrust to Deganos,

5A unilateral contract has been defined as A contract in which one party makes a promise or undertakes a performance. Thus, it was
observed that [M]any unilateral contacts are in reality gratuitous promises enforced for good reason with no element of
bargain. [BLACKS LAW DICTIONARY 326 (1990)] It is perhaps in this sense that agency is unilateral because it is the agent who
undertakes the performance of the agency. However, one must not forget that agency is still a contract with a bilateral character.
Manresa explains: As regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion, from the
point of view of the Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily supposes,
there will be obligations exclusively for the agent and rights exclusively for the principal. It is clear that at times it happens this way, but
what is common in agency with other contracts is the mutuality and the reciprocity that arises from the existence of an obligation against
another obligation, a right against another right. 11 MANRESA. COMENTARIOS AL CODIGO CIVIL ESPAOL 443 (1950)
6Litonjua,

Jr. v. Eternit Corp., 490 SCRA 204 (2006); Villoria v. Continental Airlines, 663 SCRA 57 (2012).

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not once or twice but on at least six occasions as evidenced by receipts, several pieces
of jewelry of substantial value without requiring a written authorization from his alleged
principal. Bordador v. Luz, 283 SCRA 374 (1997).
A co-owner does not become an agent of other co-owners, and any exercise of an
option to buy a piece of land transacted with one co-owner does not bind other coowners. The most prudent thing for buyer should have done was to ascertain the
extent of said co-owners authority; being negligent, buyer cannot seek relief on the
basis of a supposed agency. xDizon v. Court of Appeals, 302 SCRA 288 (1999).
Art. 1897 reinforces the doctrine that an agentis not personally liable to the party with
whom he contracts; it is the principal who is liable on the contracts of the agent.
xEurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).7
When an agent purchases the property in bad faith, the principal is deemed a
purchaser in bad faith. xCaram, Jr. v. Laureta, 103 SCRA 7 (1981).
Under principle that knowledge of agent is knowledge by principal, spouses cannot
contend lack of knowledge of the rules upon which they received their tickets from the
airline company since their travel agent, who handled their travel arrangements, was
duly informed by the airline representatives. xAir France v. CA, 126 SCRA 448 (1983).

e. Fiduciary and Revocable


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

5.

DISTINGUISHED FROM OTHER SIMILAR CONTRACTS:


a. FROM BROKERAGE
Difference in the Nature of the Service Covered: Real estate broker is one who
negotiates the sale of real properties. His businessis only to find a purchaser who is willing to
buy the land upon terms fixed by the owner. He has no authority to bind the principal by
signing a contract of sale. Indeed, an authority to find a purchaser of real property does not
include an authority to sell. xLitonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).8
On the Duties and Obligations Assumed: The duties and liability of a broker to his
employer are essentially those which an agent owes to his principal. Consequently, the
decisive legal provisions on determining whether a broker is mandated to give to the
employer the propina or gift received from the buyer would be Articles 1891 and 1909 of the
Civil Code. (NOTE: Yet the facts did indicate clearly that the real estate broker was
appointed as an exclusive agent.) Domingo v. Domingo, 42 SCRA 131 (1971).
Since brokerage relationship is necessarily a contract for the employment of an agent,
principles of contract law also govern the broker-principal relationship [?]. xAbacus Securities
Corp. v. Ampil, 483 SCRA 315 (2006).
Entitlement to the Commission Agreed Upon: Agent receives a commission upon
successful conclusion of a sale; whereas, broker earns his pay merely by bringing the buyer
and the seller together, even if no sale is eventually made. [?] xHahn v. Court of Appeals,
266 SCRA 537 (1997); Tan v. Gullas, 393 SCRA 334 (2002).
A real estate brokers business is only to find a bona fide purchaser. The settled rule is
that, in the absence of an express stipulation on the matter, the broker becomes entitled to
the usual commissions only when he brings to his principal a party who is able and willing to
take the property and enter into a valid contract upon the terms then named by the principal,
although the particulars may be arranged and the matter negotiated and completed between
the principal and the purchaser directly. Macondray & Co. v. Sellner, 33 Phil. 370 (1916).
Thus, when the terms of the brokerage arrangement is to the effect that entitlement to the
commission was contingent on the purchase by a customer of a fire truck, the implicit
condition being that the broker would earn the commission if he was instrumental in bringing

7Tan

v. Engineering Services, 498 SCRA 93 (2006); Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

8Schmid

and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).

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the sale about. Since the agent had nothing to do with the sale of the fire truck, he is not
entitled to any commission at all. Guardex v. NLRC, 191 SCRA 487 (1990).
Doctrine of Efficient Procuring Cause In agencies to sell where the entitlement of
the commission is subject to the successful consummation of the sale with the buyer located
by agent, said agent would still be entitled to the commission on sales consummated after
the expiration of his agency when the facts show that the agent was the efficient procuring
cause in bringing about the sale. Pratts v. Court of Appeals, 81 SCRA 360 (1978).
Although sale of object of agency was perfected three days after expiration of the agency,
agent would still be entitled to receive commission stipulated based on doctrine in Pratts v.
Court of Appeals, 81 SCRA 360 (1978), that when agent was the efficient procuring cause in
bringing about the sale he was entitled to compensation. Manotok Bros. Inc. v. Court of
Appeals, 221 SCRA 224 (1993).
Although buyer was introduced by broker to seller, nonetheless broker was not entitled to
commission even with the consummation of the sale because the lapse of the period of more
than one (1) year and five (5) months between the expiration of brokers authority to sell and
the consummation of the sale to the buyer, is significant index of the brokers nonparticipation 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 brokers commission. Inland Realty v. Court of Appeals, 273 SCRA 70 (1997).
Procuring cause, in describing a brokers activity, refers to a cause originating a series of
events which, without break in their continuity, result in the accomplishment of the prime
objective of the employment of the brokerproducing a purchaser ready, willing and able to
buy on the owners terms. To be regarded as the procuring cause of a sale as to be entitled
to a commission, a brokers efforts must have been the foundation on which the negotiations
resulting in a sale began. Medrano v. Court of Appeals, 452 SCRA 77 (2005).9
b. From Employment Contract
The relationship between corporation which owns and operates a theatre, and security
guard it hires to maintain the peace and order at the entrance of the theatre is not that of
principal and agent, because the principle of representation was in no way involved. xDela
Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954).10
The concept of a single person having the dual role of agent and employee while doing
the same task is a novel one in our jurisprudence, which must be viewed with caution
especially when it is devoid of any jurisprudential support or precedent. Read without
any clear understanding of fine legal distinctions, appears to speak of control by insurance
company over its agents. They are, however, controls aimed only at specific results in
undertaking an insurance agency, and are, in fact, parameters set by law in defining an
insurance agency and the attendant duties and responsibilities an insurance agent must
observe and undertake. They do not reach the level of control into the means and manner of
doing an assigned task that invariably characterizes an employment relationship as defined
by labor law. xTongko v. Manufacturers Life Insurance Co. (Phils.), 640 SCRA 395 (2011).
c. From Contract for a Piece-of-Work
That operator owed his position to the company which could remove or terminate him at
will; that the service station belonged to the company and bore its tradename and operator
sold only the products of the company; that equipment used by operator belonged to the
company and were just loaned to operator and company took charge of their repair and
maintenance; that an employee of the company supervised operator and conducted periodic
inspection of the companys gasoline and service station; that the price of the products sold
by the operator was fixed by the company and not by the operator; the finding of the Court of
Appeals that the operator was an agent of the company and not an independent contractor
should not be disturbed. xShell v. Firemens Ins. Co., 100 Phil 757 (1957).
d. Agency to Sell Differentiated from a Contract of Sale
When agency agreement compels agent to pay for the products received from principal
within the stipulated period, even when there has been no sale thereof to the public, the
relationship is not one of agency to sell, but one of actual sale. A true agent does not assume
personal responsibility for the payment of the price of the object of the agency; his obligation
is merely to turn-over to the principal the proceeds of the sale once he receives them from
the buyer. Consequently, since the underlying agreement is not an agency agreement, it
cannot be revoked at the will of the principal. xQuiroga v. Parsons, 38 Phil 502 (1918).
9Reiterated
10Mamaril

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

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

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When under the agreement the agent becomes responsible for any changes in the
acquisition cost of the object he has been authorized to purchase from a supplier in the
United States, the underlying agreement is not 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. xGonzalo Puyat v. Arco, 72 Phil. 402 (1941).
Primordial difference between a sale and an agency to sell is the transfer of ownership or
title over the subject property. In an agency, the principal retains ownership and control over
the property and the agent merely acts on the principal's behalf and under his instructions in
furtherance of the objectives for which the agency was established. On the other hand, the
contract is clearly a sale if the parties intended that the delivery of the property will effect a
relinquishment of title, control and ownership in such a way that the recipient may do with the
property as he pleases. xSpouses Viloria v. Continental Airlines, 663 SCRA 57 (2012).
e. From Agricultural Tenancy
There is no agency relationship existing in a tenancy arrangement over agricultural land: the
tenant farmer, who has possession of the land, and has sole discretion in all matters of
agricultural production, acts for his sole benefit and not under the control of the landowner, whose
only right under the set-up is to demand annually the delivery of the agreed number of cavanes of
palay, without any concern about how the cultivation could be improved in order to yield more
produce. xJusayan v.Sombilla, 746 SCRA 437 (2015).

II. FORMS AND KINDS OF AGENCY


1.

How Agency May Be Constituted (Art. 1869)


There are legal provisions which require certain contractual formalities: First, when form is
required for the validity of the contract; second, when it is required to make the contract
effective as against third parties; third, when the form is required for the purpose of proving
the contracts existence. A contract of agency to sell on commission basis does not belong to
any of these three categories, hence it is valid and enforceable in whatever form in may be
entered into. Consequently, when the agent signs her signature on any face of the receipt
showing that she receives the jewelry for her to sell on commission, she is bound to the
obligations of an agent. Lim v. Court of Appeals, 254 SCRA 170 (1996).
A contract of agency may be inferred from all the dealings between Oliver and Castro.
Agency can be express or implied from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency knowing that another person is acting on his
behalf without authority. 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. The question is ultimately one of intention. Oliver v. Philippine
Savings Bank, G.R. No. 214567, 04 April 2016.
a. From Side of the Principal (Art. 1869)
Where buyers failed for several years to clear their title to property purchased and allowed
seller-a-retro to remain in possession in spite of expiration of redemption period, execution of
memorandum of repurchase by buyers son-in-law, which stood for years unrepudiated,
constituted an implied agency under Art. 1869, from their silence or lack of action, or their
failure to repudiate the agency. xConde v. Court of Appeals, 119 SCRA 245 (1982).
Where the principal has acquiesced in the act of his agent for a long period of time, and
has received and appropriated to his own use the benefits result in from the acts of his agent,
courts cannot declare the acts of the agent null and void. Linan v. Puno, 31 Phil. 259 (1915).
b. From Side of the Agent (Arts. 1870, 1871 and 1872)
Whether or not an agency has been created is determined by the fact that one is
representing and acting for another. The law makes no presumption of agency; proving its
existence, nature and extent is incumbent upon the person alleging it. xUrban Bank v. Pea,
659 SCRA 418 (2011).
Whether or not an agency has been created is determined by the fact that one is
representing and acting for another. xJusayan v. Sombilla, 746 SCRA 437 (2015).
c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)
(i) Agency Is Not Presumed to Exist

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One who alleges the existent of an agency must prove such fact for the law does not
make presumption of agency and proving its existence, nature and extent is incumbent upon
the person alleging it. xYun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009). 11
Persons dealing with an agent must ascertain not only the fact of agency, but also the
nature and extent of the agents authority. A third person with whom the agent wishes to
contract on behalf of the principal may require the presentation of the power of attorney, or
the instructions as regards the agency. The basis for agency is representation and a person
dealing with an agent is put upon inquiry and must discover on his own peril the authority of
the agent. According to Article 1990 of the New Civil Code, insofar as third persons are
concerned, an act is deemed to have been performed within the scope of the agents
authority, if such as is within the terms of the power of attorney, as written. Salvador v.
Rabaja, 749 SCRA 654 (2015).12
The law does not presume agency; hence, proving its existence, nature and extent is
incumbent upon the person alleging it. xJusayan v. Sombilla, 746 SCRA 437 (2015).
(ii) Agency by Estoppel With Respect to Third Parties
Registered owner who placed in the hands of another an executed deed of transfer of the
registered land, has effectively represented to a third party that the holder of such document
is authorized to deal with the property. xBlondeau v. Nano, 61 Phil. 625 (1935).13
When owner of a hotel/caf business allows a person to use the title managing agent
and allows such person to take charge of the business during his prolonged absence,
performing the duties usually entrusted to managing agent, then such owner is bound by the
act of such person. One who clothes another apparent authority as his agent, and holds him
out to the public as such, 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 such person in good faith and
in the following pre-assumptions or deductions, which the law expressly directs to be made
from particular facts, are deemed conclusive. xMacke v. Camps, 7 Phil 522 (1907).
When the law firm has allowed for quite a period the messenger of another office to
receive mails and correspondence on their behalf, an implied agency had been duly
constituted, specially when there is no showing that counsel had objected to such practice or
took step to put a stop to it. xEquitable PCI-Bank v. Ku, 355 SCRA 309 (2001).
An agency by estoppel, which is similar to the doctrine of apparent authority, requires proof of
reliance upon the representations, and that, in turn, needs proof that the representations predated
the action taken in reliance. Country Bankers Insurance v Keppel Cebu Shipyard, 673

SCRA 427 (2012).

2.

KINDS OF AGENCY
a. Based on Business or Transactions Encompassed (Art. 1876): General or Universal
Agency versus Special or Particular Agency
Siasat v. IAC, 139 SCRA 238 (1985) describes them as follows:
Universal agent is authorized to do all acts for his principal which can lawfully be
delegated to an agent; such an agent may be said to have universal authority.
General agent is authorized to do all acts pertaining to a business of a certain kind or
at a particular place, or all acts pertaining to a business of a particular class or series.
He has usually authority expressly conferred in general terms or in effect made general
by the usages, customs or nature of the business which he is authorized to transact.
Special agent is authorized to do some particular act or to act upon some particular
occasion; he acts usually in accordance with specific instructions or under limitations
necessarily implied from the nature of the act to be done.
b. Whether It Covers Legal Matters: Attorney-at-Law versus Attorney-in-Fact
The relation of attorney and client is in many respects one of agency, and the general
rules of agency apply to such relation; the acts of an agent are deemed the acts of the
principal only if the agent acts within the scope of his authority. Therefore, only the employeeclient, not his counsel, can impugn the consideration of the compromise as being
unconscionable. On the other hand, although a client has undoubtedly the right to

11Nevada

v. Casuga, 668 SCRA 441 (2012).

12Woodschild Holdings, v. Roxas Electric and Construction Co., 436 SCRA 235 (2004); Manila Memorial Park v. Linsangan, 443 SCRA
377 (2004); Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012); Umipig v. People, 677 SCRA 53 (2012); Recio
v. Heirs of Spouses Altamirano, 702 SCRA 137 (2013).
13Domingo

v. Robles, 453 SCRA 812 (2005).

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compromise a suit without the intervention of his lawyer, the same cannot be done to defraud
the lawyer of the earned attorneys fees. xJ-Phil Marine v. NLRC, 561 SCRA 675 (2008).
An attorney cannot, without a clients authorization, settle the action or subject matter of
the litigation, even when he believes that such a settlement will best serve his clients
interest. xPhil. Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722 (2000).
c. Whether It Covers Acts of Administration or Acts of Dominion: General Power of
Attorney versus Special Power of Attorney
(1) Formal Requisite: Must Be in Writing and Signed by Principal
When no particular formality is required by law, then the principal may appoint his agent
in any form which might suit his convenience or that of the agent, in this case a letter
addressed to the agent requesting him to file a protest in behalf of the principal with the
Collector of Customs against the appraisement of the merchandise imported into the
country by the principal. xKuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).
A power of attorney to convey real property need not be in a public document, it need
only be in writing, since a private document is competent to create, transmit, modify, or
extinguish a right in real property. xJimenez v. Rabot, 38 Phil 378 (1918).
The dated letter relied upon by the petitioners was signed by Fernandez alone, without
any authority from the owners. There is no actuation of Fernandez in connection with her
dealings with the petitioners. As such, said letter is not binding on the respondents as
owners of the subject properties. xLitonjua v. Fernandez, 427 SCRA 478 (2004).
In a case involving authority to act in baranggay conciliation cases covering an
ejectment for failure to pay rentals: A power of attorney is an instrument in writing by which
one person, as principal, appoints another as his agent and confers upon him the authority
to perform certain specified acts or kinds of acts on behalf of the principal. The written
authorization itself is the power of attorney, and this is clearly indicated by the fact that it
has also been called a letter of attorney. xWee v. De Castro, 562 SCRA 695 (2008).
(2) How Powers of Attorney Construed or Interpreted
General rule is that a power of attorney must be strictly construed; it will be held to grant
only those powers that are specified, and the agent may neither go beyond nor deviate from
the power of attorney. xOlaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
Contracts of agency and general powers of attorney, must be interpreted in accordance
with the language used by the partiesthe real intention of the parties is primarily to be
determined from the language used, and to be gathered from the whole instrument. In case
of doubt, resort must be had to the situation, surroundings, and relations of the parties.
Whenever it is possible, effect is to be given to every word or clause used by the parties, for
it is to be presumed that the parties said what they intended to say and that they used each
word or clause with sole purpose, and that purpose is, if possible, to be ascertained and
enforced. If the contract be open to two constructions, one of which would while the other
would overthrow it, the former is to be chosen; if by one construction the contract would be
illegal, and by another equally permissible construction would be lawful, the latter must be
adopted. The acts of the parties will be presumed to be done in conformity with and not
contrary to the intent of the contract. The meaning of general words must be construed with
reference to the specific object to be accomplished and limited by the recitals made in
reference to such object. xLinan v. Puno, 31 Phil. 259 (1915).
(3) Notarized Power of Attorney
When a special power of attorney is duly notarized, the notarial acknowledgment is
prima facie evidence of the fact of its due executiona buyer has every reason to rely on a
persons authority to sell a particular property owned by a corporation on the basis of a
notarized board resolutionundeniably the buyer is an innocent purchaser for value in
good faith. xSt. Marys Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).14
3.

GENERAL POWERS OF ATTORNEY (Art. 1877)


Agency couched in general terms comprises only acts of administration, even if principal
should state that he withholds no power or that the agent may execute such acts as he may
consider appropriate, or even though the agency should authorize a general and unlimited
management. xYoshizaki v. Joy Training Center of Aurora, Inc., 702 SCRA 631 (2013).
Acts of Administration means to perform acts which the principal himself may pursue in
the ordinary course of the business, thus:

14Veloso

v. CA, 260 SCRA 593 (1996).

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When agent has been given general control and management of the business, he is
deemed to have power to employ such agents and employees as are usual and
necessary in the conduct of the business, and needs no SPA for such purpose. xYu
Chuck v. Kong Li Po, 46 Phil. 608 (1924).
A co-owner who is made an attorney-in-fact, with the same power and authority to deal
with the property which the principal might or could have had if personally present,
may retain the services of legal counsel to preserve the ownership and possession of
the principals property. xGovernment of PI v. Wagner, 54 Phil. 132 (1929).
Admissions obtained by agent from the adverse party prior to the formal amendment of
complaint that included principal as a party, can be availed of by the principal, since an
agent may do such acts as may be conducive to the accomplishment of the purpose of
the agency, admissions secured by the agent within the scope of the agency ought to
favor the principal. xBay View Hotel v. Ker & Co., 116 SCRA 327 (1982).
Power of administration does not include dispositions or encumbrances which are acts
of strict ownership. Authority to dispose cannot proceed from authority to administer,
and vice versa, for the two powers may only be exercised by an agent by following the
provisions Arts. 1876 to 1878. xAggabao v. Parulan Jr., 629 SCRA 562 (2010).
4.

SPECIAL POWERS OF ATTORNEY


Although document is entitled Special Power of Attorney its wordings show that it sought
only to establish an agency that comprises all the business of the principal within the
designated locality, but couched in general terms, and consequently was limited only to acts
of administration. A general power permits the agent to do all acts for which the law does not
require a special power, and only covers acts of administration. Dominion Insurance
Corp. v. Court of Appeals, 376 SCRA 239 (2002).
Even when instruments title is General Power of Attorney, but its operative clause
contains an authority to sell, it constituted the requisite special power of attorney to sell a
piece of land. Thus, there was no need to execute a separate and special power of attorney
since the general power of attorney had expressly authorized the agent or attorney in fact the
power to sell the subject property. Veloso v. Court of Appeals, 260 SCRA 593 (1996).
a. CASES WHERE SPECIAL POWERS OF ATTORNEY ARE NECESSARY (Art. 1878)
Article 1878 does not state that a special power of attorney must be in writing. As long as
the mandate is express, such authority may be either oral or written. We unequivocably
declared that the requirement under Art. 1878 refers to the nature of the authorization and
not to its form. Be that as it may, the authority must be duly established by competent and
convincing evidence other than the self serving assertion of the party claiming that such
authority was verbally given. Patrimonio v. Gutierrez, 724 SCRA 636 (2014).
(1) WITH RESPECT TO MATTERS INVOLVED IN LITIGATION INVOLVING THE PRINCIPAL:
(a) To Compromise
(b) To Submit Questions to Arbitration
(c) To Renounce the Right to Appeal from a Judgment
(d) To Waive Objections to the Venue of an Action
(e) To Abandon a Prescription Already Acquired
Power to Compromise Excludes Power to Submit to Arbitration;
Vice Versa (Art. 1880)
Power to Bring Suits in Behalf of the Principal to collect amounts accruing in the ordinary
course of business properly belonging to the class of acts described in Art. 1713 of the old
Civil Code as acts of strict ownership. Nonetheless, the provision in the power of attorney
to exact the payment of sums of money by legal means must be construed to be an
express power to sue. xGermann v. Donaldson, 1 Phil 63 (1901).
Although counsel asserted verbal authority to compromise, however, Sec. 23, Rule 138
require a special authority for attorneys to compromise the litigation of their clients. While
the same does not state that the special authority be in writing, courts has every reason to
expect, that, if not in writing, the same be duly established by evidence other than the selfserving assertion of counsel himself for, authority to compromise cannot lightly be
presumed. xHome Insurance Co. v. United Shipping Lines, 21 SCRA 863 (1967).
(2) WITH RESPECT TO MONEY OR FUNDS OF THE PRINCIPAL:
(2-A) To Make Payments Are Not Usually Considered as Acts of Administration
The payment of claims by the area manager of an insurance company is not an act of
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administration, and that since the settlement of claims was not included among the acts
enumerated in the SPA 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. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).
(2-B) To Collect or Receive Payments on Behalf of the Principal
The right of an agent to indorse check will not be lightly inferred. A salesman with authority
to collect money for his principal does not have the implied authority to indorse checks
received in payment. Any person taking checks made payable to a corporation which can act
only by agents does so at his peril, and must abide by the consequence if the agent who
indorses the same is without authority. xInsular Drug v. PNB, 58 Phil. 684 (1933).
(2-C) To Loan or Borrow Money
EXCEPT: Agent May Borrow Money When It Is Urgent and Indispensable for the
Preservation of the Things Which Are Under Administration
An SPA is necessary for an agent to borrow money, unless it be urgent and indispensable
for the preservation of the things which are under administration. Yasuma v. Heirs of Cecilio
S. De Villa, 499 SCRA 466 (2006). 15
Wife may not be held liable for the mortgage loan contracted by the husband personally,
where the power of attorney given to the husband was limited to a grant of authority to
mortgage land titled in the wifes name. De Villa v. Fabricante, 105 Phil. 672 (1959).
Entrusting by the principal of blank pre-signed checks to the agent, does not give the
agent the implied authority to enter into loan in the name of the principal. The contract of
agency and the special fiduciary relationship inherent in this contract must exist as a matter
of fact. The person alleging it has the burden of proof to show, not only the fact of agency, but
also its nature and extent. Patrimonio v. Gutierrez, 724 SCRA 636 (2014)
(3) WITH RESPECT TO OBLIGATIONS DUE TO/FROM THE PRINCIPAL:
(3-A) To Effect Novations Which Put an End to Obligations Already in Existence at the
Time the Agency Was Constituted
(3-B) To Waive Any Obligation Gratuitously
(3-C) To Ratify or Recognize Obligations Contracted Before the Agency
Where a wife gave her husband a power of attorney to loan and borrow money and to
mortgage her property, that fact does not carry with it or imply that he has a legal right to sign
her name to a promissory note which would make her liable for the payment of a pre-existing
debt of the husband or that of his firm, for which she was not previously liable, or to mortgage
her property to secure the pre-existing debt. B.P.I. v. De Coster, 47 Phil 594 (1925).
Where the power granted to attorney-in-fact was to the end that the principal-seller may
be able to collect the balance of the selling price of the printing establishment sold, such
agent had no power to enter into new sales arrangements with the buyer, or to novate the
terms of the original sale. Villa v. Garcia Bosque, 49 Phil 126 (1926).
(4) WITH RESPECT TO IMMOVABLE PROPERTIES:
(4-A) To Enter Into Any Contract by Which Ownership of an Immovable Is
Trans-mitted or Acquired, Gratuitously or For a Valuable Consideration
(4-B) Sale of a Piece of Land or Interest Therein (Art. 1874)
Old Civil Code: Under Sec. 335 of the Code of Civil Procedure, an agreement for the
leasing for a longer period than one year, or for the sale of real property, or of an interest
therein, is invalid if made by the agent unless the authority of the agent be in writing and
subscribed by the party sought to be charged. Rio y Olabbarrieta v.Yutec, 49 Phil 276 (1926).
Where nephew in his own name sold a house and lot to the company, when in fact it was
the uncles property, but in the estafa case filed by the company against the nephew, the
uncle swore that he had authorized his nephew to sell the property, the uncle can be
compelled in the civil action to execute the deed of sale covering the property. It having been
proven at the trial that he gave his consent to the said sale, it follows that the defendant
conferred verbal, or at least implied, power of agency upon his nephew Duran, who accepted
it in the same way by selling the said property. The principal must therefore fulfill all the
obligations contracted by the agent, who acted within the scope of his authority. (Arts. 1709,
1710 and 1727) Gutierrez Hermanos v. Orense, 28 Phil. 572 (1914).
15Gozun

v. Mercado 511 SCRA 305 (2006).

