notes on partnership and agency

Morc’s Notes on Partnership and Agency

Notes on Partnership and Agency

PRELIMINARY CONSIDERATIONS

Review of the Law on Contracts

Statutory definition of a contract: A contract is a

meeting of minds between two persons whereby

one binds himself, with some respect to the other,

to give something or to render some service (Article

1305, New Civil Code).

Effect: In effect, obligations arising from

contracts have the force of law between the

contracting parties and should be complied

with in good faith (Article 1159, NCC).

Essential elements (COC):

1. Consent. It is the conformity or

concurrence of wills (offer and acceptance)

and with respect to contracts, it is the

agreement of the will of one contracting

party with that of another or others, upon

the object and terms of the contract (De

Leon). In the Philippines, the theory of

cognition is followed. This means that the

offer and the acceptance concur only when

the offeror comes to know, and not when

the offeree merely manifests his

acceptance.

2. Object. It is the subject matter of the

contract.

3. Consideration/Cause. It is the “why” of the

contract.

Form: Contracts are obligatory in whatever form

they may have been entered into, provided that all

the essential requisites for their validity are present.

However, when the law requires that a contract be

in some form in order that it may be valid or

enforceable, or that a contract be proved in a certain

way, that requirement is absolute and indispensable.

Principal characteristics of contracts (AMOR = love)

1. Autonomy. The freedom to establish such

stipulations, clauses, terms and conditions

as the parties may deem convenient.

However, the stipulations should not

contravene law, morals, good customs,

public order or public policy (Article 1306,

NCC).

2. Mutuality. Validity or compliance binds

both parties and cannot be left to the will of

one of them (Article 1308).

3. Obligatory force and consensuality.

Contracts are perfected by mere consent,

and from that moment, the parties are

bound not only to the fulfillment of what

has been expressly stipulated but also to all

the consequences which, according to their

nature, may be keeping with good faith,

usage and law (Article 1315).

4. Relativity. Contracts, as a general rule, take

effect only between the parties, their

assigns and heirs (Article 1311).

History of Partnership as a business organization

According to Professor Rowley (1916), the earliest

form of partnership was that of the first man and

first woman who joined forces against the elements

and the dangers while they gave one another mutual

protection and assistance. He described such

partnership as the rudest sort, with no laws

governing the subject except the law of the

strongest arm, the quickest eye, and the heaviest

club.

De Leon and De Leon (2010) have noted that,

between 3,000 BC and 1,000 BC at the time of

Babylonian civilization, people have learned to pool

their resources to a common fund. Hence,

Hammurabi provided for the regulation of

partnerships in his compilation of the system of laws

during that time. It can be gainsaid therefore that

the idea of forming partnerships was undoubtedly

practiced from the earliest time among those

individuals who did not have sufficient capitals and

not in a position to conduct business or to undertake

certain enterprises singly (Espiritu, 1918).


However, most authors including De Leon, have

credited the development of partnership as a form

of business organization to the Romans, hence were

regulated by Roman law (Paras; Villanueva).

During the Industrial Revolution in England,

incorporations were restricted by the Parliament

through the criteria of “public policy.” Potential

competitors of petitioners raised their objections to

petitions for incorporation, framed in public interest

language but certainly aimed to further their

interests as objectors. As a result, petitions were

frequently rejected. It was noted that firms that

were successful in obtaining a charter were often in

industries that required a large lump sum capital and

additional legal privileges. More so, when firms

ventured into unincorporated joint stock companies

as substitute for incorporation, the Parliament

passed the Bubble Act which sought to restrict the

formation of unincorporated joint stock companies.

Furthermore, stock markets and financial

intermediaries had yet to catch up with the

functionality offered by the legal system, aside from

the absence of a comprehensive securities

regulation scheme. From such circumstances

contemporaneous during that time, some

entrepreneurs have ventured into partnerships

despite the business organization’s legal

characteristics (Bubb, 2015).

It can be supposed that partnerships are but an

offshoot of entrepreneurship. Entrepreneurship can

be traced back when people began to dispose their

surpluses. As people learned to specialize, they

began to trade their own produce for others’

produce and crafts (Small Enterprises Research and

Development Foundation, 1998). In the long run, as

trade relations became more complex and additional

capital were needed, a sole proprietorship

transformed into a partnership (Rodriguez &

Echanis, 2001). This, in turn, permitted

combinations of capital and experience (De Leon &

De Leon, 2010; Espiritu, 1918).

Evolution of Law on Partnership

Citing Professor Rowley’s work, Mendiola (1919)

wrote that partnership as a legal relation is a

product of the Babylonian partnership, modified by

Jewish, and civil and common law.

Philippine Law on Partnership

Spanish Influence

1. There were two kinds of relationships, to

wit: commercial/mercantile partnerships

and civil partnerships.

a. Commercial or mercantile

partnerships are those which dealt

in mercantile transactions and

governed by the Code of

Commerce. In this kind of legal

relation, registration is absolutely

necessary to be complied with,

otherwise the association does not

become a juridical entity. As to

liability, commercial partners are

jointly and severally liable for the

whole debt of the firm after the

firm’s assets have been exhausted

by the creditors.

b. Civil partnerships are those which

engage in civil purposes and are

governed by the Old Civil Code. In

this kind of legal relation, no

registration is needed to give the

firm a legal personality. As to

liability, civil partners are only

liable pro rata to the amount of

their contributions to the firm’s

capital for the partnership debt.

Note: The classification was criticized for having no

clear-cut distinction. An author remarked that such

absurdity is brought about by their common

purpose: obtain profits.

2. A partnership has a juridical personality of

its own, distinct and separate from that

each of the partners.

American influence


1. The doctrine of estoppel

a. As culled from The Uniform

Partnership Act, persons who are

not persons as to each other are

partners as to third persons.

2. Provisions on limited partnerships. Chapter

4, which covers Articles 1843 to 1867, was

adopted with appropriate amendments

from the Uniform Limited Partnership Act.

According to the Code Commission, the

provisions on limited partnerships in the

Code of Commerce were considered too

meager and inadequate to govern such

juridical institution.

3. Since a substantial portion of Philippine

Partnership Law is derived from US laws, US

case laws which interpret and apply the

adopted provisions are highly persuasive

(Casis, 2011).

New Civil Code

1. With the advent of the New Civil Code, the

provisions of the Code of Commerce

relating to commercial partnerships have

been repealed. Hence, it did away with the

distinction between commercial and civil

partnerships. Under the NCC, the

partnerships contemplated are those

formed for private interest or purpose

under Article 45. More so, the Code now

governs all transactions of all partnerships,

whether the object be civil or commercial.

2. Under Article 46 of the NCC, a partnership,

being a juridical person, have rights, to wit:

a. Right to acquire and possess

property of all kinds;

b. Right to incur obligations; and,

c. Right to bring civil or criminal

actions.

In the case of Smith Bell v. Navarro, the Supreme

Court recognized that juridical persons are entitled

to constitutional rights and guarantees. It

elucidated:

“Private corporations are ‘persons’ within

the scope of the guaranties in so far as their

property is concerned. It is but an

association of individuals under an assumed

name and with a distinct legal entity. In

organizing itself as a collective body, it

waives no constitutional immunities

appropriate for such body. Its property

cannot be taken without compensation. It

can only be proceeded against by due

process of law and is protected against

unlawful discrimination.”

“In the partnership setting, there is closer

identity between the partners and the

partnership in the sense that the partners

not only own the partnership and its affairs

and they directly manage the affairs of the

partnership, but more so that the separate

juridical personality is closely identified with

the personality of the partners under

delectus personae considerations.”

“It is understandable that a corporation,

which has no heart, feels no pain and no

soul that can be damned, cannot be

expected to be entitled to the constitutional

right against self-incrimination. It is quite

different in the case of partnership since its

person is merely an extension of the group

of partners, who having come together in

business, and acting still for such business

enterprise, could not be presumed to have

waived their individual right against self-

incrimination.”

GENERAL PROVISIONS

Article 1767: Statutory Definition of Partnership

By the contract of partnership two or more

persons bind themselves to contribute

money, property, or industry to a common

fund, with the intention of dividing the

profits among themselves.

Two or more persons may also form a

partnership for the exercise of a profession.


Characteristic elements of partnership:

1. It is a contract whereby two or more

persons bind themselves to contribute

money, property or industry to a common

fund, with the intention of dividing the

profits among themselves, or in order to

exercise a profession.

Being a contract, it has the following

characteristics:

a. It is consensual,

bilateral/multilateral, nominate,

principal, onerous and

preparatory;

b. It consists of a contribution of

money, property or industry to a

common fund;

c. Object is a lawful one;

d. There is an intention of dividing

the profit among the partners;

and,

e. There is a desire to formulate an

active union (affectio societatis).

2. The doctrine of delectus personae. Roughly,

it refers to mutual trust and confidence. As

defined by Villanueva (2012), the doctrine

of delectus personae is that the contract of

partnership creates the most personal

relationship between and among the

partners which when broken, also breaks

the bond of the partnership. It emphasizes

the personal-contractual relationship

between and among the partners as being

more important than the property rights

and the business enterprise created in the

partnership.

Neither would the presence of a period for

its specific duration or the statement of a

particular purpose for its creation prevent

the dissolution of any partnership by an act

or will of a partner. Among partners,

mutual agency arises and the doctrine of

delectus personae allows them to have the

power, although not necessarily the right,

to dissolve the partnership. Verily, any one

of the partners may, at his sole pleasure,

dictate a dissolution of the partnership at

will. However, he must act in good faith,

not that the attendance of bad faith can

prevent the dissolution of the partnership

but that it can result in a liability for

damages.

Can a partnership be created by operation of law?

No. As defined, a partnership is a contract; hence, it

cannot be created by operation of law.

Essential features of partnership:

1. There must be a valid contract;

2. The parties must have legal capacity to

enter into contract;

3. There must be a mutual contribution of

money, property, or industry to a common

fund (existence of proprietary interest);

4. The object must be a lawful one; and,

5. The primary purpose must be to obtain

profits and to divide the same among the

parties.

Distinctions:

Partnership Corporation

It is created by voluntary

agreement of the

parties.

It is created by the State

in the form of a special

charter or by a general

enabling law.

There is no time limit

except agreement of

parties.

Not more than fifty

years; may be reduced,

but never extended.

It may be liable to

strangers with their

private property beyond

their contribution to the

firm.

It is liable only for

payment of their

subscribed capital stock.

Even if a partner

transfers his interest to

another, the transferee

does not become a

partner unless all other

A transfer of interest

makes the transferee a

stockholder, even

without the consent of

others.


partners consent.

Generally, partners

acting on behalf of the

partnership are agents

thereof; consequently,

they can bind both the

firm and the partners.

Generally, the

stockholders cannot bind

the corporation since

they are not agents

thereof.

A partner can sue a

partner who

mismanages.

A stockholder cannot

sue a member of the

board of directors who

mismanages: the action

must be in the name of

the corporation.

A partnership is a

national of the country it

was created.

A corporation is a

national of the country

under whose laws it was

incorporated, except for

wartime purposes or for

the acquisition of land,

natural resources and

the operation of public

utilities in the

Philippines, in which

case the veil of

corporate identity is

pierced and we go to the

nationality of the

controlling stockholders.

The firm becomes a

juridical person from the

time contract begins.

The firm becomes a

juridical person from the

time it is registered in

the SEC, and all

requisites have been

complied with.

Causes of dissolution:

death, retirement,

insolvency, civil

interdiction, or insanity

of a partner.

Such causes do not

dissolve a corporation.

Ordinary Partnership Conjugal partnership of gains

It is created by the will or consent of the parties.

It is created by operation of law upon the celebration of the

marriage.

In general, the law which governs is the will of the parties. The law is only subsidiary.

In general, it is the law that governs.

It possesses a legal personality.

It does not possess any legal personality distinct from that of the husband or wife; hence, it cannot sue or be sued as such.

It begins from the moment of the execution of the contract but a contrary stipulation is allowed.

It commences precisely on the date of the celebration of the marriage and no contrary stipulation is allowed.

It is formed for profit. It is not formed particularly for profit.

As a rule, profits are divided according to previous agreement; and if there is no agreement, in proportion to the amount contributed.

As a rule, profits are divided equally, but settlement can provide otherwise.

As a rule, management is conferred upon the partners so appointed by others; otherwise, all are equally considered agents of the firm.

As a rule, the administration and enjoyment of the conjugal partnership property belong to both spouses jointly.

There are many grounds for dissolution.

There are few grounds for dissolution.

There may be division of profits even without dissolution.

There will be no liquidation or giving of profits till after dissolution.

Partnership Co-ownership

It is created by contract

only.

Created by contract, law

and other things.

It has legal or juridical

personality.

It has no juridical

personality.

It is for profit. It is for the collective

enjoyment.

As a rule, there is mutual

representation.

As a rule, there is no

mutual representation.

Cannot substitute

another as partner in his

place, without

Can dispose of his share


the others.


unanimous consent.

No term limit is set by

law.

Must not be more than

10 years, although

agreement after

termination may be

renewed.

Profits may be stipulated

upon.

Profits must always

depend on

proportionate shares.

It is dissolved by death

or incapacity of a

partner.

It is not dissolved by the

death or incapacity of a

co-owner.

It may be made in any

form except when real

property is contributed.

No public instrument is

needed even if real

property is the object.

Partnership Agency

A partner is both a

principal and an agent

for the firm and the

others.

An agent never acts for

himself, but only for his

principal.

Partnership Joint Stock Company

It is an association of

persons.

It is association of

capital.

Capital is not divided

into shares.

Although a special form

of partnership, its capital

is divided into shares,

like in a corporation.

Generally, all the

partners are involved in

the management of the

enterprise.

Generally, management

is with the board of

directors.

Partners may be liable

with their individual

properties after the

exhaustion of

partnership assets.

Liability of the members

is only up to the extent

of their shares if such is

what the statute

provides.

Transferee of the

partner’s share does not

become a partner unless

all the partners consent.

Transferee of the

member’s shares himself

becomes a member

without any necessity of

consent from the other

members.

Partnership Labor Union

Its purpose is essentially to enable its members, as principals, to conduct a lawful business, trade or profession for pecuniary gain of partners.

Its purpose is for collective bargaining or of dealing with employers concerning terms and conditions of employment.

No one may become a partner without consent of all partners.

Consent of all partners is not necessary for one to become a member, as one simply needs to pay membership fees. However, the law enumerates those who cannot join labor unions.

Partnership Trust

All of the members are principals and are agents of each other.

The trustee is only a principal and is not an agent. Only the trustee and not the beneficiaries is empowered to make contracts to carry on the business affairs and the only one who has legal title to the property.

Paragraph 2 relates to the exercise of a profession.

Strictly speaking, the practice of a profession is not a

business or an enterprise for profit. However, the

law allows the joint pursuit thereof by two or more

persons as partners. In such case, it is the individual

partners, and not the partnership, who engages in

the practice of the profession and are responsible

for their own acts as such.

Under Section 22 of the National Internal Revenue

Code, the term “corporation” includes partnerships,

no matter how created or organized, joint-stock

companies, joint accounts, association, or insurance

companies, but does not include general

professional partnerships and a joint venture or

consortium formed for the purpose of undertaking

construction projects or engaging in petroleum, coal,

geothermal and other energy operations pursuant to


an operating consortium agreement under a service

contract with the Government. General professional

partnerships are partnerships formed by persons for

the sole purpose of exercising their common

profession, no part of the income of which is derived

from engaging in any trade or business.

Is there a conflict between the two? In reconciling

the two provisions, the Civil Code merely defined the

partnership as a contract, its composition,

enumerated the types of contribution, and the

purpose. Insofar as the NIRC is concerned, while it

did not categorically define the partnership, it means

that the tax treatment of the partnership shall be

that of the corporation mentioned in the Code

(Chavez).

Classifications of partnership:

1. As to the extent of its subject matter:

a. Universal partnership. It is one

which refers to all present

property or to all profits.

b. Particular partnership. It is one

which has for its object

determinate things, their use or

fruits, or specific undertaking, or

the exercise of a profession or

vocation.

2. As to liability:

a. General partnership. It is one

consisting of general partners who

are liable pro rata and subsidiarily

and sometimes solidarily, with

their separate property for

partnership debt.

b. Limited partnership. It is one

formed by two or more persons

having as members one or more

general partners and one or more

limited partners, the latter not

being personally liable for the

obligations of the partnership.

3. As to its duration:

a. Partnership at will. It is one in

which no time is specified and is

not formed for a particular

undertaking or venture and which

may be terminated at anytime by

mutual agreement of the partners,

or by the will of any one partner

alone; or one for a fixed term or

particular undertaking which is

continued by the partners after the

termination of such term or

particular undertaking without

express agreement.

b. Partnership with a fixed term. It is

one which the term for which the

partnership is to exist is fixed or

agreed upon or formed for a

particular undertaking, and upon

the expiration of the term or

completion of the particular

enterprise, the partnership is

dissolved, unless continued by the

partners.

4. As to the legality of its existence:

a. De jure partnerships. It is one

which has complied with all the

legal requirements for its

establishment.

b. De facto partnerships. It is one

which has failed to comply with all

the legal requirements for its

establishment.

5. As to representation to others:

a. Ordinary or real partnership. It is

one which actually exists among

the partners and also to third

persons.

b. Ostensible partnership or

partnership by estoppel. It is one

which in reality is not a

partnership, but is considered a

partnership only in relation to

those who, by their conduct or

admission, are precluded to deny

or disprove its existence.

6. As to publicity:

a. Secret partnership. It is one

wherein the existence of certain

persons as partners is not avowed


or made known to the public by

any of the partners.

b. Open or notorious partnership. It

is one whose existence is avowed

or made known to the public by

the members of the firm.

7. As to its purpose:

a. Commercial or trading partnership.

It is one formed for the transaction

of business.

b. Professional or non-trading

partnership. It is one formed for

the exercise of a profession.

Cases:

Lim Tong Lim v. Philippine Fishing Gear

Industries, Inc., GR 136448, November 3,

1999

On the existence of a partnership:

Specifically, both lower courts ruled that a

partnership among the three existed based on the

following factual findings:

1. That Petitioner Lim Tong Lim requested

Peter Yao who was engaged in commercial

fishing to join him, while Antonio Chua was

already Yao’s partner;

2. That after convening for a few times, Lim

Chua, and Yao verbally agreed to acquire

two fishing boats, the FB Lourdes and the FB

Nelson for the sum of P3.35 million;

3. That they borrowed P3.25 million from

Jesus Lim, brother of Petitioner Lim Tong

Lim, to finance the venture.

4. That they bought the boats from CMF

Fishing Corporation, which executed a Deed

of Sale over these two (2) boats in favor of

Petitioner Lim Tong Lim only to serve as

security for the loan extended by Jesus Lim;

5. That Lim, Chua and Yao agreed that the

refurbishing , re-equipping, repairing, dry

docking and other expenses for the boats

would be shouldered by Chua and Yao;

6. That because of the unavailability of funds,

Jesus Lim again extended a loan to the

partnership in the amount of P1 million

secured by a check, because of which, Yao

and Chua entrusted the ownership papers

of two other boats, Chua’s FB Lady Anne

Mel and Yao’s FB Tracy to Lim Tong Lim.

7. That in pursuance of the business

agreement, Peter Yao and Antonio Chua

bought nets from Respondent Philippine

Fishing Gear, in behalf of "Ocean Quest

Fishing Corporation," their purported

business name.

8. That subsequently, Civil Case No. 1492-MN

was filed in the Malabon RTC, Branch 72 by

Antonio Chua and Peter Yao against Lim

Tong Lim for (a) declaration of nullity of

commercial documents; (b) reformation of

contracts; (c) declaration of ownership of

fishing boats; (d) injunction; and (e)

damages.

9. That the case was amicably settled through

a Compromise Agreement executed

between the parties-litigants the terms of

which are already enumerated above.

From the factual findings of both lower courts, it is

clear that Chua, Yao and Lim had decided to engage

in a fishing business, which they started by buying

boats worth P3.35 million, financed by a loan

secured from Jesus Lim who was petitioners

brother. In their Compromise Agreement, they

subsequently revealed their intention to pay the

loan with the proceeds of the sale of the boats, and

to divide equally among them the excess or loss.

These boats, the purchase and the repair of which

were financed with borrowed money, fell under the

term common fund under Article 1767. The

contribution to such fund need not be cash or fixed

assets; it could be an intangible like credit or

industry. That the parties agreed that any loss or

profit from the sale and operation of the boats

would be divided equally among them also shows

that they had indeed formed a partnership.


Moreover, it is clear that the partnership extended

not only to the purchase of the boat, but also to that

of the nets and the floats. The fishing nets and the

floats, both essential to fishing, were obviously

acquired in furtherance of their business. It would

have been inconceivable for Lim to involve himself

so much in buying the boat but not in the acquisition

of the aforesaid equipment, without which the

business could not have proceeded.

Given the preceding facts, it is clear that there was,

among petitioner, Chua and Yao, a partnership

engaged in the fishing business. They purchased the

boats, which constituted the main assets of the

partnership, and they agreed that the proceeds from

the sales and operations thereof would be divided

among them.

Partner vs. Lessor

Verily, as found by the lower courts, petitioner

entered into a business agreement with Chua and

Yao, in which debts were undertaken in order to

finance the acquisition and the upgrading of the

vessels which would be used in their fishing

business. The sale of the boats, as well as the

division among the three of the balance remaining

after the payment of their loans, proves beyond cavil

that F/B Lourdes, though registered in his name, was

not his own property but an asset of the partnership.

It is not uncommon to register the properties

acquired from a loan in the name of the person the

lender trusts, who in this case is the petitioner

himself. After all, he is the brother of the creditor,

Jesus Lim.

We stress that it is unreasonable indeed, it is absurd

for petitioner to sell his property to pay a debt he

did not incur, if the relationship among the three of

them was merely that of lessor-lessee, instead of

partners.

Pascual v. CIR, GR 78133, October 18, 1988

On how a partnership is established

The sharing of returns does not in itself establish a

partnership whether or not the persons sharing

therein have a joint or common right or interest in

the property. There must be a clear intent to form a

partnership, the existence of a juridical personality

different from the individual partners, and the

freedom of each party to transfer or assign the

whole property.

Evangelista v. CIR, L-9996, October 15, 1957

Pursuant to this article, the essential elements of a

partnership are two, namely: (a) an agreement to

contribute money, property or industry to a

common fund; and (b) intent to divide the profits

among the contracting parties. The first element is

undoubtedly present in the case at bar, for,

admittedly, petitioners have agreed to, and did,

contribute money and property to a common fund.

Hence, the issue narrows down to their intent in

acting as they did. Upon consideration of all the facts

and circumstances surrounding the case, we are fully

satisfied that their purpose was to engage in real

estate transactions for monetary gain and then

divide the same among themselves, because:

1. Said common fund was not something they

found already in existence;

2. They invested the same, not merely in one

transaction, but in a series of transactions;

3. The affairs relative to said properties have

been handled as if the same belonged to a

corporation or business enterprise operated

for profit;

4. The foregoing conditions have existed for

more than 10 years, or, to be exact, over 15

years, since the first property was acquired,

and over 12 years, since Simeon Evangelista

became the manager; and,

5. Petitioners have not testified or introduced

any evidence, either on their purpose in

creating the set-up already adverted to, or

on the causes for its continued existence.

Although, taken singly, they might not suffice to

establish the intent necessary to constitute a

partnership, the collective effect of these

circumstances is such as to leave no room for doubt

on the existence of said intent in petitioners herein.


Only one or two of the aforementioned

circumstances were present in the cases cited by

petitioners herein, and, hence, those cases are not in

point.

Estanislao v. CA, L-49982, April 27, 1988

The Joint Affidavit of April 11, 1966 (Exhibit A),

clearly stipulated by the members of the same family

that the P15,000.00 advance rental due to them

from Shell shall augment their "capital investment"

in the operation of the gasoline station. Moreover

other evidence in the record shows that there was in

fact such partnership agreement between the

parties. This is attested by the testimonies of private

respondent Remedios Estanislao and Atty. Angeles.

Petitioner submitted to private respondents periodic

accounting of the business. Petitioner gave a written

authority to private respondent Remedios

Estanislao, his sister, to examine and audit the books

of their "common business" (aming negosyo).

Respondent Remedios assisted in the running of the

business. There is no doubt that the parties hereto

formed a partnership when they bound themselves

to contribute money to a common fund with the

intention of dividing the profits among themselves.

The sole dealership by the petitioner and the

issuance of all government permits and licenses in

the name of petitioner was in compliance with the

afore-stated policy of Shell and the understanding of

the parties of having only one dealer of the Shell

products.

Heirs of Lim v. Lim, GR 172690, March 3,

2010

A partnership exists when two or more persons

agree to place their money, effects, labor, and skill in

lawful commerce or business, with the

understanding that there shall be a proportionate

sharing of the profits and losses among them. A

contract of partnership is defined by the Civil Code

as one where two or more persons bind themselves

to contribute money, property, or industry to a

common fund, with the intention of dividing the

profits among themselves.

Undoubtedly, the best evidence would have been

the contract of partnership or the articles of

partnership. Unfortunately, there is none in this

case, because the alleged partnership was never

formally organized.

A careful review of the records persuades us to

affirm the CA decision. The evidence presented by

petitioners falls short of the quantum of proof

required to establish that: (1) Jose was the partner

and not Elfledo; and (2) all the properties acquired

by Elfledo and respondent form part of the estate of

Jose, having been derived from the alleged

partnership.

Agreeing with the findings of the CA, the Court

rendered:

It is notable too that Jose Lim died when the

partnership was barely a year old, and the

partnership and its business not only

continued but also flourished. If it were true

that it was Jose Lim and not Elfledo who was

the partner, then upon his death the

partnership should have been dissolved and

its assets liquidated. On the contrary, these

were not done but instead its operation

continued under the helm of Elfledo and

without any participation from the heirs of

Jose Lim.

Whatever properties appellant and her

husband had acquired, this was through their

own concerted efforts and hard work. Elfledo

did not limit himself to the business of their

partnership but engaged in other lines of

businesses as well.

Sevilla v. CA, GR 41182-83, April 15, 1988

Employer-employee relationship vs. partnership vs.

agency

The records will show that the petitioner, Lina

Sevilla, was not subject to control by the private

respondent Tourist World Service, Inc., either as to

the result of the enterprise or as to the means used

in connection therewith. In the first place, under the


contract of lease covering the Tourist Worlds Ermita

office, she had bound herself in solidum as and for

rental payments, an arrangement that would be like

claims of a master-servant relationship. True the

respondent Court would later minimize her

participation in the lease as one of mere guaranty,

that does not make her an employee of Tourist

World, since in any case, a true employee cannot be

made to part with his own money in pursuance of

his employer's business, or otherwise, assume any

liability thereof. In that event, the parties must be

bound by some other relation, but certainly not

employment.

The fact that Sevilla had been designated 'branch

manager" does not make her, ergo, Tourist World's

employee. As we said, employment is determined

by the right-of-control test and certain economic

parameters. But titles are weak indicators.

In rejecting Tourist World Service, Inc.'s arguments

however, we are not, as a consequence, accepting

Lina Sevilla's own, that is, that the parties had

embarked on a joint venture or otherwise, a

partnership. And apparently, Sevilla herself did not

recognize the existence of such a relation. In her

letter of November 28, 1961, she expressly

'concedes your [Tourist World Service, Inc.'s] right to

stop the operation of your branch office in effect,

accepting Tourist World Service, Inc.'s control over

the manner in which the business was run. A joint

venture, including a partnership, presupposes

generally a of standing between the joint co-

venturers or partners, in which each party has an

equal proprietary interest in the capital or property

contributed and where each party exercises equal

rights in the conduct of the business. Furthermore,

the parties did not hold themselves out as partners,

and the building itself was embellished with the

electric sign "Tourist World Service, Inc.” in lieu of a

distinct partnership name.

It is the Court's considered opinion, that when the

petitioner, Lina Sevilla, agreed to (wo)man the

private respondent, Tourist World Service, Inc.'s

Ermita office, she must have done so pursuant to a

contract of agency. It is the essence of this contract

that the agent renders services "in representation or

on behalf of another. In the case at bar, Sevilla

solicited airline fares, but she did so for and on

behalf of her principal, Tourist World Service, Inc. As

compensation, she received 4% of the proceeds in

the concept of commissions. And as we said, Sevilla

herself based on her letter of November 28, 1961,

pre-assumed her principal's authority as owner of

the business undertaking. We are convinced,

considering the circumstances and from the

respondent Court's recital of facts, that the ties had

contemplated a principal agent relationship, rather

than a joint management or a partnership.

But unlike simple grants of a power of attorney, the

agency that we hereby declare to be compatible

with the intent of the parties, cannot be revoked at

will. The reason is that it is one coupled with an

interest, the agency having been created for mutual

interest, of the agent and the principal. It appears

that Lina Sevilla is a bona fide travel agent herself,

and as such, she had acquired an interest in the

business entrusted to her. Moreover, she had

assumed a personal obligation for the operation

thereof, holding herself solidarily liable for the

payment of rentals. She continued the business,

using her own name, after Tourist World had

stopped further operations. Her interest, obviously,

is not to the commissions she earned as a result of

her business transactions, but one that extends to

the very subject matter of the power of

management delegated to her. It is an agency that,

as we said, cannot be revoked at the pleasure of the

principal. Accordingly, the revocation complained of

should entitle the petitioner, Lina Sevilla, to

damages.

Torres v. CA, GR 134559, December 9, 1999

Under the above-quoted Agreement, petitioners

would contribute property to the partnership in the

form of land which was to be developed into a

subdivision; while respondent would give, in

addition to his industry, the amount needed for

general expenses and other costs. Furthermore, the

income from the said project would be divided

according to the stipulated percentage. Clearly, the


contract manifested the intention of the parties to

form a partnership.

It should be stressed that the parties implemented

the contract. Thus, petitioners transferred the title

to the land to facilitate its use in the name of the

respondent. On the other hand, respondent caused

the subject land to be mortgaged, the proceeds of

which were used for the survey and the subdivision

of the land. As noted earlier, he developed the

roads, the curbs and the gutters of the subdivision

and entered into a contract to construct low-cost

housing units on the property.

Respondent’s actions clearly belie petitioners’

contention that he made no contribution to the

partnership. Under Article 1767 of the Civil Code, a

partner may contribute not only money or property,

but also industry.

Sardane v. CA, 167 SCRA 524

On who is a partner

The fact that he had received 50% of the net profits

does not conclusively establish that he was a partner

of the private respondent herein. Article 1769(4) of

the Civil Code is explicit that while the receipt by a

person of a share of the profits of a business is prima

facie evidence that he is a partner in the business, no

such inference shall be drawn if such profits were

received in payment as wages of an employee.

Furthermore, herein petitioner had no voice in the

management of the affairs of the basnig.

Can a corporation become a partner in a

partnership? NO. The majority view is that a

corporation cannot become a partner on grounds of

public policy; otherwise, people other than its

officers may be able to bind it. However, a

corporation can enter into a joint venture with

another where the nature of that venture is in line

with the business authorized in its charter.

Aurbach v. Sanitary Wares, 180 SCRA 350

On joint ventures and partnerships

The rule is that whether the parties to a particular

contract have thereby established among

themselves a joint venture or some other relation

depends upon their actual intention which is

determined in accordance with the rules governing

the interpretation and construction of contracts.

The legal concept of a joint venture is of common

law origin. It has no precise legal definition, but it

has been generally understood to mean an

organization formed for some temporary purpose.

(Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact

hardly distinguishable from the partnership, since

their elements are similar — community of interest

in the business, sharing of profits and losses, and a

mutual right of control. (Blackner v. McDermott, 176

F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d.,

1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183,

288 P. 2d. 12 289 P. 2d. 242 [1955]). The main

distinction cited by most opinions in common law

jurisdictions is that the partnership contemplates a

general business with some degree of continuity,

while the joint venture is formed for the execution

of a single transaction, and is thus of a temporary

nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d.

500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d.

74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).

This observation is not entirely accurate in this

jurisdiction, since under the Civil Code, a partnership

may be particular or universal, and a particular

partnership may have for its object a specific

undertaking. (Art. 1783, Civil Code). It would seem

therefore that under Philippine law, a joint venture

is a form of partnership and should thus be governed

by the law of partnerships. The Supreme Court has

however recognized a distinction between these two

business forms, and has held that although a

corporation cannot enter into a partnership

contract, it may however engage in a joint venture

with others. (At p. 12, Tuazon v. Bolaños, 95 Phil.

906 [1954]) (Campos and Lopez — Campos

Comments, Notes and Selected Cases, Corporation

Code 1981)

It is said that participants in a joint venture, in

organizing the joint venture deviate from the


traditional pattern of corporation management. A

noted authority has pointed out that just as in close

corporations, shareholders’ agreements in joint

venture corporations often contain provisions which

do one or more of the following: (1) require greater

than majority vote for shareholder and director

action; (2) give certain shareholders or groups of

shareholders power to select a specified number of

directors; (3) give to the shareholders control over

the selection and retention of employees; and (4) set

up a procedure for the settlement of disputes by

arbitration (See I O’Neal, Close Corporations, 1971

ed., Section 1.06a, pp. 15-16) (Decision of SEC

Hearing Officer, p. 16)

Moreover, the usual rules as regards the

construction and operations of contracts generally

apply to a contract of joint venture. (O’Hara v.

Harman 14 App. Dev. (167) 43 NYS 556).

Tocao v. CA, GR 127405, October 4, 2000

On the doctrine of attributes of proprietorship:

It is a means to prove or disprove the existence of a

partnership. This was used in the above case. In

brushing aside the assertions of no contract of

partnership, the Court, apart from holding that a

contract of partnership need not be in writing to be

valid and enforceable, held that all three parties had

the evidence adduced exercised rights of

proprietorship on the business ventures as to show

without doubt the existence of a partnership

(Villanueva). The Court held:

“Petitioners admit that private respondent

had the expertise to engage in the business

of distributorship of cookware. Private

respondent contributed such expertise to

the partnership and hence, under the law,

she was the industrial or managing partner.

It was through her reputation with the West

Bend Company that the partnership was

able to open the business of distributorship

of that companys cookware products; it was

through the same efforts that the business

was propelled to financial success.

Petitioner Tocao herself admitted private

respondents indispensable role in putting

up the business.”

Heirs of Tan Eng Kee v. CA, GR 126881,

October 3, 2000

Thus, in order to constitute a partnership, it must be

established that (1) two or more persons bound

themselves to contribute money, property, or

industry to a common fund, and (2) they intend to

divide the profits among themselves. The

agreement need not be formally reduced into

writing, since statute allows the oral constitution of

a partnership, save in two instances: (1) when

immovable property or real rights are contributed,

and (2) when the partnership has a capital of three

thousand pesos or more. In both cases, a public

instrument is required. An inventory to be signed by

the parties and attached to the public instrument is

also indispensable to the validity of the partnership

whenever immovable property is contributed to the

partnership.

The trial court determined that Tan Eng Kee and Tan

Eng Lay had entered into a joint adventure, which it

said is akin to a particular partnership. A particular

partnership is distinguished from a joint adventure,

to wit:

(a) A joint adventure (an American concept

similar to our joint accounts) is a sort of

informal partnership, with no firm name and

no legal personality. In a joint account, the

participating merchants can transact

business under their own name, and can be

individually liable therefor.

(b) Usually, but not necessarily a joint adventure

is limited to a single transaction, although

the business of pursuing to a successful

termination may continue for a number of

years; a partnership generally relates to a

continuing business of various transactions

of a certain kind.


A joint adventure presupposes generally a parity of

standing between the joint co-ventures or partners,

in which each party has an equal proprietary interest

in the capital or property contributed, and where

each party exercises equal rights in the conduct of

the business

Rojas v. Maglana, GR 30616, December 10,

1990

The main issue in this case is the nature of the

partnership and legal relationship of the Maglana-

Rojas after Pahamotang retired from the second

partnership.

The lower court is of the view that the second

partnership superseded the first, so that when the

second partnership was dissolved there was no

written contract of co-partnership; there was no

reconstitution as provided for in the Maglana, Rojas

and Pahamotang partnership contract. Hence, the

partnership which was carried on by Rojas and

Maglana after the dissolution of the second

partnership was a de facto partnership and at will. It

was considered as a partnership at will because

there was no term, express or implied; no period

was fixed, expressly or impliedly (Decision, R.A. pp.

962-963).

On the other hand, Rojas insists that the registered

partnership under the firm name of Eastcoast

Development Enterprises (EDE) evidenced by the

Articles of Co-Partnership dated January 14, 1955

(Exhibit "A") has not been novated, superseded

and/or dissolved by the unregistered articles of co-

partnership among appellant Rojas, appellee

Maglana and Agustin Pahamotang, dated March 4,

1956 (Exhibit "C") and accordingly, the terms and

stipulations of said registered Articles of Co-

Partnership (Exhibit "A") should govern the relations

between him and Maglana. Upon withdrawal of

Agustin Pahamotang from the unregistered

partnership (Exhibit "C"), the legally constituted

partnership EDE (Exhibit "A") continues to govern

the relations between them and it was legal error to

consider a de facto partnership between said two

partners or a partnership at will. Hence, the letter of

appellee Maglana dated February 23, 1961, did not

legally dissolve the registered partnership between

them, being in contravention of the partnership

agreement agreed upon and stipulated in their

Articles of Co-Partnership (Exhibit "A"). Rather,

appellant is entitled to the rights enumerated in

Article 1837 of the Civil Code and to the sharing

profits between them of "share and share alike" as

stipulated in the registered Articles of Co-

Partnership (Exhibit "A").

After a careful study of the records as against the

conflicting claims of Rojas and Maglana, it appears

evident that it was not the intention of the partners

to dissolve the first partnership, upon the

constitution of the second one, which they

unmistakably called an "Additional Agreement"

(Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-

25). Except for the fact that they took in one

industrial partner; gave him an equal share in the

profits and fixed the term of the second partnership

to thirty (30) years, everything else was the same.

Thus, they adopted the same name, Eastcoast

Development Enterprises, they pursued the same

purposes and the capital contributions of Rojas and

Maglana as stipulated in both partnerships call for

the same amounts. Just as important is the fact that

all subsequent renewals of Timber License No. 35-36

were secured in favor of the First Partnership, the

original licensee. To all intents and purposes

therefore, the First Articles of Partnership were only

amended, in the form of Supplementary Articles of

Co-Partnership (Exhibit "C") which was never

registered (Brief for Plaintiff-Appellant, p. 5).

Otherwise stated, even during the existence of the

second partnership, all business transactions were

carried out under the duly registered articles. As

found by the trial court, it is an admitted fact that

even up to now, there are still subsisting obligations

and contracts of the latter (Decision, R.A. pp. 950-

957). No rights and obligations accrued in the name

of the second partnership except in favor of

Pahamotang which was fully paid by the duly

registered partnership (Decision, R.A., pp. 919-921).


On the other hand, there is no dispute that the

second partnership was dissolved by common

consent. Said dissolution did not affect the first

partnership which continued to exist. Significantly,

Maglana and Rojas agreed to purchase the interest,

share and participation in the second partnership of

Pahamotang and that thereafter, the two (Maglana

and Rojas) became the owners of equipment

contributed by Pahamotang. Even more convincing,

is the fact that Maglana on March 17, 1957, wrote

Rojas, reminding the latter of his obligation to

contribute either in cash or in equipment, to the

capital investment of the partnership as well as his

obligation to perform his duties as logging

superintendent. This reminder cannot refer to any

other but to the provisions of the duly registered

Articles of Co-Partnership. As earlier stated, Rojas

replied that he will not be able to comply with the

promised contributions and he will not work as

logging superintendent. By such statements, it is

obvious that Roxas understood what Maglana was

referring to and left no room for doubt that both

considered themselves governed by the articles of

the duly registered partnership.

Under the circumstances, the relationship of Rojas

and Maglana after the withdrawal of Pahamotang

can neither be considered as a de facto partnership,

nor a partnership at will, for as stressed, there is an

existing partnership, duly registered.

Article 1768: Partnership as a juridical person

The partnership has a juridical personality

separate and distinct from that of each of

the partners, even in case of failure to

comply with the requirements of Article

1772, first paragraph.

Its juridical personality is separate and distinct from

that of each of the partners. Hence, a partnership

can, in general:

1. Acquire and possess property of all kinds;

2. Incur obligations;

3. Bring civil or criminal actions; and,

4. Can be adjudged insolvent even if the

individual members be each financially

solvent.

Existence of a separate juridical personality is

conditioned on the perfection and validity of the

contract. Even if it is not registered, it is a still a

juridical person so long as it has been validly

constituted.

To organize a corporation or a partnership that could

claim a juridical personality of its own and transact

business as such is not a matter of absolute right but

a privilege which may be enjoyed only under such

terms as the State may deem necessary to impose.

Thus, in the case of Ang Pue & Co. v. Secretary of

Commerce and Industry, it has been held that the

State, through Congress, and in the manner provided

by law, had the right to enact RA 1180 or Retail

Trade Nationalization Law, and to provide therein

that only Filipinos may engage in the retail business,

cannot be seriously doubted. The law provides,

among other things, that after its enactment, a

partnership not wholly formed by Filipinos could

continue to engage in the retail business only until

the expiration of its term. This provision is clearly

intended to apply to partnerships already existing at

the time of the enactment of the law. Hence, the

agreement in the articles of partnership to extend

the terms of its life must be deemed subject to RA

1180 if it was already in force when the parties came

to agree regarding the extension of the original term

of their partnership.

Cases:

Sunga-Chan v. Sunga, GR 143340, August

15, 2001

A partnership may be constituted in any form,

except where immovable property or real rights are

contributed thereto, in which case a public

instrument shall be necessary. Hence, based on the

intention of the parties, as gathered from the facts

and ascertained from their language and conduct, a

verbal contract of partnership may arise. The

essential points that must be proven to show that a


partnership was agreed upon are (1) mutual

contribution to a common stock, and (2) a joint

interest in the profits.

Article 1768 of the Civil Code explicitly provides that

the partnership retains its juridical personality even

if it fails to register. The failure to register the

contract of partnership does not invalidate the same

as among the partners, so long as the contract has

the essential requisites, because the main purpose

of registration is to give notice to third parties, and it

can be assumed that the members themselves knew

of the contents of their contract. In the case at bar,

non-compliance with this directory provision of the

law will not invalidate the partnership considering

that the totality of the evidence proves that

respondent and Jacinto indeed forged the

partnership in question.

Villareal v. Ramirez, GR 144214, July 14,

2004

Since it is the partnership, as a separate and distinct

entity, that must refund the shares of the partners,

the amount to be refunded is necessarily limited to

its total resources. In other words, it can only pay

out what it has in its coffers, which consists of all its

assets. However, before the partners can be paid

their shares, the creditors of the partnership must

first be compensated. After all the creditors have

been paid, whatever is left of the partnership assets

becomes available for the payment of the partners

shares.

Tocao v. CA, supra.

To be considered a juridical personality, a

partnership must fulfill these requisites: (1) two or

more persons bind themselves to contribute money,

property or industry to a common fund; and (2)

intention on the part of the partners to divide the

profits among themselves. It may be constituted in

any form; a public instrument is necessary only

where immovable property or real rights are

contributed thereto. This implies that since a

contract of partnership is consensual, an oral

contract of partnership is as good as a written one.

Where no immovable property or real rights are

involved, what matters is that the parties have

complied with the requisites of a partnership. The

fact that there appears to be no record in the

Securities and Exchange Commission of a public

instrument embodying the partnership agreement

pursuant to Article 1772 of the Civil Code did not

cause the nullification of the partnership.

Aguila v. CA, GR 127347, November 25,

1999

On who is the proper party to a suit

Rule 3, 2 of the Rules of Court of 1964, under which

the complaint in this case was filed, provided that

every action must be prosecuted and defended in

the name of the real party in interest. A real party in

interest is one who would be benefited or injured by

the judgment, or who is entitled to the avails of the

suit. This ruling is now embodied in Rule 3, 2 of the

1997 Revised Rules of Civil Procedure. Any decision

rendered against a person who is not a real party in

interest in the case cannot be executed. Hence, a

complaint filed against such a person should be

dismissed for failure to state a cause of action.

Under Art. 1768 of the Civil Code, a partnership has

a juridical personality separate and distinct from that

of each of the partners. The partners cannot be held

liable for the obligations of the partnership unless it

is shown that the legal fiction of a different juridical

personality is being used for fraudulent, unfair, or

illegal purposes. In this case, private respondent has

not shown that A.C. Aguila & Sons, Co., as a separate

juridical entity, is being used for fraudulent, unfair,

or illegal purposes. Moreover, the title to the

subject property is in the name of A.C. Aguila & Sons,

Co. and the Memorandum of Agreement was

executed between private respondent, with the

consent of her late husband, and A. C. Aguila & Sons,

Co., represented by petitioner. Hence, it is the

partnership, not its officers or agents, which should

be impleaded in any litigation involving property

registered in its name. A violation of this rule will

result in the dismissal of the complaint. We cannot

understand why both the Regional Trial Court and


the Court of Appeals sidestepped this issue when it

was squarely raised before them by petitioner.

Syjuco v. Castro, GR 70403, July 7, 1989

The respondent partnership is composed exclusively

of the individual Lims in whose name all the cases

herein referred to, with the sole exception of Civil

Case No. Q-36485, were brought and prosecuted,

their contribution to the partnership consisting

chiefly, if not solely, of the property subject of the

Syjuco mortgage. It is also a fact that despite its

having been contributed to the partnership,

allegedly on March 30, 1959, the property was never

registered with the Register of Deeds in the name of

the partnership, but to this date remains registered

in the names of the Lims as owners in common. The

original mortgage deed of November 14, 1964 was

executed by the Lims as such owners, as were all

subsequent amendments of the mortgage. There

can be no dispute that in those circumstances, the

respondent partnership was chargeable with

knowledge of the mortgage from the moment of its

execution. The legal fiction of a separate juridical

personality and existence will not shield it from the

conclusion of having such knowledge which naturally

and irresistibly flows from the undenied facts. It

would violate all precepts of reason, ordinary

experience and common sense to propose that a

partnership, as such, cannot be held accountable

with knowledge of matters commonly known to all

the partners or of acts in which all of the latter,

without exception, have taken part, where such

matters or acts affect property claimed as its own by

said partnership

Article 1769: Rules to Determine the existence of a

partnership

In determining whether a partnership

exists, these rules shall apply:

1. Except as provided by Article 1825,

persons who are not partners as to

each other are not partners as to third

persons;

2. Co-ownership or co-possession does

not itself establish a partnership,

whether such co-owners or co-

possessors do or do not share any

profits made by the use of the

property;

3. The sharing of gross returns does not of

itself establish a partnership, whether

or not the persons sharing them have a

joint or common right or interest in any

property from which the returns are

derived;

4. The receipt by a person of a share of

the profits of a business is prima facie

evidence that he is a partner in the

business, but no such inference shall be

drawn if such profits were received in

payment:

a. As a debt by instalments or

otherwise;

b. As wages of an employee or

rent to a landlord;

c. As an annuity to a widow or

representative of a deceased

partner;

d. As interest on a loan, though

the amount of payment vary

with the profits of the

business;

e. As the consideration for the

sale of a goodwill of a business

or other property by

instalments or otherwise.

The purpose of this article is to indicate some tests

to determine if what may seem to be a partnership

really is one, or it is not.

The best evidence to prove partnership’s existence is

still a contract of partnership or articles of

partnership. Should this not be present, as culled

from the cases of Heirs of Lim v. Lim and Heirs of Tan

Eng Kee v. CA, he who alleges the partnership’s

existence must prove the existence of the elements,

as provided for by Article 1767.


The sharing of net profits is prima facie evidence

that one is a partner except in the five instances

enumerated under Article 1769(4).

Legal intention is the crux of partnership. Parties

may call themselves partners in no uncertain terms,

yet their contract may be adjudged something quite

different. Conversely, parties may expressly

stipulate that their contract is not partnership yet

the law may determine otherwise on the basis of

legal intent. It is true, however, that courts will be

influenced to some extent by what the parties call

their contract (De Leon).

In determining whether a partnership exists, it is

important to distinguish between tests or indicia and

incidents of partnership.

Tests or indicia Incidents

Only those terms of a contract upon which the parties have reached an actual understanding may afford a test by which to ascertain the legal nature of the contract. Once the legal nature of a contract as one of partnership has been established, certain consequences or incidents follow as a matter of law, irrespective of any actual understanding between the parties.

1. Partners share in profits and losses. This community of interest in profits is not incidental to the ordinary agency;

2. They have equal rights in the management and conduct of the partnership business;

3. Every partner is an agent of the partnership, and entitled to bind the other partners by his acts, for the purpose of its business;

4. All partners are personally liable for the debts of the partnership with their separate property except that limited partners are not bound beyond the amount of their investment.

5. A fiduciary relation exists between the

partners; and, 6. On dissolution, the

partnership is not terminated, but continues until the winding up of partnership is completed.

“Cause” “Effect”

Cases:

Sardane v. CA, supra.

The fact that he had received 50% of the net profits

does not conclusively establish that he was a partner

of the private respondent herein. Article 1769(4) of

the Civil Code is explicit that while the receipt by a

person of a share of the profits of a business is prima

facie evidence that he is a partner in the business, no

such inference shall be drawn if such profits were

received in payment as wages of an employee.

Furthermore, herein petitioner had no voice in the

management of the affairs of the basnig.

Tocao v. CA, supra.

While it is true that the receipt of a percentage of

net profits constitutes only prima facie evidence that

the recipient is a partner in the business, the

evidence in the case at bar controverts an employer-

employee relationship between the parties. In the

first place, private respondent had a voice in the

management of the affairs of the cookware

distributorship, including selection of people who

would constitute the administrative staff and the

sales force. Secondly, petitioner Tocao’s admissions

militate against an employer-employee relationship.

She admitted that, like her who owned Geminesse

Enterprise, private respondent received only

commissions and transportation and representation

allowances and not a fixed salary.

Culled from the cases of Sardane and Tocao, it is

therefore not sufficient to establish that one receives

his share in the net profits to prove that he is a

partner. It must likewise be established that he has a

role or power in the management of a business.


Heirs of Lim v. Lim, supra.

