ATENEO DE MANILA LAW SCHOOL

AGENCY & TRUSTS, PARTNERSHIPS

& JOINT VENTURES1
FIRST SEMESTER, SY 2015-16

A.

DEAN CESAR L. VILLANUEVA

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

LAW ON AGENCY

I. NATURE AND OBJECT OF AGENCY

1. Definition of Agency (Art. 1868); Parties in an Agency Relationship
Under Article 1868 of Civil Code, a contract of agency is one whereby a person binds himself
to render some service or to do something in representation or on behalf of another, with the
consent or authority of the latter.2
The Spanish term for principal is mandante; and among the terms used for agent are
mandatario, factor, broker, attorney-in-fact, proxy, delegate or representative.
2. Root and Objectives of Agency (Arts. 1317 and 1403[1])
The general rule is that what a man may do in person he may do through another. A
stockholders right of inspection can be exercised either by himself or by an attorney-in-fact,
either with or without the stockholders attendance. Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919).
In an agency relationship, the personality of the principal is extended through the facility of the
agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all
acts which the latter would have him do. Such a relationship can only be effected with the
consent of the principal, which must not, in any way, be compelled by law or by any court.
Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
3. Elements of the Contract of Agency
Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978):
(a) Consent, express or implied, of the parties to establish the relationship;
(b) Object, Which Is the Execution of Juridical Acts in Relation to Third Parties;
(c) The agent acts as a representative and not for himself; and
(d) The agent acts within the scope of his authority.3
Whether or not an agency has been created is determined by the fact that one is representing
and acting for another. The law makes no presumption of agency; proving its existence, nature
and extent is incumbent upon the person alleging it. Urban Bank v. Pea, 659 SCRA 418 (2011).
Where a common carrier leases the trucks of another carrier there can be no contract of
agency between them, for there is no representation by one with respect to the other and neither
was there any authority to represent the other by the terms of the arrangements. Loadmasters
Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011).
There is no principal-agent relationship between an establishment and the security guards
assigned by the security company to its premises because there is no power of representation.
Mamaril v. Boy Scouts of the Philippines, 688 SCRA 437 (2013).
a. CONSENT (Arts. 1317 and 1403[1])
The basis for agency is representation; on the part of the principal, there must be an actual
intention to appoint or an intention naturally inferable from his words or actions; and on the part of
the agent, there must be an intention to accept the appointment and act on it; in the absence of
such intent, there is no agency. Dominion Insurance Corp. v. CA, 376 SCRA 239 (2002).4
b. SUBJECT MATTER: ServiceExecution of Juridical Acts in Behalf of Principal
It is clear from Art. 1868 that the basis of agency is representation. . . .One factor which most
clearly distinguishes agency from other legal concepts is control: the agent agrees to act under
1

Unless otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines.
See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239
(2002); Republic v. Evangelista, 466 SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Eurotech Industrial
Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
3
Reiterated in Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 (2000); Manila Memorial Park Cemetery, Inc. v.
Linsangan, 443 SCRA 377 (2004); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007); Loadmasters Customs
Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011); Urban Bank, Inc. v. Pena, 659 418 (2011); Westmont Investment
Corp. v. Francis, Jr., 661 SCRA 787 (2011); Villoria v. Continental Airlines, Inc., 663 SCRA 57 (2012).
4
Urban Bank, Inc. v. Pea, 659 SCRA 418 (2011).
2

the control or direction of the principal. Indeed, the very word agency has come to connote
control by the principal. Victorias Milling Co. v. CA, 333 SCRA 663 (2000).5
c. CONSIDERATION: Agency Presumed to Be for Compensation,
Unless There Is Proof to the Contrary (Art. 1875)
Old Civil Code: The service rendered by the agent was deemed to be gratuitous; if it were true
that agent and principal had an understanding that the agent was to receive compensation aside
from the use and occupation of the houses of the deceased, it cannot be explained how the agent
could have rendered services for eight years without receiving and claiming any compensation
from the deceased. Agua v. Larena, 57 Phil 630 (1932).
Prescinding from the principle that the terms of the contract of agency constituted the law
between the principal and the agent, the mere fact that other agents intervened in the
consummation of the sale and were paid their respective commissions could not vary the terms of
the agency with the plaintiff entitled to a 5% commission based on the selling price. De Castro v.
Court of Appeals, 384 SCRA 607 (2002).

4. ESSENTIAL CHARACTERISTICS OF AGENCY

a. Nominate and Principal
Acts done by one person in behalf of another who authorized such acts is the essential nature
one of agency it will be an agency whether the parties understood the exact nature of the
relation or not. Also, the fact that two agents enter into a contract of behalf of their principals,
even if the principals do not actually and personally know each other, the same does not affect
their juridical standing as agents, since the very purpose of agency is to extent the personality of
the principal through the facility of the agent. Doles v. Angeles, 492 SCRA 607 (2006).
Even when the Agreement provides that the manager shall be considered an independent
contractor and not an agent, nonetheless since the manager is expressly authorized to solicit and
remit offers to purchase interments spaces, it covers an agency arrangement. Manila Memorial
Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).
b. Unilateral6 and Primarily Onerous (Art. 1875)
Agency is presumed to be for compensation; when agent performs services for principal at the
latters request, principals intent to compensate the agent for services performed will be inferred
from the principal's request for the agents service. Urban Bank v. Pea, 659 SCRA 418 (2011).
c. Consensual (Arts. 1869 and 1870)
An agency may be expressed or implied from the act of the principal, from his silence or lack
of action, or failure to repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
The basis for agency is representation, and therefore every person dealing with an agent is
put upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). Consequently:

Where there is no showing that Brigida consented to or authorized the acts of Deganos,
then any attempt to foist liability on her through the supposed agency relation with Deganos
is groundless. It was grossly negligent of petitioners to entrust to Deganos, not once or
twice but on at least six occasions as evidenced by six receipts, several pieces of jewelry of
substantial value without requiring a written authorization from his alleged principal.
Bordador v. Luz, 283 SCRA 374 (1997).

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

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

A unilateral contract has been defined as A contract in which one party makes a promise or undertakes a performance. Thus,
it was observed that [M]any unilateral contacts are in reality gratuitous promises enforced for good reason with no element of
bargain. [BLACKS LAW DICTIONARY 326 (1990)] It is perhaps in this sense that agency is unilateral because it is the agent who
undertakes the performance of the agency. However, one must not forget that agency is still a contract with a bilateral character.
Manresa explains: As regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion,
from the point of view of the Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily
supposes, there will be obligations exclusively for the agent and rights exclusively for the principal. It is clear that at times it
happens this way, but what is common in agency with other contracts is the mutuality and the reciprocity that arises from the
existence of an obligation against another obligation, a right against another right. 11 MANRESA. COMENTARIOS AL CODIGO CIVIL
ESPAOL 443 (1950)
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d. Personal, Representative and Derivative (Art. 1868)

Agency is basically personal, representative, and derivative in nature. The authority of the
agent emanates from the powers granted to him by his principal; his act is the act of the principal
if done within the scope of the authority. Qui facit per alium facit per se. He who acts through
another acts himself. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).
The essence of agency being the representation of another, it is evident that the obligations
contracted are for and on behalf of the principalthe principal is liable for the acts of his agent
performed within the limits of his authority. Tan v. Engineering Services, 498 SCRA 93 (2006).
It is said that the underlying principle of the contract of agency is to accomplish results by
using the services of othersto do a great variety of things. Its aim is to extent the personality of
the principal or the party for whom another acts and from whom he or she derives the authority to
act. Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011).
(i) Agent Is Not Liable for the Contracts Entered Into in Behalf of the
Principal and Within the Scope of His Authority (Art. 1897)
In an agency, the principals personality is extended through the facility of the agentthe
agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter
would have him do. Such a relationship can only be effected with the consent of the principal,
which must not, in any way, be compelled by law or by any court. Orient Air Services v.
Court of Appeals, 197 SCRA 645 (1991).7
The basis of agency is representation, that is, the agent acts for and on behalf of the
principal on matters within the scope of his authority with the same legal effect as if they were
personally executed by the principal. By this legal fiction, the actual or real absence of the
principal is converted into his legal or juridical presence qui facit per alium facit per se. Art.
1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to
the party with whom he contracts; it is the principal who is liable on the contracts of the agent.
Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).8
(ii) Other Consequences of the Doctrine of Representation:
Under the principle that knowledge of the agent is considered knowledge by the principal,
spouses cannot contend lack of knowledge of the rules upon which they received their tickets
from the airline company since their travel agent, who handled their travel arrangements, was
duly informed by the airline representatives. Air France v. CA, 126 SCRA 448 (1983).
When an agent purchases the property in bad faith, the principal is deemed a purchaser in
bad faith. Caram, Jr. v. Laureta, 103 SCRA 7 (1981).
Agency is extinguished by the death of the principal or agent. Rallos v. Felix Go Chan &
Sons Realty, 81 SCRA 251 (1978).
e. Fiduciary and Revocable
The relations of an agent to his principal are fiduciary and in regard to the property forming the
subject matter of the agency, he is estopped from acquiring or asserting a title adverse to that of
the principal. Severino v. Severino, 44 Phil. 343 (1923).
A contract of agency is generally revocable as it is a personal contract of representation based
on trust and confidence reposed by the principal on his agent. As the power of the agent to act
depends on the will and license of the principal he represents, the power of the agent ceases
when the will or permission is withdrawn by the principal. Thus, generally, the agency may be
revoked by the principal at will. Republic v. Evangelista, 466 SCRA 544 (2005).
f. AGENCY IS A PREPARATORY CONTRACT

5. DISTINGUISHED FROM OTHER SIMILAR CONTRACTS:

a. From Employment Contract
The relationship between the corporation which owns and operates a theatre, and the security
guard it hires to maintain the peace and order at the entrance of the theatre is not that of principal
and agent, because the principle of representation was in no way involved. Dela Cruz v. Northern
Theatrical Enterprises, 95 Phil 739 (1954).
The concept of a single person having the dual role of agent and employee while doing the
same task is a novel one in our jurisprudence, which must be viewed with caution especially
when it is devoid of any jurisprudential support or precedent. All these, read without any
clear understanding of fine legal distinctions, appear to speak of control by the insurance
7
8

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

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company over its agents. They are, however, controls aimed only at specific results in
undertaking an insurance agency, and are, in fact, parameters set by law in defining an insurance
agency and the attendant duties and responsibilities an insurance agent must observe and
undertake. They do not reach the level of control into the means and manner of doing an
assigned task that invariably characterizes an employment relationship as defined by labor law.
Tongko v. The Manufacturers Life Insurance Co. (Phils.), Inc., 640 SCRA 395 (2011).
b. From Contract for a Piece-of-Work
That the operator owed his position to the company which could remove him or terminate his
services at will; that the service station belonged to the company and bore its tradename and the
operator sold only the products of the company; that the equipment used by the operator
belonged to the company and were just loaned to the operator and the company took charge of
their repair and maintenance; that an employee of the company supervised the operator and
conducted periodic inspection of the company's gasoline and service station; that the price of the
products sold by the operator was fixed by the company and not by the operator; the finding of
the Court of Appeals that the operator was an agent of the company and not an independent
contractor should not be disturbed. Shell v. Firemens Ins. Co., 100 Phil 757 (1957).
C.