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Authority found in a power of attorney to sell any kind of realty that might belong to the
principal is deem to include also such as the principal might afterwards have or acquire
during the time it was in force. Katigbak v. Tai Hing Co., 52 Phil. 622 (1928).
Express mandate required by Art. 1874 is for power of attorney to expressly empower the
agent to sell land belonging to the principal. It need not contain a specific description of the
land to be sold, such that giving the agent the power to sell any or all tracts, lots, or parcels
of land belonging to the principal is adequate. Domingo v. Domingo, 42 SCRA 131 (1971).
Where SPA primarily empowered the agent of the corporation to bring an ejectment case
against the occupant and also to compromise . . . so far as it shall protect the rights and
interest of the corporation in the aforementioned lots, and that the agent did execute a
compromise in the legal proceedings filed which sold the lots to the occupant, the
compromise agreement is void for the power to sell by way of compromise could not be
implied to protect the interests of the principal to secure possession of the properties.
Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
The rule under Art. 1874 that when the sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be
void, applies when the sale of corporate piece of land is pursued through an officer without
written authority. City-Lite Realty Corp. v. Court of Appeals, 325 SCRA 385 (2000). 16
Art. 1878 provides that an SPA is necessary to enter into any contract by which the
ownership of an immovable is transmitted or acquired either gratuitously or for a valuable
consideration, or to create or convey real rights over immovable property, or for any other act
of strict dominion. Any sale of real property by one purporting to be the agent of the
registered owner without any authority therefore in writing from the said owner is null and
void; declarations of the agent alone are generally insufficient to establish the fact or extent
of her authority. Litonjua v. Fernandez, 427 SCRA 478 (2004).17
Under Art. 1878, an SPA is necessary for agent to enter into a contract by which the
ownership of an immovable property is transmitted or acquired, either gratuitously or for a
valuable consideration. Absence of a written authority makes sale of a piece of land is ipso
jure void, precisely to protect the interest of an unsuspecting owner from being prejudiced by
the unwarranted act of another. However, we apply estoppel principle to enforce of the sale
with respect to the principal. Pahud v. Court of Appeals, 597 SCRA 13 (2009).
As a general rule, an agency may be oral; however, Art. 1874 provides that the contract of
agency must be written for the validity of the sale of a piece of land or any interest therein;
otherwise, the sale shall be void. A related provision, Art. 1878 states that special powers of
attorney are necessary to convey real rights over immovable properties. Yoshizaki v. Joy
Training Center of Aurora, Inc., 702 SCRA 631 (2013). 18
(4-C) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2])
Prohibition against agents purchasing property held for sale or management is not
absolute; when so authorized by principal, agent is not disqualified from purchasing property
held under an agency to sell. xOlaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
(4-D) Power to Sell Excludes Power to Mortgage, Vice Versa (Art. 1879)
Where the power of attorney authorized agent By means of a mortgage of my real
property, to borrow and lend sums in cash, at such interest and for such periods and
conditions as he may deem property and to collect or to pay the principal and interest
thereon when due, while it did not authorize the agent to execute deeds of sale with right of
repurchase over the property of the principal, nonetheless would validate the main contract of
loan entered into with the deed of sale with right of repurchase constituting merely an
equitable mortgage. xRodriguez v. Pamintuan and De Jesus, 37 Phil 876 (1918).
Where power of attorney vested agent with authority for me and in my name to sign, seal
and execute, and as my act and deed, deliver any lease, any other deed for conveying any
real or personal property or any other deed for the conveying of any real or personal
property, it does not carry with it or imply that agent has power to execute a promissory note
or a mortgage to secure its payment. xPNB v. Tan Ong Sze, 53 Phil. 451 (1929).
An SPA to mortgage real estate is limited to such authority to mortgage and does not bind
the grantor personally to other obligations contracted by the grantee (in this case the
16San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002);
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
17Litonjua,

Jr. v. Eternit Corp., 490 SCRA 204 (2006).

18Estate

of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008); Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. v. PajoReyes, 632 SCRA 400 (2010); Recio v. Heirs of the Spouses Altamirano, 702 SCRA 137 (2013); Bautista v. Spouses Jalandoni, 710
SCRA 670 (2013).

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personal loan obtained by the agent in his own name from the PNB). In other words, the
power to mortgage does not include the power to obtain loans, especially when the grantors
allege that they had no benefit at all from the proceeds of the loan taken by the agent in his
own name from the bank. xPNBv. Sta. Maria, 29 SCRA 303 (1969).
In Agency, in order to bind the principal by a mortgage on real property executed by an
agent, it must upon its face purport to be made, signed and sealed in the name of the
principal, otherwise, it will bind the agent only. xGozun v. Mercado 511 SCRA 305 (2006).
(4-E) To Lease Real Property for More Than One Year
Art. 1878 expresses that a special power of attorney is necessary to lease any real
property to another person for more than one year, for such is considered not merely an act
of administration but an act of strict dominion or of ownership. xShoppers Paradise Realty v.
Roque, 419 SCRA 93 (2004).
Where lease contract involves the lease of real property for a period of more than one
year was entered into by an agent on behalf of the principle, Art. 1878 requires that the agent
be armed with an SPA to lease the premises; otherwise, the provisions of the contract of
lease, including the grant therein of an option to purchase to the lessee, would be
unenforceable. Vda. De Chua v. IAC, 229 SCRA 99 (1994).
(5) WITH RESPECT TO SPECIFIC CONTRACTS DEEMED PERSONAL TO THE PRINCIPAL:
(5-A) To Accept or Repudiate an Inheritance
(5-B) To Make Gifts
(5-C) To Bind the Principal to Render Some Service Without Compensation
(5-D) To Bind the Principal in a Contract of Partnership
(5-E) To Obligate the Principal as a Guarantor or Surety
When principal empowered his agent to mortgage his property, as well as a contract of
surety, but the agent only entered into a contract of mortgage, no inference can be made to
make the principal liable as a surety. xWise and Co. v. Tanglao, 63 Phil. 372 (1936).
Where a power of attorney is executed primarily to enable manager of a mercantile
business, to conduct its affairs for and on behalf of the principal-owner, i.e., act and deed
delivery, any lease, or any other deed for the conveying any real or personal property and
act and deed delivery, any lease, release, bargain, sale, assignment, conveyance or
assurance, or any other deed for the conveying any real or personal property, such cannot
be interpreted as giving the manager power to bind the principal to a contract of guaranty or
surety unconnected with the business. xDirector v. Sing Juco, 53 Phil 205 (1929).
SPA to approve loans does not carry power to bind the principal to a guaranty even to the
extent of the amount for which a loan could have been granted by agent. Guaranty is not
presumed, it must be expressed and cannot be extended beyond its specified limits (Director
v. Sing Juco, 53 Phil. 205). Where a wife gave her husband power to loan money, such fact
did not authorized him to make her liable as a surety for the payment of the debt of a third
person. BA Finance v. Court of Appeals, 211 SCRA 112 (1992).
A power of attorney authorizing agent to bind principal to a surety bond to a particular
entity, cannot be relied upon as sufficient authority to a surety bond issued to other persons
or entity. xCountry Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
(6) ANY OTHER ACT OF STRICT DOMINION

5.

Doctrine of Implied Powers Emanating from Express Powers Specific grants of


Powers of Dominion necessarily includes those implied powers or those necessary to fulfill
those powers of ownership granted, thus:
Empowering the agent to sell hemp in a foreign country, carries with it implied power to
make and enter into the usual and customary contract for its sale, which may provide
for settlement of issues by arbitration. xRobinson Fleming v. Cruz, 49 Phil 42 (1926).
An SPA to make an assignment of credits, hire lawyers to take charge of actions
necessary or expedient for principals interests, and defend suits brought against
principal, necessarily implies authority to pay for professional services thus engaged,
which includes assignment of the judgment secured for the principal in settlement of
outstanding fees. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
SPA to sell for such price or amount is broad enough to cover exchange in the Deed
of Assignment between the properties and the corresponding corporate shares in a
corporation, with the latter replacing the cash equivalent of the option money initially
agreed to be paid by the corporation under the MOA. xHernandez-Nievera v.
Hernandez, 642 SCRA 646 (2011).
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6.

Express Power of Attorney Excludes Powers of Administration


(e.g., General Power of Attorney)
Instrument which grants agent power To follow-up, ask, demand, collect and receipt for
my benefit indemnities or sum due me relative to the sinking of M.V. NEMOS in the vicinity of
El Jadida, Casablanca, Morocco on the evening of February 17, 1986, are SPAs, and
exclude any intent to grant a GPA or to constitute a universal agency. Being SPAs, they must
be strictly construed, and cannot be read to give power to the attorney-in-fact to obtain,
receive, receipt from the insurance company the proceeds arising from the death of the
seaman-insured, especially when the commercial practice for group insurance of this nature
is that it is the employer-policyholder who took out the policy who is empowered to collect the
proceeds on behalf of the covered insured or their beneficiaries. Pineda v. Court of
Appeals, 226 SCRA 754 (1993).

III. POWER, DUTIES AND OBLIGATIONS OF THE AGENT


1.

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

2.

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

3.

DUTY OF OBEDIENCE
a. Agent Must Act In the Name of the Principal, Within the Scope of His
Authority (Art. 1881)
(i)

Act Deemed to Have Been Performed within the Scope of Agents Authority,
If Such Act Is Within the Terms of the Written Power of Attorney, Even If in
Fact the Agent Exceeded the Limits of the Authority According the Private
Understanding With the Principal (Art. 1900)
(ii) Authority of Agent Shall Not Be Deemed Exceeded If Performed in a Manner
More Advantageous to Principal. (Art. 1882)19
b. Primary Obligation of Agent Is to Carry Out Agency in Accordance with Principals
Instructions (Art. 1887)
If Agent Followed Instructions, Principal Cannot Set-up Agents Ignorance or
Circumstance which Principal Was/Ought to Have Been Aware Of (Art. 1899)
Pursuant principals instructions, agent purchased a piece of land in their names using
the sums given by principals, and thereafter principals had ratified the transaction and even
received profits arising from the investment in the land. Since there is nothing which would
indicate that agent failed to exercise reasonable care and diligence in the performance of his
duty, or that he undertook to guarantee the vendors title to the land purchased, the eventual
loss sustained by said principals from a defect in the title in the land cannot be a basis to hold
the agent personally liable for damages. xNepomuceno v. Heredia, 7 Phil 563 (1907).
When an agent in executing the orders and commissions of his principal carries out the
instructions he has received from his principal, and does not appear to have exceeded his
authority or to have acted with negligence, deceit or fraud, he cannot be held responsible for
the failure of his principal to accomplish the object of the agency. Agents, although they act in
representation of the principal, are not guarantors for the success of the business enterprise
they are asked to manage. xGuiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).
When bank officers, acting as agent, had not only gone against the instructions, rules and
regulations of the bank in releasing loans to numerous borrowers who were not qualified,
then such bank officers are liable personally for the losses sustained by the bank. That bank
had also filed suits against the borrowers to recover the amounts given does not amount to
ratification of the acts done by the bank officers. xPNB v. Bagamaspad, 89 Phil. 365 (1951).
19See

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

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c. Effects of Acts Done Within the Scope of Agents Authority: Valid, and Principal Is
the One Liable; Agent Is Not Personally Liable (Art. 1881)
Under Art. 1881, when agent acts within the scope of authority, principal is bound by acts
effected in his behalf, whether or not third person dealing with the agent believes that the
agent has actual authority. xSargasso Const. & Dev. Corp. v. PPA, 623 SCRA 260 (2010).
The legal impact of Art. 1881 which provides that the agent must act within the scope of
his authority, is that the gent is granted the right to affect the legal relations of his principal
by the performance of acts effectuated in accordance with the principal's manifestation of
consent. Pacific Rehouse Corp. v. EIB Securities, Inc., 633 SCRA 214 (2010).
d. Effects When Agents Act Beyond the Scope of His Authority: Unenforceable, Not
Void; UNLESS PRINCIPAL RATIFIES, WHICH MAKE IT VALID (Arts. 1317, 1403 and 1898)
When money received as a deposit by an agent is given to principal, with notice that it is
the money of the depositor, principal is bound to return to depositor, even if his agent was not
authorized to receive such deposit. [There has, in effect, ratification of the unauthorized act of
the agent, thereby binding the principal]. xCason v. Rickards, 5 Phil 639 (1906).
When the administrator enters into a contract that is outside of the scope of authority, the
contract would nevertheless not be an absolute nullity, but simply voidable [unenforceable!] at
the instance of the parties who had been improperly represented, and only such parties can
assert the nullity of said contracts as to them. xZayco v. Serra, 49 Phil 985 (1925).
Under Art. 1898, acts of an agent beyond the scope of his authority do not bind the
principal, unless the latter ratifies the same expressly or impliedly. When third person knows
that the agent was acting beyond his power or authority, the principal cannot be held liable for
the acts of the agent. If the said third person is aware of the limits of the authority, he is to
blame, and is not entitled to recover damages from the agent, unless the latter undertook to
secure the principals ratification. Cervantes v. Court of Appeals, 304 SCRA 25 (1999). 20
Even when attorney-at-law in forging a compromise agreement, had exceeded his
authority in inserting a penalty clause, same is not void but merely voidable [unenforceable!],
i.e., capable of being ratified. Clients failure to question the inclusion of the penalty clause
despite several opportunities to do so and with the representation of new counsel, was
tantamount to ratification. xBorja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003).
Contracts entered in the name of another person by one who has been given no authority
or legal representation or who has acted beyond his powers are unauthorized contracts and
are unenforceable (!), unless they are ratified. xGozun v. Mercado 511 SCRA 305 (2006).
e. Effects When Agent Acts in His Own Name (Art. 1883):
Principal Has No Right Against Third Person Contracting with Agent
Agent Is Directly Bound to Third Person as If the Transaction Were His Own
EXCEPT: When Contract Involves Things Belonging to Principal
It being established that the agent acted in his own name in selling the merchandise to the
defendants who fully believed that they were dealing with the said agent on his own, without
any knowledge that he was the agent of the plaintiffs, and having paid him in full for the
merchandise purchased, they are not liable to the plaintiffs, for said merchandise. xLim Tiu v.
Ruiz & Rementeria, 15 Phil. 367 (1910).
Even when the agent has written authority to convey real property, nevertheless when the
deed of sale was executed by the agent in her own name without showing the capacity in
which she acted, although the act was doubtless irregular, the deed operated to bind the
principal who had authorized the sale. xJimenez v. Rabot, 38 Phil. 378 (1918).
Under Art. 1883, if agent acts in his own name, principal has no right of action against the
persons with whom he has contracted; neither have such persons against the principal. In
such case, agent is directly bound in favor of the person with whom he has contracted, as if
the transaction were his own, except when the contract involves things belonging to the
principal. xSmith Bell v. Sotelo Matti, 44 Phil. 874 (1922); xMarimperio Cia. Naviera, S.A. v.
CA, 156 SCRA 368 (1987).
When agent executes a contract in his personal capacity, the fact that he is described in
the contract as agent of the principal and the properties mortgaged pertain to the principal,
may not be taken to mean that he enters into the contract in the name of the principal. A
mortgage on real property of the principal not made and signed in the name of the principal is
not valid as to the principal. xPhil. National Bank v. Palma Gil, 55 Phil. 639 (1931). 21
20Reiterated

in Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001).

21Reiterated in Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925); PNB v. Agudelo, 58 Phil 655 (1933); Rural Bank of
Bombon v. CA, 212 SCRA 25 (1992); Gozun v. Mercado 511 SCRA 305 (2006).

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Where a co-owner transfers the entirety of the mining claim to the buyer, who knew that it
included the one-half share pro-indiviso of the other co-owner, the transaction may be
considered as one where the disposing co-owner acted as agent of the other co-owner.
Consequently, under Art. 1883, such other co-owner may sue the person with whom the
agent dealt with in his (agents) own name, when the transaction involves things belong to
the principal. xGoldstar v. Lim, 25 SCRA 597 (1968).
When a commission agent enters into a shipping contract in his own name to transport
NFA grains on a vessel owned by a shipping company, NFA cannot claim it is not liable to the
shipping company under Art. 1883 when things belong to the principal are dealt with, agent is
bound to the principal although he does not assume the character of such agent and appears
acting in his own name. If the principal can be obliged to perform his duties under the
contract, then it can also demand the enforcement of its rights arising from the contract. xNFA
v. IAC, 184 SCRA 166 (1990).
(1) Provisions Are Without Prejudice to Actions Between Principal and Agent
Where plaintiffs appointed defendant to purchase a vessel and giving him money for that
purpose, but the agent purchased the boat and placed it in his own name, he has breached
his fiduciary obligation and is obliged to transfer the same to the plaintiffs, or the plaintiffs
have a right to be subrogated. According to the exception under Art. 1717 (old Civil Code)
when things belonging to the principal are dealt with, the agent is bound to the principal
although he does not assume the character of such agent and appears acting in his own
name. xSy-Juco v. Sy-Juco, 40 Phil. 634 (1920).
4.

DUTY OF DILIGENCE:
a. Agent Must Exercise Due Diligence in the Pursuit of the Principals Business
b. Agent Should Not Act If It Would Manifestly Result in Damage to Principal (Art.
1888)
c. Agent Also Liable Personally (with the Principal) for Fraud and Negligence
Committed in Pursuit of the Principals Affairs (Arts. 1884 and 1909)
The provision is clear that an agent is bound to carry out the agency. The relationship
existing between principal and agent is a fiduciary one, demanding conditions of trust and
confidence. It is the duty of the agent to act in good faith for the advancement of the interests
of the principal. In this case, BPI had the obligation to carry out the agency by informing the
beneficiary, who appeared before BPI to withdraw funds of the insured who was BPI's
depositor, not only of the existence of the insurance contract but also the accompanying
terms and conditions of the insurance policy in order for the beneficiary to be able to properly
and timely claim the benefit. Bank of the Philippine Islands v. Laingo, G.R. No. 205206,
16 March 2016.
What Shall Aggravate or Mitigate Liability Arising Out of Negligence Whether
Agency Was for a Compensation or Was Gratuitous
He who seeks to make agent liable has the burden to show that the losses and damage
were occasioned by his fault or negligence; mere allegation without substantiation is not
enough to make the agent personally liable. xHeredia v. Salina, 10 Phil 157 (1908).
While an agent who acts for a revealed principal does not become personally bound to the
other party, yet that rule does apply when the agent intercepted and appropriated for himself
the thing which the principal is bound to deliver, and thereby made the performance of the
principal impossible. The agent in any event must be precluded from doing any positive act
that could prevent performance on the part of his principal, otherwise the agent becomes
liable also on the contract. xPhil. National Bank v. Welsh Fairchild, 44 Phil 780 (1923).
Where holder of an exclusive and irrevocable power of attorney to make collections, failed
to collect the sums due to principal and thereby allowed the allotted funds to be exhausted by
other creditors, such agent has failed to act with the care of a good father of a family required
under Art. 1887 and became personally liable for the damages which the principal may suffer
through his non-performance. Phil. National Bank v. Manila Surety, 14 SCRA 776 (1965).
In stressing that it was acting only as a collecting agent, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal; this is not exactly true. On
the contrary, Art. 1909 clearly provides that the agent is responsible not only for fraud, but
also for negligence. xMetrobank v. Court of Appeals, 194 SCRA 169 (1991).
Provision in mortgage contract that in case of accident or loss, finance company shall
make a proper claim against insurance company, was in effect an agency, and under Art.
1884, finance company was bound by its acceptance to carry out the agency. In spite of
borrowers instructions to make such claims, it insisted on having the vehicle repaired but
eventually resulting in loss of the insurance coverage, the finance company had breached its
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duty of diligence, and must assume the damages suffered by borrower, and can no longer
collect on the balance of the mortgage loan. BA Finance v. CA, 201 SCRA 157 (1991).
It is well-settled that agent is also responsible for any negligence in performance of its
function (Art. 1909) and is liable for damages which principal may suffer by reason of its
negligent act. (Art. 1884). British Airways v. Court of Appeals, 285 SCRA 450 (1998). 22

5.

