2014 UP Agency and Partnership Reviewer

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UP LAW BOC AGENCY AND PARTNERSHIP CIVIL LAW

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PARTNERSHIP

Contract of Partnership DEFINITION By the contract of partnership:

(1) Two or more persons;

(2) Bind themselves to contribute money,

property, or industry to a common fund;

(3) With the intention of dividing the profits

among themselves [Art. 1767]

Article 1767 defines partnership from the

viewpoint of a contract. From the contract arises

the partnership relation [De Leon (2010)]

ESSENTIAL FEATURES (1) There must be a valid contract;

(2) The parties must have legal capacity;

(3) There must be a mutual contribution of

money, property, or industry to a common

fund;

(4) The object must be lawful;

(5) The primary purpose must be to obtain

profits and to divide the same among the

parties;

(6) The partnership has a juridical personality

separate from individual partners [Art. 1768].

As such, 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 [Art. 1774].

PARTIES General rule: Any person capacitated to contract

may enter into a contract of partnership.

As such, the following persons cannot enter into

a contract of partnership:

(1) Those suffering from civil interdiction;

(2) Minors;

(3) Insane or demented persons;

(4) Deaf-mutes who do not know how to write;

(5) Incompetents who are under guardianship.

Exceptions : The capacity of the following

persons to enter into a contract of partnership,

though capacitated to contract generally, are

limited:

(1) Those who are prohibited from giving each

other any donation or advantage cannot

enter into a universal partnership [Art. 1782];

(2) A corporation cannot enter into a

partnership in the absence of express

authorization by statute or charter.

Although a corporation cannot enter into a

partnership contract, it may, however, engage in

a joint venture with others [Auerbach vs. Sanitary Wares Manufacturing Corp (1989)]. On

the other hand, there is no prohibition against a

partnership being a partner in another

partnership [De Leon (2010)]

OBJECT

OBJECT OF UNIVERSAL PARTNERSHIP A universal partnership may refer to:

(1) All present property :

(a) The partners contribute all the property

which belongs to them to a common

fund, with the intention of dividing the

same among themselves, as well as the

profits they may acquire therewith [Art. 1778].

(b) The property contributed includes all

those belonging to the partners at the

time of the constitution of the

partnership.

(c) A stipulation for the common

enjoyment of any other profits may also

be made. However, the property which

the partners may acquire subsequently

by inheritance, legacy or donation

cannot be included in such stipulation,

except the fruits thereof [Art. 1779].

(2) All the profits:

(a) It comprises all that the partners may

acquire by their industry or work during

the existence of the partnership.

(b) Only the usufruct over the property

of the partners passes to the

partnership [Art. 1780].

Art. 1781. When the articles of universal

partnership does not specify its nature (all

present property or all the profits), the

partnership will be considered as one only of all

the profits.


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OBJECT OF PARTICULAR PARTNERSHIP

Art. 1783. A particular partnership has for its

object determinate things, their use or fruits, or

a specific undertaking, or the exercise of a

profession or vocation.

EFFECT OF UNLAWFUL OBJECT If the partnership has an unlawful object or

purpose:

(1) The contract is void ab initio [Art. 1409, par. 1].

(2) Once dissolved by judicial decree:

(a) The profits shall be confiscated by favor

of the State;

(b) The instruments or tools and proceeds

of the crime shall also be forfeited in

favor of the State [Art. 1770].

(3) The contributions of partners shall not be

confiscated unless they are instruments or

tools of the crime [De Leon (2010)].

FORM General rule: The contract may be constituted in

any form [Art. 1771].

Exceptions:

(1) Where immovable property or real rights

are contributed:

(a) The contract must appear in a public

instrument; and

(b) Attached to such instrument must be

an inventory, signed by the parties, of

the property contributed [Arts. 1771 and 1773];

(2) Where the capital is at least P3,000, in

money or property:

(a) The contract must appear in a public

instrument; and

(b) It must be recorded in the Office of the

Securities and Exchange Commission

(SEC).

As to the second, failure to comply with these

requirements, however, does not affect the

liability of the partnership and the partners to

third persons [Arts. 1768 and 1772].

DURATION

COMMENCEMENT

Art. 1784. A partnership begins from the

moment of the execution of the contract, unless

otherwise stipulated.

TERM As to period, a partnership may either be:

(1) For a fixed term or particular undertaking;

or

(2) At will, the formation and dissolution of

which depend on the mutual desire and

consent of the parties. Any one of the

partners may, at his sole pleasure, dictate

the dissolution of the partnership, even in

bad faith, subject to liability for damages

[Ortega v. CA (1995)].

EXTENSION A partnership term may be extended by:

(1) Express renewal; or

(2) Implied renewal, when these requisites

concur:

(a) The partnership is for a fixed term or

particular undertaking;

(b) It is continued after the termination of

the fixed term or particular undertaking

without any express agreement [Art. 1785].

RULES TO DETERMINE EXISTENCE When the intent of the parties is clear, such

intent shall govern. When it does not clearly

appear, the following rules apply:

(1) Persons who are not partners to each other

are not partners as to third persons, subject

to the provisions on partnership by

estoppel.

(2) Co-ownership or co-possession does not of

itself establish a partnership, even when

there is sharing of profits in the use of the

property.

(3) Sharing of gross returns does not of itself

establish a partnership, even when the

parties have joint or common interest in any

property from which the returns are derived.


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(4) The receipt by a person of a share in the

profits of a business is prima facie evidence

that he is a partner.

As to the fourth, no such inference is drawn if

the profits are received in payment:

(1) As a debt by installments or otherwise;

(2) As wages of an employee of rent to a

landlord;

(3) As an annuity to a widow or representative

of a deceased partner;

(4) As interest on a loan, though the amount of

payment vary with the profits of the

business;

(5) As the consideration for the sale of a

goodwill of a business or other property by

installments or otherwise [Art. 1769].

KINDS (1) As to the legality of its existence:

(a) Partnership de jure is one which has

complied with all the requisites for its

lawful establishment;

(b) Partnership de facto is one which failed

to so comply.

(2) As to its object:

(a) Universal partnership:

(i) Of all present property;

(ii) Of profits;

(b) Particular partnership.

(3) As to its duration:

(a) For a fixed term or particular

undertaking;

(b) At will.

(4) As to the liability of the partners:

(a) General partnership, consisting of

general partners only, who are liable

pro rata for partnership obligations with

all their after exhaustion of partnership

assets;

(b) Limited partnership, includes, aside

from general partner/s, limited

partners, who are not personally liable

for partnership obligations.

(5) As to its publicity:

(a) Secret partnership, where the existence

of certain persons as partners is not

made known by the partners;

(b) Open or notorious partnership, the

existence of which is made known to the

public by the partners.

(6) As to its purpose:

(a) Commercial or trading partnership, for

transaction of business;

(b) Professional or non-trading partnership,

for the exercise of profession.

A profession has been defined as “a group of men pursuing a learned art as a common

calling in the spirit of public service – no less a

public service because it may incidentally be a

means of livelihood” [In the Matter of the Petition for Authority to Continue Use of Firm name “Sycip, Salazar, etc.”/“Ozaeta, Romulo, etc.” (1979)]. A professional partnership is a particular


KINDS OF PARTNERS (1) Capitalist partner, whose contribution is

money or property;

(2) Industrial partner, contribution is only his

industry;

(3) General partner, whose liability to third

persons extends to his separate property;

(4) Limited partner, whose liability to third

persons is limited to his capital contribution;

(5) Managing partner, who was designated to

manage the affairs or business of the

partnership;

(6) Liquidating partner, who takes charge of the

winding up of partnership affairs;

(7) Partner by estoppel, who is not really a

partner but is liable as such for the

protection of innocent third persons;

(8) Continuing partner, who continues the

business after dissolution of the partnership

by admission of a new partner, or

retirement, death or expulsion of existing

partners;

(9) Surviving partner, who remains a partner

after dissolution by death of any partner;

(10) Subpartner, who is not a member of the

partnership but contracts with a partner

with regard to the share of the latter in the

partnership;

(11) Ostensible partner, who takes active part in

the business of the partnership and is

known by the public;

(12) Secret partner, who takes active part in the

business, but is unknown to the third

persons as a partner;


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(13) Silent partner, who does not take active part

in the business, but may be known to be a

partner by third persons;

(14) Dormant partner, who does not take active

part in the business and is not known or

held out as a partner;

(15) Original partner, who has been a partner

since the constitution of the partnership;

(16) Incoming partner, who is about to be taken

as a member into an existing partnership;

(17) Retiring partner, who is withdrawing from

the partnership.

Industrial partner

Capitalist partner

Form of contribution

Industry Money or property

Share in profits

Just and equitable

share

According to

agreement; if none, in

proportion to

contribution

Share in losses

Exempted as to losses

as between partners,

but liable to third

persons, without

prejudice to

reimbursement from

capitalist partners

According to

agreement; if none, in

the same proportion

as the agreed share in

profits; if none, in

proportion to

contribution

Engagement in business

Cannot engage in

business for himself,

unless the partnership

expressly permits him

to do so; should he do

so without permission,

the capitalist partners

may: (1) exclude him

from the firm; or (2)

avail themselves of

the benefits obtained

in violation of the

prohibition, with right

to damages in either

case [Art. 1789]

Cannot engage, for his

own account, in the

same kind of business

as that of the

partnership, unless

there is a stipulation

to the contrary; should

he do so, he shall

bring to the common

fund any profits

accruing to him from

his transactions and

shall personally bear

all the losses [Art. 1808]

PARTNERSHIP AND OTHER CONTRACTS DISTINGUISHED

Partnership Joint venture

Operates with firm

name and legal

personality

Operates without firm

name and legal

personality

Generally relates to a

continuing business of

various transactions of

a certain kind

Usually limited to a

single transaction

Corporations may not

enter into a

partnership

Corporations may

enter into joint

ventures

Under Philippine law, a joint venture is a form of

partnership and should thus be governed by the

laws of partnership [Auerbach vs. Sanitary Wares Manufacturing Corp. (1989)].

Partnership Co-ownership

Generally created by

either express or

implied contract

Generally created by

law and may exist

even without a

contract

Has a separate

juridical personality

Has no separate

juridical personality

Generally, the purpose

is to obtain profits

The purpose is the

common enjoyment of

a thing or right

Duration has no

limitation

An agreement to keep

a thing undivided for

more than ten years is

not allowed, but may

be extended

There is mutual

agency between

partners

There is no mutual

representation among

co-owners

Death or incapacity of

a partner dissolves the

partnership

Death or incapacity of

a co-owner does not

dissolve the co-

ownership

A partner cannot

dispose of his interest,

so as to make the

assignee a partner,

without consent of

others

A co-owner can

dispose of his share

without consent of

others


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Partnership Corporation

Has juridical personality separate and distinct

from its individual members

Can only act through agents

Composed of an aggregate of individuals

Distributes its profits to those who contributed

capital to the business

Can only be organized where there is a law

authorizing its organization

Taxable as in a corporation

Created by agreement Created by operation

of law

Involves at least two

persons

Except for corporation

sole, requires at least

five incorporators

Personality

commences from the

moment of execution

of the contract

Personality

commences from the

issuance of certificate

of incorporation

Can exercise any

power authorized by

partners

Can exercise only

powers conferred by

the Corporation Code

or by its articles of

incorporation, and

such as are necessary

or incidental to the

exercise of such

powers

When management is

not agreed upon,

every partner may act

for the partnership

Management is vested

in the board of

directors or trustees

Partners are generally

liable for partnership

debts

Stockholders are

liable only to the

extent of their shares

A partner cannot

dispose of his interest,

so as to make the

assignee a partner,

without consent of

others

A stockholder has the

right to transfer his

shares without

consent of others

Duration has no

limitation

The term limit is 50

years, but may be

extended

May be dissolved at

any time by one or all

of the partners

May only be dissolved

with the consent of

the state

Partnership Conjugal Partnership of

Gains

Created by voluntary

agreement of two or

more partners of either

sex

Arises in case the

spouses, of opposite

sex, agree before

marriage

Governed by

agreement

Governed by law

Has juridical

personality

Has no juridical

personality

Commencement date

may be stipulated

Commencement is on

the date of the

celebration of the

marriage and any

stipulation to the

contrary is void

Share in profits may be

stipulated; otherwise,

in proportion to

contribution

Share in profits is equal

Management shared by

all partners, unless

otherwise agreed upon

Administration belongs

to the spouses jointly,

but decision of

husband prevails in

case of disagreement

Partner can dispose of

interest even without

consent of others

Spouse cannot dispose

of interest during

marriage, even with

consent

Partnership Association

Has juridical

personality

Has no juridical

personality

Organized for profit Not always organized

for profit

Capital is contributed Capital is not

contributed, although

fees are collected from

members

The partnership is

primarily liable; the

partners are liable only

subsidiarily

The members are liable

individually for debts

which they authorized

or ratified

Share in profits may be

stipulated; otherwise,

in proportion to

contribution

Share in profits is equal


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Rights and Obligations of

the Partnership

RIGHT TO CONTRIBUTION The partnership has a right to the contribution

(or the partners are obliged to contribute). The

money or property thus contributed, or their use

or fruits, become the property of the

partnership.

CONTRIBUTION OF MONEY OR PROPERTY With respect to contribution of property, a

partner is obliged to:

(1) To contribute, at the beginning of the

partnership or at the stipulated time, the

money, property or industry which he

undertook to contribute;

(2) In case a specific and determinate thing is

to be contributed:

(a) To warrant against eviction in the same

manner as a vendor; and

(b) To deliver to the partnership the fruits

of the property promised to be

contributed, from the time they should

have been delivered, without need of

demand [Art. 1786];

(3) In case a sum of money is to be contributed,

or in case he took any amount from the

partnership coffers, to indemnify the

partnership for:

(a) Interest; and

(b) Damages, from the time he should have

complied with his obligation, or from

the time he converted the amount to his

own use, respectively [Art. 1788].