Applying the legal provision to the facts of this case,

the following circumstances tend to prove that

Elfledo was himself the partner of Jimmy and

Norberto:

1. Cresencia testified that Jose gave Elfledo

P50,000.00, as share in the partnership, on

a date that coincided with the payment of

the initial capital in the partnership;

2. Elfledo ran the affairs of the partnership,

wielding absolute control, power and

authority, without any intervention or

opposition whatsoever from any of

petitioners herein;

3. All of the properties, particularly the nine

trucks of the partnership, were registered in

the name of Elfledo;

4. Jimmy testified that Elfledo did not receive

wages or salaries from the partnership,

indicating that what he actually received

were shares of the profits of the business;

and,

5. None of the petitioners, as heirs of Jose, the

alleged partner, demanded periodic

accounting from Elfledo during his lifetime.

As repeatedly stressed in Heirs of Tan Eng

Kee, a demand for periodic accounting is

evidence of a partnership.

Furthermore, petitioners failed to adduce any

evidence to show that the real and personal

properties acquired and registered in the names of

Elfledo and respondent formed part of the estate of

Jose, having been derived from Jose’s alleged

partnership with Jimmy and Norberto. They failed to

refute respondent’s claim that Elfledo and

respondent engaged in other businesses. Edison

even admitted that Elfledo also sold Interwood

lumber as a sideline. Petitioners could not offer any

credible evidence other than their bare assertions.

Thus, we apply the basic rule of evidence that

between documentary and oral evidence, the former

carries more weight.

Finally, we agree with the judicious findings

of the CA, to wit:

The above testimonies prove that Elfledo

was not just a hired help but one of the

partners in the trucking business, active and

visible in the running of its affairs from day

one until this ceased operations upon his

demise. The extent of his control,

administration and management of the

partnership and its business, the fact that its

properties were placed in his name, and that

he was not paid salary or other

compensation by the partners, are indicative

of the fact that Elfledo was a partner and a

controlling one at that. It is apparent that

the other partners only contributed in the

initial capital but had no say thereafter on

how the business was ran. Evidently it was

through Elfredos efforts and hard work that

the partnership was able to acquire more

trucks and otherwise prosper. Even the

appellant participated in the affairs of the

partnership by acting as the bookkeeper sans

salary.

It is notable too that Jose Lim died when the

partnership was barely a year old, and the

partnership and its business not only

continued but also flourished. If it were true

that it was Jose Lim and not Elfledo who was

the partner, then upon his death the

partnership should have been dissolved and

its assets liquidated. On the contrary, these

were not done but instead its operation

continued under the helm of Elfledo and

without any participation from the heirs of

Jose Lim.

Whatever properties appellant and her

husband had acquired, this was through their

own concerted efforts and hard work.

Elfledo did not limit himself to the business

of their partnership but engaged in other

lines of businesses as well.


In sum, we find no cogent reason to disturb the

findings and the ruling of the CA as they are amply

supported by the law and by the evidence on record.

Heirs of Tan Eng Kee v. CA, supra.

Undoubtedly, the best evidence would have been

the contract of partnership itself, or the articles of

partnership but there is none. The alleged

partnership, though, was never formally organized.

Unfortunately for petitioners, Tan Eng Kee has

passed away. Only he, aside from Tan Eng Lay, could

have expounded on the precise nature of the

business relationship between them. In the absence

of evidence, we cannot accept as an established fact

that Tan Eng Kee allegedly contributed his resources

to a common fund for the purpose of establishing a

partnership. The testimonies to that effect of

petitioners’ witnesses is directly controverted by Tan

Eng Lay. It should be noted that it is not with the

number of witnesses wherein preponderance lies

the quality of their testimonies is to be considered.

None of petitioners’ witnesses could suitably

account for the beginnings of Benguet Lumber

Company, except perhaps for Dionisio Peralta whose

deceased wife was related to Matilde Abubo. He

stated that when he met Tan Eng Kee after the

liberation, the latter asked the former to accompany

him to get 80 pieces of G.I. sheets supposedly owned

by both brothers. Tan Eng Lay, however, denied

knowledge of this meeting or of the conversation

between Peralta and his brother. Tan Eng Lay

consistently testified that he had his business and his

brother had his, that it was only later on that his said

brother, Tan Eng Kee, came to work for him. Be that

as it may, co-ownership or co-possession (specifically

here, of the G.I. sheets) is not an indicium of the

existence of a partnership.

Besides, it is indeed odd, if not unnatural, that

despite the forty years the partnership was allegedly

in existence, Tan Eng Kee never asked for an

accounting. The essence of a partnership is that the

partners share in the profits and losses. Each has

the right to demand an accounting as long as the

partnership exists. We have allowed a scenario

wherein [i]f excellent relations exist among the

partners at the start of the business and all the

partners are more interested in seeing the firm grow

rather than get immediate returns, a deferment of

sharing in the profits is perfectly plausible. But in

the situation in the case at bar, the deferment, if

any, had gone on too long to be plausible. A person

is presumed to take ordinary care of his concerns

In the light of the aforequoted legal provision, we

conclude that Tan Eng Kee was only an employee,

not a partner. Even if the payrolls as evidence were

discarded, petitioners would still be back to square

one, so to speak, since they did not present and

offer evidence that would show that Tan Eng Kee

received amounts of money allegedly representing

his share in the profits of the enterprise. Petitioners

failed to show how much their father, Tan Eng Kee,

received, if any, as his share in the profits of Benguet

Lumber Company for any particular period. Hence,

they failed to prove that Tan Eng Kee and Tan Eng

Lay intended to divide the profits of the business

between themselves, which is one of the essential

features of a partnership.

In the instant case, we find private respondents

arguments to be well-taken. Where circumstances

taken singly may be inadequate to prove the intent

to form a partnership, nevertheless, the collective

effect of these circumstances may be such as to

support a finding of the existence of the parties

intent. Yet, in the case at bench, even the aforesaid

circumstances when taken together are not

persuasive indicia of a partnership. They only tend to

show that Tan Eng Kee was involved in the

operations of Benguet Lumber, but in what capacity

is unclear. We cannot discount the likelihood that as

a member of the family, he occupied a niche above

the rank-and-file employees. He would have

enjoyed liberties otherwise unavailable were he not

kin, such as his residence in the Benguet Lumber

Company compound. He would have moral, if not

actual, superiority over his fellow employees,

thereby entitling him to exercise powers of

supervision. It may even be that among his duties is

to place orders with suppliers. Again, the


circumstances proffered by petitioners do not

provide a logical nexus to the conclusion desired;

these are not inconsistent with the powers and

duties of a manager, even in a business organized

and run as informally as Benguet Lumber Company.

Oña v. CIR, L-19342, May 25, 1972

On when co-ownership ceases and an unregistered

partnership commences

From the moment petitioners allowed not only the

incomes from their respective shares of the

inheritance but even the inherited properties

themselves to be used by Lorenzo T. Oña (who

managed the properties) as a common fund in

undertaking several transactions or in business, with

the intention of deriving profit to be shared by them

proportionally, such act was tantamount to actually

contributing such incomes to a common fund and, in

effect, they thereby formed an unregistered

partnership within the purview of the provisions of

the Tax Code.

In cases of inheritance, there is a period when the

heirs can be considered as co-owners rather than

unregistered co-partners within the contemplation

of our corporate tax laws. Before the partition and

distribution of the estate of the deceased, all the

income thereof does belong commonly to all the

heirs, obviously, without them becoming thereby

unregistered co-partners.

The co-ownership of inherited properties is

automatically converted into an unregistered

partnership, for it is easily conceivable that after

knowing their respective shares in the partition, they

(heirs) might decide to continue holding said shares

under the common management of the

administrator or executor or of anyone chosen by

them and engage in business on that basis.

On the application of the provision

As already indicated, for tax purposes, the co-

ownership of inherited properties is automatically

converted into an unregistered partnership the

moment the said common properties and/or the

incomes derived therefrom are used as a common

fund with intent to produce profits for the heirs in

proportion to their respective shares in the

inheritance as determined in a project partition

either duly executed in an extrajudicial settlement or

approved by the court in the corresponding testate

or intestate proceeding. The reason for this is

simple. From the moment of such partition, the heirs

are entitled already to their respective definite

shares of the estate and the incomes thereof, for

each of them to manage and dispose of as

exclusively his own without the intervention of the

other heirs, and, accordingly he becomes liable

individually for all taxes in connection therewith. If

after such partition, he allows his share to be held in

common with his co-heirs under a single

management to be used with the intent of making

profit thereby in proportion to his share, there can

be no doubt that, even if no document or instrument

were executed for the purpose, for tax purposes, at

least, an unregistered partnership is formed. This is

exactly what happened to petitioners in this case.

In this connection, petitioners’ reliance on Article

1769, paragraph (3), of the Civil Code, providing

that: “The sharing of gross returns does not of itself

establish a partnership, whether or not the persons

sharing them have a joint or common right or

interest in any property from which the returns are

derived,” and, for that matter, on any other

provision of said code on partnerships is unavailing.

Obillos v. CIR, L-68118, October 29, 1985

Article 1769(3) of the Civil Code provides that “the

sharing of gross returns does not of itself establish a

partnership, whether or not the persons sharing

them have a joint or common right or interest in any

property from which the returns are derived.” There

must be an unmistakable intention to form a

partnership or joint venture.

In the case at bar, no intent was present.

As testified by Jose Obillos, Jr., they had no such

intention. They were co-owners pure and simple. To

consider them as partners would obliterate the


distinction between a co-ownership and a

partnership. The petitioners were not engaged in

any joint venture by reason of that isolated

transaction.

Their original purpose was to divide the lots for

residential purposes. If later on they found it not

feasible to build their residences on the lots because

of the high cost of construction, then they had no

choice but to resell the same to dissolve the co-

ownership. The division of the profit was merely

incidental to the dissolution of the co-ownership

which was in the nature of things a temporary state.

It had to be terminated sooner or later.

Article 1770: Object or purpose of partnership

A partnership must have a lawful object or

purpose, and must be established for the

common benefit or interest of the partners.

When an unlawful partnership is dissolved

by a judicial decree, the profits shall be

confiscated in favor of the State, without

prejudice to the provisions of the Penal

Code governing the confiscation of the

instruments and effects of a crime.

Illegality of purpose or object would have an effect

on the partnership contract. It is so because in our

law on contracts, object is an essential element. It

must foremost be lawful or within the commerce of

man, possible and not contrary to law, morals, good

customs, public order or public policy. Otherwise,

the contract is void ab initio and cannot be ratified

(Article 1409). It has likewise no legal personality.

Effects of an unlawful partnership:

1. The contract is void ab initio and the

partnership never existed in the eyes of the

law;

2. The profits shall be confiscated in favor of

the government;

3. The instruments or tools and proceeds of

the crime shall also be forfeited in favor of

the government; and,

4. The contributions shall not be confiscated

unless they were used for the crime.

If the firm is also guilty of a crime, the Revised Penal

Code governs both the criminal liability and the

forfeiture of the proceeds of the crime and the

instruments or tools with which it was committed.

Such proceeds and instruments or tools shall be

confiscated and forfeited in favor of the

Government, unless they be the property of a third

person not liable for the offense, but those articles

which are not subject of lawful commerce shall be

destroyed (Article 45, RPC).

Is a judicial decree needed to dissolve an unlawful

partnership? No, for the contract is void from the

very beginning and therefore never existed from the

viewpoint of the law. However, there would be

nothing wrong in having the court dissolve the

partnership as it affords convenience and peace of

mind to the parties. Moreover, there may be a

question as to whether or not the partnership is

indeed unlawful. This is particularly true when the

object was lawful at the beginning but has later on

become unlawful. Finally, third persons who deal

with the partnership without being aware of its

illegal purpose or character are protected, unless

such knowledge can be presumed as where the

transaction is plainly unlawful.

Effect of partial illegality of partnership business:

1. Where a part of the business of a

partnership is legal and part illegal, an

account of that which is legal may be had.

2. Where, without the knowledge or

participation of the partners, the firm’s

profits in a lawful busienss have been

increased by wrongful acts, the innocent

partners are not precluded as against the

guilty partners from recovering their share

of the profits.

Effect of subsequent illegality of partnership

business: Dissolution under Article 1830.

Cases:


Deluao v. Casteel, L-21906, December 24,

1968

Too well-settled to require any citation of authority

is the rule that everyone is conclusively presumed to

know the law. It must be assumed, conformably to

such rule, that the parties entered into the so called

"contract of service" cognizant of the mandatory and

prohibitory laws governing the filing of applications

for fishpond permits. And since they were aware of

the said laws, it must likewise be assumed — in

fairness to the parties — that they did not intend to

violate them. This view must perforce negate the

appellees’ allegation that the "contract of service"

created a contract of co — ownership between the

parties over the disputed fishpond. The contract

must be construed as one of partnership, divided

into two parts — namely, contract of partnership to

exploit the fishpond pending its award which is valid,

and a contract of partnership to divide the fishpond

between them after such award which is illegal. The

evidence preponderates in favor of the view that the

initial intention of the parties was not to form a co -

ownership but to establish a partnership, plaintiff

Deluao as capitalist partner and defendant —

appellant as an industrial partner — the ultimate

undertaking of which was to divide into two equal

parts such portion of the fishpond as might have

been developed by the amount extended by the

plaintiffs-appellees, with the further provision that

defendant appellant should reimburse the expenses

incurred by the appellees over one-half of the

fishpond that would pertain to him.

The arrangement under the so-called "contract of

service" continued until the decision both dated

Sept. 15, 1950 were issued by the Secretary of

Agriculture and Natural Resources in DANR Cases

353 and 353-B. This development, by itself, brought

about the dissolution of the partnership. Since the

partnership had for its object the division into two

equal parts of the fishpond between the appellees

and the appellant after it shall have been awarded to

the latter, and therefore it envisaged the

unauthorized transfer of one half thereof to parties

other than the applicant Casteel, it was dissolved by

the approval of his application and the award to him

of the fishpond. The approval was an event which

made it unlawful for the members to carry it on in

partnership. Moreover, subsequent events likewise

reveal the intent of both parties to terminate the

partnership because each refused to share the

fishpond with the other.

Why was it unlawful?

Act 4003, known as the Fisheries Act, prohibits the

holder of a fishpond permit (the permittee) from

transferring or subletting the fishpond granted to

him, without the previous consent or approval of the

Secretary of Agriculture and Natural Resources.

Sec. 40 of Commonwealth Act 141, otherwise known

as the Public Land Act, likewise provides that. "The

lessee shall not assign, encumber, or sublet his rights

without the consent of the Secretary of Agriculture

and Commerce, and the violation of this condition

shall avoid the contract; Provided, That assignment,

encumbrance, or subletting for purposes of

speculation shall not be permitted in any case:

Provided further, That nothing contained in this

section shall be understood or construed to permit

the assignment, encumbrance, or subletting of lands

leased under this Act, or under any previous Act, to

persons, corporations, or associations which under

this Act, are not authorized to lease public lands."

Article 1771: Form of contract of partnership

A partnership may be constituted in any

form, except where immovable property or

real rights are contributed thereto, in which

case a public instrument shall be necessary.

An agreement to form a partnership does not of

itself create a partnership. When there are

conditions to be fulfilled or when a certain period is

to elapse, first, the partnership is not created till

after the fulfillment of the conditions or the arrival

of the term, and this is true even if one of the parties

has already advanced his agreed share of the capital.

Moreover, there is a marked distinction between a

partnership actually consummated and an

agreement to enter into a partnership at a future


time. So long as an agreement remains executory,

the partnership is inchoate, not having been called

into being by the concerted action necessary under

the partnership agreement (Paras).

When does the Statute of Frauds apply? It would

only apply when there is merely an agreement to

form a partnership after one year from the making

thereof. More so, the Statute of Frauds, in the law

on partnership, applies only for the purpose of

convenience and not for validity or enforceability.

Article 1772: Recording of contract of partnership

with the SEC

Every contract of partnership having a

capital of PhP 3,000.00 or more, money or

property, shall appear in a public

instrument, which must be recorded in the

Office of the Securities and Exchange

Commission.

Failure to comply with the requirements of

the preceding paragraph shall not affect the

liability of the partnership and the members

thereof to third persons.

Article 1773: Contribution of immovable property

in contract of partnership

A contract of partnership is void, whenever

immovable property is contributed thereto,

if an inventory of said property is not made,

signed by the parties, and attached to the

public instrument.

Required to appear in a public instrument:

1. Where immovable property or real right is

contributed;

Effect: Contract of partnership is

void.

2. Where capital is P 3,000.00 or more, as in

the case of personal property.

Effect: As provided by Article 1768,

failure to comply with above

provision does not affect its

acquisition of juridical personality.

It does not affect also the liability

of the partnership and the partners

to third persons.

Under Article 1773, other requirements should be

met in order that the contract of partnership is valid,

to wit:

1. An inventory of said property is made;

2. The inventory is signed by the parties; and,

3. The inventory must be attached to the

public instrument.

Cases:

Agad v. Mabato, L-24193, June 28, 1968

The issue before us hinges on whether or not

"immovable property or real rights" have been

contributed to the partnership under consideration.

Mabato alleged and the lower court held that the

answer should be in the affirmative, because "it is

really inconceivable how a partnership engaged in

the fishpond business could exist without said

fishpond property (being) contributed to the

partnership." It should be noted, however, that, as

stated in Annex "A" the partnership was established

"to operate a fishpond", not to "engage in a fishpond

business." Moreover, none of the partners

contributed either a fishpond or a real right to any

fishpond. Their contributions were limited to the

sum of PhP 1,000.00 each. Indeed, Paragraph 4 of

the Annex "A" provides:

"That the capital of the said partnership is

Two Thousand (P2,000.00) Pesos Philippine

Currency, of which One Thousand

(P1,000.00) pesos has been contributed by

Severino Mabato and One Thousand

(P1,000.00) Pesos has been contributed by

Mauricio Agad.”

The operation of the fishpond mentioned in Annex

"A" was the purpose of the partnership. Neither said

fishpond nor a real right thereto was contributed to

the partnership or became part of the capital

thereof, even if a fishpond or a real right thereto

could become part of its assets.


Navarro v. CA, GR 101847, May 27, 1993

Furthermore, the Code provides under Article 1771

and 1772 that while a partnership may be

constituted in any form, a public instrument is

necessary where immovables or any rights is

constituted. Likewise, if the partnership involves a

capitalization of P3,000.00 or more in money or

property, the same must appear in a public

instrument which must be recorded in the Office of

the Securities and Exchange Commission. Failure to

comply with these requirements shall not affect

liability of the partners to third persons.

In consideration of the above, it is undeniable that

both the plaintiff and the defendant-wife made

admission to have entered into an agreement of

operating this Allied Air Freight Agency of which the

plaintiff personally constituted with the Manila

Office in a sense that the plaintiff did supply the

necessary equipments and money while her brother

Atty. Rodolfo Villaflores was the Manger and the

defendant the Cashier. It was also admitted that part

of this agreement was an equal sharing of whatever

proceeds realized. Consequently, the plaintiff

brought into this transaction certain chattels in

compliance with her obligation. The same has been

done by the herein brother and the herein

defendant who started to work in the business. A

cursory examination of the evidences presented no

proof that a partnership, whether oral or written had

been constituted at the inception of this transaction.

True it is that even up to the filing of this complaint

whose movables brought by plaintiff for the use in

the operation of the business remain registered in

her name.

Torres v. CA, supra.

First, Article 1773 was intended primarily to protect

third persons. Thus, the eminent Arturo M.

Tolentino states that under the aforecited provision

which is a complement of Article 1771, the execution

of a public instrument would be useless if there is no

inventory of the property contributed, because

without its designation and description, they cannot

be subject to inscription in the Registry of Property,

and their contribution cannot prejudice third

persons. This will result in fraud to those who

contract with the partnership in the belief [in] the

efficacy of the guaranty in which the immovables

may consist. Thus, the contract is declared void by

the law when no such inventory is made. The case at

bar does not involve third parties who may be

prejudiced.

Second, petitioners themselves invoke the allegedly

void contract as basis for their claim that respondent

should pay them 60 percent of the value of the

property. They cannot in one breath deny the

contract and in another recognize it, depending on

what momentarily suits their purpose. Parties

cannot adopt inconsistent positions in regard to a

contract and courts will not tolerate, much less

approve, such practice.

In short, the alleged nullity of the partnership will

not prevent courts from considering the Joint

Venture Agreement an ordinary contract from which

the parties rights and obligations to each other may

be inferred and enforced.

Angeles v. Secretary of Justice, GR 142612,

July 29, 2005

The Angeles spouses position that there is no

partnership because of the lack of a public

instrument indicating the same and a lack of

registration with the Securities and Exchange

Commission (SEC) holds no water. First, the Angeles

spouses contributed money to the partnership and

not immovable property. Second, mere failure to

register the contract of partnership with the SEC

does not invalidate a contract that has the essential

requisites of a partnership. The purpose of

registration of the contract of partnership is to give

notice to third parties. Failure to register the

contract of partnership does not affect the liability of

the partnership and of the partners to third persons.

Neither does such failure to register affect the

partnerships juridical personality. A partnership may

exist even if the partners do not use the words

partner or partnership.


Indeed, the Angeles spouses admit to facts that

prove the existence of a partnership: a contract

showing a sosyo industrial or industrial partnership,

contribution of money and industry to a common

fund, and division of profits between the Angeles

spouses and Mercado.

Litonjua v. Litonjua, GR 166299-30,

December 13, 2005

Annex A-1, on its face, contains typewritten entries,

personal in tone, but is unsigned and undated. As an

unsigned document, there can be no quibbling that

Annex A-1 does not meet the public instrumentation

requirements exacted under Article 1771 of the Civil

Code. Moreover, being unsigned and doubtless

referring to a partnership involving more than

P3,000.00 in money or property, Annex A-1 cannot

be presented for notarization, let alone registered

with the Securities and Exchange Commission (SEC),

as called for under the Article 1772 of the Code. And

inasmuch as the inventory requirement under the

succeeding Article 1773 goes into the matter of

validity when immovable property is contributed to

the partnership, the next logical point of inquiry

turns on the nature of petitioners contribution, if

any, to the supposed partnership.

The CA, addressing the foregoing query, correctly

stated that petitioner’s contribution consisted of

immovables and real rights. Wrote that court:

A further examination of the allegations in

the complaint would show that [petitioners]

contribution to the so-called

partnership/joint venture was his supposed

share in the family business that is

consisting of movie theaters, shipping and

land development under paragraph 3.02 of

the complaint. In other words, his

contribution as a partner in the alleged

partnership/joint venture consisted of

immovable properties and real rights.

Significantly enough, petitioner matter-of-factly

concurred with the appellate courts observation

that, prescinding from what he himself alleged in his

basic complaint, his contribution to the partnership

consisted of his share in the Litonjua family

businesses which owned variable immovable

properties. Petitioners assertion in his motion for

reconsideration of the CA’s decision, that what was

to be contributed to the business [of the partnership]

was [petitioners] industry and his share in the family

[theatre and land development] business leaves no

room for speculation as to what petitioner

contributed to the perceived partnership.

Lest it be overlooked, the contract-validating

inventory requirement under Article 1773 of the Civil

Code applies as long real property or real rights are

initially brought into the partnership. In short, it is

really of no moment which of the partners, or, in this

case, who between petitioner and his brother

Eduardo, contributed immovables. In context, the

more important consideration is that real property

was contributed, in which case an inventory of the

contributed property duly signed by the parties

should be attached to the public instrument, else

there is legally no partnership to speak of.

Petitioner, in an obvious bid to evade the

application of Article 1773, argues that the

immovables in question were not contributed,

but were acquired after the formation of the

supposed partnership. Needless to stress, the

Court cannot accord cogency to this specious

argument. For, as earlier stated, petitioner

himself admitted contributing his share in the

supposed shipping, movie theatres and realty

development family businesses which already

owned immovables even before Annex A-1 was

allegedly executed.

Considering thus the value and nature of

petitioners alleged contribution to the

purported partnership, the Court, even if so

disposed, cannot plausibly extend Annex A-1 the

legal effects that petitioner so desires and

pleads to be given. Annex A-1, in fine, cannot

support the existence of the partnership sued

upon and sought to be enforced. The legal and

factual milieu of the case calls for this

disposition. A partnership may be constituted in


any form, save when immovable property or

real rights are contributed thereto or when the

partnership has a capital of at least P3,000.00, in

which case a public instrument shall be

necessary. And if only to stress what has

repeatedly been articulated, an inventory to be

signed by the parties and attached to the public

instrument is also indispensable to the validity

of the partnership whenever immovable

property is contributed to it.

Torres, Angeles and Litonjua cases: As explained by

Villanueva

The rulings in Torres and Angeles which have their

basis from jurisprudence under the Old Civil Code

and the Code of Commerce, will continue to prevail;

and that the Litonjua doctrine of rendering the

contract of partnership void for failure to comply

with the requirements under Article 1773 of the Civil

Code is applicable only to situations where the

claimant who asserts that a contract of partnership

has been duly constituted relies only upon a note or

instrument, and does not have other evidence to

prove that indeed a contract of partnership has been

constituted. The best evidence presented by the

younger brother to prove a contract of partnership

has been constituted was the unsigned typewritten

note, and he failed to prove the essential elements

of the contract of partnership.

Under the provisions of the Code of Commerce and

the Old Civil Code which prescribed formalities for

the formation of a partnership where real property

is contributed, knowledge of the existence of the

new partnership or community of property must, at

least, be brought home to third persons dealing with

the surviving husband in regard to community real

property in order to bind them by the community

agreement. Consequently, third parties without

knowledge of the existence of the partnership who

deal with the property still registered in the name of

one of the partners have a right to expect full

effectivity of such transaction on the property, in

spite of the protestation of the other partners and

perhaps even the partnership creditors.

How should we appreciate the rulings in Angeles and

Torres, and Litonjua then?

According to Villanueva, it would have been better if

the Court made it categorical that Litonjua had

expressly set aside its ruling in Torres, so that its

doctrine would have been the clear guide to legal

practitioners. For him, the cases of Torres and

Angeles rendered the provision useless.

He suggested, the following afore-quoted passage is

the best way to appreciate the decision in Litonjua:

“Lest it be overlooked, petitioner is the

intended beneficiary of the PhP 1 Million or

10% equity of the family businesses

supposedly promised by Eduardo to give in

the near future. Any suggestion that the

stated amount or the equity component of

the promise was intended to go to a

common fund would be to read something

not written in Annex A-1. Thus, even this

angle alone argues against the very idea of

a partnership, the creation of which

requires two or more contracting minds

mutually agreeing to contribute money,

property, or industry to a common fund

with the intention of dividing the profits

between or among themselves.”

That, in the end, no contract of partnership arose

between the Litonjua siblings even on the basis of

the arrangement purported, since it lacked the

essential element of contributing to a common fund.

Thus, the rulings of the failure to comply with the

provisions of Article 1771 to 1773 of the Civil Code

ought to be considered as obiter dictum.

Article 1774: Acquisition of partnership of

immovable property

Any immovable property or an interest

therein may be acquired in the partnership

name. Title so acquired can be conveyed

only in the partnership name.

Article 1775. Secret Partnerships without juridical

personality.


Associations and societies, whose articles

are kept secret among the members and

wherein any one of the members may

contract in his own name with third

persons, shall have no juridical personality

and shall be governed by the provisions

relating to co-ownership.

In the following instances, the “partnership” does

not have juridical personality:

1. Unlawful partnerships due to unlawfulness

of object and/or purpose;

2. Articles which are kept secret among its

members;

3. Any one of the members may contract in his

own name with third persons;

4. Failure to comply with Article 1773; and,

5. Article 1782: Persons who are prohibited

from giving each other any donation or

advantage cannot enter into universal

partnership.

Article 1776: Classification of partnership; universal

or particular partnership

As to its object, a partnership is either

universal or particular.

As regards the liability of the partners, a

partnership may be general or limited.

Article 1777: Universal partnership of present

properties or profit

A universal partnership may refer to all the

present property or to all the profits.

Article 1778: Universal partnership of present

property defined

A partnership of all present property is that

in which the partners contribute all the

property which actually belongs to them to

a common fund, with the intention of

dividing the same among themselves, as

well as all the profits which they may

acquire therewith.

Article 1779. Rule of ownership of property in

universal partnership of all present property

In a universal partnership of all present

property, the property which belonged to

each of the partners at the time of the

constitution of the partnership, becomes

the common property of all the partners, as

well as the profits which they may acquire

therewith.

A stipulation for the common enjoyment of

any other profits may also be made; but the

property which the partners may acquire

subsequently by inheritance, legacy or

donations cannot be included in such

stipulation, except the fruits thereof.

Article 1780: Universal partnership of profits

A universal partnership of profits comprises

all that the partners may acquire by their

industry or work during the existence of the

partnership.

Movable or immovable property which

each of the partners may possess at the

time of the celebration of the contract shall

continue to pertain exclusively to each, only

the usufruct passing to the partnership.

Article 1781: Presumption in favor of universal

partnership of profits

Articles of universal partnership, entered

into without specification of its nature, only

constitute a universal partnership of profits.

Article 1782: Persons prohibited from entering into

a universal partnership

Persons who are prohibited from giving

each other any donation or advantage

cannot enter into universal partnership.

Article 1783. Particular partnership; definition and

object


A particular partnership has for its object

determinate things, their use or fruits, or

specific undertaking, or the exercise of a

profession or vocation.

The above provisions pertain to the classification of

partnership according to its object. These are

universal partnerships and particular partnerships.

Definitions:

1. Universal partnership. This kind of

partnership is further divided into:

a. Universal partnership of all present

property under Article 1778; and,

b. Universal partnership of profits as

defined by Article 1780.

2. Particular partnership. It is defined by

Article 1783.

Distinctions:

All profits All present property

Only the usufruct of the

properties of the

partners becomes

common property. The

naked ownership is

retained by each of the

partners.

All property actually

belonging to the

partners are contributed

– and said properties

become common

property except those

properties subsequently

acquired by inheritance,

legacy or donation but

the fruits thereof can be

included in the

stipulation.

All profits acquired by

the industry or work of

the partners become

common property,

regardless of whether or

not said profits were

obtained through the

usufruct contributed.

As a rule, aside from the

contributed properties,

only the profits of said

contributed common

property, not other

profits. Profits from

other sources may

become common, but

only if there is a

stipulation to such

effect.

Persons who are together cannot form a universal

partnership:

1. Husband and wife

2. Those guilty of adultery or concubinage

3. Those guilty of the same criminal offense, if

the partnership was entered into in

consideration of the same.

Cases:

Commssioner of Internal Revenue v. Suter,

L-25532, February 28, 1969

While spouses cannot enter into a universal

partnership, they can enter into a particular

partnership or be members thereof.

OBLIGATIONS OF THE PARTNERS

Kinds of relations:

1. Between the partners

2. Between the partners and the partnership

3. Between partners and third persons

4. Between the partnership and third persons

Kinds of partners:

1. Capitalist partner. It is one who contributes

money or property to a common fund.

2. Industrial partner. It is one who contributes

only his industry or personal service.

3. General partner. It is one whose liability to

third persons extends to his separate

property; he may either be a capitalist or

industrial partner. He is also known as real

partner.

4. Limited partner. It is one whose liability to

third persons is limited to his capital

contribution. He is also known as special

partner.

5. Managing partner. It is one who manages

the affairs or business of the partnership;

he may be appointed either in the articles

of partnership or after the constitution of

the partnership.


6. Liquidating partner. It is one who takes

charge of the winding up of partnership

affairs upon dissolution.

7. Partner by estoppel. It is one who is not

really a partner, not being a party to a

partnership agreement, but is liable as a

partner for the protection of innocent third

persons. He is one who is represented as

being in fact a partner, but who is not so as

between the partners themselves. He is

also known as partner by implication,

nominal partner, or quasi-partner.

8. Continuing partner. It is one who continues

the business of a partnership after it has

been dissolved by reason of the admission

of a new partner, or the retirement, death

or expulsion of one or more partners.

9. Surviving partner. It is one who remains

after the partnership has been dissolved by

death of any partner.

10. Subpartner. It is one who, not being a

member of the partnership, contracts with

a partner with reference to the latter’s

share in the partnership.

11. Ostensible partner. It is one who takes

active part and is known to the public as a

partner in the business, whether or not he

has an actual interest in the firm. Thus, he

may be an actual partner or a nominal

partner. If he is not actually a partner, he is

subject to liability by doctrine of estoppel.

12. Secret partner. It is one who takes active

part in the business but is not known to be

a partner by outside parties nor held out as

a partner by the other partners, although

he participates in the profits and losses of

the partnership. He is an actual partner.

13. Silent partner. It is one who does not take

any active part in the business although he

may be known to be a partner. If he

withdraws from the partnership, he must

give notice to those persons who did

business with the firm to escape liability in

the future.

14. Dormant partner. It is one who does not

take active part in the business and is not

known or held out as a partner. He would

be both a silent and a secret partner. He

may retire from the partnership without

giving notice and cannot be held liable for

obligations of the firm subsequent to his

withdrawal. His only interest in joining the

partnership would be the sharing of the

profits earned. He is called sleeping

partner.

15. Original partner. It is one who is a member

of the partnership from the time of its

organization.

16. Incoming partner. It is one who lately or

about to be taken into an existing

partnership as a member.

17. Retiring partner. It is one who withdraws

from the partnership.

Obligations of partners

1. To give his contribution

2. Not to convert firm money or property for

his own use

3. Not to engage in unfair competition with his

own firm

4. To account for and hold as trustee,

unauthorized personal profits

5. Pay for damages caused by his fault

6. Duty to credit to the firm, payment made

by a debtor who owes him and the firm

7. Share with the other partners the share of

the partnership credit which he has

received from an insolvent firm debtor

Rights of partners:

1. Property rights

2. Right to associate with another person in

his share

3. Right to inspect and copy partnership books

4. Right to demand a formal account

5. Right to ask for the dissolution of the firm at

the proper time

Article 1784. Commencement and term of

partnership


A partnership begins from the moment of

the execution of the contract, unless it is

otherwise stipulated.

Generally, a partnership begins from the moment of

the execution of the contract, except when there is a

contrary stipulation.

Article 1785: Duration of a partnership

When a partnership for a fixed term or

particular undertaking is continued after

the termination of such term or particular

undertaking without any express

agreement, the rights and duties of the

partners remain the same as they were at

such termination, so far as is consistent

with a partnership at will.

A continuation of the business by the

partners or such of them as habitually acted

therein during the term, without any

settlement or liquidation of the partnership

affairs, is prima facie evidence of a

continuation of the partnership.

A partnership is unlimited as to its duration in the

sense that no time limit is fixed by law. The duration

may be agreed upon expressly (as when there is a

definite period) or impliedly (as when a particular

enterprise is undertaken – it being understood that

the firm ends as soon as its purpose has been

achieved).

From the above, a partnership can be classified

according to its duration:

1. Partnership with a fixed term

2. Partnership for a particular undertaking

3. Partnership at will

Cases:

Ortega v. CA, GR 109248, July 3, 1995

On partnership at will and its dissolution

A partnership that does not fix its term is a

partnership at will. That the law firm "Bito, Misa &

Lozada," and now "Bito, Lozada, Ortega and

Castillo," is indeed such a partnership need not be

unduly belabored. The birth and life of a partnership

at will is predicated on the mutual desire and

consent of the partners. The right to choose with

whom a person wishes to associate himself is the

very foundation and essence of that partnership. Its

continued existence is, in turn, dependent on the

constancy of that mutual resolve, along with each

partner’s capability to give it, and the absence of a

cause for dissolution provided by the law itself.

Verily, any one of the partners may, at his sole

pleasure, dictate a dissolution of the partnership at

will. He must, however, act in good faith, not that

the attendance of bad faith can prevent the

dissolution of the partnership but that it can result in

a liability for damages. In passing, neither would the

presence of a period for its specific duration or the

statement of a particular purpose for its creation

prevent the dissolution of any partnership by an act

or will of a partner. Among partners, mutual agency

arises and the doctrine of delectus personae allows

them to have the power, although not necessarily

the right, to dissolve the partnership. An unjustified

dissolution by the partner can subject him to a

possible action for damages. The dissolution of a

partnership is the change in the relation of the

parties caused by any partner ceasing to be

associated in the carrying on, as might be

distinguished from the winding up of, the business.

Upon its dissolution, the partnership continues and

its legal personality is retained until the complete

winding up of its business culminating in its

termination. The liquidation of the assets of the

partnership following its dissolution is governed by

various provisions of the Civil Code, however, an

agreement of the partners, like any other contract, is

binding among them and normally takes precedence

to the extent applicable over the Code’s general

provisions. And here, the term "retirement" must

have been used in the Articles of Partnership in a

generic sense to mean the dissociation by a partner,

inclusive of resignation or withdrawal, from the

partnership that thereby dissolves it.


On the dissolution of a partnership at will due to

withdrawal of a partner, absent any bad faith

Attorney Misa did not act in bad faith. Public

respondents viewed his withdrawal to have been

spurred by "interpersonal conflict" among the

partners. It would not be right, to let any of the

partners remain in the partnership under such an

atmosphere of animosity; certainly, not against their

will. Indeed, for as long as the reason for withdrawal

of a partner is not contrary to the dictates of justice

and fairness, nor for the purpose of unduly visiting

harm and damage upon the partnership, bad faith

cannot be said to characterize the act. Bad faith, in

the context here used, is no different from its

normal concept of a conscious and intentional

design to do a wrongful act for a dishonest purpose

or moral obliquity.

Article 1786: Obligations of a partner with respect

to contribution of property

Every partner is a debtor of the partnership

for whatever he may have promised to

contribute thereto.

He shall also be bound for warranty in case

of eviction with regard to specific and

determinate things which he may have

contributed to the partnership, in the same

cases and in the same manner as the

vendor is bound with respect to the vendee.

He shall also be liable for the fruits thereof

from the time they should have been

delivered, without the need of any demand.

Three important duties of every partner:

1. The duty to contribute what had been

promised;

2. The duty to deliver the fruits of what should

have been delivered;

3. The duty to warrant in cases of eviction, as

it applies only to specific and determinate

things already contributed;

4. The duty to preserve the property with the

diligence of a good father of a family

pending delivery to the partnership; and,

5. The duty to indemnify the partnership for

any damage caused to it by the retention of

the same or by the delay in its contribution.

Effect is enunciated by Article 1788, paragraph 1. It

provides that a person who has undertaken to

contribute a sum of money and fails to do so

becomes a debtor for the interest and damages from

the time he should have complied with his

obligation.

Cases:

Moran v. CA, L-59956, October 31, 1984

The rule is, when a partner who has undertaken to

contribute a sum of money fails to do so, he

becomes a debtor of the partnership for whatever

he may have promised to contribute and for

interests and damages he should have complied with

his obligation.

If the partnership venture is a failure, a partner is not

entitled to his promised commission, if said promise

does not state the basis of the commission.

Who owns the property before it is delivered?

According to Paras, both in the case of money or

property, it is the partner who still owns the same

before delivery, for it is delivery, actual or

constructive, that transfers ownership.

If a partner fails to contribute within the stipulated

time what was promised, may the partnership

contract be rescinded? As a general rule, no. The

reason is, rescission is not the proper remedy; the

remedy should be to collect what is owing, as well as

damages. However, if the defaulting partner is

already dead, rescission may prosper.

Article 1787: When contribution consists of goods;

appraisal of property

When the capital or a part thereof which a

partner is bound to contribute consists of

goods, their appraisal must be made in the

manner prescribed in the contract of

partnership, and in the absence of


stipulation, it shall be made by experts

chosen by the partners, and according to

current prices, the subsequent changes

thereof being for the account of the

partnership.

Article 1788. Effect of failure to contribute and

obligation for conversion

A partner who has undertaken to

contribute a sum of money and fails to do

so becomes a debtor for the interest and

damages from the time he should have

complied with his obligation.

The same rule applies to any amount he

may have taken from the partnership

coffers, and his liability shall begin from the

time he converted the amount to his own

use.

The coverage of liability due to his failure to

contribute:

1. Interest at the agreed rate; if none, at the

legal rate of 6% per annum

2. Damages that may be suffered by the

partnership.

Is demand necessary to put partner in default?

In the case of contribution, because time is of the

essence, a partnership is formed precisely to make

use of the contributions, and this use should start

from its formation, unless a different period has

been set; otherwise, the firm is necessarily deprived

of the benefits thereof. Thus, the injury is constant.

In the case of conversion, because the firm is

deprived of the benefits of the money, from the very

moment of conversion.

Cases:

Uy v. Puson, L-19819, October 26, 1977

Facts:

Bartolome Puzon had a contract with the Republic of

the Philippines, through the Bureau of Public

Highways, for the construction of 2 projects. Since

he found difficulty in accomplishing the projects, he

sought financial assistance from William Uy,

proposing that they create a partnership, which is to

be considered as the subcontractor of the projects,

and the profits to be divided equally between them.

Uy agreed to Puzon’s proposition.

They agreed that the capital would be P100,000.00,

each partner to contribute P50,000.00 in cash.

However, Puzon was short of cash and he promised

to contribute his share in the partnership capital as

soon as his application for a loan with the PNB in the

amount of P150,000.00 be approved.

However, before his loan application could be acted

upon, he had to clear his collaterals of its

encumbrances. Hence, Uy gave Puzon P10,000.00 as

advance contribution of his share in the partnership

organized between them. On a later date, Uy gave

Puzon P30,000.00 as his partial contribution to the

proposed partnership. The P30,000.00 was used by

Puzon to clear his obligations with the Rehabilitation

Finance Corporation.

Puzon promised Uy that the amount of P150,000.00

(amount to be borrowed from PNB) would be given

to the partnership, broken down as follows:

P40,000.00 as reimbursement of the capital

contribution of Uy which he (Uy) had advanced to

the partnership; and the balance of P60,000.00 as

Puzon’s personal loan to the partnership.

Puzon’s loan application with the PNB was approved,

and he gave Uy the amount of P60,000.00. Of this

amount, P40,000.00 was for the reimbursement of

Uy’s contribution to the partnership which was used

to clear the title to Puzon’s property, and the

P20,000.00 as Puzon’s contribution to the

partnership capital.

To guarantee the repayment of the loan, Puzon,

without the knowledge and consent of Uy, assigned

to the PNB all the payments to be received on

account of the contracts with the Bureau of Public


Highways for the construction of the projects. By

virtue of said agreement, the Bureau of Public

Highways paid the money due on the partial

accomplishments on the projects to the PNB which,

in turn, applied portions of it in payment of Puzon’s

loan. Of the amount of P1,047,181.07 released by

the Bureau in payment of the partial work

completed by the partnership on the projects, the

amount of P332,539.60 was applied in payment of

Puzon’s loan and only the amount of P27,820.80 was

deposited in the partnership funds, which was also

under Puzon’s account since Puzon was the

custodian of the common funds.

Uy asked Puzon to comply with his obligations under

the terms of their partnership agreement and to

place his capital contribution at the disposal of the

partnership. However, Puzon failed to do so. Uy

consequently wrote Puzon formal letters of demand

to which Puzon replied that he was unable to put in

additional capital to continue with the projects.

Having failed to reach an agreement with Uy, Puzon

wrote the subcontractor, which is the partnership

between Uy and Puzon (U.P. Construction

Company), that unless they presented an immediate

solution and capacity to carry out the work

effectively, he (Puzon) would consider the

subcontract terminated and thereafter, assume all

the responsibilities in the construction of the

projects in accordance with his original contract with

the Bureau. On a later date, Puzon again wrote the

partnership that he was finally terminating the

subcontract agreement.

During the termination of the agreement, Uy had

contributed to the partnership the amount of

P115,453.39, including his capital through the

arrangement he had had with Puzon.

Uy claimed that Puzon had violated the terms of

their partnership agreement and hence instituted an

action seeking the dissolution of the partnership and

the payment of damages.

The trial court found that Puzon failed to contribute

his share in the capital of the partnership, applied

partnership funds to his personal use, ousted Uy

from the management of the firm, and caused the

failure of the partnership to realize the expected

profits. Puzon appealed from the decision, but

during the pendency, died. He was substituted by

Franco Puzon.

Ruling:

The Court affirmed the findings of the trial court.

On Bartolome Puzon’s failure to make his

contribution:

Bartolome Puzon indeed failed to contribute his

share in the capital of the partnership. The record

shows that, after the appellant’s loan of P150,000.00

was approved by the PNB, he gave the amount of

P60,000.00 to Uy who was then managing the

construction projects. Of this amount, P40,000.00

was to applied as reimbursement of Uy’s

contribution to the partnership which was used to

clear the title to Puzon’s property; and the balance

of P20,000.00 as his (Puzon) contribution to the

partnership. Thereafter, Puzon failed to make any

further contributions to the partnership funds as

shown in his letters to Uy wherein he confessed his

inability to put in additional capital to continue with

the projects.

On the misappropriation of partnership funds

The findings of the trial court were likewise

sustained. As shown, Bartolome Puzon assigned to

the PNB all the payments to be received on account

of the contracts with the Bureau of Public Highways

for the construction of the projects to guarantee the

repayment of his personal loan with the bank. By

virtue of said assignment, the Bureau paid the

money due on the partial accomplishments on the

construction projects in question to the PNB which,

in turn, applied portions of it in payment of his loan.

Bartolome Puzon claimed that it was with Uy’s

consent, and that the assignment did not prejudice

the partnership as he reimbursed the partnership.

However, Uy categorically denied such knowledge

and consent. He likewise stated that when he


learned of said assignment, he called the attention

of Puzon who assured him that the assignment was

only temporary as he would transfer the loan to the

RFC within 3 months time.

As found by the trial court, out of the P1,047,184.01

as payment for the construction projects,

P332,539.60 was used by Puzon to pay his personal

loan with PNB, and only P27,820.80 was deposited in

the partnership’s account. The balance of

P686,823.61 was deposited in his own account.

If Puzon gave to the partnership all that were earned

and due it under the subcontract agreements, the

money would have been used as a safe reserve for

the discharge of all obligations of the firm and the

partnership would have been able to successfully

and profitably execute the projects it subcontracted.

Article 1789: Obligations of an industrial partner

An industrial partner cannot engage in

business for himself, unless the partnership

expressly permits him to do so, and if he

should do so, the capitalist partners may

either exclude him from the firm or avail

themselves of the benefits which he may

have obtained in violation of this provision,

with a right to damages in either case.

Distinctions:

Industrial partner Capitalist partner

One who furnishes

industry or labor.

One who furnishes

capital.

He is exempted from

losses as between the

partner.

He is not exempted from

losses.

He cannot engage in any

other business without

the express consent of

the other partners,

otherwise he suffers

consequences

enumerated by law.

He can engage in other

business provided that

there is no competition

between the partner and

his business.

This provision underscores the industrial partner’s

duty of loyalty. Hence, regardless of whether he

engages in the same business or not, he is prohibited

from engaging in other businesses other than the

partnership. There is an exception however, that is

when the partnership expressly permitted him to do

so.

Consequences if an industrial partner engages in

business for himself, absent the express approval of

the partnership:

1. Exclusion from the firm, plus damages; or,

2. Benefits he had obtained from the other

businesses can be availed of by the other

partners, plus damages.

Cases:

Evangelista v. Abad-Santos, L-31684, June

28, 1973

It is not disputed that the provision against the

industrial partner engaging in business for himself

seeks to prevent any conflict of interest between the

industrial partner and the partnership, and to insure

faithful compliance by said partner with this

prestation. There is no pretense, however, even on

the part of the appellee is engaged in any business

antagonistic to that of appellant company, since

being a Judge of one of the branches of the City

Court of Manila can hardly be characterized as a

business. That appellee has faithfully complied with

her prestation with respect to appellants is clearly

shown by the fact that it was only after filing of the

complaint in this case and the answer thereto

appellants exercised their right of exclusion under

the codal art just mentioned by alleging in their

Supplemental Answer dated June 29, 1964 - or after

around nine (9) years from June 7, 1955 -

subsequent to the filing of defendants' answer to the

complaint, defendants reached an agreement

whereby the herein plaintiff been excluded from,

and deprived of, her alleged share, interests or

participation, as an alleged industrial partner, in the

defendant partnership and/or in its net profits or

income, on the ground plaintiff has never


contributed her industry to the partnership, instead

she has been and still is a judge of the City Court

(formerly Municipal Court) of the City of Manila,

devoting her time to performance of her duties as

such judge and enjoying the privilege and

emoluments appertaining to the said office, aside

from teaching in law school in Manila, without the

express consent of the herein defendants' (Record

On Appeal, pp. 24-25). Having always knows as a

appellee as a City judge even before she joined

appellant company on June 7, 1955 as an industrial

partner, why did it take appellants many years

before excluding her from said company as

aforequoted allegations? And how can they

reconcile such exclusive with their main theory that

appellee has never been such a partner because

"The real agreement evidenced by Exhibit "A" was to

grant the appellee a share of 30% of the net profits

which the appellant partnership may realize from

June 7, 1955, until the mortgage of P30,000.00

obtained from the Rehabilitation Finance Corporal

shall have been fully paid." (Appellants Brief, p. 38).

Does an industrial partner then have a right to

demand for a formal accounting and receive share in

the net profit? YES. In the words of the Court in the

case of Evangelista:

What has gone before persuades us to hold

with the lower Court that appellee is an

industrial partner of appellant company,

with the right to demand for a formal

accounting and to receive her share in the

net profit that may result from such an

accounting, which right appellants take

exception under their second assigned

error. Our said holding is based on the

following article of the New Civil Code:

ART. 1809. Any partner shall have the right

to a formal account as to partnership

affairs:

1. If he is wrongfully excluded from the

partnership business or possession of

its property by his co-partners;

2. If the right exists under the terms of

any agreement;

3. As provided by Article 1807;

4. Whenever other circumstances render

it just and reasonable.

We find no reason in this case to depart from

the rule which limits this Court's appellate

jurisdiction to reviewing only errors of law,

accepting as conclusive the factual findings of

the lower court upon its own assessment of the

evidence.

Article 1790: Capital contribution to the partnership

Unless there is a stipulation to the contrary,

the partners shall contribute equal shares

to the capital of the partnership.

It is permissible to contribute unequal shares, if

there is a stipulation to that effect. In the absence of

proof, the shares are presumed equal.

Article 1791: Obligation of capitalist partner to

contribute additional capital

If there is no agreement to the contrary, in

case of an imminent loss of the business of

the partnership, any partner who refuses to

contribute an additional share to the

capital, except an industrial partner, to save

the venture, shall be obliged to sell his

interest to the other partners.