DUTY OF LOYALTY:
a. Agent Shall Be Liable for Damages Sustained by the Principal Where in Case of
Conflict-of-Interests Situations, He Should Prefer His Own Interest (Art. 1889)
b. Agent Is Prohibited from Buying Property Entrusted to Him for Administration or
Sale Without Principals Consent (Art. 1491[2]).
Where agent by means of misrepresentation of the condition of the market induces
principal to sell to him the property consigned to his custody at a price less than that for
which he has already contracted to sell part of it, and who thereafter disposes of the whole at
an advance, is liable to principal for the difference. Such conduct constituted fraud, entitling
principal to annul the sale. Although commission earned by agent on the fraudulent sale may
be disallowed, nonetheless commission earned from other transactions which were not
tainted with fraud should be allowed. xCadwallader v. Smith Bell, 7 Phil. 461 (1907).
General manager, who also was the majority stockholder, and designated to be the main
negotiator for the company with the Government for the sale of its large tract of land, having
special knowledge of commercial information that would increase the value of the shares in
relation to the sale of the land to the Government, can be treated legally as being an agent of
the stockholders, with a fiduciary obligation to reveal to other stockholders such special
information before proceeding to purchase from the other stockholders their shares of stock.
If he purchases the shares of a stockholder without having disclosed important facts or to
render the appropriate report on the expected increase in value of the company, there was
fraud committed for which the director shall be liable for the earnings earned against the
stockholder on the sale of shares. xStrong v. Guiterrez Repide, 41 Phil. 947 (1909).
A confidential employee who, knowing that his principal was negotiating with the owner of
some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his
wife, commits an act of disloyalty and infidelity to his principal, whereby he becomes liable,
among other things, for the damages caused, which meant to transfer the property back to
the principal under the terms and conditions offered to the original owner. xSing Juco and
Sing Bengco v. Sunyantong and Llorente, 43 Phil 589 (1922).
Uncle who was acting as agent/administrator of property belonging to a niece had
procured Torrens title in his own name is deemed to be a trustee, and must surrender the
property and transfer title to the niece. The relations of an agent to his principal are fiduciary
and agent is estopped from acquiring or asserting a title adverse to that of the principal.
Consequently, an action in personam will lie against an agent to compel him to return or
retransfer to his principal, or the latters estate, the real property committed to his custody as
such agent and also to execute the necessary documents of conveyance to effect such
retransfer. xSeverino v. Severino, 44 Phil. 343 (1923).
Agent cannot represent both himself and his principal in a transaction involving the shifting
to another person of the agents liability for a debt to the principal. xAboitiz v. De Silva, 45
Phil 883 (1924).
Under Art. 267 of Code of Commerce which declared that no agent shall purchase for
himself or for another that which he has been ordered to sell, then a sale by a broker to
himself without the consent of the principal would be void and ineffectual whether the broker
has been guilty of fraudulent conduct or not. Consequently, such broker is not entitled to
receive any commission under the contract, much less any reimbursement of expenses
incurred in pursuing and closing such sales. The same prohibition is now contained in Art.
1491(2) of Civil Code. xBarton v. Leyte Asphalt, 46 Phil 938 (1924).
When an agent is involved in the perpetration of fraud upon his principal for his extrinsic
benefit, he is not really acting for the principal but is really acting for himself, entirely outside
the scope of his agency the basic tenets of agency rest on the highest consideration of
justice, equity and fair play, and an agent will not be permitted to pervert his authority to his
own personal advantage. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
Relation of agent to his principal is fiduciary and, an agent is estopped from acquiring or
asserting a title adverse to that of the principala position analogous to that of a trusteehe
cannot, consistently with the principles of good faith, be allowed to create in himself an

22Also

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

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

23Also

Guzman v, CA, 99 Phil. 703, 706-707 (1956); Balerta v. People of the Philippines, 743 SCRA 166 (2014).

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those which he still owes, after the expiration of the agency, from the time of his default.
xMendezonna v. Vda. De Goitia, 54 Phil 557 (1930).
The successor-in-interest of the principal is not entitled to collect interest from the agent of
the father for sums loaned to and collected by the agent from various persons for the
deceased principal. In all the aforementioned transactions, the defendant acted in his
capacity as attorney-in-fact of the deceased father, and there being no evidence showing that
he converted the money entrusted to him to his own use, he is not liable for interest thereon,
in accordance with Art.1724 of the Civil Code. xDe Borja v. De Borja, 58 Phil 811 (1933).

6.

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


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

7.

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


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

24Also

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

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8.

Liability When Two Or More Agents Appointed by the Same Principal:


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

9.

RULE ON LIABILITY RULES TO THIRD PARTIES: Agent Not Bound to Third Parties; It Is
the Principal Who Is Bound by the Contracts Entered Into By the Agent (Art. 1897)
A promissory note and mortgages executed by agent for and on behalf of his principal, in
accordance with a power of attorney, are valid, and as provided by Art. 1727, the principal
must fulfill the obligations contracted by the agent. xPNB v. Palma Gil, 55 Phil. 639 (1931).
The settlement or adjustment agent in the Philippines of a New York insurance company
is no different from any other agent from the point of view of his responsibility: whenever he
adjusts or settles a claim, he does it in behalf of his principal, and his action is binding upon
his principal, and the agent does not assume any personal liability, and he cannot be sued on
his own right; the recourse of the insured is to press his claim against the principal. xSalonga
v. Warner Barnes, 88 Phil 125 (1951). 25
A resident agent, as a representative of the foreign insurance company, is tasked only to
receive legal processes on behalf of its principal and not to answer personally for the any
insurance claims. xSmith Bell v. Court of Appeals, 267 SCRA 530 (1997).
Where buyer effects payment of part of purchase price to one of sellers creditors
pursuant to the terms of the deed of sale, there is no subrogation that takes place, as the
buyer then merely acts as an agent of seller effecting payment that was due to the seller in
favor of a third-party creditor. xChemphil Export v. Court of Appeals, 251 SCRA 217 (1995).
Agents who have been authorized to sell parcels of land cannot claim personal damages
in the nature of unrealized commission where the buyer refuses to proceed with the sale. The
rendering of such service did not make them parties to the contracts of sale executed in
behalf of the latter. Since a contract may be violated only by the parties thereto as against
each other, the real parties-in-interest, either as plaintiff or defendant, in an action upon that
contract must, generally, either be parties to said contract. xUy v. Court of Appeals, 314
SCRA 69 (1999). 26
A person acting as a mere representative of another acquires no rights whatsoever, nor
does he incur any liabilities arising from the said contract between his principal and another
party. xAngeles v. PNR, 500 SCRA 444 (2006). 27
Art. 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally
liable to the party with whom he contracts; it is the principal who is liable on the contracts of
the agent. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).28
Since, as a rule, the agency, as a contract, is binding only between the contradicting
parties, then only the parties, as well as the third person who transacts with the parties
themselves, may question the validity of the agency or the violation of the terms and
conditions found therein. xVillegas v. Lingan, 526 SCRA 63 (2007).
a. EXCEPT: When Agent Expressly Binds Himself (Art. 1897):
When the attorney-in-fact of the owner of a parcel of land acted within the scope of his
authority by mortgaging the property of the principal, the principal is bound by the mortgage,
and cannot use the fact that the agent has also bound himself personally to the debt. There is
nothing in the law which prohibits an agent from binding himself personally for the debt
incurred in behalf of the principal. In fact the law recognizes such undertaking as valid and
binding on the agent. xTuason v. Orozco, 5 Phil 596 (1906).
Under Art. 1897, an agent who expressly binds himself to the contract entered into on
behalf of the principal becomes personally bound thereto . But the doctrine is not applicable

25Also

E Macias & Co. v. Warner, Barnes & Co., 43 Phil 155 (1922).

26Ormoc

Sugarcane Planters Assn. v. CA, 596 SCRA 630 (2009).

27Chua v. Total Office Products and Services, 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA 93 (2006); Chong v. CA,
527 SCRA 144 (2007); Heirs of Eugenio Lopez, Sr. v. Querubin, 753 SCRA 371 (2015).

28Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

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viceversa, since everything agreed upon by the principal to be binding on himself is not
legally binding personally on the agent. Thus, when the previous agent of the union bound
itself personally liable on the contracts of the union, the new agent is not bound by the
assumption undertaken by original agent. xBenguet v. BCI Employees, 23 SCRA 465 (1968).
b. EXCEPT: When Agent Exceeds Authority Without Giving Notice of Limited Powers
(Art. 1897) Only the Agent Is Liable, Principal Is Not Liable Unless He Ratifies.
Under Art. 1897 when an agent acts in behalf of the principal, he cannot be held liable
personally, except when he acts outside the scope of his authority. Thus, a third party cannot
generally sue on the contract seeking both principal and agent to be liable thereon, for by
suing the principal, the agent is deemed not to be personally liable. On the other hand, if the
agent is being sued on the basis that he acted outside the scope of his authority, then it does
not make sense to be also suing the principal who cannot be held liable for the acts of the
agent outside the scope of his authority. At any rate, Art. 1897 does not hold that in cases of
excess of authority, both the agent and the principal are liable to the other contracting party.
xPhil. Products Co. v. Primateria Society Anonyme, 15 SCRA 301 (1965). 29
Where an agent defies the instructions of its principal in New York not to proceed with the
sale due to non-availability of carriage, it has acted without authority or against its principals
instructions and holds itself personally liable for the contract it entered into with the local
company. National Power v. NAMARCO, 117 SCRA 789 (1982).
c. EXCEPT: When Agent Acts with Fraud or Negligence: Solidarily Bound with Principal
The rule relied upon by the agent to avoid the imposition of the liquidated damages
provided for in the contract of sale that every person dealing with an agent is put upon inquiry
and must discover upon his peril the authority of the agent would apply if the principal is
sought to be held liable on the contract entered into by the agent. That is not so in this case
for it is the agent that it sought to be held liable on a contract which was expressly repudiated
by the principal because the agent took chances, it exceeded its authority, and, in effect, it
acted in its own name. xNAPOCOR v. NAMARCO, 117 SCRA 789, 800 (1982).
The practice in group insurance business, which is consistent with the jurisprudence
thereon in the State of California from whose laws our Insurance Code has been mainly
patterned, is that the employer-policyholder who takes out the insurance for its officers and
employees, is the agent of the insurer who has authority to collect the proceeds from the
insurer. In this case, the insurer, through the negligence of its agent, allowed a purported
attorney-in-fact whose instrument does not clearly show such power to collect the proceeds,
it was liable therefor under the doctrine that the principal is bound by the misconduct of its
agent. xPineda v. Court of Appeals, 226 SCRA 754 (1993).
Where lending bank required borrower to obtain a mortgage-redemption-insurance and
deducted the premiums thereto from the loan proceeds, it was wearing two hats, as a lender
and as insurance agent. When it turned out that the bank knew or ought to have known that
borrower was not qualified at his age for MRI coverage which prevented his insurance
coverage at the time of the borrowers death, the bank was deemed to have been an agent
who acted beyond the scope of its authority. Under Art. 1897, if third person dealing with an
agent is unaware of the limits of the authority conferred by the principal and third person has
been deceived by the non-disclosure thereof by the agent, then the latter is liable for
damages to him. The rule is founded upon the supposition that there has been some wrong
or omission on his part either in misrepresenting, or in affirming, or concealing the authority
under which he assumes to act. DBP v. Court of Appeals, 231 SCRA 370 (1994).
Every principal is subject to liability for loss caused to another by the latters reliance upon
a deceitful representation by an agent in the course of his employment (1) if the
representation is authorized; (2) if it is within the implied authority of the agent to make for the
principal; or (3) if it is apparently authorized, regardless of whether the agent was authorized
by him or not to make the representation. xPahud v. CA, 597 SCRA 13 (2009).
d. Agent Is Criminally Liable for Crime Committed in the Pursuit of the Agency
The Law on Agency has no application in criminal cases, and no man can escape
punishment when he participates in the commission of a crime upon the ground that he
simply acted as an agent of any party. xPeople v. Chowdury, 325 SCRA 572 (2000).

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


a. Commission Agent Responsible for Goods Received According to Terms and
Conditions and as Described in Consignment (Art. 1903)
EXCEPT: When Has Made Written Statement of Damage/Deterioration (Art. 1903)
29Reiterated

in Eurotech Industrial Technologies v. Cuizon, 521 SCRA 584 (2007).

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In sale on consignment, as a form of agency, consignee-agent is relieved from his liability


to return the goods received from the consignor-principal when it is shown by preponderance
of evidence in the civil case brought that the goods were taken from the custody of the
consignee by robbery, and no separate conviction of robbery is necessary to avail of the
exempting provisions under Art. 1174 for force majeure. xAustria v. Court of Appeals, 39
SCRA 527 (1971).
b. Agent Handling Various Goods for Different Owners (Art. 1904): He Must
Distinguish Them by Countermarks If Goods of Same Kind and Mark
PURPOSE: To Prevent Conflict of Interest Among Owners
COMPARE: Contracts of Deposit under Art. 1976: Depositary May Commingle Grain
or Other Articles of Similar Nature and Quality Ownership pro-rata
c. Commission Agent Cannot Sell on Credit Without Principals Consent (Art. 1905)
OTHERWISE: Considered as Cash Sales
Whether as an agency to sell or a contract of sale, liability of Green Valley is indubitable.
Adopting Green Valleys theory that the contract is an agency to sell, it is liable because it
sold on credit without authority from its principal. Under Art. 1905, without the express or
implied consent of principal, commission agent cannot sell on credit; should it do so principal
may demand from him payment in cash. Green Valley v. IAC, 133 SCRA 697 (1984).
d. When With Principals Authority to Sell on Credit: (Art. 1906)
Inform the Principal with Statement of Buyers Names;
Effect of Non-Compliance Considered Cash Sale
e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907):
He Shall Bear the Risk of Collection
He Shall Pay Principal the Proceeds on Same Terms Agreed with Purchaser
f. Liability for Failure to Collect Principals Credit When Due (Art. 1908)
Liability for Damages
Unless Due Diligence Proven

IV. OBLIGATIONS OF THE PRINCIPAL


1.

OBLIGATIONS OF PRINCIPAL WITH THIRD PARTIES WITH WHOM THE AGENT CONTRACTS
a. The Principal Is Bound By the Contracts Entered Into by the Agent:
Entered Into in the Name of the Principal (Art. 1883)
Done Within Agents Scope of Authority (Art. 1897)
And Even When the Agent Acts with Negligence or Fraud (Art. 1909)
Where authorized agent failed to indicate in the mortgage that she was acting for and on
behalf of her principal; and the Real Estate Mortgage explicitly shows on its face that it was
signed by agent in her own name and in her own personal capacity. Thus, consistent with the
law on agency, the principal cannot be bound by the acts of the agent. The third-party bank
has no one to blame but itself: Not only did it act with undue haste when it granted and
released the loan in less than three days, it also acted negligently in preparing the Real
Estate Mortgage as it failed to indicate that agent was signing it for and on behalf of principal.
xBucton v. Rural Bank of El Salvador, Inc., 717 SCRA 278 (2014).
Since the general rule is that the principal is bound by the acts of his agent in the scope of
the agency, therefore when the agent had full authority to make the tax returns and file them,
together with the check payments, with the Collector of Internal Revenue on behalf of the
principal, then the effects of dishonesty of the agent must be borne by the principal, not by an
innocent third party who has dealt in good faith with the dishonest agent. xLim Chai Seng v.
Trinidad, 41 Phil. 544 (1921).
A person with whom an agent has contracted in the name of his principal, has a right of
action against the purported principal, even when the latter denies the authority of the agent,
in which case the party suing has the burden of proving the existence of the agency. If the
agency relation is proved, then the principal shall be held liable, and the agent who is made a
party to the suit cannot be held personally liable. On the other hand, if the agency
relationship is not proven, it would be the agent who would become liable personally on the
contract. xNantes v. Madriguera, 42 Phil. 389 (1921).
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As a general rule, the mismanagement of the business by his agents does not relieve said
party-principal from the responsibility that he had contracted with third persons. xCommercial
Bank & Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).
Where petitioners had issued a check in payment of the judgment debt and made
arrangements with the bank to allow the encashment thereof, but check was dishonored by
the bank which increased the amount of the judgment debt, then the defense of petitioner
that he cannot be held liable for the oversight of the bank is untenable: Principal is
responsible for the acts of the agent, done within the scope of his authority, and should bear
the damages caused upon third parties; petitioners remedy is recover from the bank. xLopez
v. Alvendia, 12 SCRA 634 (1964).
Where principal issued the checks in full payment of the taxes due, but his agents had
misapplied the check proceeds, the principal would still be liable, because when a contract of
agency exists, the agents acts bind his principal, without prejudice to the latter seeking
recourse against the agent in an appropriate civil or criminal action. xDy Peh v. Collector of
Internal Revenue, 28 SCRA 216 (1969).
When a third party admitted that she had contracted with the principal through a duly
authorized agent, and then sues both the principal and the agent on an alleged breach of that
contract, and in fact later on dismisses the suit insofar as the principal is concerned, there
can be no cause of action against the agent. Since it is the principal who should be
answerable for the obligation arising from the agency, it is obvious that if a third person
waives his claims against the principal, he cannot assert them against the agent. xBedia v.
White, 204 SCRA 273 (1991).
The fact that the agent defrauded the principal in not turning over the proceeds of the
transactions to the latter cannot in any way relieve or exonerate such principal from liability to
the third persons who relied on his agents authority. It is an equitable maxim that as between
two innocent parties, the one who made it possible for the wrong to be done should be the
one to bear the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993).
Principal is not absolve from damages sustained by its buyer based on the fault primarily
caused by its agent in pointing to the wrong lot, since under Arts. 1909 and 1910, the liability
of the principal for acts done by the agent within the scope of his authority do not exclude
those done negligently. Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996).
b. Agents Written Power of Attorney, Insofar as Concerns Third Persons, Governs on
Questions Whether Agent Acted Within Scope of Authority Even if it Exceeds
Authority According to Understanding Between Principal and Agent (Art. 1900)
As far as third persons are concerned, an act is deemed to have been performed within
the scope of the agents authority, if such is within the terms of the power of attorney, as
written, even if the agent has in fact exceeded the limits of his authority according to an
understanding between the principal and his agent. xEugenio v. Court of Appeals, 239 SCRA
207 (1994). CONSEQUENTLY:
Spouses Rabaja did not recklessly enter into a contract to sell with Gonzales. They
required her presentation of the power of attorney before they transacted with her
principal. And when Gonzales presented the SPA to Spouses Rabaja, the latter had no
reason not to rely on it. Salvador v. Rabaja, 749 SCRA 654 (2015).
Where wife gave husband a power of attorney to loan and borrow money, and for such
purpose to mortgage her property, the resulting transactions are binding upon the wife
regardless of what the husband may have done with the loan proceeds. Bank of P.I. v.
De Coster, 47 Phil 594 (1925).
Where memorial park company authorized its agent to solicit and remit offers to
purchase internment spaces obtained on forms provided therefore, then the terms of the
offer to purchase, therefore, are contained in such forms and, when signed by the buyer
and an authorized officer of the company, becomes binding on both the company and
said buyer. Any arrangement, term or condition outside of those provided in the form do
not bind the principal, since the same were made obviously outside the agents authority.
When the power of the agent to sell are governed by the written form, it is beyond the
authority of the agent as a fact that is deemed known and accepted by the third person,
to offer terms and conditions outside of those provided in writing. Manila Memorial
Park Cemetery v. Linsangan, 443 SCRA 377 (2004).
It is a settled rule that third persons dealing with an assumed agent, whether the assumed
agency be a general or special one, are bound at their peril if they would hold the principal
liable, to act with ordinary prudence and reasonable diligence to ascertain (i) not only the fact
of agency, (ii) but also the nature and extent of authority, and in case either is controverted,

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the burden of proof is upon them to establish it. Harry Keeler v. Rodriguez, 4 Phil. 19
(1922). 30 CONSEQUENTLY:
Where a bank accepted a letter of guarantee signed by a mere credit administrator on
behalf of the finance company, the burden was on the bank to satisfactorily prove that
the credit administrator with whom they transacted acted within the authority given to
him by his principal. xBA Finance v. Court of Appeals, 211 SCRA 112 (1992).
When one knowingly deals with the sales representative of a car dealer company, it is
incumbent upon such person to know the extent of the sales representatives authority
as an agent in respect of contracts to sell the vehicles. Such person ought to know that
he is dealing with an agent, normal business practice does not warrant a sales
representative to have power to enter into a valid and binding contract of sale for the
company. xToyota Shaw, Inc. v. CA, 244 SCRA 320 (1995).
Mere representation or declaration of one that he is authorized to act on behalf of
another cannot of itself serve as proof of his authority to act as agent or of the extent of
his authority as agent. xYu Eng Cho v. PANAM, 328 SCRA 717 (2000).
Burden of proof of the authority of the agent is not overcome when the agent himself
specifically denied that she was authorized by the respondents-owners to sell the
properties, both in her answer to the complaint and when she testified. xLitonjua v.
Fernandez, 427 SCRA 478 (2004).
That the person applying for the loan is other than the registered owner of the real
property being mortgaged should have already raised a red flag with the Bank and which
should have induced it to make inquiries into and confirm Santos authority to mortgage.
A person who deliberately ignores a significant fact that could create suspicion in an
otherwise reasonable person is not an innocent purchaser for value. Bank of
Commerce v. San Pablo, Jr., 522 SCRA 713 (2007).
Undue haste in granting the loan without inquiring into the ownership of the subject
properties being mortgage, as well as the authority of the supposed agent to constitute
the mortgages on behalf of the owners, bank accepting the mortgage cannot be deemed
a mortgagee in good faith. xSan Pedro v. Ong, 569 SCRA 767 (2008).
Ignorance of a person of the scope of the agents authority he is dealing with is no
excuse and the fault cannot be thrown upon the principal. A person dealing with an agent
assumes the risk of lack of authority of the agent. He cannot charge the principal by relying
upon the agents assumption of authority that proves to be unfounded. The principal, on the
other hand, may act on the presumption that third persons dealing with his agent will not be
negligent in failing to ascertain the extent of his authority as well as the existence of his
agency. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).
c. Principal Not Bound to Contracts Entered Into By Agent Outside of His Authority
(Arts. 1898 and 1910),
(i) When Principal Ratifies, Expressly or Impliedly (Art. 1901)
Where a sale of land is effected through an agent who made misrepresentations to the
buyer that the property can be delivered physically to the buyer when in fact it was in adverse
possession of third parties, the seller-principal is bound for such misrepresentations and
cannot insist that the contract is valid and enforceable; the seller-principal cannot accept the
benefits derived from such representations of the agent and at the same time deny the
responsibility for them. Gonzales v. Haberer, 47 Phil. 380 (1925).
In agency, ratification is the adoption/confirmation by principal of an act performed on his
behalf by another without authoritythe substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority. For ratification to take place, it is
required that the principal must have full knowledge at the time of ratification of all the
material facts and circumstances relating to the unauthorized act of the person who assumed
to act as agent; and that is such material facts were suppressed or unknown, there can be no
valid ratification. Nevertheless, if the principals ignorance of the material facts and
circumstances was willful, or that the principal chooses to act in ignorance of the facts, there
would still be ratification. Only the principal can ratify; the agent cannot ratify his own
unauthorized acts. Moreover, the principal must have knowledge of the acts he is to ratify.
Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377, 394 (2004).
Since the basis of agency is representation, then the question of whether an agency has
been created is ordinarily a question which may be established in the same way as any other
fact, either by direct or circumstantial evidence. Though that fact or extent of authority of the
30Also

Strong v. Repide, 6 Phil. 680 (1906); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); Veloso v. La Urbana, 58 Phil. 681
(1933); Pineda v. CA, 226 SCRA 754 (1993); Bacaltos Coal Mines v. CA, 245 SCRA 460 (1995); Litonjua, Jr. v. Eternit Corp., 490 SCRA
204 (2006); Escueta v. Lim, 512 SCRA 411 (2007); Soriamont Steamship Agencies v. Sprint Transport Services, 592 SCRA 622 (2009).