AMOUNT OF CONTRIBUTION General rule: Partners are to contribute equal

shares to the capital of the partnership.

Exception: When there is an agreement to the

contrary, the contribution shall follow such

agreement [Art. 1790].

ADDITIONAL CAPITAL CONTRIBUTION Requisites:

(1) There is an imminent loss of the business of

the partnership;

(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 refuses deliberately

(not because of financial inability) to

contribute an additional share to the

capital; and

(4) There is no agreement that even in case of

imminent loss of the business, the partners

are not obliged to contribute.

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,

unless there is an agreement to the contrary

[Art. 1791].

CONTRIBUTION OF INDUSTRY An industrial partner is obliged to contribute his

industry at the stipulated time.

General rule: An industrial partner cannot

engage in business for himself. Should he do so,

the capitalist partners, as well as industrial

partners [De Leon (2010)] may either:

(1) Exclude him from the firm; or

(2) Avail themselves of the benefit which he

may have obtained.

Exception: He may engage in business for

himself when the partnership expressly permits

him to do so [Art. 1789].

RIGHT TO APPLY PAYMENT RECEIVED TO PARTNERSHIP CREDIT

General rule: A partner authorized to manage,

who collects a demandable sum owed to him in

his own name from a person who also owes the

partnership a demandable sum, is obliged to

apply the sum collected to both credits pro rata,

even if he issued a receipt for his own credit

only.

Requisites:

(1) There exist at least two debts, one where

the collecting partner is creditor, and the

other, where the partnership is the creditor;


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(2) Both debts are demandable; and

(3) The partner who collects is authorized to

manage and actually manages the

partnership.

Exceptions:

(1) In case the receipt was issued for the

account of the partnership credit only,

however, the sum shall be applied to the

partnership credit alone.

(2) When the debtor declares, pursuant to

Article 1252, at the time of making the

payment, to which debt the sum must be

applied, it shall be so applied [Art. 1792].

RIGHT TO RETURN OF CREDIT RECEIVED A partner, authorized to manage or not, who

already received, in whole or in part, his share of

a partnership credit, is obliged to bring to the

partnership capital what he received when:

(1) The other partners have not collected their

shares; and

(2) The partnership debtor has become

insolvent.

This obligation exists even when he issued a

receipt for his share only [Art. 1793].

Ratio: In this case, the debt becomes a bad

debt. It would be unfair for the partner who

already collected not to share in the loss of the

other partners.

RIGHT TO INDEMNITY FOR DAMAGES Every partner is responsible to the partnership

for damages suffered by it through his fault.

SET-OFF OF LIABILITY General rule: The liability for damages cannot

be set-off or compensated by profits or benefits

which the partner may have earned for the

partnership by his industry.

Ratio: The partner has the obligation to secure

the benefits for the partnership. As such, the

requirement for compensation, that the partner

be both a creditor and a debtor of the

partnership at the same time, is not complied

with [Art. 1278; De Leon (2010)].

Exception : The court may equitably lessen the

liability if, through his extraordinary efforts in

other activities of the partnership, unusual

profits were realized [Art. 1794]. Note, however,

that there is still no compensation in this case.

SUIT FOR DAMAGES Before a partner may sue another for alleged

fraudulent management and resultant

damages, liquidation must first be effected to

determine the extent of the damage. Without

liquidation of partnership affairs, a partner

cannot claim damages [Soncuya v. De Luna (1939)].

RESPONSIBILITY TO PARTNERS In the absence of any stipulation to the contrary,

every partner is an agent of the partnership for

the purpose of its business. As such, it is

responsible to every partner:

(1) For amounts, and the corresponding

interest from the time the expenses were

made, which he may have disbursed on

behalf of the partnership;

(2) For obligations he may have contracted in

good faith in the interest of the partnership

business; and

(3) For risks in consequence of the

management of the partnership [Art. 1796].

Rights and Obligations of

Partners Inter Se

RIGHT TO ASSOCIATE ANOTHER IN SHARE Every partner may associate another person

with him in his share. The admission of the

associate to the partnership, however, requires

consent of all the other partners even if the

partner having an associate is a managing

partner [Art. 1804].

This arrangement refers to a contract of

subpartnership, which is a partnership within a

partnership, distinct and separate from the

main partnership. It is considered a modification

of the original contract [De Leon (2010)].


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RIGHT TO INSPECT PARTNERSHIP BOOKS The partnership books shall be kept:

(1) At a place agreed upon by the partners;

(2) When there is no such agreement, at the

principal place of business of the

partnership.

Every partner shall, at any reasonable hour,

have access to and may inspect and copy any of

them.

Any reasonable hour means reasonable hours

on business days throughout the year [Pardo v. Lumber Co. (1925)].

RIGHT TO FORMAL ACCOUNT General rule: The right to a formal account of

partnership affairs accrues only when the

partnership is dissolved.

Exceptions: In the special and unusual cases

mentioned in Article 1809, formal accounting

may be demanded by any partner even before

dissolution:

(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) If, without his consent, a partner has derived

profits from any transaction connected with

the formation, conduct, or liquidation of the

partnership or from any use of partnership

property;

(4) Whenever other circumstances render it just

and reasonable [Art. 1809].

PROPERTY RIGHTS OF PARTNERS

IN GENERAL The property rights of a partner are:

(1) Rights in specific partnership property;

(2) Interest in the partnership; and

(3) Right to participate in the management

[Art. 1810].

PROPERTY AND CAPITAL DISTINGUISHED

Partnership capital Partnership property

With constant value Value varies with

market conditions

Includes only actually

contributed and

promised capital

Includes the

contributions and

property acquired by

the partnership

OWNERSHIP OF CERTAIN PROPERTIES (1) The ownership of property used by the

partnership depends on the intention of the

parties, which may be drawn from an

express agreement or their conduct.

(a) A partner may allow the property to be

used by the partnership without transfer

of ownership, contributing only the use

or enjoyment thereof.

(b) He may also hold title to partnership

property, without acquiring ownership

thereof [Art. 1819].

(2) Property acquired by a partner with

partnership funds is presumed to be

partnership property.

(3) The same presumption also arises when the

property is indicated in the partnership

books as partnership asset.

(4) Other factors may be considered to

determine ownership of the property.

RIGHTS IN SPECIFIC PROPERTY (1) The partners have equal rights to possess

partnership property for partnership

purposes.

(2) For other purposes, the consent of his

partners is necessary.

(3) If the partner is excluded, he may ask for:

(a) Formal accounting [Art. 1809]; or

(b) Dissolution by judicial decree [Art. 1831]. (4) A partner’s right in such property is not

assignable, except when all the partners

assign their rights in the same property;

(5) The right is not subject to attachment or

execution, except on claim against the

partnership. In case of such attachment, the

partners, or any of them, or the

representatives of a deceased partner,


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cannot claim any right under the

homestead or exemption laws.

(6) The right is not subject to legal support

under Article 291 [Art. 1811].

INTEREST IN PARTNERSHIP A partner’s interest in the partnership is his

share of the profits and surplus [Art. 1812].

ASSIGNMENT OF INTEREST Assignment by a partner of his whole interest in

the partnership, of itself:

(1) Does not dissolve the partnership; or

(2) Does not entitle the assignee to:

(a) Interfere in the management or

administration of the partnership

business or affairs;

(b) Require information or account of

partnership; or

(c) Inspect the partnership books.

It merely entitles the assignee to:

(1) Receive the profits to which the assigning

partner was entitled;

(2) In case of fraud in management, avail

himself of the usual remedies;

(3) In case of dissolution:

(a) Receive his assignor’s interest; and

(b) Require an accounting from the date

only of the last account agreed to by all

the partners [Art. 1813].

INTEREST BY PERSONAL CREDITORS General rule: Partnership creditors are preferred

over the personal creditors of the partners as

regards partnership property.

Exception: On due application by any judgment

creditor of a partner, a competent court may:

(1) Charge the interest of the partner for the

satisfaction of the judgment debt;

(2) Appoint a receiver of the share of the profits

and of any other money due or to fall due to

the partner; and

(3) Make all other orders, directions, accounts

and inquiries, which the debtor partner

might have made, or which the

circumstances may require.

The interest charged may be redeemed before

foreclosure or, in case of sale directed by the

court, may be purchased without causing

dissolution:

(1) With separate property, by one or more of

the partners; or

(2) With partnership property, by one or more

of the partners, will consent of all, except

the debtor partner [Art. 1814].

RIGHT TO PARTICIPATE IN MANAGEMENT Management of the partnership is primarily

governed by the agreement of the partners in

the articles of partnership. It may be stipulated

that the partnership will be managed by:

(1) All the partners; or

(2) A number of partners appointed as

managers, which may be appointed:

(a) In the articles of partnership; or

(b) After constitution of the partnership.

POWERS OF A MANAGING PARTNER General rule: The partner designated as

manager in the articles may execute all acts of

administration despite opposition by the other

partners.

Exception: He cannot do so when he acts in bad

faith.

REVOCATION OF POWER BY MANAGING PARTNER The powers of the managing partner may be

revoked:

(1) If appointed in the articles of partnership,

when:

(a) There is just or lawful cause for

revocation; and

(b) The partners representing the

controlling interest revoke such power.

(2) If appointed after the constitution of the

partnership, at any time and for any cause

[Art. 1800].

MANAGING BY TWO OR MORE PARTNERS When there are two or more managing partners

appointed, without specification of their duties

or without a stipulation on how each one will

act:


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(1) Each one may separately execute all acts of

administration.

(2) If any of them opposes the acts of the

others, the decision of the majority prevails.

(3) In case of a tie, the partners owning the

controlling interest will decide [Art. 1801].

Requisites:

(1) Two or more partners have been appointed

as managers;

(2) There is no specification of their respective

duties; and

(3) There is no stipulation that one of them

shall not act without the consent of all the

others.

STIPULATION OF UNANIMITY

Art. 1802. In case there is a stipulation that none

of the managing partners shall act without the

consent of others, the concurrence of all is

necessary for the validity of the acts, and the

absence or disability of one cannot be alleged,

unless there is imminent danger of grave or

irreparable injury to the partnership.

MANAGEMENT WHEN MANNER NOT AGREED UPON

When there is no agreement as to the manner

of management, the following rules apply:

(1) All the partners are considered agents

(mutual agency). Whatever any one does

alone binds the partnership, unless there is

a timely opposition to the act, under Article

1801.

(2) Any important alteration in the immovable

property of the partnership, even if useful to

the partnership, requires unanimity. If the

alteration is necessary for the preservation

of the property, however, consent of the

others is not required [De Leon (2010)].

If the refusal is manifestly prejudicial to the

partnership, court intervention may be sought

[Art. 1803].

MUTUAL AGENCY In addition to the Article 1801, there is effectively

a mutual agency in the following cases:

(1) Partners can dispose of partnership

property even when in partnership name

[Art. 1819].

(2) An admission or representation made by

any partner concerning partnership affairs is

evidence against the partnership [Art. 1820].

(3) Notice to any partner of any matter relating

to partnership affairs is notice to the

partnership [Art. 1821]. (4) Wrongful act or omission of any partner

acting for partnership affairs makes the

partnership liable [Art. 1822].

(5) Partnership is bound to make good losses

for wrongful acts or misapplications of

partners [Art. 1823].

RIGHT TO PROFITS AND OBLIGATIONS FOR LOSSES RULES FOR DISTRIBUTION OF PROFITS AND LOSSES The distribution of profits and losses shall be in

accordance with the following rules:

(1) They shall be distributed in conformity with

the agreement.

(2) If only the share in profits has been

stipulated, the share in the losses shall be in

the same proportion.

(3) In the absence of any stipulation:

(a) The share in the profits of the capitalist

partners shall be in proportion to their

contributions.

(b) The losses shall be borne by the

capitalist partners, also in proportion to

the contributions.

(c) The share of the industrial partners in

the profits is that share as may be just

and equitable. If he also contributed

capital, he will receive a share of the

profits in proportion to his contribution;

and

(d) The industrial partner, who did not

contribute capital, is not liable for losses

[Art. 1797].


PAGE 308

EXCLUSION OF PARTNER FROM SHARE General rule: A stipulation excluding one or

more partners from any share in the profits or

losses is void [Art. 1799].

Exception: A stipulation exempting an industrial

partner from losses is valid, since, if the

partnership fails to realize profits, he can no

longer withdraw his work or labor [De Leon (2010)].

OBLIGATION TO RENDER INFORMATION Partners shall render on demand true and full

information of all things affecting the

partnership to:

(1) Any partner;

(2) The legal representative of any deceased

partner; or

(3) The legal representative of any partner

under legal disability [Art. 1806].

OBLIGATION TO ACCOUNT AND ACT AS TRUSTEE Every partner must (1) account to the

partnership for any benefit and (2) hold as

trustee for it any profits derived by him without

the consent of the other partners:

(1) From any transaction connected with the

formation, conduct, or liquidation of the

partnership; or

(2) From any use by him of its property [Art. 1807].

Obligations of the

Partnership/Partners to

Third Persons

OBLIGATION TO OPERATE UNDER A FIRM NAME

Art. 1815. 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.

General rule: The partners may adopt any firm

name desired.

Exceptions:

(1) They cannot use a name which is “identical or deceptively or confusingly similar to an

existing or corporation [or partnership] or to

any other name already protected by law or

is patently deceptive, confusing or contrary

to existing laws” [Sec. 18, Corporation Code].

(2) Use of names of deceased partner in law

firms is “permissible provided that the firm indicates in all its communications that said

partner is deceased” [Rule 3.02, Code of Professional Responsibility].

LIABILITY OF PARTNERS FOR

PARTNERSHIP CONTRACTS The partnership is primarily liable for contracts

entered into:

(1) In its name and for its account;

(2) Under its signature; and

(3) By a person authorized to act for it.

Upon exhaustion of its assets, all partners are

liable pro rata with all their property.