When is a capitalist partner obliged to sell his

interest to the other partners? There are four

requisites, to wit:

1. There is an imminent los of the

partnership’s business;

2. The majority of the capitalist partners are of

the opinion that an additional contribution

to the common fund would save the

business;

3. The capitalist partner deliberately refuses

to contribute an additional share to the

capital; and,


4. There is no agreement to the contrary.

Article 1792: Obligation of managing partner who

collects debts; duty of loyalty

If a partner authorized to manage collects a

demandable sum, which was owed to him

in his own name, from a person who owed

the partnership another sum also

demandable, the sum thus collected shall

be applied to the two credits in proportion

to their amounts, even though he may have

given a receipt for his own credit only, but

should he have given it for the account of

the partnership credit, the amount shall be

fully applied to the latter.

The provisions of this article are understood

to be without prejudice to the right granted

to the debtor by Article 1252 but only if the

personal credit of the partner should be

more onerous to him.

For this article to apply, the following requisites

must concur:

1. The existence of at least 2 debts – one

where the firm is the creditor and the

other, where the partner is the creditor;

2. Both sums are demandable; and,

3. The collecting partner is a managing

partner.

Who is a managing partner? One who manages

actively the firm’s affairs.

Article 1252 provides that a debtor may declare at

the time of the payment to which of the debts is the

payment applied. In relation to Article 1792, it

applies when partner’s credit is more onerous than

that of the partnership’s.

Article 1793: Obligation of partner who received

shares of partnership credit

A partner who has received, in whole or in

part, his share of a partnership credit, when

the other partners have not collected

theirs, shall be obliged, if the debtor should

thereafter become insolvent, to bring to the

partnership capital what he received even

though he may have given receipt for his

share only.

Distinctions:

Article 1792 Article 1793

Two debts One debt only (firm

credit)

Applies only to managing

partner

Applies to any partner

Article 1794: Obligations of partner for damages to

the partnership

Every partner is responsible to the

partnership for damages suffered by it

through his fault and he cannot

compensate them with the profits and

benefits which he may have earned for the

partnership by his industry. However, the

courts may equitably lessen his

responsibility if through the partner’s

extraordinary efforts in other activities of

the partnership, unusual profits have been

realized.

Article 1795: Risk of loss of things contributed

The risk of specific and determinate things,

which are not fungible, contributed to the

partnership so that only their use and fruits

may be for the common benefit, shall be

borne by the partner who owns them.

If the things contributed are fungible, or

cannot be kept without deteriorating, or if

they were contributed to be sold, the risk

shall be borne by the partnership. In the

absence of stipulation, the risk of things

brought and appraised in the inventory,

shall also be borne by the partnership, and

in such case the claim shall be limited to the

value of which they were appraised.

Who bears risk of loss?


1. For specific and determinate things. The

usufruct is enjoyed by a firm; hence,

partner who owns it bears loss because

ownership was never transferred to the

firm.

2. Fungible or deteriorable. The firm bears

loss for evidently ownership was being

transferred; otherwise, use is impossible.

3. Things contributed to be sold. The firm

bears loss for evidently, the firm was

intended to be the owner; otherwise, a sale

could not be made.

4. Contributed under appraisal. The firm

bears loss because this has the effect of an

implied sale.

Article 1796: Responsibility of the partnership to

the partners

The partnership shall be responsible to

every partner for the amounts he may have

disbursed on behalf of the partnership and

for the corresponding interest, from the

time the expenses are made, it shall also

answer to each partner for the obligations

he may have contracted in good faith in the

interest of the partnership business, and for

risks in consequence of its management.

Responsibility of firm:

1. Refund amounts disbursed on behalf of the

firm plus interest from the time expenses

were made; and,

2. Answer to each partner for obligations he

may have entered into in good faith in the

interest of the partnership as well as for

risks in consequence of its management.

Article 1797: Rules for the distribution of profits

and losses

The losses and profits shall be distributed in

conformity with the agreement. If only the

share of each partner in the profits has

been agreed upon, the share of each of the

losses shall be in the same proportion.

In the absence of stipulation, the share of

each partner in the profits and losses shall

be in proportion to what he may have

contributed but the industrial partner shall

not be liable for the losses. As for the

profits, the industrial partner shall receive

such share as may be just and equitable

under the circumstances. If besides his

services he has contributed capital, he shall

also receive a share in the profits in

proportion to his capital.

Article 1798: Designation by a third person of

shares in profits and losses

If the partners have agreed to intrust to a

third person the designation of the share of

each one in the profits and losses, such

designation may be impugned only when it

is manifestly inequitable. In no case may a

partner who has begun to execute the

decision of the third person, or who has not

impugned the same within a period of 3

months from the time he had knowledge

thereof, complain of such decision.

The designation of losses and profits cannot

be intrusted to one of the partners.

Article 1799: Stipulation excluding partner from

profits and losses

A stipulation which excludes one or more

partners from any share in the profits or

losses is void.

Rules on division of profits and losses:

1. Agreement or stipulation

2. Contribution

How about for industrial partners? The second

paragraph of Article 1797 applies only in case there

is no stipulation. Hence, if an industrial partner

agreed to the stipulation as regards his share in the

profits, he is to shoulder the same share in losses.

He cannot claim the contract to be valid in one

breath and impugn its validity in another. It is a valid


stipulation and should therefore be enforced.

Otherwise, to exempt him from losses would violate

Article 1799.

Reason: He consented to the stipulation.

Hence, the contract becomes the law

between the parties.

The general rule is that a stipulation excluding one or

more partners from any share in the profits or losses

is void.

Generally, an industrial partner is exempted from

losses unless there is a stipulation to the effect and

he consented to it.

Cases:

Marsman Drysdale Land, Inc. v. Philippine

Geoanalytics, Inc. & Gotesco Properties,

Inc., GR 183374 & 183376, June 29, 2010

In the JVA, Marsman Drysdale and Gotesco agreed

on a 50-50 ratio on the proceeds of the project.

They did not provide for the splitting of losses,

however. Applying the above-quoted provision of

Article 1797 then, the same ratio applies in splitting

the P535,353.50 obligation-loss of the joint

venture.

The appellate court’s decision must be modified,

however. Marsman Drysdale and Gotesco being

jointly liable, there is no need for Gotesco to

reimburse Marsman Drysdale for 50% of the

aggregate sum due to PGI.

Allowing Marsman Drysdale to recover from

Gotesco what it paid to PGI would not only be

contrary to the law on partnership on division of

losses but would partake of a clear case of unjust

enrichment at Gotescos expense. The grant by the

lower courts of Marsman Drysdale cross-claim

against Gotesco was thus erroneous.

Jarantila v. Jarantila, GR 154486, December

1, 2010

It is clear from the foregoing that a partner is

entitled only to his share as agreed upon, or in the

absence of any such stipulations, then to his share in

proportion to his contribution to the partnership.

The petitioner himself claims his share to be 6%, as

stated in the Acknowledgement of Participating

Capital. However, petitioner fails to realize that this

document specifically enumerated the businesses

covered by the partnership: Manila Athletic Supply,

Remotigue Trading in Iloilo City and Remotigue

Trading in Cotabato City. Since there was a clear

agreement that the capital the partners contributed

went to the three businesses, then there is no

reason to deviate from such agreement and go

beyond the stipulations in the document. Therefore,

the Court of Appeals did not err in limiting

petitioners share to the assets of the businesses

enumerated in the Acknowledgement of

Participating Capital.

Ramnani v. Ramnani, GR 85494 & 85496,

May 7, 1991

Nevertheless, under the peculiar circumstances of

this case and despite the fact that Choithram, et al.,

have committed acts which demonstrate their bad

faith and scheme to defraud spouses Ishwar and

Sonya of their rightful share in the properties in

litigation, the Court cannot ignore the fact that

Choithram must have been motivated by a strong

conviction that as the industrial partner in the

acquisition of said assets he has as much claim to

said properties as Ishwar, the capitalist partner in

the joint venture. Through the industry and genius of

Choithram, Ishwar’s property was developed and

improved into what it is now — a valuable asset

worth millions of pesos. As of the last estimate in

1985, while the case was pending before the trial

court, the market value of the properties is no less

than P22,304,000.00. It should be worth much more

today. We have a situation where two brothers

engaged in a business venture. One furnished the

capital, the other contributed his industry and talent.

Justice and equity dictate that the two share equally

the fruit of their joint investment and efforts.

Perhaps this Solomonic solution may pave the way

towards their reconciliation. Both would stand to


gain. No one would end up the loser. After all, blood

is thicker than water.

Article 1800: Appointment of a manager

The partner who has been appointed

manager in the articles of partnership may

execute all acts of administration despite

the opposition of his partners, unless he

should act in bad faith; and his power is

irrevocable without just or lawful cause.

The vote of the partners representing the

controlling interest shall be necessary for

such revocation of power.

A power granted after the partnership has

been constituted may be revoked at any

time.

Article 1801: Rule when there are two or more

managers

If two or more partners have been intrusted

with the management of the partnership

without specification of their respective

duties, or without a stipulation that one of

them shall not act without the consent of all

the others, each one may separately

execute all acts of administration, but if any

of them should oppose the acts of the

others, the decision of the majority shall be

prevail. In case of a tie, the matter shall be

decided by the partners owning the

controlling interest.

Article 1802: Unanimity of action by managing

partners

In case it should have been stipulated that

none of the managing partners shall act

without the consent of the others, the

concurrence of all shall be necessary for the

validity of the acts, and the absence or

disability of any one of them cannot be

alleged unless there is imminent danger or

grave or irreparable injury to the

partnership.

Article 1803: Rule when manner of management

not agreed

When the manner of management has not

been agreed upon, the following rules shall

be observed:

1. All the partners shall be considered

agents and whatever any one of them

may do alone shall bind the

partnership, without prejudice to the

provisions of Article 1801.

2. None of the partners may, without the

consent of the others, make any

important alteration in the immovable

property of the partnership, even if it

may be useful to the partnership. But if

the refusal of consent by the other

partners is manifestly prejudicial to the

interest of the partnership, the court’s

intervention may be sought.

Appointment in articles of partnership:

1. Power is irrevocable without just or lawful

cause. Therefore, to remove him for just

cause, the controlling partners should vote

to oust him. To remove him without cause

or for an unjust cause, there must be

unanimity.

2. As to the extent of power, should the

articles of partnership be silent on the

specification of their respective duties or on

the need for the consent of all the others, if

he acts in good faith, he may do all acts of

administration despite the opposition of his

partners. However, if he is in bad faith, he

cannot do any act.

3. When there are two or more managers,

each may separately execute all acts of

administration. In case of opposition, the

majority prevails. In case of tie, partners

having controlling interest prevail.

4. Should there be a stipulation requiring

unanimity in the acts of management, none

of the managing partners should act

without the consent of the others.


What is the scope of powers of a manager? Unless

his powers are specifically restricted, he has the

power of a general agent, as well as all the incidental

powers needed to carry out the objectives of the

partnership. Moreover, as manager he has, even

without approval of the other partners, the power to

dismiss an employee, particularly when a justifiable

cause exists.

Rules to be observed when manner of management

has not been agreed upon or there is no stipulation

to that effect:

1. Partners are considered agents and

whatever any one of them may do alone

will bind the partnership. However, should

any one of them opposed, the majority’s

decision prevails.

2. None of the partners may, without the

consent of the others, make any important

alteration in the immovable property of the

partnership, even if it may be useful to the

partnership. However, when refusal of

consent is manifestly prejudicial to the

partnership’s interest, any one of them may

seek the court’s intervention.

Cases:

Bachrach v. La Protectora, L-11624, January

21, 1918

Several members of a civil partnership executed a

document authorizing one of the members to buy

two automobile trucks in the name and

representation of the firm. The partner holding this

authority effected the purchase and signed the

name of the partnership to the purchase money

notes and added his own name as an individual,

thereby assuming, as to himself, joint and several

liability with the firm. It was held that the partners

who emitted the authority were not liable on the

note, as the document in question contained no

authority to bind them personally and in fact the

notes did not purport to do so; but they were liable

in their capacity as partners.

Article 1804: Contract of sub-partnership

Every partner may associate another person

with him in his share, but the associate shall

not be admitted in the partnership without

the consent of all the other partners, even if

the partner having an associate should be a

manager.

This article underscores the doctrine of delectus

personae. It is because:

1. Before an associate may become a partner,

all of the partners must consent.

2. However, for a partner to have an associate

in his share, consent of the other partners is

not required.

Article 1805: Partnership books

The partnership books shall be kept, subject

to any agreement between the partners, at

the principal place of business of the

partnership, and every partner shall at any

reasonable hour have access to and may

inspect and copy any of them.

Article 1806: Duty to give information

Partners shall render on demand true and

full information of all things affecting the

partnership to any partner or the legal

representative of any deceased partner or

of any partner under legal disability.

Article 1807: Duty to account

Every partner must account to the

partnership for any benefit, and hold as

trustee for it any profits derived by him

without the consent of the other partners

from any transaction connected with the

formation, conduct, or liquidation of the

partnership or from any use by him of its

property.

Article 1808: Prohibition for capitalist partner to

engage in business


The capitalist partners cannot engage for

their own account in any operation which is

of the kind of business in which the

partnership is engaged, unless there is a

stipulation to the contrary.

Any capitalist partner violating this

prohibition shall bring to the common funds

any profits accruing to him from his

transactions, and shall personally bear all

the losses.

While the industrial partner is prohibited from

engaging in business for himself, the capitalist

partner is prohibited from engaging for his own

account in any operation which is of the same kind

of business in which the partnership is engaged. The

competition may become unfair in view of the

knowledge by the capitalist partner of the firm’s

business secrets.

Consequences of violation:

1. Bring to the common fund what he had

benefited; and,

2. Shoulder all the losses.

Article 1809: Right to demand a formal account

Any partner shall have the right to a formal

account as to the partnership affairs:

1. If he is wrongfully excluded from the

partnership business or possession of

its property by his co-partners;

2. If the right exists under the terms of

any agreement;

3. As provided by Article 1807;

4. Whenever other circumstances render

it just and reasonable.

Generally, no formal accounting is demandable till

after dissolution. This is so because there is access

to the partnership books.

Cases:

Evangelista v. Abad-Santos, supra.

What has gone before persuades us to hold with the

lower Court that appellee is an industrial partner of

appellant company, with the right to demand for a

formal accounting and to receive her share in the

net profit that may result from such an accounting,

which right appellants take exception under their

second assigned error.

Lim Tanhu v. Ramolete, L-40098, August 29,

1975

If Po Chuan was in control of the affairs and the

running of the partnership, how could the

defendants have defrauded him of such huge

amounts as plaintiff had made his Honor believe?

Upon the other hand, since Po Chuan was in control

of the affairs of the partnership, the more logical

inference is that if defendants had obtained any

portion of the funds of the partnership for

themselves, it must have been with the knowledge

and consent of Po Chuan, for which reason no

accounting could be demanded from them therefor,

considering that Article 1807 of the Civil Code refers

only to what is taken by a partner without the

consent of the other partner or partners. Incidentally

again, this theory about Po Chuan having been

actively managing the partnership up to his death is

a substantial deviation from the allegation in the

amended complaint to the effect that "defendants

Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim

Teck Chuan and Eng Chong Leonardo, through fraud

and machination, took actual and active

management of the partnership and although Tee

Hoon Lim Po Chuan was the manager of Glory

Commercial Co., defendants managed to use the

funds of the partnership to purchase lands and

buildings etc. (Par. 4, p. 2 of amended complaint,

Annex B of petition) and should not have been

permitted to be proven by the hearing officer, who

naturally did not know any better.

The decision is rather emphatic in that Lim Tanhu

and Ng Sua had no known income except their

salaries. Actually, it is not stated, however, from

what evidence such conclusion was derived in so far

as Ng Sua is concerned. On the other hand, with

respect to Lim Tanhu, the decision itself states that


according to Exhibit NN-Pre trial, in the supposed

income tax return of Lim Tanhu for 1964, he had an

income of P4,800 as salary from Philippine Metal

Industries alone and had a total assess sable net

income of P23,920.77 that year for which he paid a

tax of P4,656.00. (p. 14. Annex L, id.) And per Exhibit

GG-Pretrial in the year, he had a net income of

P32,000 for which be paid a tax of P3,512.40. (id.) As

early as 1962, "his fishing business in Madridejos

Cebu was making money, and he reported "a net

gain from operation (in) the amount of P865.64" (id.,

per Exhibit VV-Pre-trial.) From what then did his

Honor gather the conclusion that all the properties

registered in his name have come from funds

malversed from the partnership?

It is rather unusual that His Honor delved into

financial statements and books of Glory Commercial

Co. without the aid of any accountant or without the

same being explained by any witness who had

prepared them or who has knowledge of the entries

therein. This must be the reason why there are

apparent inconsistencies and inaccuracies in the

conclusions His Honor made out of them. In Exhibit

SS-Pre-trial, the reported total assets of the

company amounted to P2,328,460.27 as of

December, 1965, and yet, Exhibit TT-Pre-trial,

according to His Honor, showed that the total value

of goods available as of the same date was

P11,166,327.62. On the other hand, per Exhibit XX-

Pre-trial, the supposed balance sheet of the

company for 1966, "the value of inventoried

merchandise, both local and imported", as found by

His Honor, was P584,034.38. Again, as of December

31, 1966, the value of the company's goods available

for sale was P5,524,050.87, per Exhibit YY and YY-

Pre-trial. Then, per Exhibit II-3-Pre-trial, the

supposed Book of Account, whatever that is, of the

company showed its "cash analysis" was

P12,223,182.55. We do not hesitate to make the

observation that His Honor, unless he is a certified

public accountant, was hardly qualified to read such

exhibits and draw any definite conclusions

therefrom, without risk of erring and committing an

injustice. In any event, there is no comprehensible

explanation in the decision of the conclusion of His

Honor that there were P12,223,182.55 cash money

defendants have to account for, particularly when it

can be very clearly seen in Exhibits 11-4, 11-4- A, 11-

5 and 11-6-Pre-trial, Glory Commercial Co. had

accounts payable as of December 31, 1965 in the

amount of P4,801,321.17. (p. 15, id.) Under the

circumstances, We are not prepared to permit

anyone to predicate any claim or right from

respondent court's unaided exercise of accounting

knowledge.

Leung v. IAC, GR 70926, January 31, 1989

Regarding the prescriptive period within which the

private respondent may demand an accounting,

Articles 1806, 1807, and 1809 show that the right to

demand an accounting exists as long as the

partnership exists. Prescription begins to run only

upon the dissolution of the partnership when the

final accounting is done.

Emnace v. CA, GR 126334, November 23,

2001

The three (3) final stages of a partnership are: (1)

dissolution; (2) winding-up; and (3) termination. The

partnership, although dissolved, continues to exist

and its legal personality is retained, at which time it

completes the winding up of its affairs, including the

partitioning and distribution of the net partnership

assets to the partners. For as long as the partnership

exists, any of the partners may demand an

accounting of the partnerships business.

Prescription of the said right starts to run only upon

the dissolution of the partnership when the final

accounting is done.

Contrary to petitioners protestations that

respondents right to inquire into the business affairs

of the partnership accrued in 1986, prescribing four

(4) years thereafter, prescription had not even

begun to run in the absence of a final accounting.

Article 1842 of the Civil Code provides:

The right to an account of his interest shall

accrue to any partner, or his legal

representative as against the winding up


partners or the surviving partners or the

person or partnership continuing the

business, at the date of dissolution, in the

absence of any agreement to the contrary.

Applied in relation to Articles 1807 and 1809, which

also deal with the duty to account, the above-cited

provision states that the right to demand an

accounting accrues at the date of dissolution in the

absence of any agreement to the contrary. When a

final accounting is made, it is only then that

prescription begins to run. In the case at bar, no

final accounting has been made, and that is precisely

what respondents are seeking in their action before

the trial court, since petitioner has failed or refused

to render an accounting of the partnerships business

and assets. Hence, the said action is not barred by

prescription.

PROPERTY RIGHTS OF PARTNERS

Article 1810: Property rights of partners

The property rights of a partner are:

1. His rights in specific partnership

property;

2. His interest in the partnership; and,

3. His right to participate in the

management.

The rights enumerated above are considered as

principal property rights of a partner.

Distinction:

Partnership property Partnership capital

In terms of changes in

value, partnership

property is variable. Its

value may vary from day

to day with changes in

the market value of the

partnership assets.

In terms of changes in

value, partnership

capital is constant. It

remains unchanged as

the amount fixed by the

agreement of the

partners, and is not

affected by fluctuations

in the value of

partnership property,

although it may be

increased or diminished

by unanimous consent of

the partners.

Partnership property

includes not only the

original capital

contribution of the

partners, but all

property subsequently

acquired on account of

the partnership, or in the

partnership name with

partnership funds,

unless a contrary

intention is shown,

including partnership

name and the goodwill

of the partnership.

Partnership capital

represents the aggregate

of the individual

contributions made by

the partners in

establishing or

continuing the business.

Article 1811: Nature of partner’s right in specific

partnership property

ART. 1811. A partner is co-owner with his

partners of specific partnership property. The

incidents of this co-ownership are such that:

1. A partner, subject to the provisions of

this Title and to any agreement

between the partners, has an equal

right with his partners to possess

specific partnership property for

partnership purposes; but he has no

right to possess such property for any

other purpose without the consent of

his partners;

2. A partner’s right in specific partnership

property is not assignable except in

connection with the assignment of

rights of all the partners in the same

property;


property is not subject to attachment

or execution, except on a claim against

the partnership. When partnership

property is attached for a partnership

debt the partners, or any of them, or


the representatives of a deceased

partner, cannot claim any right under

the homestead or exemption laws;


property is not subject to legal support

under Article 291.

Partners have equal right of possession. However,

the rules on co-ownership do not necessarily apply;

the rules on “co-ownership” are applicable.

In general he has an equal right with his partners to

possess the partnership property but only for

partnership purposes. A partner, as such, does not

actually own any part of partnership property or

property owned by the partnership as a separate

business entity, although he does have rights in

specific partnership assets.

1. Equal right of possession for partnership

purposes;

2. A partner cannot separately assign his right

to specific partnership property but all of

them can assign their rights in the same

property.

3. No particular partnership property or any

specific or an aliquot part thereof can be

considered the separate or individual

property of any partner. The whole of

partnership property belongs to the

partnership considered as a juridical person

and a partner has no interest in it but his

share of what remains after all partnership

debts are paid.

Cases:

Navarro v. Escobido, GR 153788, November

27, 2009

Article 124 of the Family Code, on the

administration of the conjugal property, provides:

Art. 124. The administration and

enjoyment of the conjugal

partnership property shall belong

to both spouses jointly. In case

of disagreement, the husband’s

decision shall prevail, subject to

recourse to the court by the wife

for proper remedy, which must be

availed of within five years from

the date of the contract

implementing such decision.

This provision, by its terms, allows either Karen or

Glenn Go to speak and act with authority in

managing their conjugal property, i.e., Kargo

Enterprises. No need exists, therefore, for one to

obtain the consent of the other before performing

an act of administration or any act that does not

dispose of or encumber their conjugal property.

Under Article 108 of the Family Code, the conjugal

partnership is governed by the rules on the

contract of partnership in all that is not in conflict

with what is expressly determined in this Chapter

or by the spouses in their marriage settlements. In

other words, the property relations of the husband

and wife shall be governed primarily by Chapter 4

on Conjugal Partnership of Gains of the Family

Code and, suppletorily, by the spouses’ marriage

settlement and by the rules on partnership under

the Civil Code. In the absence of any evidence of a

marriage settlement between the spouses Go, we

look at the Civil Code provision on partnership for

guidance.

A rule on partnership applicable to the spouses’

circumstances is Article 1811 of the Civil Code,

which states:

Art. 1811. A partner is a co-owner

with the other partners of specific

partnership property.

The incidents of this co-ownership

are such that:

(1) A partner, subject to the

provisions of this Title and to any

agreement between the partners,

has an equal right with his

partners to possess specific

partnership property for

partnership purposes; xxx


Under this provision, Glenn and Karen Go are

effectively co-owners of Kargo Enterprises and the

properties registered under this name; hence, both

have an equal right to seek possession of these

properties. Applying Article 484 of the Civil Code,

which states that in default of contracts, or special

provisions, co-ownership shall be governed by the

provisions of this Title, we find further support in

Article 487 of the Civil Code that allows any of the

co-owners to bring an action in ejectment with

respect to the co-owned property.

Clemente v. Galvan, GR 45662, April 26,

1939

The evidence of record shows that the machines in

contention originally belonged to the defendant and

from him were transferred to the partnership Galvan

y Compañia. This being the case, said machines

belong to the partnership and not to him, and shall

belong to it until partition is effected according to

the result thereof after the liquidation.

Article 1812: Nature of partner’s interest in the

partnership

A partner’s interest in the partnership is his

share of the profits and surplus.

While in general, a partner’s interest in specific

partnership property cannot be assigned, cannot be

attached and is not subject to legal support, a

partner’s interest in the partnership (i.e., his share in

the profits and surplus) can in general be assigned,

be attached and be subject to legal support (Paras).

Article 1813: Assignment of partner’s whole

interest in the partnership

A conveyance by a partner of his whole

interest in the partnership does not of itself

dissolve the partnership, or, against the

other partners in the absence of

agreement, entitle the assignee, during the

continuance of the partnership, to interfere

in the management or administration of the

partnership business or affairs, or to require

any information or account of partnership

transactions, or to inspect the partnership

books; but it merely entitles the assignee to

receive in accordance with his contract the

profits to which the assigning partner would

otherwise be entitled. However, in case of

fraud in the management of the

partnership, the assignee may avail himself

of the usual remedies.

In case of a dissolution of the partnership,

the assignee is entitled to receive his

assignor’s interest and may require an

account from the date only of the last

account agreed to by all the partners.

The assignee does not necessarily become a partner.

He can neither interfere in the management or

administration of the partnership business or affairs.

He cannot also demand information, accounting, and

inspection of the accounting book. The assignor is

still the partner, with a right to demand accounting

and settlement.

Effect of assignment: No dissolution of the

partnership. The assignor is still the partner.

Rights of the assignee:

1. To get whatever profits the assignor-

partner would have obtained;

2. To avail himself of the usual remedies in

case of fraud in the management;

3. To ask for annulment of the contract of

assignment if he was induced to enter into

it thru any of the vices of consent or if he

himself was incapacitated to give consent;

4. To demand an accounting once the

partnership is dissolved. The account

covers the period only from the date of the

last accounting which has been agreed to by

all the partners.

Does Article 1813 cover also a case when the partner

merely mortgages his interest in the profits? Yes, but

here said interest is not alienated; it is merely given

as security, and therefore the rules on securities for

loans can properly apply (Paras).


Cases:

Villareal v. Ramirez, supra.

We hold that respondents have no right to demand

from petitioners the return of their equity share.

Except as managers of the partnership, petitioners

did not personally hold its equity or assets. The

partnership has a juridical personality separate and

distinct from that of each of the partners. Since the

capital was contributed to the partnership, not to

petitioners, it is the partnership that must refund the

equity of the retiring partners.

Realubit v. Jaso, GR 178782, September 21,

2011

From the foregoing provision, it is evident that (t)he

transfer by a partner of his partnership interest does

not make the assignee of such interest a partner of

the firm, nor entitle the assignee to interfere in the

management of the partnership business or to

receive anything except the assignees profits. The

assignment does not purport to transfer an interest

in the partnership, but only a future contingent right

to a portion of the ultimate residue as the assignor

may become entitled to receive by virtue of his

proportionate interest in the capital. Since a

partner’s interest in the partnership includes his

share in the profits, we find that the CA committed

no reversible error in ruling that the Spouses Jaso

are entitled to Biondo’s share in the profits, despite

Juanita’s lack of consent to the assignment of said

Frenchmans interest in the joint venture. Although

Eden did not, moreover, become a partner as a

consequence of the assignment and/or acquire the

right to require an accounting of the partnership

business, the CA correctly granted her prayer for

dissolution of the joint venture conformably with the

right granted to the purchaser of a partner’s interest

under Article 1831 of the Civil Code.

Article 1814: Remedies of separate judgment

creditor of a partner

Without prejudice to the preferred rights of

partnership creditors under article 1827, on

due application to a competent court by

any judgment creditor of a partner, the

court which entered the judgment, or any

other court, may charge the interest of the

debtor partner with payment of the

unsatisfi ed amount of such judgment debt

with interest thereon; and may then or later

appoint a receiver of his share of the profi

ts, and of any other money due or to fall

due to him in respect of the partnership,

and make all other orders, directions,

accounts and inquiries which the debtor

partner might have made, or which

circumstances of the case may require.

The interest charged may be redeemed at

any time before foreclosure, or in case of a

sale being directed by the court, may be

purchased without thereby causing a

dissolution:

1. With separate property, by any one or

more of the partners; or,

2. With partnership property, by any one

or more of the partners with the

consent of all the partners whose

interests are not so charged or sold.

Nothing in this Title shall be held to deprive

a partner of his right, if any, under the

exemption laws, as regards his interest in

the partnership.

This provision provides for the available remedies.

While a separate creditor of a partner cannot attach

or levy upon specific partnership property for the

satisfaction of his credit because partnership assets

are reserved for partnership creditors, he can secure

a judgment on his credit and then apply to the

proper court for a charging order.

What is a charging order? It is that which is applied

for by a judgment creditor of a partner after he had

secured a judgment on his credit. By virtue of the

charging order, the interest of the debtor-partner in

the partnership is used to secure for the payment of

the unsatisfied amount of such judgment with


interest thereon. More so, by virtue of the charging

order, any amount or portion thereof which the

partnership would otherwise pay to the debtor-

partner should instead be given to the judgment

creditor.

However, this remedy is subject to the preferred

rights of partnership creditors. It means that the

claims of partnership creditors must be satisfied first

before the separate creditors of the partners can be

paid out of the interest charged.

Is the judgment creditor of the partner entitled to a

writ of execution? From the provisions of the article,

it seems he is not.

Other remedies:

1. Receivership. When the charging order is

applied for and granted, the court may at

the same time or later appoint a receiver of

the partner’s share in the profits or other

money due him.

What is the remedy of the debtor-partner then?

Should the charging order be granted, the interest of

the debtor-partner so charged may be redeemed or

purchased with the separate property of any or

more of the partners, or with partnership property

but with the consent of all the partners whose

interests are not so charged or sold. Redemption

here merely means the extinguishment of the charge

or attachment on the partner’s interest in the

profits.

How is this redemption made?

1. The charge may be redeemed or bought at

anytime before foreclosure.

2. After foreclosure, it may still be bought with

separate property by any one or more of

the partners, or with partnership property

with consent of all the other partners.

Article 1815: Partnership name

Every partnership shall operate under a firm

name, which may or may not include the

name of one or more of the partners.

Those who, not being members of the

partnership, include their names in the firm

name, shall be subject to the liability of a

partner.

A partnership must have a firm name under which it

will operate. A firm name is necessary to distinguish

the partnership which has a distinct and separate

juridical personality from the individuals composing

the partnership and from other partnerships and

entities.

The partners enjoy the utmost freedom in the

selection of the partnership name. This is different

from the mandate of Article 126 of the Code of

Commerce which requires that the name of at least

one of the general partners in the general

partnership should appear.

Strangers who include their names in the firm are

liable as partners because of estoppel but do not

have the rights of partners for after all, they had not

entered into any partnership contract.

Cases:

In re: Petition for authority to continue use

of the firm name “Ozaeta, Romulo, De

Leon, Mabanta & Reyes,” GR X92-1, July 30,

1979

It is clearly tacit in the above provision that names in

a firm name of a partnership must either be those of

living partners and, in the case of non-partners,

should be living persons who can be subjected to

liability. In fact, Article 1825 of the Civil Code

prohibits a third person from including his name in

the firm name under pain of assuming the liability of

a partner. The heirs of a deceased partner in a law

firm cannot be held liable as the old members to the

creditors of a firm particularly where they are non-

lawyers. Thus, Canon 34 of the Canons of

Professional Ethics "prohibits all agreement for the

payment to the widow and heirs of a deceased


lawyer of a percentage, either gross or net, of the

fees received from the future business of the

deceased lawyer’s clients, both because the

recipients of such division are not lawyers and

because such payments will not represent service or

responsibility on the part of the recipient."

Accordingly, neither the widow nor the heirs can be

held liable for transactions entered into after the

death of their lawyer-predecessor. There being no

benefits accruing, there can be no corresponding

liability.

Prescinding the law, there could be practical

objections to allowing the use by law firms of the

names of deceased partners. The public relations

value of the use of an old firm name can tend to

create undue advantages and disadvantages in the

practice of the profession. An able lawyer without

connections will have to make a name for himself

starting from scratch. Another able lawyer, who can

join an old firm, can initially ride on that old firm’s

reputation established by deceased partners

However, as it applies to law firms, Rule 3.02 of the

Code of Professional Responsibility allows or permits

the surviving partners of a law firm the continued

use of the name of a deceased partner provided

there is an indication that said partner is already

dead.

Teck Seing & Co. Ltd. v. Pacific Commercial

Company, GR 19892, September 6, 1923

On the presence of “Ltd.”

Article 126 of the Code of Commerce requires the

general co-partnership to transact business under

the name of all its members, or of several of them,

or of one only. The object of the article is manifestly

to protect the public against imposition and fraud.

Article 126 of the Code of Commerce was intended

more for the protection of the creditors than of the

partners themselves. A distinction can be drawn

between the right of the alleged partnership to

institute action when failing to live up to the

provision of the law, or even the rights of the

partners as among themselves, and the right of a

third person to hold responsible a general

partnership which merely lacks a firm name, in order

to make it a partnership de jure. the law should be

construed as rendering contracts made in violation

of it unlawful and unenforceable at the instance of

the offending party only, but not as designed to take

away the rights of innocent parties who may have

dealt with the offenders in ignorance of their having

violated the law.

Citing Dr. Echavarri y Vivanco in his Codigo de

Comercio:

"The name of the collective merchant is

called firm name. By this name, the new

being is distinguished from others, its

sphere of action fixed, and the juridical

personality better determined, without

constituting an exclusive character of the

general partnership to such an extent as to

serve the purpose of giving a definition of

said kind of a mercantile partnership, as is

the case in our Code.”

"Having in mind that these partnership are

prevailingly of a personal character, article

126 says that they must transact business

under the name of all its members, of some

of them or of one only, the words ’and

company’ to be added in the latter two

cases.”

"It is rendered impossible for the general

partnership to adopt a firm name

appropriate to its commercial object; the

law wants to link, and does link, the solidary

and unlimited responsibility of the member

of this partnership with the formation of its

name, and imposes a limitation upon

personal liberty in its selection, not only by

prescribing the requisites, but also by

prohibiting persons not members of the

company from including their names in its

firm name under penalty of civil solidary

responsibility.”


"Of course, the form required by the Code

for the adoption of the firm name does not

prevent the addition thereto of any other

title connected with the commercial

purpose of the association. The reader may

see our commentaries on the mercantile

registry about the business names and firm

names of associations, but it is proper to

establish here that, while the business

name may be alienated by any of the means

admitted by the law, it seems impossible to

separate the firm names of general

partnerships from the juridical entity for the

creation of which it was formed."

The legal intention deducible from the acts of the

parties controls in determining the existence of a

partnership. If they intend to do a thing which in law

constitute a partnership, they are partners, although

their purpose was to avoid the creation of such

relation. Here, the intention of the persons making

up Teck Seing & Co., Ltd. was to establish a

partnership which they erroneously denominated a

limited partnership. If this was their purpose, all

subterfuges resorted to in order to evade liability for

possible losses, while assuming their enjoyment of

the advantages to be derived from the relation must

be disregarded. The partners who have their identity

under a designation distinct from that of any of the

members of the firm should be penalized, and not

the creditors who presumably have dealt with the

partnership in good faith.

Article 1816: Liability of partners for contractual

obligations of the partnership

All partners, including industrial ones, shall

be liable pro rata with all their property and

after all the partnership assets have been

exhausted, for the contracts which may be

entered into in the name and for the

account of the partnership, under its

signature and by a person authorized to act

for the partnership. However, any partner

may enter into a separate obligation to

perform a partnership contract.

The provision lays down the rule that the partners,

including the industrial partner, are liable to

creditors of the partnership for the obligations

contracted by a partner in the name and for the

account of the partnership. The debts and

obligations of the partnership, are in substance, also

the debts and obligations of each individual member

of the firm. Their individual liability to creditors is

pro rata and subsidiary.

Principles governing individual liability:

Pro rata. It means equally or jointly, not

proportionately because it is based on the

number of partners and not on the amount

of their contributions to the common fund.

Subsidiary. It is secondary because the

partners become personally liable only after

all the partnership assets have been

exhausted.

Note that while an industrial partner is exempted by

law from losses, he is not exempted from liability

insofar as third persons are concerned. This means

that the third person can sue the firm and the

partners, including the industrial partner.

What is the liability of a partner who has withdrawn

from the partnership? A partner who withdraws is

not liable for liabilities contracted after he has

withdrawn, for then he is no longer a partner. If his

interest has not yet been paid him, his right to the

same is that of a mere creditor.

What is the effect of a stipulation exempting liability

to third persons? The stipulation would be null and

void, pursuant to Article 1817. Such stipulation will

be valid insofar as among the partners.

The provision likewise recognizes a partner assuming

a separate undertaking in his name with a third party

to perform a partnership contract or make himself

solidarily liable on a partnership contract. In such

case, the partner is personally bound by his contract

even if only the partnership is shown to have derived

benefits from it.

Cases:


Island Sales, Inc. v. United Pioneers General

Construction, L-22493, July 31, 1975

The defendant company, a general partnership,

purchased from Island Sales, Inc. a motor vehicle,

executing for that purpose a promissory note for the

entire price, payable in twelve monthly installments.

Having failed to receive the third installment, Island

Sales sued the company, including its general

partners as co-defendants. On motion of plaintiff,

the complaint was later dismissed insofar as one of

the partners was concerned. After trial, judgment

was entered sentencing the defendant to pay the

sum due, with interest, and expressly stating that

the four of the five partners would pay in case the

company has no properties with which to satisfy

judgment. One of the partners appealed claiming

that the liability of each partner should not exceed

1/5 of the obligation due inasmuch as there are five

partners in the company.

The Supreme Court ruled that under Art. 1816 of the

Civil Code, the liability of partners shall be pro-rata;

that the dismissal of the complaint to favor one of

the general partners results in the condonation of

the debt of that partner’s individual share and that

appellant’s share in the obligation shall not be

increased thereby but shall be limited to 1/5 of the

obligation of defendant company.

Muñasque v. CA, L-39780, November 11,

1985

While it is true that under Article 1816 of the Civil

Code, "All partners, including industrial ones, shall

be liable pro rata with all their property and after all

the partnership assets have been exhausted, for the

contracts which may be entered into the name and

for the account of the partnership, under its

signature and by a person authorized to act for the

partnership. . . .", this provision should be construed

together with Article 1824 which provides that: "All

partners are liable solidarily with the partnership for

everything chargeable to the partnership under

Articles 1822 and 1823." In short, while the liability

of the partners are merely joint in transactions

entered into by the partnership, a third person who

transacted with said partnership can hold the

partners solidarily liable for the whole obligation if

the case of the third person falls under Articles 1822

or 1823.

PNB v. Lo, L-26937, October 5, 1927

The judgment against the appellants is in accordance

with article 127 of the Code of Commerce which

provides that all the members of a general

partnership, be they managing partners thereof or

not, shall be personally and solidarily liable with all

their property, for the results of the transactions

made in the name and for the account of the

partnership, under the signature of the latter, and by

a person authorized to use it.


Industries, Inc., supra.

There is no dispute that the respondent, Philippine

Fishing Gear Industries, is entitled to be paid for the

nets it sold. The only question here is whether

petitioner should be held jointly liable with Chua and

Yao. Petitioner contests such liability, insisting that

only those who dealt in the name of the ostensible

corporation should be held liable. Since his name

does not appear on any of the contracts and since he

never directly transacted with the respondent

corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of

the nets found inside F/B Lourdes, the boat which

has earlier been proven to be an asset of the

partnership. He in fact questions the attachment of

the nets, because the Writ has effectively stopped

his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that

Lim, Chua and Yao decided to form a corporation.

Although it was never legally formed for unknown

reasons, this fact alone does not preclude the

liabilities of the three as contracting parties in

representation of it. Clearly, under the law on

estoppel, those acting on behalf of a corporation and

those benefited by it, knowing it to be without valid

existence, are held liable as general partners.


Technically, it is true that petitioner did not directly

act on behalf of the corporation. However, having

reaped the benefits of the contract entered into by

persons with whom he previously had an existing

relationship, he is deemed to be part of said

association and is covered by the scope of the

doctrine of corporation by estoppel.

Article 1817: Stipulation against liability

Any stipulation against the liability laid

down in the preceding article shall be void,

except as among the partners.

A stipulation among the partners contrary to the pro

rata and subsidiary liability expressly imposed by

Article 1816 is void and of no effect insofar as it

affects the rights of third persons. It is valid and

enforceable only as among the partner.

Article 1818: Partner as agent; powers

Every partner is an agent of the partnership

for the purpose of its business, and the act

of every partner, including the execution in

the partnership name of any instrument, for

apparently carrying on in the usual way the

business of the partnership of which he is a

member binds the partnership, unless the

partner so acting has in fact no authority to

act for the partnership in the particular

matter, and the person with whom he is

dealing has knowledge of the fact that he

has no such authority.

An act of a partner which is not apparently

for the carrying on of the business of the

partnership in the usual way does not bind

the partnership unless authorized by the

other partners.

Except when authorized by the other

partners or unless they have abandoned the

business, one or more but less than all the

partners have no authority to:

1. Assign the partnership property in trust

for creditors or on the assignee’s

promise to pay the debts of the

partnership;

2. Dispose of the goodwill of the business;

3. Do any other act which would make it

impossible to carry on the ordinary

business of a partnership;

4. Confess a judgment;

5. Enter into a compromise concerning a

partnership claim or liability;

6. Submit a partnership claim or liability

to arbitration;

7. Renounce a claim of the partnership.

No act of a partner in contravention of a

restriction on authority shall bind the

partnership to persons having knowledge of

the restriction.

This article speaks of:

1. The fact that the partner is an agent;

2. The instances when he can bind the

partnership;

3. The instances when he cannot bind the

partnership should he enter into the

contract alone.

In the absence of an agreement to the contrary, all

partners have equal rights in the management and

conduct of the partnership business. Hence, when a

partner performs an act within the scope of his

actual, implied, or apparent authority, he is not only

a principal as to himself but is also for all purposes,

an agent as to his co-partners or to the partnership.

It follows that the general rules on agency apply to

partners. Interestingly, it has been truthfully said

that a partnership is a contract of “mutual agency,”

each partner acting as a principal on his own behalf,

and as an agent for his co-partners or the firm.

When a partner acts under the usual way of the

partnership or carries on in the usual way the

business of the partnership, he binds the partnership

unless the partner so acting has in fact no authority

to act for the partnership in the particular matter

and the person with whom he is dealing has

knowledge of the fact that he has no authority. On


the other end of the spectrum, when a partner’s acts

are not apparently for the carrying on of business of

the partnership in the usual way, his acts do not bind

the partnership unless authorized by the other

partners.

Put simply, here are the rules:

1. If the partner’s acts are pursuant to the

regular business of the partnership, the

partner binds the partnership, subject to 2

exceptions.

2. If the partner’s acts are not in the regular

business of the partnership, his acts do not

bind the partnership for all of the partners

must have authorized him to do so.

Cases:

Mendoza v. Paule, GR 175885, February 13,

2009

Records show that Paule (or, more appropriately,

EMPCT) and Mendoza had entered into a

partnership in regard to the NIA project. Paule’s

contribution thereto is his contractor’s license and

expertise, while Mendoza would provide and secure

the needed funds for labor, materials and services;

deal with the suppliers and sub-contractors; and in

general and together with Paule, oversee the

effective implementation of the project. For this,

Paule would receive as his share three per cent (3%)

of the project cost while the rest of the profits shall

go to Mendoza. Paule admits to this arrangement in

all his pleadings.

Although the SPAs limit Mendoza’s authority to such

acts as representing EMPCT in its business

transactions with NIA, participating in the bidding of

the project, receiving and collecting payment in

behalf of EMPCT, and performing other acts in

furtherance thereof, the evidence shows that when

Mendoza and Cruz met and discussed (at the EMPCT

office in Bayuga, Muñoz, Nueva Ecija) the lease of

the latters heavy equipment for use in the project,

Paule was present and interposed no objection to

Mendoza’s actuations. In his pleadings, Paule does

not even deny this. Quite the contrary, Mendoza’s

actions were in accord with what she and Paule

originally agreed upon, as to division of labor and

delineation of functions within their partnership.

Under the Civil Code, every partner is an agent of the

partnership for the purpose of its business; each one

may separately execute all acts of administration,

unless a specification of their respective duties has

been agreed upon, or else it is stipulated that any

one of them shall not act without the consent of all

the others. At any rate, Paule does not have any

valid cause for opposition because his only role in

the partnership is to provide his contractor’s license

and expertise, while the sourcing of funds, materials,

labor and equipment has been relegated to

Mendoza.

Doctrine of apparent authority. The partnership may

still be held liable even if the transacting partner had

no authority to do so; Provided, that the partner acts

on transactions which are part of the regular

business of the enterprise and the partnership made

it appear that said partner has authority and third

persons subsequently believed such representation.

Goquiolay v. Sycip, L-11840, July 26, 1960

We are not unaware of the provision of Article 129

of the Code of Commerce to the effect that –

If the management of the general

partnership has not been limited by special

agreement to any of the members, all shall

have the power to take part in the direction

and management of the common business,

and the members present shall come to an

agreement for all contracts or obligations

which may concern the association.

(Emphasis supplied)

but this obligation is one imposed by law on the

partners among themselves, that does not

necessarily affect the validity of the acts of a partner,

while acting within the scope of the ordinary course

of business of the partnership, as regards third

persons without notice. The latter may rightfully

assume that the contracting partner was duly


authorized to contract for and in behalf of the firm

and that, furthermore, he would not ordinarily act to

the prejudice of his co-partners. The regular course

of business procedure does not require that each

time a third person contracts with one of the

managing partners, he should inquire as to the

latter's authority to do so, or that he should first

ascertain whether or not the other partners had

given their consent thereto. In fact, Article 130 of

the same Code of Commerce provides that even if a

new obligation was contracted against the express

will of one of the managing partners, "it shall not be

annulled for such reason, and it shall produce its

effects without prejudice to the responsibility of the

member or members who contracted it, for the

damages they may have caused to the common

fund."

Article 1819: Conveyance of real property belonging

to the partnership

Where title to real property is in the

partnership name, any partner may convey

title to such property by a conveyance

executed in the partnership name; but the

partnership may recover such property

unless the partner’s act binds the

partnership under the provisions of the first

paragraph of Article 1818, or unless such

property has been conveyed by the grantee

or a person claiming through such grantee

to a holder for value without the knowledge

that the partner, in making the conveyance,

has exceeded his authority.

Where title to real property is in the name

of the partnership, a conveyance executed

by a partner, in his own name, passes the

equitable interest of the partnership,

provided the act is one within the authority

of the partner under the provisions of the

first paragraph of Article 1818.

Where title to real property is in the name

of one or more but not all the partners, and

the record does not disclose the right of the

partnership, the partners in whose name

the title stands may convey title to such

property, but the partnership may recover

such property if the partners’ act does not

bind the partnership under the provisions

of the first paragraph of Article 1818, unless

the purchaser or his assignee, is a holder for

value, without knowledge.

Where the title to real property is in the

name of one or more or all the partners, or

in a third person in trust for the

partnership, a conveyance executed by a

partner in the partnership name, or in his

name, passes the equitable interest of the

partnership, provided the act is one within

the authority of the partner under the

provisions of the first paragraph of Article

1818.

Where the title to real property is in the

names of all the partners a conveyance

executed by all the partners passes all their

rights in such property.

According to Paras, this article is a particular

elaboration of Article 1818 but is applicable to real

property alone.

What does “equitable interest” mean? An equitable

interest or title is one not only recognized by law,

but also by the principles of equity. It refers to all

interest which the partnership had, except title. One

is entitled to the beneficial interests like use and

fruits, but not the naked ownership.

A firm may get back the land unless the firm is

engaged in the buying and selling of land or the

buyer had in turn sold the same land to another for

value and the later buyer did not know of the

partner’s lack of authority. Regardless of the fact

that one partner cannot convey partnership realty

without the concurrence of his co-partners, it is

fundamental that innocent purchasers without

notice must be protected.

A conveyance of partnership realty by one partner

may be authorized by his co-partners, or when made

without authority, may be ratified by them. Such


authority or ratification must affirmatively appear,

for the authority of one partner to make and

acknowledge a deed for the partnership will not be

presumed. However, after a lapse of many years

from the time of execution of a conveyance by a

partner purporting to act for the partnership,

authority or ratification will be presumed (estoppel

by silence).

Cases:

Syjuco v. Castro, supra.

On failure to impugn mortgage for more than 17

years (estoppel by silence)

If, therefore, the respondent partnership was

inescapably chargeable with knowledge of the

mortgage executed by all the partners thereof, its

silence and failure to impugn said mortgage within a

reasonable time, let alone a space of more than

seventeen years, brought into play the doctrine of

estoppel to preclude any attempt to avoid the

mortgage as allegedly unauthorized.

On acts of all the individual members being

considered as acts of the partnership

Equally or even more preclusive of the respondent

partnership’s claim to the mortgaged property is the

last paragraph of Article 1819 of the Civil Code,

which contemplates a situation duplicating the

circumstances that attended the execution of the

mortgage in favor of Syjuco and therefore applies

foursquare thereto:

"Where the title to real property is in the

names of all the partners a conveyance

executed by all the partners passes all their

rights in such property."

The term "conveyance" used in said provision, which

is taken from Section 10 of the American Uniform

Partnership Act, includes a mortgage.

Interpreting Sec. 10 of the Uniform Partnership Act,

it has been held that the right to mortgage is

included in the right to convey. This is different from

the rule in agency that a special power to sell

excludes the power to mortgage.”