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agents may not, as a general rule, be established from the declarations of the agents alone,
if one professes to act as agent for another, she may be estopped to deny her agency both
as against the asserted principal and the third persons interested in the transaction in which
he or he is engaged. xDoles v. Angeles, 492 SCRA 607 (2006).
Even when agent exceeds his authority, principal is still solidarily liable with the agent, if
principal allowed agent to act as though the agent had full powers. In other words, the acts
of an agent beyond the scope of his authority do not bind the principal, unless the principal
ratifies them, expressly or implied. Ratification in agency is the adoption or confirmation by
one person of an act performed on his behalf by another without authority. Innocent third
persons should not be prejudiced if the principal failed to adopt the needed measures to
prevent misrepresentation, much more so if the principal ratified his agents acts beyond the
latters authority. Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542 (2008).
Under Arts. 1898 and 1910, agents act done beyond the scope of authority may bind
principal if he ratifies them, whether expressly or tacitly. Only the principal, and not the agent,
can ratify the unauthorized acts, which the principal must have knowledge of. Thus, where
the special power of attorney that an agent for the insurance company provides clearly the
limit of the entities to whom he can issue a surety bond, as well as the limit of the amounts
that it can cover, an insured who does not fall within such authority cannot claim good faith as
to make the surety issued outside of the scope of authority binding on the insurance
company. xCountry Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
(ii) Third Person Cannot Set-up Facts of Agents Exceeding Authority Where Principal
Ratified or Signified Willingness to Ratify Agents Acts (Art. 1901)
Principal Should Be the One to Question Agents Lack/Excess of Authority
Power of Attorney (Must) Be Required by Third Party (Art. 1902)
Private or Secret Orders of Principal Do Not Prejudice Third Persons Who
Relied Upon Agents Power of Attorney or Principals Instruction (Art. 1902)
In an expropriation proceeding, the State cannot raise the alleged lack of authority of the
counsel of the owner to bind his client in a compromise agreement because such lack of
authority may be questioned only by the principal or client. [Since it is within the right or
prerogative of the principal to ratify even the unauthorized acts of the agent]. xCommissioner
of Public Highways v. San Diego, 31 SCRA 617 (1970)
(iii) Where Agent Acts in Excess of Authority, But the Principal Allowed Agent to Act as
Though Agent Had Full Powers (Art. 1911)
Doctrine of Apparent Authority
Where bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell a piece of land in the normal course of business, it is legally obliged to
confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. xRural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000).
The doctrine of apparent authority focuses on two factors: first the principals
manifestations of the existence of agency which need not be expressed, but may be
general and implied; and second, is the reliance of third persons upon the conduct of the
principal or agent. Under the doctrine, the question in every case is whether the principal
has by his voluntary act placed the agent in such a situation that a person of ordinary
prudence, conversant with business usages and the nature of the particular business, is
justified in presuming that such agent has authority to perform the particular act in question.
xProfessional Services, Inc. v. CA, 544 SCRA 170 (2008); 611 SCRA 282 (2010).
Easily discernible from the foregoing is that apparent authority is determined only by the
acts of the principal and not by the acts of the agent. The principal is, therefore, not
responsible where the agents own conduct and statements have created the apparent
authority. xSargasso Construction & Dev. Corp. v. PPA, 623 SCRA 260 (2010).
There can be no apparent authority of an agent without acts or conduct on the part of the
principal, which must have been known and relied upon in good faith as a result of the
exercise of reasonable prudence by a third party claimant, and which must have produced
a change of position to the third partys detriment. There is no basis to apply the doctrine
where there is no evidence showing manner by which the supposed principal, has clothed
or held out its branch manager as having the power to enter into an agreement, as
claimed by petitioners. xBanate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010).
(ii) Agency by Estoppel
By opening of branch office with the appointment of its branch manager and honoring
several surety bonds issued in its behalf, insurance company induced the public to believe
that its branch manager had authority to issue such bonds. Insurance company was
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estopped from pleading against a regular customer thereof, that the branch manager had
no authority. xCentral Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159 (1971).
Even when agent of real estate company acts unlawfully and outside the scope of
authority, the principal can be held liable when by its own act it accepts without protest the
proceeds of the sale of the agents which came from double sales of the same lots, as when
learning of the misdeed, it failed to take necessary steps to protect the buyers and failed to
prevent further wrong from being committed when it did not advertise the revocation of the
authority of the culprit agent. In such case the liabilities of both the principal and the agent
is solidary. xManila Remnants v. Court of Appeals, 191 SCRA 622 (1990).
For an agency by estoppel to exist, following must be proved: (1) principal manifested a
representation of the agents authority or knowingly allowed the agent to assume such
authority; (2) third person, in good faith, relied upon such representation; (3) relying upon
such representation, such third person has changed his position to his detriment. An
agency by estoppel, which is similar to doctrine of apparent authority, requires proof of
reliance upon representations, which needs proof that the representations predated the
action taken in reliance. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).31
For one to successfully claim the benefit of estoppel on the ground that he has been
misled by the representations of another, he must show that he was not misled through his
own want of reasonable care and circumspection. xCountry Bankers Insurance v. Keppel
Cebu Shipyard, 673 SCRA 427 (2012).

2.

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

3.

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


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

4.

OBLIGATIONS OF THE PRINCIPAL WITHIN THE AGENCY ARRANGEMENT


a. Obligation to Pay Agents Compensation (Art. 1875)
b. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912)
(1) Agent Has Right to Reimbursement for Expenses Advanced Including Interest
from the Day It Was Advanced
COMPARE: Where Agent Consents and Is Bound to Advance the Sums as Stipulated
(Art. 1886)
(2) Where Principle Not Liable to Agent for Expenses Incurred (Art. 1918)
Where BMW periodically inspected the service centers to see to it that BMW standards
were maintained. Indeed, it would seem from BMW's letter to Hahn that it was for Hahn's
alleged failure to maintain BMW standards that BMW was terminating Hahn's dealership.
The fact that Hahn invested his own money to put up these service centers and

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

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showrooms does not necessarily prove that he is not an agent of BMW. For as already
noted, there are facts in the record which suggest that BMW exercised control over
Hahn's activities as a dealer and made regular inspections of Hahn's premises to enforce
compliance with BMW standards and specifications. Hahn v. Court of Appeals, 266
SCRA 537 (1997).
However, while Agency Law prohibits the area manager from obtaining reimbursement,
his right to recover may still be justified under the general law on obligations and
contracts, particularly Article 1236 of the Civil Code on payment by a third party of the
obligation of the debtor, allows recovery only insofar as the payment has been beneficial
to the debtor. Thus, to the extent that the obligation of the insurance company has been
extinguished, the area manager may demand for reimbursement from his principal. To rule
otherwise would result in unjust enrichment of petitioner. Dominion Insurance Corp. v.
Court of Appeals, 376 SCRA 239 (2002).
c. Obligation to Indemnify Agent for Damages Sustained in Pursuing Agency (Art.
1913)
COMPARE: Liability for Damages for Non-Performance of Agency (Art. 1884)
When copra purchased by a company from another company is by way of sale rather
than an agency to purchase, the former is not liable to reimburse the latter for expenses
incurred by the latter in maintaining it purchasing organization intact over a period during
which the actual buying of copra was suspended. xAlbaladejo y Cia. v. PRC, 45 Phil 556
(1923).
d. Agents Right to Retain Object as Pledge for Advances and Damages (Art. 1914)
(1) Agent Bound to Deliver to Principal Everything Received, Even If Not Due the
Principal (Art. 1891).
(2) Thing Pledged May Be Sold Only After Demand of Amount Due (Art. 2122):
Public auction to take place within one (1) month after demand
Debtor may demand return of not sold within this period

3.

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

V. EXTINGUISHMENT OF AGENCY
1.

How and When Agency Extinguished (Art. 1919)


a. By Principals Revocation (Express or Implied) of the Agency
b. By Agents Withdrawal from the Agency
c. By Death, Civil Interdiction, Insanity or Insolvency of the Principal or the Agent
d. By Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency
e. By the Accomplishment of the Object or Purpose of the Agency
f. By the Expiration of the Period for Which Agency Was Constituted

2.

EXPRESS REVOCATION: The Principal May Revoke an Agency at Will


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

3.

IMPLIED REVOCATION
a. Appointment of New Agent for Same Business/Transaction (Art. 1923)
Impliedly Revoked as to Agent Only
As to Third Persons, Notice to Them Is Necessary (Art. 1922)
In litigation, the fact that a second attorney enters an appearance on behalf of a litigant
does not authorize a presumption that the authority of the first attorney has been withdrawn.
xAznar v. Morris, 3 Phil. 636 (1904).
Where the father first gave a power of attorney over the business to his son, and
subsequently to the mother, without evidence showing that the son was informed of the
power of attorney to the mother, the transaction effected by the son pursuant to his power of
attorney, was valid and binding. xGarcia v. De Manzano, 39 Phil 577 (1919).
b. Principal Directly Manages Business Entrusted to Agent (Art. 1924)
If the purpose of the principal in dealing directly with the purchaser and himself effecting
the sale of the principals property is to avoid payment of his agents commission, the implied
revocation is deemed made in bad faith and cannot be sanctioned without according to the
agent the commission which is due him. xInfante v. Cunanan, 93 Phil 693 (1953).
Where purported agent was given only authority to follow up the purchase of fire truck
with municipal government, there was no authority to sell nor was he empowered to make a
sale for and in behalf of the seller. But even if purported agent is considered to have been
constituted as an agent to sell the fire truck, such agency would have been deemed revoked
upon resumption of direct negotiations between seller-principal and the municipality, the
purported agent having in the meantime abandoned all efforts to secure the deal in the
sellers behalf. xGuardex v. NLRC, 191 SCRA 487 (1990).
The act of contractor, who, after executing an SPA in favor another to collect whatever
amounts may be due to him from the Government, and thereafter demanded and collected
from the government the money the collection of which he entrusted to his attorney-in-fact,
constituted revocation of the agency in favor of the attorney-in-fact. New Manila Lumber Co.,
Inc. v. Republic of the Philippines, 107 Phil. 824 (1960). Damages are generally not awarded
to the agent for the revocation of the agency, and the case at bar is not one falling under the
exception mentioned, which is to evade the payment of the agents commission. CMS
Logging v. Court of Appeals, 211 SCRA 374 (1992).
c. General Power of Attorney Is Revoked by a Special One Granted to Another Agent,
As Regards the Special Matter Involved in the Latter (Art. 1926)
A special power of attorney giving the son the authority to sell the principals properties is
deemed revoked by a subsequent general power of attorney that does not give such power
to the son, and any sale effected thereafter by the son in the name of the father would be
void. Dy Buncio and Co. v. Ong Guan Ca, 60 Phil 696 (1934).

4.

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


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

5.

Effects of Revocation on Third Parties


a. Agency Created With Reference to Specified Third Parties, Revocation Affects Such
Third Parties Only When So Notified (Art. 1921)
Where principal had revoked agents power to handle the business, but such revocation
was not conveyed to a long-standing client to whom the agent had been specifically
endorsed in the past by the principal, the revocation was not deemed effective as to such
client and the contracts entered into by agent for the principal after the revocation would still
be valid and binding against the principal. Rallos v. Yangco, 20 Phil 269 (1911). 32
Where the lands principal owner executes an SPA giving agent the power to mortgage the
same, even when there has been a revocation thereof, but the same has not been made
known to third parties, then those who receive a mortgage on the properties in good faith will

32Cia.

Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).

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be protected pursuant to principle embodied in Art. 1921 that if an agency has been
entrusted for the purpose of contracting with specified persons, its revocation shall not
prejudice the latter if they were not given notice. Lustan v. CA, 266 SCRA 663 (1997).
b. Revocation of Agents General Powers Effective Against Third Persons (Art. 1922)
Refers to Agency Created to Deal with the General Public
Revocation Will Not Prejudice Third Persons Who Deal with the Agent in
Good Faith and Without Knowledge of Revocation
However Notice of Revocation in a Newspaper of General Circulation Is
Sufficient Warning
While Art. 1358 requires that the contracts involving real property must appear in a proper
document, a revocation of a special power of attorney to mortgage a parcel of land,
embodied in a private writing, is valid and binding between the parties, such requirement of
Article 1358 being only for the convenience of the parties and to make the contract effective
as against third persons. xPNB v. Intermediate Appellate Court, 189 SCRA 680 (1990).
In a case covering a power of attorney to deal with the general public, the fact that the
revocation was advertised in a newspaper of general circulation would be sufficient warning
to third persons. xRammani v. Court of Appeals, 196 SCRA 731 (1991).

6.

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


By Giving Due Notice to Principal
Agent to Indemnify Principal Should He Suffer Any Damage
UNLESS: Withdrawal Is Due to Impossibility of Continuing Agency Without Grave
Detriment to Agent
Even If Agent Withdraws from the Agency for a Valid Reason, He Must Continue to
Act Until the Principal Has Had Reasonable Opportunity to Take Necessary Steps
to Meet the Situation (Art. 1929)
When agent informs principal by letter that for reasons of health and medical treatment he
will depart from the place where the said property is situated, turns property over to a third
party, renders accounts of its revenues up to the date on which he ceases to hold his position
and transmits to his principal a general statement which summarizes and embraces all the
balances of his accounts since he began the administration to the date of the termination of
his trust, and asked his principal to execute a power of attorney in due form in favor of and
transmit the same to another person who took charge of the administration of the said
property, said agent had expressly and definitely renounced his agency and that such agency
was duly terminated. xDela Pena v. Hidalgo, 16 Phil 450 (1910).
Where agent institutes an action against his principal for the recovery of the balance in his
favor resulting from the liquidation of the accounts between them arising from the agency,
and renders a final account, is equivalent to an express renunciation of the agency, and
terminates the juridical relation between them. The subsequent purchase by the former agent
of the principals usufruct rights in a public auction therefore was valid, since no fiduciary
relationship existed between them at that point. xValera v. Velasco, 51 Phil 695 (1928).

7.

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


By reason of the very nature of the relationship between principal and agent, agency is
extinguished by the death of the principal or the agent. xRallos v. Felix Go Chan & Sons
Realty Corp., 81 SCRA 251 (1978).
Death of a client divests his lawyer of authority to represent him as counsel. xLavina v.
Court of Appeals, 171 SCRA 691 (1988). 33
a. When the Agency Continues Despite Death of Principal (Art. 1930):
If It Was Constituted for Common Interest of Principal and Agent; or
In Favor of Third Person Who Accepted Stipulation in His Favor.
It is an agency coupled with interest when a power of attorney is constituted in real estate
mortgage pursuant to the requirement of Act No. 3135, which would empower the mortgagee
upon the default of the mortgagor to payment the principal obligation, to effect the sale of the
mortgage property through extrajudicial foreclosure. The death of the principal-debtor did not
extinguished the power of the Bank to sell the property at a public sale; the power to
foreclose is not an ordinary agency that contemplates exclusively the representation of the

33Barrameda

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

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principal by the agent but is primarily an authority conferred upon the mortgagee for the
latters own protection. Perez v. PNB, 17 SCRA 833 (1966).34
Agency is extinguished by principals death; exception is when it has been constituted in
the common interest of the latter and of the agent, or in the interest of a third person who has
accepted the stipulation in his favor. xSasaba v. Vda. De Te, 594 SCRA 410 (2009).
b. Acts Done by Agent Without Knowledge of Principals Death (Art. 1931): Acts Are
Valid Provided:
Agent Does Not Know of Death or Other Cause of Extinguishment of Agency;
Third Persons Must Also Be in Good Faith (Not Aware of Death or Other Cause).
Under Art. 1931, we must uphold the validity of the sale of the land effected by the agent
only after the death of the principal, when no evidence was adduced to show that at the time
of sale both the agent and the buyers were unaware of the death of the principal. xBauson v.
Panuyas, 105 Phil 795 (1959); xHerrera v. Uy Kim Guan, 1 SCRA 406 (1961).

8.

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

B.

BUSINESS TRUSTS

I.

NATURE AND CLASSIFICATION OF TRUSTS

1.

Definition and Essential Characteristic of Trust (Art. 1440)


A trust is a fiduciary relationship with respect to property which involves the existence of
equitable duties imposed upon the holder of the title to the property to deal with it for the
benefit of another. 35 Its characteristics are: (a) it is a relationship; (b) it is a relationship of
fiduciary character; (c) It is a relationship with respect to property, not one involving merely
personal duties; (d) it involves the existence of equitable duties imposed upon the holder of
the title to the property to deal with it for the benefit of another; and (e) it arises as a result of
a manifestation of intention to create the relationship. Morales v. Court of Appeals, 274
SCRA 282 (1997).
a. Trusts Are Based on Equity Principles (Common-law) (Art. 1442)
As the law of trusts has been much more frequently applied in England and in the United
States than in Spain, we may draw freely upon American precedents in determining the effect
of the testamentary trust here under consideration, especially so as the trusts known to
American and English equity jurisprudence are derived from the fidei commissa of the
Roman law and are based entirely upon Civil Law principles. xGovernment v. Abadilla, 46
Phil. 642 (1924).36
Article 1442 incorporates a large part of the American law on trusts, and thereby the
Philippine legal system will be amplified and will be rendered more suited to a just and
equitable solution of many questions. Report of the Code Commission, at p. 60.
b. Distinguished from Agency
(1) While both trust and agency relationships are fiduciary in nature; agency is essentially
revocable, while a trust contract is essentially obligatory in its terms and period, and
can only be rescinded based on breach of trust.

34Superseded

Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad, 104 Phil. 648 (1958).

35Huang v. CA, 236 SCRA 429 (1994); Rizal Surety & Insurance Co. v. CA, 261 SCRA 69 (1996); Tala Realty Services v. Banco
Filipino Savings Bank, 392 SCRA 506 (2002); DBP v. COA, 422 SCRA 459 (2004); Heirs of Tranquilino Labiste v. Heirs of Jose Labiste,
587 SCRA 417 (2009); Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 360
(2010); PNB v. Aznar, 649 SCRA 214 (2011); Torbela v. Rosario, 661 SCRA 633 (2011); Estate of Margarita D. Cabacungan v. Laigo, 655
SCRA 366 (2011); Advent Capital and Finance Corp. v. Alcantara, 664 SCRA 224 (2012); Goyanko v. UCPB, 690 SCRA 79 (2013).
36Miguel

v. CA, 29 SCRA 760 (1969); Spouses Rosario v. CA, 310 SCRA 464 (1999).

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(2) Trustee takes legal or naked title to the subject matter of trust, and acts on his own
business discretion; agent possesses property under agency for and in the name of
the owner and must act upon instructions of the owner;
(3) Trustee enters into contracts pursuant to the trust in his own name as legal or naked
title holder, while agent enters into contract in the name of the principal; and
(4) Trustee is liable directly and may be sued, albeit in his trust capacity; while agent
cannot be sued since it is the principal that must be held liable on the suit.
An investment management account, where the written instrument provides that bank
shall purchase debt securities on behalf of client and will handle the accounts in accordance
with clients instructions, creates a principal-agent relationship, and not a trust relationship
nor an ordinary bank deposit account. Consequently, under Art. 1910, the client assumed all
obligations or inherent risks entailed by transactions emanating from the arrangement, and
the bank may be held liable as an agent, only when it exceeds its authority, or acts with fraud,
negligence or bad faith. Principals are solely obliged to observe the solemnity of the
transaction entered into by the agent on their behalf, absent any proof that the latter acted
beyond its authority, and concomitant to this obligation is that the principal also assumes the
risks that may arise from the transaction. Panlilio v. Citibank, 539 SCRA 69 (2007).

2.

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

II. EXPRESS TRUSTS


1.

Essence and Definition of Express Trusts (Art. 1440)


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

2.

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

37Spouses Rosario v. CA, 310 SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242 (2007); Pealber v. Ramos, 577 SCRA 509 (2009);
DBP v. COA, 422 SCRA 459 (2004).
38Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. CA, 280 SCRA 271 (1997); Policarpio v. CA, 269 SCRA 344 (1997); Spouses
Rosario v. CA, 310 SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242 (2007); Pealber v. Ramos, 577 SCRA 509 (2009).
39Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to satisfy the
demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or hold the legal right to property which he ought not, in equity and good conscience, to hold. Spouses Rosario v. CA,
310 SCRA 464 (1999).
40Guy

v. CA, 539 SCRA 584 (2007).

41Vda. De Esconde v. CA, 253 SCRA 66 (1996); Spouses Rosario v. CA, 310 SCRA 464 (1999); DBP v. COA, 422 SCRA 459 (2004);
Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350 (2010).

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For, technical or particular forms of words or phrases are not essential to the
manifestation of intention to create a trust or to the establishment thereof. Nor would the use
of some such words as trust or trustee essential to the constitution of a trust; conversely,
the mere fact that such terms were employed would not necessarily prove an intention to
create a trust. What is important is whether the trustor manifested an intention to create the
kind of relationship which in law is known as a trust. It is important that the trustor should
know that the relationship which intents to create is called a trust, and whether or not he
knows the precise characteristics of the relationship which is called a trust. Here, that trust is
effective as against defendants and in favor of the beneficiary thereof, plaintiff Victoria Julio,
who accepted it in the document itself. Julio v. Dalandan, 21 SCRA 543 (1967). 42
Express trusts are created by direct and positive acts of the parties, by some writing or
deed, or will, or by words either expressly or implied evincing an intention to create a trust.
Under Art. 1444 No particular words are required for the creation of an express trust, it being
sufficient that a trust is clearly intended. The Affidavit of Epifanio is in the nature of a trust
agreement. Epifanio affirmed the lot brought in his name was co-owned by him, as one of the
heirs of Jose, and his uncle Tranquilino. And by agreement, each of them has been in
possession of half of the property. Their arrangement was corroborated by the subdivision
plan prepared by Engr. Bunagan and approved by Jose P. Dans, Acting Director of Lands.
Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).
The creation of an express trust must be manifested with reasonable certainty and cannot
be inferred from loose and vague declarations or from ambiguous circumstances susceptible
of other interpretations. No such reasonable certitude in the creation of an express trust
obtains in the case at bar. In fact, a careful scrutiny of the plain and ordinary meaning of the
terms used in the Minutes does not offer any indication that the parties thereto intended that
Aznar, et al., become beneficiaries under an express trust and that RISCO serve as trustor.
PNB v. Aznar, 649 SCRA 214 (2011).43
In Tamayo v. Callejo, 46 SCRA 27 (1972), the Court recognized that a trust may have a
constructive or implied nature in the beginning, but the registered owners subsequent
express acknowledgement in a public document of a previous sale of the property to another
party, had the effect of imparting to the aforementioned trust the nature of an express trust.
Torbela v. Spouses Rosario, 661 SCRA 633 (2011).
It is possible to create a trust without using the word "trust" or "trustee." Conversely, the
mere fact that these words are used does not necessarily indicate an intention to create a
trust. The question in each case is whether the trustor manifested an intention to create the
kind of relationship which to lawyers is known as trust. It is immaterial whether or not he
knows that the relationship which he intends to create is called a trust, and whether or not he
knows the precise characteristics of the relationship which is called a trust. Go v. Estate of
Felisa Tamio de Buenaventura, 763 SCRA 632 (2015).
a. Express Trust Cannot Be Proven by Parol Evidence (Art. 1443)
As a rule, however, the burden of proving the existence of a trust is on the party asserting
its existence, and such proof must be clear and satisfactorily show the existence of the trust
and its elements. xMorales v. Court of Appeals, 274 SCRA 282 (1997). 44
We find it clear that the plaintiffs alleged an express trust over an immovable, especially
since it is alleged that the trustor expressly told the defendants of his intention to establish
the trust. Such a situation definitely falls under Art. 1443, and cannot be proven by parol
evidence. xCuaycong v. Cuaycong, 21 SCRA 1192 (1967). 45
A trust must be proven by clear, satisfactory, and convincing evidence; it cannot rest on
vague and uncertain evidence or on loose, equivocal or indefinite declarations De Leon v.
Peckson, 62 O.G. 994. 46
b. Ultimately Existence of Express Trust Requires That Legal Title Is Held By One, and
the Equitable or Beneficial Title Is Held by Another (65 CORPUS JURIS 212)
Trust, in its technical sense, is a right of property, real or personal, held by one party for
the benefit of another it is a fiduciary relationship with respect to property, subjecting the
person holding the same to the obligation of dealing with the property for the benefit of
another person. xGuy v. Court of Appeals, 539 SCRA 584 (2007).
42Lorenzo

v. Posadas, 64 Phil. 353 (1937); Torbela v. Rosario, 661 SCRA 633 (2011); Goyanko v. UCPB, 690 SCRA 79 (2013).