FROM A BROKER
The business of a real estate broker or agent, generally, is only to find a purchaser, and the
settled rule as stated by the courts is that, in the absence of an express contract between broker
and his principal, the implication generally is that the broker becomes entitled to the usual
commissions whenever he brings to his principal a party who is able and willing to take the
property and enter into a valid contract upon the terms then named by the principal, although the
particulars may be arranged and the matter negotiated and completed between the principal and
the purchaser directly. Macondray & Co. v. Sellner, 33 Phil. 370 (1916).
A real estate broker is one who negotiates the sale of real properties. His business, generally
speaking, is only to find a purchaser who is willing to buy the land upon terms fixed by the owner.
He has no authority to bind the principal by signing a contract of sale. Indeed, an authority to find
a purchaser of real property does not include an authority to sell. Litonjua, Jr. v. Eternit Corp.,
490 SCRA 204 (2006); xSchmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
Agent receives a commission upon successful conclusion of a sale; whereas, broker earns his
pay merely by bringing the buyer and the seller together, even if no sale is eventually made.
xHahn v. Court of Appeals, 266 SCRA 537 (1997); Tan v. Gullas, 393 SCRA 334 (2002).
Thus, when the terms of the brokerage arrangement is to the effect that entitlement to the
commission was contingent on the purchase by a customer of a fire truck, the implicit condition
being that the broker would earn the commission if he was instrumental in bringing the sale
about. Since the agent had nothing to do with the sale of the fire truck, he is not entitled to any
commission at all. Guardex v. NLRC, 191 SCRA 487 (1990).
The duties and liability of a broker to his employer are essentially those which an agent owes
to his principal. Consequently, the decisive legal provisions on determining whether a broker is
mandated to give to the employer the propina or gift received from the buyer would be Articles
1891 and 1909 of the Civil Code. (CLV: Yet the facts did indicate clearly that the real estate
broker was appointed as an exclusive agent.) Domingo v. Domingo, 42 SCRA 131 (1971).
In agencies to sell where the entitlement of the commission is subject to the successful
consummation of the sale with the buyer located by the agent, said agent would still be entitled to
the commission on sales consummated after the expiration of his agency when the facts show
that the agent was the efficient procuring cause in bringing about the sale. Pratts v. Court of
Appeals, 81 SCRA 360 (1978).
Although the sale of the object of agency was perfected three days after expiration of the
agency period, agent would still be entitled to receive commission stipulated based on doctrine in
Pratts v. Court of Appeals, 81 SCRA 360 (1978), that when agent was the efficient procuring
cause in bringing about the sale he was entitled to compensation. Manotok Bros. Inc. v. C,
221 SCRA 224 (1993).
Although the buyer was introduced by the broker to the seller, nonetheless broker was not
entitled to receive the commission even with the consummation of the sale because the lapse of
the period of more than one (1) year and five (5) months between the expiration of brokers
authority to sell and the consummation of the sale to the buyer, is significant index of the brokers
non-participation in the really critical events leading tot he consummation of said sale. Broker was
not the efficient procuring cause in bringing about the sale and therefore not entitled to the
stipulated brokers commission. Inland Realty v. Court of Appeals, 273 SCRA 70 (1997).
The term procuring cause in describing a brokers activity, refers to a cause originating a
series of events which, without break in their continuity, result in the accomplishment of the prime
objective of the employment of the brokerproducing a purchaser ready, willing and able to buy
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on the owners terms. To be regarded as the procuring cause of a sale as to be entitled to a

commission, a brokers efforts must have been the foundation on which the negotiations resulting
in a sale began. Medrano v. Court of Appeals, 452 SCRA 77 (2005).9
Since brokerage relationship is necessary a contract for the employment of an agent,
principles of contract law also govern the broker-principal relationship (?). Abacus Securities
Corp. v. Ampil, 483 SCRA 315 (2006).
d. From Sale
When the agreement compels the purported agent to pay for the products received from the
purported principal within the stipulated period, even when there has been no sale thereof to the
public, the underlying relationship is not one of contract of agency to sell, but one of actual sale. A
true agent does not assume personal responsibility for the payment of the price of the object of
the agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he
receives them from the buyer. Consequently, since the underlying agreement is not an agency
agreement, it cannot be revoked except for cause. xQuiroga v. Parsons, 38 Phil 502 (1918).
When under the agreement the purported agent becomes responsible for any changes in the
acquisition cost of the object he has been authorized to purchase from a supplier in the United
States, the underlying agreement is not an contract of agency to buy, since a true agent does not
bear any risk relating to the subject matter or the price. Being a contract of sale and not agency,
any profits realized by the purported agent from discounts received from the American supplier
pertained to it with no obligation to account for it, much less to turn it over, to the purported
principal. Gonzalo Puyat v. Arco, 72 Phil. 402 (1941).
The primordial difference between a sale and an agency to sell is the transfer of ownership or
title over the property subject of the contract. In an agency, the principal retains ownership and
control over the property and the agent merely acts on the principal's behalf and under his
instructions in furtherance of the objectives for which the agency was established. On the other
hand, the contract is clearly a sale if the parties intended that the delivery of the property will
effect a relinquishment of title, control and ownership in such a way that the recipient may do with
the property as he pleases. Spouses Viloria v. Continental Airlines, Inc., 663 SCRA 57 (2012).
e. From Tenancy
By assenting to Jorge's possession of the land sans accounting of the cultivation expenses and
actual produce of the land provided that Jorge annually delivered to him 110 cavans of palay and paid
the irrigation fees belied the very nature of agency, which was representation. The verbal agreement
between Timoteo and Jorge left all matters of agricultural production to the sole discretion of Jorge and
practically divested Timoteo of the right to exercise his authority over the acts to be performed by
Jorge. While in possession of the land, therefore, Jorge was acting for himself instead of for Timoteo.
Unlike Jorge, Timoteo did not benefit whenever the production increased, and did not suffer whenever
the production decreased. Timoteo's interest was limited to the delivery of the 110 cavans of palay
annually without any concern about how the cultivation could be improved in order to yield more
produce. Jusayan v. Sombilla, G.R. No. 163928, 21 Jan. 2015.

II. FORMS AND KINDS OF AGENCY

1.

How Agency May Be Constituted (Art. 1869)

There are provisions of law which require certain formalities for particular contracts: the first is
when the form is required for the validity of the contract; the second is when it is required to make
the contract effective as against third parties; and the third is when the form is required for the
purpose of proving the existence of the contract. A contract of agency to sell on commission basis
does not belong to any of these three categories, hence it is valid and enforceable in whatever
form in may be entered into. Consequently, when the agent signs her signature on any face of the
receipt showing that she receives the jewelry for her to sell on commission, she is bound to the
obligations of an agent. Lim v. Court of Appeals, 254 SCRA 170 (1996).
a. From Side of the Principal (Art. 1869)
Where buyers-a-retro failed for several years to clear their title to the property purchased and
allowed seller-a-retro to remain in possession in spite of expiration of the redemption period, the
execution of the memorandum of repurchase by the buyers son-in-law, which stood unrepudiated
for many years, constituted an implied agency under Article 1869, from their silence or lack of
action, or their failure to repudiate the agency. Conde v. Court of Appeals, 119 SCRA 245 (1982).
Where the principal has acquiesced in the act of his agent for a long period of time, and has
received and appropriated to his own use the benefits result in from the acts of his agent, courts
cannot declare the acts of the agent null and void. Linan v. Puno, 31 Phil. 259 (1915).

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

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

c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)
(i) Agency Is Not Presumed to Exist
One who alleges the existent of an agency relationship must prove such fact for the law
does not make presumption of agency and proving its existence, nature and extent is
incumbent upon the person alleging it. Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009);
Nevada v. Casuga, 668 SCRA 441 (2012).
Persons dealing with an assumed agent are bound at their peril, and if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and extent of
authority, and in case either is controverted, the burden of proof is upon them to prove it.
Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).10
(ii) Agency by Estoppel With Respect to Third Parties
When the owner of a hotel/caf business allows a person to use the title managing agent
and allows such person to take charge of the business during his prolonged absence,
performing the duties usually entrusted to managing agent, then such owner is bound by the
act of such person. One who clothes another apparent authority as his agent, and holds him
out to the public as such, can not be permitted to deny the authority of such person to act as
his agent, to the prejudice of innocent third parties dealing with such person in good faith and
in the following pre-assumptions or deductions, which the law expressly directs to be made
from particular facts, are deemed conclusive. Macke v. Camps, 7 Phil 522 (1907).
When the law firm has allowed for quite a period the messenger of another office to receive
mails and correspondence on their behalf, an implied agency had been duly constituted,
specially when there is no showing that counsel had objected to such practice or took step to
put a stop to it. Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001).

2. KINDS OF AGENCY
a. Based on Business or Transactions Encompassed (Art. 1876): General or Universal
Agency versus Special or Particular Agency
Siasat v. IAC, 139 SCRA 238 (1985) describes them as follows:
Universal agent is authorized to do all acts for his principal which can lawfully be
delegated to an agent; such an agent may be said to have universal authority.
General agent is authorized to do all acts pertaining to a business of a certain kind or at
a particular place, or all acts pertaining to a business of a particular class or series. He
has usually authority expressly conferred in general terms or in effect made general by
the usages, customs or nature of the business which he is authorized to transact.
Special agent is authorized to do some particular act or to act upon some particular
occasion; he acts usually in accordance with specific instructions or under limitations
necessarily implied from the nature of the act to be done.
The right of an agent to indorse check will not be lightly inferred. A salesman with authority
to collect money for his principal does not have the implied authority to indorse checks
received in payment. Any person taking checks made payable to a corporation which can act
only by agents does so at his peril, and must abide by the consequence if the agent who
indorses the same is without authority. Insular Drug v. PNB, 58 Phil. 684 (1933).
The registered owner who placed in the hands of another an executed document of transfer
of the registered land, was held to have effectively represented to a third party that the holder
of such document is authorized to deal with the property. Blondeau v. Nano, 61 Phil. 625
(1935); Domingo v. Robles, 453 SCRA 812 (2005).
We stress that the power of administration does not include acts of disposition or
encumbrance, which are acts of strict ownership. As such, an authority to dispose cannot
proceed from an authority to administer, and vice versa, for the two powers may only be
exercised by an agent by following the provisions Arts. 1876 to 1878 of Civil Code. Aggabao
v. Parulan Jr., 629 SCRA 562 (2010).
b. Whether It Covers Legal Matters: Attorney-at-Law versus Attorney-in-Fact
The relation of attorney and client is in many respects one of agency, and the general rules
of agency apply to such relation; the acts of an agent are deemed the acts of the principal only
if the agent acts within the scope of his authority, Therefore only the employee, not his counsel
10

Woodschild Holdings, Inc. v. Roxas Electric and Construction Co., Inc., 436 SCRA 235 (2004); Manila Memorial Park Cemetery,
Inc. v. Linsangan, 443 SCRA 377 (2004); Umipig v. People, 677 SCRA 53 (2012);Recio v. Heirs of the Spouses Altamirano, 702
SCRA 137 (2013).