As indisputable as the propositions and principles

just stated is that the cause of action in Civil Case

No. Q-36485 is barred by prior judgment. The right

subsumed in that cause is the negation of the

mortgage, postulated on the claim that the parcels

of land mortgaged by the Lims to Syjuco did not in

truth belong to them but to the partnership.

Assuming this to be so, the right could have been

asserted at the time that the Lims instituted their

first action on December 24,1968 in the Manila

Court of First Instance, Civil Case No. 75180, or when

they filed their subsequent actions: Civil Case No.

112762, on December 19, 1977; Civil Case No. 83-

19018, in 1983, and Civil Case No. Q-39294, also in

1983. The claim could have been set up by the Lims,

as members composing the partnership, "Heirs of

Hugo Lim." It could very well have been put forth by

the partnership itself, as co-plaintiff in the

corresponding complaints, considering that the

actions involved property supposedly belonging to it

and were being prosecuted by the entire

membership of the partnership, and therefore, the

partnership was in actuality, the real party in

interest. In fact, consistently with the Lims’ theory,

they should be regarded, in all the actions presented

by them, as having sued for vindication, not of their

individual rights over the property mortgaged, but

those of the partnership. There is thus no reason to

distinguish between the Lims, as individuals, and the

partnership itself, since the former constituted the

entire membership of the latter. In other words,

despite the concealment of the existence of the

partnership, for all intents and purposes and

consistently with the Lims’ own theory, it was that

partnership which was the real party in interest in all

the actions; it was actually represented in said

actions by all the individual members thereof, and

consequently, those members’ acts, declarations

and omissions cannot be deemed to be simply the

individual acts of said members, but in fact and in

law, those of the partnership.

Article 1820: Admission by a partner


An admission or representation made by

any partner concerning partnership affairs

within the scope of his authority in

accordance with this Title is evidence

against the partnership.

Statements of a partner bind the partnership only if

they are made in the course of, related to, and are

material to, the transaction of the partnership’s

business. A partnership is a joint affair and to charge

it with liability, there must be joint words or actions.

An individual partner cannot do this.

Restrictions on the rule:

1. Admissions made before dissolution are

binding only when the partner has authority

to act on the particular matter.

2. Admissions made after dissolution are

binding only if the admissions were

necessary to wind up the business.

According to Paras, citing the Court in Ormachea Tin

Congco v. Trillana, an admission by a former partner,

made after he has retired from the partnership, is

not evidence against the firm.

When is a previous admission of a partner admissible

in evidence against the partnership? When it was

made within the scope of the partnership and during

its existence, provided of course that the existence

of the partnership is first proved by evidence other

than such act or declaration.

Article 1821: Notice to partners

Notice to any partner of any matter relating

to partnership affairs, and the knowledge of

the partner acting in the particular matter,

acquired while a partner or then present to

his mind, and the knowledge of any other

partner who reasonably could and should

have communicated it to the acting partner,

operate as notice to or knowledge of the

partnership except in the case of a fraud on

the partnership, committed by or with the

consent of that partner.

Notice to a partner is notice to the partnership. Like

the law of agency, the law of partnership imputes

notice to, or knowledge of, any partner of any

matter relating to partnership affairs to the

partnership except in case of fraud. The reason is

that members of a partnership stand in a fiduciary

relationship to one another, and it is presumed that

the partners disclose to one another all relevant

information concerning partnership business.

Article 1821 speaks of three cases of knowledge:

1. Knowledge of the partner acting in the

particular matter acquired while a partner;

2. Knowledge of the partner acting in the

particular matter then present to his mind;

and,

3. Knowledge of any other partner who

reasonably could and should have

communicated it to the acting partner.

Article 1822: Liability for wrongful acts or omission

Where, by any wrongful act or omission of

any partner acting in the ordinary course of

the business of the partnership or with the

authority of his co-partners, loss or injury is

caused to any person, not being a partner in

the partnership, or any penalty is incurred,

the partnership is liable therefor to the

same extent as the partner so acting or

omitting to act.

Article 1823: When partnership bound to make

good loss

The partnership is bound to make good the

loss:

1. Where one partner acting within the

scope of his apparent authority

receives money or property of a third

person and misapplies it; and,

2. Where the partnership in the course of

its business receives money or property

of a third person and the money or

property so received is misapplied by


any partner while it is in the custody of

the partnership.

Article 1824: Solidary liability of partners under

Articles 1822 and 1823

All partners are liable solidarily with the

partnership for everything chargeable to

the partnership under articles 1822 and

1823.

The above three articles provide for the solidary

liability of the partners and also the partnership to

third persons for the wrongful act or omission, or

breach of trust of a partner acting within the scope

of the firm’s business or with the authority of his co-

partners.

Cases:

Muñasque v. CA, supra.

The obligation is solidary because the law protects

him, who in good faith relied upon the authority of a

partner, whether such authority is real or apparent.

That is why under Article 1824 of the Civil Code, all

partners, whether innocent or guilty, as well as the

legal entity, which is the partnership, are solidarily

liable.

In the case at bar the respondent Tropical had every

reason to believe that a partnership existed between

the petitioner and Galan and no fault or error can be

imputed against it for making payments to "Galan

and Associates" and delivering the same to Galan

because as far as it was concerned, Galan was a true

partner with real authority to transact on behalf of

the partnership with which it was dealing. This is

even more true in the cases of Cebu Southern

Hardware and Blue Diamond Glass Palace who

supplied materials on credit to the partnership.

Thus, it is but fair that the consequences of any

wrongful act committed by any of the partners

therein should be answered solidarily by all the

partners and the partnership as a whole.

However, as between the partners Muñasque and

Galan, justice also dictates that Muñasque be

reimbursed by Galan for the payments made by the

former representing the liability of their partnership

to herein intervenors, as it was satisfactorily

established that Galan acted in bad faith in his

dealings with Muñasque as a partner.

Article 1825: Partnership by estoppel

When a person, by words spoken or writ-

ten or by conduct, represents himself, or

consents to another representing him to

anyone, as a partner in an existing

partnership or with one or more persons

not actual partners, he is liable to any such

persons to whom such representation has

been made, who has, on the faith of such

representation given credit to the actual or

apparent partnership, and if he has made

such representation or consented to its

being made in a public manner he is liable

to such person, whether the representation

has or has not been made or communicated

to such person so giving credit by or with

the knowledge of the apparent partner

making the representation or consenting to

its being made:

1. When a partnership liability results, he

is liable as though he were an actual

member of the partnership;

2. When no partnership liability results,

he is liable pro rata with the other

persons, if any, so consenting to the

contract or representation as to incur

liability, otherwise separately.

When a person has been thus represented

to be a partner in an existing partnership, or

with one or more persons not actual

partners, he is an agent of the persons

consenting to such representation to bind

them to the same extent and in the same

manner as though he were a partner in fact,

with respect to persons who rely upon the

representation. When all the members of

the existing partnership consent to the

representation, a partnership act or


obligation results; but in all other cases it is

the joint act or obligation of the person

acting and the persons consenting to the

representation.

Persons who are not partners as to each other are

not partners as to third persons. No one can be held

liable nor claim rights as a partner unless he has

given his consent to become such. An exception to

this rule is Article 1825. Due to the doctrine of

estoppel, one may become liable as a partner even

though he is not a partner in fact.

A person may:

1. Represent himself as a partner of an

existing partnership with or without the

consent of the partnership;

2. Represent himself as a partner of a non-

existent partnership.

If a third person is misled and acts because of such

misrepresentation, the deceiver is a partner by

estoppel. If the partnership consented to the

misrepresentation, partnership liability results. This

gives rise to a partnership by estoppel with the

original members and the deceiver as partners. If

the firm had not consented, no partnership liability

results, but the deceiver is considered still as a

partner by estoppel with all the obligations, but not

the rights of a partner.

Hence, the holding out as a partner may be done by

the person himself, or by his consent, or with his

knowledge. To hold the party liable, the third

person must prove such misrepresentation by the

purported partner and that a bona fide or justifiable

reliance by him upon it caused him injury.

Heed however that the above provision does not

create a partnership as between the alleged

partners. A contract, express or implied, is essential

to the formation of a partnership. The law only

considers them as partners and the association as a

partnership insofar as it is favorable to third persons

by reasons of equitable principle of estoppel.

Cases:


Industries, Inc., supra.

Thus, even if the ostensible corporate entity is

proven to be legally nonexistent, a party may be

estopped from denying its corporate existence. The

reason behind this doctrine is obvious - an

unincorporated association has no personality and

would be incompetent to act and appropriate for

itself the power and attributes of a corporation as

provided by law; it cannot create agents or confer

authority on another to act in its behalf; thus, those

who act or purport to act as its representatives or

agents do so without authority and at their own risk.

And as it is an elementary principle of law that a

person who acts as an agent without authority or

without a principal is himself regarded as the

principal, possessed of all the right and subject to all

the liabilities of a principal, a person acting or

purporting to act on behalf of a corporation which

has no valid existence assumes such privileges and

obligations and becomes personally liable for

contracts entered into or for other acts performed

as such agent.

The doctrine of corporation by estoppel may apply

to the alleged corporation and to a third party. In the

first instance, an unincorporated association, which

represented itself to be a corporation, will be

estopped from denying its corporate capacity in a

suit against it by a third person who relied in good

faith on such representation. It cannot allege lack of

personality to be sued to evade its responsibility for

a contract it entered into and by virtue of which it

received advantages and benefits.

On the other hand, a third party who, knowing an

association to be unincorporated, nonetheless

treated it as a corporation and received benefits

from it, may be barred from denying its corporate

existence in a suit brought against the alleged

corporation. In such case, all those who benefited

from the transaction made by the ostensible

corporation, despite knowledge of its legal defects,

may be held liable for contracts they impliedly

assented to or took advantage of.


There is no dispute that the respondent, Philippine

Fishing Gear Industries, is entitled to be paid for the

nets it sold. The only question here is whether

petitioner should be held jointly liable with Chua and

Yao. Petitioner contests such liability, insisting that

only those who dealt in the name of the ostensible

corporation should be held liable. Since his name

does not appear on any of the contracts and since he

never directly transacted with the respondent

corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of

the nets found inside F/B Lourdes, the boat which

has earlier been proven to be an asset of the

partnership. He in fact questions the attachment of

the nets, because the Writ has effectively stopped

his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that

Lim, Chua and Yao decided to form a corporation.

Although it was never legally formed for unknown

reasons, this fact alone does not preclude the

liabilities of the three as contracting parties in

representation of it. Clearly, under the law on

estoppel, those acting on behalf of a corporation and

those benefited by it, knowing it to be without valid

existence, are held liable as general partners.

Technically, it is true that petitioner did not directly

act on behalf of the corporation. However, having

reaped the benefits of the contract entered into by

persons with whom he previously had an existing

relationship, he is deemed to be part of said

association and is covered by the scope of the

doctrine of corporation by estoppel.

Article 1826: Liability of incoming partners for

partnership debts

A person admitted as a partner into an

existing partnership is liable for all the

obligations of the partnership arising before

his admission as though he had been a

partner when such obligations were

incurred, except that this liability shall be

satisfied only out of partnership property,

unless there is a stipulation to the contrary.

When a person is admitted as a partner into an

existing partnership, he is liable for all obligations

existing at the time of his admission as though he

was already a partner when such obligations were

incurred. For such obligations, his liability s limited

to his share in the partnership property, unless there

is a stipulation to the contrary. For all the

obligations accruing subsequent to the admission of

the new partner, all the partners are liable with their

separate properties. Such obligations may have

been incurred by virtue of a contract made before

his admission.

It therefore results that existing and subsequent

creditors have equal rights as against partnership

property and separate property of the previously

existing members of the partnership while only

subsequent creditors have rights against the

separate estate of the newly admitted partner.

Does the admission of a new partner dissolve the old

firm and create a new one? Yes and it is precisely

because of this principle in Article 1826 has been

enacted. The reason is simple: since the old firm is

dissolved, the original creditors would not be the

creditors of the new firm, but only of the original

partners; hence, they may lose their preference. To

avoid this injustice, under the NCC, they are also

considered creditors of the new firm.

Is not the rule of holding the new partner liable, with

his share of the firm’s assets, for previous obligations

of the firm unduly harsh on said new partner? No, it

is not unduly harsh. After all, the incoming partner

partakes of the benefit of the partnership property

and an established business. He has every means of

obtaining full knowledge and protecting himself,

because he may insist on the liquidation or

settlement of existing partnership debts. On the

other hand, the creditors have no means of

protecting themselves.

Article 1827: Preference of creditors as regards

partnership property

The creditors of the partnership shall be

preferred to those of each partner as


regards the partnership property. Without

prejudice to this right, the private creditors

of each partner may ask the attachment

and public sale of the share of the latter in

the partnership assets.

With respect to partnership assets, the partnership

creditors are entitled to priority of payment. This is

anchored on the principle that a partnership enjoys

a separate and distinct personality from the

members composing the same. It is a juridical

person with whom the creditors have contracted.

What is the effect of a sale by a partner of his share

to a third party? If a partner sells his share to a third

party, but the firm itself remains solvent, creditors of

the partnership cannot assail the validity of the sale

by alleging that it is made in fraud of them since they

have not really been prejudiced.

DISSOLUTION AND WINDING UP

Article 1828: Definition of dissolution of

partnership

The dissolution of a partnership is the

change in the relation of the partners

caused by any partner ceasing to be

associated in the carrying on as

distinguished from the winding up of the

business.

Article 1829: Effects of dissolution

On dissolution the partnership is not

terminated, but continues until the winding

up of partnership affairs is completed.

Definitions:

1. Dissolution is the change in the relation of

the partners caused by any partner ceasing

to be associated in the carrying on of the

business. It is that point of time when the

partners cease to carry on the business

together.

2. Winding up is actual process of settling the

business or partnership affairs after

dissolution, involving the collection and

distribution of partnership assets, payment

of debts, and determination of the value of

each partner’s interest in the partnership.

3. Termination is that point in time when all

partnership affairs are completely wound

up and finally settled. It signifies the end of

the partnership life. It takes place after

both dissolution and winding up have

occurred.

Effects of change in membership can either result to:

1. Change in the relation dissolves the

partnership but will not disturb the

continuance by the remaining partners:

a. Dissolution of existing partnership

and formation of a new one.

b. Regard all partners as incoming

partners. All partners forming the

new partnership upon the

admission of the new person into

the business are “incoming

partners,” even though the same

business had theretofore been

conducted by the others through

the medium of partnership.

c. Continuance by remaining partners

of partnership as before. A

partnership is a contractual and

fiduciary relation dependent upon

the personality of its members,

and the withdrawal or admission

of a member changes so radically

the contractual rights and duties

inter se as to produce essentially a

new relation even though the

parties contemplate no actual

dissolution of the firm.

2. Change in the relation of the partners

caused the dissolution and the partners

may choose to proceed with winding up

and termination of the partnership.

Cases:

Yu v. NLRC, GR 97212, June 30, 1993


Two (2) main issues are thus posed for our

consideration in the case at bar: (1) whether the

partnership which had hired petitioner Yu as

Assistant General Manager had been extinguished

and replaced by a new partnerships composed of

Willy Co and Emmanuel Zapanta; and (2) if indeed a

new partnership had come into existence, whether

petitioner Yu could nonetheless assert his rights

under his employment contract as against the new

partnership.

In respect of the first issue, we agree with the result

reached by the NLRC, that is, that the legal effect of

the changes in the membership of the partnership

was the dissolution of the old partnership which had

hired petitioner in 1984 and the emergence of a new

firm composed of Willy Co and Emmanuel Zapanta in

1987.

The applicable law in this connection — of which the

NLRC seemed quite unaware — is found in the Civil

Code provisions relating to partnerships.

In the case at bar, just about all of the partners had

sold their partnership interests (amounting to 82%

of the total partnership interest) to Mr. Willy Co and

Emmanuel Zapanta. The record does not show what

happened to the remaining 18% of the original

partnership interest. The acquisition of 82% of the

partnership interest by new partners, coupled with

the retirement or withdrawal of the partners who

had originally owned such 82% interest, was enough

to constitute a new partnership.

On the effects of dissolution

The occurrence of events which precipitate the legal

consequence of dissolution of a partnership do not,

however, automatically result in the termination of

the legal personality of the old partnership. Article

1829 of the Civil Code states that:

“[o]n dissolution the partnership is not


up of partnership affairs is completed.”

In the ordinary course of events, the legal

personality of the expiring partnership persists for

the limited purpose of winding up and closing of the

affairs of the partnership. In the case at bar, it is

important to underscore the fact that the business

of the old partnership was simply continued by the

new partners, without the old partnership

undergoing the procedures relating to dissolution

and winding up of its business affairs. In other

words, the new partnership simply took over the

business enterprise owned by the preceding

partnership, and continued using the old name of

Jade Mountain Products Company Limited, without

winding up the business affairs of the old

partnership, paying off its debts, liquidating and

distributing its net assets, and then re-assembling

the said assets or most of them and opening a new

business enterprise. There were, no doubt, powerful

tax considerations which underlay such an informal

approach to business on the part of the retiring and

the incoming partners. It is not, however, necessary

to inquire into such matters.

Singson v. Isabela Sawmill, L-27343,

February 28, 1979

It is true that the dissolution of a partnership is

caused by any partner ceasing to be associated in

the carrying on of the business. However, on

dissolution, the partnership is not terminated but

continuous until the winding up to the business.

The remaining partners did not terminate the

business of the partnership "Isabela Sawmill".

Instead of winding up the business of the

partnership, they continued the business still in the

name of said partnership. It is expressly stipulated in

the memorandum-agreement that the remaining

partners had constituted themselves as the

partnership entity, the "Isabela Sawmill".

There was no liquidation of the assets of the

partnership. The remaining partners, Leon Garibay

and Timoteo Tubungbanua, continued doing the

business of the partnership in the name of "Isabela

Sawmill". They used the properties of said

partnership.


The properties mortgaged to Margarita G. Saldajeno

by the remaining partners, Leon Garibay and

Timoteo Tubungbanua, belonged to the partnership

"Isabela Sawmill." The appellant, Margarita G.

Saldajeno, was correctly held liable by the trial court

because she purchased at public auction the

properties of the partnership which were mortgaged

to her.

It does not appear that the withdrawal of Margarita

G. Saldajeno from the partnership was published in

the newspapers. The appellees and the public in

general had a right to expect that whatever, credit

they extended to Leon Garibay and Timoteo

Tubungbanua doing the business in the name of the

partnership "Isabela Sawmill" could be enforced

against the proeprties of said partnership. The

judicial foreclosure of the chattel mortgage executed

in favor of Margarita G. Saldajeno did not relieve her

from liability to the creditors of the partnership.

The appellant, Margarita G. Saldajeno, cannot

complain. She is partly to blame for not insisting on

the liquidation of the assets of the partnership. She

even agreed to let Leon Garibay and Timoteo

Tubungbanua continue doing the business of the

partnership "Isabela Sawmill" by entering into the

memorandum-agreement with them.

Although it may be presumed that Margarita G.

Saldajeno had action in good faith, the appellees

also acted in good faith in extending credit to the

partnership. Where one of two innocent persons

must suffer, that person who gave occasion for the

damages to be caused must bear the consequences.

Had Margarita G. Saldajeno not entered into the

memorandum-agreement allowing Leon Garibay and

Timoteo Tubungbanua to continue doing the

business of the partnership, the applees would not

have been misled into thinking that they were still

dealing with the partnership "Isabela Sawmill".

Under the facts, it is of no moment that technically

speaking the partnership "Isabela Sawmill" was

dissolved by the withdrawal therefrom of Margarita

G. Saldajeno. The partnership was not terminated

and it continued doing business through the two

remaining partners.

Dira v. Tañega, L-23232, June 17, 1970

On the inapplicability of Article 1829

Equally untenable is appellant’s reliance on the

theory that as a member of the partnership,

appellee continued as a trustee even after 1947,

when said appellee took the business for himself and

even after 1951, the expiry date of the agreements.

The provisions of Article 1785 to the effect that:

“When a partnership for a fixed term or

particular undertaking is continued after

the termination of such term or particular

undertaking without any express

agreement, the rights and duties of the

partners remain the same as they were at

such termination, so far as is consistent

with a partnership at will.”

“A continuation of the business by the

partners or such of them as habitually acted

therein during the term, without any

settlement or liquidation of the partnership

affairs, is prima facie evidence of a

continuation of the partnership”

and Article 1829 thus:

“On dissolution the partnership is not


up of partnership affairs is completed.”

are clearly inapplicable here, for the simple reason

that those articles are premised on a continuation of

the partnership as such, which is not our case,

because here appellee repudiated the partnership as

early as 1947 with either actual or presumed

knowledge of the appellant. By analogy, at least,

with the rule as to a co-ownership, which a

partnership essentially is, prescription does not run

in favor of any of the co-owners only as long as the

co-owner claiming against the others "expressly or

impliedly recognizes the co-ownership," a

circumstance irreconcilably inconsistent with

appellee’s conduct of transferring the place of

business, changing its name and not paying


appellant any of the salaries agreed upon in the

articles of partnership.

Sunga-chan v. Chua, supra.

With regard to petitioners’ insistence that laches

and/or prescription should have extinguished

respondents claim, we agree with the trial court and

the Court of Appeals that the action for accounting

filed by respondent three (3) years after Jacinto’s

death was well within the prescribed period. The

Civil Code provides that an action to enforce an oral

contract prescribes in six (6) years while the right to

demand an accounting for a partner’s interest as

against the person continuing the business accrues

at the date of dissolution, in the absence of any

contrary agreement. Considering that the death of a

partner results in the dissolution of the partnership,

in this case, it was after Jacinto’s death that

respondent as the surviving partner had the right to

an account of his interest as against petitioners. It

bears stressing that while Jacinto’s death dissolved

the partnership, the dissolution did not immediately

terminate the partnership. The Civil Code expressly

provides that upon dissolution, the partnership

continues and its legal personality is retained until

the complete winding up of its business, culminating

in its termination.

Sy v. CA, GR 94285, August 31, 1999

On dissolution vs. winding up vs. partition or

distribution

Petitioners fail to recognize the basic distinctions

underlying the principles of dissolution, winding up

and partition or distribution. The dissolution of a

partnership is the change in the relation of the

parties caused by any partner ceasing to be

associated in the carrying on, as might be

distinguished from the winding up, of its business.




termination. The dissolution of the partnership did

not mean that the juridical entity was immediately

terminated and that the distribution of the assets to

its partners should perfunctorily follow. On the

contrary, the dissolution simply effected a change in

the relationship among the partners. The

partnership, although dissolved, continues to exist

until its termination, at which time the winding up of

its affairs should have been completed and the net

partnership assets are partitioned and distributed to

the partners.

Article 1830: Causes of dissolution

Dissolution is caused:

1. Without violation of the agreement

between the partners:

a. By the termination of the

definite term or particular

undertaking specified in the

agreement;

b. By the express will of any

partner, who must act in good

faith, when no definite term or

particular undertaking is

specified;

c. By the express will of all the

partners who have not

assigned their interests or

suffered them to be charged

for their separate debts, either

before or after the

termination of any specified

term or particular

undertaking;

d. By the expulsion of any

partner from the business

bona fi de in accordance with

such a power conferred by the

agreement between the

partners;

2. In contravention of the agreement

between the partners, where the

circumstances do not permit a

dissolution under any other provision

of this article, by the express will of any

partner at any time;

3. By any event which makes it unlawful

for the business of the partnership to


be carried on or for the members to

carry it on in partnership;

4. When a specific thing, a partner had

promised to contribute to the

partnership, perishes before the

delivery; in any case by the loss of the

thing, when the partner who

contributed it having reserved the

ownership thereof, has only

transferred to the partnership the use

or enjoyment of the same; but the

partnership shall not be dissolved by

the loss of the thing when it occurs

after the partnership has acquired the

ownership thereof;

5. By the death of any partner;

6. By the insolvency of any partner or of

the partnership;

7. By the civil interdiction of any partner;

8. By decree of court under the following

article.

Article 1831: Judicial dissolution of partnership

On application by or for a partner, the court

shall decree a dissolution whenever:

1. A partner has been declared insane in

any judicial proceeding or is shown to

be of unsound mind;

2. A partner becomes in any other way

incapable of performing his part of the

partnership contract;

3. A partner has been guilty of such

conduct as tends to affect prejudicially

the carrying on of the business;

4. A partner willfully or persistently

commits a breach of the partnership

agreement, or otherwise so conducts

himself in matters relating to the

partnership business that it is not

reasonably practicable to carry on the

business in partnership with him;

5. The business of the partnership can

only be carried on at a loss;

6. Other circumstances render a

dissolution equitable.

On the application of the purchaser of a

partner’s interest under Article 1813 or

1814:

1. After the termination of the specified

term or particular undertaking;

2. At any time if the partnership was a

partnership at will when the interest

was assigned or when the charging

order was issued.

The causes of dissolution can be categorized into 4

causes:

1. With violation of agreement;

2. Without violation of agreement;

3. Beyond the partners’ control or by

operation of law; and,

4. By court decree.

Other causes are provided in Article 1840.

Distinctions:

Article 1830 Article 1831 Article 1840

Results to

automatic

dissolution

Does not

result to

automatic

dissolution

Results in

automatic

dissolution

Causes range

from those

brought about

by violation or

non-violation of

agreement to

those brought

about by

operation of law,

and dissolution

may be effected

judicially or

extrajudicially.

Causes are

grounds for

judicial

dissolution.

Causes are

when a new

partner is

admitted or

when a partner

retires,

withdraws or is

expelled from

the partnership.

Should the partner withdraw from the partnership,

can he be held liable for breach of contract? No. In

the law on partnerships, the doctrine of delectus

personae is given a much higher premium than the


general principles governing contracts. Absent any

bad faith, a partner cannot be held liable for breach

of contract as no person can be compelled either to

become a partner or to remain one, as the relation

of partners is one of mutual agency, a distinct

feature among partnerships. By way of obiter in the

case of Tocao, the Court ruled that an unjustified

dissolution of a partner can subject him to action for

damages because by mutual agency that arises in a

partnership, the doctrine of delectus personae

allows the partners to have the power, although not

necessarily the right to dissolve the partnership.

In the absence of an express agreement to that

effect, there exists no right or power of any member,

or even a majority of the members, to expel all other

members of the firm at will. Nor can they at will

forfeit the share or interest of a member or

members and compel him or them to quit the firm,

even paying what is due him.

The insolvency of the partner or of the partnership, a

ground enumerated in Article 1830, must be

adjudged by court. Will it be recognized as a ground

under Article 1831 then, and not of Article 1830? No.

This is so in pursuance to the Insolvency law. The

determination is to the extent of the partner’s

insolvency only, and no judicial decree is rendered

ordering the partnership’s dissolution.

Can the partners in their contract decrease or limit

the causes of dissolution? No. In the case of

Lichauco v. Lichauco, the Court held that a

contractual provision prohibiting dissolution except

by authorization of two-thirds of the members

cannot be sustained when the firm had lost its

capital, or had become bankrupt, or had utterly

abandoned the enterprise for which it had been

organized.

Who can sue for dissolution?

1. A partner for any of the 6 causes

enumerated in Article 1831;

2. The purchaser of a partner’s interest in the

partnership under Article 1813 or 1814,

provided that the period has expired or if

the firm was a partnership at will when the

interest was assigned or changed.

Cases:

Fue Leung v. IAC, GR 70926, January 31,

1989

The private respondent is a partner of the petitioner

in Sun Wah Panciteria. The requisites of a

partnership which are — 1) two or more persons

bind themselves to contribute money, property, or

industry to a common fund; and 2) intention on the

part of the partners to divide the profits among

themselves (Article 1767, Civil Code; Yulo v. Yang

Chiao Cheng, 106 Phil. 110) — have been

established. As stated by the respondent, a partner

shares not only in profits but also in the losses of the

firm. If excellent relations exist among the partners

at the start of business and all the partners are more

interested in seeing the firm grow rather than get

immediate returns, a deferment of sharing in the

profits is perfectly plausible. It would be incorrect to

state that if a partner does not assert his rights

anytime within ten years from the start of

operations, such rights are irretrievably lost. The

private respondent’s cause of action is premised

upon the failure of the petitioner to give him the

agreed profits in the operation of Sun Wah

Panciteria. In effect the private respondent was

asking for an accounting of his interests in the

partnership.

Considering the facts of this case, the Court may

decree a dissolution of the partnership under Article

1831 of the Civil Code.

There shall be a liquidation and winding up of

partnership affairs, return of capital, and other

incidents of dissolution because the continuation of

the partnership has become inequitable

Rojas v. Maglana, supra.

As to the question of whether or not Maglana can

unilaterally dissolve the partnership in the case at

bar, the answer is in the affirmative.


Hence, as there are only two parties when Maglana

notified Rojas that he dissolved the partnership, it is

in effect a notice of withdrawal.

Under Article 1830, par. 2 of the Civil Code, even if

there is a specified term, one partner can cause its

dissolution by expressly withdrawing even before

the expiration of the period, with or without

justifiable cause. Of course, if the cause is not

justified or no cause was given, the withdrawing

partner is liable for damages but in no case can he

be compelled to remain in the firm. With his

withdrawal, the number of members is decreased,

hence, the dissolution. And in whatever way he may

view the situation, the conclusion is inevitable that

Rojas and Maglana shall be guided in the liquidation

of the partnership by the provisions of its duly

registered Articles of Co-Partnership; that is, all

profits and losses of the partnership shall be divided

"share and share alike" between the partners.

But an accounting must first be made and which in

fact was ordered by the trial court and accomplished

by the commissioners appointed for the purpose.

As to whether Maglana is liable for damages because

of such withdrawal, it will be recalled that after the

withdrawal of Pahamotang, Rojas entered into a

management contract with another logging

enterprise, the CMS Estate, Inc., a company engaged

in the same business as the partnership. He

withdrew his equipment, refused to contribute

either in cash or in equipment to the capital

investment and to perform his duties as logging

superintendent, as stipulated in their partnership

agreement. The records also show that Rojas not

only abandoned the partnership but also took funds

in an amount more than his contribution (Decision,

R.A., p. 949).

In the given situation Maglana cannot be said to be

in bad faith nor can he be liable for damages.

Article 1832: Termination of authority of partner

Except so far as may be necessary to wind

up partnership affairs or to complete

transactions begun but not then finished,

dissolution terminates all authority of any

partner to act for the partnership.

1. With respect to the partners:

a. When the dissolution is not by

the act, insolvency or death of

a partner; or

b. When the dissolution is by

such act, insolvency or death

of a partner, in cases where

Article 1833 so requires;

2. With respect to persons not partners,

as declared in Article 1834.

Article 1833: Liability to share in any liability

created by partner

Where the dissolution is caused by the act,

death or insolvency of a partner, each

partner is liable to his co-partners for his

share of any liability created by any partner

acting for the partnership as if the

partnership had not been dissolved unless:

1. The dissolution being by act of any

partner, the partner acting for the

partnership had knowledge of the

dissolution; or,

2. The dissolution being by the death or

insolvency of a partner, the partner

acting for the partnership had

knowledge or notice of the death or

insolvency.

Upon dissolution, the partnership ceases to be a

going concern and the partner’s power of

representation is confined only to acts incident to

winding up or completing the transactions begun but

not then finished. Hence, the event of dissolution

terminates the actual authority of a partner to

undertake new business for the partnership.

Rules:

1. When the dissolution is caused not by the

act, insolvency or death of a partner, the

authority of any partner to bind the


partnership by a new contract is

immediately terminated.

2. When the dissolution is caused by the act,

death, or insolvency of a partner and there

is no knowledge or notice of dissolution,

death or insolvency, a partner’s acts would

still bind the co-partners. The co-partners

cannot proceed against said partner.

3. Conversely, transactions entered into after

dissolution will not bind the firm:

a. If dissolution is caused by an act

and the partner had knowledge of

the dissolution.

b. If dissolution is caused by death or

insolvency and the partner had

knowledge or notice of the death

or insolvency.

In such instances, the co-partners would

still contribute to extinguish liability but

they may proceed against the erring

partner.

Article 1833 applies only if the contract of the

partner binds the partnership. If the partnership is

not bound, only the acting partner is personally

liable.

Article 1834: Power to bind dissolved partnership

to third persons

After dissolution, a partner can bind the

partnership, except as provided in the third

paragraph of this article:

1. By an act appropriate for winding up

partnership affairs or completing

transactions unfinished at dissolution;

2. By any transaction which would bind

the partnership if dissolution had not

taken place, provided the other party

to the transaction:

a. Had extended credit to the

partnership prior to

dissolution and had no

knowledge or notice of the

dissolution; or

b. Though he had not so

extended credit, had

nevertheless known of the


dissolution, and having no

knowledge or notice of

dissolution, the fact of

dissolution had not been

advertised in a newspaper of

general circulation in the place

(or in each place if more than

one) at which the partnership

was regularly carried on.

The liability of a partner under the first

paragraph, No. 2, shall be satisfied out of

partnership assets alone when such partner

had been prior to dissolution:

1. Unknown as a partner to the person

with whom the contract is made; and

2. So far unknown and inactive in

partnership affairs that the business

reputation of the partnership could not

be said to have been in any degree due

to his connection with it.

The partnership is in no case bound by any

act of a partner after dissolution:

1. Where the partnership is dissolved

because it is unlawful to carry on the

business, unless the act is appropriate

for winding up partnership affairs; or

2. Where the partner has become

insolvent; or

3. Where the partner had no authority to

wind up partnership affairs, except by a

transaction with one who —

a. Had extended credit to the


dissolution and had no

knowledge or notice of his

want of authority; or

b. Had not extended credit to the


dissolution, and, having no


knowledge or notice of his

want of authority, the fact of

his want of authority has not

been advertised in the manner

provided for advertising the

fact of dissolution in the fi rst

paragraph, No. 2(b).

Nothing in this article shall affect the

liability under Article 1825 of any person

who after dissolution represents himself or

consents to another representing him as a

partner in a partnership engaged in carrying

on business.

This article speaks of two possibilities:

1. When the partnership is bound to

strangers:

a. Business is for winding up;

b. Business is to complete unfinished

transactions; and,

c. Completely new business with

third parties considered innocent.

2. When the partnership is not bound to

strangers:

a. Completely new business with

third parties having knowledge or

notice of the dissolution;

b. Where the firm was dissolved

because it was unlawful to carry on

the business, except when the act

is for winding up;

c. Where the partner that acted in

the transaction has become

insolvent; and,

d. Where the partner is unauthorized

to wind up, except if the

transaction is with a customer in

good faith.

Is a retired partner liable to previous customers who

transact with the new firm if the firm still uses the

old firm name? Yes, unless said partner notifies said

old customers or unless said customers actually

know of his retirement.

Under the second paragraph, the liability of a

partner unknown as such to the person with whom

the contract is made or so far unknown and inactive

in the partnership affairs shall be satisfied out of

partnership assets alone. This applies to dormant

partners, who are both inactive and secret.

Article 1835: Effect of dissolution on partners’

existing liability

The dissolution of the partnership does not

of itself discharge the existing liability of any

partner.

A partner is discharged from any existing

liability upon the dissolution of the

partnership by an agreement to that effect

between himself, the partnership creditor

and the person or partnership continuing

the business; and such agreement may be

inferred from the course of dealing

between the creditor having knowledge of

the dissolution and the person or

partnership continuing the business.

The individual property of a deceased

partner shall be liable for all obligations of

the partnership incurred while he was a

partner, but subject to the prior payment of

his separate debts.

A partner may be relieved from all existing liabilities

upon dissolution only by an agreement to that effect

between himself, the partnership creditor, and the

other partners. The consent, however, of the

creditor and the partners to the novation may be

implied from their conduct.

An action for accounting against a managing partner

should be discontinued if he dies during the

pendency of the action. The suit must be conducted

in the settlement proceedings of the deceased’s

estate, particularly if this is the desire of his

administrator. Thus, it is wrong to just continue the

action for accounting and substitute the dead

defendant with his heirs.

Article 1836: Manner of winding up


Unless otherwise agreed, the partners who

have not wrongfully dissolved the

partnership or the legal representative of

the last surviving partner, not insolvent, has

the right to wind up the partnership affairs,

provided, however, that any partner, his

legal representative or his assignee, upon

cause shown, may obtain winding up by the

court.

Who may wind up the firm?

1. Those mentioned in the agreement;

2. Partners who have not wrongfully dissolved

the partnership; and,

3. Legal representative of the last surviving

partner, provided the last surviving partner

is not insolvent.

Distinctions:

Extrajudicial winding up Judicial winding up

By the partners

themselves, without

intervention of the

court.

Under the control and

direction of the court,

upon proper cause that

is shown to the court by

any partner, his legal

representative, or his

assignee.

For the purpose of winding up the affairs of a

dissolved partnership, the surviving partner has full

authority to do every thing that may be necessary,

but his power is limited to the performance of acts

which are indispensable to that end. The deceased

partner’s estate is not liable for any subsequent

debts or losses incurred by the surviving partners

who continued the partnership business.

Article 1837: Application of partnership property on

dissolution

When dissolution is caused in any way,

except in contravention of the partnership

agreement, each partner, as against his co-

partners and all persons claiming through

them in respect of their interests in the

partnership, unless otherwise agreed, may

have the partnership property applied to

discharge its liabilities, and the surplus

applied to pay in cash the net amount

owing to the respective partners. But if

dissolution is caused by expulsion of a

partner, bona fide under the partnership

agreement and if the expelled partner is

discharged from all partnership liabilities,

either by payment or agreement under the

second paragraph of Article 1835, he shall

receive in cash only the net amount due

him from the partnership.

When dissolution is caused in contravention

of the partnership agreement, the rights of

the partners shall be as follows:

1. Each partner who has not caused

dissolution wrongfully shall have:

a. All the rights specified in the

first paragraph of this article,

and,

b. The right, as against each

partner who has caused the

dissolution wrongfully, to

damages for breach of the

agreement.

2. The partners who have not caused the

dissolution wrongfully, if they all desire

to continue the business in the same

name either by themselves or jointly

with others, may do so, during the

agreed term for the partnership and for

that purpose may possess the

partnership property, provided they

secure the payment by bond approved

by the court, or pay to any partner who

has caused the dissolution wrongfully,

the value of his interest in the

partnership at the dissolution, less any

damages recoverable under the second

paragraph, No. 1(b) of this article, and

in like manner indemnify him against all

present or future partnership liabilities.


3. A partner who has caused the

dissolution wrongfully shall have:

a. If the business is not

continued under the

provisions of the second

paragraph, No. 2, all the rights

of a partner under the first

paragraph, subject to liability

for damages in the second

paragraph, No. 1(b), of this

article.

b. If the business is continued

under the second paragraph,

No. 2, of this article, the right

as against his co-partners and

all claiming through them in

respect of their interests in the

partnership, to have the value

of his interest in the

partnership, less any damage

caused to his co-partners by

the dissolution, ascertained

and paid to him in cash, or the

payment secured by a bond

approved by the court and to

be released from all existing

liabilities of the partnership;

but in ascertaining the value of

the partner’s interest, the

value of the good will of the

business shall not be

considered.

Rights of all partners (no contravention):

1. Have the partnership property applied to its

liabilities;

2. Surplus is distributed among them.

Right of expelled partner who was discharged from

all partnership liabilities:

1. Instead of having the surplus, he receives in

cash the net amount due him.

Rights of partners (there is contravention of

agreement):

1. Have the partnership property applied to its

liabilities;

2. Surplus is distributed among them;

3. Damages against the cause of dissolution;

4. May continue the business subject to

certain provisions of law

Rights of partners who wrongfully caused the

dissolution:

1. Same with other partners except that they

pay damages, if the partners decide not to

continue the business

2. If the business is continued, to have the

value of his interest in the partnership at

the time of the dissolution, less any

damages caused by the dissolution to his

co-partners, ascertained and paid in cash or

secured by bond approved by the court and

to be released from all existing and future

liabilities of the partnership.

Article 1838: Rights of partners when partnership is

rescinded

Where a partnership contract is rescinded

on the ground of the fraud or

misrepresentation of one of the parties

thereto, the party entitled to rescind is,

without prejudice to any other right,

entitled:

1. To a lien on, or right of retention of, the

surplus of the partnership property

after satisfying the partnership

liabilities to third persons for any sum

of money paid by him for the purchase

of an interest in the partnership and for

any capital or advances contributed by

him;

2. To stand on, after all liabilities to third

persons have been satisfied, in the

place of the creditors of the

partnership for any payments made by

him in respect of the partnership

liabilities; and


3. To be indemnified by the person guilty

of the fraud of making the

representation against all debts and

liabilities of the partnership.

The article speaks of 3 rights of injured partner

should the contract be annulled:

1. Right of lien or retention;

2. Right of subrogation;

3. Right of indemnification.

Article 1839: Liquidation and distribution of assets

of dissolved partnership

In settling accounts between the partners

after dissolution, the following rules shall be

observed, subject to any agreement to the

contrary:

1. The assets of the partnership are:

a. The partnership property,

b. The contributions of the

partners necessary for the

payment of all the liabilities

specified in No. 2.

2. The liabilities of the partnership shall

rank in order of payment, as follows:

a. Those owing to creditors other

than partners;

b. Those owing to partners other

than for capital and profits,

c. Those owing to partners in

respect of capital,

d. Those owing to partners in

respect of profits.

3. The assets shall be applied in the order

of their declaration in No. 1 of this

article to the satisfaction of the

liabilities.

4. The partners shall contribute, as

provided by article 1797, the amount

necessary to satisfy the liabilities.

5. An assignee for the benefit of creditors

or any person appointed by the court

shall have the right to enforce the

contributions specified in the preceding

number.

6. Any partner or his legal representative

shall have the right to enforce the

contributions specified in No. 4, to the

extent of the amount which he has paid

in excess of his share of the liability.

7. The individual property of a deceased

partner shall be liable for the

contributions specified in No. 4.

8. When partnership property and the

individual properties of the partners

are in possession of a court for

distribution, partnership creditors shall

have priority on partnership property

and separate creditors on individual

property, saving the rights of lien or

secured creditors.

9. Where a partner has become insolvent

or his estate is insolvent, the claims

against his separate property shall rank

in the following order:

a. Those owing to separate

creditors;

b. Those owing to partnership

creditors;

c. Those owing to partners by

way of contributions.

Order of payment of firm’s liabilities:

1. First, give to creditors (who are strangers),

otherwise they may be prejudiced.

2. Then give to partners who are also creditors

(they should be placed in a subordinate

position to outside creditors for otherwise

they may prefer their own interests).

3. Then give to the partners their capital.

4. Lastly, the profits must be distributed.

If a partner is insolvent, how will his individual

properties be distributed? First, give to the

individual or separate creditors. Then, to the

partnership creditors. Then, those owing to the

other partners by way of contribution.


Doctrine of the marshalling of assets. It involves the

ranking of assets in a certain order toward the

payment of outstanding debts. Stated otherwise,

the general rule is: “Partnership assets to

partnership creditors, individual assets to individual

creditors; anything left from either goes to the

other.”

Cases:

Claridades v. Mercader, L-20341, May 14,

1966

An action for the liquidation of a partnership is a

personal one which may be brought in the place of

residence of either the plaintiff or the defendant.

The fact that plaintiff prays for the sale of the assets

of the partnership, including a fishpond located in a

province other than that where the action was

brought, does not change the nature or character of

the action, such sale being merely a necessary

incident of the liquidation of the partnership, which

should precede and/or is part of its proper

dissolution.

Ortega v. CA, GR 109248, July 3, 1995




termination. The liquidation of the assets of the

partnership following its dissolution is governed by

various provisions of the Civil Code, however, an

agreement of the partners, like any other contract, is

binding among them and normally takes precedence

to the extent applicable over the Code’s general

provisions. And here, the term "retirement" must

have been used in the Articles of Partnership in a

generic sense to mean the dissociation by a partner,

inclusive of resignation or withdrawal, from the

partnership that thereby dissolves it.

Primelink Properties and Development

Corporation v. Lazatin-Magat, GR 167379,

June 27, 2006

When the RTC rescinded the JVA on complaint of

respondents based on the evidence on record that

petitioners willfully and persistently committed a

breach of the JVA, the court thereby

dissolved/cancelled the partnership. With the

rescission of the JVA on account of petitioners

fraudulent acts, all authority of any partner to act for

the partnership is terminated except so far as may

be necessary to wind up the partnership affairs or to

complete transactions begun but not yet finished.

On dissolution, the partnership is not terminated but

continues until the winding up of partnership affairs

is completed. Winding up means the administration

of the assets of the partnership for the purpose of

terminating the business and discharging the

obligations of the partnership.

The transfer of the possession of the parcels of land

and the improvements thereon to respondents was

only for a specific purpose: the winding up of

partnership affairs, and the partition and distribution

of the net partnership assets as provided by law.

After all, Article 1836 of the New Civil Code provides

that unless otherwise agreed by the parties in their

JVA, respondents have the right to wind up the

partnership affairs.

It must be stressed, too, that although respondents

acquired possession of the lands and the

improvements thereon, the said lands and

improvements remained partnership property,

subject to the rights and obligations of the parties,

inter se, of the creditors and of third parties under

Articles 1837 and 1838 of the New Civil Code, and

subject to the outcome of the settlement of the

accounts between the parties as provided in Article

1839 of the New Civil Code, absent any agreement

of the parties in their JVA to the contrary. Until the

partnership accounts are determined, it cannot be

ascertained how much any of the parties is entitled

to, if at all.

It was thus premature for petitioner Primelink to be

demanding that it be indemnified for the value of

the improvements on the parcels of land owned by

the joint venture/partnership. Notably, the JVA of

the parties does not contain any provision

designating any party to wind up the affairs of the

partnership.


Thus, Article 1837 of the New Civil Code provides for

the rights of the parties when dissolution is caused

in contravention of the partnership agreement. And

under Article 1838 of the New Civil Code, the party

entitled to rescind is, has other rights, to wit: right to

lien, right to indemnification and right to

subrogation.

The accounts between the parties after dissolution

have to be settled as provided in Article 1839 of the

New Civil Code.

Villareal v. Ramirez, supra.

Petitioners further argue that respondents acted

negligently by permitting the partnership assets in

their custody to deteriorate to the point of being

almost worthless. Supposedly, the latter should

have liquidated these sole tangible assets of the

partnership and considered the proceeds as

payment of their net capital. Hence, petitioners

argue that the turnover of the remaining partnership

assets to respondents was precisely the manner of

liquidating the partnership and fully settling the

latter’s share in the partnership.

We disagree. The delivery of the store furniture and

equipment to private respondents was for the

purpose of storage. They were unaware that the

restaurant would no longer be reopened by

petitioners. Hence, the former cannot be faulted for

not disposing of the stored items to recover their

capital investment.

Article 1840: Dissolution because of change in

membership

In the following cases, creditors of the

dissolved partnership are also creditors of

the person or partnership continuing the

business:

1. When any new partner is admitted into

an existing partnership, or when any

partner retires and assigns (or the

representative of the deceased partner

assigns) his rights in partnership

property to two or more of the

partners, or to one or more of the

partners and one or more third

persons, if the business is continued

without liquidation of the partnership

affairs;

2. When all but one partner retire and

assign (or the representative of a

deceased partner assigns) their rights in

partnership property to the remaining

partner, who continues the business

without liquidation of partnership

affairs, either alone or with others;

3. When any partner retires or dies and

the business of the dissolved

partnership is continued as set forth in

Nos. 1 and 2 of this article, with the

consent of the retired partners or the

representative of the deceased partner,

but without any assignment of his right

in partnership property;

4. When all the partners or their

representatives assign their rights in

partnership property to one or more

third persons who promise to pay the

debts and who continue the business of

the dissolved partnership;

5. When any partner wrongfully causes a

dissolution and the remaining partners

continue the business under the

provisions of article 1837, second

paragraph, No. 2, either alone or with

others, and without liquidation of the

partnership affairs;

6. When a partner is expelled and the

remaining partners continue the

business either alone or with others

without liquidation of the partnership

affairs.

The liability of a third person becoming a

partner in the partnership continuing the

business, under this article, to the creditors

of the dissolved partnership shall be

satisfied out of the partnership property

only, unless there is a stipulation to the

contrary.


When the business of a partnership after

dissolution is continued under any

conditions set forth in this article the

creditors of the dissolved partnership, as

against the separate creditors of the retiring

partner or deceased partner or the

representative of the deceased partner,

have a prior right to any claim of the retired

partner or the representative of the

deceased partner against the person or

partnership continuing the business, on

account of the retired or deceased partner’s

interest in the dissolved partnership or on

account of any consideration promised for

such interest or for his right in partnership

property.

Nothing in this article shall be held to

modify any right of creditors to set aside

any assignment on the ground of fraud.

The use by the person or partnership

continuing the business of the partnership

name, or the name of a deceased partner as

part thereof, shall not of itself make the

individual property of the deceased partner

liable for any debts contracted by such

person or partnership.

A partnership dissolved by:

a. When a new partner is admitted;

b. When a partner retires;

c. When a partner dies;

d. When a partner withdraws;

e. When a partner is expelled from

the partnership;

f. When the other partners assign

their rights to the sole remaining

partner;

g. When all the partners assign their

rights in partnership property to

third persons.

need not undergo the procedure relating to

dissolution and winding of its business affairs. The

remaining partners may elect to continue the

business of the old partnership without interruption

by simply taking over the business enterprise owned

by the preceding partner and continuing the use of

the old name.

The Article deals with the rights of creditors when

the partnership is dissolved by a change of

membership and its business is continued by a

former partner, either alone or with new partners,

without liquidation of partnership affairs. Both

classes of creditors, the old and the new, are treated

alike, being given equal rights in partnership

property.

The last paragraph of Article 1840 primarily deals

with the exemption from liability to creditors of a

dissolved partnership of the individual property of

the deceased partner for debts contracted by the

person or partnership which continues the business

using the partnership name or the name of the

deceased partner as part thereof.

As a general rule, upon the dissolution of a

commercial partnership, the succeeding partners or

parties have the right to carry on the business under

the old name, in the absence of stipulation

forbidding it, since the name of a commercial

partnership is a partnership asset inseparable from

the goodwill of the firm. On the other hand, a

professional partnership the reputation of which

depends on the individual skill of the members has

no goodwill to be distributed as a firm on its

dissolution, however, intrinsically valuable such skill

and reputation may be, especially where there is no

provision in the partnership agreement relating to

goodwill as an asset.