43Medina

v. CA, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corp. v. Alcantara, 664 SCRA 224 (2012).

44Caezo

v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing, 538 SCRA 42 (2008).

45Pascual

v. Meneses, 20 SCRA 219 (1967); Ramos v. Ramos, 61 SCRA 284 (1974).

46Ringor

v. Ringor, 436 SCRA 484 (2004); Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013).

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What distinguishes a trust from other relations is the separation of legal title and equitable
ownership of the propertylegal title is vested in the fiduciary while equitable ownership is
vested in a cestui que trust. The petitioner alleged that the tax declaration of the land was
transferred to the name of Crispulo without her consent. Had it been her intention to create a
trust and make Crispulo her trustee, she would not have made an issue out of this because
in a trust agreement, legal title is vested in the trustee. Trustee would necessarily have the
right to transfer the tax declaration in his name and to pay the taxes on the propertythese
acts would be treated as beneficial to the cestui qui trust and would not amount to an
adverse possession. Express trust must be proven by some writing or deed. In this case, the
only evidence to support the claim that an express trust existed between the petitioner and
her father was the self-serving testimony of the petitioner. Bare allegations do not constitute
evidence adequate to support a conclusion. Caezo v. Rojas, 538 SCRA 242, 255 (2007).

2.

Other Essential Characteristics of Express Trusts


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

3.

Parties and Elements of an Express Trust


Elements for an express trust are: (1) a trustor or settlor who executes the instrument
creating the trust; (2) a trustee, who is the person expressly designated to carry out the trust;
(3) the trust res, consisting of duly identified and definite real properties; and (4) the cestui
que trust, or beneficiaries whose identity must be clear. Furthermore, there must be a present
and complete disposition of the trust property, notwithstanding that the enjoyment in the
beneficiary will take place in the future. It is essential, too, that the purpose be an active one
to prevent trust from being executed into a legal estate or interest, and one that is not in
contravention of some prohibition of statute or rule of public policy. Rizal Surety &
Insurance v. Court of Appeals, 261 SCRA 69 (1996). 48
a. The Trustor. A person who establishes a trust is called the trustor.49
b. The Trustee. One in whom confidence is reposed is known as the trustee.50
Trustee Must Have Legal Capacity to Accept the Trust.
Failure of Trustee to Assume the Position (Art. 1445).
Obligations of the Trustee (Rule 98, Rules of Court).
Generally, Trustee Does Not Assume Personal Liability on the Trust as to
Properties Outside of the Trust Estate When a trustee enters into a contract that
gives rise to liability, there must be clear indication that he enters into the contract as
trustee, so that he would be liable individually only to the extent of the trust properties:
In other words, when the transaction at hand could have been entered into by a
trustee either as such or in its individual capacity, then it must be clearly indicated that
the liabilities arising therefrom shall be chargeable to the trust estate, otherwise they
are due from the trustee in his personal capacity. xTan Senguan and Co. v. Phil. Trust
Co., 58 Phil. 700 (1933).
Trustee Generally Entitled to Receive Compensation for His Services. xLorenzo v.
Pasadas, 64 Phil. 353 (1937).

47Ramos

v. Ramos, 61 SCRA 284 (1974); Pealber v. Ramos, 577 SCRA 509 (2009).

48Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Caezo v. Rojas, 538 SCRA 242 (2007); Goyanko v. UCPB, 690 SCRA 79
(2013).
49DBP

v. COA, 422 SCRA 459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).

50DBP

v. COA, 422 SCRA459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).

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c. The Beneficiary (Arts. 1440 and 1446). Person for whose benefit the trust has been
created is referred to as the beneficiary.51
In order that a trust may become effective there must, of course be a trustee and a cestui
que trust. The existence of an equivalent designated position in the testamentary trust to act
as trustee In regard to private trusts it is not always necessary the the cestui que trust
should be named, or even be in esse at the time the trust is created in his favor. Thus a
devise a father in trust for accumulation for his children lawfully begotten at the time of his
death has been held to be good although the father had no children at the time of the vesting
of the funds in him as trustee. In charitable trusts such as the one here under discussion, the
rule is still further relaxed. Government v. Abadilla, 46 Phil. 642 (1924).
Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities
of donations. Cristobal v. Gomez, 50 Phil. 810 (1927).
A person is considered as a beneficiary of a trust if there is a manifest intention to give
such a person the beneficial interest over the trust properties. Here, the trust agreement
plainly confer the status of beneficiary to the planholders, not to Legacy. The categorical
declaration in the agreement that Legacy bound itself to provide for the sound, prudent and
efficient management and administration of such portion of the collection for the benefit and
account of the planholders, through LBP (as the trustee) indicates that the intention of the
trustor is to make the planholders the beneficiaries of the trust properties, and not Legacy,
which is left without any iota of interest in the trust fund. This is consistent with the nature of a
trust arrangement, whereby there is a separation of interests in the subject matter of the trust,
the beneficiary having an equitable interest, and the trustee having an interest which is
normally legal interest. SEC v. Laigo, G.R. No. 188639. 02 Sept 2015.
d. The Corpus, Res, or Trust Estate
Where DBP establishes a pension trust for its officers and employees and appoints
trustees for the fund whereby the trust agreement transferred legal title over the income and
properties of the fund, the principal and income of the fund constitute the res or subject
matter of the trust. Since the trust agreement established the fund precisely so that it would
eventually be sufficient to pay for the retirement benefits of DBP officers and employees, then
the income and profits thereof cannot be booked by DBP as its own, and DBP cannot be
directed by COA to treat such income as it own. DBP v. COA, 422 SCRA 459 (2004).
A trust by operation of law is the right to the beneficial enjoyment of a property whose
legal title is vested in another. A property between two parties, one having the rightful
ownership and property owned by one party is separate and distinct from that which has
been registered in anothers name. Chu, Jr. vs. Caparas, 696 SCRA 325 (2013).

4.

Kinds of Express Trust


a. Express Trust Involving Immovable (Art. 1443)
A person who has held legal title to land, coupled with possession and beneficial use of
the property for more than ten years, will not be declared to have been holding such title as
trustee for himself and his brothers and sisters upon doubtful oral proof tending to show a
recognition by such owner of the alleged rights of his brother and sisters to share in the
produce of the land. [Ergo: The requirement that express trust over immovable must be in
writing should be added as being governed by the Statute of Frauds.] Gamboa v. Gamboa,
52 Phil. 503 (1928).
Express trust over real property cannot be constituted when nothing in writing was
presented to prove it; but it may be proved as an implied trust. Ty v. Ty, 553 SCRA 306
(2008).
In accordance with Art. 1443, when an express trust concerns an immovable property or
any interest therein, the same may not be proved by parol or oral evidence. However, when
the oppositors failed to timely object when the petitioner tried to prove by parol evidence the
existence of an express trust over immovable, there is deemed to be a waiver since Art. 1443
is in the nature of a statute of frauds. Pealber v. Ramos, 577 SCRA 509 (2009).
b. Contractual versus Intervivos Trusts
c. Charitable Trusts
d. Testamentary Trust
A testamentary trust is created by a provision in the will whereby the testator directs the
creation of a trust for the benefit of a secondary school to be established in the town of

51DBP

v. COA, 422 SCRA459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).

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Tayabas, naming as trustee the ayutamiento or if there be no ayutamiento, then the civil
governor of the Province of Tayabas. xGovernment of P.I. v. Abadilla, 46 Phil. 642 (1924).
Although the will did not use the words trust or trustee, the intention to create one is
clear since testator ordered therein that certain properties be kept together undisposed
during a fixed period, for a stated purpose. No particular or technical words are required to
create a testamentary trust; hence, probate court exercised sound judgment in appointing a
trustee to carry the proivisions into effect. xLorenzo v. Pasadas, 64 Phil. 353 (1937).
e. Pension or Retirement Trusts
A foundation existing for the purpose of holding title to, and administering, the tax-exempt
Employees Trust Fund established for the benefit of the employees, has the personality to
claim tax refunds due the Employers Trust Fund. xMiguel J. Ossorio Pension Foundation,
Inc. v. Court of Appeals, 621 SCRA 606 (2010).
Employees trust or benefit plans are intended to provide economic assistance to
employees upon the occurrence of certain contingencies, particularly, old age retirement,
death, sickness, or disability. They give security against certain hazards to which members of
the Plan may be exposed. They are independent and additional sources of protection for the
working group and established for their exclusive benefit and for no other purpose. The
provident and retirement fund of the employees cannot be used by the trustee-bank to pay
for the obligations of the employer corporation. xMetropolitan Bank v. Board of Trustees of
Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350 (2010); CIR v. Court of
Appeals, 207 SCRA 487 (1992).

5.

Termination of Express Trusts


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

III. IMPLIED TRUSTS


1.

Listing of Implied Trusts Not Exclusive: FOUNDED ON EQUITY (Art. 1447)


The concept of implied trusts is that from the facts and circumstances of a given case (i.e.,
the structure of the transactions that vest title to property) the existence of a trust relationship
is inferred in order to effect the presumed (in this case it is even expressed) intention of the
parties (i.e., resulting trust) or to satisfy the demands of justice or to protect against fraud
(i.e., constructive trusts). Padilla v. Court of Appeals, 53 SCRA 168 (1973).
Although an implied trust arising from mortgage contracts is not among those
enumerated, Art. 1147 of Civil Code provides that such listing does not exclude others
established by general law on trust. Under the general principles on trust, equity converts
the holder of a property right as trustee for the benefit of another if the circumstances of its
acquisition makes the holder ineligible in x x x good conscience [to] hold and enjoy [it].52 As
implied trusts are remedies against unjust enrichment, the only problem of great importance
in constructive trusts is whether in the numerous and varying factual situations presented
there is a wrongful holding of property and hence, a threatened unjust enrichment of the
defendant. 53 Juan v. Yap, Sr., 646 SCRA 753 (2011).
a. Distinctions Between Resulting Trusts and Constructive Trusts

52Roa,

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

53Heirs

of Moreno v. Mactan-Cebu Int.l Airport Authority, 413 SCRA 5023 (2003).

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Resulting trusts are based on the equitable doctrine that valuable consideration and not
legal title determines the equitable title or interest and are presumed always to have been
contemplated by the parties. They arise from the nature of circumstances of the
consideration involved in a transaction whereby one person thereby becomes invested with
legal title but is obliged in equity to hold his legal title for the benefit of another. On the other
hand, constructive trusts are created by the construction of equity in order to satisfy the
demands of justice and prevent unjust enrichment. They arise contrary to intention against
one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property
which he ought not, in equity and good conscience, to hold. Lopez v. Court of Appeals,
574 SCRA 26 (2008). 54
b. How to Prove Implied Trusts (Art. 1457)
The burden of proving the existence of a trust is on the party asserting its existence, and
such proof must be clear and satisfactorily show the existence of the trust and its elements.
While implied trusts may be proven by oral evidence, the evidence must be trustworthy and
received by the courts with extreme caution, and should not be made to rest on loose,
equivocal or indefinite declarations. Trustworthy evidence is required because oral evidence
can easily be fabricated. Heirs of Narvasa, Sr. v. Imbornal, 732 SCRA 171 (2014).
An implied trust in order to be recognized must measure up to the yardstick that a trust
must be proven by clear, satisfactory and convincing evidence, and cannot rest on vague
and uncertain evidence or on loose, equivocal or indefinite declarations. Salao v. Salao, 70
SCRA 65 (1976). Consequently:
Existence of public records other than the Torrens title indicating a proper description
of the land, and not the technical description thereof, and clearly indicating the
intention to create a trust, is considered sufficient proof to support the claim of the
cestui que trust. xMunicipality of Victorias v. CA, 149 SCRA 32 (1987).
An affidavit of the fact of resulting trust against contrary affidavits, as well as the
transfer certificates of title and tax declarations to the contrary, do not support clearly
the existence of trust. xBooc v. Five Start Marketing Co., Inc., 538 SCRA 42 (2007).55
In order to establish an implied trust in real property by parol evidence, the proof
should be as fully convincing as if the acts giving rise to the trust obligation are proven
by an authentic document. In the present case, there was no evidence of any
transaction between the petitioner and her father from which it can be inferred that a
resulting trust was intended. Caezo v. Rojas, 538 SCRA 242 (2007).
c. Distinguished from Quasi-Contracts The Civil Code incorporated constructive trusts,
on top of quasi-contracts, both of which embody the principle of equity above strict
legalism. PNB v. Court of Appeals, 217 SCRA 347 (1993).

2.

RESULTING TRUSTS
Resulting trusts are species of implied trust that are presumed always to have been
contemplated by the parties intention, which can be found in the nature of their transaction
although not expressed in a deed or instrument of conveyance; they are based on the
equitable doctrine that valuable consideration and not legal title determines the equitable title
or interest. xOssorio Pension Foundation v. Court of Appeals, 621 SCRA 606 (2010).56
Resulting trusts arise from nature or circumstances of consideration involved in a
transaction whereby one person thereby becomes invested with full legal title but is obligated
in equity to hold his title for the benefit of another. xRosario v. CA, 310 SCRA 464 (1999).
In an resulting trust, the beneficiarys cause of action arises when the trustee repudiates
the trust, not when the trust was created. Paringit v. Bajit, 631 SCRA 584 (2010).
a. Purchase of Property Where Beneficial Title in One
Person, But Price Paid by Another Person (Art. 1448)
RATIONALE: One who pays for something usually does so for his own benefit. Uy Aloc v.
Cho Jan Jing, 19 Phil. 202 (1911).
EXCEPTION: Although the father was the source of the funds in the purchase of a parcel of
land which was titled in the name of his son, no implied trust is deemed to have been
established since under Art. 1448, if the person to whom the title is conveyed is the child of

54Aznar Brothers Realty Co. v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. CA, 310 SCRA 464 (1999); Estate of Margarita D.
Cabacungan, v. Laigo, 655 SCRA 366 (2011).
55Tigno

v. CA, 280 SCRA 262 (1997); Morales v. CA, 274 SCRA 282 (1997).

56Caezo

v. Rojas, 538 SCRA 242 (2007).

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the one paying the price of the sale, no trust is implied by law, and instead a donation is
disputably presumed in favor of the child. The successors of the deceased father had not
shown that no such donation was intended. Ty v. Ty, 553 SCRA 306 (2008).
While the share was bought by Sime Darby and placed under the name of Mendoza, his
title is only limited to the usufruct, or the use and enjoyment of the clubs facilities and
privileges while employed with the company. In Thomson v. Court of Appeals, 298 SCRA 280
(1998), we held that a trust arises in favor of one who pays the purchase price of a property
in the name of another, because of the presumption that he who pays for a thing intends a
beneficial interest for himself. While Sime Darby paid for the purchase of the club share,
Mendoza was given the legal title. Thus, a resulting trust is presumed as a matter of law. The
burden shifts to the transferee to show otherwise. Sime Darby Pilipinas, Inc. v. Mendoza,
699 SCRA 290 (2013).

b. Purchase of Property Where Title Is Placed in the Name of Person Who


Loaned the Purchase Price (Art. 1450) Equitable Mortgage
Resulting trust under Art. 1450 presupposes a situation where a person, using his own
funds, buys property on behalf of another, who in the meantime may not have the funds to
purchase ittitle to the property is for the time being placed in the name of the trustee, the
person who pays for it, until he is reimbursed by the beneficiary, the person for whom the
trustee bought the land. It is only after the beneficiary reimburses the trustee of the purchase
price that the former can compel conveyance of the property from the latter. Paringit v.
Bajit, 631 SCRA 584 (2010).
c. When Absolute Conveyance of Property Effected Only as a Means to Secure
Performance of Obligation of the Grantor (Art. 1454) Equitable Mortgage
When a deed of sale a retro was really intended to cover a loan made by the purported
seller from the purported buyer, then the doctrines upheld in Uy Aloc vs. Cho Jan Ling, 19
Phil. 202, Camacho v. Municipality of Baliaug, 28 Phil. 46, and Severino v. Severino, 44 Phil.,
343, are applicable in the instant case in the sense that the defendants only hold the
certificate of transfer in trust for the plaintiffs as to the portion of the lot containing 1,300
coconut trees, and therefore, said defendants are bound to execute a deed in favor of the
plaintiffs transferring said portion to them. De Ocampo v. Zaporteza, 53 Phil. 442 (1929).
d. Several Persons Jointly Purchase Property, Places Title
In One of Them (Art. 1452)
Decedent had married legitimately three successive times without liquidation of conjugal
partnerships formed during the first and second marriages. The only male issue managed to
convince his co-heirs that he should act as administrator of the estate, but instead obtained
a certificate of title in his own name to the valuable piece of property of the estate. Held:
Where the son, through fraud was able to secure a title in his own name to the exclusion of
his co-heirs who equally have the right to a share of the land covered by the title, an implied
trust was created in favor of said co-heirs, and that said son was deemed to merely hold the
property for their and his benefit. xGonzales v. Jimenez, Sr., 13 SCRA 73 (1964).
Law expressly allows a first co-owner of a parcel of land to register his proportionate
share in the name of his second co-owner in whose name the entire land is registeredthe
second co-owner serves as a legal trustee of the first co-owner insofar as the proportionate
share of the first co-owner is concerned. Article 1452 expressly authorizes a person to
purchase a property with his own money and to take conveyance in the name of another.
xMiguel J. Ossorio Pension Foundation, v. Court of Appeals, 621 SCRA 606 (2010).
e. Property Conveyed to a Person Merely as Holder Thereof (Art. 1453)
Where real property is taken by a person under an agreement to hold it for, or convey it to
another, a resulting trust arises in favor of the intended beneficiary, which is enforceable even
when the agreement is not in writing; is not an express trust which requires that it be in
writing to be enforceable. xMartinez v. Grao, 42 Phil. 35 (1921).
Where original purchaser of the immovable property had sold all his interest thereto to his
brother who reimbursed him all amounts previously, but continued to pay the balance of the
installments in the name of the original buyer with understanding that upon full payment the
title would be transferred to the buyer, am implied trust had been constituted. Heirs of
Emilio Candelaria v. Romero, 109 Phil. 500 (1960).
Art. 1453 would apply if the person conveying the property did not expressly state that he
was establishing the trust, unlike the case at bar where he was alleged to have expressed
such intent. Consequently, lower court did not err in dismissing the complaint, on the ground
that since complaint sought to recover an express trust over immovables, under Art. 1443 the
same may not be proved by parol evidence. xCuaycong v. Cuaycong, 21 SCRA 1192 (1967).
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Where a lot was taken by a person under an agreement to hold it for, or convey it to
another or to the grantor, a resulting or implied trust arises in favor of the person for whose
benefit the property was intended. xRosario v. Court of Appeals, 310 SCRA 464 (1999).

f. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449)
Where father donates a piece of land in the name of the daughter but with verbal notice
that the other half would be held by her for the benefit of a younger brother, coupled with a
deed of waiver subsequently executed by the daughter that she held the land for the
common benefit of her brother, created an implied trust in favor of the brother under Art.
1449. Adaza v. Court of Appeals, 171 SCRA 369 (1989). [Express trust?]
g. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451)
When the eldest sibling had registered land inherited from the parents in his name, he
was acting in a trust capacity and as representative of all his brothers and sisters. As a
consequence he is now holding the registered title thereto in a trust capacity, and it is proper
for the court to declare that the other siblings are entitled to their several pro rata shares.
xSeverino v. Severino, 44 Phil. 343 (1923); xCastro v. Castro, 57 Phil. 675 (1932).
In a situation where a Chinese resident had caused land to be placed in the name of the
trustee who was bound to hold the same for the benefit of the trustor and his family in the
event of death, the application of the doctrine of implied trust under Art. 1451 by the heirs of
the trustor cannot be upheld. This contention must fail because the prohibition against an
alien from owning lands of the public domain is absolute and not even an implied trust can be
permitted to arise on equity consideration. xTing Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).
3.

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

b. When Fiduciary Uses Funds or Property Held in Trust to Purchase


Property Which Is Registered in Fiduciarys Name (Art. 1455)
A confidential employee who, knowing that his principal was negotiating with the owner of
some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his
wife, commits an act of disloyalty and infidelity to his principal, and is liable for damage. The
reparation of the damage must consist in respecting the contract which was about to be
57Carantes
58Roa,

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

59Policarpio
60Roa,

v. CA, 76 SCRA 514 (1977); Marcado v. Espinocilla, 664 SCRA 724 (2012).

v. CA, 269 SCRA 344 (1997); Arlequi v. CA, 378 SCRA 322 (2002).

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

61Tigno

v. CA, 280 SCRA 262 (1997).

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concluded, and transferring the said land for the same price and upon the same terms as
those on which the purchase was made for the land sold to the wife of said employee passed
to them as what might be regarded as equitable trust, by virtue of which the thing thus
acquired by an employee is deemed to have been acquired not for his own benefit or that of
any other person but for his principal and held in trust for the latter. Sing Juco and Sing
Bengco v. Sunyantong and Llorente, 43 Phil. 589 (1922).
A verbal assertion of a partner that partnership funds were used to purchase real
properties registered solely in the name of the other partners-spouses, without further
evidence, does not overcome the Torrens title issued showing exclusive ownership in the
name of the partners-spouses, but cannot also be used to establish an implied trust over said
properties in favor of the alleging partner. xJarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

c. When Property Acquired Through Mistake or Fraud (Art. 1456)


Old Civil Code Rulings: Where a mother and her minor daughter inherited a large tract of
land, and had it applied for cadastral survey, but title was issued only in the name of the
mother, courts of equity will impress upon the title, a condition which is generally in a broad
sense termed constructive trust in favor of the defrauded party, but use of the word trust in
this sense is not technically accurate. Gayondato v. Treasurer, 49 Phil. 244 (1926).
When an agent, taking advantage of the illiteracy of the principal, claims for himself the
property which he was designated to claim for the principal and manages to have it
registered in his own name and became part of his estate when the agent died, the estate is
in equity bound to execute the deed of conveyance of the lot to the cestui que trust. The
courts have therefore shielded fiduciary relations against every manner of chicanery or
detestable designed cloaked by legal technicalities. Torrens system was never calculated to
foment betrayal in the performance of a trust. xEscobar v. Locsin, 74 Phil. 86 (1943). 62
New Civil Code Rulings: Under Art. 1456 principle of constructive trust, registration of
property by one person in his name, whether by mistake or fraud, the real owner being
another person, impresses upon the title so acquired the character of a constructive trust for
the real owner, which would justify an action for reconveyance within a period of 10 years
from registration. In the action for reconveyance, the decree of registration is respected as
incontrovertible, and what is sought instead is the transfer of the property wrongfully or
erroneously registered in anothers name to its rightful owner or to one with a better right.
Pasio v. Monterroyo, 560 SCRA 739 (2008). 63
Where testator expressed in notarial will that she wished to constitute a trust fund for her
paraphernal properties, to be administered by her husband, and that two-thirds (2/3) of the
income from rentals over theses properties were to answer for the education of deserving but
needy honor students, while one-third (1/3) was to shoulder the expenses and fees of the
administrator; but that eventually in the probate of the will the properties were adjudicated to
the husband as sole heir, then a constructive trust has been constituted under Art. 1456 in
favor of beneficiaries of the Fideicomiso. xLopez v. Court of Appeals, 574 SCRA 26 (2008).64
The rule that a fraudulently acquired free patent may only be assailed by the government
in an action for reversion pursuant to the Public Land Act is not without exception: where
plaintiff-claimant seeks direct reconveyance from defendant of public land unlawfully and in
breach of trust titled by him, on the principle of enforcement of a constructive trust.
xHortizuela v. Tagufa, 751 SCRA 371 (2015).
The conveyance made by seller of a property acquired through pactum commisorium is
void, and thus not vest title to the buyer. Such a situation falls squarely under Art. 1456,
where the buyer is deemed to have acquired the property by mistake or through ineffectual
transfer. xHome Guaranty Corp. v. La Savoje Dev. Corp., 748 SCRA 312 (2015).
4.