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can impugn the consideration of the compromise as being unconscionable. On the other hand,
although a client has undoubtedly the right to compromise a suit without the intervention of his
lawyer, the same cannot be done to defraud the lawyer of the earned attorneys fees. J-Phil
Marine, Inc. v. NLRC, 561 SCRA 675 (2008).
An attorney cannot, without a clients authorization, settle the action or subject matter of the
litigation even when he believes that such a settlement will best serve his clients interest.
Philippine Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722 (2000).
c. Whether It Covers Acts of Administration or Acts of Dominion: POWERS OF ATTORNEY
(1) Formal Requisite: Must Be in Writing and Signed by the Principal
When no particular formality is required by law, rules or regulation, then the principal may
appoint his agent in any form which might suit his convenience or that of the agent, in this
case a letter addressed to the agent requesting him to file a protest in behalf of the principal
with the Collector of Customs against the appraisement of the merchandise imported into the
country by the principal. Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).
A power of attorney to convey real property need not be in a public document, it need only
be in writing, since a private document is competent to create, transmit, modify, or extinguish a
right in real property. Jimenez v. Rabot, 38 Phil 378 (1918).
In a case involving authority to act in baranggay conciliation cases covering an ejectment
for failure to pay rentals: A power of attorney is an instrument in writing by which one person,
as principal, appoints another as his agent and confers upon him the authority to perform
certain specified acts or kinds of acts on behalf of the principal. The written authorization itself
is the power of attorney, and this is clearly indicated by the fact that it has also been called a
letter of attorney. Wee v. De Castro, 562 SCRA 695 (2008).
True, said counsel asserted that he had verbal authority to compromise the case. The
Rules, however, require, for attorneys to compromise the litigation of their clients, a special
authority (Section 23, Rule 138, Rules of Court). And while the same does not state that the
special authority be in writing, the court has every reason to expect, that, if not in writing, the
same be duly established by evidence other than the self-serving assertion of counsel himself
that such authority was verbally given to him. For, authority to compromise cannot lightly be
presumed. Home Insurance Co. v. USL, 21 SCRA 863 (1967).
The dated letter relied upon by the petitioners was signed by Fernandez alone, without any
authority from the owners. There is no actuation of Fernandez in connection with her dealings
with the petitioners. As such, said letter is not binding on the respondents as owners of the
subject properties. Litonjua v. Fernandez, 427 SCRA 478 (2004).
It is a general rule that a power of attorney must be strictly construed; the instrument will be
held to grant only those powers that are specified, and the agent may neither go beyond nor
deviate from the power of attorney. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
Contracts of agency and general powers of attorney, must be interpreted in accordance
with the language used by the partiesthe real intention of the parties is primarily to be
determined from the language used, and to be gathered from the whole instrument. In case of
doubt, resort must be had to the situation, surroundings, and relations of the parties.
Whenever it is possible, effect is to be given to every word or clause used by the parties, for it
is to be presumed that the parties said what they intended to say and that they used each
word or clause with sole purpose, and that purpose is, if possible, to be ascertained and
enforced. If the contract be open to two constructions, one of which would while the other
would overthrow it, the former is to be chosen; if by one construction the contract would be
illegal, and by another equally permissible construction would be lawful, the latter must be
adopted. The acts of the parties will be presumed to be done in conformity with and not
contrary to the intent of the contract. The meaning of general words must be construed with
reference to the specific object to be accomplished and limited by the recitals made in
reference to such object. Linan v. Puno, 31 Phil. 259 (1915).
(2) Notarized Power of Attorney
When a special power of attorney is duly notarized, the notarial acknowledgment is prima
facie evidence of the fact of its due executiona buyer has every reason to rely on a persons
authority to sell a particular property owned by a corporation on the basis of a notarized board
resolutionundeniably the buyer is an innocent purchaser for value in good faith. St. Marys
Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).11

11

Veloso v. Court of Appeals, 260 SCRA 593 (1996).

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3. GENERAL POWERS OF ATTORNEY (Art. 1877)

Agency couched in general terms comprises only acts of administration, even if principal should
state that he withholds no power or that the agent may execute such acts as he may consider
appropriate, or even though the agency should authorize a general and unlimited management.
Yoshizaki v. Joy Training Center of Aurora, Inc., 702 SCRA 631 (2013).
Acts of Administration means to perform acts which the principal himself may pursue in the
ordinary course of the business, thus:
When an agent has been given general control and management of the business, he is
deemed to have power to employ such agents and employees as are usual and necessary
in the conduct of the business, and needs no special power of attorney for such purpose.
Yu Chuck v. Kong Li Po, 46 Phil. 608 (1924).
A co-owner who is made an attorney-in-fact, with the same power and authority to deal
with the property which the principal might or could have had if personally present, may
adopt the usual legal means to accomplish the object, including acceptance of service and
engaging of legal counsel to preserve the ownership and possession of the principals
property. Government of PI v. Wagner, 54 Phil. 132 (1929).
Admissions obtained by the agent from the adverse party prior to the formal amendment of
the complaint that included the principal as a party to the suit, can be availed of by the
principal, since an agent may do such acts as may be conducive to the accomplishment of
the purpose of the agency, admissions secured by the agent within the scope of the agency
ought to favor the principal. Bay View Hotel v. Ker & Co., 116 SCRA 327 (1982).
4.

SPECIAL POWERS OF ATTORNEY

Although the document is entitled Special Power of Attorney its wordings show that it sought
only to establish an agency that comprises all the business of the principal within the designated
locality, but couched in general terms, and consequently was limited only to acts of administration. A
general power permits the agent to do all acts for which the law does not require a special power,
and only covered acts of administration. Dominion Insurance Corp. v. Court of Appeals, 376
SCRA 239 (2002).
Even when the title given to a deed is as a General Power of Attorney, but its operative clause
contains an authority to sell, it constituted the requisite special power of attorney to sell a piece of
land. Thus, there was no need to execute a separate and special power of attorney since the
general power of attorney had expressly authorized the agent or attorney in fact the power to sell the
subject property. Veloso v. Court of Appeals, 260 SCRA 593 (1996).
a. Doctrine of Implied Power. Specific grants of Powers of Dominion necessarily includes
those implied powers or those necessary to fulfill those powers of ownership granted, thus:
When the attorney-in-fact was empowered by his principal to make an assignment of
credits, rights, and interests, in payment of debts for professional serviced rendered by
laws, and the hiring of lawyers to take charge of any actions necessary or expedient for the
interests of his principal, and to defend suits brought against the principal, such powers
necessarily implies the authority to pay for the professional services thus engaged, which
includes assignment of the judgment secured for the principal in settlement of outstanding
professional fees. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
When an agent has been empowered to sell hemp in a foreign country, that express power
carries with it the implied power to make and enter into the usual and customary contract
for its sale, which sale contract may provide for settlement of issues by arbitration,
especially in this case when the contract was ratified and approved subsequently by the
principal. Robinson Fleming v. Cruz, 49 Phil 42 (1926).
The power expressly conferred on the agent to sell for such price or amount is broad
enough to cover the exchange contemplated in the Deed of Assignment and Conveyance
between the properties and the corresponding corporate shares in a corporation, with the
latter replacing the cash equivalent of the option money initially agreed to be paid by the
said corporation under the Memorandum of Agreement. A special power of attorney to sell
is sufficient to enable the agent to make a binding commitment under the Deed of
Assignment and Conveyance. Hernandez-Nievera v. Hernandez, 642 SCRA 646 (2011).
b. Express Power of Attorney Excludes Powers of
Administration (e.g., General Power of Attorney)
The instrument which grants to the agent the power To follow-up, ask, demand, collect
and receipt for my benefit indemnities or sum due me relative to the sinking of M.V. NEMOS in
the vicinity of El Jadida, Casablanca, Morocco on the evening of February 17, 1986, is a
special power of attorney, excludes any intent to grant a general power of attorney or to
constitute a universal agency. Being special powers of attorney, they must be strictly
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construed. The instrument cannot be read to give power to the attorney-in-fact to obtain,
receive, receipt from the insurance company the proceeds arising from the death of the
seaman-insured, especially when the commercial practice for group insurance of this nature is
that it is the employer-policyholder who took out the policy who is empowered to collect the
proceeds on behalf of the covered insured or their beneficiaries. Pineda v. Court of
Appeals, 226 SCRA 754 (1993).
c. CASES WHERE SPECIAL POWERS OF ATTORNEY ARE NECESSARY (Art. 1878)
Article 1878 does not state that the authority be in writing. As long as the mandate is
express, such authority may be either oral or written. We unequivocably declared in Lim Pin v.
Liao Tian, et al., that the requirement under Article 1878 of the Civil Code refers to the nature
of the authorization and not to its form. Be that as it may, the authority must be duly
established by competent and convincing evidence other than the self serving assertion of the
party claiming that such authority was verbally given. Patrimonio v. Gutierrez, 724 SCRA
636 (2014)
(1) To Make Payments As Are Not Usually Considered as Acts of Administration
In the case of the area manager of an insurance company, it was held that the payment of
claims is not an act of administration, and that since the settlement of claims was not included
among the acts enumerated in the Special Power of Attorney issued by the insurance
company, nor is of a character similar to the acts enumerated therein, then a special power of
attorney was required before such area manager could settle the insurance claims of the
insured. Consequently, the amounts paid by the area manager to settle such claims cannot be
reimbursed from the principal insurance company. Dominion Insurance Corp. v. Court of
Appeals, 376 SCRA 239 (2002).
(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
The power to compromise excludes the power to submit to arbitration. It would
also be reasonable to conclude that the power to submit to arbitration does not
carry with it the power to compromise. (Art. 1880)
Old Civil Code: The power to bring suit to collect amounts accruing in the ordinary course
of business properly belonging to the class of acts described in Art. 1713 of the Civil Code
as acts of strict ownership. But in this case it to be something which is necessarily a part
of mere administration of such a business as that described in the instrument in question
and only incidentally, if at all, involving a power to dispose of the title to property. In any
event, the provision to exact the payment of sums of money by legal means was
construed to be express power to sue. Germann v. Donaldson, 1 Phil 63 (1901).
(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
Old Civil Code: Where nephew in his own name sold a parcel of land with the house
constructed thereon to the company, when in fact it was the uncles property, but in the
estafa case filed by the company against the nephew, the uncle swore that he had
authorized his nephew to sell the property, the uncle can be compelled in the civil action
to execute the deed of sale covering the property. It having been proven at the trial that
he gave his consent to the said sale, it follows that the defendant conferred verbal, or at
least implied, power of agency upon his nephew Duran, who accepted it in the same way
by selling the said property. The principal must therefore fulfill all the obligations
contracted by the agent, who acted within the scope of his authority. (Arts. 1709, 1710
and 1727) Gutierrez Hermanos v. Orense, 28 Phil. 572 (1914).
(5-A) Sale of a Piece of Land or Interest Therein (Art. 1874)
The authority found in a power of attorney to sell any kind of realty that might belong to
the principal is deem to include also such as the principal might afterwards have or acquire
during the time it was in force. Katigbak v. Tai Hing Co., 52 Phil. 622 (1928).
The express mandate required by Art. 1874 is for the power of attorney to expressly
empower the agent to sell land belonging to the principal. The power of attorney need not
contain a specific description of the land to be sold, such that giving the agent the power to sell