Article 1841: Rights of retiring, or estate of

deceased partner

When any partner retires or dies, and the

business is continued under any of the

conditions set forth in the preceding article,

or in article 1837, second paragraph, No. 2,

without any settlement of accounts as

between him or his estate and the person

or partnership continuing the business,


unless otherwise agreed, he or his legal

representative as against such person or

partnership may have the value of his

interest at the date of dissolution

ascertained, and shall receive as an ordinary

creditor an amount equal to the value of his

interest in the dissolved partnership with

interest, or at his option or at the option of

his legal representative, in lieu of interest,

the profits attributable to the use of his

right in the property of the dissolved

partnership; provided that the creditors of

the dissolved partnership as against the

separate creditors, or the representative of

the retired or deceased partner, shall have

priority on any claim arising under this

article, as provided by Article 1840, third

paragraph.

Rights of retiring or of estate of deceased partner

when business is continued

1. To have the value of the interest of the

retiring partner or deceased partner in the

partnership ascertained as of the date of

dissolution; and,

2. To receive thereafter, as an ordinary

creditor, an amount equal to the value of

his share in the dissolved partnership.

Article 1842: Accrual and prescription of partner’s

right to account of his interest

The right to an account of his interest shall

accrue to any partner, or his legal

representative as against the winding up

partners or the surviving partners or the

person or partnership continuing the

business, at the date of dissolution, in the

absence of any agreement to the contrary.

Under Article 1842, the right to demand accrues at

the date of dissolution in the absence of any

contrary agreement. Prescription runs only upon

the dissolution of the partnership when the final

accounting is done.

This right of a partner or the one who represents

him as owner of his interest to an account, and to a

payment of the amount of his interest, may be

exercised against:

1. The winding up partner

2. The surviving partner

3. The person or partnership continuing the

business

A partner’s share cannot be returned without first

dissolving and liquidating the partnership, for the

return is dependent on the discharge of creditors,

whose claims enjoy preference over the partners;

and it is self-evident that all members of the

partnership are interested in its assets and business,

and are entitled to be heard in the matter of the

firm’s liquidation and the distribution of its property.

LIMITED PARTNERSHIPS

Distinctions:

General

partnership/partner

Limited

partnership/partner

One consisting of

general partners who

are liable pro rata and

subsidiarily and

sometimes solidarily

with their separate

property for partnership

debt

One formed by two or

more persons having as

members one or more

general partners and one

or more limited

partners, the latter not

being personally liable

for the obligations of the

partnership.

A general partnership, as

a general rule, may be

constituted in any form

by contract or conduct

of the parties.

A limited partnership is

created by the members

after compliance with

the requirements set

forth by law.

A general partner is

personally liable for

partnership obligations.

A limited partner’s

liability extends only to

his capital contributions.

When the manner of

management has not

been agreed upon, all of

the general partners

have an equal right in

When the manner of

management has not

been agreed upon, a

limited partner has no

share in the


the management of the

business.

management of a limited

partnership as his rights

being limited to those

specified by law.

A general partner may

contribute money,

property, or industry to

the partnership

A limited partner must

contribute cash or

property to the

partnership but not

services

A general partner is a

proper party to

proceeding by or against

a partnership.

A limited partner is not a

proper party to

proceeding by or against

a partnership.

A general partner’s

interest in the

partnership may not be

assigned as to make the

assignee a new partner


the other partners

although he may

associate a third person

with him in his share.

A limited partner’s

interest is freely

assignable, with the

assignee acquiring all the

rights of the limited

partner subject to

certain qualifications.

The name of a general

partner may appear in

the firm name.

The name of a limited

partner must not appear

in the firm name.

A general partner is

prohibited from

engaging in a business

which is of kind of

business in which the

partnership is engaged,

if he is a capitalist

partner or in any

business for himself if he

is an industrial partner.

There is no such

prohibition in the case of

a limited partner who is

considered as a mere

contributor to the

partnership.

The retirement, death,

insanity or insolvency of

a general partner

dissolves the

partnership.

The retirement, death,

insanity or insolvency of

a limited partner does

not have the same

effect, for his executor

or administrator shall

have the rights of a

limited partner for the

purpose of selling his

estate.

A partnership where all the partners are “limited

partners” cannot exist as a limited partnership. It

will even be refused registration. If at all it

continues, it will be a general partnership, and all the

partners will be general partners (Paras).

Article 1843. Concept and definition of limited

partnership

A limited partnership is one formed by two

or more persons under the provisions of the

following article, having as members one or

more general partners and one or more

limited partners. The limited partners as

such shall not be bound by the obligations

of the partnership.

It is so called because the liability to third persons of

one or more of its members referred to as limited, or

special partners, is limited to a fixed amount, their

capital contributions or the amount they have

invested in the partnership. This limited liability is

the key characteristic of the limited partnership.

Characteristics of limited partnership:

1. Formed by compliance with the statutory

requirements;

2. One or more general partners control the

business and are personally liable to

creditors;

3. One or more limited partners contribute to

the capital and share in the profits but do

not participate in the management of the

business and are not personally liable for

partnership obligations beyond the amount

of their capital contributions;

4. Limited partners may ask for the return of

their capital contributions under the

conditions prescribed by law;

5. The partnership debts are paid out of

common fund and the individual properties

of the general partners.


Article 1844: Creation of limited partnership;

requirements

Two or more persons desiring to form a

limited partnership shall:

1. Sign and swear to a certificate, which

shall state:

a. The name of the partnership,

adding thereto the word

“Limited”;

b. The character of the business;

c. The location of the principal

place of business;

d. The name and place of

residence of each member,

general and limited partners

being respectively designated;

e. The term for which the

partnership is to exist;

f. The amount of cash and

description of and the agreed

value of the other property

contributed by each limited

partner;

g. The additional contributions, if

any, to be made by each

limited partner and the times

at which or events on the

happening of which they shall

be made;

h. The time, if agreed upon,

when the contribution of each

limited partner is to be

returned;

i. The share of the profits or the

other compensation by way of

income which each limited

partner shall receive by reason

of his contribution;

j. The right, if given, of a limited

partner to substitute an

assignee as contributor in his

place, and the terms and

conditions of the substitution;

k. The right, if given, of the

partners to admit additional

limited partners;

l. The right, if given, of one or

more of the limited partners

to priority over other limited

partners, as to contributions

or as to compensation by way

of income, and the nature of

such priority;

m. The right, if given, of the

remaining general partner or

partners to continue the

business on the death,

retirement, civil interdiction,

insanity or insolvency of a

general partner; and

n. The right, if given, of a limited

partner to demand and

receive property other than

cash in return of his

contribution.

2. File for record the certificate in the

Office of the Securities and Exchange

Commission.

A limited partnership is formed if there has

been substantial compliance in good faith

with the foregoing requirements.

Two important things are needed:

1. The signing under oath of the required

certificate, with all the enumerated items;

and,

2. The filing for record of the certificate in the

Office of the SEC.

The creation of a limited partnership is a formal

proceeding and is not a mere voluntary agreement,

as in the case of a general partnership. Accordingly,

the requirements of the statute must be followed. A

limited partnership is formed if there has been

substantial compliance in good faith with the

requirements set forth in Article 1844. More so, a

person who files a false certificate thereby renders

himself liable as a general partner.


If the proposed limited partnership has not

conformed substantially with the requirements of

this article, as when the name of one of the general

partners appear in the firm name, it is not

considered a limited partnership but a general

partnership. This is because a firm transacting

business as a partnership is presumed to be a

general partnership.

Article 1845: Contribution of a limited partner

The contributions of a limited partner may

be cash or other property, but not services.

Article 1846. Name of limited partnership; effects

of surname of limited partner found in partnership

name

The surname of a limited partner shall not

appear in the partnership name unless:

1. It is also the surname of a general

partner, or

2. Prior to the time when the limited

partner became such, the business

had been carried on under a name in

which his surname appeared.

A limited partner whose surname appears

in a partnership name contrary to the

provisions of the first paragraph is liable as

a general partner to partnership creditors

who extend credit to the partnership

without actual knowledge that he is not a

general partner.

Article 1847: False statement in certificate filed

with the SEC; effects; liability

If the certificate contains a false statement,

one who suffers loss by reliance on such

statement may hold liable any party to the

certificate who knew the statement to be

false:

1. At the time he signed the certificate, or

2. Subsequently, but within a sufficient

time before the statement was relied

upon to enable him to cancel or amend

the certificate, or to fi le a petition for

its cancellation or amendment as

provided in Article 1865.

This article does not say that the guilty partner shall

be liable as a general partner. This liability imposed

by the article is merely a statutory penalty and does

not make the limited partner a general partner for

all purposes, even as to third persons.

Article 1848: Liability of limited partner for

participating in management

A limited partner shall not become liable as

a general partner unless, in addition to the

exercise of his rights and powers as a

limited partner, he takes part in the control

of the business.

The following acts do not constitute taking “part in

the control of the business”:

1. Mere dealing with a customer;

2. Mere consultation on one occasion with the

general partners.

It would seem that such control contemplates active

participation in the management of the partnership

business and does not comprehend the mere giving

of advice to general partners as to specific matters

which the latter may follow or not.

Article 1849: Admission of additional limited

partners

After the formation of a limited partnership,

additional limited partners may be admitted

upon filing an amendment to the original

certificate in accordance with the

requirements of Article 1865.

Even after a limited partnership has already been

formed, the firm may still admit new limited

partners, provided there is a proper amendment to

the certificate.

Article 1850: Rights, powers, and liabilities of a

general partner is a limited partnership


A general partner shall have the rights and

powers and be subject to all the restrictions

and liabilities of a partner in a partnership

without limited partners. However, without

the written consent or ratification of the

specific act by all the limited partners, a

general partner or all of the general

partners have no authority to:

1. Do any act in contravention of the

certificate;

2. Do any act which would make it

impossible to carry on the ordinary

business of the partnership;

3. Confess a judgment against the

partnership;

4. Possess partnership property, or assign

their rights in specific partnership

property, for other than a partnership

purpose;

5. Admit a person as a general partner;

6. Admit a person as a limited partner,

unless the right to do so is given in the

certificate;

7. Continue the business with partnership

property on the death, retirement,

insanity, civil interdiction or insolvency

of a general partner, unless the right so

to do is given in the certificate.

In the absence of an agreement to the contrary, a

limited partner is not entitled to compensation for

his services beyond his share of the profits.

Does the general partner enjoy plenary powers in a

limited partnership? As a rule, a general partner

may bind the partnership by any act of

administration, but he has no power to do the

specific acts enumerated in the article above, even if

agreed to by all the general partners, without the

written consent or at least ratification of all the

limited partners.

The general partners have no power to bind the

limited partners beyond the latter’s investment.

Article 1851: Rights of a limited partner in the

partnership

A limited partner shall have the same rights

as a general partner to:

1. Have the partnership books kept at the

principal place of business of the

partnership, and at a reasonable hour

to inspect and copy any of them;

2. Have on demand true and full

information of all things affecting the

partnership, and a formal account of

partnership affairs whenever

circumstances render it just and

reasonable; and,

3. Have dissolution and winding up by

decree of court.

A limited partner shall have the right to

receive a share of the profits or other

compensation by way of income, and to

the return of his contribution as provided in

Articles 1856 and 1857.

The rights of limited partners are enumerated in the

Article above. A limited partner has lesser rights

than a general partner.

Specific rights of a limited partner:

1. To require that the partnership books be

kept at the principal place of business of the

partnership;

2. To inspect and copy at a reasonable hour

partnership books or any of them;

3. To demand true and full information of all

things affecting the partnership;

4. To demand a formal account of partnership

affairs whenever circumstances render it

just and reasonable;

5. To ask for dissolution and winding up by

decree of court;

6. To receive a share of the profits or other

compensation by way of income; and,

7. To receive the return of his contributions

provided the partnership assets are in

excess of all its liabilities.


Article 1852: Error in belief as to being a limited

partner; status

Without prejudice to the provisions of

Article 1848, a person who has contributed

to the capital of a business conducted by a

person or partnership erroneously believing

that he has become a limited partner in a

limited partnership, is not, by reason of his

exercise of the rights of a limited partner, a

general partner with the person or in the

partnership carrying on the business, or

bound by the obligations of such person or

partnership; provided that on ascertaining

the mistake he promptly renounces his

interest in the profits of the business or

other compensation by way of income.

The article grants exemption from liability in favor of

one who has contributed to the capital of a business

conducted by a person or partnership erroneously

believing that he has become a limited partner in a

limited partnership or in a general partnership

thinking that it is a limited partnership.

Conditions for exemption from liability as a general

partner:

1. Renunciation of his interest upon

ascertaining mistake;

2. Does not participate in the management of

business; and,

3. Surname does not appear in the

partnership name.

The person, however, must promptly renounce his

interest before the partnership has become liable to

third persons who cannot be blamed for considering

him a general partner. However, where partnership

creditors are not prejudiced, it would seem that

renunciation of his interest is not necessary.

An heir of a deceased general partners admitted as a

partner under the articles of partnership providing

for such admission, ordinarily becomes a limited

partner for his own protection, because he would

normally prefer to avoid any liability in excess of the

value of the estate inherited so as not to jeopardize

his personal assets.

Article 1853: Rights and powers of a person who is

both a general and limited partner

A person may be a general partner and a

limited partner in the same partnership at

the same time, provided that this fact shall

be stated in the certificate provided for in

article 1844.

A person who is a general, and also at the

same time a limited partner shall have all

the rights and powers and be subject to all

the restrictions of a general partner; except

that, in respect to his contribution, he shall

have the rights against the other members

which he would have had if he were not

also a general partner.

A person may be a general and a limited partner at

the same time, provided that this fact is stated in the

certificate signed, sworn to, and recorded in the

office of the SEC.

Generally, his rights and powers are those of a

general partner. Hence, he is liable with his separate

property to third persons. However, with respect to

his contribution as a limited partner, he would have

the right of a limited partner insofar as the other

partners are concerned. This means that while he is

not relieved from personal liability to third persons

for partnership debts, he is entitled to recover from

the general partners the amount he has paid to such

third persons; and in settling accounts after

dissolution, he shall have priority over general

partners in the return of their respective

contributions.

Article 1854: Loan and other business transactions

with a limited partnership by a limited partner

A limited partner also may loan money to

and transact other business with the

partnership, and, unless he is also a general

partner, receive on account of resulting

claims against the partnership, with general


creditors, a pro rata share of the assets. No

limited partner shall in respect to any such

claim:

1. Receive or hold as collateral security

any partnership property, or

2. Receive from a general partner or the

partnership any payment,

conveyance, or release from liability, if

at the time the assets of the

partnership are not sufficient to

discharge partnership liabilities to

persons not claiming as general or

limited partners.

The receiving of collateral security, or a

payment, conveyance, or release in

violation of the foregoing provisions is a

fraud on the creditors of the partnership.

While the limited partner, in the case of a claim

referred to in the article, is prohibited to receive or

hold as collateral security any partnership property,

still he if not prohibited to purchase partnership

assets which are used to satisfy partnership

obligations toward third parties.

Allowable transactions:

1. Granting loans to the partnership;

2. Transacting other business with it;

3. Receiving a pro rata share of the

partnership assets with general creditors if

he is not also a general partner.

Prohibited transactions:

1. Receiving or holding as collateral security

any partnership property;

2. Receiving any payment, conveyance or

release from liability if it will prejudice the

right of third persons.

Article 1855: Who are preferred limited partners

Where there are several limited partners,

the members may agree that one or more

of the limited partners shall have a priority

over other limited partners as to the return

of their contributions, as to their

compensation by way of income, or as to

any other matter. If such an agreement is

made, it shall be stated in the certificate,

and in the absence of such a statement all

the limited partners shall stand upon equal

footing.

Nature of the preference:

1. Agreement;

2. Return of contributions;

3. Compensation;

4. Other matters

In the absence of such statement in the certificate,

even if there is an agreement, all the limited

partners shall stand on equal footing in respect of

these matters.

Article 1856: Compensation of a limited partner

A limited partner may receive from the

partnership the share of the profits or the

compensation by way of income stipulated

for in the certificate; provided, that after

such payment is made, whether from the

property of the partnership or that of a

general partner, the partnership assets are

in excess of all liabilities of the partnership

except liabilities to limited partners on

account of their contributions and to

general partners.

Third-party creditors have priority over the limited

partner’s rights.

In determining the liabilities of the partnership, the

liabilities to the limited partners for their

contributions and to general partners, whether for

contributions or not, are not included. Liabilities to

limited partners other than on account of their

contributions arising from business transactions by

them with the partnership, enjoy protection, subject

to the preferential rights of partnership creditors.


Article 1857: Requisites for return of contribution

of a limited partner

A limited partner shall not receive from a

general partner or out of partnership

property any part of his contributions until:

1. All liabilities of the partnership, except

liabilities to general partners and to

limited partners on account of their

contributions, have been paid or there

remains property of the partnership

sufficient to pay them;

2. The consent of all members is had,

unless the return of the contribution

may be rightfully demanded under the

provisions of the second paragraph;

and

3. The certificate is cancelled or so

amended as to set forth the withdrawal

or reduction.

Subject to the provisions of the first

paragraph, a limited partner may rightfully

demand the return of his contributions:

1. On the dissolution of a partnership, or

2. When the date specified in the

certificate for its return has arrived, or

3. After he has given six months notice in

writing to all other members, if no time

is specified in the certificate, either for

the return of the contribution or for the

dissolution of the partnership.

In the absence of any statement in the

certificate to the contrary or the consent of

all members, a limited partner, irrespective

of the nature of his contribution, has only

the right to demand and receive cash in

return for his contribution.

A limited partner may have the partnership

dissolved and its affairs wound up when:

1. He rightfully but unsuccessfully

demands the return of his contribution,

or,

2. The other liabilities of the partnership

have not been paid, or the partnership

property is insufficient for their

payment as required by the first

paragraph, No. 1, and the limited

partner would otherwise be entitled to

the return of his contribution.

Article 1858: Liabilities of a limited partner

A limited partner is liable to the

partnership:

1. For the difference between his

contribution as actually made and that

stated in the certificate as having been

made, and

2. For any unpaid contribution which he

agreed in the certificate to make in the

future at the time and on the

conditions stated in the certificate.

A limited partner holds as trustee for the

partnership:

1. Specific property stated in the

certificate as contributed by him, but

which was not contributed or which

has been wrongfully returned, and

2. Money or other property wrongfully

paid or conveyed to him on account of

his contribution.

The liabilities of a limited partner as set

forth in this article can be waived or

compromised only by the consent of all

members; but a waiver or compromise shall

not affect the right of a creditor of a

partnership who extended credit or whose

claim arose after the filing and before a

cancellation or amendment of the

certificate, to enforce such liabilities.

When a contributor has rightfully received

the return in whole or in part of the capital

of his contribution, he is nevertheless liable

to the partnership for any sum, not in

excess of such return with interest,


necessary to discharge its liabilities to all

creditors who extended credit or whose

claims arose before such return.

As limited partners are not principals in the

transaction of a partnership, their liability, as a rule,

is to the partnership, not to the creditors of the

partnership. The general partners cannot, however,

waive any liability of the limited partners to the

prejudice of such creditors.

A limited partner is liable for partnership obligations:

1. When he contributes services instead of

only money or property to the partnership;

2. When allows his surname to appear in the

firm name;

3. When he fails to have a false statement in

the certificate corrected, knowing it to be

false;

4. When he takes part in the control of the

business;

5. When he receives partnership property as

collateral security, payment, conveyance, or

release in fraud of partnership creditors;

and,

6. When there is failure to substantially

comply with the legal requirements

governing the formation of limited

partnerships.

As in general partnership, the creditor of a limited

partner may, in addition to other remedies allowed

under existing laws, apply to the proper court for a

“charging order” subjecting the interest in the

partnership of debtor-partner for the payment of his

obligation.

May the liabilities in the preceding problem be

waived or compromised? Yes, but two conditions

must be followed: all the other partners must agree,

and innocent third party creditors must not be

prejudiced.

Article 1859: Assignment of limited partner’s

interest; effects, rights and liabilities

A limited partner’s interest is assignable.

A substituted limited partner is a person

admitted to all the rights of a limited

partner who has died or has assigned his

interest in a partnership.

An assignee, who does not become a

substituted limited partner, has no right to

require any information or account of the

partnership transactions or to inspect the

partnership books; he is only entitled to

receive the share of the profits or other

compensation by way of income, or return

of his contribution, to which his assignor

would otherwise be entitled.

An assignee shall have the right to become

a substituted limited partner if all the

members consent thereto or if the assignor,

being thereunto empowered by the

certificate, gives the assignee that right.

An assignee becomes a substituted limited

partner when the certificate is

appropriately amended in accordance with

Article 1865.

The substituted limited partner has all the

rights and powers, and is subject to all the

restrictions and liabilities of his assignor,

except those liabilities of which he was

ignorant at the time he became a limited

partner and which could not be ascertained

from the certificate.

The substitution of the assignee as a limited

partner does not release the assignor from

liability to the partnership under Articles

1847 and 1858.

The substitution of a person as a limited partner in

place of an existing limited partner, or the

withdrawal, death, insolvency, insanity, or civil

interdiction of a limited partner, or the addition of

new limited partners does not necessarily dissolve

the partnership.

What is a substituted limited partner? He is a person

admitted to all the rights of a limited partner who


has died or has assigned his interest in a partnership.

The following are the requisites in order that the

assignee may become a substituted limited partner:

1. All the members must consent to the

assignee becoming a substituted limited

partner or the limited partner, being

empowered by the certificate, must give

the assignee the right to become a limited

partner;

2. The certificate must be amended in

accordance with Article 1865; and,

3. The certificate as amended must be

registered in the SEC.

Is a substituted limited partner responsible for the

liabilities of his assignor? Yes, except those liabilities

of which he was ignorant at the time he became a

limited partner and which could not be ascertained

from the certificate.

Is the limited partner relieved of all his liabilities to

the partner to the partnership if he assigned his

interest to another who subsequently became a

substituted limited partner? No. The limited partner

is still liable under Article 1847 to a person who

relies on a false statement and under Article 1858 to

creditors who extended credit or whose claims rose

before the assignment.

Article 1860: Effect of retirement, death,

insolvency, insanity or civil interdiction of a general

partner

The retirement, death, insolvency, insanity,

or civil interdiction of a general partner

dissolves the partnership, unless the

business is continued by the remaining

general partners:

1. Under the right so to do stated in the

certificate, or

2. With the consent of all the members.

The retirement or withdrawal, death, insolvency,

insanity, or civil interdiction of a general partner

dissolves the partnership while any of such causes

affecting a limited partner does not result in its

dissolution unless there is only one limited partner.

When may the remaining general partners continue

the business? If the right to do so is stated in the

certificate, or if all the members consent. But, at any

event, there should be an amendment of the

certificate.

Article 1861: Right of executor on the death of a

limited partner

On the death of a limited partner, his

executor or administrator shall have all the

rights of a limited partner for the purpose

of settling his estate, and such power as the

deceased had to constitute his assignee as

substituted limited partner.

The estate of a deceased limited partner

shall be liable for all his liabilities as a

limited partner.

Article 1862: Rights of creditors of limited partner

On due application to a court of competent

jurisdiction by any creditor of a limited

partner, the court may charge the interest

of the indebted limited partner with

payment of the unsatisfied amount of such

claim, and may appoint a receiver, and

make all other orders, directions, and

inquiries which the circumstances of the

case may require.

The interest may be redeemed with the

separate property of any general partner,

but may not be redeemed with partnership

property.

The remedies conferred by the first

paragraph shall not be deemed exclusive of

others which may exist.

Nothing in this Chapter shall be held to

deprive a limited partner of his statutory

exemption.


The creditor of a limited partner may apply to the

proper court for an order charging the limited

partner’s interest in the partnership for the payment

of any unsatisfied amount of his claim. The interest

so charged may be redeemed with the separate

property of any general partner but not with

partnership property.

Article 1863: Dissolution of a limited partnership

In settling accounts after dissolution the

liabilities of the partnership shall be entitled

to payment in the following order:

1. Those to creditors, in the order of

priority as provided by law, except

those to limited partners on account of

their contributions, and to general

partners;

2. Those to limited partners in respect to

their share of the profits and other

compensation by way of income on

their contributions;

3. Those to limited partners in respect to

the capital of their contributions;

4. Those to general partners other than

for capital and profits;

5. Those to general partners in respect to

profits;

6. Those to general partners in respect to

capital.

Subject to any statement in the certificate

or to subsequent agreement, limited

partners share in the partnership assets in

respect to their claims for capital, and in

respect to their claims for profits or for

compensation by way of income on their

contribution respectively, in proportion to

the respective amounts of such claims.

A limited partnership is dissolved in much the same

way as an ordinary partnership. It may be dissolved

for the misconduct of a general partner, for fraud

practiced on the limited partner by the general

partner, or on the retirement, death, etc. of a

general partner or when all the limited partners

ceased to be such, or on the expiration of the term

for which it was to exist, or by mutual consent of the

partners before the expiration of the firm’s original

term.

A limited partner may bring a suit for the dissolution

of the firm, an accounting, and the appointment of a

receiver when the misconduct of a general partner

or the insolvency of the firm warrants it.

When the firm is dissolved by the expiration of the

term fixed in the certificate, notice of the dissolution

need not be given since the papers filed and

recorded in the SEC are notice to the world of the

term of the partnership.

The consequences of the dissolution of a general

partnership apply to limited partnership. Therefore,

the partnership continues in operation while winding

up.

Article 1864: Amendment or cancellation of

certificate

The certificate shall be cancelled when the

partnership is dissolved or all limited

partners cease to be such. A certificate shall

be amended when:

1. There is a change in the name of the

partnership or in the amount or

character of the contribution of any

limited partner;

2. A person is substituted as a limited

partner;

3. An additional limited partner is

admitted;

4. A person is admitted as a general

partner;

5. A general partner retires, dies,

becomes insolvent or insane, or is

sentenced to civil interdiction and the

business is continued under article

1860;

6. There is change in the character of the

business of the partnership;

7. There is a false or erroneous statement

in the certificate;


8. There is a change in the time as stated

in the certificate for the dissolution of

the partnership or for the return of a

contribution;

9. A time is fixed for the dissolution of the

partnership, or the return of a

contribution, no time having been

specified in the certificate; or

10. The members desire to make a change

in any other statement in the

certificate in order that it shall

accurately represent the agreement

among them.

Article 1865: Requirements for the amendment or

cancellation of certificate

The writing to amend a certificate shall:

1. Conform to the requirements of article

1844 as far as necessary to set forth

clearly the change in the certificate

which it is desired to make; and

2. Be signed and sworn to by all members,

and an amendment substituting a

limited partner or adding a limited or

general partner shall be signed also by

the member to be substituted or

added, and when a limited partner is to

be substituted, the amendment shall

also be signed by the assigning limited

partner.

The writing to cancel a certificate shall be

signed by all members.

A person desiring the cancellation or

amendment of a certificate, if any person

designated in the first and second

paragraphs as a person who must execute

the writing refuses to do so, may petition

the court to order a cancellation or

amendment thereof.

If the court finds that the petitioner has a

right to have the writing executed by a

person who refuses to do so, it shall order

the Office of the Securities and Exchange

Commission where the certificate is

recorded, to record the cancellation or

amendment of the certificate; and when

the certificate is to be amended, the court

shall also cause to be filed for record in the

said office a certified copy of its decree

setting forth the amendment.

A certificate is amended or cancelled when

there is filed for record in the Office of the

Securities and Exchange Commission, where

the certificate is recorded:

1. A writing in accordance with the

provisions of the first or second

paragraph; or

2. A certified copy of the order in

accordance with the provisions of the

fourth paragraph;

3. After the certificate is duly amended in

accordance with this article, the

amended certificate shall thereafter be

for all purposes the certificate provided

for in this Chapter.

Article 1866: Standing of a limited partner in

proceedings by or against a partnership

A contributor, unless he is a general

partner, is not a proper party to

proceedings by or against a partnership,

except where the object is to enforce a

limited partner’s right against or liability to

the partnership.

Unlike in the case of a general partner, the

relationship between a limited partner, on the one

hand, and the other partners and the partnership,

on the other hand, is not one of trust and

confidence. A limited partner is, therefore, not

prohibited from engaging in business for himself

even in competition with that conducted by the

partnership and may transact business with the

partnership for ordinary purposes as though he were

a stranger.

When is a limited partner considered a proper party?


1. When it is for the purpose of enforcing his

individual rights against the partnership and

recovering damages for violation of such

right;

2. When the creditors of a firm institutes an

action to account for and restore sums

withdrawn by him from the capital of the

firm with outstanding debts on a voluntary

dissolution.

A limited partner’s contribution is not a mere

investment, as in the case of one purchasing stock in

a corporation. A limited partner is, in a sense, an

owner, which in interest in the capital of the firm

and its business as such, but he has no property right

in the firm’s assets. The nature of the limited

partner’s interest in the firm amounts to a share in

the partnership assets after its liabilities have been

deducted and a balance struck. This interest is a

chose in action, and hence, intangible personal

property.

Article 1867: Conversion of a limited partnership

existing prior to the New Civil Code

A limited partnership formed under the law

prior to the effectivity of this Code, may

become a limited partnership under this

Chapter by complying with the provisions of

Article 1844, provided the certificate sets

forth:

1. The amount of the original contribution

of each limited partner, and the time

when the contribution was made; and

2. That the property of the partnership

exceeds the amount sufficient to

discharge its liabilities to persons not

claiming as general or limited partners

by an amount greater than the sum of

the contributions of its limited

partners.

A limited partnership formed under the law

prior to the effectivity of this Code, until or

unless it becomes a limited partnership

under this Chapter, shall continue to be

governed by the provisions of the old law.

AGENCY

Article 1868: Concept and definition of agency

By the contract of agency a person binds

himself to render some service or to do

something in representation or on behalf of

another, with the consent or authority of

the latter.

According to De Leon and Paras, the definition of

agency as provided for by Article 1868 is very broad

enough as it includes all situations in which one

person is employed to render service for another.

As worded, the definition includes the relationship

of master and servant, of employer and employee,

of employer and independent contractor.

As worded, it would seem that the agent must

always expressly represent the principal. This is not

necessarily so, for sometimes an agent does not

disclose his principal: he may even act in behalf of

himself, but here the principal would still be bound

when the contract involves things belonging to the

principal.

Justice J.B.L. Reyes had stated that this article does

not draw clearly the distinction between the lease of

services and agency without representation. The

laborer also does something or renders service on

behalf of another. The true essence of the

distinction, he submits, lies in that the agent enters

or is designed to enter judicial relations, with or

without representation of the principal.

Agency is a relationship which implies a power in an

agent to contract with a third person on behalf of a

principal. It is this power to affect the principal’s

contractual relations with third persons that

differentiates the agent from the employee, the

servant, and the independent contractor.

Other definitions of agency:


1. An agency may be defined as a contract

either express or implied upon a

consideration, or a gratuitous undertaking,

by which one of the parties confides to the

other, the management of some business to

be transacted in his name or on his account,

and by which that other assumes to do

business and renders an account of it.

2. Agency is the relationship which results

from the manifestation of consent by one

person to another that the other shall act

on his behalf and subject to his control, and

consented by the other so to act.

3. Agency is an act which one person gives to

another the power to do something for the

principal and in his name.

Why is agency important? It enables a man to

increase the range of his individual and corporate

activity by enabling him to be constructively present

in many places and to carry on diverse activities at

the same time.

Characteristics of a contract of agency:

1. It is a principal, nominate, bilateral,

preparatory, commutative, and generally

onerous contract;

2. Generally, it is also a representative

relation, not a status, since agency is not

inherent or permanent;

3. It is a fiduciary relation since it is based on

trust and confidence.

Essential elements of agency:

1. There is consent, express or implied, of the

parties to establish the relationship.

2. The object is the execution of a juridical act

in relation to third persons;

3. The agent acts as a representative and not

for himself;

4. The agent within the scope of his authority.

Relationship of third party with principal and agent:

Since an agent’s contract is not his own but his

principal’s, a third party’s liability on such contract is

to the principal and not to the agent, and liability to

such third party is enforceable against the principal,

not the agent.

Parties to the contract:

1. Principal. He whom the agent represents

and from whom he derives authority; he is

the one primarily concerned in the contract.

2. Agent. He who acts or stands for another.

Usually, he is given full or partial discretion,

but sometimes he acts under a specific

command.

Capacity of the principal: In general, if he is

capacitated to act for himself, he can act thru an

agent. He must, therefore, be capacitated to give

consent. If any special capacity is needed, it is he

who must possess it and not the agent, for the latter

merely acts in his behalf. The principal may be

natural or a juridical person.

Capacity of an agent: His capacity is in general the

same as in the law of contracts, that is, he must be

able to bind himself, but only insofar as his

obligations to his principal are concerned. Insofar as

third persons are concerned, however, it is enough

that his principal be the one capacitated, for

generally, an agent assumes no personal liability.

Usually, therefore, the contract with a stranger is

valid, even if the agent be a minor so long as his

principal was capacitated. However, as between

them, the minor-agent can set up his incapacity,

provided he is not in estoppel.

Nature of relations between principal and agent:

1. Relation is fiduciary in character, hence, it is

based on trust and confidence, on a degree

which varies considerably from situation to

situation.

2. Agent is estopped from asserting interest

adverse to his principal or from acquiring a

title adverse to that of the principal.

3. Agents cannot act so as to bind their

principals, where they have an adverse

interest in themselves.

4. Agent cannot serve two masters, unless

both consent or unless he is a mere


middleman or intermediary with no

independent initiative.

5. Agent must not use or disclose secret

information as requirements of good faith

and loyalty demand of the agent such duty,

especially those obtained in the course of

his agency.

6. Agent must make known to the principal

every and all material facts, of which the

agent has cognizance, which concern the

transaction and subject matter of the

agency. More so, knowledge of agent is

imputed to principal.

Nature, basis and purpose of agency:

1. Since agency is a contract, the following

requisites must concur:

a. Consent of the contracting parties;

b. Object which is the subject matter

of the contract; and,

c. Cause which is established.

2. Agency is also a representative relation.

The agent renders some service or does

something in representation or on behalf of

another. Representation constitutes the

basis of agency. The acts of the agent on

behalf of the principal within the scope of

his authority produce the same legal and

binding effect as if they were personally

done by the principal. By this legal fiction

of representation, the actual or real

absence of the principal is transformed into

legal or juridical presence.

3. The relation of an agent to his principal is

fiduciary in character since it is based on

trust and confidence.

4. The purpose of agency is to extend the

personality of the principal. It enables the

activity of man which is naturally limited in

its exercise by his physiological conditions

to be extended, permitting him to perform

diverse juridical acts through another, when

his physical presence is impossible or

inadvisable, at the same time in different

places.

Acts that may be/not be delegated to agents: The

general rule is that what a man may do in person, he

may do thru another. Some acts, however, cannot

be done through an agent, like:

a. Personal acts;

b. Criminal acts or acts not allowed

by law.

Distinctions:

Agency Partnership

Agent acts not for

himself but for his

principal.

A partner acts for

himself, for his firm, and

for his partners.

*It may even be said that partnership is a branch of

the law on agency (Paras).

Agency Loan

An agent may be given

funds by the principal to

advance the latter’s

business.

A borrower is given

money for purposes of

his own, and he must

generally return it

whether or not his own

business is successful.

Agency Guardianship

The agent represents a

capacitated person.

A guardian represents an

incapacitated person.

The agent is appointed

by the principal and can

be removed by the

latter.

The guardian is

appointed by the court

and stands in loco

parentis.

The agent is subject to

the directions of the

principal.

The guardian is not

subject to the directions

of the ward, but must of

course act for the

benefit of the latter.

The agent can make the

principal personally

liable.

The guardian has no

power to impose

personal liability on the

ward.

Agency Judicial administration

Agent is appointed by Judicial administrator is


the principal. appointed by the court.

He represents the

principal.

He represents not only

the court but also the

heir and creditors of the

estate.

Agent generally does not

file a bond.

The administrator files a

bond.

Agent is controlled by

the principal thru their

agreement.

His acts are subject to

specific orders from the

court.

Agency Lease of property

The agent is controlled

by the principal.

The lease is not

controlled by the lessor.

The agency may involve

things other than

property.

A lease of property

involves property only.

The agent can bind the

principal.

The lessee, as such,

cannot bind the lessor.

Agency Lease of service

The basis is

representation.

The basis is

employment.

The agent exercises

discretionary powers.

The lessor ordinarily

performs only ministerial

functions.

Relationship can be

terminated at the will of

either principal or agent.

Generally, the

relationship can be

terminated only at the

will of both.

Usually involves 3

persons: the principal,

the agent, and a

stranger.

Usually involves only two

persons.

Agency Independent contract

The agent is subject to

the control of the

principal whom he

represents.

The independent

contractor exercises his

employment

independently, and not

in representation of the

employer.

The agent of the agent The employees of the

may be controlled by the

principal.

contractor are not the

employees of the

employer of the

contractor.

Agent can bind the

principal.

Ordinarily, the

independent contractor

cannot bind the

employer by tort.

The negligence of the

agent is imputable to the

principal.

The negligence of the

independent contractor

is generally not

imputable to his

employer.

Agency Negotiorium gestio

The representation is

expressly conferred.

It is not only without the

authority of the owner

of the business, but is

without his knowledge.

It is a contract. It is a quasi-contract

Agent is controlled by

the principal.

The officious manager

follows his judgment and

the presumed will of the

owner.

The legal relation is

created by the parties.

The legal relation is

created by law,

occasioned by the acts of

the manager.

*In both, there is representation.

Agency Brokerage

A commission agent is

one engaged in the

purchase or sale for

another of personal

property which for this

purpose is placed in his

possession and at his

disposal. He maintains a

relation not only with his

principal and the

purchaser or vendor, but

also with the property

A broker has no relation

with the thing he buys or

sells. He is merely an

intermediary between

the purchaser and the

vendor. He acquires

neither the custody nor

the possession of the

thing he sells. His only

function is to bring

together the parties to

the transaction.


which is the subject

matter of the

transaction.

Who is a broker? A broker is one who is engaged,

for others, on a commission, negotiating contracts

relative to property with the custody of which he has

no concern; the negotiator between other parties,

never acting in his own name but in the name of

those who employed him. A broker is one whose

occupation is to bring the parties together, in

matters of trade, commerce or navigation (Schmid &

Oberly v. RJL Martinez Fishing Corporation [1988]).

Agency Trust

Agent usually holds no

title at all.

Trustee may hold legal

title to the property.

Usually, agent acts in the

name of the principal.

The trustee may act in

his own name.

Usually, agent may be

terminated or revoked at

any time.

The trust is usually

ended by the

accomplishment of the

purposes for which it

was formed.

Agency may not be

connected at all with

property.

Trust involves control

over the property.

Agent has authority to

make contracts which

will be binding on his

principal.

Trustee does not

necessarily or even

possess such authority

to bind the trustor or the

cestui que trust.

Agency is really a

contractual relation,

A trust may be the result

of the contract or not; it

may be created also by

law.

Agency to Sell Sale

Ownership of the goods

is not transferred to the

agent.

Ownership is transferred

to the buyer after

delivery.

The agent delivers the The buyer pays the price.

price.

Agency to Buy Sale

The agent acquires

ownership on behalf of

the principal.

The buyer acquires

ownership for himself.

The agent must account

for all benefits or

discounts received from

the seller.

The buyer who obtains a

discount does not have

to reveal such fact to its

own buyer.

The agent delivers the

price.

The buyer pays the price.

How do we determine the existence of agency 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. The question is ultimately

one of intention. Note that the relation of agency

cannot be inferred from mere relationship or family

ties unattended by conditions, acts or conduct

clearly implying an agency.

Cases:

Rallos v. Felix Go Chan & Sons Realty

Corporation, L-24332, January 31, 1978

It is a basic axiom in civil law embodied in our Civil

Code that no one may contract in the name of

another without being authorized by the latter, or

unless he has by law a right to represent him. A

contract entered into in the name of another by one

who has no authority or the legal representation or

who has acted beyond his powers, shall be

unenforceable, unless it is ratified, expressly or

impliedly, by the person on whose behalf it has been

executed, before it is revoked by the other

contracting party.

Out of the above given principles, sprung the

creation and acceptance of the relationship of

agency whereby one party, caged the principal

(mandante), authorizes another, called the agent

(mandatario), to act for and in his behalf in


transactions with third persons. The essential

elements of agency are: (1) there is consent, express

or implied of the parties to establish the

relationship; (2) the object is the execution of a

juridical act in relation to a third person; (3) the

agents acts as a representative and not for himself,

and (4) the agent acts within the scope of his

authority.

Agency is basically personal representative, and

derivative in nature. The authority of the agent to

act emanates from the powers granted to him by his

principal; his act is the act of the principal if done

within the scope of the authority. Qui facit per alium

facit se. "He who acts through another acts himself"

Orient Air Services & Hotel Representatives

v. CA, GR 76931 & 76933, May 29, 1991

It is a well settled legal principle that in the

interpretation of a contract, the entirety thereof

must be taken into consideration to ascertain the

meaning of its provisions. The various stipulations in

the contract must be read together to give effect to

all. After a careful examination of the records, the

Court finds merit in the contention of Orient Air that

the Agreement, when interpreted in accordance

with the foregoing principles, entitles it to the 3%

overriding commission based on total revenue, or as

referred to by the parties, "total flown revenue."

As the designated exclusive General Sales Agent of

American Air, Orient Air was responsible for the

promotion and marketing of American Air’s services

for air passenger transportation, and the solicitation

of sales therefor. In return for such efforts and

services, Orient Air was to be paid commissions of

two (2) kinds: first, a sales agency commission,

ranging from 7-8% of tariff fares and charges from

sales by Orient Air when made on American Air

ticket stock; and second, an overriding commission

of 3% of tariff fares and charges for all sales of

passenger transportation over American Air services.

It is immediately observed that the precondition

attached to the first type of commission does not

obtain for the second type of commissions. The

latter type of commissions would accrue for sales of

American Air services made not on its ticket stock

but on the ticket stock of other air carriers sold by

such carriers or other authorized ticketing facilities

or travel agents. To rule otherwise, i.e., to limit the

basis of such overriding commissions to sales from

American Air ticket stock would erase any distinction

between the two (2) types of commissions and

would lead to the absurd conclusion that the parties

had entered into a contract with meaningless

provisions. Such an interpretation must at all times

be avoided with every effort exerted to harmonize

the entire Agreement.

It is clear from the records that American Air was the

party responsible for the preparation of the

Agreement.

By affirming this ruling of the trial court, respondent

appellate court, in effect, compels American Air to

extend its personality to Orient Air. Such would be

violative of the principles and essence of agency,

defined by law as a contract whereby "a person

binds himself to render some service or to do

something in representation or on behalf of another,

WITH THE CONSENT OR AUTHORITY OF THE

LATTER." (Emphasis supplied) In an agent-principal

relationship, the personality of the principal is

extended through the facility of the agent. In so

doing, the agent, by legal fiction, becomes the

principal, authorized to perform all acts which the

latter would have him do. Such a relationship can

only be effected with the consent of the principal,

which must not, in any way, be compelled by law or

by any court. The Agreement itself between the

parties states that "either party may terminate the

Agreement without cause by giving the other 30

days’ notice by letter, telegram or cable." We,

therefore, set aside the portion of the ruling of the

respondent appellate court reinstating Orient Air as

general sales agent of American Air.

Eurotech Industrial Technologies v. Cuizon,

GR 167552, April 23, 2007

In a contract of agency, a person binds himself to

render some service or to do something in

representation or on behalf of another with the


latter’s consent. The underlying principle of the

contract of agency is to accomplish results by using

the services of others to do a great variety of things

like selling, buying, manufacturing, and transporting.

Its purpose is to extend the personality of the

principal or the party for whom another acts and

from whom he or she derives the authority to act. It

is said that the basis of agency is representation,

that is, the agent acts for and on behalf of the

principal on matters within the scope of his authority

and said acts have the same legal effect as if they

were personally executed by the principal. By this

legal fiction, the actual or real absence of the

principal is converted into his legal or juridical

presence qui facit per alium facit per se

The elements of the contract of agency are: (1)

consent, express or implied, of the parties to

establish the relationship; (2) the object is the

execution of a juridical act in relation to a third

person; (3) the agent acts as a representative and

not for himself; (4) the agent acts within the scope of

his authority.

Bordador v. Luz, GR 130148, December 15,

1997

The basis for agency is representation. Here, there is

no showing that Brigida consented to the acts of

Deganos or authorized him to act on her behalf,

much less with respect to the particular transactions

involved. Petitioners’ attempt to foist liability on

respondent spouses through the supposed agency

relation with Deganos is groundless and ill-advised.

Besides, it was grossly and inexcusably negligent of

petitioners to entrust to Deganos, not once or twice

but on at least six occasions as evidenced by six

receipts, several pieces of jewelry of substantial

value without requiring a written authorization from

his alleged principal. A person dealing with an agent

is put upon inquiry and must discover upon his peril

the authority of the agent.

The records show that neither an express nor an

implied agency was proven to have existed between

Deganos and Brigida D. Luz. Evidently, petitioners,

who were negligent in their transactions with

Deganos, cannot seek relief from the effects of their

negligence by conjuring a supposed agency relation

between the two respondents where no evidence

supports such claim.

Dizon v. CA, GR 122544, January 28, 1999

In an attempt to resurrect the lapsed option, private

respondent gave P300,000.00 to petitioners (thru

Alice A. Dizon) on the erroneous presumption that

the said amount tendered would constitute a

perfected contract of sale pursuant to the contract

of lease with option to buy. There was no valid

consent by the petitioners (as co-owners of the

leased premises) on the supposed sale entered into

by Alice A. Dizon, as petitioners alleged agent, and

private respondent. The basis for agency is

representation and a person dealing with an agent is

put upon inquiry and must discover upon his peril

the authority of the agent. As provided in Article

1868 of the New Civil Code, there was no showing

that petitioners consented to the act of Alice A.

Dizon nor authorized her to act on their behalf with

regard to her transaction with private respondent.

The most prudent thing private respondent should

have done was to ascertain the extent of the

authority of Alice A. Dizon. Being negligent in this

regard, private respondent cannot seek relief on the

basis of a supposed agency.

Reiterating the rule in delaing with an agent in

Bacaltos Coal Mines v. Court of Appeals:

“Every person dealing with an agent is put

upon inquiry and must discover upon his

peril the authority of the agent. If he does

not make such inquiry, he is chargeable

with knowledge of the agent’s authority,

and his ignorance of that authority will not

be any excuse. Persons dealing with an

assumed agent, whether the assumed

agency be a general or special one, are

bound at their peril, if they would hold the

principal, to ascertain not only the fact of

the agency but also the nature and extent

of the authority, and in case either is


controverted, the burden of proof is upon

them to establish it.”

Victorias Milling Co., Inc. v. CA, GR 117356,

June 19, 2000

Petitioner heavily relies upon STM's letter of

authority allowing CSC to withdraw sugar against

SLDR No. 1214M to show that the latter was STM's

agent. The pertinent portion of said letter reads:

“This is to authorize Consolidated Sugar

Corporation or its representative to

withdraw for and in our behalf (stress

supplied) the refined sugar covered by

Shipping List/Delivery Receipt = Refined

Sugar (SDR) No. 1214 dated October 16,

1989 in the total quantity of 25, 000 bags.”

It is clear from Article 1868 that the basis of agency

is representation. On the part of the principal, there

must be an actual intention to appoint or an

intention naturally inferable from his words or

actions and on the part of the agent, there must be

an intention to accept the appointment and act on it

and in the absence of such intent, there is generally

no agency. One factor which most clearly

distinguishes agency from other legal concepts is

control; one person - the agent - agrees to act under

the control or direction of another - the principal.

Indeed, the very word "agency" has come to

connote control by the principal. The control factor,

more than any other, has caused the courts to put

contracts between principal and agent in a separate

category. The Court of Appeals, in finding that CSC,

was not an agent of STM, opined:

“This Court has ruled that where the

relation of agency is dependent upon the

acts of the parties, the law makes no

presumption of agency, and it is always a

fact to be proved, with the burden of proof

resting upon the persons alleging the

agency, to show not only the fact of its

existence, but also its nature and extent

(Antonio vs. Enriquez [CA], 51 O.G. 3536].

Here, defendant-appellant failed to

sufficiently establish the existence of an

agency relation between plaintiff-appellee

and STM. The fact alone that it (STM) had

authorized withdrawal of sugar by plaintiff-

appellee "for and in our (STM's) behalf"

should not be eyed as pointing to the

existence of an agency relation ...It should

be viewed in the context of all the

circumstances obtaining. Although it would

seem STM represented plaintiff-appellee as

being its agent by the use of the phrase "for

and in our (STM's) behalf" the matter was

cleared when on 23 January 1990, plaintiff-

appellee informed defendant-appellant that

SLDFR No. 1214M had been "sold and

endorsed" to it by STM (Exhibit I, Records,

p. 78). Further, plaintiff-appellee has shown

that the 25, 000 bags of sugar covered by

the SLDR No. 1214M were sold and

transferred by STM to it ...A conclusion that

there was a valid sale and transfer to

plaintiff-appellee may, therefore, be made

thus capacitating plaintiff-appellee to sue in

its own name, without need of joining its

imputed principal STM as co-plaintiff.”

In the instant case, it appears plain to us that private

respondent CSC was a buyer of the SLDFR form, and

not an agent of STM. Private respondent CSC was

not subject to STM's control. The question of

whether a contract is one of sale or agency depends

on the intention of the parties as gathered from the

whole scope and effect of the language employed.

That the authorization given to CSC contained the

phrase "for and in our (STM's) behalf" did not

establish an agency. Ultimately, what is decisive is

the intention of the parties That no agency was

meant to be established by the CSC and STM is

clearly shown by CSC's communication to petitioner

that SLDR No. 1214M had been "sold and endorsed"

to it. The use of the words "sold and endorsed"

means that STM and CSC intended a contract of sale,

and not an agency. Hence, on this score, no error

was committed by the respondent appellate court

when it held that CSC was not STM's agent and could

independently sue petitioner.