Any partner may enter into a separate

obligation to perform a partnership contract

[Art. 1816].


PAGE 309

NATURE OF INDIVIDUAL LIABILITY

SUBSIDIARY General rule: The partners are liable subsidiarily.

It only arises upon exhaustion of partnership

assets [Cia. Maritima v. Muñoz (1907)].

Exceptions:

(1) A third person who transacted with the

partnership can hold the partners solidarily

(rather than subsidiarily) liable for the whole

obligation if the case falls under Articles

1822 or 1823 [Muñasque v. CA (1985)]. The

provisions refer to wrongful acts or omission

and misapplication of money or property by

a partner in the ordinary course of business.

(2) A person admitted as a partner into an

existing partnership is liable for all the

obligations of the partnership arising before

his admission, except that his liability shall

be satisfied only out of partnership property,

unless there is a stipulation to the contrary

[Art. 1826]. In other words, he is not

personally liable.

PRO RATA The partners are liable pro rata.

This liability is not increased even when a

partner:

(1) Has left the country and the payment of his

share of the liability cannot be enforced [Co-Pitco v. Yulo (1907)]; or

(2) His liability is condoned by the creditor

[Island Sales v. United Pioneers (1975)].

LIABILITY OF AN INDUSTRIAL PARTNER An industrial partner, who is not liable for

losses, is not exempt from this liability.

However, he can recover the amount he has

paid from the capitalist partners, unless there is

a stipulation to the contrary [Cia. Maritima v. Muñoz (1907)].

STIPULATION AGAINST INDIVIDUAL LIABILITY Any stipulation against this liability is:

(1) Void against third persons; but

(2) Valid among the partners [Art. 1817].

LIABILITY OF PARTNERS FOR PARTNERSHIP CONTRACTS

ACTS APPARENTLY FOR THE CARRYING ON OF USUAL BUSINESS General rule: Any act of a partner which is

apparently for the carrying on of the usual

business of the partnership binds the latter,

including the execution of any instrument in the

partnership name.

Exception: The partnership is not bound when

the following concur:

(1) The partner has in fact no authority to act;

and

(2) The person with whom he deals has

knowledge of such fact [Art. 1818, par. 1].

ACTS NOT APPARENTLY FOR CARRYING ON OF THE USUAL BUSINESS General rule: Acts of a partner which is not

apparently for carrying on of the usual business

does not bind the partnership.

Exception: The partnership is bound if the other

partners authorized him to do the act [Art. 1818, par. 2].

ACTS OF STRICT DOMINION General Rule: One or some of the partners have

no authority to do the following acts of strict

dominion:

(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 makes it impossible

to carry on the ordinary business of the

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.

Exceptions: They may do so if:

(1) Authorized by all the partners; or

(2) The other partners have abandoned the

business [Art. 1818, par. 3].


PAGE 310

ACTS IN CONTRAVENTION OF A RESTRICTION Any act of a partner in contravention of a

restriction on authority does not bind the

partnership to persons having knowledge of the

restriction [Art. 1818, par. 4].

CONVEYANCE OF PARTNERSHIP REAL PROPERTY

TITLE IN PARTNERSHIP NAME Any partner may convey the real property in the

name of the partnership.

The partnership can recover it, except when:

(1) The act of the partner binds the partnership,

when he has authority to carry out the usual

business of the partnership, under Article

1818, 1st par.; or

(2) If not so authorized, the property has been

conveyed by the grantee, or a person

claiming under him, to a holder for value

and without knowledge that the partner

exceeded his authority [Art. 1819, par. 1].

A partner authorized to carry out the usual

business may convey, in his own name, the

equitable interest of the partnership [Art. 1819, par. 2].

TITLE IN THE NAME OF OTHER PERSONS Where the title is in the name of one or more

but not all the partners, and the record does not

disclose the right of the partnership:

(1) The partners having title may convey title.

(2) The partnership may recover it when the

partners conveying title have no authority to

carry on the usual business of the

partnership, unless the purchaser or his

assignee is:

(a) A holder for value; and

(b) Without knowledge that the act

exceeded authority [Art. 1819, par. 4].

Where the title is in the name of one or more or

all the partners, or in a third person in trust for

the partnership a partner authorized to carry on

the usual business may convey equitable title in

the partnership name or in his own name [Art. 1819, par. 4].

Where the title is in the names of all the

partners, a conveyance executed by all of them

passes all the rights to the property [Art. 1819, par. 5].

LIABILITY OF PARTNERSHIP FOR ADMISSION BY A PARTNER An admission or representation by any partner

may be used as evidence against the

partnership when:

(1) It concerns partnership affairs;

(2) Such affairs are within the scope of his

authority [Art. 1820].

LIABILITY OF PARTNERSHIP FOR WRONGFUL ACTS OF A PARTNER The partnership is solidarily liable with the

partner who causes loss or injury to any person

not a partner, or incurs any penalty through any

wrongful act or omission:

(1) In the ordinary course of the business of the

partnership; or

(2) Not in such ordinary course of business, but

with the authority of his co-partners [Art. 1822].

LIABILITY OF THE PARTNERSHIP FOR MISAPPLICATION OF MONEY OR PROPERTY The partnership is liable for losses suffered by a

third person whose money or property was:

(1) Received by a partner:

(a) Acting within the scope of his apparent

authority; and

(b) Misapplied it;

(2) Received by the partnership:

(a) In the course of its business; and

(b) Misapplied by any partner while it is in

the custody of the partnership [Art. 1823].


PAGE 311

LIABILITY OF THE OTHER PARTNERS UNDER ART. 1822 AND 1823 All partners are solidarily liable with the

partnership for its liabilities under Articles 1822

and 1823 [Art. 1824].

This is without prejudice to the guilty partner

being liable to the other partners. However, as

far as third persons are concerned, the

partnership is answerable [De Leon (2010)].

LIABILITY IN CASE OF PARTNERSHIP BY ESTOPPEL PARTNER BY ESTOPPEL A partner by estoppel is a person who, by words

spoken or written or by conduct (1) represents

himself as a partner or (2) consents to another

representing him to anyone as a partner:

(1) In an existing partnership; or

(2) With one or more persons not actual

partners [Art. 1825, par. 1].

LIABILITY OF A PARTNER BY ESTOPPEL

PERSONAL REPRESENTATION A partner by estoppel is liable to any such

persons:

(1) To whom such representation has been

made; and

(2) Who has, on the faith of such

representation, given credit to the actual or

apparent partnership [Art. 1825, par. 1].

PUBLIC REPRESENTATION If he has made such representation or

consented to its being made in a public manner,

whether the representation has or has not been

(personally) made or communicated to such

persons so giving credit by or with his

knowledge, and:

(1) Partnership liability results, he is liable as

though he were an actual member of the

partnership.

(2) No partnership liability results, he is liable

pro rata with the other persons, if any, so

consenting to the contract or

representation.

(3) When there are no such other persons, he is

separately liable [Art. 1825, par. 1].

EFFECT ON EXISTING PARTNERSHIP OR OTHER PERSONS NOT ACTUAL PARTNERS (1) When a person has been represented to be

a partner (a) in an existing partnership, or

(b) 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.

(2) When all the members of the existing

partnership consent to the representation, a

partnership act or obligation results.

(3) In all other cases, it is the joint act or

obligation of the person acting and the

persons consenting to the representation

[Art. 1825, par. 2].

NATURE OF LIABILITY Summarizing Article 1825, a partner by estoppel

is liable in the following manner:

(1) He is liable as though he were a partner

when:

(a) There is an existing partnership;

(b) All the partners consented to the

representation; and

(c) A partnership liability results.

(2) He is liable jointly and pro rata (as though

he were a partner in fact) with those who

consented to the representation when:

(a) There is an existing partnership but not

all the partners consented; or

(b) There is no existing partnership and all

those represented as partners

consented to the representation.

(3) He is liable separately when:

(a) There is an existing partnership but

none of the partners consented; or

(b) There is no existing partnership and not

all of those represented as partners

consented to the representation.


PAGE 312

LIABILITY OF AN INCOMING PARTNER A person admitted as a partner is liable:

(1) For obligations incurred subsequent to his

admission as the other partners are liable;

(2) For obligations incurred before his

admission, but will be satisfied only out of

the partnership property, unless otherwise

stipulated that he fully assumes such

obligations.

Ratio:

(1) The new partner partakes of the benefits of

the partnership property and an already

established business.

(2) He has every means of obtaining full

knowledge of the debts of the partnership

and remedies that amply protect his

interest [De Leon (2010)].

NOTICE TO OR KNOWLEDGE OF THE PARTNERSHIP The following operate as notice to or knowledge

of the partnership:

(1) Notice to any partner of any matter relating

to partnership affairs;

(2) Knowledge of the partner acting in the

particular matter acquired while a partner;

(3) Knowledge of the partner acting in the

particular matter then present to his mind;

or

(4) Knowledge of any other partner who

reasonably could and should have

communicated it to the acting partner.

These do not apply in case of fraud on the

partnership committed by or with the consent of

the partner [Art. 1821].

Dissolution and Winding

Up

CONCEPTS 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 different from the winding-up of the business

[Art. 1828]. It does not terminate the

partnership, which continues until the winding

up of partnership affairs is completed [Art. 1829].

Winding up is the actual process of settling the

partnership business or affairs after dissolution.

It involves collection and distribution of

partnership assets, payment of debts, and

determination of the value of the interest of the

partners in the partnership.

Termination is the point in time when all

partnership affairs are completely wound up

and finally settled. It signifies the end of the

partnership life [De Leon (2010)].

CAUSES OF DISSOLUTION

WITHOUT VIOLATION OF THE AGREEMENT (1) By the termination of the definite term or

particular undertaking specified in the

agreement;

(2) By the express will of any partner, who must

act in good faith, when no definite term or

particular is specified.

(3) 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;

(4) By the expulsion of any partner from the

business bona fide in accordance with such

a power conferred by the agreement

between the partners [Art. 1830, par. 1].


PAGE 313

If, after the expiration of the definite term or

particular undertaking, the partners continue

the partnership without making a new

agreement, the firm becomes a partnership at

will [Art. 1785].

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

[Ortega v. CA (1995)].

IN CONTRAVENTION OF THE AGREEMENT Where circumstances do not permit

dissolution under any other provision of Article

1830, it may also be dissolved by the express

will of any partner at any time.

Thus, 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. 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 [Rojas v. Maglana (1990)].

BY OPERATION OF LAW (1) 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;

(2) When a specific thing which a partner had

promised to contribute, perishes before

delivery, or by the loss of the thing, only the

use or enjoyment of which has been

contributed; the loss of a specific thing,

however, does not dissolve the corporation

after its ownership has already been

transferred to the partnership;

(3) By the death of any partner;

(4) By the insolvency of any partner or of the

partnership;

(5) By the civil interdiction of any partner;

BY DECREE OF A COURT A partner may apply for dissolution in court

when:

(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.

A person who acquires the interest of a partner

may likewise apply:

(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

OTHER CAUSES

(1) When a new partner is admitted into an

existing partnership;

(2) When any partner retires;

(3) When the other partners assign their

rights to the sole remaining partner;

(4) When all the partners assign their rights

in the partnership property to third

persons [Art. 1840].

The statutory enumeration of the causes of

dissolution is exclusive [De Leon (2010)].


PAGE 314

EFFECTS OF DISSOLUTION

ON AUTHORITY OF THE PARTNERS In general, upon dissolution, the authority of the

partners to represent the partnership is

confined only to acts necessary to:

(1) Wind up partnership affairs; or

(2) Complete transactions begun but not then

finished [Art. 1832, par. 1].

WITH RESPECT TO PARTNERS The authority of partners to act for the

partnership is terminated, with respect to

partners:

(1) When the dissolution is not by the act,

insolvency or death of a partner; or

(2) When the dissolution is by such act,

insolvency or death, when the partner

acting for the partnership has knowledge or

notice of the cause [Arts. 1832 and 1833].

In other cases, each partner is still liable for his

share in the liability created by the partner

acting for the partnership [Art. 1833].

WITH RESPECT TO THIRD PERSONS With respect to persons not partners:

(1) After dissolution, a partner can bind the

partnership by any act appropriate for:

(a) Winding up partnership affairs; or

(b) Completing transactions unfinished at

dissolution.

(2) He can also bind it by any transaction which

would bind the partnership as 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 thereof; or

(b) Had not so extended credit but had

known of the partnership prior to

dissolution, and having no knowledge

or notice of dissolution, the fact 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 business was regularly

carried on [Art. 1834, par. 1].

Note the character of the notice required:

(1) As to persons who extended credit to the

partnership prior to dissolution, notice must

be actual.

(2) As to persons who merely knew of the

existence of the partnership, publication in a

newspaper of general circulation in the

place of business of the partnership is

sufficient.

ON LIABILITY FOR TRANSACTIONS AFTER DISSOLUTION The liability of a partner, in general, is the same

as in ordinary contracts (pro rata and

subsidiary).

In the following cases, however, the liability

shall be satisfied out of the partnership assets

alone (i.e., there is no subsidiary liability):

(1) When the partner had been, prior to the

dissolution, unknown as a partner to the

person with whom the contract is made;

(2) When the partner had been, prior to the

dissolution, so far unknown or inactive in

partnership affairs that the business

reputation of the partnership could not be

said to have been in any degree due to his

connection with it [Art. 1834].

Any act of a partner after dissolution in no case

binds the partnership in the following cases:

(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;

(2) Where the partner has become insolvent; or

(3) Where the partner has no authority to wind

up partnership affairs, except by a

transaction with one who:

(a) Had extended credit to the partnership

prior to dissolution and had no

knowledge or notice of his want of

authority; or

(b) Had not extended credit to the

partnership prior to dissolution, and,

having no knowledge or notice of his

want of authority, the fact of his want of

authority has not been advertised [Art. 1834].


PAGE 315

Article 1834 does not 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

[Art. 1834].