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any or all tracts, lots, or parcels of land belonging to the principal is adequate. Domingo v.
Domingo, 42 SCRA 131 (1971).
Article 1878 provides that a special power of attorney is necessary to enter into any
contract by which the ownership of an immovable is transmitted or acquired either gratuitously
or for a valuable consideration, or to create or convey real rights over immovable property, or
for any other act of strict dominion. Any sale of real property by one purporting to be the agent
of the registered owner without any authority therefore in writing from the said owner is null
and void (?); declarations of the agent alone are generally insufficient to establish the fact or
extent of her authority. Litonjua v. Fernandez, 427 SCRA 478 (2004).
According to Art. 1874, when the sale of a piece of land or any interest therein is made
through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void.
Also, under Art. 1878, a special power of attorney is necessary in order for an agent to enter
into a contract by which the ownership of an immovable property is transmitted or acquired,
either gratuitously or for a valuable consideration. Estate of Lino Olaguer v. Ongjoco, 563
SCRA 373 (2008).
Where the special power of attorney primarily empowered the agent of the corporation to
bring an ejectment case against the occupant and also to compromise . . . so far as it shall
protect the rights and interest of the corporation in the aforementioned lots, and that the agent
did execute a compromise in the legal proceedings filed which sold the lots to the occupant,
the compromise agreement is void for the power to sell by way of compromise could not be
implied to protect the interests of the principal to secure possession of the properties.
Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
The rule under Art. 1874 that when the sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be
void, applies when the sale of corporate piece of land is pursued through an officer without
written authority. City-Lite Realty Corp. v. Court of Appeals, 325 SCRA 385 (2000).12
Agency may be oral unless the law requires a specific form. However, to create or convey
real rights over immovable property, a special power of attorney is necessary. Thus, when a
sale of a piece of land or any portion thereof is through an agent, the authority of the latter
shall be in writing, otherwise, the sale shall be void. Litonjua, Jr. v. Eternit Corp., 490
SCRA 204 (2006).
Under Article 1878 of the Civil Code, a special power of attorney is necessary for an agent
to enter into a contract by which the ownership of an immovable property is transmitted or
acquired, either gratuitously or for a valuable consideration. Absence of a written authority to
sell a piece of land is ipso jure void, precisely to protect the interest of an unsuspecting owner
from being prejudiced by the unwarranted act of another. However, we apply the principle of
estoppel to pursue the enforcement of the sale with respect to the principal. Pahud v. Court
of Appeals, 597 SCRA 13 (2009).
As a general rule, a contract of agency may be oral; however, it must be written when the
law requires a specific form. Specifically, Art. 1874 provides that the contract of agency must
be written for the validity of the sale of a piece of land or any interest therein; otherwise, the
sale shall be void. A related provision, Art. 1878 states that special powers of attorney are
necessary to convey real rights over immovable properties. Yoshizaki v. Joy Training
Center of Aurora, Inc., 702 SCRA 631 (2013).13
Articles 1874 and 1878(5) explicitly require a written authority when the sale of a piece of
land is through an agent, whether the sale is gratuitously or for a valuable consideration.
Absent such authority in writing, the sale is null and void. In the case at bar, it is undisputed
that the sale of the subject lots to Spouses Bautista was void. Based on the records, Nasino
had no written authority from Spouses Jalandoni to sell the subject lots. The testimony of
Eliseo that Nasino was empowered by a special power of attorney to sell the subject lots was
bereft of merit as the alleged special power attorney was neither presented in court nor was it
referred to in the deeds of absolute sale. Bare allegations, unsubstantiated by evidence, are
not equivalent to proof under the Rules of Court. Bautista v. Spouses Jalandoni, 710
SCRA 670 (2013).
(5-B) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2])
The prohibition against agents purchasing property in their hands for sale or management
is, however, clearly, not absolute. When so authorized by the principal, the agent is not

12

San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385
(2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
13
Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. v. Pajo-Reyes, 632 SCRA 400 (2010); Recio v. Heirs of the
Spouses Altamirano, 702 SCRA 137 (2013);

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disqualified from purchasing the property he holds under a contract of agency to sell. Olaguer
v. Purugganan, Jr., 515 SCRA 460 (2007).
(6) To Lease Real Property for More Than One Year
Under Sec. 335 of the Code of Civil Procedure, an agreement for the leasing for a longer
period than one year, or for the sale of real property, or of an interest therein, is invalid if made
by the agent unless the authority of the agent be in writing and subscribed by the party sought
to be charged. Rio y Olabbarrieta v.Yutec, 49 Phil 276 (1926).
Article 1878 expresses that a special power of attorney is necessary to lease any real
property to another person for more than one year, for such is considered not merely an act of
administration but an act of strict dominion or of ownership. Shoppers Paradise Realty v.
Roque, 419 SCRA 93 (2004).
Where the lease contract involves the lease of real property for a period of more than one
year was entered into by an agent on behalf of the principle, Art. 1878 requires that the agent
be armed with a special power of attorney to lease the premises; otherwise, the provisions of
the contract of lease, including the grant therein of an option to purchase to the lessee, would
be unenforceable. Vda. De Chua v. IAC, 229 SCRA 99 (1994).
(7) To Create or Convey Real Rights over Immovable Property
(8) To Make Gifts
(9) To Loan or Borrow Money
EXCEPT: Agent May Borrow Money When It Is Urgent and Indispensable for the
Preservation of the Things Which Are Under Administration.
Power to Sell Excludes Power to Mortgage and Vice Versa (Art. 1879)
The fact that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally
sufficient because the authority to enter into a loan can never be presumed. The contract of
agency and the special fiduciary relationship inherent in this contract must exist as a matter of
fact. The person alleging it has the burden of proof to show, not only the fact of agency, but
also its nature and extent. Patrimonio v. Gutierrez, 724 SCRA 636 (2014).
An SPA to mortgage real estate is limited to such authority to mortgage and does not bind
the grantor personally to other obligations contracted by the grantee (in this case the personal
loan obtained by the agent in his own name from the PNB) in the absence of any ratification or
other similar act that would estop the grantor from questioning or disowning such other
obligations contracted by the grantee. In other words, the power to mortgage does not include
the power to obtain loans, especially when the grantors allege that they had no benefit at all
from the proceeds of the loan taken by the agent in his own name from the bank. PNB v. Sta.
Maria, 29 SCRA 303 (1969).
Where the power of attorney authorized the agent By means of a mortgage of my real
property, to borrow and lend sums in cash, at such interest and for such periods and
conditions as he may deem property and to collect or to pay the principal and interest thereon
when due, while it did not authorize the agent to execute deeds of sale with right of
repurchase over the property of the principal, nonetheless would validate the main contract of
loan entered into with the deed of sale with right of repurchase constituting merely an
equitable mortgage, both contracts of which were within the scope of authority of the agent.
Rodriguez v. Pamintuan and De Jesus, 37 Phil 876 (1918).
Where the power of attorney which vested the agent with authority for me and in my name
to sign, seal and execute, and as my act and deed, delivery any lease, any other deed for
conveying any real or personal property or any other deed for the conveying of any real or
personal property, it does not carry with it or imply that the agent for and on behalf of his
principal has the power to execute a promissory note or a mortgage to secure its payment.
National Bank v. Tan Ong Sze, 53 Phil. 451 (1929).
The wife may not be held liable for the payment of the mortgage debt contracted by the
husband, where the power of attorney given to the husband was limited to a grant of authority
to mortgage land titled in the wifes name. De Villa v. Fabricante, 105 Phil. 672 (1959).
A special power of attorney is necessary for an agent to borrow money, unless it be urgent
and indispensable for the preservation of the things which are under administration. Yasuma v.
Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).15
It is a general rule in the law agency that, in order to bind the principal by a mortgage on
real property executed by an agent, it must upon its face purport to be made, signed and

15

Gozun v. Mercado 511 SCRA 305 (2006).

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sealed in the name of the principal, otherwise, it will bind the agent only. Gozun v. Mercado
511 SCRA 305 (2006).
(10) To Bind the Principal to Render Some Service Without Compensation
(11) To Bind the Principal in a Contract of Partnership
(12) To Obligate the Principal as a Guarantor or Surety
When the principal has duly empowered his agent to enter into a contract of mortgage over
his property as well as a contract of surety, but the agent only entered into a contract of
mortgage, no inference from the power of attorney can be made to make the principal liable as
a surety, because under the law, a surety must be express and cannot be presumed. Wise
and Co. v. Tanglao, 63 Phil. 372 (1936).
Where a power of attorney is executed primarily to enable manager of a mercantile
business, to conduct its affairs for and on behalf of the principal-owner of the business, and to
this end the attorney-in-fact is authorized to execute contracts relating to the principals
property [act and deed delivery, any lease, or any other deed for the conveying any real or
personal property and act and deed delivery, any lease, release, bargain, sale, assignment,
conveyance or assurance, or any other deed for the conveying any real or personal property],
such power will not be interpreted as giving the attorney-in-fact power to bind the principal by a
contract of independent guaranty or surety unconnected with the conduct of the mercantile
business. Director v. Sing Juco, 53 Phil 205 (1929).
The special power to approve loans does not carry with it the power to bind the principal to
a contract of guaranty even to the extent of the amount for which a loan could have been
granted by the agent. Guaranty is not presumed, it must be expressed and cannot be
extended beyond its specified limits (Director v. Sing Juco, 53 Phil. 205. In one case, where it
appears that a wife gave her husband power of attorney to loan money, this Court ruled that
such fact did not authorized him to make her liable as a surety for the payment of the debt of a
third person. BA Finance v. Court of Appeals, 211 SCRA 112 (1992).
Article 1881 mandates an agent to act within the scope of his authority, which is what
appears in the written terms of the power of attorney granted upon him (Art. 1900). Under Art.
1878(11), a special power of attorney is necessary to obligate the principal as a guarantor or
surety. Country Bankers Ins. Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
(13) To Accept or Repudiate an Inheritance
(14) To Ratify or Recognize Obligations Contracted Before the Agency
Where a wife gave her husband a power of attorney to loan and borrow money and to
mortgage her property, that fact does not carry with it or imply that he has a legal right to sign
her name to a promissory note which would make her liable for the payment of a pre-existing
debt of the husband or that of his firm, for which she was not previously liable, or to mortgage
her property to secure the pre-existing debt. B.P.I. v. De Coster, 47 Phil 594 (1925).
Where the power granted to attorney-in-fact was to the end that the principal-seller may be
able to collect the balance of the selling price of the printing establishment sold, such agent
had no power to enter into new sales arrangements with the buyer, or to novate the terms of
the original sale. Villa v. Garcia Bosque, 49 Phil 126 (1926).