Tuazon v. Heirs of Bartolome Ramos, GR

156262, July 14, 2005

In a contract of agency, one binds oneself to render

some service or to do something in representation

or on behalf of another, with the latter’s consent or

authority. The following are the elements of agency:

(1) the parties’ consent, express or implied, to

establish the relationship; (2) the object, which is the

execution of a juridical act in relation to a third

person; (3) the representation, by which the one

who acts as an agent does so, not for oneself, but as

a representative; (4) the limitation that the agent

acts within the scope of his or her authority. As the

basis of agency is representation, there must be, on

the part of the principal, an actual intention to

appoint, an intention naturally inferable from the

principals words or actions. In the same manner,

there must be an intention on the part of the agent

to accept the appointment and act upon it. Absent

such mutual intent, there is generally no agency.

This Court finds no reversible error in the findings of

the courts a quo that petitioners were the rice

buyers themselves; they were not mere agents of

respondents in their rice dealership. The question of

whether a contract is one of sale or of agency

depends on the intention of the parties.

The declarations of agents alone are generally

insufficient to establish the fact or extent of their

authority. The law makes no presumption of

agency; proving its existence, nature and extent is

incumbent upon the person alleging it. In the

present case, petitioners raise the fact of agency as

an affirmative defense, yet fail to prove its existence.

The Court notes that petitioners, on their own

behalf, sued Evangeline Santos for collection of the

amounts represented by the bounced checks, in a

separate civil case that they sought to be

consolidated with the current one. If, as they claim,

they were mere agents of respondents, petitioners

should have brought the suit against Santos for and

on behalf of their alleged principal, in accordance

with Section 2 of Rule 3 of the Rules on Civil

Procedure. Their filing a suit against her in their own

names negates their claim that they acted as mere

agents in selling the rice obtained from Bartolome

Ramos.

Patrimonio v. Gutierrez, GR 187769, June 4,

2014

Article 1868 of the Civil Code defines a contract of

agency as a contract whereby a person "binds

himself to render some service or to do something in

representation or on behalf of another, with the

consent or authority of the latter." Agency may be

express, or implied from the acts of the principal,

from his silence or lack of action, or his failure to

repudiate the agency, knowing that another person

is acting on his behalf without authority.

Yoshizaki v. Joy Training Center of Aurora,

GR 174978, July 1, 2013

Article 1868 of the Civil Code defines a contract of

agency as a contract whereby a person “binds

himself to render some service or to do something in


consent or authority of the latter.” It may be

express, or implied from the acts of the principal,

from his silence or lack of action, or his failure to

repudiate the agency, knowing that another person

is acting on his behalf without authority.

Jusayan v. Sombilla, GR 163928, January 21,

2015

Yet, the lease of an agricultural land can be either a

civil law or an agricultural lease. In the civil law lease,

one of the parties binds himself to give to another

the enjoyment or use of a thing for a price certain,

and for a period that may be definite or indefinite.

In the agricultural lease, also termed as a leasehold

tenancy, the physical possession of the land devoted

to agriculture is given by its owner or legal possessor

(landholder) to another (tenant) for the purpose of

production through labor of the latter and of the

members of his immediate farm household, in

consideration of which the latter agrees to share the

harvest with the landholder, or to pay a price certain

or ascertainable, either in produce or in money, or in


both. Specifically, in Gabriel v. Pangilinan, this Court

differentiated between a leasehold tenancy and a

civil law lease in the following manner, namely: (1)

the subject matter of a leasehold tenancy is limited

to agricultural land, but that of a civil law lease may

be rural or urban property; (2) as to attention and

cultivation, the law requires the leasehold tenant to

personally attend to and cultivate the agricultural

land; the civil law lessee need not personally

cultivate or work the thing leased; (3) as to purpose,

the landholding in leasehold tenancy is devoted to

agriculture; in civil law lease, the purpose may be for

any other lawful pursuits; and (4) as to the law that

governs, the civil law lease is governed by the Civil

Code, but the leasehold tenancy is governed by

special laws.

The sharing of the harvest in proportion to the

respective contributions of the landholder and

tenant, otherwise called share tenancy, was

abolished on August 8, 1963 under Republic Act No.

3844. To date, the only permissible system of

agricultural tenancy is leasehold tenancy, a

relationship wherein a fixed consideration is paid

instead of proportionately sharing the harvest as in

share tenancy.

In Teodoro v. Macaraeg, this Court has synthesized

the elements of agricultural tenancy to wit: (1) the

object of the contract or the relationship is an

agricultural land that is leased or rented for the

purpose of agricultural production; (2) the size of the

landholding is such that it is susceptible of personal

cultivation by a single person with the assistance of

the members of his immediate farm household; (3)

the tenant-lessee must actually and personally till,

cultivate or operate the land, solely or with the aid

of labor from his immediate farm household; and (4)

the landlord-lessor, who is either the lawful owner

or the legal possessor of the land, leases the same to

the tenant-lessee for a price certain or ascertainable

either in an amount of money or produce.

It can be gleaned that in both civil law lease of an

agricultural land and agricultural lease, the lessor

gives to the lessee the use and possession of the

land for a price certain. Although the purpose of the

civil law lease and the agricultural lease may be

agricultural cultivation and production, the

distinctive attribute that sets a civil law lease apart

from an agricultural lease is the personal cultivation

by the lessee. An agricultural lessee cultivates by

himself and with the aid of those of his immediate

farm household. Conversely, even when the lessee is

in possession of the leased agricultural land and

paying a consideration for it but is not personally

cultivating the land, he or she is a civil law lessee.

Spouses Fernando v. Continental Airlines,

Inc., GR 188288, January 16, 2012

According to the CA, agency is never presumed and

that he who alleges that it exists has the burden of

proof. Spouses Viloria, on whose shoulders such

burden rests, presented evidence that fell short of

indubitably demonstrating the existence of such

agency.

We disagree. The CA failed to consider undisputed

facts, discrediting CAI’s denial that Holiday Travel is

one of its agents. Furthermore, in erroneously

characterizing the contractual relationship between

CAI and Holiday Travel as a contract of sale, the CA

failed to apply the fundamental civil law principles

governing agency and differentiating it from sale.

Reiterating the ruling of the Court in Rallos v. Felix

Go Chan & Sons Realty Corp:

“Out of the above given principles, sprung

the creation and acceptance of the

relationship of agency whereby one party,

called the principal (mandante), authorizes

another, called the agent (mandatario), to

act for and in his behalf in transactions with

third persons. The essential elements of

agency are: (1) there is consent, express or

implied of the parties to establish the

relationship; (2) the object is the execution

of a juridical act in relation to a third

person; (3) the agent acts as a

representative and not for himself, and (4)

the agent acts within the scope of his

authority.”


Contrary to the findings of the CA, all the elements

of an agency exist in this case. The first and second

elements are present as CAI does not deny that it

concluded an agreement with Holiday Travel,

whereby Holiday Travel would enter into contracts

of carriage with third persons on CAI’s behalf. The

third element is also present as it is undisputed that

Holiday Travel merely acted in a representative

capacity and it is CAI and not Holiday Travel who is

bound by the contracts of carriage entered into by

Holiday Travel on its behalf. The fourth element is

also present considering that CAI has not made any

allegation that Holiday Travel exceeded the

authority that was granted to it. In fact, CAI

consistently maintains the validity of the contracts of

carriage that Holiday Travel executed with Spouses

Viloria and that Mager was not guilty of any

fraudulent misrepresentation. That CAI admits the

authority of Holiday Travel to enter into contracts of

carriage on its behalf is easily discernible from its

February 24, 1998 and March 24, 1998 letters,

where it impliedly recognized the validity of the

contracts entered into by Holiday Travel with

Spouses Viloria. When Fernando informed CAI that it

was Holiday Travel who issued to them the subject

tickets, CAI did not deny that Holiday Travel is its

authorized agent.

Article 1869: Kinds of agency; form of agency

Agency may be express, or implied from the

acts of the principal, from his silence or lack

of action, or his failure to repudiate the

agency, knowing that another person is

acting on his behalf without authority.

Agency may be oral, unless the law requires

a specific form.

In general, there are no formal requirements

governing the appointment of an agent. The agent’s

authority may be oral or written. An instance when

the law requires a specific form for the agency is

Article 1874.

Agency is constituted impliedly from the acts of the

principal, from his silence or lack of action or his

failure to repudiate the agency. In such cases of

implied agency, the principal knows that another

person is acting on his behalf without authority. It is

an actual agency as much as an express.

As a general rule, agency is not presumed. The

relation between principal and agent must exist as a

fact. Thus, it is held that where the relation of

agency is dependent upon the acts of the parties,

the law makes no presumption of agency, and it is

always a fact to be proved, with the burden of proof

resting upon the person alleging the agency to show,

not only the fact of its existence, but also its nature

and extent.

Cases:

Lim v. CA, GR 102784, February 28, 1996

There are some provisions of the law which require

certain formalities for particular contracts. The first

is when the form is required for the validity of the

contract; the second is when it is required to make

the contract effective as against the third parties

such as those mentioned in Articles 1357 and 1358;

and the third is when the form is required for the

purpose of proving the existence of the contract,

such as those provided in the Statute of Frauds in

Article 1403. A contract of agency to sell on

commission basis does not belong to any of these

three categories, hence, it is valid and enforceable in

whatever form it may be entered into.

Equitable PCI Bank v. Ku, GR 142950, March

26, 2001

The Court is not wholly convinced by petitioners

argument. The Affidavit of Joel Rosales states that

he is not the constituted agent of Curato Divina

Mabilog Nedo Magturo Pagaduan Law Office. An

agency may be express but it may also be implied

from the acts of the principal, from his silence, or

lack of action, or his failure to repudiate the agency,

knowing that another person is acting on his behalf

without authority. Likewise, acceptance by the

agent may also be express, although it may also be

implied from his acts which carry out the agency, or


from his silence or inaction according to the

circumstances. In this case, Joel Rosales averred

that [o]n occasions when I receive mail matters for

said law office, it is only to help them receive their

letters promptly, implying that counsel had allowed

the practice of Rosales receiving mail in behalf of the

former. There is no showing that counsel had

objected to this practice or took steps to put a stop

to it. The facts are, therefore, inadequate for the

Court to make a ruling in petitioners favor.

Conde v. CA, L-40242, December 15, 1982

Of significance, however, is the fact that from the

execution of the repurchase document in 1945,

possession, which heretofore had been with the

Alteras, has been in the hands of petitioner as

stipulated therein. Land taxes have also been paid

for by petitioner yearly from 1947 to 1969 inclusive

(Exhibits "D" to "D-15"; and "E"). If, as opined by

both the Court a quo and the Appellate Court,

petitioner had done nothing to formalize her

repurchase, by the same token, neither have the

vendees-a-retro done anything to clear their title of

the encumbrance therein regarding petitioner's right

to repurchase. No new agreement was entered into

by the parties as stipulated in the deed of pacto de

retro, if the vendors a retro failed to exercise their

right of redemption after ten years. If, as alleged,

petitioner exerted no effort to procure the signature

of Pio Altera after he had recovered from his illness,

neither did the Alteras repudiate the deed that their

son-in-law had signed. Thus, an implied agency must

be held to have been created from their silence or

lack of action, or their failure to repudiate the

agency.

Possession of the lot in dispute having been

adversely and uninterruptedly with petitioner from

1945 when the document of repurchase was

executed, to 1969, when she instituted this action,

or for 24 years, the Alteras must be deemed to have

incurred in laches. That petitioner merely took

advantage of the abandonment of the land by the

Alteras due to the separation of said spouses, and

that petitioner's possession was in the concept of a

tenant, remain bare assertions without proof.

Spouses Fernando v. Continental Airlines,

Inc., supra.

Prior to Spouses Viloria’s filing of a complaint against

it, CAI never refuted that it gave Holiday Travel the

power and authority to conclude contracts of

carriage on its behalf. As clearly extant from the

records, CAI recognized the validity of the contracts

of carriage that Holiday Travel entered into with

Spouses Viloria and considered itself bound with

Spouses Viloria by the terms and conditions thereof;

and this constitutes an unequivocal testament to

Holiday Travel’s authority to act as its agent. This

Court cannot therefore allow CAI to take an

altogether different position and deny that Holiday

Travel is its agent without condoning or giving

imprimatur to whatever damage or prejudice that

may result from such denial or retraction to Spouses

Viloria, who relied on good faith on CAI’s acts in

recognition of Holiday Travel’s authority. Estoppel is

primarily based on the doctrine of good faith and the

avoidance of harm that will befall an innocent party

due to its injurious reliance, the failure to apply it in

this case would result in gross travesty of justice.

Estoppel bars CAI from making such denial.

As categorically provided under Article 1869 of the

Civil Code, “*a+gency may be express, or implied

from the acts of the principal, from his silence or lack

of action, or his failure to repudiate the agency,

knowing that another person is acting on his behalf

without authority.”

Considering that the fundamental hallmarks of an

agency are present, this Court finds it rather peculiar

that the CA had branded the contractual relationship

between CAI and Holiday Travel as one of sale. The

distinctions between a sale and an agency are not

difficult to discern and this Court, as early as 1970,

had already formulated the guidelines that would

aid in differentiating the two (2) contracts.

Article 1870: Form of acceptance of agency

Acceptance by the agent may also be

express, or implied from his acts which


carry out the agency, or from his silence or

inaction according to the circumstances.

Article 1871: Acceptance of agency between

persons present

Between persons who are present, the

acceptance of the agency may also be

implied if the principal delivers his power of

attorney to the agent and the latter

receives it without any objection.

As regards implied acceptance by the agent, the law

distinguishes between cases where persons are

present, and where persons are absent. Agency is

impliedly accepted if the agent receives a power of

attorney from the principal himself personally

without any objection, both being present.

What is a power of attorney? It is a written

authorization to an agent to perform specified acts

in behalf of his principal which acts, when

performed, shall have binding effect on the principal.

A power of attorney is strictly construed and strictly

pursued. Under this rule, the instrument will be held

to grant only those powers which are specified and

defined, and the agent may neither go beyond nor

deviate from the power of attorney. In other words,

the act done must be legally identical with that

authorized to be done. Moreover, where the mode

of exercising a power is prescribed in the instrument

in which it is created, there must be a strict

compliance therewith in every substantial particular.

This is but in accord with the disinclination of courts

to enlarge the authority granted

Article 1872: Acceptance of agency between

persons absent

Between persons who are absent, the

acceptance of the agency cannot be implied

from the silence of the agent, except:

1. When the principal transmits his power

of attorney to the agent, who receives

it without any objection;

2. When the principal entrusts to him by

letter or telegram a power of attorney

with respect to the business in which

he is habitually engaged as an agent,

and he did not reply to the letter or

telegram.

If both the principal and the agent are absent,

acceptance by the agent is not implied from his

silence or inaction. Since the agent is not bound to

accept the agency, he can simply ignore the offer.

In No. 1 as distinguished from No. 2, just because the

offeree did not reply does not mean that the agency

has been accepted. For if this would be equivalent

to implied acceptance, there would be no difference

between the two. A good instance of implied

acceptance in No. 1 would be when the offeree

writes a letter acknowledging the receipt of the

offer, but offers no objection to the agency. If he

does not write such a letter, it may be because he

simply wants to ignore the offer, or he may have

forgotten about it, or he is still undecided; hence, in

this latter case, it would be unfair to presume

acceptance. Another instance of implied acceptance

is when the silent offeree begins to act under the

authority conferred upon him. Indeed, acceptance

can be implied from the acts which carry out the

agency.

Distinctions:


The principal personally

delivers the power of

attorney to the agent.

The principal transmits

the power of attorney to

the agent.

Article 1873: Communication of existence of agency

If a person specially informs another or

states by public advertisement that he has

given a power of attorney to a third person,

the latter thereby becomes a duly

authorized agent, in the former case with

respect to the person who received the


special information, and in the latter case

with regard to any person.

The power shall continue to be in full force

until the notice is rescinded in the same

manner in which it was given.

There are 2 ways of giving notice of agency with

different effects:

1. If by special information, the person

appointed as agent is considered such with

respect to the person to whom it was given;

2. If by public advertisement, the agent is

considered as such with regard to any

person. Public advertisement may be made

in any form.

According to Justice J.B.L. Reyes, to forestall fraud,

another paragraph must be added to said article. It

reads: “But revocation made in any manner shall be

effective against all persons having actual knowledge

thereof.”

The power of attorney must be revoked in the same

manner in which it was given. If the agency has

been entrusted for the purpose of contradicting with

specified persons, its revocation shall not prejudice

the latter if they were not given notice thereof.

Kinds of estoppel to deny agency:

1. Estoppel of agent: One professing to act as

agent for another may be estopped to deny

his agency both as against his asserted

principal and the third persons interested in

the transaction in which he engaged.

2. Estoppel of principal, discussed in Article

1911:

3. Estoppel of third persons: A third person,

having dealt with one as an agent may be

estopped to deny the agency as against the

principal, agent, or third persons in interest.

He will not, however, be estopped where

he has withdrawn from the contract made

with the unauthorized agent before

receiving any benefits thereunder.

4. Estoppel of the government: The

government is neither estopped by the

mistake or error on the part of its agents.

But, it may be estopped through affirmative

acts of its officers acting within the scope of

their authority.

Distinctions:

Agency by estoppel Implied Agency

The “agent” is not a true

agent; hence, he has no

rights as such.

The agent is a true agent

with rights and duties of

an agent.

If the estoppel is caused

by the principal, he is

liable but only if the

third person acted on

the misrepresentation.

The principal is always

liable.

If the estoppel is caused

by the agent, it is only

the agent who is liable,

never the alleged

principal.

The agent is never

personally liable.

Cases:

Naguiat v. CA, GR 118375, October 3, 2003

Naguiat questions the admissibility of the various

written representations made by Ruebenfeldt on the

ground that they could not bind her following the res

inter alia acta alteri nocere non debet rule. The

Court of Appeals rejected the argument, holding that

since Ruebenfeldt was an authorized representative

or agent of Naguiat the situation falls under a

recognized exception to the rule. Still, Naguiat

insists that Ruebenfeldt was not her agent.

Suffice to say, however, the existence of an agency

relationship between Naguiat and Ruebenfeldt is

supported by ample evidence. As correctly pointed

out by the Court of Appeals, Ruebenfeldt was not a

stranger or an unauthorized person. Naguiat

instructed Ruebenfeldt to withhold from Queao the

checks she issued or indorsed to Queao, pending

delivery by the latter of additional collateral.


Ruebenfeldt served as agent of Naguiat on the loan

application of Queaos friend, Marilou Farralese, and

it was in connection with that transaction that

Queao came to know Naguiat. It was also

Ruebenfeldt who accompanied Queao in her

meeting with Naguiat and on that occasion, on her

own and without Queao asking for it, Reubenfeldt

actually drew a check for the sum of P220,000.00

payable to Naguiat, to cover for Queaos alleged

liability to Naguiat under the loan agreement.

The Court of Appeals recognized the existence of an

agency by estoppel citing Article 1873 of the Civil

Code. Apparently, it considered that at the very

least, as a consequence of the interaction between

Naguiat and Ruebenfeldt, Queao got the impression

that Ruebenfeldt was the agent of Naguiat, but

Naguiat did nothing to correct Queao’s impression.

In that situation, the rule is clear. One who clothes

another with apparent authority as his agent, and

holds him out to the public as such, cannot be

permitted to deny the authority of such person to

act as his agent, to the prejudice of innocent third

parties dealing with such person in good faith, and in

the honest belief that he is what he appears to be.

The Court of Appeals is correct in invoking the said

rule on agency by estoppel.

Yun Kwan Byung v. PAGCOR, GR 163553,

December 11, 2009

Petitioner alleges that there is an implied agency.

Alternatively, petitioner claims that even assuming

that no actual agency existed between PAGCOR and

ABS Corporation, there is still an agency by estoppel

based on the acts and conduct of PAGCOR showing

apparent authority in favor of ABS Corporation.

Petitioner states that one factor which distinguishes

agency from other legal precepts is control and the

following undisputed facts show a relationship of

implied agency:

1. Three floors of the Grand Boulevard Hotel

were leased to PAGCOR for conducting

gambling operations;

2. Of the three floors, PAGCOR allowed ABS

Corporation to use one whole floor for

foreign exchange gambling, conducted by

PAGCOR dealers using PAGCOR facilities,

operated by PAGCOR employees and using

PAGCOR chips bearing the PAGCOR logo;

3. PAGCOR controlled the release, withdrawal

and return of all the gambling chips given to

ABS Corporation in that part of the casino

and at the end of the day, PAGCOR

conducted an inventory of the gambling

chips;

4. ABS Corporation accounted for all gambling

chips with the COA, the official auditor of

PAGCOR;

5. PAGCOR enforced, through its own

manager, all the rules and regulations on

the operation of the gambling pit used by

ABS Corporation.

Petitioner’s argument is clearly misplaced. The basis

for agency is representation, that is, the agent acts

for and on behalf of the principal on matters within

the scope of his authority and said acts have the

same legal effect as if they were personally executed

by the principal. On the part of the principal, there

must be an actual intention to appoint or an

intention naturally inferable from his words or

actions, while on the part of the agent, there must

be an intention to accept the appointment and act

on it. Absent such mutual intent, there is generally

no agency.

There is no implied agency in this case because

PAGCOR did not hold out to the public as the

principal of ABS Corporation. PAGCORs actions did

not mislead the public into believing that an agency

can be implied from the arrangement with the

junket operators, nor did it hold out ABS Corporation

with any apparent authority to represent it in any

capacity. The Junket Agreement was merely a

contract of lease of facilities and services.

The players brought in by ABS Corporation were

covered by a different set of rules in acquiring and

encashing chips. The players used a different kind of

chip than what was used in the regular gaming areas

of PAGCOR, and that such junket players played

specifically only in the third floor area and did not


mingle with the regular patrons of PAGCOR.

Furthermore, PAGCOR, in posting notices stating

that the players are playing under special rules,

exercised the necessary precaution to warn the

gaming public that no agency relationship exists.

For the second assigned error, petitioner claims that

the intention of the parties cannot apply to him as

he is not a party to the contract.

We disagree. The Court of Appeals correctly used

the intent of the contracting parties in determining

whether an agency by estoppel existed in this case.

An agency by estoppel, which is similar to the

doctrine of apparent authority requires proof of

reliance upon the representations, and that, in turn,

needs proof that the representations predated the

action taken in reliance.

There can be no apparent authority of an agent

without acts or conduct on the part of the principal

and such acts or conduct of the principal must have

been known and relied upon in good faith and as a

result of the exercise of reasonable prudence by a

third person as claimant, and such must have

produced a change of position to its detriment.

Such proof is lacking in this case.

In the entire duration that petitioner played in

Casino Filipino, he was dealing only with ABS

Corporation, and availing of the privileges extended

only to players brought in by ABS Corporation. The

facts that he enjoyed special treatment upon his

arrival in Manila and special accommodations in

Grand Boulevard Hotel, and that he was playing in

special gaming rooms are all indications that

petitioner cannot claim good faith that he believed

he was dealing with PAGCOR. Petitioner cannot be

considered as an innocent third party and he cannot

claim entitlement to equitable relief as well.

For his third and final assigned error, petitioner

asserts that PAGCOR ratified the acts of ABS

Corporation.

The trial court has declared, and we affirm, that the

Junket Agreement is void. A void or inexistent

contract is one which has no force and effect from

the very beginning. Hence, it is as if it has never been

entered into and cannot be validated either by the

passage of time or by ratification. Article 1409 of the

Civil Code provides that contracts expressly

prohibited or declared void by law, such as gambling

contracts, cannot be ratified.

Article 1874: Sale of land through agent;

requirement

When a sale of a piece of land or any

interest therein is through an agent, the

authority of the latter shall be in writing;

otherwise, the sale shall be void.

Under this article, the sale of a piece of land or any

interest thereon, like usufruct, mortgage, etc.,

through an agent is void unless the authority of the

agent is in writing. Hence, a letter containing the

authority to sell is held sufficient.

Does the phrase “any interest therein” include

usufruct, easement and buildings? Strictly speaking,

it does not. But, if this would be the construction, it

would follow that in an agency to sell a building, it

does not have to be in writing.

Effect if the article is violated: The sale is void, not

merely unenforceable. Therefore, the principal

cannot technically ratify. If he does so, there should

be no retroactive effect.

More so, under Article 1403(2)(e), an oral agreement

for the sale of real property or of an interest is

unenforceable even if there is no agent.

Cases:

Pahud v. CA, GR 160346, August 25, 2009

The focal issue to be resolved is the status of the sale

of the subject property by Eufemia and her co-heirs

to the Pahuds. We find the transaction to be valid

and enforceable.

Also, under Article 1878, a special power of attorney

is necessary for an agent to enter into a contract by

which the ownership of an immovable property is

transmitted or acquired, either gratuitously or for a


valuable consideration. Such stringent statutory

requirement has been explained in Cosmic Lumber

Corporation v. Court of Appeals:

“*T+he authority of an agent to execute a

contract [of] sale of real estate must be

conferred in writing and must give him

specific authority, either to conduct the

general business of the principal or to

execute a binding contract containing terms

and conditions which are in the contract he

did execute. A special power of attorney is

necessary to enter into any contract by

which the ownership of an immovable is

transmitted or acquired either gratuitously

or for a valuable consideration. The express

mandate required by law to enable an

appointee of an agency (couched) in

general terms to sell must be one that

expressly mentions a sale or that includes a

sale as a necessary ingredient of the act

mentioned. For the principal to confer the

right upon an agent to sell real estate, a

power of attorney must so express the

powers of the agent in clear and

unmistakable language. When there is any

reasonable doubt that the language so used

conveys such power, no such construction

shall be given the document.”

In several cases, we have repeatedly held that the

absence of a written authority to sell a piece of land

is, ipso jure, void, precisely to protect the interest of

an unsuspecting owner from being prejudiced by the

unwarranted act of another.

Based on the foregoing, it is not difficult to conclude,

in principle, that the sale made by Eufemia, Isabelita

and her two brothers to the Pahuds sometime in

1992 should be valid only with respect to the 4/8

portion of the subject property. The sale with

respect to the 3/8 portion, representing the shares

of Zenaida, Milagros, and Minerva, is void because

Eufemia could not dispose of the interest of her co-

heirs in the said lot absent any written authority

from the latter, as explicitly required by law. This

was, in fact, the ruling of the CA.

Still, in their petition, the Pahuds argue that the sale

with respect to the 3/8 portion of the land should

have been deemed ratified when the three co-heirs,

namely: Milagros, Minerva, and Zenaida, executed

their respective special power of attorneys

authorizing Eufemia to represent them in the sale of

their shares in the subject property.

While the sale with respect to the 3/8 portion is void

by express provision of law and not susceptible to

ratification, we nevertheless uphold its validity on

the basis of the common law principle of estoppel.

More so, it is a basic rule in the law of agency that a

principal is subject to liability for loss caused to

another by the latter’s reliance upon a deceitful

representation by an agent in the course of his

employment (1) if the representation is authorized;

(2) if it is within the implied authority of the agent to

make for the principal; or (3) if it is apparently

authorized, regardless of whether the agent was

authorized by him or not to make the

representation.

By their continued silence, Zenaida, Milagros and

Minerva have caused the Pahuds to believe that they

have indeed clothed Eufemia with the authority to

transact on their behalf. Clearly, the three co-heirs

are now estopped from impugning the validity of the

sale from assailing the authority of Eufemia to enter

into such transaction.

AF Realty & Development, Inc. v. Dieselman

Freight Services Co., GR 111448, January 16,

2002

Involved in this case is a sale of land through an

agent. Thus, the law on agency under the Civil Code

takes precedence. This is well stressed in Yao Ka Sin

Trading vs. Court of Appeals:

“Since a corporation, such as the private

respondent, can act only through its officers

and agents, all acts within the powers of

said corporation may be performed by

agents of its selection; and, except so far as

limitations or restrictions may be imposed


by special charter, by-law, or statutory

provisions, the same general principles of

law which govern the relation of agency

for a natural person govern the officer or

agent of a corporation, of whatever status

or rank, in respect to his power to act for

the corporation; and agents when once

appointed, or members acting in their

stead, are subject to the same rules,

liabilities, and incapacities as are agents of

individuals and private persons. (Emphasis

supplied).

Pertinently, Article 1874 of the same Code provides:

ART. 1874. When a sale of piece of land or

any interest therein is through an agent,

the authority of the latter shall be in

writing; otherwise, the sale shall be void.

(Emphasis supplied)

Considering that respondent Cruz, Jr., Cristeta

Polintan and Felicisima Ranullo were not authorized

by respondent Dieselman to sell its lot, the supposed

contract is void. Being a void contract, it is not

susceptible of ratification by clear mandate of Article

1409 of the Civil Code.

Upon the other hand, the validity of the sale of the

subject lot to respondent Midas is unquestionable.

As aptly noted by the Court of Appeals, the sale was

authorized by a board resolution of respondent

Dieselman dated May 27, 1988.

Cosmic Lumber Corporation v. CA, GR

114311,, November 29, 1996

When the sale of a piece of land or any interest

thereon is through an agent, the authority of the

latter shall be in writing otherwise, the sale shall be

void. Thus the authority of an agent to execute a

contract for the sale of real estate must be conferred

in writing and must give him specific authority,

either to conduct the general business of the

principal or to execute a binding contract containing

terms and conditions which are in the contract he

did not execute. A special power of attorney is

necessary to enter into any contract by which the

ownership of an immovable is transmitted or

acquired either gratuitously or for a valuable

consideration. The express mandate required by law

to enable an appointee of an agency (couched) in

general terms to sell must be one that expressly

mentions a sale or that includes a sale as a necessary

ingredient of the act mentioned. For the principal to

confer the right upon an agent to sell real estate, a

power of attorney must so express the powers of the

agent in clear and unmistakable language. When

there is any reasonable doubt that the language so

used conveys such power, no such construction shall

be given the document.

The authority granted Villamil-Estrada under the

special power of attorney was explicit and

exclusionary; for her to institute any action in court

to eject all persons found on Lots Nos. 9127 and 443

so that petitioner could take material possession

thereof, and for this purpose, to appear at the pre-

trial and enter into any stipulation of facts and/or

compromise agreement but only insofar as this was

protective of the rights and interests of petitioner in

the property. Nowhere in this authorization was

Villamil-Estrada granted expressly or impliedly any

power to sell the subject property nor a portion

thereof. Neither can a conferment of the power to

sell be validly inferred from the specific authority "to

enter into a compromise agreement" because of the

explicit limitation fixed by the grantor that the

compromise entered into shall be "so far as it shall

protect the rights and interest of the corporation in

the aforementioned lots." In the context of the

specific investiture of powers to Villamil-Estrada,

alienation by sale of an immovable certainly cannot

be deemed protective of the right of petitioner to

physically possess the same, more so when the land

was being sold for a price of P80.00 per square

meter, very much less than its assessed value of

P250.00 per square meter, and considering further

that petitioner never received the proceeds of the

sale. It is therefore clear that by selling to

respondent Perez a portion of petitioner's land

through a compromise agreement, Villamil-Estrada

acted without or in obvious authority. The sale ipso


jure is consequently void. So is the compromise

agreement. This being the case, the judgment based

thereon is necessarily void. Antipodal to the opinion

expressed by respondent court in resolving

petitioner's motion for reconsideration, the nullity of

the settlement between Villamil-Estrada and Perez

impaired the jurisdiction of the trial court to render

its decision based on the compromise agreement.

This ruling was adopted in Jacinto v. Montesa, by Mr.

Justice J.B.L. Reyes, a much-respected authority on

civil law, where the Court declared that a judgment

based on a compromise entered into by an attorney

without specific authority from the client is void.

Such judgment may be impugned and its execution

restrained in any proceeding by the party against

whom it is sought to be enforced. The Court also

observed that a defendant against whom a judgment

based on a compromise is sought to be enforced

may file a petition for certiorari to quash the

execution. He could not move to have the

compromise set aside and then appeal from the

order of denial since he was not a party to the

compromise. Thus it would appear that the obiter of

the appellate court that the alleged nullity of the

compromise agreement should be as a defense

against its enforcement is not legally feasible.

Petitioner could not be in a position to question the

compromise agreement in the action to revive the

compromise judgment since it was never privy to

such agreement. Villamil-Estrada who signed the

compromise agreement may have been the

attorney-in-fact but she could not legally bind

petitioner thereto as she was not entrusted with a

special authority to sell the land, as required in Art.

1878, par. (5), of the Civil Code.

Spouses Bautista v. Spouses Jalandoni, GR

171464, November 27, 2013

Before resolving the issue on whether Spouses

Bautista were purchasers in good faith for value, the

Court shall first discuss the validity of the sale.

Likewise, Article 1878 paragraph 5 of the Civil Code

specifically mandates that the authority of the agent

to sell a real property must be conferred in writing,

to wit:

Art. 1878. Special powers of attorney are

necessary in the following cases:

5. To enter into any contract by which the

ownership of an immovable is transmitted

or acquired either gratuitously or for a

valuable consideration;

The foregoing provisions explicitly require a written

authority when the sale of a piece of land is through

an agent, whether the sale is gratuitously or for a

valuable consideration. Absent such authority in

writing, the sale is null and void.

In the case at bar, it is undisputed that the sale of

the subject lots to Spouses Bautista was void. Based

on the records, Nasino had no written authority

from Spouses Jalandoni to sell the subject lots. The

testimony of Eliseo that Nasino was empowered by a

special power of attorney to sell the subject lots was

bereft of merit as the alleged special power attorney

was neither presented in court nor was it referred to

in the deeds of absolute sale. Bare allegations,

unsubstantiated by evidence, are not equivalent to

proof under the Rules of Court.

Article 1875: Agency presumed to be with

compensation

Agency is presumed to be for a

compensation, unless there is proof to the

contrary.

The principal must pay the agent the compensation

agreed upon, or the reasonable value of the agent’s

services if no compensation was specified. This

presupposes, however, that the agent has complied

with his obligation as such to the principal.

Under the old Civil Code, agency was presumed to

be gratuitous. In the present Code, agency is

presumed to be for compensation.

In the absence of stipulation, the agent is entitled to

compensation only after he has completely or


substantially completed his obligation as an agent.

The compensation may be contingent or dependent

upon the realization of profit for the principal. This

is so in case there is a stipulation to this effect.

Cases:

Oriental Petroleum and Minerals

Corporation v. Tuscan Realty, Inc., GR

195481, July 10, 2013

The CA invoked the principle of “procuring cause”

(Prats doctrine) in ordering the payment of broker’s

commission to Tuscan Realty. The term “procuring

cause” refers to a cause which starts a series of

events and results, without break in their continuity,

in the accomplishment of a broker’s prime objective

of producing a purchaser who is ready, willing, and

able to buy on the owner’s terms. This is similar to

the concept of proximate cause in Torts, without

which the injury would not have occurred. To be

regarded as the procuring cause of a sale, a broker’s

efforts must have been the foundation of the

negotiations which subsequently resulted in a sale.

Here, it was Tuscan Realty that introduced Gateway

to Oriental Petroleum as an interested buyer of its

condominium units. Oriental Petroleum’s own

Executive Vice President attested to this, saying that

they learned of Gateway’s interest in the properties

from Mr. Capotosto of Tuscan Realty.

The evidence shows that on August 14, 1996, Tuscan

Realty submitted an initial list of prospective buyers

with contact details. It twice updated this list with

Gateway always on top of the lists. Clearly then, it

was on account of Tuscan Realty’s effort that

Oriental Petroleum got connected to Gateway, the

prospective buyer, resulting in the latter two

entering into a contract to sell involving the two

condominium units. Although Gateway turned

around and sold the condominium units to Ancheta,

the fact that such ultimate sale could not have

happened without Gateway’s indispensable

intervention as intermediate buyer. Applying the

principle of procuring cause, therefore, Tuscan

Realty should be given its broker’s commission.

Oriental Petroleum of course claims that Gateway

was not a ready, willing, and able purchaser and that

it in fact assigned its right to Ancheta who became

the ultimate buyer and that, moreover, it was not

Tuscan Realty that introduced Ancheta to Oriental

Petroleum. But there is no question that the

contract to sell that Oriental Petroleum concluded

with Gateway was a valid and binding contract to

sell, which precluded Oriental Petroleum from

peddling the properties to others. Indeed, Oriental

Petroleum executed a deed of absolute sale in

Ancheta’s favor by virtue of Gateway’s assignment

to him of its rights under the contract to sell.

Consequently, it cannot be said that Oriental

Petroleum found a direct buyer in Ancheta without

the intermediate contract to sell in favor of

Gateway, Tuscan Realty’s proposed buyer.

Oriental Petroleum further points out that Tuscan

Realty took no part in its negotiation with Gateway.

That may be the case but the reason why Tuscan

Realty refrained from doing so was because of

Oriental Petroleum’s advice that it would henceforth

directly negotiate the sale with Gateway. Besides,

assuming that the advice amounted to a revocation

of Tuscan Realty’s authority to sell, the Court has

always recognized the broker’s right to his

commission, although the owner revoked his

authority and directly negotiated with the buyer

whom he met through the broker’s efforts. It would

be unfair not to give the broker the reward he had

earned for helping the owner find a buyer who

would pay the price.

Lim v. Saban, GR 163720, December 16,

2004

The Court affirms the appellate courts finding that

the agency was not revoked since Ybaez requested

that Lim make stop payment orders for the checks

payable to Saban only after the consummation of

the sale on March 10, 1994. At that time, Saban had

already performed his obligation as Ybaezs agent

when, through his (Sabans) efforts, Ybaez executed

the Deed of Absolute Sale of the lot with Lim and the

Spouses Lim.


To deprive Saban of his commission subsequent to

the sale which was consummated through his efforts

would be a breach of his contract of agency with

Ybaez which expressly states that Saban would be

entitled to any excess in the purchase price after

deducting the P200,000.00 due to Ybaez and the

transfer taxes and other incidental expenses of the

sale.

In Macondray & Co. v. Sellner, the Court recognized

the right of a broker to his commission for finding a

suitable buyer for the sellers property even though

the seller himself consummated the sale with the

buyer. The Court held that it would be in the height

of injustice to permit the principal to terminate the

contract of agency to the prejudice of the broker

when he had already reaped the benefits of the

broker’s efforts.

In Infante v. Cunanan, et al., the Court upheld the

right of the brokers to their commissions although

the seller revoked their authority to act in his behalf

after they had found a buyer for his properties and

negotiated the sale directly with the buyer whom he

met through the broker’s efforts. The Court ruled

that the seller’s withdrawal in bad faith of the

broker’s authority cannot unjustly deprive the

brokers of their commissions as the sellers duly

constituted agents.

The pronouncements of the Court in the aforecited

cases are applicable to the present case, especially

considering that Saban had completely performed

his obligations under his contract of agency with

Ybaez by finding a suitable buyer to preparing the

Deed of Absolute Sale between Ybaez and Lim and

her co-vendees. Moreover, the contract of agency

very clearly states that Saban is entitled to the

excess of the mark-up of the price of the lot after

deducting Ybaez’ share of P200,000.00 and the taxes

and other incidental expenses of the sale.

However, the Court does not agree with the

appellate courts pronouncement that Sabans agency

was one coupled with an interest. Under Article

1927 of the Civil Code, an agency cannot be revoked

if a bilateral contract depends upon it, or if it is the

means of fulfilling an obligation already contracted,

or if a partner is appointed manager of a partnership

in the contract of partnership and his removal from

the management is unjustifiable. Stated differently,

an agency is deemed as one coupled with an interest

where it is established for the mutual benefit of the

principal and of the agent, or for the interest of the

principal and of third persons, and it cannot be

revoked by the principal so long as the interest of

the agent or of a third person subsists. In an agency

coupled with an interest, the agents interest must be

in the subject matter of the power conferred and not

merely an interest in the exercise of the power

because it entitles him to compensation. When an

agent’s interest is confined to earning his agreed

compensation, the agency is not one coupled with

an interest, since an agents interest in obtaining his

compensation as such agent is an ordinary incident

of the agency relationship.

Saban’s right to receive compensation for

negotiating as broker for Ybaez arises from the

Agency Agreement between them. Lim is not a party

to the contract. However, the record reveals that she

had knowledge of the fact that Ybaez set the price of

the lot at P200,000.00 and that the P600,000.00the

price agreed upon by her and Sabanwas more than

the amount set by Ybaez because it included the

amount for payment of taxes and for Sabans

commission as broker for Ybaez.

Article 1876: General and special agencies

An agency is either general or special. The

former comprises all the business of the

principal. The latter, one or more specific

transactions.

Distinctions:

Universal

agent

General agent Special or

particular

agent

One authorized

to do all acts

that the

principal may

One authorized

to transact all

the business of

his principal, or

One authorized

to act in one or

more specific

transactions or


personally do,

and which he

can lawfully

delegate to

another the

power of doing.

all business of a

particular kind

or in a

particular

place, or to do

all acts

connected with

a particular

trade, business

or

employment.

to act upon a

particular

occasion.

The distinction here depends on the extent of the

business covered. Hence, the more the special the

power is, the more specific it is (Paras).

Attorney-in-fact Attorney at law

One who is given

authority by his principal

to do a particular act not

of a legal character.

One whose business is to

represent clients in legal

proceedings.

General agent Special/particular agent

Usually authorized to do

all acts connected with

the business or

employment in which

the principal is engaged.

Authorized to do only

one or more specific acts

in pursuance of a

particular instructions or

with restrictions

necessarily implied form

the act to be done.

Authorized to conduct a

series of transactions

over time involving

continuity of service.

Authorized to conduct a

single transaction or a

series of transactions not

involving continuity of

service and covering a

relatively limited period

of time.

He may bind his principal

by any act within the

scope of his authority

although it may be

contrary to his special

instructions.

He cannot bind his

principal in a manner

beyond or outside the

specific acts which he is

authorized to perform

on behalf of the

principal.

A general agency is in its

general nature,

continuing and

unrestricted by

limitations other than

those which confine the

authority within the

bounds of what is usual,

proper, and necessary

under like

circumstances; hence, if

there are limitations, the

principal must disclose

them.

A special agency is in its

nature temporary and

naturally suggests

limitations of power

which third persons

must inform themselves.

The apparent authority

created in a general

agent does not

terminate by the mere

revocation of his

authority without notice

to the third party.

The duty imposed upon

the third party to inquire

makes termination of

the relationship as

between principal and

agent effective as to

such third party unless

agency has been

entrusted for the

purpose of contracting

with such third party.

Article 1877: Agency couched in general terms

An agency couched in general terms

comprises only acts of administration, even

if the principal should state that he

withholds no power or that the agent may

execute such acts as he may consider

appropriate, or even though the agency

should authorize a general and unlimited

management.

According to the power or authority conferred, the

agency may be:

1. Couched in general terms; or,

2. Couched in specific terms.

The power of authority includes only acts of

administration and an express power is necessary to


perform any act of strict ownership, even if the

principal states that:

1. He withholds no power;

2. The agent may execute such acts as he may

consider appropriate; or,

3. He authorizes a general or unlimited

management.

What are acts of administration? Acts of

administration are those which do not imply the

authority to alienate for the exercise of which an

express power is necessary, such as entering into a

compromise, accepting or repudiating an

inheritance, or selling or mortgaging properties.

Article 1878: Necessity of special powers of

attorney; instances

Special powers of attorney are necessary in

the following cases:

1. To make such payments as are not

usually considered as acts of

administration;

2. To effect novations which put an end to

obligations already in existence at the

time the agency was constituted;

3. To compromise, to submit questions to

arbitration, to renounce the right to

appeal from judgment, to waive

objections to the venue of an action or

to abandon a prescription already

acquired;

4. To waive any obligation gratuitously;

5. To enter into any contract by which the

ownership of an immovable is

transmitted or acquired either

gratuitously or for a valuable

consideration;

6. To make gifts, except customary ones

for charity or those made to employees

in the business managed by the agent;

7. To loan or borrow money, unless the

latter act be urgent and indispensable

for the preservation of the things which

are under administration;

8. To lease any real property to another

person for more than a year;

9. To bind the principal to render some

service without compensation;

10. To bind the principal in a contract of

partnership;

11. To obligate the principal as a guarantor

or surety;

12. To create or convey real rights over

immovable property;

13. To accept or repudiate an inheritance;

14. To ratify or recognize obligations

contracted before the agency;

15. Any other act of strict dominion.

The 15 cases enumerated are general acts of strict

dominion or ownership. Hence, a special power of

attorney is necessary for their execution through an

agent.

According to Justice J.B.L. Reyes, the acts referred to

in this article can be reduced to 3:

1. Acts of strict dominion or ownership;

2. Gratuitous contracts;

3. Contracts where personal trust or

confidence is of the essence of the

agreement.

What is a special power of attorney? It refers to a

clear mandate, express or implied, specifically

authorizing the performance of the act, and must

therefore be distinguished from an agency couched

in general terms.

Powers of attorney are generally construed strictly

and courts will not infer or presume broad powers

from deeds which do not sufficiently include

property or subject under which the agent is to deal.

Hence, authority in the cases enumerated in this

Article must be couched in clear and unmistakable

language.

Should the SPA be notarized in order to be valid? A

power of attorney is valid although no notary public

intervened in its execution. However, a notarized

power of attorney carries the weight conferred upon

with respect to its due execution.


Scope of authority to purchase: Where an agent’s

power to purchase is general and unrestricted, he

has implied authority to do whatever is usual and

necessary in the exercise of such power. He may

determine the usual and necessary details of the

contract, agree upon the prices, modify or rescind

the contract of purchase, accept delivery for his

principal, give directions for the delivery of the

property purchased, and may borrow money to pay

for the care and preservation of the property

purchased; but he has no special power to settle a

contest between the principal and a third person as

to the ownership of the goods purchased, or to

agree to an account stated, or to do anything not

usual and necessary to the exercise of such

authority. However, where the agency is a special

one, or is restricted to purchases upon certain terms

and conditions, the agent has no authority to

purchase upon different terms and conditions from

those authorized or to modify or rescind a contract

of purchase made by the principal.

Cases:

Litonjua v. Fernandez, GR 148116, April 14,

2004

There is no documentary evidence on record that

the respondents-owners specifically authorized

respondent Fernandez to sell their properties to

another, including the petitioners. Article 1878 of

the New Civil Code provides that a special power of

attorney is necessary to enter into any contract by

which the ownership of an immovable is transmitted

or acquired either gratuitously or for a valuable

consideration, or to create or convey real rights over

immovable property, or for any other act of strict

dominion. Any sale of real property by one

purporting to be the agent of the registered owner

without any authority therefor in writing from the

said owner is null and void. The declarations of the

agent alone are generally insufficient to establish the

fact or extent of her authority. In this case, the only

evidence adduced by the petitioners to prove that

respondent Fernandez was authorized by the

respondents-owners is the testimony of petitioner

Antonio Litonjua that respondent Fernandez openly

represented herself to be the representative of the

respondents-owners, and that she promised to

present to the petitioners on December 8, 1996 a

written authority to sell the properties.

The petitioners cannot feign ignorance of

respondent Fernandez lack of authority to sell the

properties for the respondents-owners. It must be

stressed that the petitioners are noted businessmen

who ought to be very familiar with the intricacies of

business transactions, such as the sale of real

property.

The settled rule is that persons dealing with an

assumed agent are bound at their peril, and if they

would hold the principal liable, to ascertain not only

the fact of agency but also the nature and extent of

authority, and in case either is controverted, the

burden of proof is upon them to prove it. In this

case, respondent Fernandez specifically denied that

she was authorized by the respondents-owners to

sell the properties, both in her answer to the

complaint and when she testified. The Letter dated

January 16, 1996 relied upon by the petitioners was

signed by respondent Fernandez alone, without any

authority from the respondents-owners. There is no

evidence on record that the respondents-owners

ratified all the actuations of respondent Fernandez

in connection with her dealings with the petitioners.

As such, said letter is not binding on the respondents

as owners of the subject properties.

Patrimonio v. Gutierrez, supra.

As a general rule, a contract of agency may be oral.

However, it must be written when the law requires a

specific form, for example, in a sale of a piece of land

or any interest therein through an agent.

Article 1878 paragraph 7 of the Civil Code expressly

requires a special power of authority before an

agent can loan or borrow money in behalf of the

principal.

Article 1878 does not state that the authority be in

writing. As long as the mandate is express, such

authority may be either oral or written. We


unequivocably declared in Lim Pin v. Liao Tian, et al.,

that the requirement under Article 1878 of the Civil

Code refers to the nature of the authorization and

not to its form. Be that as it may, the authority must

be duly established by competent and convincing

evidence other than the self serving assertion of the

party claiming that such authority was verbally

given, thus:

“The requirements of a special power of

attorney in Article 1878 of the Civil Code

and of a special authority in Rule 138 of

the Rules of Court refer to the nature of

the authorization and not its form. The

requirements are met if there is a clear

mandate from the principal specifically

authorizing the performance of the act. As

early as 1906, this Court in Strong v.

Gutierrez-Repide (6 Phil. 680) stated

that such a mandate may be either oral or

written, the one vital thing being that it

shall be express. And more recently, We

stated that, if the special authority is not

written, then it must be duly established by

evidence:

x x x the Rules require, for attorneys to

compromise the litigation of their clients, a

special authority. And while the same does

not state that the special authority be in

writing the Court has every reason to

expect that, if not in writing, the same be

duly established by evidence other than

the self-serving assertion of counsel

himself that such authority was verbally

given him. (Home Insurance Company vs.

United States lines Company, et al., 21 SCRA

863; 866: Vicente vs. Geraldez, 52 SCRA

210; 225). (emphasis supplied).”

A review of the records reveals that Gutierrez did

not have any authority to borrow money in behalf of

the petitioner. Records do not show that the

petitioner executed any special power of attorney

(SPA) in favor of Gutierrez. In fact, the petitioner’s

testimony confirmed that he never authorized

Gutierrez (or anyone for that matter), whether

verbally or in writing, to borrow money in his behalf,

nor was he aware of any such transaction.

Marasigan however submits that the petitioner’s

acts of pre-signing the blank checks and releasing

them to Gutierrez suffice to establish that the

petitioner had authorized Gutierrez to fill them out

and contract the loan in his behalf.

Marasigan’s submission fails to persuade us.

In the absence of any authorization, Gutierrez could

not enter into a contract of loan in behalf of the

petitioner. As held in Yasuma v. Heirs of De Villa,

involving a loan contracted by de Villa secured by

real estate mortgages in the name of East Cordillera

Mining Corporation, in the absence of an SPA

conferring authority on de Villa, there is no basis to

hold the corporation liable, to wit:

“The power to borrow money is one of

those cases where corporate officers as

agents of the corporation need a special

power of attorney. In the case at bar, no

special power of attorney conferring

authority on de Villa was ever presented. x

x x There was no showing that respondent

corporation ever authorized de Villa to

obtain the loans on its behalf.”