ON LIABILITY FOR CONTRACTS AFTER DISSOLUTION BY SPECIFIC CAUSES General rule: A contract entered into by a

partner acting for the partnership after

dissolution by act, death or insolvency of a

partner binds the other partners.

Exceptions:

(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 death or insolvency

of a partner, the partner acting for the

partnership had knowledge or notice of the

death or insolvency [Art. 1833].

ON EXISTING LAIBILITY OF PARTNERS General rule: Dissolution does not of itself

discharge the existing liability of any partner.

Exception: A partner may be relieved when there

is an agreement to that effect between:

(1) Himself;

(2) The partnership creditor; and

(3) The person or partnership continuing the

business.

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.

In case of dissolution by death, the individual

property of a deceased partner is liable for

obligations of the partnership incurred while he

was a partner, after payment of his separate

debts [Art. 1835].

WINDING UP PARTNERS

WHO MAY WIND UP The following partners have the right to wind up

the partnership affairs:

(1) Those designated in an agreement;

(2) Those who have not wrongfully dissolved

the partnership; or

(3) The legal representative of the last surviving

partner, who was not insolvent.

Any partner or his legal representative or

assignee may obtain winding up by the court,

upon cause shown [Art. 1836].

MANNER OF WINDING UP (1) Extrajudicial, by the partners themselves; or

(2) Judicial, under the control and direction of

the proper court.

The action for liquidation of the partnership is

personal. The fact that sale of assets, including

real property, is involved does not change its

character, such sale being merely a necessary

incident of the liquidation of the partnership,

which should precede and/or is part of its

process of dissolution [Claridades v. Mercader (1966)].

RIGHTS OF PARTNERS IN CASE OF DISSOLUTION

DISSOLUTION WITHOUT VIOLATION OF THE AGREEMENT Each partner may have:

(1) The partnership property applied to

discharge the partnership liabilities; and

(2) The surplus applied in cash to the net

amount owing to the respective partners.

This is a right as against his co-partners and all

partners claiming through them in respect of

their interests in the partnership. It cannot be

availed if there is an agreement to the contrary

[Art. 1837, par. 1].


PAGE 316

DISSOLUTION IN CONTRAVENTION OF THE AGREEMENT

PARTNER WHO DID NOT CAUSE THE DISSOLUTION The partners who did not cause the dissolution

wrongfully has the following rights:

(1) To demand the right under Article 1837, 1st

par.;

(2) To be indemnified for damages for breach

of the agreement against the partner who

caused the dissolution wrongfully [Art. 1837(1)];

(3) To continue the business:

(a) In the same name;

(b) By themselves or jointly with others;

(c) During the agreed term for the

partnership.

For the purpose of continuing the business, the

said partners may possess the partnership

property provided:

(1) They secure the payment by bond approved

by the court; or

(2) They pay any partner who has caused the

dissolution wrongfully the value of his

interest in the partnership, less any

damages recoverable, and indemnity

against all present or future partnership

liabilities [Art. 1837(2)].

PARTNER WHO CAUSED THE DISSOLUTION The partner who caused the dissolution

wrongfully has the following rights:

(1) If the business is not continued, all the

rights Article 1837, par. 1, subject to liability

for damages;

(2) If the business is continued, the right, as

against his co-partners and all claiming

through them, to:

(a) Ascertainment, without considering the

value of the goodwill of the business,

and payment to him in cash the value of

his partnership interest, less any

damage, or have the payment secured

by a bond approved by the court; and

(b) Be released from all existing liabilities

of the partnership [Art. 1837(3)].

The goodwill of a business may be defined to be

the advantage which it has from its

establishment or from the patronage of its

customers, over and above the mere value of its

property and capital. The goodwill (which

includes the firm name) is part of the

partnership assets and may be subject of sale

[De Leon (2010)].

RIGHTS OF PARTNERS IN CASE OF RECISSION A partner, who is induced by fraud or

misrepresentation to become such partner, may

rescind the contract. Without prejudice to any

other right, he is 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, 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 or making the representation

against all debts and liabilities of the


SETTLING OF ACCOUNTS BETWEEN PARTNERS Subject to any agreement to the contrary, the

following rules shall be observed in settling

accounts between partners after dissolution.

COMPOSITION OF PARTNERSHIP ASSETS (1) The partnership property; and

(2) The contributions of the partners necessary

for the payment of all the liabilities [Art. 1839(1)].

In accordance with the subsidiary liability of the

partners, the partnership property shall be

applied first to satisfy any liability of the

partnership [Art. 1839(3)].


PAGE 317

AMOUNT OF CONTRIBUTION FOR LIABILITIES The rules for distribution of losses shall

determine the contributions of the partners [Art.

1839(4)]. As such:

(1) The contribution shall be in conformity with

the agreement.

(2) If only the share in profits has been

stipulated, the contribution shall be in the

same proportion.

(3) In the absence of any stipulation, the

contribution shall be in proportion to the

capital contribution [Art. 1797].

ENFORCEMENT OF CONTRIBUTION The following persons have the right to enforce

the contributions:

(1) An assignee for the benefit of creditors;

(2) Any person appointed by the court; or

(3) To the extent of the amount which he has

paid in excess of his share of the partnership

liability, any partner or his legal

representative [Art. 1839(5) and (6)].

The individual property of a deceased partner

shall be liable for the contributions [Art.

1839(7)].

ORDER OF APPLICATION OF ASSETS The partnership liabilities shall rank, in order of

payment, as follows:

(1) Those owing to creditors other than

partners;

(2) Those owing to partners other than for

capital and profits;

(3) Those owing to partners in respect of

capital;

(4) Those owing to partners in respect of profits

[Art. 1839(2)].

DOCTRINE OF MARSHALLING OF ASSETS When partnership property and the individual

properties of the partners are in possession of a

court for distribution:

(1) Partnership creditors have priority on

partnership property;

(2) Separate creditors have priority on

individual property, saving the rights of lien

of secured creditors.

(3) Anything left from either shall be applied to

satisfy the other [Art. 1839(8)].

DISTRIBUTION OF PROPERTY OF INSOLVENT PARTNER Where a partner has become insolvent or his

estate is insolvent, the claims against his

separate property shall rank in the following

order:

(1) Those owing to separate creditors;

(2) Those owing to partnership creditors;

(3) Those owing to partners by way of

contribution [Art. 1839(9)].

RIGHTS OF CREDITORS OF DISSOLVED PARTNERSHIP

AS CREDITORS OF THE NEW PARTNERSHIP In the following cases, creditors of the dissolved

partnership are also creditors of the person or

partnership continuing the business:

(1) When the business is continued without

liquidation, and the cause of dissolution is:

(a) Admission of a new partner into the

existing partnership;

(b) Retirement or death of any partner, and

his rights to partnership property are

assigned to (1) two or more of the

partners, or (2) one or more of the

partners and one or more third persons;

(c) Retirement of all but one partner, and

their rights to partnership property are

assigned to the remaining partner, who

continues the business, either alone or

with others;

(d) Wrongful dissolution by any partner,

and the remaining partners continue

the business, either alone or with

others;

(e) Expulsion of a partner, and the

remaining partners continue the

business, either alone or with others.

(2) When the cause of dissolution is the

retirement or death of any partner, and

business is continued with the consent of

the retired partner or the representative of

the deceased partner, without assignment

of their rights to partnership property.


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(3) When the cause of dissolution is the

assignment by all the partners or their

representatives of their rights in partnership

property to one or more third persons who

promise to pay the debts and who continue

the business of the partnership [Art. 1840, par. 1].

LIABILITY OF A NEW PARTNER The liability to the creditors of the dissolved

partnership of a new partner in the partnership

continuing the business shall be satisfied out of

the partnership property alone. However, he

may, through agreement, assume individual

liability [Art. 1840, par. 2].

PRIORITY OF CREDITORS OF DISSOLVED PARTNERSHIP Creditors of the dissolved partnership have prior

right to any claim of the retired partner or the

representative of the deceased partner against

the person or partnership continuing the

business [Art. 1840, par. 3].

This is without prejudice to the right of creditors

to set aside any assignment on the ground of

fraud [Art. 1840, par. 4].

RIGHTS OF A RETIRED PARTNER OR A REPRESENTATIVE OF DECEASED PARTNER Unless otherwise agreed upon, when any

partner retires or dies, and the business is

continued without any settlement of accounts

as between him or his estate and the person or

partnership continuing the business, he or his

legal representative, as against such person or

partnership, subject to the prior rights of

creditors of the dissolved partnership:

(1) May have the value of his interest at the

date of dissolution ascertained; and

(2) Shall receive as an ordinary creditor:

(a) An amount equal to the value of his

interest in the dissolved partnership

with interest; or

(b) 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


RIGHT TO AN ACCOUNT In the absence of any agreement to the

contrary, the right to an account of his interest

shall accrue to any partner, or his legal

representative at the date of dissolution, as

against:

(1) The winding up partners;

(2) The surviving partners; or

(3) The person or partnership continuing the

business [Art. 1842].

Limited Partnership

DEFINITION A limited partnership is:

(1) A partnership;

(2) Formed by two or more persons;

(3) Having as members:

(a) One or more general partners; and

(b) One or more limited partners.

The limited partners as such shall not be bound

by the obligations of the partnership [Art. 1843].

CHARACTERISTICS (1) A limited partnership is formed by

compliance with the statutory requirements

[Art. 1844].

(2) The business is controlled or managed by

one or more general partners, who are

personally liable to creditors [Arts. 1848 and 1850].

(3) One or more limited partners contribute to

the capital and share in the profits but do

not manage the business and are not

personally liable for partnership obligations

beyond their capital contributions [Arts. 1845, 1848 and 1856].

(4) Obligations or debts are paid out of the

partnership assets and the individual

property of the general partners [Art. 1843].

(5) The limited partners may have their

contributions back subject to conditions

prescribed by law [Arts. 1844 and 1957].


PAGE 319

A limited partnership has the following

advantages:

(1) For general partners, to secure capital from

others while retaining control and

supervision for the business;

(2) For limited partners, to have a share in the

profits without risk of personal liability.

GENERAL AND LIMITED PARTNERS DISTINGUISHED

General partner Limited partner

Extent of liability

Personally, but

subsidiarily, liable for

obligations of the

partnership

Liable only to the

extent of his capital

contributions

Right to participate in management

Unless otherwise

agreed upon, all

general partners have

an equal right to

manage the

partnership

No right to participate

in management

Nature of contribution

Cash, property or

industry

Cash or property only,

not industry

Proper party in proceedings by

or against partnership

Proper party Not proper party,

unless (1) he is

also a general partner;

or (2) where the object

of the proceedings is

to enforce his right

against or liability to

the partnership

Firm name

Name may appear in

the firm name

Name must not

appear in the firm

name

Prohibition to engage in other business

Prohibited (subject to

qualifications)

Not prohibited

General partner Limited partner

Effect of retirement, death, insanity

or insolvency

Dissolves partnership Does not dissolve

partnership; rights

transferred to

executor or

administrator for

selling his estate

Assignability of interest

Not assignable Assignable

GENERAL AND LIMITED

PARTNERSHIP DISTINGUISHED General

partnership Limited

partnership

Creation

May be constituted in

any form, subject to

exceptions

Partners must: (1) sign

and swear to a

certificate in

compliance with

Article 1844; and (2)

file the certificate for

record in the SEC

Composition

Only general partners One or more general,

and one or more

limited partners

Firm name

Must contain the word

“Company” [SEC Memo Circ No. 14-00],

except for professional

partnerships

May or may not

include the name of

one or more of the

partners

Must include the word

“Limited” [SEC Memo. Circ. No. 14-00]

Must not include

name of limited

partners, 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 has been

carried on under a

name in which his

surname appeared

Rules governing dissolution

Articles 1828-1842 Articles 1860-1863


PAGE 320

FORMATION

GENERAL REQUIREMENTS Two or more persons desiring to form a limited

partnership shall:

(1) Sign and swear to a certificate stating the

items in Article 1844; and

(2) File for record the certificate in the SEC [Art. 1844].

A limited partnership is formed if there is

substantial compliance in good faith with the

requirements. When there is failure to

substantially comply with the requirements:

(1) In relation to third persons, the partnership

is general, unless they recognized that the

firm is a limited partnership; and

(2) As between the partners, the partnership

remains limited, since they are bound by

their agreement [De Leon (2010)].

PURPOSE OF FILING The purpose of filing the certificate in the SEC

is:

(1) To give actual or constructive notice to

potential creditors or persons dealing with

the partnership; and

(2) To acquaint them with its essential features,

including the limited liability of limited

partners [De Leon (2010)].

FIRM NAME General rule: The surname of a limited partner

shall not appear in the partnership name.

Exceptions:

(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 this prohibition is

liable as a general partner to partnership

creditors who extend credit without actual

knowledge that he is not a general partner.

FALSE STATEMENT IN THE CERTIFICATE If the certificate contains a false statement, one

who suffers loss by reliance thereon 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 file a petition for its

cancellation or amendment [Art. 1847].

Requisites:

(1) The partner knew the statement to be false:

(a) At the time he signed the certificate; or

(b) Subsequently, but having sufficient time

to cancel or amend it, or file a petition

for its cancellation or amendment, and

he failed to do so;

(2) The person seeking to enforce liability has

relied upon the false statement in

transacting business with the partnership;

and

(3) The person suffered loss as a result of

reliance upon such false statement.

GENERAL AND LIMITED PARTNER AT THE SAME TIME

Art. 1853. A person may be a general and a

limited partner in the same partnership at the

same time. This fact must be stated in the

certificate.

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 as a limited partner,

he shall have the rights against the other

members which he would have had if he were

not also a general partner.

MANAGEMENT Only general partners have the right to manage

the partnership. If a limited partner takes part in

the control of the business, he becomes liable

as a general partner [Art. 1848].