III. POWER, DUTIES AND OBLIGATIONS OF THE AGENT

1.

General Obligation of Agent Who Accepts the Agency (Art. 1884): Agent Is Bound to
Carry the Agency to Its Completion and for the Benefit of Principal.
OTHERWISE: Agent Will Be Liable for Damages Which the Principal May Suffer Through
His Non-Performance.
Under the original version of Art. 1884 (old Civil Code), the burden is on the person who
seeks to make an agent liable to show that the losses and damage caused were occasioned by
the fault or negligence of the agent; mere allegation without substantiation is not enough to
make the agent personally liable. Heredia v. Salina, 10 Phil 157 (1908).
COMPARE: In Event of Death of Principal: Agent Must Finish Business Already Begun
Should Delay Entail Any DangerEven If Under Art. 1919(3) Principals Death
Extinguishes Agency.

2.

Obligation of Agent Who Declines Agency Who Has Custody of Goods (Art. 1885) :
Agent Must Observe Due Diligence in the Custody and Preservation of the Goods
Until New Agent Appointed.
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COMPARE: Agent Who Withdraws From the Agency (Art. 1929): He Must Continue to Act
Until Principal Takes Necessary Steps to Meet Situation.

3.

DUTY OF OBEDIENCE
a. Agent Must Act In the Name of the Principal and Within the Scope of His
Authority (Art. 1881)
(1) An Act Is Deemed to Have Been Performed within the Scope of Agents
Authority, If Such Act Is Within the Terms of the Written Power of Attorney,
Even If in Fact the Agent Has Exceeded the Limits of the Authority According
the Private Understanding With the Principal. (Art. 1900)
(2) Authority of Agent Shall Not Be Deemed Exceeded If Performed in a Manner
More Advantageous to Principal. (Art. 1882)
b. Agent Must Follow the Instructions of the Principal. (Art. 1887)
c. Effects of Acts Done Within the Scope of Agents Authority:
Principal Is the One Liable; Agent Is Not Personally Liable.
Under Art. 1881, when agent acts within the scope of his authority, principal is bound by
acts effected in his behalf, whether or not the third person dealing with the agent believes that
the agent has actual authority. Sargasso Const. & Dev. Corp. v. PPA, 623 SCRA 260 (2010).
The legal impact of Art. 1881 which provides that the agent must act within the scope of his
authority, is that the gent is granted the right to affect the legal relations of his principal by the
performance of acts effectuated in accordance with the principal's manifestation of consent.
Pacific Rehouse Corp. v. EIB Securities, Inc., 633 SCRA 214 (2010).
d. Effects When Agents Act Beyond the Scope of His Authority: Unenforceable, Not
Void; UNLESS PRINCIPAL RATIFIES, WHICH MAKE IT VALID (Arts. 1317, 1403 and 1898)
When money received as a deposit by an agent is turned to the principal, with notice that it is
the money of the depositor, the principal is bound to deliver to the depositor, even if his agent
was not authorized to receive such deposit. [There has, in effect, ratification of the unauthorized
act of the agent, thereby binding the principal]. Cason v. Rickards, 5 Phil 639 (1906).
When the administrator enters into a contract that is outside of the scope of authority, the
contract would nevertheless not be an absolute nullity, but simply voidable [unenforceable] at
the instance of the parties who had been improperly represented, and only such parties can
assert the nullity of said contracts as to them. Zayco v. Serra, 49 Phil 985 (1925).
Under Art. 1898, acts of an agent beyond the scope of his authority do not bind the principal,
unless the latter ratifies the same expressly or impliedly. Furthermore, when the third person
knows that the agent was acting beyond his power or authority, the principal cannot be held
liable for the acts of the agent. If the said third person is aware of the limits of the authority, he is
to blame, and is not entitled to recover damages from the agent, unless the latter undertook to
secure the principals ratification. Cervantes v. Court of Appeals, 304 SCRA 25 (1999).16
Even when attorney-at-law in forging a compromise agreement, had exceeded his authority
in inserting penalty clause, the status of the said clause is not void but merely voidable
[unenforceable!], i.e., capable of being ratified. Clients failure to question the inclusion of the
penalty clause despite several opportunities to do so and with the representation of new
counsel, was tantamount to ratification. Borja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003).
Contracts entered in the name of another person by one who has been given no authority or
legal representation or who has acted beyond his powers are unauthorized contracts and are
unenforceable, unless they are ratified. Gozun v. Mercado 511 SCRA 305 (2006).
e. Effects When Agent Acts in His Own Name (Art. 1883):
Principal Has No Right Against Third Person Contracting with Agent
Agent Is Directly Bound to Third Person as If the Transaction Were His Own
EXCEPTION: When Contract Involves Things Belonging to Principal
It being established that the agent acted in his own name in selling the merchandise to the
defendants who fully believed that they were dealing with the said agent on his own, without any
knowledge that he was the agent of the plaintiffs, and having paid him in full for the
merchandise purchased, they are not liable to the plaintiffs, for said merchandise. Lim Tiu v.
Ruiz & Rementeria, 15 Phil. 367 (1910).
Even when the agent has written authority to convey real property, nevertheless when the
deed of sale was executed by the agent in her own name without showing the capacity in which

16

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

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she acted, although the act was doubtless irregular, the deed operated to bind the principal who
had authorized the sale. Jimenez v. Rabot, 38 Phil. 378 (1918).
When an agent acts in his own name, the principal has no right of action against the persons
with whom the agent has contracted, or such persons against the principal. In such case, the
agent is directly liable to the person with whom he has contracted, as if the transactions were
his own. Smith Bell v. Sotelo Matti, 44 Phil. 874 (1922).
Under Art. 1883, if agent acts in his own name, principal has no right of action against the
persons with whom the agent has contracted; neither have such persons against the principal.
In such case, agent is the one directly bound in favor of the person with whom he has
contracted, as if the transaction were his own, except when the contract involves things
belonging to the principal. Since the principals have caused their agent to enter into a charter
party in his own, then such principals have no standing to sue upon any issue or cause of action
arising from said charter party. Marimperio Cia. Naviera, S.A. v. CA, 156 SCRA 368 (1987).
When the agent executes a contract in his personal capacity, the fact that he is described in
the contract as the agent of the principal and the properties mortgaged pertain to the principal,
may not be taken to mean that he enters into the contract in the name of the principal. A
mortgage on real property of the principal not made and signed in the name of the principal is
not valid as to the principal. National Bank v. Palma Gil, 55 Phil. 639 (1931).17
A party who signs a bill of exchange as an agent (as the President of the company), but
failed to disclose his principal becomes personally liable for the drafts he accepted, even when
he did so expressly as an agent. Phil. Bank of Commerce v. Aruego, 102 SCRA 530 (1981).
Where a co-owner transfers the entirety of the mining claim to the buyer, who knew that it
included the one-half share pro-indiviso of the other co-owner, the transaction may be
considered as one where the disposing co-owner acted as agent of the other co-owner.
Consequently, under Art. 1883, such other co-owner may sue the person with whom the agent
dealt with in his (agents) own name, when the transaction involves things belong to the
principal. Goldstar v. Lim, 25 SCRA 597 (1968).
When a commission agent enters into a shipping contract in his own name to transport the
grains of NFA on a vessel owned by a shipping company, NFA cannot claim it is not liable to the
shipping company under Art. 1883 when things belong to the principal are dealt with, the agent
is bound to the principal although he does not assume the character of such agent and appears
acting in his own name. If the principal can be obliged to perform his duties under the contract,
then it can also demand the enforcement of its rights arising from the contract. NFA v. IAC, 184
SCRA 166 (1990).
(1) Provisions Are Without Prejudice to Actions Between Principal and Agent
Where plaintiffs appointed defendant to purchase a vessel and giving him money for that
purpose, but the agent purchased the boat and placed it in his own name, he has breached his
fiduciary obligation and is obliged to transfer the same to the plaintiffs, or the plaintiffs have a
right to be subrogated. According to the exception under Art. 1717 (old Civil Code) when things
belonging to the principal are dealt with, the agent is bound to the principal although he does not
assume the character of such agent and appears acting in his own name. Sy-Juco v. Sy-Juco,
40 Phil. 634 (1920).
4.

DUTY OF DILIGENCE:
a. Agent Must Exercise Due Diligence in the Pursuit of the Principals Business
b. Agent Also Liable Personally (with the Principal) for Fraud and Negligence Committed
in Pursuit of the Principals Affairs (Arts. 1884 and 1909)
What Shall Aggravate or Mitigate Liability Arising Out of Negligence Whether
Agency Was for a Compensation or Was Gratuitous
c. Agent Should Not Act If It Would Manifestly Result in Damage to Principal (Art. 1888)
Where holder of an exclusive and irrevocable power of attorney to make collections, failed to
collect the sums due to the principal and thereby allowed the allotted funds to be exhausted by
other creditors, such agent has failed to act with the care of a good father of a family required
under Article 1887 and became personally liable for the damages which the principal may suffer
through his non-performance. PNB v. Manila Surety, 14 SCRA 776 (1965).
While it is true that an agent who acts for a revealed principal does not become personally
bound to the other party in the sense that an action can ordinarily be maintained upon such
contract directly against the agent, yet that rule does not control when the agent cannot
17

Reiterated in National Bank v. Agudelo, 58 Phil 655 (1933); Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925);
Rural Bank of Bombon v. Court of Appeals, 212 SCRA 25 (1992).