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


a. SUMMARY OF RULINGS FOR EXPRESS TRUSTS:

62Pacheco

v. Arro, 85 Phil. 505.

63Ruiz v. CA, 79 SCRA 525 (1977); Heirs of Tanak Pangaaran Patiwayon v. Martinez, 142 SCRA 252 (1986); Municipality of Victorias v.
CA, 149 SCRA 32 (1987); Mendizabel v. Apao, 482 SCRA 587 (2006); Heirs of Tabia v. CA, 516 SCRA 431 (2007); Pedrano v. Heirs of
Benedicto Pedrano, 539 SCRA 401 (2007); Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007); Leoveras v. Valdez, 652
SCRA 61 (2011); PNB v. Jumamoy, 655 SCRA 54 (2011); Toledo v. CA, 765 SCRA 104 (2015).
64Vda.

De Esconde v. CA, 253 SCRA 66 (1996); Iglesia Filipina Independiente v. Heirs of Taeza, 715 SCRA 138 (2014).

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GENERAL RULE: Express trusts are generally imprescriptible: the express undertaking to hold
title for the benefit of the beneficiary disables the trustee from acquiring for himself the
property committed to his management or custody. 65
The beneficiarys alleged delay in seeking recovery of the property is directly attributable to
the trustee who undertakes to hold the property for the former; trustees possession is,
therefore, not adverse to the beneficiary, until and unless the latter is made aware that the
trust has been repudiated. xDiaz v. Gorricho and Aguado, 103 Phil. 261 (1958).66
EXCEPTION: For acquisitive prescription to bar the action of the beneficiary against the
trustee, it must be shown that:67
(1) Trustee has performed unequivocal acts of repudiation amounting to an ouster of cestui
que trust.
(2) Such positive acts of repudiation have been made known to the cestui que trust.
(3) Evidence is clear and conclusive: a clear repudiation of the trust duly communicated to
the beneficiary A trustee who obtains a Torrens title over the property held in trust by
him for another cannot repudiate the trust by relying on the registration. The rule
requires a clear repudiation of the trust duly communicated to the beneficiary. The only
act that can be construed as repudiation was when respondents filed the petition for
reconstitution seeking registration only in his name. xHeirs of Tranquilino Labiste v. Heirs
of Jose Labiste, 587 SCRA 417 (2009).68
(4) 10 years have lapsed since the point of repudiation. xEscay v. Court of Appeals, 61
SCRA 369 (1974).
HOWEVER: Though prescription does not run between the trustee and cestui que trust as long
as the trust relations subsist, it runs between against the trustee and in favor of a third person
who holds actual, open, public, and continuous possession adverse to the trust, of land for
over 10 years. xGovernment v. Abadilla, 46 Phil. 642 (1924).
b. SUMMARY OF RULINGS FOR RESULTING TRUSTS:
GENERAL RULE: As a rule, implied resulting trusts do not prescribe except when the trustee
repudiates the trust. Further, the action to reconvey does not prescribe so long as the
property stands in the name of the trustee. To allow prescription would be tantamount to
allowing a trustee to acquire title against his principal and true owner. Tong v. Go Tiat Kun,
722 SCRA 623 (2014).
The rule of imprescriptibility of the action to recover property held in trust may apply to
resulting trusts as long as the trustee has not repudiated the trust. The continuous
recognition of a resulting trust, therefore, precludes any defense of laches in a suit to declare
and enforce the trust. After all, the beneficiary in a resulting trust may, without prejudice to his
right to enforce the trust, prefer the trust to persist and demand no conveyance from the
trustee. xHeirs of Candelaria v. Romero, 109 Phil. 500 (1960).69
A co-ownership is a form of trust, with each owner being a trustee for each other. Mere
actual possession by one will not give rise to the inference that the possession was adverse
because a co-owner is, after all, entitled to possession of the property. Thus, as a rule,
prescription does not run in favor of a co-heir or co-owner as long as he expressly or
impliedly recognizes the co-ownership; and he cannot acquire by prescription the share of
the other co-owners, absent a clear repudiation of the co-ownership. An action to demand
partition among co-owners is imprescriptible, and each co-owner may demand at any time
the partition of the common property. Heirs of Yambao v. Heirs of Yambao, G.R. No.
194260, 13 April 2016.

65A trustee cannot acquire by prescription the ownership of property entrusted to him (Palma v. Cristobal, 77 Phil. 712); an action to
compel a trustee to convey property registered in his name in trust for the benefit of the cestui qui trust does not prescribe (Manalang v.
Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil. 810); the defense of prescription cannot be set up in an action to recover property held
by a person in trust for the benefit of another (Sevilla v. Delos Angeles, 97 Phil. 875); property held in trust can be recovered by the
beneficiary regardless of the lapse of time (Marabilles v. Quito, 100 Phil. 64; Bancairen v. Diones, 98 Phil. 122, Juan v. Zuiga, 4 SCRA
1221; Vda de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962). Ramos v. Ramos, 61 SCRA 284, 299 (1974).
66Laguna v. Levantino, 71 Phil. 566 (1941); Sumira v. Vistan, 74 Phil. 138 (1943); Golfeo v. CA, 12 SCRA 199 (1964); Caladiao v.
Santos, 10 SCRA 691, (1964); Torbela v. Rosario, 661 SCRA 633 (2011).
67Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Caezo v. Rojas, 538 SCRA 242 (2007); Heirs of Tranquilino Labiste
v. Heirs of Jose Labiste, 587 SCRA 417 (2009).
68Torbela

v. Rosario, 661 SCRA 633 (2011)

69Martinez

v. Grao, 42 Phil. 35 (1921); Buencamino v. Matias, 16 SCRA 849 (1966)]. Ramos v. Ramos, 61 SCRA 284 (1974).

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EXCEPTION: In resulting trusts, acquisitive prescription run in favor of the trustee only when he
repudiates expressly the trusts and makes known such repudiation to the beneficiary, and
there is a lapse of 10 years from:
(1) Notice of repudiation served upon the beneficiary; 70
(2) Registration of title in name of trustee, when such registration is equivalent to a clear act
of repudiation said notice of repudiation:71
Such as registration by one of the co-owners of title in his sole name in fraud of the
other co-owners (which makes it a class of constructive trust).72
c. SUMMARY OF RULINGS FOR CONSTRUCTIVE TRUSTS:
GENERAL RULE: In constructive trusts, laches constitutes a bar to actions to enforce the trust,
without need of prior repudiation, 73 and that acquisitive prescription runs in favor of the
trustee after 10 years from the registration of title in trustees name.74
In constructive trusts, there is neither promise nor fiduciary relation; the so-called trustee
does not recognize any trust and has no intent to hold for the beneficiary; therefore, the
beneficiary is not justified in delaying action to recover his property; it is his fault if he delays;
hence, he may be estopped by his own laches. 75
EXCEPTIONS: The acquisitive prescription of 10 years upon registration of title does not apply
to favor the trustee in the following cases:
(1) Where Trustee Recognizes the Rights of Cestui Que Trust. Prescription may not apply by
mere registration of the title in the name of the trustee, where the trustee formally recognized
the beneficial right of the cestui que trust. xGeronimo and Isidro v. Nava and Aquino, 105
Phil. 145 (1959); xAdaza v. Court of Appeals, 171 SCRA 369 (1989).
(2) When the Cestui Que Trust Is a Minor. When the act of repudiation of the trustee was
effected at the time the cestui que trust was still a minor, then such act does not prejudice the
latter: We are unable to see how a minor with whom another is in trust relation can be
prejudiced by repudiation of the trustee addressed to him by the person who is subject to the
trust obligation.. xCastro v. Castro, 57 Phil. 675 (1932).
(3) When Cestui Que Trust Is a Close Relation. The existence of a confidential relationship
based upon consanguinity is an important circumstance for consideration; hence, laches
being rooted in equity, is not to be applied mechanically as between near relatives. xAdaza v.
Court of Appeals, 171 SCRA 369 (1989).76
(4) Where Cestui Que Trust Is in Possession of the Trust Property. Prescriptive period applies
only if there is an actual need to reconvey the property, as when plaintiff is not in possession;
if plaintiff is in possession, prescription does not commence to run. When an action for
reconveyance is nonetheless filed, it would be in the nature of a suit for quieting of title, an
action that is imprescriptible. xBrito v. Dianala, 638 SCRA 529 (2010).77
(5) Where Title of the Trustee Is Void. Where signatures of the petitioners, being forced heirs,
in the extrajudicial settlement with sale have been forged, and although title to the land had

70Castro v. Echarri, 20 Phil. 23; Bargayo v. Camumot, 40 Phil. 857 (1920); Ramos v. Ramos, 45 Phil. 362 (1923); Varsity Hills v.
Navarro, 43 SCRA 503 (1972).
71Caezo

v. Rojas, 538 SCRA 242 (2007).

72Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962); Castrillo v. CA, 10 SCRA 549 (1964); Lopez v. Gonzaga, 10 SCRA 167
(1974); Gerona v. De Guzman, 11 SCRA 153 (1964); Mariano v. Judge De Vega, 148 SCRA 342 (1987); Figuracion v. Figuracion-Gerilla,
690 SCRA 495 (2013).
73Boaga v. Soler, 11 Phil. 651; Claridad v. Henares, 97 Phil. 973; Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959); Candelaria
v. Romero, 109 Phil. 500 (1960); De Pasion v. De Pasion, 112 Phil. 403; J.M. Tuazon & Co. v. Mandanagal, 4 SCRA 84 (1962); Alzona v.
Capunitan, 4 SCRA 450 (1962); Vda. De Jacinto v. Vda. De Jacinto, 5 SCRA 371 (1962); Gerona v. De Guzman, 11 SCRA 153 (1964);
Gonzales v. Jimenez, 13 SCRA 80 (1965); Fabian v. Fabian, 22 SCRA 231 (1968); Bueno v. Reyes, 27 SCRA 1179 (1969); Ramos v.
Ramos, 61 SCRA 284 (1974); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
74Boaga v. Soler, 2 SCRA 755 (1961); J. M. Tuason & Co., Inc. v. Magdangal, 4 SCRA 123 (1962); Alzona v. Capunitan, 4 SCRA 450
(1962); Gonzales v. Jimenez, 13 SCRA 80 (1965); Cuaycong v. Cuaycong, 21 SCRA 1192 (1967); Varsity Hills v. Navarro, 43 SCRA 503
(1972); Escay v. CA, 61 SCRA 369 (1974); Carantes v. CA, 76 SCRA 514 (1977); Gonzales v. Intermediate Appellate Court, 204 SCRA
106 (1991); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007); Cavile v. Litania-Hong, 581 SCRA 408 (2009); Heirs of
Domingo Valientes v. Ramas, 638 SCRA 444 (2010).
75Diaz

v. Gorricho and Aguado, 103 Phil. 261 (1958); Caezo v. Rojas, 538 SCRA 242 (2007).

76Estate

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

77Armamento

v. Guererro, 96 SCRA 178 (1980); Gonzales v. IAC, 204 SCRA106 (1991); Heirs of Domingo Valientes v. Ramas, 638
SCRA 444 (2010); PNB v. Jumamoy, 655 SCRA 54 (2011); Tiongco Yared v. Tiongco, 659 SCRA 545 (2011), Zuiga-Santos v. SantosGran, 738 SCRA 33 (2014); Toledo v. CA, 765 SCRA 104 (2015).

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been registered in the name of the buyer, contract is void, and action to seek the declaration
of nullity is imprescriptible. xMacababbad v. Masirag, 576 SCRA 70 (2009).78
(6) Where Property Is in the Hands of an Innocent Purchaser. Aggrieved party may no longer

file an action for reconveyance based on a constructive trust, when the property has
been acquired by an innocent purchaser for value. xKhoemani v. Heirs of Anastacio
Trinidad, 540 SCRA 83 (2007).79

oOoMID-TERM EXAMINATION COVERAGEoOo

C.

PARTNERSHIPS

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

b.

Registration Key for Commercial Partnerships Coming into Existence (Arts.


118-119, Code of Commerce); While Mere Consent Perfected the Civil Partnership
A laundry business is a civil partnership governed by the Civil Code, and it exist validly
even when no formal partnership agreement was entered into and registered, and the
obligations of the partners for partnership debts would be pro rata. Dietrich v. Freeman, 18
Phil. 341 (1911).

78Cuison
79Cavile

v. Fernandez and Bengzon, 105 Phil. 135 (1959).

v. Litania-Hong, 581 SCRA 408 (2009).

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c. On Partnership Debts: Commercial Partners Were Solidarily Liable, Albeit


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

II. NATURE AND ATTRIBUTES OF THE PARTNERSHIP


1.

Definition of Partnership (Art. 1767)


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

2.

TRI-LEVEL EXISTENCE/LEGAL RELATIONSHIPS IN A PARTNERSHIP SETTING


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

3.

ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP


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

4.

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


c. As to the Nature of the Liabilities of Partners
i. General Partnership (Art. 1776, 2nd par.)
ii. Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867)
5.

COMPARED WITH OTHER MEDIA OF DOING BUSINESS


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

III. PARTNERSHIP AS PRIMARILY A CONTRACTUAL RELATIONSHIP


1.

ESSENTIAL ELEMENTS AND PURPOSE OF THE PARTNERSHIP


a. CONSENT: Partnership Must Necessarily Arise from a Contractual Relationship.
Persons Who Are Not Partners to One Another Are Not Partners as to
Third Persons (Art. 1769[1])
EXCEPT: Partnership by Estoppel (Art. 1825)
b. SUBJECT MATTER: Partners Undertake to Jointly Pursue a Business Enterprise (Art.
1767), through their Agreements/Intentions to: (i) Contribute to a Common Fund;
and (ii) Divide the Profits and Losses.
EXCEPT: A Professional Partnership
Partnership Must Be Established for Common Benefit of the Parties (Art. 1770)
The obtaining of profit or gain from the business to be carried on is the very reason
for the existence of a partnership; it is the element that distinguishes the partnership from
voluntary religious or social organizations. xFernandez v. De la Rosa, 1 Phil. 671 (1903).
An agreement to operate a cockpit, where one contributes his services and the other to
provide the capital, the profits to be divided between them, constitutes a partnership. The
performance of services in connection with the business and that defendant not only
rendered an accounting of the business and paid him his share of the profits, were
competent proof to establish the partnership. xDuterte v. Rallos, 2 Phil. 509 (1903).
Where the society is not constituted for the purpose of gain, it does not fall within this
article of the Civil Code [on partnerships]. Such an organization is fully covered by the
Law of Associations of 1887, but that law was never extended to the Philippine Islands.
xCouncil of Red Men v. Veterans Army, 7 Phil. 685 (1907).
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c. CONSIDERATION: Undertakings to Contribute Money, Property or Industry to a


Common Fund (Art. 1767)
d Rules on Determining Perfected Partnership (Art. 1769)
The issue as to whether there is a partnership between the parties is a factual matter.
xAlicbusan v. Court of Appeals, 269 SCRA 336 (1997).
Although a partnership cannot be established by general reputation, rumor, or hearsay,
nonetheless, a verbal partnership is valid and may be proven by competent evidence, and
intention of the parties to form a partnership may be gathered from the facts and ascertained
from their language and conduct. xKiel v. Estate of P.S. Sabert, 46 Phil. 193 (1924).
When facts proven show that purported partner never furnished the P20,000 capital, nor
rendered any help or intervention in the management of the purported partnership business,
much less demanded an accounting of its affairs and its earnings, there was never intended
a real partnership despite the articles of partnership executed. All that the purported partner
did was to receive her share of P3,000 a month, and was in accordance with the original
letter of defendant (Exh. A), which shows that both parties considered themselves as
lessor-lessee under a contract of lease. Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959).
When family members lease out to SHELL a family lot for the establishment of a gasoline
station, and invested the advanced rentals and deposits to allow one of their members to use
the amounts as the registered dealer of SHELL under its of one station, one dealer policy,
and that the registered dealer had accounted for the operations to the other members of the
family, there was a partnership formed, for which the registered dealer can be compelled to
execute the covering articles of partnership, for accounting and distribution of the shares in
profits of the other partners. Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988).
(i) Co-Ownership or Co-Possession Does Not Itself
Establish a Partnership, Even When Profits Are Shared
Mere co-ownership or co-possession of property does not necessarily constitute the coowners or co-possessors are partners in the absence of express or implied meeting of minds
to enter into a partnership. xNavarro v. Court of Appeals, 222 SCRA 675 (1993).
When land is purchased with funds contributed by the parties and thereafter divided
equally among them, there was no partnershipit was a mere joint acquisition of land, and
there was no agreement to pursue a business undertaking. xGallemet v. Tabilaran, 20 Phil.
241 (1911).
When fifteen people contributed money to buy a sweepstakes ticket with the intention to
divide the prize, and in fact the ticket won third prize, a partnership was constituted.
xGatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939).
First element of an agreement to contribute money, property or industry to a common
fund, is undoubtedly present for petitioners have agreed to, and did, contribute money and
property to a common fund. Second element of intent to divide the profits among
themselves, was present when the facts showed that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves,
displaying the character of habituality peculiar to business transactions engaged in for
purposes of gain. Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957).
Where father and son purchased lot and building and had it administered with the original
purpose of dividing the net income from the property, a partnership was constituted. xReyes
v. CIR, 24 SCRA 198 (1968).
When after partition of the estate, heirs agreed to retain the properties and income into
common enterprise and divide profits in proportion to their shares in the inheritance, coownership was converted into a partnership. Oa v. CIR, 45 SCRA 74 (1972).
When four brothers and sisters acquired lots with the original purpose to divide the lots for
residential purposes, and later they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but to resell the same to
dissolve the co-ownership. The division of the profit was merely incidental to the dissolution
of the co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later. xObillos, Jr. v. CIR, 139 SCRA 436 (1985).
In contrast with Evangelista, when the only facts proven was the existence of coownership between the parties covering two isolated purchase of parcels of land and the
sharing of profits on the subsequent sales thereof, there can be no deduction that an
unregistered partnership has been constituted to make it separately liable for corporate
income tax: the transactions were isolated, the parcels purchased were not managed or even
leased out. Pascual v. CIR, 166 SCRA 560 (1988).
(ii) Sharing in the Gross Return of a Business Does Not Create Partnership
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An exclusive agent mandated to develop a parcel of land and entitled to receive a 20%
commission on the gross sales, cannot claim to be a partner to the venture simply on the
basis that he had made personal advances for the expenses incurred in the development
and administration of the property, since the amounts were never considered contributions
into the business. xBiglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).
(iii) Receipt by a Person of a Share of the Profits of a Business
Despite agreement that Bastida was to receive 35% of the profit from the business of
mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any
contract of partnership constituted on the following key elements: (a) there was never any
common fund created between the parties, since the entire business as well as the expenses
and disbursements for operating it were entirely for the account of Menzi & Co.; (b) there was
no provision in the agreement for reimbursing Menzi & Co. in case there should be no profits
at the end of the year; and (c) the fertilizer business was just one of the many lines of
business of Menzi & Co., and there were no separate books and no separate bank accounts
kept for that particular line of business. The arrangement was one of employment. Bastida
v. Menzi and Co., 58 Phil. 188 (1933).
Where there is no written partnership agreement, nor proof that the claimant received a
share in the profits, nor that he had any participation with the running of the business, then
no partnership claim can be sustained. xSy v. Court of Appeals, 398 SCRA 301 (2003); Heirs
of Jose Lim v. Lim, 614 SCRA 141 (2010).
Although the Olivas were mere creditors, not partners, the Antons agreed to compensate
them for the risks they had taken. The Olivas gave the loans with no security and they were
to be paid such loans only if the stores made profits. Had the business suffered loses and
could not pay what it owed, the Olivas would have ultimately assumed those loses just by
themselves. Still there was nothing illegal or immoral about this compensation scheme.
Anton v. Oliva, 647 SCRA 506 (2011).
(iv) When Entitlement to Net Profits Does Not Create Presumption of Partnership:
As Installment Payments of Debt or Interest Thereof
There is no partnership where a loan was obtained to purchase a venture under the
condition that the lender would receive part of the profits of the business in lieu of
interest. xPastor v. Gaspar, 2 Phil. 592 (1903).
A creditor of a business cannot recover his claim against a person who gave personal
guarantees to some other obligations of the business enterprise and who is without any
right to participate in the profits and cannot be deemed a partner in the business
enterprise, since the essence of partnership is that the partners share in the profits and
losses. xTocao v. Court of Appeals, 365 SCRA 463 (2001).
As Wages of an Employee
Manager of the partnership would naturally have some degree of control over the
business operations and maintenance, but the fact that he had received 50% of the net
profits does not conclusively establish that he was a partnerArt. 1769(4) is explicit that
no inference of being a partner shall be drawn if such profits were received in payment
as wages of an employee. xSardane v. CA, 167 SCRA 524 (1988); xFortis v Gutierrez
Hermanos, 6 Phil. 100 (1906).
The payroll of the company indicating that the brother was listed as an employee
receiving only wages from the company militates against his claim of being a partner.
xHeirs of Tang Eng Kee v. CA, 341 SCRA 740 (2000).
The fact that in their articles the parties agreed to divide the profits of a lending
business in a stipulated proportion shows a partnership exists, even when the other
parties to the agreement were given separate compensations as bookkeeper and credit
investigator. xSantos v. Reyes, 368 SCRA 261 (2001).
As Rent Payments to a Landlord
As Annuity to a Widow or Representative of Deceased Partner
Consideration of Sale of Goodwill or Other Property

2.

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


a. Nominate and Principal
b. Consensual

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

IV. PARTNERSHIP AS A JURIDICAL PERSON (Arts. 44(3), 45, 1768 and 1784)
1.

CONSEQUENCES OF PARTNERSHIP BEING A JURIDICAL PERSON:


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

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Against unreasonable searches and seizures. cf xStonehill v. Diokno, 20 SCRA 383


(1967).
Partnership obtains its personality from the State and therefore not entitled to the
constitutional right against self-incrimination. cf xBataan Shipyard & Engineering Co. v.
PCGG, 150 SCRA 181 (1987).

2.

Provisions Contravening the Attribute of Separate Juridical Personality


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

V. FORMALITIES REQUIRED FOR THE CONTRACT OF PARTNERSHIP


1.

A Partnership Begins from the Moment of Meeting of the Minds to Pursue a


Business Jointly; UNLESS: It Is Otherwise Stipulated (Art. 1784)

2.