PAGE 321

A general partner shall have the rights and

powers and be subject to all restrictions and

liabilities of a partner in a partnership without

limited partners. Thus, he has general authority

over the business.

However, written consent or ratification by all

limited partners is necessary to authorize the

general partners 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 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.

OBLIGATIONS OF A LIMITED PARTNER

OBLIGATIONS RELATED TO CONTRIBUTION The contributions of a limited partner may be

cash or other property, but not services [Art. 1845].

A limited partner is liable for partnership

obligations when he contributes services

instead of only money or property to the

partnership [De Leon (2010)].

A limited partner is liable to the partnership:

(1) For the difference between his actual

contribution 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 [Art. 1858, par. 1].

He 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 [Art. 1858, par. 2].

These liabilities can be waived or compromised

only by the consent of all members. Such waiver

or compromise, however, shall not affect the

right to enforce said liabilities of a creditor:

(1) Who extended credit; or

(2) Whose claim arose, after the filing or before

a cancellation or amendment of the

certificate, to enforce such liabilities [Art. 1858, par. 3].

Even after a limited partner has rightfully

received the return in whole or in part of his

capital contribution, he is still liable to the

partnership for any sum, not in excess of such

return with interest, necessary to discharge its

liabilities to all creditors:

(1) Who extended credit; or

(2) Whose claims arose before such return [Art. 1858, par. 4].

A person who has contributed capital to a

partnership, erroneously believing that he has

become a limited partner, but his name appears

in the certificate as a general partner or he is

not designated as a limited partner, is not

personally liable as a general partner by reason

of his exercise of the rights of a limited partner,

provided:

(1) On ascertaining the mistake, he promptly

renounces his interest in the profits of the

business or other compensation by way of

income [Art. 1852];

(2) He does not participate in the management

of the business [Art. 1848]; and

(3) His surname does not appear in the

partnership name [Art. 1846].

LIABLITY TO PARTNERSHIP CREDITORS General rule: A limited partner is not liable as a

general partner. His liability is limited to the

extent of his contributions [Art. 1843].


PAGE 322

Exceptions: The limited partner is liable as a

general partner when:

(1) His surname appears in the partnership

name, with certain exceptions [Art. 1846, par. 2].

(2) He takes part in the control of the business

[Art. 1848].

LIABILITY TO SEPARATE CREDITORS On due application to a court of competent

jurisdiction by any separate creditor of a limited

partner, the court may:

(1) Charge his interest with payment of the

unsatisfied amount of such claim;

(2) Appoint a receiver; and

(3) Make all other orders, directions and

inquiries which the circumstances of the

case may require.

The interest so charged may be redeemed with

the separate property of any general partner,

but may not be redeemed with partnership

property [Art. 1862].

Note: In a general partnership, the interest may

be redeemed with partnership property with the

consent of all the partners whose interests are

not charged [Art. 1814].

RIGHTS OF A LIMITED PARTNER

IN GENERAL A limited partner shall have the same rights as

a general partner to:

(1) Require that the partnership books be kept

at the principal place of business of the

partnership;

(2) To inspect and copy any of them at a

reasonable hour;

(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 contribution

provided the partnership assets are in

excess of all its liabilities [Art. 1851].

RIGHT TO TRANSACT BUSINESS WITH THE PARTNERSHIP A limited partner may:

(1) Loan money to the partnership;

(2) Transact other business with the

partnership; and

(3) Receive a pro rata share of the partnership

assets with general creditors if he is not also

a general partner [Art. 1854, par. 1].

Limitations: A limited partner, with respect to

his transactions with the partnership, cannot:

(1) Receive or hold as collateral security any

partnership property; or

(2) Receive any payment, conveyance, or

release from liability if it will prejudice the

right of third persons [Art. 1854, par. 1].

Violation of the prohibition is considered a fraud

on the creditors of the partnership [Art. 1854, par. 2].

RIGHT TO SHARE IN PROFITS 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.

This right is subject to the condition that

partnership assets will still be in excess of

partnership liabilities after such payment [Art. 1856] The partnership liabilities being referred

to exclude the liabilities to the limited and

general partners.

Ratio: Otherwise, he will receive a share to the

prejudice of third-party creditors.

RIGHT TO RETURN OF CONTRIBUTION A limited partner may have his contributions

withdrawn or reduced when:

(1) All the 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 may be demanded as a matter of

right; and


PAGE 323

(3) The certificate is cancelled or so amended

as to set forth the withdrawal or reduction

[Art. 1857, par. 1].

The return of his contributions may be

demanded, as a matter of right (i.e., even when

not all the other partners consent), when (1) and

(2) above are complied with:

(1) On the dissolution of the partnership;

(2) Upon the arrival of the date specified in the

certificate for the return; or

(3) After the expiration of a 6-month notice in

writing given by him to the other partners, if

no time is fixed in the certificate for:

(a) The return of the contribution; or

(b) The dissolution of the partnership [Art. 1857, par. 2].

General rule: A limited partner, irrespective of

the nature of his contribution has only the right

to demand and receive cash in return for his

contribution.

Exceptions: He may receive his contribution in a

form other than cash when:

(1) There is a statement in the certificate to the

contrary; or

(2) All the members of the partnership consent

[Art. 1857, par. 3].

PREFERENCE OF LIMITED PARTNERS General rule: The limited partners stand on

equal footing.

Exception: By an agreement of all the partners

(general and limited) in the certificate, priority or

preference may be given to some limited

partners over others with respect to:

(1) The return of contributions;

(2) Their compensation by way of income; or

(3) Any other matter [Art. 1855].

RIGHT TO ASSIGN INTEREST The interest of a limited partner is assignable.

The assignee may become:

(1) A substituted limited partner; or

(2) A mere assignee.

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. He has all the rights and powers,

and is subject to all the restrictions and

liabilities of his assignor, except those liabilities

which:

(1) The assignee was ignorant of; and

(2) Cannot be ascertained from the certificate

[Art. 1859, pars. 2 and 6].

An assignee is only entitled to receive the share

of the profits or other compensation by way of

income, or the return of contribution, to which

the assignor would otherwise be entitled. He

has no right:

(1) To require any information or account of the

partnership transactions;

(2) To inspect the partnership books [Art. 1859, par. 3].

An assignee has the right to become a

substituted limited partner if:

(1) All the partners consent thereto; or

(2) The assignor, being empowered to do so by

the certificate, gives him that right [Art. 1859, par. 4].

An assignee becomes a substituted limited

partner when the certificate is appropriately

amended [Art. 1859, par. 5].

RIGHT TO ASK FOR DISSOLUTION 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) He has a right to contribution but his

contribution is not paid because the

partnership property is insufficient to pay its

liabilities [Art. 1857, par. 4].

DISSOLUTION A limited partnership is dissolved in much the

same way and causes as an ordinary

partnership [De Leon (2010)].

General rule: The retirement, death, insolvency,

insanity or civil interdiction of a general partner

dissolves the partnership.

Exception: It is not so dissolved when the

business is continued by the remaining general

partners:


PAGE 324

(1) Under a right to do so stated in the

certificate; or

(2) With the consent of all members [Art. 1860].

Upon the death of a limited partner, his

executor or administrator shall have:

(1) All the rights of a limited partner for the

purpose of settling his estate; and

(2) The power to constitute an assignee as a

substituted limited partner, if the deceased

was so empowered in the certificate.

The estate of a deceased limited partner shall

be liable for all his liabilities as a limited partner

[Art. 1861].

SETTLEMENT OF ACCOUNTS

ORDER OF PAYMENT In settling accounts after dissolution, the

liabilities of the partnership shall be entitled to

payment in the following order:

(1) Those to creditors, including limited

partners except those on account of their

contributions, in the order of priority as

provided by law;

(2) Those to limited partners in respect to their

share of the profits and other compensation

by way of income in 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 [Art. 1863, par. 1].

Note: In settling accounts of a general

partnership, those owing to partners in respect

to capital enjoy preference over those in respect

to profits.

SHARE IN PARTNERSHIP ASSETS The share of limited partners in respect to their

claims for capital, profits, or for compensation

by way of income, is in proportion of their

contribution, unless:

(1) There is a statement in the certificate as to

their share in the profits; or

(2) There is a subsequent agreement fixing

their share [Art. 1863].

AMENDMENT OR CANCELLATION OF CERTIFICATE

CANCELLATION OF CERTIFICATE The certificate shall be cancelled when:

(1) The partnership is dissolved; or

(2) All limited partners cease to be such limited

partners.

AMENDMENT OF CERTIFICATE 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;

(6) There is a 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 [Art. 1864].

REQUIREMENTS FOR AMENDMENT OR CANCELLATION To amend or cancel a certificate:

(1) The amendment or cancellation must be in

writing;

(2) It must be signed and sworn to by all the

members including the new members, and

the assigning limited partner in case of


PAGE 325

substitution or addition of a limited or

general partner; and

(3) The writing to amend (with the certificate,

as amended) or to cancel must be filed for

record in the SEC.

When a person required to sign the writing, a

person desiring the cancellation or amendment

may petition the court to order cancellation or

amendment. The court shall order the SEC to

record the cancellation or amendment if it finds

that the petitioner has a right to have the

writing executed.

From the moment the amended

certificate/writing or a certified copy of a court

order granting the petition for amendment has

been filed, such amended certificate shall

thereafter be the certificate of partnership [Art. 1865].

AGENCY

Contract of Agency

DEFINITION By the contract of agency:

(1) A person binds himself to render some

service or to do something;

(2) In representation or on behalf of another;

(3) With the consent or authority of the latter

[Art. 1868].

Agency may refer to both a contract, as defined

in the provision, and the representative relation

created. As a relationship, it is fiduciary (based

on trust and confidence), where the agent is

empowered to contract with a third person on

behalf of a principal [De Leon (2010)].

The basis of agency is representation [Victorias Milling v. CA (2000)].

CHARACTERISTICS The contract of agency is:

(1) Consensual, perfected by mere consent;

(2) Nominate, has its own name;

(3) Preparatory, entered into as a means to

enter into other contracts;

(4) Principal, does not depend on another

contract for existence and validity;

(5) Bilateral, if for compensation, giving rise to

reciprocal rights and obligations, but

unilateral, if gratuitous, creating obligations

only for the agent.

FORMATION

ESSENTIAL ELEMENTS (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; and

(4) The agent acts within the scope of his

authority [Rallos v. Felix Go Chan (1978)].

PARTIES (1) Principal, one whom the agent represents

and from whom he derives his authority;

and

(2) Agent, who acts for and represents the

principal, having derivative authority in

carrying out the business of the latter.

Juridical persons such as corporations and

partnerships can be principals and agents [Art. 1919(4)].

CAPACITY (1) A principal must have legal capacity to

enter into contract in his own right.

(2) An agent must have legal capacity to enter

into the contract of agency, although he

may not have capacity to enter into the

particular contract subject of agency.

Ratio: One who acts through an agent in law

does the act himself. As such, the capacity to

act by an agent depends in general on the

capacity of the principal to do the act himself as

if he were present.

INTENT (1) 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

(2) On the part of the agent, there must be an

intention to accept the appointment and act

on it [Victorias Milling v. CA (2000)].


PAGE 326

General rule: In the absence of such intent, there

is no agency.

Exceptions:

(1) Agency by estoppel; and

(2) Agency by operation of law.

CONSENT An agency, both on the part of the principal and

the agent, is either express or implied. It does

not require express appointment and

acceptance.

As to the principal, the appointment of an agent

may be implied:

(1) From his acts;

(2) From his silence or lack of action; or

(3) From his failure to repudiate the agency,

knowing that another person is acting on his

behalf without authority.

The appointment may be oral, unless the law

requires a specific form [Art. 1869].

As to the agent, acceptance may also be

implied:

(1) From his acts which carry out the agency;

(2) From his silence or inaction according to the

circumstances [Art. 1870];

(3) When both the principal and the agent

being present if:

(a) The principal delivers his power of

attorney to the agent; and

(b) The agent receives it without any

objection [Art. 1871]; (4) When both the principal and the agent

being absent if:

(a) The principal transmits his power of

attorney to the agent, who receives it

without any objection; or

(b) 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.

In other cases between persons who are absent,

acceptance cannot be implied from the silence

of the agent [Art. 1872].

POWER OF ATTORNEY A power of attorney is an instrument in writing

by which one person, as principal, appoints

another as his agent and confers upon him the

authority to perform certain specified acts of

kinds of acts on his behalf [De Leon (2010)].

FORM OF CONTRACT General rule: There are no formal requirements

governing the appointment of an agent.

Exceptions: The law imposes formal

requirements on certain types of agency [Art. 1869, par. 2]:

(1) When a sale of piece of land or any interest

therein is through an agent, in which case

the authority shall be in writing; otherwise

the sale is void [Art. 1874];

(2) When the law requires a special power of

attorney [Art. 1878].

The manner by which the parties designate the

relationship is not controlling. The use of this

term (“agent”) in one clause of the contract cannot dominate the real nature of the

agreement as revealed in other clauses, no less

than in the caption (“agency agreement”) of the agreement itself [Albadejo y Cia. v. Phil. Refining (1923)].

ACTS DELEGATED General rule: What a person may do in person,

he may do through another.

Exceptions:

(1) Personal acts, which the law or public policy

requires to be performed personally (e.g., to

vote, make a will, make statements under

oath, or attend board meetings as director

or trustee of a corporation);

(2) Criminal acts;

(3) Acts not allowed by law to be done by the

principal.

PRESUMPTION OF EXISTENCE General rule: Agency must exist as a fact. The

law makes no presumption thereof. The person

alleging it has the burden of proof to show, not

only the fact of its existence, but also its nature

and extent [People v. Yabut (1977)].


PAGE 327

Exceptions: A presumption of agency may arise:

(1) Where an agency may arise by operation of

law (e.g., all the partners being considered

agents of the partnership when the manner

of management has not been agreed upon);

or

(2) To prevent unjust enrichment [De Leon (2010)].