“Therefore, on the first issue, the loan was

personal to de Villa. There was no basis to

hold the corporation liable since there was

no authority, express, implied or apparent,

given to de Villa to borrow money from

petitioner. Neither was there any

subsequent ratification of his act.”

“The liability arising from the loan was the

sole indebtedness of de Villa (or of his

estate after his death). (citations omitted;

emphasis supplied).”

In the absence of any showing of any agency

relations or special authority to act for and in behalf

of the petitioner, the loan agreement Gutierrez

entered into with Marasigan is null and void. Thus,


the petitioner is not bound by the parties’ loan

agreement.

Article 1879: Scope of authority to sell/mortgage

A special power to sell excludes the power

to mortgage; and a special power to

mortgage does not include the power to

sell.

The power to sell carries with it the:

1. Power to find a purchaser or to sell directly;

2. Power to deliver the property;

3. Power to make the usual representation

and warranty;

4. Power to execute the necessary transfer

documents;

5. Power to fix the terms of the sale, including

the time, place, mode of delivery, price of

the goods, and the mode of payment unless

there be set conditions stipulated by the

principal;

6. Power to sell only for cash;

7. Power to receive the price, unless he was

authorized only to solicit orders

The power to mortgage does not include the power:

1. To sell;

2. To execute a second mortgage;

3. To mortgage for the agent’s personal

benefit or for the benefit of any third

person, unless contrary has been clearly

indicated.

Power to revoke and right to revoke authority: The

principal always has the power to revoke but not

having the right to do so in those cases wherein he

has agreed not to exercise his power during a certain

period. The authority may be withdrawn at any

moment but the contract cannot be terminated in

violation of its terms, without making the principal

liable for damages.

Cases:

Hernandez v. Hernandez, GR 171165,

February 14, 2011

Demetrio’s special power of attorney granting the

powers to sell and/or mortgage reads in part:

1. To sell and/or mortgage in favor of any

person, corporation, partnership,

private banking or financial institution,

government or semi-government

banking or financial institution for such

price or amount and under such terms

and conditions as our aforesaid

attorney-in-fact may deem just and

proper, parcels of land more

particularly described as follows:

2. To carry out the authority aforestated,

to sign, execute and deliver such deeds,

instruments and other papers that may

be required or necessary;

3. To further attain the authority herein

given, to do and perform such acts and

things that may be necessary or

incidental to fully carry out the

authority herein granted.

It is in the context of this vesture of power that

Demetrio, representing his shared interest with

Carolina and Margarita, entered into the MOA with

PMRDC. It is likewise within this same context that

Demetrio later on entered into the DAC and

accordingly extinguished the previously subsisting

obligation of PMRDC to deliver the stipulated option

money and replaced said obligation with the delivery

instead of participation certificates in favor of

Demetrio.

The powers conferred on Demetrio were exclusive

only to selling and mortgaging the properties.

Between these two specific powers, the power to

sell is quite controversial because it is the sale

transaction which bears close resemblance to the

deal contemplated in the DAC. In fact, part of the

testimony of Atty. Danilo Javier, counsel for

respondent HIGC and head of its legal department at

the time, is that in the execution of the DAC,

respondents had relied on Demetrio’s special power


of attorney and also on his supposed agreement to

be paid in kind, i.e., in shares of stock, as

consideration for the assignment and conveyance of

the subject properties to the Asset Pool. What

petitioners miss, however, is that the power

conferred on Demetrio to sell for such price or

amount is broad enough to cover the exchange

contemplated in the DAC between the properties

and the corresponding corporate shares in PMRDC,

with the latter replacing the cash equivalent of the

option money initially agreed to be paid by PMRDC

under the MOA. Suffice it to say that price is

understood to mean the cost at which something is

obtained, or something which one ordinarily accepts

voluntarily in exchange for something else, or the

consideration given for the purchase of a thing.

Thus, it becomes clear that Demetrio’s special power

of attorney to sell is sufficient to enable him to make

a binding commitment under the DAC in behalf of

Carolina and Margarita. In particular, it does include

the authority to extinguish PMRDC’s obligation

under the MOA to deliver option money and agree

to a more flexible term by agreeing instead to

receive shares of stock in lieu thereof and in

consideration of the assignment and conveyance of

the properties to the Asset Pool. Indeed, the terms

of his special power of attorney allow much leeway

to accommodate not only the terms of the MOA but

also those of the subsequent agreement in the DAC

which, in this case, necessarily and consequently has

resulted in a novation of PMRDC’s integral

obligations.

Article 1880: Scope of special power to compromise

A special power to compromise does not

authorize submission to arbitration.

When an agent is specifically empowered to submit

a matter to arbitration, the arbitral award binds the

principal, provided the agent acted within the scope

of his authority. In a case decided by the US

Supreme Court, it was held that if the principal had

specifically designated who the arbitrators should

be, the agent has no authority to submit the

question to other arbitrators. However, when no

designation has been made by the principal and on

the contrary, the agent was authorized to submit the

controversy to anyone, it was held that the agent

could agree to an arrangement for the appointment

of additional arbitrators; moreover, it would be

permissible for the agent to agree that an award

could be validly made by less than the full number of

the arbitrators selected.

Article 1881: Authority of agent

The agent must act within the scope of his

authority. He may do such acts as may be

conducive to the accomplishment of the

purpose of the agency.

Article 1882: Limits to agent’s authority; exceptions

The limits of the agent’s authority shall not

be considered exceeded should it have

been performed in a manner more

advantageous to the principal than that

specified by him.

There are two very important principles of a true

agency:

1. The agent must act within the scope of his

authority; and,

2. The agent must act on behalf of his

principal.

Distinctions:

Authority Power

Cause Effect

It emanates from a

principal.

It is that given to the

agent.

Authority Instructions

Principal affects only

third persons, because if

the act is done outside

the scope of the agent’s

authority, the principal is

not bound.

Concern only the

principal and the agent.

Third persons must Third persons do not


therefore verify or

investigate the

authority.

have to investigate or

verify the instructions.

What is an authority of an agent? It is the power of

the agent to affect the legal relations of the principal

by acts done in accordance with the principal’s

manifestation of consent to him. This can be

express, implied, general, special, apparent or

ostensible, actual, or authority by necessity.

What is the doctrine of authority by necessity? By

virtue of the existence of an emergency, the

authority of an agent is correspondingly enlarged in

order to cope with the exigencies or the necessities

of the moment. Five conditions were laid down by

the US Supreme Court for “authority of agency by

necessity”:

1. The real existence of an emergency

2. Inability of the agent to communicate with

the principal

3. The exercise of the additional authority for

the principal’s own protection

4. The adoption of fairly reasonable means,

premises duly considered

5. The ceasing of the authority the moment

the emergency no longer demands the

same

Effects:

1. With authority

On principal’s behalf On agent’s behalf

Valid, which means that

the principal is bound

and the agent is not

personally liable unless

he bound himself.

Generally, it is not

binding on the principal;

agent and stranger are

the only parties, except

regarding things

belonging to the

principal

2. Without authority

On “principal’s” behalf On “agent’s” behalf

Unauthorized and Valid, whether or not the

unenforceable, but it

may be ratified, in which

case it may be validated

from the very beginning.

subject matter belongs

to the principal,

provided that at the time

delivery is to be made,

the “agent” can transfer

legally the ownership of

the thing. Otherwise, he

will be held liable for

breach of warranty

against eviction.

Liability of principal or agent for acts of agent

beyond his authority of power:

1. For the principal: As a general rule, the

principal is not bound by the acts of an

agent beyond his limited powers. There are

however four qualifications whereby the

principal is held liable:

a. Where his acts have contributed to

deceive a third person in good

faith;

b. Where the limitations upon the

power created by him could not

have been known by third persons;

c. Where the principal has placed in

the hands of the agent instruments

signed by him in blank; and,

d. Where the principal has ratified

the acts of the agent.

2. For the agent: The agent who exceeds his

authority is personally liable either to the

principal or to the third party in the absence

of ratification by the principal.

a. If the principal is liable to the third

party on the ground of apparent

authority, the agent’s liability is to

the principal.

b. If the principal is not liable to the

third person because the facts are

such not apparent authority is

present, then the agent’s liability is

to the third party.

c. If the agent personally assumes

responsibility for the particular


transaction, if the principal

defaults, he, in effect, also

becomes obligated as a co-

principal.

Article 1883: Acts of agent in his own name; right of

action of parties

If an agent acts in his own name, the

principal has no right of action against the

persons with whom the agent has

contracted; neither have such persons

against the principal.

In such case, the agent is the one directly

bound in favor of the person with whom he

has contracted, as if the transaction were

his own, except when the contract involves

things belonging to the principal.

The provisions of this article shall be

understood to be without prejudice to the

actions between the principal and agent.

This article speaks of a case where the agent was

authorized, but instead of acting on behalf of the

principal, he acts in his own behalf. Thus, Article

1883 does not apply if the agent was unauthorized

or he acts in excess of his authority.

Kinds of principal:

1. Disclosed principal. If at the time of the

transaction contracted by the agent, the

other party thereto has notice that the

agent is acting for a principal and of the

principal’s identity. This is the usual type of

agency.

2. Partially disclosed principal. If the other

party has notice that the agent is or may be

acting for a principal but has no notice of

the principal’s identity.

3. Undisclosed principal. If the other party has

no notice that the agent is acting for a

principal.

Should the agent act in his name when he should

have had acted on behalf of the principal, the agent

is the one directly liable to the person with whom he

had contracted as if the transaction were his own. In

effect, the resulting contractual relation is only

between the agent and the third person. Therefore,

the principal does not have a right of action against

the third person nor the third person against him.

What does the phrase “things belonging to the

principal” mean? This means that in the case of this

exception, the agent’s apparent representation

yields to the principal’s true representation; and

that, in reality and in effect, the contract must be

considered as entered into between the principal

and the third person and consequently, if the

obligations belong to the former, to him alone must

also belong the rights arising from the contract.

Cases:

Maritime Agencies & Services, Inc. v. CA, GR

77638, July 12, 1990

As regards the goods damaged or lost during

unloading, the charterer is liable therefor, having

assumed this activity under the charter party "free of

expense to the vessel." The difficulty is that

Transcontinental has not been impleaded in these

cases and so is beyond our jurisdiction. The liability

imposable upon it cannot be borne by Maritime

which, as a mere agent, is not answerable for injury

caused by its principal. It is a well-settled principle

that the agent shall be liable for the act or omission

of the principal only if the latter is undisclosed.

Union seeks to hold Maritime liable as ship agent on

the basis of the ruling of this Court in the case of

Switzerland General Insurance Co., Ltd. v. Ramirez.

However, we do not find that case is applicable

In that case, the charterer represented itself on the

face of the bill of lading as the carrier. The vessel

owner and the charterer did not stipulate in the

Charter party on their separate respective liabilities

for the cargo. The loss/damage to the cargo was

sustained while it was still on board or under the

custody of the vessel. As the charterer was itself the

carrier, it was made liable for the acts of the ship


captain who was responsible for the cargo while

under the custody of the vessel.

As for the charterer’s agent, the evidence showed

that it represented the vessel when it took charge of

the unloading of the cargo and issued cargo receipts

(or tally sheets) in its own name. Claims against the

vessel for the losses/damages sustained by that

cargo were also received and processed by it. As a

result, the charterer’s agent was also considered a

ship agent and so was held to be solidarily liable with

its principal.

The facts in the cases at bar are different. The

charterer did not represent itself as a carrier and

indeed assumed responsibility only for the unloading

of the cargo, i.e, after the goods were already

outside the custody of the vessel. In supervising the

unloading of the cargo and issuing Daily Operations

Report and Statement of Facts indicating and

describing the day-to-day discharge of the cargo,

Maritime acted in representation of the charterer

and not of the vessel. It thus cannot be considered a

ship agent. As a mere charterer’s agent, it cannot be

held solidarily liable with Transcontinental for the

losses/damages to the cargo outside the custody of

the vessel. Notably, Transcontinental was disclosed

as the charterer’s principal and there is no question

that Maritime acted within the scope of its authority.

Gozun v. Mercado, GR 167812, December

19, 2006

By the contract of agency a person binds himself to

render some service or to do something in


consent or authority of the latter. Contracts entered

into in the name of another person by one who has

been given no authority or legal representation or

who has acted beyond his powers are classified as

unauthorized contracts and are declared

unenforceable, unless they are ratified.

Generally, the agency may be oral, unless the law

requires a specific form. However, a special power

of attorney is necessary for an agent to, as in this

case, borrow money, unless it be urgent and

indispensable for the preservation of the things

which are under administration. Since nothing in

this case involves the preservation of things under

administration, a determination of whether Soriano

had the special authority to borrow money on behalf

of respondent is in order.

It bears noting that Lilian signed in the receipt in her

name alone, without indicating therein that she was

acting for and in behalf of respondent. She thus

bound herself in her personal capacity and not as an

agent of respondent or anyone for that matter.

It is a general rule in the law of agency

that, in order to bind the principal by a

mortgage on real property executed by an

agent, it must upon its face purport to be

made, signed and sealed in the name of the

principal, otherwise, it will bind the agent

only. It is not enough merely that the agent

was in fact authorized to make the

mortgage, if he has not acted in the name

of the principal. x x x (Emphasis and

underscoring supplied)

Rural Bank of Bombon, Inc. v. CA, GR 95703,

August 3, 1992

In view of this rule, Aquino's act of signing the Deed

of Real Estate Mortgage in his name alone as

mortgagor, without any indication that he was

signing for and in behalf of the property owner,

Ederlinda Gallardo, bound himself alone in his

personal capacity as a debtor of the petitioner Bank

and not as the agent or attorney-in-fact of Gallardo.

The Court of Appeals further observed:

“It will also be observed that the deed of

mortgage was executed on August 26, 1981

therein clearly stipulating that it was being

executed "as security for the payment of

certain loans, advances or other

accommodation obtained by the Mortgagor

from the Mortgagee in the total sum of

Three Hundred Fifty Thousand Pesos only

(P350,000.00)" although at the time no

such loan or advance had been obtained.


The promissory notes were dated August

31, September 23 and October 26, 1981

which were subsequent to the execution of

the deed of mortgage. The appellant is

correct in claiming that the defendant Rural

Bank should not have agreed to extend or

constitute the mortgage on the properties

of Gallardo who had no existing

indebtedness with it at the time.”

“Under the facts the defendant Rural Bank

appeared to have ignored the

representative capacity of Aquino and dealt

with him and his wife in their personal

capacities. Said appellee Rural Bank also did

not conduct an inquiry on whether the

subject loans were to benefit the interest of

the principal (plaintiff Gallardo) rather than

that of the agent although the deed of

mortgage was explicit that the loan was for

purpose of the bangus and sugpo

production of defendant Aquino.”

“In effect, with the execution of the

mortgage under the circumstances and

assuming it to be valid but because the loan

taken was to be used exclusively for

Aquino's business in the "bangus" and

"sugpo" production, Gallardo in effect

becomes a surety who is made primarily

answerable for loans taken by Aquino in his

personal capacity in the event Aquino

defaults in such payment. Under Art. 1878

of the Civil Code, to obligate the principal as

a guarantor or surety, a special power of

attorney is required. No such special power

of attorney for Gallardo to be a surety of

Aquino had been executed. (pp. 42-

43, Rollo.)”

Petitioner claims that the Deed of Real Estate

Mortgage is enforceable against Gallardo since it

was executed in accordance with Article 1883 where

in such case the agent is the one directly bound in

favor of the person with whom he has contracted, as

if the transaction were his own, except when the

contract involves things belonging to the principal.

The above provision of the Civil Code relied upon by

the petitioner Bank, is not applicable to the case at

bar. Herein respondent Aquino acted purportedly as

an agent of Gallardo, but actually acted in his

personal capacity. Involved herein are properties

titled in the name of respondent Gallardo against

which the Bank proposes to foreclose the mortgage

constituted by an agent (Aquino) acting in his

personal capacity. Hence, Gallardo’s property is not

liable on the real estate mortgage.

OBLIGATIONS OF THE AGENT

The obligations, in general, of agent to principal

should be done in good faith, and impressed with

loyalty to his trust, obedience to principal’s

instructions, and exercise of reasonable care.

Specific obligations of agent to principal:

1. To carry out the agency in accordance with

its terms, and in good faith;

2. To answer for the damages which through

his non-performance the principal may

suffer;

3. To finish the business already begun on the

death of the principal, should delay entail

any danger;

4. To observe the diligence of a good father of

a family in the custody and preservation of

the goods forwarded to him by the owner

in case he declines an agency, until an agent

is appointed;

5. To advance the necessary funds should

there be a stipulation to that effect;

6. To act in accordance with the instructions

of the principal;

7. Not to carry out the agency if its execution

would manifestly result in loss or damage to

the principal;

8. To answer for damages should he prefer in

case of conflict, his own interests to those

of the principal;

9. Not to loan to himself without the consent

of the principal when he has been

authorized to lend at interest;


10. To render an account of his transactions

and to deliver to the principal whatever he

may have received by virtue of the agency;

11. To distinguish goods by countermarks and

designate the merchandise respectively

belonging to each principal, in the case of a

commission agent who handles goods of

the same kind and mark, which belong to

different owners;

12. To be responsible in certain cases for the

acts of the substitute appointed by him;

13. To pay interest on funds he has applied to

his own;

14. To inform the principal, where an

authorized sale of credit has been made, of

such sale;

15. To bear the risk of collection, should he

receive also on a sale, a guarantee

commission;

16. To indemnify the principal for damages for

his failure to collect the credits of his

principal at the time that they become due;

17. To answer for his fraud or negligence.

Article 1884: General obligations of an agent to

principal

The agent is bound by his acceptance to

carry out the agency and is liable for the

damages which, through his non-

performance, the principal may suffer.

He must also finish the business already

begun on the death of the principal, should

delay entail any danger.

A person is free to refuse to be agent but once he

accepts, he is bound to carry it out in accordance

with its terms in good faith and following the

instructions, if any, of the principal. An agent who

does not carry out the agency is liable for damages.

Upon the other hand, if he fulfils his duty, he is not

personally liable unless he so binds himself.

Cases:

BA Finance Corporation v. CA, GR 82040,

August 27, 1991

B.A. Finance Corporation was deemed subrogated to

the rights and obligations of Supercars, Inc. when

the latter assigned the promissory note, together

with the chattel mortgage constituted on the motor

vehicle in question, in favor of the former.

Consequently, B.A. Finance Corporation is bound by

the terms and conditions of the chattel mortgage

executed between the Cuadys and Supercars, Inc.

Under the deed of chattel mortgage, B.A. Finance

Corporation was constituted attorney-in-fact with

full power and authority to file, follow-up,

prosecute, compromise or settle insurance claims; to

sign, execute and deliver the corresponding papers,

receipts and documents to the Insurance Company

as may be necessary to prove the claim, and to

collect from the latter the proceeds of insurance to

the extent of its interests, in the event that the

mortgaged car suffers any loss or damage (Rollo, p.

89). In granting B.A. Finance Corporation the

aforementioned powers and prerogatives, the Cuady

spouses created in the former’s favor an agency.

Under Article 1884 of the Civil Code of the

Philippines, B.A. Finance Corporation is bound by its

acceptance to carry out the agency, and is liable for

damages which, through its non-performance, the

Cuadys, the principal in the case at bar, may suffer.

Article 1885: Obligation of a person who declines

an agency

In case a person declines an agency, he is

bound to observe the diligence of a good

father of a family in the custody and

preservation of the goods forwarded to him

by the owner until the latter should appoint

an agent. The owner shall as soon as

practicable either appoint an agent or take

charge of the goods.

Duty of the owner:

1. Appointing an agent; or,

2. Taking charge of the goods.


Article 1886: Obligation to advance necessary funds

Should there be a stipulation that the agent

shall advance the necessary funds, he shall

be bound to do so except when the

principal is insolvent.

As a rule, the principal must advance to the agent,

should the latter so request, the sums necessary for

the execution of the agency. The contract of agency,

however, may stipulate that the agent shall advance

the necessary funds. In such case, the agent is

bound to furnish such funds except when the

principal is insolvent.

Article 1887: Agent to act according to instructions

In the execution of the agency, the agent

shall act in accordance with the instructions

of the principal.

In default thereof, he shall do all that a

good father of a family would do, as

required by the nature of the business.

What are instructions? There are private directions

which the principal may give the agent in regard to

the manner of performing his duties as such agent,

but of which a third party is ignorant.

If the agent exceeds, violates or fails to act upon

such instructions, he will be liable to the principal for

any loss or damage resulting therefrom. This is so as

the fundamental duty of the agent is to obey all the

reasonable and lawful instructions given to him by

his principal. Conversely, the agent may disobey the

principal’s instruction where it calls for the

performance of illegal acts, or where he is privileged

to do so to protect his security interest in the subject

matter of the agency.

It is the duty of the principal, if he desires an

authority executed in a particular manner to make

his terms so clear and unambiguous that they cannot

reasonably be misconstrued. If he does this, it is the

agent’s duty to the principal to execute the authority

strictly and faithfully; and third persons who know of

the limitations, or who from the circumstances of

the case ought to have known of them can claim no

rights against the principal based upon their

violation. If, on the other hand, the authority is

couched in such uncertain terms as to be reasonably

susceptible of two different meanings, and the agent

in good faith and without negligence adopts one of

them, the principal cannot be heard to assert, either

as against the agent or against third persons who

have, in like good faith and without negligence,

relied upon the same construction, with the other

interpretation. If in such a case, the agent exercises

his best judgment and an honest discretion, he fulfils

his duty, and though a loss ensues, it cannot be cast

upon the agent (Paras, citing Mechem).

Article 1888: When agent shall not carry out agency

An agent shall not carry out an agency if its

execution would manifestly result in loss or

damage to the principal.

The duty of the agent is to render service for the

benefit of the principal and not to act to his

detriment. Hence, if justified or proven, this

provision can be used as a defense for non-

performance under Article 1884.

Article 1889: Conflict of interest; liability of agent

The agent shall be liable for damages if,

there being a conflict between his interests

and those of the principal, he should prefer

his own.

The underlying basis of the rule prohibiting an agent

from engaging in self-dealing is to shut the door

against temptation on his part and to ensure that he

places the rights and welfare of his principal above

his own in performing his agency.

When there is a conflict between the agent’s own

interests and those of the principal, the agent has

the duty to prefer the principal’s interest over his

own. However, where the agent’s interests are

superior, such as where he has a security interest in

goods of the principal in his possession, he may

protect this interest even if in so doing, he disobeys

the principal’s orders or injures his interest.


Article 1890: Obligations in relation to borrowing of

money; loan

If the agent has been empowered to

borrow money, he may himself be the

lender at the current rate of interest. If he

has been authorized to lend money at

interest, he cannot borrow it without the

consent of the principal.

The agent cannot, without a special power of

attorney, loan or borrow money.

1. If he has been expressly empowered to

borrow money, he may himself be the

lender at the current rate of interest for

there is no danger of the principal suffering

any damage since the current rate of

interest would have to be paid in any case if

the loan were obtained from a third person;

2. If the agent has been authorized to lend

money at interest, he cannot be the

borrower without the consent of the

principal because the agent may prove to

be a bad debtor. There is here a possible

conflict of interest; hence, it may be

prejudicial to the principal.

Article 1891: Obligations to render account

Every agent is bound to render an account

of his transactions and to deliver to the

principal whatever he may have received by

virtue of the agency, even though it may

not be owing to the principal.

Every stipulation exempting the agent from

the obligation to render an account shall be

void.

The article does not apply to case of solutio indebiti

for in such cases, recovery can be had by the payor

against the agent himself. Therefore, the agent

meantime can keep what had been given to him by

error.

If the agent fails to deliver and instead converts or

appropriates for his own use the money or property

belonging to the principal, the agent is liable for

estafa.

They duty embodied in this Article will not apply if

the agent or broker acted only as a middleman with

the task of merely bringing together the vendor and

the vendee, who themselves thereafter negotiate on

the terms and conditions of the transaction.

Doctrines on the duty to account:

1. Whoever administers another’s affairs must

render an account because of the

representative relation and because of the

fiduciary position;

2. If an agent refuses to account when it is his

duty to do so, the principal may at once

terminate the agency and sue for the

balance due. If the principal dies, the

agency is extinguished but the duty to

account subsists, and can be demanded by

the principal’s heirs or legal

representatives;

3. The principal, or his legal representative,

has the right to pass upon the correctness

of the accounting;

4. Corollary to his right to demand an

accounting, a principal has the right to

make a reasonable inspection of the book

of account and memoranda, including the

original entries;

5. An agent, as a consequence of his duty to

account, cannot dispute his principal’s title

to the property in his possession.

Article 1892: Appointment of sub-agent; sub-agent

defined

The agent may appoint a substitute if the

principal has not prohibited him from doing

so; but he shall be responsible for the acts

of the substitute:

1. When he was not given the power to

appoint one;

2. When he was given such power, but

without designating the person, and the


person appointed was notoriously

incompetent or insolvent.

All acts of the substitute appointed against the

prohibition of the principal shall be void.

What is a sub-agent? A sub-agent is a person to

whom the agent delegates as his agent, the

performance of an act for the principal which the

agent has been empowered to perform through his

representative.

Unless prohibited by the principal, the agent may

appoint a subagent or substitute. While ordinarily

the selection of an agent is determined largely by

the trust and confidence that the principal has in the

agent, the principal need not fear prejudice as he

has a right of action not only against the agent but

also against the substitute.

Effects of substitution:

1. When the substitute is appointed by the

agent against the express prohibition of the

principal, the agent exceeds the limits of his

authority. The law says that all acts of the

substitute in such a case shall be void.

2. If in the contract of agency, the agent is

given the power to appoint a substitute, the

substitution has the effect of releasing the

agent from his responsibility unless the

person appointed is notoriously

incompetent or insolvent. But if the

substitute is the person designated by the

principal, the consequence is the absolute

exemption of the agent.

3. If the agent appoints a substitute when he

was not given the power to appoint one,

the law recognizes the validity of the

substitution if the same is beneficial to the

principal because the agency has thus been

executed in fulfillment of its object. If the

substitution has occasioned damage to the

principal, the agent shall be primarily

responsible for the acts of the substitute as

if he himself executed them. But the

principal has also a right of action against

the substitute.

Cases:

Escueta v. Lim, 512 SCRA 411

Applying the above-quoted provision to the special

power of attorney executed by Ignacio Rubio in favor

of his daughter Patricia Llamas, it is clear that she is

not prohibited from appointing a substitute. By

authorizing Virginia Lim to sell the subject

properties, Patricia merely acted within the limits of

the authority given by her father, but she will have

to be responsible for the acts of the sub-agent,

among which is precisely the sale of the subject

properties in favor of respondent.

Even assuming that Virginia Lim has no authority to

sell the subject properties, the contract she

executed in favor of respondent is not void,

but simply unenforceable.

Serona v. CA, GR 130423, November 18,

2002

Where, as in the present case, the agents to whom

personal property was entrusted for sale,

conclusively proves the inability to return the same

is solely due to malfeasance of a subagent to whom

the first agent had actually entrusted the property in

good faith, and for the same purpose for which it

was received; there being no prohibition to do so

and the chattel being delivered to the subagent

before the owner demands its return or before such

return becomes due, we hold that the first agent

cannot be held guilty of estafa by either

misappropriation or conversion. The abuse of

confidence that is characteristic of this offense is

missing under the circumstances.

Labrador admitted that she received the jewelry

from petitioner and sold the same to a third person.

She further acknowledged that she owed petitioner

P441,035.00, thereby negating any criminal intent

on the part of petitioner. There is no showing that

petitioner derived personal benefit from or

conspired with Labrador to deprive Quilatan of the


jewelry or its value. Consequently, there is no estafa

within contemplation of the law.

Notwithstanding the above, however, petitioner is

not entirely free from any liability towards Quilatan.

The rule is that an accused acquitted of estafa may

nevertheless be held civilly liable where the facts

established by the evidence so warrant. Then too, an

agent who is not prohibited from appointing a sub-

agent but does so without express authority is

responsible for the acts of the sub-

agent.[29] Considering that the civil action for the

recovery of civil liability arising from the offense is

deemed instituted with the criminal action,

petitioner is liable to pay complainant Quilatan the

value of the unpaid pieces of jewelry.

Article 1893: Remedy of principal against the sub-

agent

In the cases mentioned in Nos. 1 and 2 of

the preceding article, the principal may

furthermore bring an action against the

substitute with respect to the obligations

which the latter has contracted under the

substitution.

Under the premises given in the Article, the principal

can sue both the agent and the substitute. This is

one exception to the principle of privity of contracts.

Article 1894: Responsibility of two or more agents

The responsibility of two or more agents,

even though they have been appointed

simultaneously, is not solidary, if solidarity

has not been expressly stipulated.

Article 1895: Solidarity of responsibility of two or

more agents

If solidarity has been agreed upon, each of

the agents is responsible for the non-

fulfillment of the agency, and for the fault

or negligence of his fellow agents, except in

the latter case when the fellow agents

acted beyond the scope of their authority.

The liability referred in the two articles is the liability

of the agents towards the principal, and not that

towards third parties.

Distinction:


Liability is joint. Liability is solidary due to

an express stipulation.

If solidarity has been agreed upon, each of the

agents becomes solidarily liable:

1. For the fulfillment of the agency; and,

2. For the fault or negligence of his fellow

agents provided the latter acted within the

scope of their authority.

Article 1896: Liability of agent for interest

The agent owes interest on the sums he has

applied to his own use from the day on

which he did so, and on those which he still

owes after the extinguishment of the

agency.

The article contemplates 2 distinct cases:

1. One refers to sums belonging to the

principal which the agent applied to his own

use;

2. Another refers to sums which the agent still

owes the principal after the expiration of

the agency.

This article is without prejudice to a criminal action

that may be brought because of conversion.

Is it always necessary that a demand for payment be

made by the principal in order that delay on the part

of the agent shall exist? No. It is clear that if, by

provision of law, the agent is bound to deliver to the

principal whatever he may have received by virtue of

the agency, demand is no longer necessary.

Article 1897: Duties and liabilities of agent to third

persons

http://sc.judiciary.gov.ph/jurisprudence/2002/nov2002/130423.htm#_ftn29


The agent who acts as such is not personally

liable to the party with whom he contracts,

unless he expressly binds himself or

exceeds the limits of his authority without

giving such party sufficient notice of his

powers.

The rule is that the principal is responsible for the

acts of the agent done within the scope of his

authority and should bear any damage caused to

third persons. The agent acquires no rights

whatsoever, nor does he incur any liabilities arising

from the contract entered into by him on behalf of

his principal.

An agent who acts as such within the scope of his

authority represents the principal so that his

contract is really the principal’s. Hence, the agent is

not personally liable to the party with whom he

contracts unless he expressly binds himself or he

exceeds the limits of his authority without giving

such party sufficient notice of his powers.

Moreover, action must be brought against the

principal; otherwise, there is no cause of action.

If the agent pays, even if he expressly binds himself

to the transaction, to the benefit of the principal, the

principal’s obligation to pay is still not relieved.

A third party’s liability on agent’s contracts is to the

principal, not to the agent, because such contracts

are not his own but his principal’s. There are few

instances in which a third party subjects himself to

liability at the hands of an agent:

1. Where the agent contracts in his own name

for an undisclosed principal, in which case,

the agent may sue the third party to

enforce the contract;

2. Where the agent possesses a beneficial

interest in the subject matter of the agency.

A factor selling under a del credere

commission would illustrate such an agent,

as would also an auctioneer by virtue of his

lien;

3. Where the agent pays money of his

principal to a third person by mistake or

under a contract which proves

subsequently to be illegal, the agent being

ignorant with respect to its illegal nature;

and,

4. Where the third party commits a tort

against the agent.

Cases:

Eurotech Industrial Technologies, Inc. v.

Cuizon, GR 167552, April 23, 2007

Article 1897 reinforces the familiar doctrine that an

agent, who acts as such, is not personally liable to

the party with whom he contracts. The same

provision, however, presents two instances when an

agent becomes personally liable to a third person.

The first is when he expressly binds himself to the

obligation and the second is when he exceeds his

authority. In the last instance, the agent can be held

liable if he does not give the third party sufficient

notice of his powers. We hold that respondent

Edwin does not fall within any of the exceptions

contained in this provision.

Soriamont Steamship Agencies, Inc. v.

Sprint Transport Services, Inc., GR 174610,

July 14, 2009

Alternatively, if PTS is found to be its agent,

Soriamont argues that PTS is liable for the loss of the

subject equipment, since PTS acted beyond its

authority as agent. Soriamont cites Article 1897 of

the Civil Code, which provides:

“Art. 1897. The agent who acts as such is

not personally liable to the party with

whom he contracts, unless he expressly

binds himself or exceeds the limits of his

authority without giving such party

sufficient notice of his powers.”

The burden falls upon Soriamont to prove its

affirmative allegation that PTS acted in any manner

in excess of its authority as agent, thus, resulting in

the loss of the subject equipment. To recall, the

subject equipment was withdrawn and used by PTS

with the authority of Soriamont. And for PTS to be


personally liable, as agent, it is vital that Soriamont

be able to prove that PTS damaged or lost the said

equipment because it acted contrary to or in excess

of the authority granted to it by Soriamont. As the

Court of Appeals and the RTC found, however,

Soriamont did not adduce any evidence at all to

prove said allegation. Given the lack of evidence

that PTS was in any way responsible for the loss of

the subject equipment, then, it cannot be held liable

to Sprint, or even to Soriamont as its agent. In the

absence of evidence showing that PTS acted

contrary to or in excess of the authority granted to it

by its principal, Soriamont, this Court cannot merely

presume PTS liable to Soriamont as its agent. The

only thing proven was that Soriamont, through PTS,

withdrew the two chassis units from Sprint, and that

these have never been returned to Sprint.

Article 1898: Effects of acts of agent without

authority to third persons

If the agent contracts in the name of the

principal, exceeding the scope of his

authority, and the principal does not ratify

the contract, it shall be void if the party

with whom the agent contracted is aware

of the limits of the powers granted by the

principal. In this case, however, the agent is

liable if he undertook to secure the

principal’s ratification.

This article refers only to the liability of the agent

towards the third person. It is clear that under the

premises given, the principal is not at all bound,

except of course if there is subsequent ratification by

him.

Cases:

Safic Alcan & Cie v. Imperial Vegetable Oil

Co., Inc., GR 126751, March 28, 2001

It can be clearly seen from the foregoing provision of

IVO’s By-laws that Monteverde had no blanket

authority to bind IVO to any contract. He must act

according to the instructions of the Board of

Directors. Even in instances when he was authorized

to act according to his discretion, that discretion

must not conflict with prior Board orders,

resolutions and instructions. The evidence shows

that the IVO Board knew nothing of the 1986

contracts and that it did not authorize Monteverde

to enter into speculative contracts. In fact,

Monteverde had earlier proposed that the company

engage in such transactions but the IVO Board

rejected his proposal. Since the 1986 contracts

marked a sharp departure from past IVO

transactions, Safic should have obtained from

Monteverde the prior authorization of the IVO

Board. Safic cannot rely on the doctrine of implied

agency because before the controversial 1986

contracts, IVO did not enter into identical contracts

with Safic. The basis for agency is representation

and a person dealing with an agent is put upon

inquiry and must discover upon his peril the

authority of the agent. In the case of Bacaltos Coal

Mines v. Court of Appeals, we elucidated the rule on

dealing with an agent thus:

“Every person dealing with an agent is put

upon inquiry and must discover upon his

peril the authority of the agent. If he does

not make such inquiry, he is chargeable

with knowledge of the agent’s authority,

and his ignorance of that authority will not

be any excuse. Persons dealing with an

assumed agent, whether the assumed

agency be a general or special one, are

bound at their peril, if they would hold the

principal, to ascertain not only the fact of

the agency but also the nature and extent

of the authority, and in case either is

controverted, the burden of proof is upon

them to establish it.”

The most prudent thing petitioner should have done

was to ascertain the extent of the authority of

Dominador Monteverde. Being remiss in this regard,

petitioner cannot seek relief on the basis of a

supposed agency.

Under Article 1898 of the Civil Code, the acts of an

agent beyond the scope of his authority do not bind

the principal unless the latter ratifies the same


expressly or impliedly. It also bears emphasizing

that when the third person knows that the agent

was acting beyond his power or authority, the

principal cannot be held liable for the acts of the

agent. If the said third person is aware of such limits

of authority, he is to blame, and is not entitled to

recover damages from the agent, unless the latter

undertook to secure the principals ratification.

There was no such ratification in this case. When

Monteverde entered into the speculative contracts

with Safic, he did not secure the Boards approval.

He also did not submit the contracts to the Board

after their consummation so there was, in fact, no

occasion at all for ratification. The contracts were

not reported in IVOs export sales book and turn-out

book. Neither were they reflected in other books

and records of the corporation. It must be pointed

out that the Board of Directors, not Monteverde,

exercises corporate power. Clearly, Monteverdes

speculative contracts with Safic never bound IVO

and Safic cannot therefore enforce those contracts

against IVO.

Cervantes v. CA, GR 125138, March 2, 1999

From the aforestated facts, it can be gleaned that

the petitioner was fully aware that there was a need

to send a letter to the legal counsel of PAL for the

extension of the period of validity of his ticket.

Since the PAL agents are not privy to the said

Agreement and petitioner knew that a written

request to the legal counsel of PAL was necessary,

he cannot use what the PAL agents did to his

advantage. The said agents, according to the Court

of Appeals, acted without authority when they

confirmed the flights of the petitioner.

Under Article 1898 of the New Civil Code, the acts of

an agent beyond the scope of his authority do not

bind the principal, unless the latter ratifies the same

expressly or impliedly. Furthermore, when the third

person (herein petitioner) knows that the agent was

acting beyond his power or authority, the principal

cannot be held liable for the acts of the agent. If the

said third person is aware of such limits of authority,

he is to blame, and is not entitled to recover

damages from the agent, unless the latter undertook

to secure the principals ratification.

DBP v. CA, GR 109937, March 21, 1994

Under Article 1897 of the Civil Code of the

Philippines, "the agent who acts as such is not

personally liable to the party with whom he

contracts, unless he expressly binds himself or

exceeds the limits of his authority without giving

such party sufficient notice of his powers."

The DBP is not authorized to accept applications for

MRI when its clients are more than 60 years of age

(Exh. "1-Pool"). Knowing all the while that Dans was

ineligible for MRI coverage because of his advanced

age, DBP exceeded the scope of its authority when it

accepted Dan’s application for MRI by collecting the

insurance premium, and deducting its agent’s

commission and service fee.

The liability of an agent who exceeds the scope of his

authority depends upon whether the third person is

aware of the limits of the agent’s powers. There is

no showing that Dans knew of the limitation on

DBP’s authority to solicit applications for MRI.

If the third person dealing with an agent is unaware

of the limits of the authority conferred by the

principal on the agent and he (third person) has

been deceived by the non-disclosure thereof by the

agent, then the latter is liable for damages to him (V

Tolentino, Commentaries and Jurisprudence on the

Civil Code of the Philippines, p. 422 [1992], citing

Sentencia [Cuba] of September 25, 1907). The rule

that the agent is liable when he acts without

authority is founded upon the supposition that there

has been some wrong or omission on his part either

in misrepresenting, or in affirming, or concealing the

authority under which he assumes to act (Francisco,

V., Agency 307 [1952], citing Hall v. Lauderdale, 46

N.Y. 70, 75). Inasmuch as the non-disclosure of the

limits of the agency carries with it the implication

that a deception was perpetrated on the

unsuspecting client, the provisions of Articles 19, 20


and 21 of the Civil Code of the Philippines come into

play.

Article 1899: Effects of ignorance of agent

If a duly authorized agent acts in

accordance with the orders of the principal,

the latter cannot set up the ignorance of

the agent as to circumstances whereof he

himself was, or ought to have been, aware.

If the principal appoints an agent who is ignorant,

the fault is his alone and he must suffer the

consequences of his acts.

Notice that under this Article, it is not enough for the

agent to act within the scope of his authority. It is

also imperative for such agent to have complied with

the orders and instructions of the principal.

Article 1900: Scope of agent’s authority to third

persons

So far as third persons are concerned, an

act is deemed to have been performed

within the scope of the agent’s authority, if

such act is within the terms of the power of

attorney, as written, even if the agent has in

fact exceeded the limits of his authority

according to an understanding between the

principal and the agent.

The scope of the agent’s authority includes not only

the actual authorization conferred upon the agent

by his principal, but also that which has apparently

or impliedly been delegated to him.

Where the authority is not in writing, every person

dealing with an assumed agent is under obligation, if

he would hold the principal liable, to make an

inquiry not only as to existence of the agency, but

also as to the nature and extent of authority of the

agent.

If the authority of the agent is in writing, such person

is not required to inquire further than the terms of

the written power of attorney. As far as he is

concerned, an act of the agent within the terms of

the power of attorney as written is within the scope

of the agent’s authority although the agent has in

fact exceeded the limits of his actual authority

according to the secret understanding between him

and the principal.

Methods of broadening and restricting agent’s

authority:

1. By implication. This means that the agent’s

authority extends not only to the express

requests, but also to those acts and

transactions incidental thereto.

2. By usage and custom.

3. By necessity.

4. By the doctrines of apparent authority, of

liability by estoppel, and of ratification

5. By the rule of ejusdem generis

The scope of the agent’s authority is what appears in

the written terms of the power of attorney. While

third persons are bound to inquire into the extent or

scope of the agent’s authority, are they required to

go beyond the terms of the written power of

attorney? No. Third persons cannot be adversely

affected by an understanding between the principal

and his agent as to the limits of the latter’s

authority. In the same way, third persons need not

concern themselves with instructions given by the

principal to his agent outside of the written power of

attorney.

The motive of the agent in entering into a contract

with a third person is immaterial, except where the

third person knew that the agent was acting for his

private benefit or where the owner is seeking

recovery of personal property of which he has been

unlawfully deprived.

Cases:

Eugenio v. CA, GR 103737, December 15,

1994

The next inquiry then would be as to what exactly is

the nature of the TPRs insofar as they are used in the

day-to-day business transactions of the company.

These trade provisional receipts are bound and given


in booklets to the company sales representatives,

under proper acknowledgment by them and with a

record of distribution thereof. After every

transaction, when a collection is made the customer

is given by the sales representative a copy of the

trade provisional receipt, that is the triplicate copy

or customer’s copy, properly filled up to reflect the

completed transaction. All unused TPRs, as well as

the collections made, are turned over by the sales

representative to the appropriate company officer.

According to respondent court, "the questioned

TPR’s are merely ‘provisional’ and were, as printed

at the bottom of said receipts, as to be officially

confirmed by plaintiff within fifteen (15) days by

delivering the original copy thereof stamped paid

and signed by its cashier to the customer. . . .

Defendants-appellants (herein petitioners) failed to

present the original copies of the TPRs in question,

showing that they were never confirmed by the

plaintiff, nor did they demand from plaintiff the

confirmed original copies thereof."

We do not agree with the strained implication

intended to be adverse to petitioners. The TPRs

presented in evidence by petitioners are disputably

presumed in evidence as evidentiary of payments

made on account of petitioners. There are

presumptions juris tantum in law that private

transactions have been fair and regular and that the

ordinary course of business has been followed. The

role of presumptions in the law on evidence is to

relieve the party enjoying the same of evidential

burden to prove the proposition that he contends

for, and to shift the burden of evidence to the

adverse party. Private respondent having failed to

rebut the aforestated presumptions in favor of valid

payment by petitioners, these would necessarily

continue to stand in favor in this case.

Besides, even assuming arguendo that herein private

respondent’s cashier never received the amounts

reflected in the TPRs, still private respondent failed

to prove that Estrada, who is its duly authorized

agent with respect to petitioners, did not receive

those amounts from the latter. As correctly

explained by petitioners, "in so far as the private

respondent’s customers are concerned, for as long

as they pay their obligations to the sales

representative of the private respondent using the

latter’s official receipt, said payment extinguishes

their obligations." Otherwise, it would unreasonably

cast the burden of supervision over its employees

from respondent corporation to its customers.

The substantive law is that payment shall be made

to the person in whose favor the obligation has been

constituted, or his successor-in-interest or any

person authorized to receive it. As far as third

persons are concerned, an act is deemed to have

been performed within the scope of the agent’s

authority, if such is within the terms of the power of

attorney, as written, even if the agent has in fact

exceeded the limits of his authority according to an

understanding between the principal and his agent.

In fact, Atty. Rosario, private respondent’s own

witness, admitted that "it is the responsibility of the

collector to turn over the collection."

Toyota Shaw, Inc. v. CA, L-116650, May 23,

1995

Moreover, Exhibit "A" shows the absence of a

meeting of minds between Toyota and Sosa. For one

thing, Sosa did not even sign it. For another, Sosa

was well aware from its title, written in bold letters,

viz.,

AGREEMENTS BETWEEN MR. SOSA &

POPONG BERNARDO OF TOYOTA SHAW,

INC.

that he was not dealing with Toyota but with Popong

Bernardo and that the latter did not misrepresent

that he had the authority to sell any Toyota vehicle.

He knew that Bernardo was only a sales

representative of Toyota and hence a mere agent of

the latter. It was incumbent upon Sosa to act with

ordinary prudence and reasonable diligence to know

the extent of Bernardo's authority as an agent in

respect of contracts to sell Toyota's vehicles. A

person dealing with an agent is put upon inquiry and

must discover upon his peril the authority of the

agent.


Litonjua v. Eternit Corporation, GR 144805,

June 8, 2006

It bears stressing that in agent-principal relationship,

the personality of the principal is extended through

the facility of the agent. In so doing, the agent, by

legal fiction, becomes the principal, authorized to

perform all acts which the latter would have him do.

Such a relationship can only be effected with the

consent of the principal, which must not, in any way,

be compelled by law or by any court.

The petitioners cannot feign ignorance of any regular

and valid authority of respondent EC empowering

Adams, Glanville, or Delsaux to offer the properties

for sale and to sell the said properties to the

petitioners. A person dealing with a known agent is

not authorized, under any circumstances, blindly to

trust the agents; statements as to the extent of his

powers; such person must not act negligently but

must use reasonable diligence and prudence to

ascertain whether the agent acts within the scope of

his authority. The settled rule is that, persons

dealing with an assumed agent are bound at their

peril, and if they would hold the principal liable, to

ascertain not only the fact of agency but also the

nature and extent of authority, and in case either is

controverted, the burden of proof is upon to prove

it.

Country Bankers Insurance Corporation v.

Keppel Cebu Shipyard, GR 166044, June 18,

2012

Our law mandates an agent to act within the scope

of his authority. The scope of an agent’s authority is

what appears in the written terms of the power of

attorney granted upon him. Under Article 1878 (11)

of the Civil Code, a special power of attorney is

necessary to obligate the principal as a guarantor or

surety.

In the case at bar, CBIC could be held liable even if

Quinain exceeded the scope of his authority only if

Quinain’s act of issuing Surety Bond No. G (16)

29419 is deemed to have been performed within the

written terms of the power he was granted.

However, contrary to what the RTC held, the special

power of attorney accorded to Quinain clearly states

the limits of his authority and particularly provides

that in case of surety bonds, it can only be issued in

favor of the DPWH, the NAPOCOR, and other

government agencies; furthermore, the amount of

the surety bond is limited to P 500,000.00.

Esguerra v. CA, GR 119310, February 3,

1997

On a compromise agreement being a source of

agent’s authority

The Civil Code provides that a contract is

unenforceable when it is entered into in the name of

another person by one who has been given no

authority or legal representation, or who has acted

beyond his powers. And that contract entered into

in the name of another by one who has no authority

or legal representation, or who has acted beyond his

powers, shall be unenforceable. After a thorough

review of the case at bench, the Court finds the sale

of Esguerra Building II by VECCI to private

respondent Sureste Properties, Inc. valid. The sale

was expressly and clearly authorized under the

judicially-approved compromise agreement freely

consented to and voluntarily signed by petitioner

Julieta Esguerra. Thus, petitioner’s contention that

the sale is unenforceable as to her share for being

unauthorized is plainly incongruous with the express

authority granted by the compromise agreement to

VECCI, which specified no condition that the latter

shall first consult with the former prior to selling any

of the properties listed there.

As far as private respondent Sureste Properties, Inc.

is concerned, the sale to it by VECCI was completely

valid and legal because it was executed in

accordance with the compromise agreement,

authorized not only by the parties thereto, who

became co-principals in a contract of agency created

thereby, but by the approving court as well.

Consequently, the sale to Sureste Properties, Inc. of

Esguerra Building II cannot in any manner or guise be

deemed unenforceable, as contended by petitioner.


Article 1901: Ratification by principal; effect on

third persons

A third person cannot set up the fact that

the agent has exceeded his powers, if the

principal has ratified, or has signified his

willingness to ratify the agent’s acts.

Article 1902: Proof of authority or instruction

required by third person

A third person with whom the agent wishes

to contract on behalf of the principal may

require the presentation of the power of

attorney, or the instructions as regards the

agency. Private or secret orders and

instructions of the principal do not

prejudice third persons who have relied

upon the power of attorney or instructions

shown them.

Article 1903: Factor or commission agent

The commission agent shall be responsible

for the goods received by him in the terms

and conditions and as described in the

consignment, unless upon receiving them

he should make a written statement of the

damage and deterioration suffered by the

same.

A factor or commission agent is one whose business

is to receive and sell goods for a commission and

who is entrusted by the principal with the possession

of goods to be sold.

Distinctions:

Ordinary agent Commission agent

Does not need to have

possession of the goods

of his principal

Must have in possession

the goods of his principal

Commission agent Broker

One engaged in the

purchase and sale for a

principal of personal

He maintains no relation

with the thing which he

purchases or sells. He is

property, which for this

purpose, has to be

placed in his possession

and at his disposal. He

has a relation not only

with his principal, and

the buyers or sellers, but

also with the property

which constitutes the

object of the

transaction.

supposed to be merely a

go-between, an

intermediary between

the seller and the buyer.

As such, he does not

have either the custody

or the possession of the

thing that he disposes of.