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intercept and appropriate the thing which the principal is bound to deliver, and thereby make the
performance of the principal impossible. The agent in any event must be precluded from doing
any positive act that could prevent performance on the part of his principal, otherwise the agent
becomes liable also on the contract. National Bank v. Welsh Fairchild, 44 Phil 780 (1923).
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank
seems to be suggesting that as a mere agent it cannot be liable to the principal; this is not
exactly true. On the contrary, Article 1909 clearly provides that the agent is responsible not only
for fraud, but also for negligence. Metrobank v. Court of Appeals, 194 SCRA 169 (1991).
Provision in the mortgage contract that in the event of accident or loss, the finance company
shall make a proper claim against the insurance company, was in effect an agency relation, and
that under Art. 1884, the finance company was bound by its acceptance to carry out the agency,
and in spite of the instructions of the borrowers to make such claims instead insisted on having
the vehicle repaired but eventually resulting in loss of the insurance coverage, the finance
company had breached its duty of diligence, and must assume the damages suffered by the
borrowers, and consequently can no longer collect on the balance of the mortgage loan secured
thereby. BA Finance v. Court of Appeals, 201 SCRA 157 (1991).
The well-settled rule is that an agent is also responsible for any negligence in the
performance of its function (Art. 1909) and is liable for the damages which the principal may
suffer by reason of its negligent act. (Art. 1884). British Airways v. Court of Appeals, 285
SCRA 450 (1998).
Article 1882 provides that the limits of an agents authority shall not be considered exceeded
should it have been performed in a manner advantageous to the principal than that specified by
him. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
d. Primary Obligation of Agent Is to Carry Out Agency in Accordance with Principals
Instructions (Art. 1887)
If Agent Followed Instructions, Principal Cannot Set-up Agents Ignorance or
Circumstance which Principal Was/Ought to Have Been Aware Of (Art. 1899)
Pursuant to the instructions of principals, the agent purchased a piece of land in their
names using the sums given to him by principals, and thereafter the principals had ratified the
transaction and even received profits arising from the investment in the land. There is nothing
in the record which would indicate that the agent failed to exercise reasonable care and
diligence in the performance of his duty, or that he undertook to guarantee the vendors title to
the land purchased by direction of the principals, then the eventual loss sustained by said
principals from a defect in the title in the land cannot be a basis to hold the agent personally
liable for damages. Nepomuceno v. Heredia, 7 Phil 563 (1907).
When an agent in executing the orders and commissions of his principal carries out the
instructions he has received from his principal, and does not appear to have exceeded his
authority or to have acted with negligence, deceit or fraud, he cannot be held responsible for
the failure of his principal to accomplish the object of the agency. Agents, although they act in
representation of the principal, are not guarantors for the success of the business enterprise
they are asked to manage. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).
When bank officers, acting as agent, had not only gone against the instructions, rules and
regulations of the bank in releasing loans to numerous borrowers who were qualified, then
such bank officers are liable personally for the losses sustained by the bank. The fact that the
bank had also filed suits against the borrowers to recover the amounts given does not amount
to ratification of the acts done by the bank officers. PNB v. Bagamaspad, 89 Phil. 365 (1951).

5.

DUTY OF LOYALTY:
a. Agent Shall Be Liable for Damages Sustained by the Principal Where in Case of
Conflict-of-Interest Situations, Agent Preferred His Own Interest. (Art. 1889)
b. Agent Is Prohibited from Buying Property Entrusted to Him for Administration or Sale
Without Principals Consent (Art. 1491[2]).
Where the agent by means of misrepresentation of the condition of the market induces his
principal to sell to him the property consigned to his custody at a price less than that for which
he has already contracted to sell part of it, and who thereafter disposes of the whole at an
advance, is liable to principal for the difference. Such conduct on the part of the agent
constituted fraud, entitling the principal to annul the contract of sale. Although commission
earned by the agent on the fraudulent sale may be disallowed, nonetheless commission earned
from other transactions which were not tainted with fraud should be allowed the agent.
Cadwallader v. Smith Bell, 7 Phil. 461 (1907).
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The director/general manager, who also was the majority stockholder, and designated to be
the main negotiator for the company with the Government for the sale of its large tract of land,
having special knowledge of commercial information that would increase the value of the shares
in relation to the sale of the parcels of land to the Government, can be treated legally as being
an agent of the stockholders, with a fiduciary obligation to reveal to the other stockholders such
special information before proceeding to purchase from the other stockholders their shares of
stock. If such director purchases the shares of a stockholder without having disclosed important
facts or to render the appropriate report on the expected increase in value of the company,
there was fraud committed for which the director shall be liable for the earnings earned against
the stockholder on the sale of shares. Strong v. Guiterrez Repide, 41 Phil. 947 (1909).
A confidential employee who, knowing that his principal was negotiating with the owner of
some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife,
commits an act of disloyalty and infidelity to his principal, whereby he becomes liable, among
other things, for the damages caused, which meant to transfer the property back to the principal
under the terms and conditions offered to the original owner. Sing Juco and Sing Bengco v.
Sunyantong and Llorente, 43 Phil 589 (1922).
An uncle who was acting as agent/administrator of property belonging to a niece had
procured Torrens title in his own name is deemed to be a trustee, and he must surrender the
property to the niece and transfer title to her. The relations of an agent to his principal are
fiduciary and in regard to the property subject of the agency, he is estopped from acquiring or
asserting a title adverse to that of the principal. Consequently, an action in personam will lie
against an agent to compel him to return or retransfer to his principal, or the latters estate, the
real property committed to his custody as such agent and also to execute the necessary
documents of conveyance to effect such retransfer. Severino v. Severino, 44 Phil. 343 (1923).
An agent cannot represent both himself and his principal in a transaction involving the
shifting to another person of the agents liability for a debt to the principal. Aboitiz v. De Silva, 45
Phil 883 (1924).
Under Art. 267 of Code of Commerce which declared that no agent shall purchase for
himself or for another that which he has been ordered to sell, then a sale by a broker to himself
without the consent of the principal would be void and ineffectual whether the broker has been
guilty of fraudulent conduct or not. Consequently, such broker is not entitled to receive any
commission under the contract, much less any reimbursement of expenses incurred in pursuing
and closing such sales. The same prohibition is now contained in Article 1491(2) of Civil Code.
Barton v. Leyte Asphalt, 46 Phil 938 (1924).
When an agent is involved in the perpetration of fraud upon his principal for his extrinsic
benefit, he is not really acting for the principal but is really acting for himself, entirely outside the
scope of his agency the basic tenets of agency rest on the highest consideration of justice,
equity and fair play, and an agent will not be permitted to pervert his authority to his own
personal advantage. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
The relation of an agent to his principal is fiduciary and it is elementary that in regard to
property subject matter of the agency, an agent is estopped from acquiring or asserting a title
adverse to that of the principala position analogous to that of a trusteehe cannot,
consistently with the principles of good faith, be allowed to create in himself an interest in
opposition to that of his principal or cestui que trust. Hernandez v. Hernandez, 645 SCRA
24 (2011).
c. Agent Obliged to Render an Accounting to the Principal of All Matters Relating
Agency (Art. 1891):
Agent Must Deliver to Principal Whatever Is Received by Virtue of Agency
Obligation Arises and Becomes Demandable at the Time Agency Ends
Stipulation Exempting Agent from Obligation to Render an Accounting Is Void
An administrator of an estate is liable under Art. 1720 (now Art. 1891) for failure to render an
account of his administration to the heirs, unless the heirs consented thereto or are estopped by
having accepted the correctness of his account previously rendered. Ojinaga v. Estate of Perez,
9 Phil 185 (1907).
There is an essential distinction between the possession by a receiving teller of funds
received from third persons paid to the bank, and an agent who receives the proceeds of sales
of merchandise delivered to him in agency by his principal. In the former case, payment by third
persons to the teller is payment to the bank itself; the teller is a mere custodian or keeper of the
funds received, and has no independent right or title to retain or possess the same as against
the bank. An agent, on the other hand, can even assert, as against his own principal, an
independent, autonomous, right to retain money or goods received in consequence of the
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agency; as when the principal fails to reimburse him for advances he has made, and indemnify
him for damages suffered without his fault. Chua-Burce v. Court of Appeals, 331 SCRA 1
(2000).18 Consequently:
An insurance agent is guilty of estafa for his failure to deliver sums of money paid to him
as an insurance agent for the account of his employer. Where nothing to the contrary
appears, the provisions of Art. 1720 of Civil Code impose upon an agent the obligation to
deliver to his principal all funds collected on his account. U.S. v. Kiene, 7 Phil 736 (1907)
A travelling sales agent who misappropriated or failed to return to his principal the
proceeds of the things or goods he was commissioned or authorized to sell, is liable for
estafa. Guzman v. Court of Appeals, 99 Phil. 703 (1956).
Whereas, a bank teller or cash custodian, being merely an employee of the bank, cannot
be held liable for estafa, but rather for theft. Chua-Burce v. Court of Appeals, infra.
As a necessary consequence of such breach of trust, an agent must then forfeit his right to
the commission and must return the part of the commission he received from his principal.
Domingo v. Domingo, 42 SCRA 131 (1971).
The submission by administrator of four letter reports during the entire 18 years that he was
administering the property can hardly be considered as sufficient to keep the principal informed
and updated of the condition and status of the latter's properties. Sazon v. Vasquez-Menancio,
666 SCRA 707 (2012).
When principal approves agents, he has no right to ask afterwards for a revision of the same
or for a detailed account of the business, unless he can show that there was fraud, deceit, error
or mistake in the approval of the accounts. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491,
505 (1915); Pastor v. Nicasio, 6 Phil. 152 (1906).
d. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890)
If Empowered to Borrow Money, Agent May Be the Lender at Current Interest Rates;
If Empowered to Lend Money, He Cannot Borrow Without Principals Consent.
When power granted to agent was only to borrow money and mortgage principals property
to secure the loan, it cannot be interpreted to include the authority to mortgage the properties to
support the agents personal loans and use the proceeds thereof for his own benefit. The lender
who lends money to the agent knowing that is was for personal purpose and not for the
principals account, is a mortgagee in bad faith and cannot foreclose on the mortgage thus
constituted. Hodges v. Salas and Salas, 63 Phil. 567 (1936).
e. Agent Is Liable to the Principal for Interest (Art. 1896):
On Sums He Applied to His Own Use (from the Time He Used Them)
On Sums Owing the Principal (from the Time Agency Is Extinguished)
As to the interest imposed in the judgment on amounts received by agent which were not
turned over to the principal, Art. 1724 provides that an agent shall be liable for interest upon any
sums he may have applied to his own use, from the day on which he did so, and upon those
which he still owes, after the expiration of the agency, from the time of his default. Mendezonna
v. Vda. De Goitia, 54 Phil 557 (1930).
The successor-in-interest of the principal is not entitled to collect interest from the agent of
the father for sums loaned to and collected by the agent from various persons for the deceased
principal. In all the aforementioned transactions, the defendant acted in his capacity as attorneyin-fact of the deceased father, and there being no evidence showing that he converted the
money entrusted to him to his own use, he is not liable for interest thereon, in accordance with
Art.1724 of the Civil Code. De Borja v. De Borja, 58 Phil 811 (1933)

6.

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

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

7.

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

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

18

Citing Guzman v, Court of Appeals, 99 Phil. 703, 706-707 (1956). Doctrine reiterated in Balerta v. People of the Philippines,
G.R. No. 205144, November 26, 2014.