COMMUNICATION OF EXISTENCE There are two ways of giving notice of agency

with different effects:

(1) If a person specially informs another (e.g.,

by letter), the person appointed is

considered an agent with respect to the

person specially informed;

(2) If a person states by public advertisement,

the person appointed is considered an

agent with regard to any person.

In either case, the power of the agent continues

in full force until the notice is rescinded in the

same manner in which it was given [Art. 1873].

DUTY OF THIRD PERSONS The person dealing with the agent must act

with ordinary prudence and reasonable

diligence. Obviously, if he knows or has good

reason to believe that the agent is exceeding his

authority, he cannot claim protection [Keeler Electric v. Rodriguez (1922)].

EFFECT

EXTENSION OF PERSONALITY In an agent-principal relationship, the

personality of the principal is extended through

the facility of the agent. The agent, by legal

fiction, becomes the principal, authorized to

perform all acts which the latter would have

him do [Litonjua v. Eternit Corp. (2006)].

THEORY OF IMPUTED KNOWLEDGE General rule: Notice to the agent constitutes

notice to the principal [Air France v. CA (1983)].

Thus, knowledge of the agent is ascribed to the

principal [Rovels Enterprises v. Ocampo (2002)].

Requisites:

(1) Actual notice to the agent;

(2) Notice must pertain to a matter of fact and

not of law;

(3) The fact must be within the scope of the

agent’s authority.

Exceptions:

(1) Where the agent’s interests are adverse to

those of the principal;

(2) Where the agent’s duty is not to disclose the

information (e.g., he is informed by way of

confidential information);

(3) Where the person claiming the benefit of

the rule colludes with the agent to defraud

the principal [De Leon (2010)].

AGENCY AND OTHER CONTRACTS DISTINGUISHED 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

[Victorias Milling v. CA (2000)].

Agency Partnership

Representation

An agent acts only for

the principal

A partner acts for the

other partners, the

partnership and

himself

Control

An agent’s power to bind the principal is

subject to the latter’s control

A partner’s power to bind his co-partners is

not subject to their

control

Personal liability

An agent does not

assume personal

liability, if he acts

within the scope of his

authority

A partner is personally

liable with all his

property, after

exhaustion of the

partnership properties

Share in profits

An agent is not

entitled to profits, only

compensation

A partner is entitled to

a share in the profits

of the partnership


PAGE 328

Agency Independent contractor

Control

An agent acts under

the control and

instruction of the

principal

An independent

contractor is not

subject to control,

except insofar as the

result of the work is

concerned

Liability for tort

Principal is liable for

torts committed by

the agent with the

scope of his authority

Employer is not liable

for torts committed by

the independent

contractor

Sub-agents

Agents of the agent is

still subject to the

control of the principal

Employees of

independent

contractor are not

subject to control of

his employer

Agency Lease of service

Basis

Representation Employment

Purpose

Execution of juridical

acts in relation to third

persons

Execution of piece of

work or rendition of

service

Authorized acts

Juridical acts

(creation,

modification,

extinction of relations

with third parties)

Material acts only

Discretion

An agent is authorized

to exercise discretion

Ordinarily, lessor

performs only

ministerial functions

Parties

Three parties are

involved (principal-

agent-third party)

Two parties are

involved (employer-

employee)

Agency Lease of property

Control

An agent acts under

the control and

instruction of the

principal

A lessee is not subject

to the control of the

lessor

Things involved

Agency may involve

things other than

property

Lease of property

involves property only

Authority to bind

An agent can bind the

principal

Lessee cannot bind

the lessor

Agency to sell Sale

Ownership of goods

Principal retains

ownership

Buyer acquires

ownership

Payment

An agent delivers the

proceeds of the sale to

the principal

A buyer pays the

purchase price

Return of goods

Generally, an agent

can return goods

unsold

Generally, a buyer

cannot return the

goods bought

Dealing with the goods

An agent deals with

the goods according

to the instructions of

the principal

A buyer, being the

owner, can deal with

the goods as he

pleases

Agency to buy Sale

Ownership of goods

Ownership is acquired

in behalf of the

principal

Ownership is

transferred to the

buyer

Change in price

Generally, any change

in the price is borne by

the principal

A buyer cannot adjust

the price already

agreed upon

Payment

Price is paid in behalf

of the principal

Price is paid by the

buyer


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Agency Guardianship

Person represented

An agent represents a

capacitated person

A guardian represents

an incapacitated

person

Source of authority

An agent is appointed

by the principal

A guardian is

appointed by the court

Control

An agent is subject to

the control of the

principal

A guardian is not

subject to the control

of the ward

Authority to bind

An agent can make

the principal

principally liable

A guardian has no

power to impose

personal liability on

the ward

Agency Trust

Title to property

Title retained by

principal

Title passes to the

trustee

Control

An agent is subject to

the control of the

principal

A trustee is only

subject to the

stipulated guidance of

the trustor

Termination

In general, an agency

may be revoked at any

time

In general, a trust may

be terminated only

when its purpose is

fulfilled

Kinds of Agency

IN GENERAL As to manner of creation:

(1) Express;

(2) Implied.

As to cause or consideration:

(1) Gratuitous;

(2) Compensated or onerous.

Note: Agency is presumed to be for a

compensation, unless there is proof to the

contrary [Art. 1875].

As to the extent of business covered:

(1) Universal;

(2) General;

(3) Special.

As to the authority conferred:

(1) Couched in general terms;

(2) Couched in specific terms.

As to nature and effect:

(1) Ostensible or representative, where the

agent acts in the name and representation

of the principal [Art. 1868];

(2) Simple or commission, where the agent acts

in his own name but for the account of the

principal.

As to the kinds of principal:

(1) With a disclosed principal, where, at the

time the transaction was contracted by the

agent, the other party thereto has known:

(a) That the agent is acting for a principal;

and

(b) The principal’s identity;

(2) Partially disclosed, where the other party

knows or has reason to know that the agent

is or may be acting for a principal but is

unaware of the principal’s identity;

(3) Undisclosed, where the party has no notice

of the fact that the agent is acting as such

for a principal.

AS TO MANNER OF CREATION

EXPRESS AGENCY An express agency is one where the agent has

been actually authorized by the principal, either:

(1) Orally; or

(2) In writing [Art. 1869].

IMPLIED AGENCY The appointment and acceptance are implied:

(1) As to the appointment of an agent by the

principal:

(a) From his acts;

(b) From his silence or lack of action; or


PAGE 330

(c) From his failure to repudiate the agency

knowing that another person is acting

on his behalf without authority [Art. 1869].

(2) As to the acceptance of the agency by the

agent:

(a) From his acts which carry out the

agency;

(b) From his silence or inaction according

to the circumstances (i.e., presence or

absence of the parties) [Arts. 1870, 1871 and 1872].

AS TO EXTENT OF BUSINESS COVERED (1) Universal agency comprises all acts which

the principal can lawfully delegate to an

agent;

(2) General agency comprises all the business

of the principal.

(3) Special agency comprises one or more

specific transactions [Art. 1876].

General agency Special agency

Scope of authority

All acts connected

with the business or

employment in which

agent is engaged

Only specific

authorized acts or

those necessarily

implied

Nature of service authorized

Involves continuous

service

Usually involves a

single transaction

Authority to bind

Acts within the scope

of authority, even in

conflict with special

instructions, may bind

principal

Acts beyond authority

given cannot bind

principal

Termination of authority

Notice to third

persons required to

terminate apparent

authority

No notice required,

since third parties are

required to inquire as

to authority

Instructions

Notice to third

persons required

The instructions, in so

far as they grant

authority, are strictly

construed

AS TO AUTHORITY CONFERRED

COUCHED IN GENERAL TERMS An agency couched in general terms is one

created in general terms and is deemed to

comprise only acts of administration, even if:

(1) The principal should state that he withholds

no power;

(2) He should state that the agent may execute

such acts as he may consider appropriate;

or

(3) Even though the agency should authorize a

general and unlimited management [Art. 1877].

COUCHED IN SPECIFIC TERMS An agency couched in specific terms

authorizes only the performance of specific acts.

Certain specific acts, however, require special

powers of attorney.

A special power of attorney is an instrument in

writing by which one person, as principal,

appoints another as his agent and confers upon

him the authority to perform certain specified

acts or kinds of acts on behalf of the principal.

The following acts of strict dominion require

special powers of attorney:

(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 a 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;


PAGE 331

(8) To lease any real property to another person

for more than one 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 requirement of special power of attorney

refers to the nature of the authorization, not to

its form. Thus, even if a document is titled as a

general power of attorney, the requirement of a

special power of attorney is met if there is a

clear mandate from the principal specifically

authorizing the performance of the act [Bravo-Guerrero v. Bravo (2005)].

A special power of attorney can be included in

the general power when it is specified therein

the act or transaction for which the special

power is required [Veloso v. CA (1996)].

Art. 1879. A special power to sell excludes the

power to mortgage; and a special power to

mortgage does not include the power to sell.

Art. 1879. A special power to compromise does

not authorize submission to arbitration.

The power to “exact the payment” of sums of money “by legal means” includes the power to institute suits for their recovery [Germann & Co., v. Donaldson, Sim & Co. (1901)].

A power of attorney “to loan and borrow money” and to mortgage the principal’s

property does not carry with it or imply that that

the agent has a legal right to make the principal

liable for the personal debts of the agent [BPI v. De Coster (1925)].

Although the Civil Code expressly requires a

special power of attorney in order that one may

compromise an interest of another, it is neither

accurate nor correct to conclude that its

absence renders the compromise agreement

void. In such a case, the compromise is merely

unenforceable [Duñgo v. Lopena (1962)].

SPECIAL KINDS

AGENCY BY ESTOPPEL Through estoppel:

(1) An admission or representation;

(2) Is rendered conclusive upon the person

making it; and

(3) Cannot be denied or disproved as against

the person relying thereon [Art. 1431].

Ratification Estoppel

Rests on intention Rests on prejudice

Retroacts as if

originally authorized

Affects only relevant

parts of the

transaction

Substance is

confirmation of

unauthorized acts

after it has been done

Substance is the

principal’s inducement for third

party to act to his

prejudice

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 [De Leon (2010)].

In agency by estoppel, there is no agency. The

alleged agent seemed to have apparent or

ostensible authority, but not real authority to

represent another.

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 [Litonjua v. Eternit Corp. (2006)].


PAGE 332

As to liability, implied agency and agency by

estoppel are different in that, in the former, the

principal is liable, while in the latter, the person

who acts in bad faith is liable.

Article 1911 states that: “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.” In this case, there is a duly formed agency and estoppel only applies to the excess

of authority. This is an application of the

doctrine of apparent authority.

The doctrine of apparent authority is to the

effect that: 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.

Under the doctrine of apparent authority, the

question in every case is whether the principal

has, by his voluntary act, placed the agent in

such a situation that a person of ordinary

prudence, conversant with business usages and

the nature of the particular business, is justified

in presuming that such agent has authority to

perform the particular act in question

[Professional Services v. Agana (2008)].

AGENCY WITH UNDISCLOSED PRINCIPAL General Rule: If an agent acts in his own name

(the principal is undisclosed), the agent is

directly bound in favor of the person with whom

he has contracted as if the transaction were his

own.

Ratio: There is no representation of the principal

when the agent acts in his own name. The third

person cannot allege that he was misled by any

representation since he did not know of the

existence of the undisclosed principal.

Exception: The principal is bound when the

contract involves things belonging to him [Art. 1883]. In this case, the contract is considered as

one between the principal and the third person.

Qualification: The exception only applies if the

agent contracts with the properties of the

principal within the scope of his authority [PNB v. Agudelo (1933)].

AGENCY BY OPERATION OF LAW An agency may exist by operation of law, such

as in the following cases:

(1) Every partner is an agent of the partnership

for the purpose of its business [Art. 1818];

(2) When the principal’s actions would

reasonably lead a third person to conclude

that an agency exists, an agency by

estoppel is created by operation law [Black’s Law Dictionary (9th)];

(3) In case of certain necessity or emergency, an

agency by necessity may arise.

IRREVOCABLE AGENCY Article 1927 (on agency coupled with an

interest) mentions three instances where the

sole will of the principal cannot terminate an

agency:

(1) A bilateral contract depends upon it;

(2) It is the means of fulfilling an obligation

already contracted; or

(3) A partner is appointed manager of a

partnership in the contract of partnership

and his removal from the management is

unjustifiable.

Qualifications:

(1) Coupled with interest or not, the authority

certainly can be revoked for a just cause,

such as when the attorney-in-fact betrays

the interest of the principal. It is not open to

serious doubt that the irrevocability of the

power of attorney may not be used to shield

the perpetration of acts in bad faith, breach

of confidence, or betrayal of trust, by the

agent for that would amount to holding

that a power coupled with an interest

authorizes the agent to commit frauds

against the principal [Coleongco v. Claparols (1964)].

(2) A mere statement in the power of attorney

that it is coupled with an interest is not

enough. In what does such interest consist

must be stated in the power of attorney [Del Rosario v. Abad (1958)].


PAGE 333

(3) An agency couple with an interest cannot

affect third persons. They are obligatory

only on the principal who executed the

agency [New Manila Lumber v. Republic (1960)].

KINDS OF AGENTS

AS TO NATURE AND EXTENT OF AUTHORITY According to the nature and extent of their

authority, agents have been classified into:

(1) Universal agents are authorized to do all

acts for his principal which can lawfully be

delegated to an agent. So far as such a

condition is possible, such an agent may be

said to have universal authority.

(2) General agents are authorized to do all acts

pertaining to a business of a certain kind or

at a particular place, or all acts pertaining to

a business of a particular class or series. He

has usually authority either expressly

conferred in general terms or in effect made

general by the usages, customs or nature of

the business which he is authorized to

transact. An agent, therefore, who is

empowered to transact all the business of

his principal of a particular kind or in a

particular place, would, for this reason, be

ordinarily deemed a general agent.