FORMALITIES REQUIRED:
a. GENERAL RULE: Being Consensual in Character, a Partnership May Be Constituted in
Any Form (Art. 1771)
Old Civil Code and Code of Commerce: Third parties without knowledge of the
partnerships existence, who deal with the property registered in the name of one partner
have a right to expect effectivity of such transaction on the property, in spite of the protest of
other partners and partnership creditors. xBorja v. Addison, 44 Phil. 895 (1922).
b. EXCEPT: When Capital Coxntribution Is P3,000 or More:
Must Appear in a Public Instrument; and
Registered with the SEC.
BUT: Failure to Comply with Requirements Shall Not Affect the Liability of the
Partnership and Its Members to Third Persons (Art. 1784)
When the articles of partnership provide that the venture is established to operate a
fishpond, it does not necessarily mean that immovable properties or real rights have been
contributed into the partnership which would trigger the operation of Article 1773. Agad v.
Mabato, 23 SCRA 1223 (1968).
Failure to prepare an inventory of the immovable property contributed, in spite of Art. 1773
declaring the partnership void, would not render the partnership void when: (a) No third-party
is involved since Art. 1773 was intended for the protection of third-parties; and (b) the
partners have made a claim on the partnership agreement which is deemed binding between
them as any other contract. xTorres v. Court of Appeals, 320 SCRA 428 (1999).
While the sale of land appearing in a private deed is binding between the parties, it cannot
be considered binding on third persons if it is not embodied in a public instrument and
recorded in the Registry of Deeds. When it comes to contributions of real estate to a
partnership, especially when it covers registered land, then the peremptory provisions of the
Property Registration Decree (P.D. 1459) will prevail as to who has a better claim, right or lien
on the property, since registration in good faith and for value, is the operative rule under the
Torrens system. xSecuya v. Vda. de Selma, 326 SCRA 244 (2000).
c. EXCEPT: Where Immovable Property or Real Rights Are Contributed
Must Be In a Public Instrument (Art. 1771)
Would Be Void If Inventory of the Property Is Not Made, Signed by the
Partiers and Attached to the Public Instrument (Art. 1773)
Failure to register the partnership with the SEC does not invalidate a contract that has the
essential requisites of partnership agreement to contribute to a common fund and the
division of profits and losses would bring about the existence of a partnership. A partnership
may exist even if the partners do not use the words partner or partnership. Angeles v.
Secretary of Justice, 465 SCRA 106 (2005).
Unregistered partnership having all the essential requisites is valid as among the partners,
because the main purpose of registration is to give notice to third parties. The failure to
register does not affect the liability of the partnership and of the partners to third persons,
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much less that of its juridical personality; it can be assumed that the members themselves
knew of the contents of their contract. Ma v. Fernandez, Jr., 625 SCRA 566 (2010).
d. Legal Value of the Formal Requirements for Partnerships
An oral partnership is valid and binding between the parties, even if the amount of capital
contributed is in excess of the sum of 1,500 pesetas. The provisions of law requiring a
contract to be is a particular form should be understood to grant to the parties the remedy to
compel that the form mandated by law be complied with, but does not prevent them from
claiming under an oral contract which is otherwise valid without first seeking compliance with
such form. xThunga Chui v. Que Bentec, 2 Phil. 561 (1903); xMagalona v. Pesayco, 59 Phil.
453 (1934).
Registration of the partnership is the best evidence to prove the existence of the
partnership among the partners. xHeirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740
(2000); xHeirs of Jose Lim v. Lim, 614 SCRA 141 (2010).
When there has been duly registered articles of partnership, and subsequently the original
partners accept an industrial partner but do not register a new partnership, and thereafter the
industrial partner retires from the business, and the original partners continue under the same
set-up as the original partnership, then although the second partnership was dissolved with
the withdrawal of the industrial partner, there resulted a reversion back into the original
partnership under the terms of the registered articles of partnership. There is not constituted
a new partnership at will. Rojas v. Maglana, 192 SCRA 110 (1990).
An instrument purporting to be the contract of partnership which is unsigned and undated,
does not meet the public instrumentation requirements exacted under Article 1771, not even
registrable with the SEC as called for under Article 1772, and which also does not meet the
inventory requirement under Article 1773 since the claims involve contributions of immovable
properties, does not warrant a finding that a contract of partnership or joint venture exist.
Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005).

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


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

4. OTHER RULES ON THE CONSTITUTION OF A PARTNERSHIP


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

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The requirement under the Code of Commerce that the partnership name contain the
names of all the partners, is meant to protect from fraud the public dealing with the
partnership; it cannot be invoked by the partners to allege partnerships non-existence. xJo
Chung Cang v. Pacific Comml Co., 45 Phil. 142 (1923); xPNB v. Lo, 50 Phil. 802 (1927).
d. RULE 3.02, Code of Professional Responsibility: The continued use of the name of a
deceased partner in a professional partnership is permissible, provided that the firm
indicates in all its communications that said partner is deceased.
The contention that Art. 1840 regulating the use of partnership name allows a partnership
from continuing its business under a firm name which includes the name of a deceased partner
has been denied when it comes to a law partnership on the following grounds: (a) it
contravenes the provision of Arts. 1815 and 1825, which impose liability on a person whose
name is included in the firm name, which cannot cover a deceased person who can no longer
be subject to any liability; (b) public relations value of the use of an old firm name can tend to
create undue advantages and disadvantages in the practice of the profession; (c) Art. 1840
covers dissolution and winding up scenarios and cannot be taken to mean to cover firms that
are intended as going concerns, and cover more commercial partnerships; and (d) when it
comes to other professions, there is legislative authority for them to use in their firm names
those of deceased partners. xIn the Matter of the Petition for Authority to Continue Using Firm
Names, 92 SCRA 1 (1979).

VI. RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTNERS


1.

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

2.

PROPERTY RIGHTS OF PARTNERS


a. CO-OWNERSHIP RIGHTS to Specific Partnership Properties (Arts. 1810 and 1811)
Equal Right to Possess, But for Partnership Purpose Only.
Appeals, 163 SCRA 97 (1988).

xCelino v. Court of

Non-Assignable (Art. 1811[2])


Not Subject to Attachment/Execution by Partners Separate Creditors nor For a
Partners Legal Support Obligations (Art. 1811[3])
b. MUTUAL AGENCY: Right to Participate in Management of the Partnership
(i) General Rule on Agency
All Partners Shall Be Considered Agents and Whatever Any One of Them May
Do Alone Shall Bind the Partnership (Arts. 1803[1])
Every Partner Is an Agent of the Partnership for Apparently Carrying On in the
Usual Way the Business of the Partnership (Art. 1818)
Partnership Shall Answer to Each Partner for the Obligation a Partner May
Have Contracted in Good Faith in the Interest of the Partnership Business,
and the Risks in Consequence of Its Management (Art. 1796)
(ii) Other Powers or Rights Relating to Mutual Agency:
Can Dispose of Partnership Property Even When in Partnership Name (Art.
1819)
Admission or Representation Made by Any Partner Concerning Partnership
Affairs Is Evidence Against the Partnership (Art. 1820)
Notice to Any Partner Relating to Partnership Affairs Is Notice to the
Partnership (Art. 1821)
Wrongful Act or omission of Any Partner Acting for Partnership Affairs Makes
the partnership liable (Art. 1822)
Partnership Bound to Make Good Losses for Acts or Misapplications of
Partners (Art. 1823)
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(iii) Acts Requiring Unanimous Consent (Art. 1818)


(iv) Consent Required in Making Alterations on Immovable Property (Art. 1803[2])
(v) When There Is Designation of Manager (Arts. 1800 to 1802)
In the ordinary course of business, a partner has authority to purchase goods, xSmith,
Bell & Co. v. Aznar, 40 O.G. 1882 (1941); to hire employees for the partnership, xGarcia
Ron v. La Compania de Minas de Batau, 12 Phil. 130 (1908); as well as dismiss them,
xMartinez v. Cordoba & Conde, 5 Phil. 545 (1906).
The stipulation in the articles of partnership that the two managing partners may
contract and sign in the name of the partnership with the consent of the other creates an
obligation between the two partners, which consists in asking the others consent before
contracting for the partnership. This obligation of course is not imposed upon a third
person who contracts with the partnership. A third person has a right to presume that the
partner with whom he contracts has, in the ordinary and natural course of business, the
consent of his copartner Third person would naturally not presume that the partner with
whom he enters into the transaction is violating the articles of partnership, but on the
contrary, is acting in accordance therewith. Litton v. Hil & Ceron, 67 Phil. 509 (1935).
In a transaction within the ordinary course of the partnership business effected by the
industrial partner without the consent of the capitalist partner, the provisions in the articles
of partnership that the industrial partner shall manage, operate and direct the affairs,
businesses and activities of the partnership, constitute sufficient authority to make such
transaction binding against the partnership, as against another provision of the articles by
which the industrial partner is authorized To make, sign, seal, execute and deliver
contracts . . upon terms and conditions acceptable to him duly approved in writing by the
capitalist partner. xSmith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941).
When partnership real property had been mortgaged and foreclosed, the redemption
by any of the partners, even when using his separate funds, does not allow such
redemption to be in his sole favor, under the general principle of law under Art. 1818 that a
partner is an agent of the partnership. Under Art. 1807, every partner becomes a trustee
for his copartner with regard to any benefits or profits derived from his act as a partner.
xCatalan v. Gatchalian, 105 Phil. 1270 (1959).
In spite of Art. 129 of Code of Commerce that If the management of the general
partnership has not been limited by special agreement to any of the members, all shall
have the power to take part in the direction and management of the common business,
and the members present shall come to an agreement for all contracts or obligations
which may concern the association, such obligation is imposed by law among the
partners, that does not necessarily affect the validity of the acts of a partner, while acting
in the ordinary course of business of the partnership, as regards third persons without
notice. The latter may rightfully assume that the contracting partner was duly authorized to
contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to
the prejudice of his co-partners. Goquiolay v. Sycip, 108 Phil. 947 (1960).
A partner is presumed to be an authorized agent for the firm to bind it in carrying on the
partnership transaction. xMuasque v. Court of Appeals, 139 SCRA 533 (1985).
c. EQUITY RIGHTS: Right to Shares in Profits and Losses (Arts. 1810 and 1812)
VOID: Stipulation Excluding Partner from Sharing in Profits or Losses (Art. 1799)
(i) Participation in Profits and Losses (Art. 1797):
Distributed in Accordance with Stipulation
If Share In Profits Only Stipulated, Share in the Losses Shall Be the Same
If No Stipulation on Sharing, Partners Share Profits and Losses in
Proportion to their Capital Contributions
In the Absence of Stipulation, an Industrial Partner Shall Receive Such Share
in the Profits As May Be Just and Equitable under the Circumstances.
(ii) Third-Party May Be Designated to Determine Profit-Loss Sharing (Art. 1798)
Determination by Designated Third-Party May Be Impugned Only When
Manifestly Inequitable
But Such Right to Impugn Is Lost:
When Partnership Has Began to Execute the Third Party Decision; or
3 Months Have Lapsed from Knowledge of Such Decision.
In a partnership arrangement, when the agreement to pay a high commission to one of
the partners was in anticipation of large profits being made from the venture, but that
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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. Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).
Art. 1797 covers the distribution of losses among the partners in the settlement of
partnership affairs and does not cover the obligations of partners to third persons which is
covered by Art. 1816. Ramnani v. Court of Appeals, 196 SCRA 731 (1991).
d. Conveyance By Partner of His Whole Partnership Interest DOES NOT (Art. 1813):
Dissolve the Partnership
Entitle the Assignee During the Term of the Partnership to Interfere with
Management or Administration of Partnership Business
Entitle the Assignee to Require Information or an Accounting of Partnership
Matters, Much Less to Inspect Partnership Books
Merely Entitles Assignee to Receive Profits to Which Assignor Is Entitled To
Any partner may transfer his interest and his assignee may demand an accounting from
the remaining partners and a third person into whose hands the partnership property has
passed in satisfaction of the firms debt. xJackson v. Blum, 1 Phil. 4 (1901).
e. Other Proprietary Rights of Partners
(i) Right to Inspect Partnership Books and Records (Art. 1805)
(ii) Right to Full Information (Art. 1806)
(iii) Right to Formal Accounting (Art. 1809) Partners right to accounting for
partnership properties in the custody of the other partners shall apply only when there
is proof that such properties, registered in the individual names of the other partners,
have been acquired from the use of partnership funds, thus: Accordingly, the
defendants have no obligation to account to anyone for such acquisitions in the
absence of clear proof that they had violated the trust of [one of the partners] during
the existence of the partnership. xLim Tanhu v. Ramolete, 66 SCRA 425 (1975).
(iv) Right to Reimbursement for Advances (Art. 1796) The rule is inapplicable where
no money other than what was contributed as capital is involved. xMartinez v. Ong
Pong Co., 14 Phil. 726 (1910).
(v) DELECTUS PERSONAE: Right to Dissolve the Partnership (Art. 1830[2]) Even in a
partnership not at will, a partner can unilaterally dissolve the partnership by a notice
of dissolution, which in effect is a notice of withdrawal. Under Art.1830(2), even if
there is a specified term, one partner can cause its dissolution by expressly
withdrawing even before the expiration of the period, with or without justifiable cause.
Of course, if the cause is not justified or no cause was given, the withdrawing partner
is liable for damages but in no case can he be compelled to remain in the firm. With
his withdrawal, the number of members is decreased, hence, the dissolution. Rojas
v. Maglana, 192 SCRA 110 (1990).

3.

OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP


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

80Moran,

Jr. v. CA, 133 SCRA 88 (1984).

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c. When Bound to Contribute Property:


(i) When Property Contributed Is Specific/Determinate (Art. 1786):
Bound to the Warranty Against Eviction
Liable for the Fruits Thereof from the Time They Should Have Been
Delivered, Without Need of Demand
(ii) When Property Contributed Are Fungible/Cannot Be Kept Without Deterioration:
Risk of Loss Shall Be Borne by the Partnership
(iii) When Contribution in Goods:
Must Be Appraised to Establish Value; Subsequent Change of Value for the
Partnerships Account (Arts. 1787 and 1795)
(iv) When Real Property Contributed:
Inventory of Immovable Property Must Be Made and Attached to Articles of
Partnership Registered with SEC (Arts. 1772 and 1773)
Credit, such as a promissory note or other evidence of obligation, or even goodwill, may
be validly contributed into the partnership. xCity of Manila v. Cumbe, 13 Phil. 677 (1909).
d. Additional Contribution in Case of Imminent Loss (Art. 1791): Unless Otherwise
Agreed, Partner Who Refuses to Contribute Additional Capital, Except an Industrial
Partner, to Save the Venture, Shall Be Obliged to Sell His Interest to Other Partners

4.

FIDUCIARY DUTIES OF PARTNERS


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

81Director

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

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Former partners have no obligation to account on how they acquired properties in their
names, when such acquisition were effected long after the partnership had been dissolved,
especially in the absence of clear proof that they had violated the trust of managing partner
during the existence of the partnership. xLim Tanhu v. Remolete, 66 SCRA 425 (1975).
When a partner engages in a separate business enterprise that is competitive with that of
the partnership, the other partners withdrawal becomes thereby justified and for which the
latter cannot be held liable for damages. Rojas v. Maglana, 192 SCRA 110 (1990).

5.

PARTNERS SUBJECT TO UNLIMITED LIABILITY FOR PARTNERSHIP DEBTS


a. Partners Liable Pro-Rata with Their Separate Properties After Partnership Assets
Have Been Exhausted, for All Partnership Debts (Art. 1816)
Any Stipulation Against Personal Liability of Partners, Even Industrial Partners,
for Partnership Debts Is Void, Except as Among Themselves (Art. 1817)
The meaning of pro rata to determine the unlimited liability of partners in a general
partnership means that they shall equally divide among themselves the partnership debts
remaining after exhaustion of partnership assets. xCo-Pitco v. Yulo, 8 Phil 544 (1907);
xIsland Sales v. United Pioneers General Construction Co., 65 SCRA 554 (1975).
Art. 1816 provides: First, partners obligation to partnership liabilities is subsidiary in
naturethey shall only be liable with their property after all partnership assets have been
exhausted. Resort to properties of a partner may be made only after efforts in exhausting
partnership assets have failed or that such partnership assets are insufficient to cover the
entire obligation. Second, that partners' obligation to third persons with respect to partnership
liability is pro rata or joint, i.e., liable only for the payment of only a proportionate part of the
debt. Joint liability of partners is a defense that can be raised by a partner impleaded in a
complaint against partnership. Guy v. Gacott, G.R. No. 206147, 13 Jan. 2016.
b. All Partners Solidarily Liable with Partnership (Art. 1824) for Everything Chargeable
to the Partnership When Caused By:
Wrongful Act or Omission of Any Partner Acting
In the Partnerships Ordinary Course of Business; or
With Authority from the Other Partners (Art. 1822)
Partners Act or Misapplication of Properties of Third Parties
Where Partner Receives Property Acting With Apparent Authority; or
Partnership Received Property in the Ordinary Course of Business (Art. 1823)
Partners are solidarily liable for employees workmens compensation claims. xLiwanag
and Reyes v. Workmens Compensation Commission, 105 Phil. 741 (1959).
c. Newly Admitted Partner into an Existing Partnership Is Liable Only Out of
Partnership Property Shares and Contributions, for All the Obligations of the
Partnership Arising Before His Admission (Art. 1826)
d. Partnership Creditors Have Preference Over the Personal Creditors of Each of the
Partners as Regards the Partnership Property (Art. 1827)
Remedy of Partners Separate Creditors (Art. 1814): May Apply with the Courts
That Entered the Judgment Debt
To Charge the Debtors Equity Interests for the Payment from His Share in the
Profits or Any Other Money Due from the Partnership
Which Interest Charged May Be Redeemed at Any Time Before Foreclosure by
the Other Partners or the Partnership Itself

6.

Liability Rules When Non-Partner Represents Himself to Third Parties as a Partner in


an Existing Partnership (Art. 1825):
a. Liable to Third Parties Who Act in Good Faith
When Partnership Liability Results, He Is Liable as Though He Were an Actual
Member of the Partnership
When No Partnership Liability Results, Liable Pro Rata with the Other Persons, If
Any, So Consenting to the Contract or Representation as to Incur Liability,
Otherwise Separately
b. When It Is the Firm That Has Made Such Representation, He Is an Agent and May
Bind the Representers to the Same Extent as Though He Were in Fact a Partner

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


1.

TYPES AND CAUSES OF DISSOLUTION


a. NON-JUDICIAL DISSOLUTION (i.e., Ipso Jure Dissolution) (Arts. 1830, 1833, and 1840[1])
(i) Without Violation of the Partnership Agreement (Without Breach):
Expiration of the Partnership Term or Achievement of Undertaking
By the Express Will of a Partner Acting in Good Faith in a Partnership at Will
Mutual Assent of the Partners to Dissolve or Accept a New Partner
Expulsion of a Partner Pursuant to an Agreement Granting Such Right
The legal effect of the changes in the membership of the partnership would be the
dissolution of the old partnership. Yu v. NLRC, 224 SCRA 75 (1993).
(ii) In Contravention of Agreement (Art. 1830[2]): Where the Circumstances Do Not
Permit a Dissolution Under Any Other Provision, By the Express Will of Any
Partner at Any Time
A mere falling out or misunderstanding among the partners does not convert the
partnership into a sham organization, since the partnership exists and is dissolved under
the law. Muasque v. Court of Appeals, 139 SCRA 533, 540 (1985).
Partner who effect a dissolution by his withdrawal in contravention of an agreement
renders himself liable for damages which may be deducted from his partnership account,
and he loses his right to wind-up. Rojas v. Maglana, 192 SCRA 110 (1990).
An unjustified dissolution by a partner can subject him to action for damages because
by the mutual agency that arises in a partnership, the doctrine of delectus personae
allows the partners to have the power, although not necessarily the right, to dissolve the
partnership. Tocao v. Court of Appeals, 342 SCRA 20 (2000)
(iii) By Operation of Law (Art. 1830)
Supervening Illegality of the Partnership Business
Loss of Specific Thing Contributed
Death, Insolvency or Civil Interdiction of a Partner
Absence of any clear stipulation, the acceptance back of part of the contribution by the
partner does not necessarily mean his withdrawal from, or dissolution of, the partnership.
Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
The death of a partner dissolves the partnership, but the liquidation of its affairs is by
law entrusted not to the executors of the deceased partner, but to the surviving partners or
to the liquidators appointed by them. xWahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).
A partnership is dissolved by a partners death there being no stipulation in the
partnership contract of its subsistence to the contrary, and it thereby attains the status of a
partnership in liquidation, and only the rights inherited by the heirs of the deceased
partner were those resulting from the said liquidation and nothing more. If there would be
a continuation of the partnership a clear agreement on meeting of the minds must be
made, otherwise, a new partnership arrangement cannot be presumed to have arisen
among the heirs and the remaining partners. xBearneza v. Dequilla, 43 Phil. 237 (1922).
In equity, surviving partners are treated as trustees in regard to the interest of the
deceased partner in the firm, and it is their duty to render an account of the performance
of their trust to the personal representatives of the deceased partner, and to pay over to
them the share of such deceased member in the surplus of firm property, whether it
consists of real or personal assets. xGuidote v. Borja, 53 Phil. 900 (1928).
b. BY JUDICIAL DECREE OF DISSOLUTION:
(i) A Partnership With an Unlawful Object or Purpose May Be Dissolved by Judicial
Decree, and the Profit Confiscated in Favor of the State (Art. 1770)
(ii) By the Decree of a Court on Application By or For a Partner (Art. 1831):
Partner Declared Insane in Any Judicial Proceeding or Shown to Be of
Unsound Mind
Partner Becomes in Any Other Way Incapable of Performing His Contract
A Partner Has Been Guilty of Such Conduct as Tends to Affect Prejudicially
the Carrying on of the Partnership Business
A Partner Willfully or Persistently Commits a Breach of the Agreement That It
Is Not Reasonably Practicable to Carry-on the Partnership Business with Him
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When Partnership Business Can Only Be Carried-on at a Loss


Other Circumstances That Render a Dissolution Equitable
Assignee of Partners Interest May Seek Court Order:
Upon Termination of the Specified Term or the Particular Undertaking of the
Partnership; or
At Any Time in a Partnership at Will
Sustaining of losses is valid basis to dissolve the partnership. xMoran, Jr. v. Court of
Appeals, 133 SCRA 88 (1984).
Courts can dissolve a partnership without formal application when the continuation of the
partnership has become inequitable. xFue Leung v. IAC, 169 SCRA 746 (1989).

2.