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b. Agent Is Responsible for Acts of Substitute When:

Agent Was Not Expressly Given the Power to Appoint a Substitute
Agent Was Given the Power, But Without Designating the Person and the
Substitute Was Notoriously Incompetent or Was Insolvent.
A subagent cannot be held at greater liability that the main agent, and when the subagent
has not received any special instructions from the agent to insure the object of the agency, the
subagent cannot be held liable for the loss of the thing from fire, which is merely force
majeure. International Films (China) v. Lyric Film, 63 Phil. 778 (1936).
Under Art. 1892, when a special power of attorney to sell a piece of land does not contain a
clear prohibition against the agent in appointing a substitute, the appointment by the agent of a
substitute to execute the contract is within the limits of the authority given by the principle,
although the agent then would have to be responsible for the acts of the sub-agent. Escueta v.
Lim, 512 SCRA 411 (2007).
The law on agency in our jurisdiction allows the appointment by an agent of a substitute or
sub-agent in the absence of an express agreement to the contrary between the agent and the
principal. Therefore, an agent who receives jewelry for sale or return cannot be charged with
estafa for there was no misappropriation when she delivered the jewelry to a sub-agent under
the sale terms which the agent received it, but a client of the sub-agent absconded with them
and could no longer be recovered. The appointment of a sub-agent and delivery of the jewelry,
in the absence of a prohibition, does not amount to conversion or misappropriation as to
constitute estafa; but the agent remains civilly liable for the value of the jewelry to the principal.
Serona v. Court of Appeals, 392 SCRA 35 (2002).19
The legal maxim potestas delegate non delegare potest, a power once delegated cannot be
re-delegated, while applied primarily in political law to the exercise of legislative power, is a
principle of agency for another, a re-delegation of the agency would be detrimental to the
principal as the second agent has no privity of contract with the former.(?) Baltazar v.
Ombudsman 510 SCRA 74 (2006).
c. All Acts of Substitute Appointed Against Principals
Prohibition Are Void as to the Principal.
Where the special power of attorney to sell a piece of land contains a prohibition to appoint a
substitute, but agent appoints a substitute who executes the deed of sale in name of the
principal, while it may be true that the agent may have acted outside the scope of his authority,
that did not make the sale void, but merely unenforceable under the second paragraph of Art.
1317 of the Civil Code. And only the principal denied the sale, his acceptance of the proceeds
thereof are tantamount to ratification thereof. Escueta v. Lim, 512 SCRA 411 (2007).
d. Rights of Principal Against Substitute (Art. 1893)
The principal is liable upon a sub-agency contract entered into by its selling agent in the
name of the principal, where it appears that the general agent was clothed with such broad
powers as to justify the interference that he was authorized to execute contracts of this kind,
and it not appearing from the record what limitations, if any, were placed upon his powers to act
for his principal, and more so when the principal had previously acknowledged the transactions
of the subagent. Del Rosario v. La Badenia, 33 Phil. 316 (1916).
8.

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

9.

RULE ON LIABILITY RULES TO THIRD PARTIES: Agent Not Bound to Third Parties; It Is the
Principal Who Is Bound by the Contracts Entered Into By the Agent (Art. 1897)

19

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

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A promissory note and two mortgages executed by agent for and on behalf of his principal, in
accordance with a power of attorney, are valid, and as provided by Art. 1727, the principal must
fulfill the obligations contracted by the agent. PNB v. Palma Gil, 55 Phil. 639 (1931).
The settlement or adjustment agent in the Philippines of a New York insurance company is
no different from any other agent from the point of view of his responsibility: whenever he
adjusts or settles a claim, he does it in behalf of his principal, and his action is binding upon his
principal, and the agent does not assume any personal liability, and he cannot be sued on his
own right; the recourse of the insured is to press his claim against the principal. Salonga v.
Warner Barnes, 88 Phil 125 (1951).21
In the same manner, a resident agent, as a representative of the foreign insurance company,
is tasked only to receive legal processes on behalf of its principal and not to answer personally
for the any insurance claims. Smith Bell v. Court of Appeals, 267 SCRA 530 (1997).
Where buyer effects payment of part of purchase price to one of sellers creditors pursuant to
the terms of the deed of sale, then there is no subrogation that takes place, as the buyer then
merely acts as an agent of the seller effecting payment of money that was due to the seller in
favor of a third-party creditor. Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995).
Agents who have been authorized to sell parcels of land cannot claim personal damages in
the nature of unrealized commission where the buyer refuses to proceed with the sale. The
rendering of such service did not make them parties to the contracts of sale executed in behalf
of the latter. Since a contract may be violated only by the parties thereto as against each other,
the real parties-in-interest, either as plaintiff or defendant, in an action upon that contract must,
generally, either be parties to said contract. Uy v. Court of Appeals, 314 SCRA 69 (1999).22
A person acting as a mere representative of another acquires no rights whatsoever, nor does
he incur any liabilities arising from the said contract between his principal and another party.
Angeles v. PNR, 500 SCRA 444 (2006).23
Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally
liable to the party with whom he contracts. Eurotech Industrial Technologies, Inc. v. Cuizon, 521
SCRA 584 (2007).
Since, as a rule, the agency, as a contract, is binding only between the contradicting parties,
then only the parties, as well as the third person who transacts with the parties themselves, may
question the validity of the agency or the violation of the terms and conditions found therein.
Villegas v. Lingan, 526 SCRA 63 (2007).
a. EXCEPT: When Agent Expressly Binds Himself (Art. 1897):
When the attorney-in-fact of the owner of a parcel of land acted within the scope of his
authority by mortgaging the property of the principal, the principal is bound by the mortgage,
and cannot use the fact that the agent has also bound himself personally to the debt. There is
nothing in the law which prohibits an agent from binding himself personally for the debt incurred
in behalf of the principal. In fact the law recognizes such undertaking as valid and binding on the
agent. Tuason v. Orozco, 5 Phil 596 (1906).
Under Art. 1897, an agent who expressly binds himself to the contract entered into on behalf
of the principal becomes personally bound thereto . But the doctrine is not applicable vice
versa, since everything agreed upon by the principal to be binding on himself is not legally
binding personally on the agent. Thus, when the previous agent of the union bound itself
personally liable on the contracts of the union, the new agent is not bound by the assumption
undertaken by original agent. Benguet v. BCI Employees, 23 SCRA 465 (1968).
b. EXCEPT: When Agent Exceeds His Authority Without Giving Notice of Limited Powers
(Art. 1897)Only the Agent Is Liable, Principal Is Not Liable Unless He Ratifies.
Under Article 1897 when an agent acts in behalf of the principal, he cannot be held liable
personally, except when he acts outside the scope of his authority. Therefore, a third party
cannot generally sue on the contract seeking both the principal and agent to be liable thereon,
for by suing the principal on the contract, the agent is deemed not to be personally liable. On the
other hand, if the agent is being sued on the basis that he acted outside the scope of his
authority, then it does not make sense to be also suing the principal who cannot be held liable
for the acts of the agent outside the scope of his authority. At any rate, Art. 1897 does not hold
that in cases of excess of authority, both the agent and the principal are liable to the other
contracting party. Phil. Products Co. v. Primateria Society Anonyme, 15 SCRA 301 (1965).24
21

Also E Macias & Co. v. Warner, Barnes & Co., 43 Phil 155 (1922).
Ormoc Sugarcane Planters Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009). Ormoc Sugarcane Planters
Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009).
23
Chua v. Total Office Products and Services (Topros), Inc., 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA 93
(2006); Chong v. Court of Appeals, 527 SCRA 144 (2007).
24
Reiterated in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
22

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Where an agent defies the instructions of its principal in New York not to proceed with the
sale due to non-availability of carriage, it has acted without authority or against its principals
instructions and holds itself personally liable for the contract it entered into with the local
company. National Power v. NAMARCO, 117 SCRA 789 (1982).
c. EXCEPT: When Agent Acts with Fraud or Negligence: Solidarily Bound with Principal
The rule relied upon by the agent to avoid the imposition of the liquidated damages provided
for in the contract of sale that every person dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent would apply if the principal is sought to be held
liable on the contract entered into by the agent. That is not so in this case for it is the agent that
it sought to be held liable on a contract which was expressly repudiated by the principal
because the agent took chances, it exceed its authority, and, in effect, it acted in its own name.
National Power v. NAMARCO, 117 SCRA 789, 800 (1982).
The practice in group insurance business, which is consistent with the jurisprudence thereon
in the State of California from whose laws our Insurance Code has been mainly patterned, is
that the employer-policyholder who takes out the insurance for its officers and employees, is the
agent of the insurer who has authority to collect the proceeds from the insurer. In this case, the
insurer, through the negligence of its agent, allowed a purported attorney-in-fact whose
instrument does not clearly show such power to collect the proceeds, it was liable therefor under
the doctrine that the principal is bound by the misconduct of its agent. Pineda v. Court of
Appeals, 226 SCRA 754 (1993).
When the bank in extending a loan required the principal borrower to obtain a mortgageredemption-insurance and deducted the premiums pertaining thereto from the loan proceeds, it
was wearing two hats, as a lender and as insurance agent. And when it turned out that the bank
knew or ought to have known that the principal borrower was not qualified at his age for MRI
coverage which prevented his insurance coverage from being made by the insurance company
at the time of the borrowers death, the bank was deemed to have been an agent who acted
beyond the scope of its authority. Under Art. 1897, if the third person dealing with an agent is
unaware of the limits of the authority conferred by the principal on the agent and he (third
person) has been deceived by the non-disclosure thereof by the agent, then the latter is liable
for damages to him. The rule that the agent is liable when he acts without authority is founded
upon the supposition that there has been some wrong or omission on his part either in
misrepresenting, or in affirming, or concealing the authority under which he assumes to act.
Inasmuch as the non-disclosure of the limits of the agency carries with it the implication that a
deception was perpetrated on the unsuspecting client, the provisions of Articles 19, 20 and 21 of
the Civil Code come into play. DBP v. Court of Appeals, 231 SCRA 370 (1994).
Every principal is subject to liability for loss caused to another by the latters reliance upon a
deceitful representation by an agent in the course of his employment (1) if the representation is
authorized; (2) if it is within the implied authority of the agent to make for the principal; or (3) if it
is apparently authorized, regardless of whether the agent was authorized by him or not to make
the representation. Pahud v. CA, 597 SCRA 13 (2009).
d. Agent Is Criminally Liable for Crime Committed in the Pursuit of the Agency
The Law on Agency has no application in criminal cases, and no man can escape
punishment when he participates in the commission of a crime upon the ground that he simply
acted as an agent of any party. People v. Chowdury, 325 SCRA 572 (2000).