(3) Special agents are authorized to do some

particular act or to act upon some particular

occasion (i.e., acts usually in accordance

with specific instructions or under

limitations necessarily implied from the

nature of the act to be done) [Siasat v. IAC (1985)].

SPECIAL TYPES OF AGENTS (1) Attorney-at-law is one whose business is to

represent clients in legal proceedings;

(2) Auctioneer is one whose business is to sell

property for others to the highest bidder at

a public sale;

(3) Broker is one whose business is to act as

intermediary between two other parties

such as insurance broker and real estate

broker;

(4) Factor or commission merchant is one

whose business is to receive and sell goods

for a commission, being entrusted with the

possession of the goods involved in the

transaction.

(5) Cashier in bank is one whose business is to

represent a banking institution in its

financial transactions;

(6) Attorney-in-fact is one who is given

authority by his principal to do a particular

act not of a legal character. In its strict legal

sense, it means an agent having a special

authority.

Attorneys have authority to bind their clients in

any case by any agreement in relation thereto

made in writing, and in taking appeals, and in

all matters of ordinary judicial procedure. But

they cannot, without special authority,

compromise their client’s litigation, or receive

anything in discharge of a client’s claim but the

full amount in cash [Sec. 23, Rule 138, Rules of Court].

Powers of the Agent

AUTHORITY OF AN AGENT Authority is the power of the agent to affect the

legal relations of his principal by acts done in

accordance with the principal’s manifestations

of consent. An agent can make the principal

legally responsible only when he is authorized

by the principal to act the way he did [De Leon (2010)].

KINDS OF AUTHORITY (1) Actual, when it is actually granted, and it

may be express or implied. It is the authority

that the agent does, in fact, have. It results

from what the principal indicates to the

agent;

(2) Express, when it is directly conferred by

words;

(3) Implied, when it is incidental to the

transaction or reasonably necessary to

accomplish the main purpose of the agency;

(4) Apparent or ostensible, when it arises by the

acts or conduct of the principal giving rise to

an appearance of authority. It makes the

principal responsible to third persons for

certain actions of the agent that were not

really authorized;


PAGE 334

(5) General, when it refers to all the business of

the principal;

(6) Special, when it is limited only to one or

more specific transactions;

(7) By necessity or by operation of law, when it

is demanded by necessity or by virtue of the

existence of an emergency. The agency

terminates when the emergency passes.

SCOPE OF AUTHORITY General rule: The scope of the authority of

the agent is what appears in the terms of the

power of attorney [Siredy Enterprises v. CA (2002)].

Exceptions: An agent is considered acting within

the scope of his authority when:

(1) He performs acts which are conducive to the

accomplishment of the purpose of the

agency [Art. 1881]; (2) He performed the agency in a manner more

advantageous to the principal than that

specified by said principal [Art. 1881]; (3) The principal ratifies the act, expressly or

tacitly [Art. 1910].

Art. 1900. 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.

While third persons are bound to inquire into

the extent or scope of the agent’s authority, they

are not required to go beyond the terms of the

written power of attorney. Third persons cannot

be adversely affected by an understanding

between the principal and his agent as to the

limits of the latter’s authority. Third persons

need not concern themselves with instructions

given by the principal to his agent outside of the

written power of attorney [Siredy Enterprises v. CA (2002)].

POWER TO BIND THE PRINCIPAL Requisites:

(1) The agent must act within the scope of his

authority; and

(2) The agent must act in behalf of the

principal.

Even when the agent acts in his own name the

principal is still bound in the following

instances:

(1) When the contract involves things

belonging to the principal [Art. 1883]; or

(2) When the principal ratifies the contract,

expressly or tacitly [Art. 1910].

EFFECTS OF THE ACTS OF AN AGENT When the agent acts:

(1) With authority of the principal:

(a) If done in the name of the principal, the

principal is bound to comply with the

obligations contracted [Art. 1910] and

the agent is not personally liable to the

party with whom he contracts [Art. 1897];

(b) If done in the name of the agent, the

agent is directly bound in favor of the

person with whom he has contracted,

except when the contract involves

things belonging to the principal;

(2) Without authority or beyond the authority

granted by the principal:

(a) If done in the name of the principal, it is

unenforceable against him, unless he

ratifies it expressly or tacitly [Art. 1910];

(b) If done in the name of the agent, the is

personally liable.


PAGE 335

Obligations of Agent

IN GENERAL

GOOD FAITH AND LOYALTY TO HIS TRUST The duty of good faith is also called the fiduciary

duty, which imposes upon the agent the

obligation of faithful service. The duty to be

loyal to the principal demands that the agent

look out for the best interests of the principal as

against his own or those of third parties (see Art.

1889).

General rule: Until proven otherwise, the

presumption arises that an agent has

performed his duty in good faith, and the

principal, until notice is received of a breach of

relational duties, may rely upon his agent’s faithfulness.

Exception: The presumption does not arise

when there is no relation of trust or confidence

between the parties (e.g., the agent is bound

merely as an instrument/servant, or there is no

agency relationship) [De Leon (2010)].

EXERCISE OF REASONABLE CARE By accepting an employment whose

requirements he knows, without stipulating

otherwise the agent impliedly undertakes that:

(1) He possesses a degree of skill reasonably

and ordinarily competent for the

performance of the service; and

(2) In performing his undertaking, he will

exercise reasonable care, skill and diligence.

OBLIGATION TO CARRY OUT AGENCY General rule: The agent is:

(1) Bound by his acceptance to carry out the

agency;

(2) Liable for damages, which the principal may

suffer, in case of non-performance;

(3) Bound to finish the business already begun

on the death of the principal should delay

entail danger [Art. 1884].

Exception: An agent shall not carry out an

agency if its execution would manifestly result in

loss or damage to the principal [Art. 1888].

OBLIGATION WHEN AGENT DECLINES 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.

The obligation lasts until the owner, as soon as

practicable:

(1) Appoints an agent; or

(2) Takes charge of the goods [Art. 1885].

Declining an agency is different from

withdrawal. In the former, no agency was

formed. Withdrawal, on the other hand,

presupposes an existing agency.

The obligation of the agent, in case of

withdrawal, is to continue to act as such agent

until the principal has had reasonable

opportunity to take the necessary steps to meet

the situation [Art. 1929].

OBLIGATION TO ADVANCE NECESSARY FUNDS General rule: The agent is not bound to advance

the necessary funds. The principal is obliged to

advance to the agent, should the latter so

request, the sums necessary for the execution of

the agency.

Exception: He shall be bound to do so should

there be a stipulation to that effect, subject to

the obligation of the principal to reimburse the

agent.

Exception to the Exception: He is not bound to

do so, even when there is a stipulation, when

the principal is insolvent [Art. 1886].

Note: Insolvency of the principal is also a ground

for extinguishment.


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OBLIGATION TO ACT IN ACCORDANCE WITH INSTRUCTIONS In the execution of the agency:

(1) The agent shall act in accordance with the

instructions of the principal; or

(2) In default thereof, he shall do all that a

good father of a family would do, as

required by the nature of the business [Art. 1887].

Note: 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 [Art. 1882].

Authority Instructions

Sum total of the

powers committed or

permitted to the agent

Private rule of

guidance to the agent

Relates to the

transaction or

business with which

the agent is

empowered to act

Refers to the manner

or mode of agent’s action with respect to

matters within the

permitted scope of

authority

Binds third parties Does not bind third

parties

OBLIGATION TO PREFER INTEREST OF PRINCIPAL General rule: The agent shall be liable for

damages if, there being a conflict between his

interest and those of the principal, he should

prefer his own [Art. 1889].

Exceptions: The agent is not liable for giving

preference to his own when:

(1) The principal waives the benefit of this rule,

with full knowledge of the facts; or

(2) When the interest of the agent is superior.

An example of the latter is where the agent has

security interest in goods of the principal in his

possession, he may protect his interest even if in

doing so, he disobeys the principal’s orders or injures his interest [De Leon (2010)].

A specific application of this subordination of

interests is found in Article 1890:

(1) If the agent has been empowered to borrow

money, he may himself be the lender at the

current rate of interest.

(2) If he has been authorized to lend money at

interest, he cannot borrow it without the

consent of the principal.

OBLIGATION FOR THINGS RECEIVED Every agent is bound to:

(1) Render an account of his transactions; and

(2) 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 to render

an account shall be void [Art. 1891].

WHAT TO DELIVER The agent has to deliver all money and property

which may have come into his hands or in that

of a sub-agent. This includes gifts from third

parties in connection with the agency. It is

immaterial whether such money or property is

the result of the performance or violation of the

agent’s duty, if it be the fruit of the agency.

If the agent fails to deliver and instead converts

or appropriates for his own use the money or

property belonging to the principal, he is liable

for estafa.

WHEN OBLIGATION IS NOT APPLICABLE (1) If the agent or broker acted only as a

middleman with the task of merely bringing

together the vendor and the vendee

[Domingo v. Domingo (1971)]. (2) If the agent had informed the principal of

the gift or bonus or profit he received from

the purchaser and the principal did not

object thereto;

(3) When a right of lien exists in favor of the

agent.


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RESPONSIBILITY FOR ACTS OF SUBSTITUTE The agent may appoint a substitute if the

principal has not prohibited him from doing so.

The agent is 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:

(a) Without designating the person; and

(b) The person appointed was notoriously

incompetent or insolvent.

All acts of the substitute appointed against the

prohibition of the principal shall be void [Art. 1892].

The principal may bring an action against the

substitute with respect to the obligations which

the latter contracted under the substitution [Art. 1893].

SUB-AGENCY A sub-agent or substitute is a person employed

or appointed by an agent as his agent, to assist

him in the performance of an act for the

principal, which the agent has been empowered

to perform. The agent is a principal with respect

to the sub-agent.

General rule: The agent may appoint a sub-

agent.

Ratio: The law allows such substitution for

reasons of convenience and practicality.

Exceptions:

(1) The appointment is prohibited by the

principal [Art. 1892];

(2) The work entrusted to the agent requires

special knowledge, skill, or competence,

unless authorized to do so by the principal

[De Leon (2010)].

RELATIONS AMONG THE PARTIES (1) When the sub-agent has been employed for

own account of the agent, to assist him, the

sub-agent is a stranger to the principal.

(2) When the appointment was authorized by

the principal a fiduciary relationship is

created between and among the principal,

agent, and sub-agent. Neither the agent

nor the substitute can be held personally

liable so long as they act within the scope of

their authority [Macias & Co. v. Warner, Barnes & Co. (1922)].

EFFECTS OF SUBSTITUTION (1) When substitution was prohibited by the

principal, appointment by the agent is an

act in excess of the limits of his authority.

All acts of the substitute are void.

(2) When substitution was authorized, the

agent is only liable when he appointed one

who is notoriously incompetent or insolvent,

unless the person was designated by the

principal.

(3) When substitution was not authorized, but

also not prohibited, the appointment is

valid, but the agent is liable for damage

caused by the substitution to the principal.

(4) When substitution was authorized and the

sub-agent was designated by the principal,

the agent is released from any liability for

the acts of the sub-agent [Art. 1892].

RESPONSIBILITY OF TWO OR MORE AGENTS General rule: The responsibility of two or more

agents is not solidary, even though they have

been appointed simultaneously. They are liable

jointly.

Exception: They are solidarily liable if solidarity

has been expressly stipulated [Art. 1894].

If solidarity has been thus agreed upon, each of

the agents is responsible for:

(1) The non-fulfillment of agency, even when

the fellow agents acted beyond the scope of

their authority; and

(2) The fault or negligence of his fellow agents,

except when the fellow agents acted

beyond their authority.

OBLIGATION FOR SUMS APPLIED TO HIS OWN USE The agent owes interest:

(1) On the sums applied to his own use from

the day on which he did so; and


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(2) On the sums which he still owes after the

agency is extinguished [Art. 1896].

The liability of the agent for interest for sums

converted to his own use is without prejudice to

a criminal action that may be brought against

him [De Leon (2010)].

The sums referred to as still owing to the

principal after extinguishment of the agency are

those which were not misapplied by the agent,

but were found to be owing to the principal after

such extinguishment.

OBLIGATIONS TO THIRD PERSONS

LIABILITY OF AGENT FOR OBLIGATIONS CONTRACTED General rule: The agent who acts as such is not

personally liable to the party with whom he

contracts. The principal is responsible for such

acts done within the scope of the authority

granted to the agent, and should bear any

damage caused to third persons [Art. 1910].

Exceptions: He is personally liable when:

(1) He acts in his own name [Art. 1883];

(2) He expressly binds himself; or

(3) He exceeds the limits of his authority

without giving such party sufficient notice of

his powers [Art. 1897].

VOID CONTRACTS The contract entered into by an agent on behalf

of the principal shall be void when:

(1) The agent contracts in the name of the

principal;

(2) He exceeded the scope of his authority;

(3) The principal does not ratify the contract;

and

(4) The party with whom the agent contracted

is aware of the limits of the powers granted

by the principal.

The agent, however, is liable if he undertook to

secure the principal’s ratification.

PRESENTATION OF POWER OF ATTORNEY A third person, with whom the agent wishes to

contract on behalf of the principal may require

the presentation of:

(1) The power of attorney; or

(2) 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 [Art. 1902].

Art. 1900. 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.

RATIFICATION OF ACTS OF AGENT A third person, who contracts with the agent

(thereby recognizing the authority of the agent),

cannot later disaffirm his contract based on the

fact that the agent has exceeded his powers, if

the principal has:

(1) Ratified the acts of the agent; or

(2) Signified his willingness to ratify said acts

[Art. 1901].

The ratification has retroactive effect, relating

back to the time of the act or contract ratified

and is equivalent to original authority [Board of Liquidators v. Kalaw (1967)].

A principal may not accept the benefits of a

transaction and repudiate its burdens. Thus, a

principal who seeks to enforce a sale made by

the agent cannot ordinarily allege that the

agent exceeded his authority.