OPTIONS ARISING BY REASON OF DISSOLUTION:


a. When Dissolution Is Without Contravention of Partnership Agreement: Each Partner
May Demand for the Winding-Up of the Partnership (Art. 1837):
Partnership Properties Applied to Discharge Liabilities, and Surplus Applied to
Pay in Cash the Net Amount Owing to the Respective Partners
b. When Dissolution Caused by Bona Fide Expulsion of a Partner Who Is Discharged
from Partnership Liabilities (Art. 1837):
Expelled Partner Shall Receive in Cash Only the Net Amount Due Him, i.e., Less
Damages
Partnership Business Continues with the Remaining Partners
c. When Dissolution Is in Contravention of Partnership Agreement:
Each Non-Breaching Partner Shall Have the Right To (Art. 1837):
Liquidate the Partnership (i.e., Have Partnership Properties Applied to
Discharge Liabilities and Receive His Share of the Surplus
Recover Damages Against Each Breaching Partner
All Breaching Partners Are Limited (Art. 1837):
If Partnership Business Not Continued: To Receive Their Net Share in the
Surplus After Payment of All Liabilities
If Partnership Business Continued: To Have Net Value of Their Interests
Ascertained (Which Shall Not Include Goodwill) and Paid to Them in Cash or
Payment Is Secured by a Bond, and to Be Released from All Existing
Partnership Liabilities
All Non-Breaching Partners, If They All Desire, May Continue the Business:
Provided They Secure the Payment by Bond or Pay to Any Breaching Partner
the Value of His Interest, Net the Damages, and Indemnity Him Against All
Present or Future Partnership Liabilities (Art. 1837)
A New Partnership Is Thereby Constituted Among the Continuing Partners
d. When Dissolution is By Operation of Law:
When a Partner Retires or Dies and Business Is Continued Without Settlement of
Accounts, Such Partner or His Representative Shall Against Such Person or
Partnership (Art. 1841):
Have the Value of His Interest the Dissolution Ascertained
Receive as an Ordinary Creditor an Amount Equal to the Value of His Interest
Option to Receive Interest on Such Value or the Profits Attributable to the Use
of His Right in the Property of the Dissolved Partnership
BUT: Partnership Creditors Have Priority Over Partners Separate Creditors
A partnership guilty of an act of insolvency may be proceeded against and declared
bankrupt in insolvency proceedings despite the solvency of each of the partners composing
it. xCampos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1922).
e. When There is Fraud or Misrepresentation (Art. 1838):
Where the Partnership Contract Is Rescinded on the Ground of Fraud or
Misrepresentation of One of the Parties, Party Rescinding Is Entitled, After
Payment of All Partnership Liabilities to Third Persons, To:

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Lien or Right of Retention of Surplus of the Remaining Partnership Property


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

3.

NATURE AND EFFECTS OF DISSOLUTION:


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

4.

WINDING-UP AND TERMINATION OF THE PARTNERSHIP BUSINESS ENTERPRISE


Winding-up is process of settling business affairs after dissolution, which includes the
paying of previous obligations; collecting of assets previously demandable; even new
business if needed to wind up, as contracting with a company for demolition of the garage
used in a used car partnership. Termination is the point in time after all the partnership
affairs have been wound up. Idos v. Court of Appeals, 296 SCRA 194 (1998).
a. Partners Authority Would Only Be for Purposes of Winding-Up (Art. 1834)
b. Authority to Wind-Up (Art. 1836): Only the Partners Who Have Not Wrongfully
Dissolved the Partnership or the Legal Representative of the Last Surviving Partner
c. Upon Dissolution (Art. 1839[4] and [7]): Partners Shall Contribute Amounts
Necessary to Satisfy Partnership Debts Not Covered by Partnership Assets
HOWEVER: Separate Creditors of Deceased Partner Shall Have Priority Over His
Separate Properties (Art. 1835)
d. SETTLEMENT OF LIABILITIES AND PARTNERSHIP CLAIMS (Art. 1839):
Partnership Assets Covers Partnership Properties and Partners Required
Contributions under the Unlimited Liability Rule
Partnership Liabilities Shall Be Paid in the Following Order of Payment:
Those Owing to Creditors Other Than the Partners
Those Owing to Partners Other Than for Capital and Profits
Those Owing to Partners in Respect of Capital
Those Owing to Partners in Respect of Profits
When a partner withdraws from the partnership, he is entitled to the payment of what may
be due him after liquidation. But no liquidation is necessary where there was already a
settlement or an agreement as to what the retiring partner shall receive, and the latter was in
fact reimbursed pursuant to the agreement. xBonnevie v. Hernandez, 95 Phil. 175 (1954).
Managing partner is not personally liable for payment of partners shares. It is the
partnership that must refund the shares of retiring partners, which cannot be returned without
first dissolving and liquidating the partnership, for the return is dependent on the discharge of
the creditors, whose claims enjoy preference over those of the partners. All partners are
interested in his assets and business, and are entitled to be heard in the matter of the firms
liquidation and the distribution of its property. xMagdusa v. Albaran, 5 SCRA 511 (1962).
Since partnership has a separate juridical personality, upon its dissolution, the withdrawing
partners have no cause of action to demand the return of their equity from the other partners;
it is the partnership that must refund the equity of the retiring partners. However, before
partners can be paid their shares, partnership creditors must first be compensated; whatever
is left thereafter becomes available for the payment of the partners shares. It is wrong to
presume that capital contributions at the beginning of the partnership remains intact,
unimpaired and available for distribution or return to the partners, or that the total capital
contribution in a partnership is equivalent to the gross assets to be distributed to the partners
at the time of dissolution of the partnership. In the pursuit of a partnership business, its
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capital is either increased by profits earned or decreased by losses sustained; it does not
remain static and unaffected by the changing fortunes of the business. When partners
venture into business together, they should have prepared for the fact that their investment
would either grow or shrink. Villareal v. Ramirez, 406 SCRA 145 (2003).

VIII. LIMITED PARTNERSHIPS


1.

BACKGROUND AND DEFINITION


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

2.

FORMATION AND STATUTORY REQUIREMENTS (Art. 1844)


a. Contents of the Articles of Limited Partnership (the Certificate)
Partnership Name, Add the Word Limited
Name of the Limited Partner Cannot Appear in Partnership Name (Art. 1846)
Character and Location of Business
Term of Existence of the Partnership
On the Partners:
Name and Residence of Each General and Limited Partners, and Their
Designation as Such Being Specifically Delineated
Amount/Description of Contributions, Details of Future Contributions, If Any,
to Be Made by Limited Partners.
Right of Limited Partners to Demand/Receive Partnership Property Other
Than Cash in Return for His Contribution
Shares of Profits, and Compensation by Way of Income of Limited Partners
Priority Rights Among the Limited Partners
Right of Substitution or Assignment by Limited Partners
Admission of Additional Limited Partners
Right to Continue the Business by the Remaining General Partners Upon
Death, Retirement, Civil Interdiction, Insanity or Insolvency of General Partner
b. Substantial Compliance (Art. 1844): Limited Partnership Is Formed If There Has
Been Substantial Compliance in Good Faith With Requirements Mandated by Law
Substantial, rather than strict, compliance in good faith with the legal requirements is all
that is necessary for the formation of a limited partnership; otherwise, when there is not even
substantial compliance, the partnership becomes a general partnership as far as third
persons are concerned. Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).
c. Effects of False Statement in Certificate (Art. 1847): One Who Suffers Loss By
Reliance on Such Statement May Hold Liable Any Party to the Certificate Who Knew
the Statement to Be False.
d. Cancellation or Amendment of Certificate (Arts. 1864 and 1865):
The Certificate Must Be Cancelled When:
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Partnership Is Dissolved
There Cease to Be Limited Partners
Certificate Must Be Amended When (Art. 1849):
Change in: Firm Name, in Character of the Partnership Business, in the
Period, or a Time Is Fixed for Its Dissolution; Amount or Character of
Contributions of Limited Partners, in Time for Return of a Contribution
An Additional Limited Partner and/or General Partners Is Admitted, or a
Person Is Substituted as a Limited Partners
A General Partner Retires, Dies, Becomes Insolvent or Insane, or Is Under
Civil Interdiction and the Business Is Continued
A False or Erroneous Statement in Certificate or to Make a Change in Any
Other Statement in Order It Shall Accurately Represent Their Agreement.

3.

GENERAL PARTNERS (Art. 1850)


a. General Partners Have the Rights and Powers and Be Subject to All the Restrictions
and Liabilities of a Partnership Without Limited Partners.
b. HOWEVER: a General Partner Shall Have Authority to Do the Following Only With the
Written Consent or Ratification of the Limited Partners:
Do Any Act in Contravention of the Certificate
Do Any Act Making It Impossible to Carry on Partnership Business
Confess a Judgment Against the Partnership
Possess Partnership Property or Assign Rights Other Than Partnership Purpose
Admit a New General Partner
Admit a New Limited Partner, Unless Right to Do So Is Given in the Certificate
COMPARE: Art. 1818
c. General Partner May Also Be a Limited Partner (Art. 1853):
Provided Such Fact Shall Be Stated in the Certificate
Shall Have All the Rights/Powers, Subject to All Restrictions of General Partner
EXCEPT: In Respect to His Contribution, He Shall Have the Rights Against the
Other Members Which He Would Have Had If He Were Not Also a General Partner

4.

LIMITED PARTNERS
a. He May Contribute Money or Property, But Never Service (Art. 1845)
b. Shall Not Be Liable As Such to the Obligations of the Partnership (Art. 1843);
EXCEPT:
When He Allows His Surname to Be Part of the Partnership Name (Art. 1846)
He Takes Part in the Control of the Partnership Business (Art. 1848)
c. He Shall Have the Same Right as a General Partner to (Art. 1851):
Have Partnership Books Kept at Principal Place of Business, to Inspect and/or
Copy Them at Reasonable Hours
Have on Demand True and Full Information of Things Affecting the Partnership
A Formal Account of Partnership Affairs
Have the Dissolution and Winding-up by Judicial Decree
d. He May Loan Money to, and Transact Business with, the Partnership and Receive on
Account of the Resulting Claims Against the Partnership, with General Creditors
But He Cannot in Respect to Such Claims Receive or Hold a Collateral Security
on Partnership Assets;
Nor a Payment, Conveyance or Release When Assets of the Partnership Not
Sufficient to Cover All Liabilities to Third Parties. (Art. 1854)
e. He Shall Have Priority of Settlement of Their Claims as Agreed Upon Them or as
Provided in the Certificate.
In the Absence of Agreement or Provision in the Certificate, Limited Partners
Shall Stand Upon Equal Footing (Art. 1855)

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f. He May Receive the Stipulated Share in the Profits and/or Compensation By Way of
Income, Provided That After Such Payment the Partnership Assets Are Sufficient to
Cover Liabilities to Third Parties (Art. 1856)
g. He Has the Right to Demand Return of His Contribution (Art. 1857):
When the Date Specified in the Certificate for Its Return Has Arrived
On Dissolution of the Partnership
If No Time Is Specified in Certificate for Return of Contribution or for Dissolution
of Partnership: After He Has Given 6 Months Written Notice to All Members
h. He Shall Not Receive Any Part of His Contribution Until (Art. 1857):
All Liabilities to Third Parties Have Been Paid or There Remains Property of the
Partnership Sufficient to Pay;
Such Return Is With Consent of All Members, or Return Is Rightfully Demanded;
Certificate Is Cancelled or Amended.
i. He Is Not Liable for the Partnership Debts Beyond His Contribution (Art. 1858);
EXCEPT:
For Difference Between His Contribution as Actually Made and That Stated in
Certificate as Having Been Made
For Any Unpaid Contribution Which He Agreed in the Certificate in the Future
A Limited Partner Holds as Trustee for Partnership
Specific Property Stated in the Certificate as Contributed by Him, But Which
Was Not Contributed or Wrongfully Returned
Money or Other Property Wrongfully Paid or Conveyed to Him on Account of
His Contribution
j. Limited Partners Right to Assign Their Rights or Substitute Another (Art. 1859):
A Limited Partners Interest Is Assignable
A Substituted Limited Partner Is a Person Admitted to All the Rights of a
Limited Partner Who Dies or Has Assigned His Interest
Assignee Shall Have the Right to Become a Substituted Limited Partner Only If:
All the Members Consent; OR
Assignor Gives Assignee Such Right under the Terms of the Certificate
AND the Certificate Is Appropriately Amended
Substituted Limited Partner Has All the Rights and Powers, and Is Subject to All
the Restrictions and Liabilities of Assignor, Except Those Liabilities of Which He
Was Ignorant and Which Could Not Be Ascertained from the Certificate
Substitution Does Not Release Assignor From Partnership Liabilities For:
False Statements in the Certificate (Art. 1847)
The Difference or What Is Due From Him for His Contributions (Art. 1858)
An Assignee Who Is Not Substituted Limited Partner Has Only One Right: To
Receive the Share of the Profits or the Return of the Contribution Which the
Assignor Was Entitled To
k. Application of a Creditor of Limited Partner (Art. 1862): A Limited Partners
Creditors May Apply With the Courts To:
Charge His Partnership Interests with Payment of Unsatisfied Amount of Such
Claims, Appoint a Receiver, Make All Other Orders Which May Be Appropriate
Interest May Be Redeemed With Separate Property of Any General Partner, But
Not Partnership Property
l. Limited Partner Is Not a Proper Party to Proceedings By or Against the Partnership
EXCEPT: Where Object Is to Enforce a His Right Against or Liability to the
Partnership (Art. 1866)
m. A Person Who Has Contributed to the Capital of a Business Conduced as a
Partnership, Believing that He Has Become a Limited Partner:
Is Not a General Partner By Reason of Exercise of Such Rights,; PROVIDED: On
Ascertaining Mistake, He Promptly Renounces His Interest in the Profits of the
Business or Other Compensation by Way of Income
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EXCEPT: When He Allows His Surname to Be Part of the Firm Name (Art. 1852)

4.

DISSOLUTION AND WINDING UP


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

IX. SEC JURISDICTION ON PARTNERSHIP MATTERS


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

D.

JOINT VENTURES

JOINT VENTURES ARE SPECIES OF PARTNERSHIP

I.

The prevailing school of though in the Philippines is that joint ventures are species of
partnership, and issues arising are to be resolved under the Law on Partnerships. xHeirs of Tan
Eng Kee v. Court of Appeals, 341 SCRA 740 (2000).82
Generally understood to mean an organization formed for some temporary purpose, a joint
venture is likened to a particular partnership, Joint ventures are governed by the law on
partnerships which are, in turn, based on mutual agency or delectus personae. Applying therefore
Art. 1813 of the Civil Code, it is evident that (t)he transfer by a partner of his partnership interest
does not make the assignee of such interest a partner of the firm, nor entitle the assignee to
interfere in the management of the partnership business or to receive anything except the
assignee's profits. Realubit v. Jaso, 658 SCRA 146 (2011).

II. TYPES OF JOINT VENTURE ARRANGEMENTS


1.

INFORMAL OR CONTRACTUAL JV ARRANGEMENT WITHOUT A SEPARATE FIRM

(SEC Opinion, 22 Dec. 1966; SEC Opinion, 29 Feb.1980; SEC Opinion, 03 Sept. 1984)

82Primelink

Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006).

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CA did not err in decreeing the close characteristics of partnerships and joint venture
agreements. There is also no merit in the assertion that before this particular partnership can
be formed, it should have been formally reduced into writing since the capital involved is
more PhP3,000, so that there is no evidence of written agreement to form a partnership
between petitioners and MBMI, no partnership was created. A partnership is defined as two
or more persons who bind themselves to contribute money, property, or industry to a
common fund with the intention of dividing the profits among themselves. On the other hand,
joint ventures have been deemed to be akin to partnerships since it is difficult to distinguish
between joint ventures and partnerships. Narra Nickel Mining and Dev. Corp. v.
Redmont Consolidated Mines Corp., 722 SCRA 382 (2014).
Contract of Lease violates PCSOs charter which prohibits it to hold and conduct charity
sweepstakes races, lotteries and other similar activities, in collaboration, association or joint
venture with any other party, because it mandates lessee to contribute resources into the
venture and to manage and operate directly the facilities, and makes lessee participate not
only in the revenues generated from the venture, and in fact absorb most of the risks
involved therein. A JVA has really been constituted between purported lessor and lessee,
since under the Law on Partnership, whenever there is an agreement to contribute money,
property or industry to a common fund, with an agreement to share the profits and losses,
then a partnership arises. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
When the purported primary co-venturer in a consortium (which is an association of
corporation bound in a joint venture arrangement) declares unilaterally that the other four
members are part of a consortium, but there is no affirmation from any of the other members,
nor is there a showing through a formal joint venture agreement of a community of interest, a
sharing of risks, profits and losses in the project bidded for, then there is really no joint
venture constituted among them, lacking the essential elements of what makes a
partnership. Information Technology Foundation v. COMELEC, 419 SCRA 141 (2004).
a. JVAs Must Be Construed and Enforced as Contracts Among Co-Venturers
When a Joint Venture Agreement covers the terms for the development of a subdivision
project, the contributions of co-venturers and manner of distribution of the profits, a
partnership has been duly constituted under Art. 1767 of Civil Code, and although no
inventory was prepared covering the parcels of land contributed to the venture, much less
was a certificate of registrations filed with the SEC, the partnership was not void because: (a)
Art. 1773 is intended for the protection of the partnership creditors and cannot be invoked
when the issue is between and among the partners; and (b) the alleged nullity of the
partnership will not prevent courts from considering the JVA as an ordinary contract form
which the parties rights and obligations to each other should be inferred and enforced.
Torres v. Court of Appeals, 320 SCRA 428 (1999).
Although parties executed a Power of Attorney and referred to themselves as Principal
and Manager, it reveals that a r joint venture was indeed intended by the parties. Perusal of
the agreement indicates that the parties had intended to create a partnership and establish a
common fund for the purpose. They also had a joint interest in the profits of the business as
shown by a 50-50 sharing in the income of the mine. While a corporation, like petitioner,
cannot generally enter into a contract of partnership unless authorized by law or its charter, it
has been held that it may enter into a joint venture which is akin to a particular partnership
relationship. Philex Mining Corp. v. CIR, 551 SCRA 428 (2008).
When principal and agent have entered into a Power of Attorney covering a construction
project, with the principal contributing thereto his contractors license and expertise, while the
agent would provide and secure the needed funds for labor, materials and services, deal with
the suppliers and sub-contractors; and in general and together with the principal, oversee the
effective implementation of the project, for which the principal would receive as his share 3%
of the project cost while the rest of the profits shall go to the agent, the parties have in effect
entered into a partnership, and the revocation of the powers of management of the agent is
deemed a breach of the contract. Mendoza v. Paule, 579 SCRA 349 (2009).
In an informal joint venture arrangement, because no separate firm or business enterprise
has been constituted as to the dealing public, then the effects of the attributes of mutual
agency and unlimited liability are not made to apply with respect to creditors.Traveo v.
Bobongon Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (2009). [See
contrary ruling in Bastida v. Menzi and Co., 58 Phil. 188 [1933])

2.

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


The fact that the instrument does not clearly provide for an option, and not an obligation,
on the part of one of the co-venturers to make contributions into the business enterprise, will
not detract from the legal fact that they constituted a partnership between themselves: The
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wording of the parties agreement as to petitioners contribution to the common fund does not
detract from the fact that petitioner transferred its funds and property to the project as
specified in paragraph 5, thus rendering effective the other stipulations of the contract,
particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances until
termination of the parties business relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions acquired an obligatory nature
as soon as petitioner had chosen to exercise the option. Philex Mining Corp. v.
Commissioner of Internal Revenue, 551 SCRA 428 (2008).
A joint venture is governed by Law on Partnerships. Here, the JVA parties agreed on a
50-50 ratio on the proceeds of the project, although they did not provide for the splitting of
losses, which therefore puts into application Art. 1797: the same ratio applies in splitting the
obligation-loss of the joint venture. The appellate courts decision must be modified, however,
there being a joint venture, there is no need for Gotesco to reimburse Marsman Drysdale for
50% of the aggregate sum due to PGI since not allowing Marsman Drysdale to recover from
Gotesco what it paid to PGI would not only be contrary to the law on partnership on division
of losses but would partake of a clear case of unjust enrichment at Gotesco's expense.
Marsman Drysdale Land, Inc. v. Philippine Geoanalytics, Inc., 622 SCRA 281 (2010).
A joint venture is a partnership and governed by the Law of Partnerships. Art. 1824
provides all partners solidarily liable with the partnership due to any wrongful act or omission
of any partner acting in the ordinary course of the business of the partnership or with the
authority of his co-partners. Whether innocent or guilty, all the partners are solidarily liable
with the partnership itself. J. Tiosejo Investment Corp. v. Ang, 630 SCRA 334 (2010).

3.

THROUGH A JOINT VENTURE CORPORATION


The manner of nomination of the members of the Board of Directors provided in the Joint
Venture Agreement must be made effective and reconciled with the statutory provision on
cumulative voting made applicable by the Corporation Code to stock corporations.
Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989).
When a corporation has been organized under the terms of a JVA, the right of first refusal
provided therein constitutes a legal means by which the corporate venture would include the
delectus personae characteristic within the JV arrangement, which allows the co-venturersstockholders the ability to prevent equity interests from being transferred to third parties. The
JVAs right of first refusal must be made to apply and be binding to the Government and the
bidder at a public bidding held on the shares of the JV corporation constituted pursuant to
the JVA. JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003).
Joint venture is an association of companies jointly undertaking a commercial endeavor,
with all contributing assets and sharing risks, profits, and losses. It is hardly distinguishable
from a partnership considering that their elements are similar and, thus, generally governed
by the law on partnership. Under JV Agreement, PNCC contributes its franchise, while the
partner contributes the financing both necessary for the construction, maintenance, and
operation of the toll facilities. PNCC did not thereby lease, transfer, grant the usufruct of, sell,
or assign its franchise or other rights or privileges. This remains true even though the
partnership acquires a distinct and separate personality from that of the joint venturers or
leads to the formation of a joint venture company. Hontiveros-Baraquel v. Toll Regulatory
Board, 751 SCRA 271 (2015).
A verbal JVA to incorporate a company that would hold parties shares and serve a
business vehicle for their food enterprise, is valid and binding. JVA created between them
reciprocal obligations that must be performed in order to fully consummate the contract and
achieve the purpose for which it was entered into. JVA is deemed extinguished through
rescission under Article 1192 in relation with Article 1191 of the Civil Code. Dueas
must therefore return the P5 Million that Fong initially contributed since rescission requires
mutual restitution. After rescission, the parties must go back to their original status
before they entered into the agreement. Fong v. Dueas, 757 SCRA 412 (2015).

III. SPECIAL JOINT VENTURE DEFINITIONS AND CONCEPTS


1.

Revised Guidelines for Entering into Joint Venture (JV) Agreement Between
Government and Private Entities Per Section 8 of E.O. 423 83 (NEDA Circular
approved on 03 May 2013)
(i) 5.7 Joint Venture (JV). An arrangement whereby a private sector entity or a group of
private sector entities on one hand, and a Government Entity or a group of Government

83
http://www.neda.gov.ph/references/Guidelines/RevisedGuidelines.pdf

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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).
(ii) 5.3 Contractual JV. A legal and binding agreement under which the JV Partners shall
perform the primary functions and obligations under the JVA without forming a JV
Company.
(iii) 5.8 JV Company. A stock corporation incorporated and registered in accordance with the
provisions of the Corporation Code of the Philippines, and based on the prevailing rules
and regulations of the Securities and Exchange Commission (SEC) of which fifty percent
(50%) or less of the outstanding capital stock is owned by the government. The JV
Company shall be registered by the JV partners that shall perform the primary functions
and obligations of the JV as stipulated under the JV Agreement. The JV Company shall
possess the characteristics stipulated under these Guidelines.

2.

Regulating Combinations in Restraint of Trade and Unfair Competition: Rules and


Regulations to Implement Rep. Act No. 10667 (Philippine Competition Act)
Rule 2(i): Joint venture refers to a business arrangement whereby an entity or group of
entities contribute capital, services, assets, or a combination of any or all of the foregoing, to
undertake an investment activity or a specific project, where each entity shall have the right
to direct and govern the policies in connection therewith, with the intention to share both
profits and risks and losses subject to agreement by the entities.

IV. TAX RECOGNITION AND TREATMENT OF JOINT VENTURES


1.

Generally, a Joint Venture, Like a Partnership Is Treated as Corporate Taxpayer.

2.

A JV Consortium Undertaking Construction Projects or Engaging in Petroleum,


Coal, Geothermal and Other Energy Operations Pursuant to an Operating or
Consortium Agreement under a Service Contract with the Government, Shall Not
Be Taxed Separately as a Corporate Taxpayer. (Sec. 22(B), NIRC of 1997)

oOo

ATP&JV Outline 2016


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