His only function is to

bring the parties to the

transaction.

This article gives a presumption to the effect that the

damage to the merchandise were suffered while in

the possession and custody of the agent. Hence, to

avoid liability, the commission agent should make a

written statement of the damage or deterioration if

the goods received by him do not agree with the

description in the consignment.

Article 1904: Obligation of a commission agent as to

goods of the same mark or kind

The commission agent who handles goods

of the same kind and mark, which belong to

different owners, shall distinguish them by

countermarks, and designate the

merchandise respectively belonging to each

principal.

Article 1905: Authority of commission agent to sell

on credit; effect

The commission agent cannot, without the

express or implied consent of the principal,

sell on credit. Should he do so, the principal

may demand from him payment in cash,

but the commission agent shall be entitled

to any interest or benefit, which may result

from such sale.

A commission agent can sell on credit only with the

express or implied consent of the principal. Hence,

an agent who sells the goods on credit without the

consent of the principal is liable for the price of the


goods. However, the agent shall get the extra

benefits derived from selling goods on credit.

The commission agent is not allowed to escape the

effects of this article by proving that the profits

would have been less had the sale been made on a

cash basis. This defense on the part of the agent is

not tenable because if this were to be allowed, the

way will be open for delay, fraud, and bad faith.

Two choices are given to the principal if such sale

was made, absent any authority:

1. He may require payment in cash, in which

case, any interest or benefit from the sale

shall belong to the agent since the principal

cannot be allowed to enrich himself at the

agent’s expense; or,

2. He may ratify the sale on credit in which

case it will have all the risks and advantages

to him.

Cases:

Green Valley Poultry & Allied Products, Inc.

v. IAC, L-49395, December 26, 1984

Whether viewed as an agency to sell or as a contract

of sale, the liability of Green Valley is indubitable.

Adopting Green Valley’s theory that the contract is

an agency to sell, it is liable because it sold on credit

without authority from its principal, contrary to

Article 1905 of the Civil Code.

Article 1906: Obligation of commission agent to sell

on credit

Should the commission agent, with

authority of the principal, sell on credit, he

shall so inform the principal, with a

statement of the names of the buyers.

Should he fail to do so, the sale shall be

deemed to have been made for cash insofar

as the principal is concerned.

Under this article, an authorized sale on credit shall

be deemed to have been on a cash basis insofar as

the principal is concerned, upon failure of the agent

to inform the principal of such sale on credit with a

statement of the names of the buyers.

This article only talks of the relations between the

commission agent and the principal; third parties

should not be prejudiced.

Article 1907: Guarantee commission; definition;

purpose; del credere commission

Should the commission agent receive on a

sale, in addition to the ordinary

commission, another called a guarantee

commission, he shall bear the risk of

collection and shall pay the principal the

proceeds of the sale on the same terms

agreed upon with the purchaser.

What is a guarantee commission? Also called a del

credere commission, it is one where, in

consideration of an increased commission, the factor

or commission agent guarantees to the principal the

payment of the debts arising through his agency. An

agent who guarantees payment of the customer’s

account in consideration of the higher commission is

called a del credere agent.

An agent with a del credere commission is liable to

the principal if the buyer fails to pay or is incapable

of paying. But he is not primarily the debtor. On the

contrary, the principal may sue the buyer in his own

name notwithstanding the del credere commission,

so that the latter amounts to no more than a

guaranty.

Liability of a del credere agent is a contingent

pecuniary liability in the event the buyer fails to pay

or is incapable of paying.

Does this article include both cash and credit sales?

Yes, since the law makes no distinction. Moreover,

there are cash sales which may give a short term or

period (Paras).

If the agent receives a guarantee commission, he

cannot put up the defense that the debtor-third

person possesses property. This is precisely the risk

the commission agent assumed.


Article 1908: Obligation of commission agent to

collect credit

The commission agent who does not collect

the credits of his principal at the time when

they become due and demandable shall be

liable for damages, unless he proves that he

exercised due diligence for that purpose.

A commission agent who has made an authorized

sale on credit must collect the credits due the

principal at the time they become due and

demandable.

If a commission agent without a guarantee

commission should prove he exercised due diligence

in the collection of the credit, and the credit is not

collected because of the fault of the third party, the

agent is freed from responsibility. In such an

eventuality, the debtor can be directly proceeded

against by the principal. The principal need not fear

in this case that the debtor can put defences which

the debtor could have set up against the agent.

Article 1909: Liability of agent for fraud and

negligence

The agent is responsible not only for fraud,

but also for negligence, which shall be

judged with more or less rigor by the

courts, according to whether the agency

was or was not for a compensation.

In the fulfillment of his obligation, the agent is

responsible to the principal not only for fraud

committed by him but also, for negligence.

1. For fraud, he is always liable.

2. For negligence, liability is affected by

whether the agency is gratuitous or not.

Mismanagement of the enterprise by a principal,

through his agent, does not relieve him from his

responsibilities he had contracted with third

persons.

Remedy of the principal: Sue the agent for the

damages he suffered.

Cases:

NAPOCOR v. National Merchandising

Corporation, L-33819 & L-33897, October

23, 1982

An agent who exceeds the limits of his authority is

personally liable

Under Article 1897 of the Civil Code, the agent who

exceeds the limits of his authority without giving the

party with whom he contracts sufficient notice of his

powers is personally liable to such party.

In the present case, Namerco, the agent of a New

York-based principal, entered into a contract of sale

with the NAPOCOR without disclosing to NAPOCOR

the limits of its powers and, contrary to its principal’s

prior cable instructions that the sale should be

subject to availability of a steamer, it agreed that

non-availability of a steamer was not a justification

for non-payment of the liquidated damages.

Namerco, therefore, is liable for damages.

The rule that every person dealing with an agent is

put upon inquiry and must discover upon his peril

the authority of the agent would only apply in cases

where the principal is sought to be held liable on the

contract entered into by the agent. The said rule is

not applicable in the instant case since it is the

agent, not the principal, that is sought to be held

liable on the contract of sale which was expressly

repudiated by the principal because the agent took

chances, it exceeded its authority and, in effect, it

acted in its own name.

On the liability of an agent

Defendant’s contention that Namerco’s liability

should be based on tort or quasi-delict as held in

some American cases is not well-taken. As correctly

argued by the NAPOCOR, it would be unjust and

inequitable for Namerco to escape liability of the

contract after it had deceived the NAPOCOR by not

disclosing the limits of its powers and entering into

the contract with stipulations contrary to its

principal’s instructions.


Lopez v. Alvendia, L-20697, December 24,

1964

The principal is responsible for the acts of the agent,

done within the scope of his authority, and should

bear the damages caused to third parties.

OBLIGATIONS OF THE PRINCIPAL

The primary obligation of the principal to the agent

is simply that of complying with the terms of their

contract, if one exists. The principal may be justified

to perform his part of the contracts when the agent

has already breached the contract.

Specific obligations of principal to agent:

1. To comply with all the obligations which the

agent may have contracted within the

scope of his authority;

2. To advance to the agent, should the latter

so request, the sums necessary for the

execution of the agency;

3. To reimburse the agent for all advances

made by him provided the agent is free

from fault;

4. To indemnify the agent for all the damages

which the execution of the agency may

have caused the latter without fault or

negligence; and,

5. To pay the agent the compensation agreed

upon, or if no compensation was specified,

the reasonable value of the agent’s

services.

Article 1910: Obligations of the principal in general

The principal must comply with all the

obligations which the agent may have

contracted within the scope of his

authority.

As for any obligation wherein the agent has

exceeded his power, the principal is not

bound except when he ratifies it expressly

or tacitly.

Aside from acting within the scope of his authority,

the agent must also act in the name of the principal,

and not in his own name; otherwise, the principal is

not bound except when the transaction concerns

things belonging to the principal. After all,

representation is the essence of agency. It is thus

evident that the obligations contracted by the agent

are for and on behalf of the principal to bind him if

he personally contracted.

An agent is the instrumentality of the principal

whose primary design is to obtain rights against third

parties. The principal’s rights are the third parties’

liabilities.

If an agent misrepresents to a purchaser, and the

principal accepts the benefits of such

misrepresentation, he cannot at the same time deny

responsibility for such misrepresentation.

As a general rule, the principal is civilly liable to third

persons for torts of an agent committed at the

principal’s direction or in the course and within the

scope of the agent’s employment. The principal

cannot escape liability so long as the tort was

committed by the agent while performing his duties

in furtherance of the principal’s business or at his

direction although outside the scope of his

employment or authority.

Business hazard theory. It advances the

argument that it is thought that the hazards

of business should be borne by the business

directly. It is reasoned that if the cost then

is added to the expense of doing business, it

will ultimately be borne by the consumer of

the product; that the consumer should pay

the costs which the hazards of the business

shave incurred.

Motivation-deviation test. The bounds of

the agent’s authority are not the limits of

the principal’s tort liability, but rather the

scope of the employment which may or

may not be within the bounds of authority.

There are two factors which lead to the

imposition of the liability for tort:


a. Satisfactory evidence that the

employee in doing the act, in the

doing of which the tort was

committed, was motivated in part,

at least, by a desire to serve his

employer; and,

b. Satisfactory evidence that the act,

in the doing of which the tort was

committed, was not an extreme

deviation from the normal conduct

of such employee.

Under the second paragraph of this Article, the

agent who exceeds his authority is not deemed a

representative of the principal. Hence, the principal

is not bound unless he ratifies the act expressly or

impliedly. Without such ratification, the agent is the

one personally liable.

Conditions for ratification:

1. Intent to ratify;

2. Principal must have the capacity and power

to ratify;

3. He must have had knowledge or had reason

to know of material or essential facts about

the transaction;

4. He must ratify the acts in its entirety;

5. The act must be capable of ratification; and,

6. The act must be done on behalf of the

principal.

Effects of ratification:

1. With respect to agent. It relieves the agent

from liability to third party to the

unauthorized transaction, and to his

principal for acting without authority and

he may recover compensation for

performing the act which has been ratified;

2. With respect to the principal himself. The

principal who ratifies thereby assumes

responsibility for the unauthorized act, as

fully as if the agent had acted under original

authority but he is not liable for acts

outside the authority approved by his

ratification;

3. With respect to third persons. Ordinarily, a

third person is bound by a ratification to the

same extent as he would have been bound

if the ratified act had been authorized in the

first instance, and he cannot raise the

question of the agent’s authority to do the

ratified act.

To be effective, ratification need not be

communicated or made known to the agent or the

third party. The act or conduct of the principal

rather than his communication is the key. But

before the ratification, the third party is free to

revoke the unauthorized contract.

Ratification so operates upon an unauthorized act to

have retroactive effect. The authority created by

ratification is subsequent but it is equivalent to intial

approval or prior authority.

However, if the third party has withdrawn from the

contract, the act or transaction is no longer capable

of ratification. There is no ratification with

retroactive effect to speak of.

Cases:

Air France v. CA, L-57339, December 29,

1983

Knowledge of agent is chargeable as knowledge of

principal; hence, third party is not liable for damages

for failure of the agent to give notice.

Filipinas Life Assurance Company v.

Pedroso, GR 159489, February 4, 2008

Filipinas Life, as the principal, is liable for obligations

contracted by its agent Valle. By the contract of

agency, a person binds himself to render some

service or to do something in representation or on

behalf of another, with the consent or authority of

the latter. The general rule is that the principal is

responsible for the acts of its agent done within the

scope of its authority, and should bear the damage

caused to third persons. When the agent exceeds

his authority, the agent becomes personally liable

for the damage. But even when the agent exceeds


his authority, the principal is still solidarily liable

together with the agent if the principal allowed the

agent to act as though the agent had full powers. In

other words, the acts of an agent beyond the scope

of his authority do not bind the principal, unless the

principal ratifies them, expressly or impliedly.

Ratification in agency is the adoption or

confirmation by one person of an act performed on

his behalf by another without authority.

China Airlines v. Chiok, GR 152122, July 30,

2003

In American Airlines v. Court of Appeals, we have

noted that under a general pool partnership

agreement, the ticket-issuing airline is the principal

in a contract of carriage, while the endorsee-airline

is the agent.

x x x Members of the IATA are under a

general pool partnership agreement

wherein they act as agent of each other in

the issuance of tickets to contracted

passengers to boost ticket sales worldwide

and at the same time provide passengers

easy access to airlines which are otherwise

inaccessible in some parts of the world.

Booking and reservation among airline

members are allowed even by telephone

and it has become an accepted practice

among them. A member airline which

enters into a contract of carriage consisting

of a series of trips to be performed by

different carriers is authorized to receive

the fare for the whole trip and through the

required process of interline settlement of

accounts by way of the IATA clearing house

an airline is duly compensated for the

segment of the trip serviced. Thus, when

the petitioner accepted the unused portion

of the conjunction tickets, entered it in the

IATA clearing house and undertook to

transport the private respondent over the

route covered by the unused portion of the

conjunction tickets, i.e., Geneva to New

York, the petitioner tacitly recognized its

commitment under the IATA pool

arrangement to act as agent of the principal

contracting airline, Singapore Airlines, as to

the segment of the trip the petitioner

agreed to undertake. As such, the petitioner

thereby assumed the obligation to take the

place of the carrier originally designated in

the original conjunction ticket. The

petitioners argument that it is not a

designated carrier in the original

conjunction tickets and that it issued its

own ticket is not decisive of its liability. The

new ticket was simply a replacement for the

unused portion of the conjunction ticket,

both tickets being for the same amount of

US$ 2,760 and having the same points of

departure and destination. By constituting

itself as an agent of the principal carrier the

petitioners undertaking should be taken as

part of a single operation under the

contract of carriage executed by the private

respondent and Singapore Airlines in

Manila.

PNB v. Bagamaspad, L-3407, June 29, 1951

To us who have always had the impression and the

idea that the business of a Bank is conducted in an

orderly, methodical and businesslike manner, that its

papers, especially those relating to loans with their

corresponding securities, are properly filed, well-

kept and in a safe place, its books kept up-to-date,

and that its funds are not given out in loans without

careful and scrupulous scrutiny of the responsibility

and solvency of the borrowers and the sufficiency of

the security given by them, the conditions obtaining

in the Cotabato Agency due to the apparent

indifference, carelessness or negligence of the

appellants, is indeed shocking. And it is because of

these shortcomings of the appellants their disregard

of the elementary rules and practice of banking and

their violation of instructions of their superiors, that

these anomalies resulting in financial losses to the

Bank were made possible.

The trial court based the civil liability of the

appellants herein on the provisions of Arts. 1718 and

1719 of the Civil Code, defining and enumerating the


duties and obligations of an agent and his liability for

failure to comply with such duties, and Art. 259 of

the Code of Commerce which provides that an agent

must observe the provisions of law and regulations

with respect to business transactions entrusted to

him otherwise he shall be responsible for the

consequences resulting from their breach or

omissions; and also Art. 1902 of the Civil Code which

provides for the liability of one for his tortious act,

that is to say, any act or omission which causes

damage to another by his fault or negligence.

Appellants while agreeing with the meaning and

scope of the legal provisions cited, nevertheless

insist that those provisions are not applicable to

them inasmuch as they are not guilty of any violation

of instructions or regulations of the plaintiff Bank;

and that neither are they guilty of negligence of

carelessness as found by the trial court. A careful

study and consideration of the record, however,

convinces us and we agree with the trial court that

the defendants-appellants have not only violated

instructions of the plaintiff Bank, including things

which said Bank wanted done or not done, all of

which were fully understood by them, but they

(appellants) also violated standing regulations

regarding the granting of loans; and, what is more,

thru their carelessness, laxity and negligence, they

allowed loans to be granted to persons who were

not entitled to receive loans.

Article 1911: Agency by estoppel; when principal is

solidarily liable with agent

Even when the agent has exceeded his

authority, the principal is solidarily liable

with the agent if the former allowed the

latter to act as though he had full powers.

What is an agency by estoppel? The principal cannot

deny the existence of the agency after third parties,

relying on his conduct, have had dealings with the

supposed agent. This method of creating an agency

is known as agency by estoppel or implication.

Kinds of estoppel of principal:

a. As to agent: One who knows that

another is acting as his agent and

fails to repudiate his acts, or

accepts the benefits of them will

be stopped to deny the agency as

against such other.

b. As to sub-agent: To estop, the

principal from denying his liability

to a third person, he must have

known or be charged with

knowledge of the fact of the

transaction and the terms of the

agreement between the agent and

sub-agent.

c. As to third persons: One who

knows that another is acting as his

agent or permitted another to

appear as his agent, to the injury of

third persons who have dealt with

the apparent agent as such in good

faith and in the exercise of

reasonable prudence, is stopped to

deny the agency.

Distinctions:

Ratification Estoppel

It rests on intention,

express or implied,

regardless of prejudice

to another.

It rests on prejudice

rather than intention.

It has retroactive effect

and makes the agent’s

unauthorized act good

from the beginning.

It operates upon

something which has

been done but after the

misleading act and in

reliance on it and may

only extend to so much

of such act as can be

shown to be affected by

the conduct.

The substance of

ratification is

confirmation of the

unauthorized act or

contract after is has

been done or made.

The substance of

estoppel is the

principal’s inducement

to another to act to his

prejudice.


Apparent authority Authority by estoppel

It is that which though

not actually granted, the

principal knowingly

permits the agent to

exercise or holds him out

as possessing.

It arises in those cases

where the principal, by

his culpable negligence,

permits his agent to

exercise powers not

granted to him, even

though the principal may

have no notice or

knowledge of the

conduct of the agent.

It is not founded in

negligence of the

principal but in the

conscious permission of

acts beyond the powers

granted.

Its basis is the negligence

of the principal in failing

properly to supervise the

affairs of the agent,

allowing him to exercise

powers not granted to

him and so justifies

others in believing he

possesses the requisite

authority.

This article also provides for solidary liability. This is

an instance when solidarity is imposed by law. It

would seem however, that this Article is unjust for if

the agent is considered innocent and acting within

the scope of his authority, he should be exempted

from liability (Paras).

Cases:

Litonjua v. Eternit Corporation, supra.

For an agency by estoppel to exist, the following

must be established:

1. The principal manifested a representation

of the agent’s authority or knowingly

allowed the agent to assume such

authority;

2. The third person, in good faith, relied upon

such representation;

3. Relying upon such representation, such

third person has changed his position to his

detriment.

An agency by estoppel, which is similar to the

doctrine of apparent authority, requires proof of

reliance upon the representations, and that, in turn,

needs proof that the representations predated the

action taken in reliance.

The Manila Remnant Co. v. CA, GR 82978,

November 22, 1990

More in point, we find that by the principle of

estoppel, Manila Remnant is deemed to have

allowed its agent to act as though it had plenary

powers. Article 1911 of the Civil Code provides:

“Even when the agent has exceeded his

authority, the principal is solidarily liable

with the agent if the former allowed the

latter to act as though he had full powers.”

The above-quoted article is new. It is intended to

protect the rights of innocent persons. In such a

situation, both the principal and the agent may be

considered as joint feasors whose liability is joint and

solidary.

Authority by estoppel has arisen in the instant case

because by its negligence, the principal, Manila

Remnant, has permitted its agent, A.U. Valencia and

Co., to exercise powers not granted to it. That the

principal might not have had actual knowledge of

the agent’s misdeed is of no moment. Consider the

following circumstances:

Firstly, Manila Remnant literally gave carte blanche

to its agent A.U. Valencia and Co. in the sale and

disposition of the subdivision lots. As a disclosed

principal in the contracts to sell in favor of the

Ventanilla couple, there was no doubt that they

were in fact contracting with the principal. Section 7

of the Ventanillas’ contracts to sell states:

“7. That all payments whether

deposits, down payment and monthly

installment agreed to be made by the


vendee shall be payable to A.U. Valencia

and Co., Inc. It is hereby expressly

understood that unauthorized payments

made to real estate brokers or agents shall

be the sole and exclusive responsibility and

at the risk of the vendee and any and all

such payments shall not be recognized by

the vendors unless the official receipts

therefor shall have been duly signed by the

vendors’ duly authorized agent, A.U.

Valencia and Co., Inc."

Indeed, once Manila Remnant had been furnished

with the usual copies of the contracts to sell, its only

participation then was to accept the collections and

pay the commissions to the agent. The latter had

complete control of the business arrangement.

Secondly, it is evident from the records that Manila

Remnant was less than prudent in the conduct of its

business as a subdivision owner. For instance,

Manila Remnant failed to take immediate steps to

avert any damage that might be incurred by the lot

buyers as a result of its unilateral abrogation of the

agency contract. The publication of the cancelled

contracts to sell in the Times Journal came three

years after Manila Remnant had revoked its

agreement with A.U. Valencia and Co.

Moreover, Manila Remnant also failed to check the

records of its agent immediately after the revocation

of the agency contract despite the fact that such

revocation was due to reported anomalies in

Valencia’s collections. Altogether, as pointed out by

the counsel for the Ventanillas, Manila Remnant

could and should have devised a system whereby it

could monitor and require a regular accounting from

A.U. Valencia and Co., its agent. Not having done so,

Manila Remnant has made itself liable to those who

have relied on its agent and the representation that

such agent was clothed with sufficient powers to act

on behalf of the principal.

Even assuming that Manila Remnant was as much a

victim as the other innocent lot buyers, it cannot be

gainsaid that it was precisely its negligence and laxity

in the day to day operations of the real estate

business which made it possible for the agent to

deceive unsuspecting vendees like the Ventanillas.

In essence, therefore, the basis for Manila

Remnant’s solidary liability is estoppel which, in

turn, is rooted in the principal’s neglectfulness in

failing to properly supervise and control the affairs

of its agent and to adopt the needed measures to

prevent further misrepresentation. As a

consequence, Manila Remnant is considered

estopped from pleading the truth that it had no

direct hand in the deception employed by its agent.

Rural Bank of Milaor v. Ocfemia, GR

137686, February 8, 2000

In passing upon the liability of a corporation in cases

of this kind it is always well to keep in mind the

situation as it presents itself to the third party with

whom the contract is made. Naturally he can have

little or no information as to what occurs in

corporate meetings; and he must necessarily rely

upon the external manifestation of corporate

consent. The integrity of commercial transactions

can only be maintained by holding the corporation

strictly to the liability fixed upon it by its agents in

accordance with law; and we would be sorry to

announce a doctrine which would permit the

property of man in the city of Paris to be whisked

out of his hands and carried into a remote quarter of

the earth without recourse against the corporation

whose name and authority had been used in the

manner disclosed in this case. As already observed, it

is familiar doctrine that if a corporation knowingly

permits one of its officers, or any other agent, to do

acts within the scope of an apparent authority, and

thus holds him out to the public as possessing power

to do those acts, the corporation will, as against any

one who has in good faith dealt with the corporation

through such agent, be estopped from denying his

authority; and where it is said "if the corporation

permits this means the same as "if the thing is

permitted by the directing power of the

corporation."

In this light, the bank is estopped from questioning

the authority of the bank manager to enter into the


contract of sale. If a corporation knowingly permits

one of its officers or any other agent to act within

the scope of an apparent authority, it holds the

agent out to the public as possessing the power to

do those acts; thus, the corporation will, as against

anyone who has in good faith dealt with it through

such agent, be estopped from denying the agent's

authority.

Unquestionably, petitioner has authorized Tena to

enter into the Deed of Sale. Accordingly, it has a

clear legal duty to issue the board resolution sought

by respondent's. Having authorized her to sell the

property, it behooves the bank to confirm the Deed

of Sale so that the buyers may enjoy its full use.

Article 1912: Obligation to advance funds

The principal must advance to the agent,

should the latter so request, the sums

necessary for the execution of the agency.

Should the agent have advanced them, the

principal must reimburse him therefor,

even if the business or undertaking was not

successful, provided the agent is free from

all fault.

The reimbursement shall include interest on

the sums advanced, from the day on which

the advance was made.

In the absence of stipulation that the agent shall

advance the necessary funds, the principal must

advance to the agent upon his request the sums

necessary for the execution of the agency.

If the principal fails to do so, the agent will not be

liable for the damage, which through his non-

performance, the principal may suffer.

In case the agent advanced the sums necessary for

the execution of the agency, whether on his own

initiative or by virtue of stipulation, the said

advances must be reimbursed by the principal with

interest from the day the advance was made.

Even if the agency be gratuitous, this Article will also

apply; hence, the agent will still be entitled to

reimbursement and interest. This is so because the

reimbursement and interest spoken of in this Article

do not refer to compensation or commission.

Article 1913: Obligation to indemnify agent for

damages

The principal must also indemnify the agent

for all the damages which the execution of

the agency may have caused the latter,

without fault or negligence on his part.

The liability of the principal for damages is limited

only to that which the execution of the agency has

caused the agent.

Naturally, this Article can be made use of only if the

agency exists, otherwise this Article cannot apply. In

such a case, the supposed agent is not acting on

behalf of a true principal and the reason for the law

would cease.

Article 1914: Right of agent to retain in pledge

object of agency

The agent may retain in pledge the things

which are the object of the agency until the

principal effects the reimbursement and

pays the indemnity set forth in the two

preceding articles.

This Article speaks of one kind of pledge by

operation of law.

Rules from 1912 to 1914:

1. Reimbursement with interest for advances

made by agent

2. Indemnification for damages caused by the

execution of the agency

3. Remedy of agent’s lien should principal fail

in reimbursing or indemnifying the agent

Nature of agent’s right of lien:


1. The right is limited only to the subject

matter of agency. Hence, the lien of the

agent is specific or particular in character.

2. The right requires the possession by agent

of the subject matter. In order to have a

lien, the agent must have some possession,

custody, control, or disposing power in and

over the subject matter in which the lien is

claimed.

3. In the absence of ratification of a sub-

agent’s acts by the principal, the right of

lien exists only in favor of the agent, and

cannot be claimed by one to whom the

agent delegates his authority where no

privity exists between the sub-agent and

the principal.

Article 1915: Solidary liability of two or more

principals

If two or more persons have appointed an

agent for a common transaction or

undertaking, they shall be solidarily liable to

the agent for all the consequences of the

agency.

Solidarity is the rule under this Article because of the

common transaction. Thus, even if the agent have

been appointed separately, the rule should apply in

the interest of justice.

Requisites for solidary liability:

1. There are two or more principals;

2. The principals have all concurred in the

appointment of the same agent; and,

3. The agent is appointed for a common

transaction or undertaking.

This rule is opposite of that in regard to the

responsibility of two or more agents which is

proportionate even though they have been

appointed simultaneously.

Cases:

Constante Amor de Castro v. CA, GR

115838, July 18, 2002

The rule in Article 1915 applies even when the

appointments were made by the principals in

separate acts, provided that they are for the same

transaction. The solidarity arises from the common

interest of the principals, and not from the act of

constituting agency.

By virtue of this solidarity, the agent can recover

from any principal the whole compensation and

indemnity owing to him by the others. The parties,

however, may, by express agreement, negate this

solidarity responsibility. The solidarity does not

disappear by the mere partition effected by the

principals after the accomplishment of the agency.

If the undertaking is one in which several are

interested, but only some create the agency, only

the latter are solidarily liable, without prejudice to

the effects of negotiorum gestio with respect to the

others. And if the power granted includes various

transactions some of which are common and others

are not, only those interested in each transaction

shall be liable for it.

Article 1916: Rule where two persons contract

separately with agent and principal

When two persons contract with regard to

the same thing, one of them with the agent

and the other with the principal, and the

two contracts are incompatible with each

other, that of prior date shall be preferred,

without prejudice to the provisions of

Article 1544.

Two persons may contract separately with the agent

and the principal with regard to the same thing. If

the two contracts are incompatible with each other,

the one of prior date shall be preferred. This is

subject, however, to the rules under Article 1544.

This is not similar to Article 1924 as this does not

result to the termination of the agency. Moreover,

the sale involves two different buyers, one

approaching the principal and the other approaching

the agent.


Article 1544 provides for the rules on double sale. It

is as follows:

“If the same thing should have been sold to

different vendees, the ownership shall be

transferred to the person who may have

first taken possession thereof in good faith,

if it should be movable property.”

“Should it be immovable property, the

ownership shall belong to the person

acquiring it who in good faith first recorded

it in the Registry of Property.”

“Should there be no inscription, the

ownership shall pertain to the person who,

in good faith was first in the possession;

and, in the absence thereof, to the person

who presents the oldest title, provided

there is good faith.”

Distinctions:

Contract to sell Deed of absolute sale

A contract to sell is a

bilateral contract

whereby the prospective

seller, while expressly

reserving the ownership

of the subject property

despite delivery thereof

to the prospective buyer,

binds himself to sell the

said property exclusively

to the prospective buyer

upon fulfillment of the

condition agreed upon,

that is, full payment of

the purchase price. It is

akin to a conditional sale

where the efficacy or

obligatory force to the

vendor’s obligation to

transfer title is

subordinated to the

happening of a

condition.

A deed of absolute sale

manifests a sale when no

condition is imposed and

ownership passes to the

vendee upon delivery of

the thing subject of the

sale. There is neither a

stipulation in the deed

that title to the property

sold is reserved in the

seller until the full

payment of the price,

nor one giving the

vendor the right to

unilaterally resolve the

contract the moment

the buyer fails to pay

within a fixed period.

What do we mean by ‘oldest title?’ It means one

who first bought the property in good faith.

Article 1917: Liability of principal if agent acted in

good faith or in bad faith in relation to Article 1916

In the case referred to in the preceding

article, if the agent has acted in good faith,

the principal shall be liable in damages to

the third person whose contract must be

rejected. If the agent acted in bad faith, he

alone shall be responsible.

Article 1918: When principal is not liable for agent’s

expenses

The principal is not liable for the expenses

incurred by the agent in the following cases:

1. If the agent acted in contravention of

the principal’s instructions, unless the

latter should wish to avail himself of

the benefits derived from the contract;

2. When the expenses were due to the

fault of the agent;

3. When the agent incurred them with

knowledge that an unfavorable result

would ensue, if the principal was not

aware thereof;

4. When it was stipulated that the

expenses would be borne by the agent,

or that the latter would be allowed only

a certain sum.

MODES OF EXTINGUISHMENT OF AGENCY

Article 1919: Modes of extinguishing an agency

Agency is extinguished:

1. By its revocation;

2. By the withdrawal of the agent;

3. By the death, civil interdiction, insanity

or insolvency of the principal or of the

agent


4. By the dissolution of the firm or

corporation which entrusted or

accepted the agency;

5. By the accomplishment of the object or

purpose of the agency;

6. By the expiration of the period for

which the agency was constituted.

An agency may be terminated:

1. By agreement (accomplishment,

expiration);

2. By the subsequent acts of the parties

(revocation, withdrawal); and,

3. By operation of law (death, civil

interdiction, insanity, insolvency,

dissolution)

Keyword: EDWARD (Expiration; Death, civil

interdiction, insanity, insolvency; Withdrawal;

Accomplishment; Revocation; Dissolution)

The modes enumerated in the article are not

exclusive. Other causes include:

1. Termination by mutual consent;

2. Novation;

3. Loss of subject matter of the agency; and,

4. Outbreak of war if inconsistent with the

agency.

What are exceptions to the effects of such

termination? Articles 1930 and 1931, and Act 3135.

Cases:

Rallos v. Felix Go Chan & Sons Realty

Corporation, supra.

There are various ways of extinguishing agency, but

here We are concerned only with one cause - death

of the principal Paragraph 3 of Art. 1919 of the Civil

Code which was taken from Art. 1709 of the Spanish

Civil Code provides:

ART. 1919. Agency is extinguished:

xxx xxx xxx

3. By the death, civil interdiction, insanity or

insolvency of the principal or of the agent;

... (Emphasis supplied)

By reason of the very nature of the relationship

between Principal and agent, agency is extinguished

by the death of the principal or the agent. This is the

law in this jurisdiction.

Manresa commenting on Art. 1709 of the Spanish

Civil Code explains that the rationale for the law is

found in the juridical basis of agency which is

representation them being an in. integration of the

personality of the principal integration that of the

agent it is not possible for the representation to

continue to exist once the death of either is

establish. Pothier agrees with Manresa that by

reason of the nature of agency, death is a necessary

cause for its extinction. Laurent says that the

juridical tie between the principal and the agent is

severed ipso jure upon the death of either without

necessity for the heirs of the fact to notify the agent

of the fact of death of the former.

The same rule prevails at common law - the death of

the principal effects instantaneous and absolute

revocation of the authority of the agent unless the

Power be coupled with an interest. This is the

prevalent rule in American Jurisprudence where it is

well-settled that a power without an interest

conferred upon an agent is dissolved by the

principal's death, and any attempted execution of

the power afterward is not binding on the heirs or

representatives of the deceased.

Is the general rule provided for in Article 1919 that

the death of the principal or of the agent

extinguishes the agency, subject to any exception,

and if so, is the instant case within that exception?

That is the determinative point in issue in this

litigation. It is the contention of respondent

corporation which was sustained by respondent

court that notwithstanding the death of the principal

Concepcion Rallos the act of the attorney-in-fact,

Simeon Rallos in selling the former's sham in the

property is valid and enforceable inasmuch as the


corporation acted in good faith in buying the

property in question.

Articles 1930 and 1931 of the Civil Code provide the

exceptions to the general rule afore-mentioned.

“ART. 1930. The agency shall remain in full

force and effect even after the death of the

principal, if it has been constituted in the

common interest of the latter and of the

agent, or in the interest of a third person

who has accepted the stipulation in his

favor.”

“ART. 1931. Anything done by the agent,

without knowledge of the death of the

principal or of any other cause which

extinguishes the agency, is valid and shall

be fully effective with respect to third

persons who may have contracted with him

in good faith.”

Article 1930 is not involved because admittedly the

special power of attorney executed in favor of

Simeon Rallos was not coupled with an interest.

Article 1931 is the applicable law. Under this

provision, an act done by the agent after the death

of his principal is valid and effective only under two

conditions, viz: (1) that the agent acted without

knowledge of the death of the principal and (2) that

the third person who contracted with the agent

himself acted in good faith. Good faith here means

that the third person was not aware of the death of

the principal at the time he contracted with said

agent. These two requisites must concur the

absence of one will render the act of the agent

invalid and unenforceable.

In the instant case, it cannot be questioned that the

agent, Simeon Rallos, knew of the death of his

principal at the time he sold the latter's share in Lot

No. 5983 to respondent corporation. The knowledge

of the death is clearly to be inferred from the

pleadings filed by Simon Rallos before the trial court.

That Simeon Rallos knew of the death of his sister

Concepcion is also a finding of fact of the court a quo

and of respondent appellate court when the latter

stated that Simon Rallos 'must have known of the

death of his sister, and yet he proceeded with the

sale of the lot in the name of both his sisters

Concepcion and Gerundia Rallos without informing

appellant (the realty corporation) of the death of the

former.

On the basis of the established knowledge of Simon

Rallos concerning the death of his principal

Concepcion Rallos, Article 1931 of the Civil Code is

inapplicable. The law expressly requires for its

application lack of knowledge on the part of the

agent of the death of his principal; it is not enough

that the third person acted in good faith.

Thus in Buason & Reyes v. Panuyas, the Court

applying Article 1738 of the old Civil rode now Art.

1931 of the new Civil Code sustained the validity , of

a sale made after the death of the principal because

it was not shown that the agent knew of his

principal's demise. To the same effect is the case of

Herrera, et al., v. Luy Kim Guan, et al., 1961, where

in the words of Justice Jesus Barrera the Court

stated:

“... even granting arguemendo that Luis

Herrera did die in 1936, plaintiffs presented

no proof and there is no indication in the

record, that the agent Luy Kim Guan was

aware of the death of his principal at the

time he sold the property. The death 6f the

principal does not render the act of an

agent unenforceable, where the latter had

no knowledge of such extinguishment of

the agency.”

Article 1920: Revocation by principal or agent

The principal may revoke the agency at will,

and compel the agent to return the

document evidencing the agency. Such

revocation may be express or implied.

Agency is generally revocable at the will of the

principal because the trust and confidence may have

been lost. It is proper even if the agency is onerous,

or even if the period fixed has not yet expired. It is


subject only to the exceptions provided in Article

1927 (Agency coupled with an interest).

Distinction:

Revocation Renunciation

Terminated by the

subsequent acts of the

principal.

Terminated by the

subsequent acts of the

agent.

The agency cannot be revoked at will in the

following instances:

1. When it is coupled with an interest, interest

possessed by the agent not in the proceeds

arising from the exercise of the power but

interest in the subject matter of the power;

2. In cases mentioned under Article 1927:

a. When a bilateral contract depends

on the agency;

b. When the agency is the means of

fulfilling an obligation already

contracted;

c. In the case of a partner appointed

manager in the contract of

partnership and his removal from

the management is unjustifiable;

3. When there has been a waiver by the

principal;

4. When the principal is obliged not to revoke

as innocent third parties should not be

prejudiced;

5. When the revocation is done in bad faith.

Under the general rule, when the revocation is

proper, the agent cannot get damages because the

principal is merely exercising a right.

If the authority of the agent is in writing, the

principal can compel the agent to return the

document evidencing the agency. It is proper in

order to prevent the agent from making use of the

power of attorney and thus avoid liability to third

persons who may subsequently deal with the agent

on the faith of the instrument.

Kinds of revocation:

1. Express

2. Implied

a. Appointment of a new agent for

the same business or transaction,

provided there is incompatibility;

b. If the principal directly manages

the business entrusted to the

agent, dealing directly with third

persons, in a way incompatible

with the agency.

Notice of revocation:

1. To agent. As between the principal and the

agent, express notice to the agent that the

agency is revoked is not always necessary.

If the party to be notified actually knows, or

has reason to know, facts indicating that

this authority has been terminated or is

suspended, there is sufficient notice. A

revocation without notice to the agent will

not render invalid an act done in pursuance

of the authority.

2. To third persons. It has been held that

actual notice must be brought home to

former customers, while notice by

publications is sufficient as to other

persons.

Renunciation of the agency by the agent: The agent

has the power to renounce the agency relationship,

subject only to the contractual obligations owing to

the principal. Thus, if there is no contract existing

between the parties or if the contract is for no fixed

or definite period of time, it is terminable by the

agent at will. An agent cannot legally terminate an

agency in order to take advantage of the principal’s

condition or to profit by information resulting from

his agency.

Article 1921: Agency for contracting with specified

persons

If the agency has been entrusted for the

purpose of contracting with specified

persons, its revocation shall not prejudice


the latter if they were not given notice

thereof.

Article 1922: Agency when third parties are not

specified

If the agent had general powers, revocation

of the agency does not prejudice third

persons who acted in good faith and

without knowledge of the revocation.

Notice of the revocation in a newspaper of

general circulation is a sufficient warning to

third persons.

Distinctions:


Third persons have been

specified.

Third persons have not

been specified.

Revocation must be

personal.

Revocation may be

personal.

If the agency is created for the purpose of

contracting with specific persons, its revocation will

not prejudice such third person until notice thereof

is given them. In case the agent has general powers,

innocent third parties dealing with the agent will not

be prejudiced by the revocation before they had

knowledge thereof. In this case, the fact the

revocation was advertised in a newspaper of general

circulation would be sufficient warning to third

persons.

Article 1923: Effect of appointment of new agent

The appointment of a new agent for the

same business or transaction revokes the

previous agency from the day on which

notice thereof was given to the former

agent, without prejudice to the provisions

of the two preceding articles.

Appointment of a new agent revokes the first agency

only in case of incompatibility. This is an implied

revocation of the previous agency. It does not

become effective however as between the principal

and the agent until it is in some way communicated

to the latter.

Essential requisites of a valid substitution of counsel

of record:

1. There must be a written request for

substitution;

2. It must be filed with the written consent of

the client;

3. It must be with the written consent of the

attorney to be substituted; and,

4. In case the consent of the attorney to be

substituted cannot be obtained, there must

be at least a proof of notice, that the

motion for substitution was served on him

in the manner prescribed by the Rules of

Court.

Article 1924: Effect if the principal directly manages

the business

The agency is revoked if the principal

directly manages the business entrusted to

the agent, dealing directly with third

persons.

The rule applies only in case of incompatibility,

because it may be that the only desire of the

principal is for him and the agent to manage the

business together. In case of true inconsistency, the

agency is revoked, for there would no longer be any

basis therefor.

Article 1924 should be distinguished from Article

1916 which governs the relations as between

themselves of third persons who separately contract

with the agent and the principal with regard to the

same thing.

Cases:

CMS Logging, Inc. v. D.R. Aguinaldo

Corporation, L-41420, July 10, 1992

The principal may revoke a contract of agency at will

and such revocation may be express or implied, and

may be availed of even if the period fixed in the


contract of agency has not yet expired. As the

principal has this absolute right to revoke the

agency, the agent cannot object thereto; neither

may he claim damages arising from such revocation,

unless it is shown that such was done in order to

evade the payment of agent’s commission.

In the case at bar, CMS appointed DRACOR as its

agent for the sale of its logs to Japanese firms. Yet

during the existence of the contract of agency,

DRACOR admitted that CMS sold its logs directly to

several Japanese firms. This act constituted an

implied revocation of the contract of agency under

Article 1924. And since the contract of agency was

revoked by CMS when it sold its logs to Japanese

firms without the intervention of DRACOR, the latter

is no longer entitled to its commission from the

proceeds of such sale and is not entitled to retain

whatever money it may have received as its

commission for said transactions. Neither would

DRACOR be entitled to collect damages from CMS,

since damages are generally not awarded to the

agent for the revocation of the agency, and the case

at bar is not one falling under the exception

mentioned, which is to evade the payment of the

agent’s commission.

Be it noted that the act of a contractor who, after

executing the powers of attorney in favor of another

empowering the latter to collect whatever amounts

may be due to him from the government, and

thereafter, demanded and collected from the

government the money the collection of which he

entrusted to his attorney-in-fact, constituted

revocation of the agency in favor of the attorney-in-

fact.

Mendoza v. Paule, supra.

There was no valid reason for Paule to revoke

Mendoza’s SPAs. Since Mendoza took care of the

funding and sourcing of labor, materials and

equipment for the project, it is only logical that she

controls the finances, which means that the SPAs

issued to her were necessary for the proper

performance of her role in the partnership, and to

discharge the obligations she had already contracted

prior to revocation. Without the SPAs, she could not

collect from NIA, because as far as it is concerned,

EMPCT and not the Paule-Mendoza partnership is

the entity it had contracted with. Without these

payments from NIA, there would be no source of

funds to complete the project and to pay off

obligations incurred. As Mendoza correctly argues,

an agency cannot be revoked if a bilateral contract

depends upon it, or if it is the means of fulfilling an

obligation already contracted, or if a partner is

appointed manager of a partnership in the contract

of partnership and his removal from the

management is unjustifiable.

Paule’s revocation of the SPAs was done in evident

bad faith. Admitting all throughout that his only

entitlement in the partnership with Mendoza is his

3% royalty for the use of his contractor’s license, he

knew that the rest of the amounts collected from

NIA was owing to Mendoza and suppliers of

materials and services, as well as the laborers. Yet,

he deliberately revoked Mendoza’s authority such

that the latter could no longer collect from NIA the

amounts necessary to proceed with the project and

settle outstanding obligations.

From the way he conducted himself, Paule

committed a willful and deliberate breach of his

contractual duty to his partner and those with whom

the partnership had contracted. Thus, Paule should

be made liable for moral damages.

Article 1925: Revocation by one of two or more

principals

When two or more principals have granted

a power of attorney for a common

transaction, any one of them may revoke

the same without the consent of the others.

In solidary obligation, the act of one is considered by

the law as an act of all.

The appointment of an agent by two or more

principals for a common transaction or undertaking

makes them solidarily liable to the agent for all the

consequences of the agency.


Article 1926: Partial revocation of general power

A general power of attorney is revoked by a

special one granted to another agent, as

regards the special matter involved in the

latter.

In this article, two agents are involved: one to whom

a general power is previously granted and the other,

to whom a special power is subsequently conferred.

A specific power prevails over a general power.

Article 1927: When an agency cannot be revoked;

agency coupled with an interest

An agency cannot be revoked if a bilateral

contract depends upon it, or if it is the

means of fulfilling an obligation already

contracted, or if a partner is appointed

manager of a partnership in the contract of

partnership and his removal from the

management is unjustifiable.

This enumerates three instances of irrevocability:

1. If a bilateral contract depends upon the

agency;

2. If the agency is the means of fulfilling an

obligation already contracted;

3. If a partner is appointed manager of a

partnership in the contract of partnership

and his removal from the management is

unjustifiable.

According to De Leon, the rule that the principal may

revoke an agency at will is subject to two exceptions:

1. When the agency is created not only for the

interest of the principal but also for the

interest of third persons; and,

2. When the agency is created for the mutual

interest of both principal and agent.

An agency coupled with an interest cannot be

terminated by the sole will of the principal although

it is so revocable after the interest ceases. Hence, if

the government allows the De la Rama Steamship

Co. to manage the former’s vessel for 2 years in

order to pay the company for its help in acquiring

the vessels, at the end of said 2 years, the

government may end the agency.

In order that an agency may be irrevocable because

it is coupled with an interest, it is essential that the

interest of the agent shall be in the subject matter of

the power conferred and not merely an interest in

the exercise of the power because it entitles him to

compensation therefor. Thus, an agency is coupled

with an interest:

1. Where the agent has parted with value or

incurred liability at the principal’s request,

looking to the exercise of the power as the

means of reimbursement or indemnity; or,

2. Where the interest in the thing concerning

which the power is to be exercised arises

from an assignment, pledge or lien created

by the principal with the agent being given

the power to deal with the thing in order to

make the assignment, pledge or lien

effectual.

As to what constitutes a sufficient interest to take

the holder out of agency relation, it is sometimes

said it must be present interest in the subject matter

itself and that an interest in the proceeds of the

power’s exercise as compensation is insufficient.

Article 1928: Withdrawal by agent

The agent may withdraw from the agency

by giving due notice to the principal. If the

latter should suffer any damage by reason

of the withdrawal, the agent must

indemnify him therefor, unless the agent

should base his withdrawal upon the

impossibility of continuing the performance

of the agency without grave detriment to

himself.

It is based on the constitutional prohibition against

involuntary servitude.

The law imposes upon the agent the duty to give due

notice to the principal and if the withdrawal is

without just cause, to indemnify the principal should


the latter suffer damage by reason of such

withdrawal. The reason for the indemnity imposed

by law is that the agent fails in his obligation and as

such, he must answer for losses and damages

occasioned by the non-fulfillment.

If the agent withdraws from the agency for a valid

cause as when the withdrawal is based on the

impossibility of continuing with the agency without

grave detriment to himself, or is due to a fortuitous

event, the agent cannot be held liable.

When an agent files a complaint against the principal

for a monetary claim in the former’s favor, dignity

and decorum will not ordinarily permit the

continuation of the agency. Such a complaint is

therefore equivalent to withdrawal of the agent

from the agency.

Article 1929: Obligation of agent to continue to act

after withdrawal

The agent, even if he should withdraw from

the agency for a valid reason, must

continue to act until the principal has had

reasonable opportunity to take the

necessary steps to meet the situation.

The law reconciles the interests of the agent with

those of the principal, and if it permits the

withdrawal of the agent, it is on the condition that

no damage results to the principal, and if the agent

desires to be relieved of the obligation of making

reparation when he withdraws for a just cause, he

must continue to act so that no injury may be caused

to the principal.

Article 1930: When agency continues even after the

death of the principal

The agency shall remain in full force and

effect even after the death of the principal,

if it has been constituted in the common

interest of the latter and of the agent, or in

the interest of a third person who has

accepted the stipulation in his favor.

As a general rule, agency is terminated by the death

of the principal. In the following cases, the agency

remains in full force and effect even after the death

of the principal:

1. If the agency has been constituted in the

common interest of the principal and the

agent; and,

2. If it has been constituted in the interest of a

third person who has accepted the

stipulation in his favor.

It is a well-settled general rule that if the authority of

an agent is coupled with an interest, it is not

revocable by the death, act, or condition of the

principal, unless there is some agreement to the

contrary between the parties. This is a well-

recognized exception to the rule that the death of

the principal revokes the authority of an agent

appointed by him. However, it must be noted that

an agent whose agency is coupled with an interest

cannot stand on a better ground than a partner

appointed as manager in the articles of partnership

insofar as revocability of authority or power is

concerned. Inasmuch as a partner appointed as

manager in the articles of partnership can be

divested of his power if there is a just or lawful

cause, it follows that an agent whose agency is

coupled with an interest can also be stripped of is

power of attorney, if there is just cause.

Cases:

del Rosario v. Abad, 104 Phil 648

The sale is not valid because the principal had

already died when it was made. The agency was

certainly not one coupled with an interest. The

mere mention of the interest in the power of

attorney is not enough. The power of attorney

should have stated what precisely the interest

consisted of. The mere fact that the improvements

on the land had been mortgaged in favor of Abad,

which fact, incidentally, was not even mentioned in

the power of attorney, is immaterial. The mortgage

of the improvement had nothing to do with the

power of attorney. The proper remedy of Abad is to


foreclose the mortgage, and not to avail himself of

the power of attorney. As the agency was not

coupled with an interest, it ended on Tiburcio’s

death, and the subsequent sale of the land cannot

be considered valid.

Article 1931: Nature of agent’s authority after the

death of the principal

Anything done by the agent, without

knowledge of the death of the principal or

of any other cause which extinguishes the

agency, is valid and shall be fully effective

with respect to third persons who may have

contracted with him in good faith.

The death of the principal extinguishes the agency

but in the same way that revocation of the agency

does not prejudice third persons who have dealt

with the agent in good faith without notice of the

revocation, such third persons are protected where

the agent acted without knowledge of the death of

the principal or of any other cause which

extinguishes the agency.

What is the rule in case business was already begun?

Under the second paragraph of Article 1884, the

agent must also finish the business already begun on

the death of the principal should delay entail any

danger.

Article 1932: Death of the agent

If the agent dies, his heirs must notify the

principal thereof, and in the meantime

adopt such measures as the circumstances

may demand in the interest of the latter.

If the heirs of the dead agent are unable to give

notice, one good measure for them to do is to

consign the object or property of the agency in

court. In this way, they can still protect the interests

of the principal, who trusted their predecessor in

interest. The heir’s duty arises from what may be

termed as a presumed agency or tacit agency or an

agency by operation of law.

The article does not impose a duty on the heirs of

the principal to notify the agent of the death of the

principal.

notes on partnership and agency

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