Before ratification, however, the third person

may repudiate the contract.

IGNORANCE OF AGENT If a duly authorized agent acts in accordance

with the orders of the principal, the principal

cannot set up the ignorance of the agent as to


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circumstances whereof he himself was, or ought

to have been, aware [Art. 1899].

Ratio: If the principal appoints an agent who is

ignorant, the fault is his alone. He is bound by

the acts of the agent. The agent is not liable to

third persons in this case.

OBLIGATIONS OF A COMMISSION AGENT

FACTOR OR COMMISSION AGENT A factor or commission agent is one whose

business is to receive and sell goods for a

commission (also called factorage) and who is

entrusted by the principal with the possession of

goods to be sold, and usually selling in his own

name. He may act in his own name or in that of

the principal.

An ordinary agent need not have possession of

the goods of the principal, while the commission

agent must be in possession [De Leon (2010)].

Ordinary agent Commission agent

Acts for and in behalf

of the principal

Acts in his own name

or that of his principal

Need not have

possession of the

goods

Must have possession

of the goods

Broker Commission agent

Has no custody of the

thing to be disposed

of, only acts as

intermediary between

seller and buyer

Has custody or

possession of the

things to be sold

Maintains no relations

with things to be

sold/bought

Maintains relations

with the thing, the

buyer and the seller

RESPONSIBILITY FOR GOODS RECEIVED (1) The commission agent shall be responsible

for 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 [Art. 1903].

(2) The commission agent who handles goods

of the same kind and mark, which belong to

different owners, shall:

(a) Distinguish them by countermarks; and

(b) Designate the merchandise respectively

belonging to each principal [Art. 1904].

SALE OF GOODS ON CREDIT WITHOUT AUTHORITY General rule: The commission agent cannot sell

on credit. Should he do so, the principal may:

(1) Demand from him payment in cash, in

which case the commission agent shall be

entitled to any interest or benefit, which

may result from such sale [Art. 1905]; or

(2) Ratify the sale on credit, in which case the

principal will have all the risks and

advantages to him [De Leon (2010)].

Exception: The commission agent can sell on

credit with the express or implied consent of the

principal.

SALE OF GOODS ON CREDIT WITH AUTHORITY If the commission agent was authorized to sell

on credit and should he so sell on credit, he

shall inform the principal of such sale, with a

statement of the names of the buyers. Should

he fail to inform the principal, the sale is

deemed to have been made for cash as far as

the principal is concerned [Art. 1906].

The commission agent is obliged to collect the

credits of his principal when they become due

and demandable [Art. 1908].

General rule: Failing to so collect, the agent

shall be liable for damages.

Exception: He is not liable if he proves that he

exercised due diligence for that purpose.

Should the commission agent receive a

guarantee commission (del credere

commission) on a sale, in addition to the

ordinary commission, he shall:

(1) Bear the risk of collection; and


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(2) Pay the principal the proceeds of the sale on

the terms agreed upon with the purchaser

[Art. 1907].

RESPONSIBILITY FOR FRAUD AND NEGLIGENCE In the fulfillment of his obligation, the agent is

responsible for:

(1) Fraud; and

(2) Negligence.

The circumstance that the agency is or is not

gratuitous will be considered by the courts in

fixing the liability for negligence only [Art. 1909].

The liability may be to the principal or to third

persons.

Obligations of the

Principal

IN GENERAL In addition to his duties specified under the

contract itself, the principal is under obligation

to deal fairly and in good faith with his agent,

who owes the same to his principal.

OBLIGATION TO COMPLY WITH CONTRACTS General rule: The principal must comply with all

the obligations which the agent may have

contracted within the scope of his authority [Art. 1910, par. 1]. As for any obligation where in the

agent has exceeded his power, the principal is

not bound.

Exceptions: The principal is:

(1) Bound by the obligation entered into by the

agent in excess of his power, when he

ratifies it expressly or tacitly [Art. 1910, par.

2];

(2) Solidarily liable with the agent if the

principal allowed the agent to act as though

he had full powers [Art. 1911].

Note: If the agent acts in his own name, but the

contract involves things belonging to the

principal, the contract must be considered as

entered into between the principal and the third

person [Sy-Juco and Viardo v. Sy-Juco (1920)].

RATIFICATION Ratification is the adoption or affirmance by a

person of a prior act which did not bind him, but

which was done or professed to be done on his

account, thus giving effect to the acts as if

originally authorized.

Aside from the intent to ratify, the following

conditions must be fulfilled for ratification to be

effective:

(1) The principal must have the capacity and

power to ratify;

(2) He must have had knowledge or had reason

to know of material or essential facts about

the transaction;

(3) He must ratify the acts entirely;

(4) The act must be capable of ratification; and

(5) The act must be done in behalf of the

principal [De Leon (2010)].

Ratification has the following effects:

(1) With respect to the agent, it relieves him of

liability. He may thus recover compensation

from the principal.

(2) With respect to the principal, he assumes

responsibility for the unauthorized act as

fully as if the agent had acted under an

original authority. But he is not liable for

acts outside the authority affirmed by his

ratification.

(3) With respect to third persons, they are

bound by the ratification and cannot set up

the fact that the agent has exceeded his

powers [Art. 1901].

SEPARATE CONTRACTS WITH PRINCIPAL AND AGENT When (1) two persons contract with regard to

the same thing, one with the agent and the

other with the principal, and (2) the two

contracts are incompatible with each other, that

of prior date shall be preferred, subject to the

rules on double sales [Art. 1916].

The rules on double sales [Art. 1544] provide:

(1) If the same movable property is sold to

different persons, ownership is transferred


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to whoever first took possession in good

faith.

(2) If it be an immovable:

(a) Ownership belongs to the person who

in good faith first recorded it in the

Registry of Property.

(b) If there is no inscription, ownership shall

belong to the person who, in good faith

was first in possession; and in the

absence of such, to the one who

presents the oldest title, provided there

is good faith.

The liability for damages suffered by the third

person whose contract must be rejected shall

be borne by:

(1) The principal, if the agent acted in good

faith; or

(2) The agent, if he acted in bad faith [Art. 1918].

WHEN PRINCIPAL IS NOT LIABLE, IN SUMMARY (1) Void or inexistent contracts [Art. 1409];

(2) Sale of a piece of land or any interest

therein when the authority of the agent is

not in writing [Art. 1874];

(3) Acts of the substitute appointed against the

prohibition of the principal [Art. 1892];

(4) Acts done in excess of the scope of the

agent’s authority [Art. 1898 and 1910];

(5) When the agent acts in his own name,

except when the contract involves things

belonging to the principal [Art. 1883];

(6) Unenforceable contracts [Art. 1403].

OBLIGATION FOR COMPENSATION OF AGENT

Art. 1875. Agency is presumed to be for a

compensation, unless there is proof to the

contrary.

AMOUNT The principal must pay the agent:

(1) The compensation agreed upon; or

(2) The reasonable value of the agent's services

if no compensation was specified.

COMPENSATION OF BROKER A broker is entitled to the usual commissions

whenever he brings to his principal a party who

is able and willing to take the property and

enter into a valid contract upon the terms

named by the principal. A broker is never

entitled to commission for unsuccessful efforts.

He must prove that he was the procuring cause

of the transaction. Otherwise, he is not entitled

to the stipulated broker’s commission [Inland Realty v. CA (1997)].

Procuring cause refers to a cause originating a

series of events which, without break in their

continuity, result in the accomplishment of the

prime objective of the employment of the broker

– producing a purchaser ready, willing and able

to buy on the owner’s terms.

Since the broker’s only job is to bring together

the parties to a transaction, it follows that if the

broker does not succeed in bringing the mind of

the purchaser and the vendor to an agreement

with reference to the terms of a sale, he is not

entitled to a commission [Rocha v. Prats (1922)].

If the principal breaks off from negotiations with

a buyer brought by the agent in order to

deliberately deal later with the buyer personally,

this is evident bad faith. In such case, justice

demands compensation for the agent [Infante v. Cunanan (1953)].

LIABILITY FOR EXPENSES AND DAMAGES

NECESSARY FUNDS (1) The principal must advance to the agent,

should the latter so request, the sums

necessary for the execution of the agency.

(2) In case the agent already advanced them,

the principal must reimburse him therefor:

(a) Even if the business or undertaking was

not successful;

(b) Provided that the agent is free from all

fault [Art. 1912].

The reimbursement shall include the interest on

the sums advanced from the day the advances

were made.


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WHEN THE PRINCIPAL IS NOT LIABLE FOR 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:

(a) The expenses would be borne by the

agent; or

(b) That the latter would be allowed only a

certain sum [Art. 1918].

DAMAGES

Art. 1913. 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 or his part.

RIGHT OF RETENTION BY AN AGENT The agent may retain in pledge the things which

are the object of the agency until the principal

effects:

(1) Reimbursement of necessary funds

advanced; and

(2) Payment of indemnity for damages [Art. 1914].

This is a case of legal pledge. However, the

agent is not entitled to the excess in case the

things are sold to satisfy his claims.

MULTIPLE PRINCIPALS If there are two or more principals who

appointed the agent for a common transaction

or undertaking, they shall be solidarily liable for

all the consequences of the agency [Art. 1915].

Requisites:

(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.

LIABILITY FOR QUASI-DELICT BY AN AGENT The principal is solidarily liable to third persons

for torts of an agent committed:

(1) At the principal’s direction; or

(2) In the course and within the scope of the

agent’s employment.

Modes of Extinguishment

IN GENERAL 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 [Art. 1919].

The provision enumerates only those which are

peculiar to agency and is, therefore, not

exclusive. Agency may also be extinguished by

the modes of extinguishment of obligations in

general [De Leon (2010)].

The modes of extinguishment may be classified

into three:

(1) By agreement (Nos. 5 and 6);

(2) By subsequent acts of the parties:

(a) By the act of both parties or by mutual

consent; or

(b) By the unilateral act of one of them

(Nos. 1 and 2);

(3) By operation of law (Nos. 3 and 4).

REVOCATION BY PRINCIPAL General rule: The principal may:

(1) Revoke the agency at will; and

(2) Compel the agent to return the document

evidencing the agency.


PAGE 343

Qualifications: The right of the principal to

terminate the authority of his agent is absolute

and unrestricted, except that he is liable for

damages in case:

(1) He revokes the agency in bad faith [Danon

v. Brimo (1921)]; or

(2) He revokes the agency before the expiration

of the period stipulated in the agency

contract.

Exception: Agency cannot be revoked if it is

coupled with an interest, such that:

(1) A bilateral contract depends upon it;

(2) It is the means of fulfilling an obligation

already contracted; or

(3) A partner is appointed manager of a

partnership in the contract of partnership

and his removal from the management is

unjustifiable.

Art. 1925. 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.

MANNER Revocation may be express or implied.

There is express revocation when the principal

clearly and directly makes a cancellation of the

authority of the agent orally or in writing.

There is implied revocation in the following

cases:

(1) 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 requirement

of notice to third persons [Art. 1923].

(2) The agency is revoked if the principal

directly manages the business entrusted to

the agent, dealing directly with third

persons [Art. 1924].

(3) A general power of attorney is revoked by a

special one granted to another agent, as

regards the special matter involved in the

latter [Art. 1926].

There is implied revocation only where the new

appointment is incompatible with the previous

one.

EFFECT OF REVOCATION IN RELATION TO THIRD PARTIES

Art. 1921. 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.

If the agent had general powers, revocation of

the agency does not prejudice third persons who

acted:

(1) In good faith; and

(2) Without knowledge of the revocation.

Notice of the revocation in a newspaper of

general circulation is a sufficient warning to

third persons [Art. 1922].

WITHDRAWAL BY AGENT The agent may withdraw from the agency by

giving due notice to the principal.

General rule: If the principal should suffer any

damage by reason of the withdrawal, the agent

must indemnify him therefor.

Exception: The agent is not liable for damages if

he should base his withdrawal upon the

impossibility of continuing the performance of

the agency without grave detriment to himself

[Art. 1928].

Art. 1929. 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.


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DEATH, CIVIL INTERDICTION, INSANITY OR INSOLVENCY

DEATH OF PRINCIPAL General rule: Death extinguishes agency.

Exceptions:

(1) The agency remains in full force and effect

even after the death of the principal, if it has

been constituted:

(a) In the common interest of the principal

and agent; or

(b) In the interest of a third person who has

accepted the stipulation in his favor

[Art. 1930].

(2) 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 [Art. 1931]. (3) The agent must finish business already

begun on the death of the principal, should

delay entail any danger [Art. 1884].

DEATH OF AGENT If the agent dies, his heirs must:

(1) Notify the principal thereof; and

(2) In the meantime adopt such measures as

the circumstances may demand in the

interest of the latter [Art. 1932].

ACCOMPLISHMENT OF OBJECT OR PURPOSE The fulfillment of the purpose for which agency

was created ipso facto terminates agency even

though it was expressly made irrevocable. If the

purpose has not been accomplished, the agency

continues indefinitely for as long as the intent to

continue is manifested through words or actions

of the parties.

DISSOLUTION OF FIRM OR CORPORATION The dissolution of a partnership or corporation

which entrusted (principal) or accepted (agent)

the agency extinguishes its juridical existence,

except for the purpose of winding up its affairs.

It is equivalent to death.

EXPIRATION OF TERM (1) If created for fixed period, expiration of the

period extinguishes agency even if the

purpose was not accomplished.

(2) If no time is specified, the courts may fix the

period as under the circumstances have

been probably contemplated by the parties

[Art. 1197]. Otherwise, the agency terminates

at the end of a reasonable period of time.

Either party can terminate the relationship

at will by giving notice to the other [De Leon (2010)].

The period contemplated may be implied from

terms of agreement, purpose of agency, and the

circumstances of the parties.

2014 UP Agency and Partnership Reviewer

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Transcript of 2014 UP Agency and Partnership Reviewer