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

a. Commission Agent Responsible for Goods Received According to Terms and
Conditions and as Described in Consignment (Art. 1903)
EXCEPT: When Has Made Written Statement of Damage/Deterioration (Art. 1903)
In sale on consignment, as a form of agency, consignee-agent is relieved from his liability to
return the goods received from the consignor-principal when it is shown by preponderance of
evidence in the civil case brought that the goods were taken from the custody of the consignee
by robbery, and no separate conviction of robbery is necessary to avail of the exempting
provisions under Art. 1174 for force majeure. Austria v. Court of Appeals, 39 SCRA 527 (1971).
b. Agent Handling Various Goods for Different Owners (Art. 1904): He Must Distinguish
Them by Countermarks If Goods of Same Kind and Mark
PURPOSE: To Prevent Conflict of Interest Among Owners
COMPARE: Contracts of Deposit under Art. 1976: Depositary May Commingle Grain or
Other Articles of Similar Nature and Quality Ownership pro-rata

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c. Commission Agent Cannot Sell on Credit Without Principals Consent (Art. 1905)
OTHERWISE: Considered as Cash Sales
Whether as an agency to sell or a contract of sale, the liability of Green Valley is indubitable.
Adopting Green Valleys theory that the contract is an agency to sell, it is liable because it sold
on credit without authority from its principal. Under Art. 1905, without the express or implied
consent of principal, commission agent cannot sell on credit; should it do so principal may
demand from him payment in cash. Green Valley v. IAC, 133 SCRA 697 (1984).
d. When With Principals Authority to Sell on Credit: (Art. 1906)
Inform the Principal with Statement of Buyers Names;
Effect of Non-Compliance Considered Cash Sale
e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907):
He Shall Bear the Risk of Collection
He Shall Pay Principal the Proceeds on Same Terms Agreed with Purchaser
f. Liability for Failure to Collect Principals Credit When Due (Art. 1908)
Liability for Damages
Unless Due Diligence Proven

IV. OBLIGATIONS OF THE PRINCIPAL

1.

OBLIGATIONS OF PRINCIPAL WITH THIRD PARTIES WITH WHOM THE AGENT CONTRACTS
a. The Principal Is Bound By the Contracts Entered Into by the Agent:
Entered Into in the Name of the Principal (Art. 1883)
Done Within Agents Scope of Authority (Art. 1897)
And Even When the Agent Acts with Negligence or Fraud (Art. 1909)
In this case, the authorized agent failed to indicate in the mortgage that she was acting for
and on behalf of her principal; and the Real Estate Mortgage explicitly shows on its face that it
was signed by agent in her own name and in her own personal capacity. Thus, consistent with
the law on agency, the principal cannot be bound by the acts of the agent. The third-party bank
has no one to blame but itself: Not only did it act with undue haste when it granted and released
the loan in less than three days, it also acted negligently in preparing the Real Estate Mortgage
as it failed to indicate that agent was signing it for and on behalf of principal. Bucton v. Rural
Bank of El Salvador, Inc., 717 SCRA 278 (2014).
Since the general rule is that the principal is bound by the acts of his agent in the scope of
the agency, therefore when the agent had full authority to make the tax returns and file them,
together with the check payments, with the Collector of Internal Revenue on behalf of the
principal, then the effects of dishonesty of the agent must be borne by the principal, not by an
innocent third party who has dealt in good faith with the dishonest agent. Lim Chai Seng v.
Trinidad, 41 Phil. 544 (1921).
A person with whom an agent has contracted in the name of his principal, has a right of
action against the purported principal, even when the latter denies the authority of the agent, in
which case the party suing has the burden of proving the existence of the agency
notwithstanding the purported principals denial thereof. If the agency relation is proved, then
the principal shall be held liable, and the agent who is made a party to the suit cannot be held
personally liable. On the other hand, if the agency relationship is not proven, it would be the
agent who would become liable personally on the contract entered into. Nantes v. Madriguera,
42 Phil. 389 (1921).
As a general rule, the mismanagement of the business by his agents does not relieve said
party-principal from the responsibility that he had contracted with third persons. Commercial
Bank & Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).
Where petitioners had issued a check in payment of the judgment debt and made
arrangements with the bank for the latter to allow the encashment thereof; but the check was
dishonored by the bank which increased the amount of the judgment debt, then the defense of
the petitioner that he cannot be held liable for the oversight of the bank is untenable: The
principal is responsible for the acts of the agent, done within the scope of his authority, and
should bear the damages caused upon third parties. If the fault or oversight lies on the agent
bank, the petitioners are free to sue said bank for damages occasioned thereby. Lopez v.
Alvendia, 12 SCRA 634 (1964).
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Where the principal issued the checks in full payment of the taxes due, but his agents had
misapplied the check proceeds, the principal would still be liable, because when a contract of
agency exists, the agents acts bind his principal, without prejudice to the latter seeking
recourse against the agent in an appropriate civil or criminal action. Dy Peh v. Collector of
Internal Revenue, 28 SCRA 216 (1969).
When a third party admitted in her written correspondence that she had contracted with the
principal through a duly authorized agent, and then sues both the principal and the agent on an
alleged breach of that contract, and in fact later on dismisses the suit insofar as the principal is
concerned, there can be no cause of action against the agent. Since it is the principal who
should be answerable for the obligation arising from the agency, it is obvious that if a third
person waives his claims against the principal, he cannot assert them against the agent. Bedia
v. White, 204 SCRA 273 (1991).
The fact that the agent defrauded the principal in not turning over the proceeds of the
transactions to the latter cannot in any way relieve or exonerate such principal from liability to
the third persons who relied on his agents authority. It is an equitable maxim that as between
two innocent parties, the one who made it possible for the wrong to be done should be the one
to bear the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993).
Principal cannot absolve itself from damages sustained by its buyer based on the fault
primarily caused by its agent in pointing to the wrong lot, since under Arts. 1909 and 1910, the
liability of the principal for acts done by the agent within the scope of his authority do not
exclude those done negligently. Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996).
b. Agents Written Power of Attorney, Insofar as Concerns Third Persons, Governs on
Questions Whether Agent Acted Within Scope of Authority Even if it Exceeds
Authority According to Understanding Between Principal and Agent (Art. 1900)
As far as third persons are concerned, an act is deemed to have been performed within the
scope of the agents authority, if such is within the terms of the power of attorney, as written,
even if the agent has in fact exceeded the limits of his authority according to an understanding
between the principal and his agent. Eugenio v. Court of Appeals, 239 SCRA 207 (1994).
Consequently:
In this case, Spouses Rabaja did not recklessly enter into a contract to sell with Gonzales. They
required her presentation of the power of attorney before they transacted with her principal. And
when Gonzales presented the SPA to Spouses Rabaja, the latter had no reason not to rely on it.
Spouses Salvador v. Spouses Rabaja, G.R. No. 199990, 04 Feb. 2015.
Where wife gave husband a power of attorney to loan and borrow money, and for such
purpose to mortgage her property, and the husband signed his wifes name to a note and
gave a mortgage on her property to secure the note and the amount of the loan was
actually paid to husband in money, the transaction is binding upon the wife regardless of
what the husband may have done with the loan proceeds. Bank of P.I. v. De Coster, 47 Phil
594 (1925).

Where memorial park company authorized its agent to solicit and remit offers to purchase
internment spaces obtained on forms provided therefore, then the terms of the offer to
purchase, therefore, are contained in such forms and, when signed by the buyer and an
authorized officer of the company, becomes binding on both the company and said buyer.
Any arrangement, term or condition outside of those provided in the form do not bind the
principal, since the same were made obviously outside the agents authority. When the
power of the agent to sell are governed by the written form, it is beyond the authority of the
agent as a fact that is deemed known and accepted by the third person, to offer terms and
conditions outside of those provided in writing. Manila Memorial Park Cemetery v.
Linsangan, 443 SCRA 377 (2004).
It is a settled rule that third persons dealing with an assumed agent, whether the assumed
agency be a general or special one, are bound at their peril if they would hold the principal
liable, to act with ordinary prudence and reasonable diligence to ascertain (i) not only the fact of
agency, (ii) but also the nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it. Harry Keeler v. Rodriguez, 4 Phil. 19 (1922).27
Consequently:
Where a bank accepted a letter of guarantee signed by a mere credit administrator on
behalf of the finance company, the burden was on the bank to satisfactorily prove that the

27

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

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credit administrator with whom they transacted acted within the authority given to him by
his principal. BA Finance v. Court of Appeals, 211 SCRA 112 (1992).
When one knowingly deals with the sales representative of a car dealership company, it is
incumbent upon such person to know the extent of the sales representatives authority as
an agent in respect of contracts to sell the vehicles. A person dealing with the sales
representative of a car dealership company ought to know that he is dealing with an agent,
normal business practice does not warrant a sales representative to have power to enter
into a valid and binding contract of sale for the company. Toyota Shaw, Inc. v. CA, 244
SCRA 320 (1995).
The mere representation or declaration of one that he is authorized to act on behalf of
another cannot of itself serve as proof of his authority to act as agent or of the extent of his
authority as agent. Yu Eng Cho v. PANAM, 328 SCRA 717 (2000).
The burden of proof of the authority of the agent is not overcome when the agent himself
specifically denied that she was authorized by the respondents-owners to sell the
properties, both in her answer to the complaint and when she testified. Litonjua v.
Fernandez, 427 SCRA 478 (2004).
That the person applying for the loan is other than the registered owner of the real property
being mortgaged should have already raised a red flag with the Bank and which should
have induced it to make inquiries into and confirm Santos authority to mortgage. A person
who deliberately ignores a significant fact that could create suspicion in an otherwise
reasonable person is not an innocent purchaser for value. Bank of Commerce v. San
Pablo, Jr., 522 SCRA 713 (2007).
The undue haste in granting the loan without inquiring into the ownership of the subject
properties being mortgage, as well as the authority of the supposed agent to constitute the
mortgages on behalf of the owners, bank accepting the mortgage cannot be deemed a
mortgagee in good faith. San Pedro v. Ong, 569 SCRA 767 (2008).
The ignorance of a person dealing with an agent as to the scope of the latters authority is
no excuse to such person and the fault cannot be thrown upon the principal. A person dealing
with an agent assumes the risk of lack of authority of the agent. He cannot charge the principal
by relying upon the agents assumption of authority that proves to be unfounded. The principal,
on the other hand, may act on the presumption that third persons dealing with his agent will
not be negligent in failing to ascertain the extent of his authority as well as the existence of his
agency. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).
c. PRINCIPAL NOT BOUND TO CONTRACTS DONE OUTSIDE OF AGENTS AUTHORITY (Arts. 1898
and 1910).
(1) When Principal Ratifies, Expressly or Impliedly (Art. 1901)
Where a sale of land is effected through an agent who made misrepresentations to the
buyer that the property can be delivered physically to the buyer when in fact it was in adverse
possession of third parties, the seller-principal is bound for such misrepresentations and
cannot insist that the contract is valid and enforceable; the seller-principal cannot accept the
benefits derived from such representations of the agent and at the same time deny the
responsibility for them. Gonzales v. Haberer, 47 Phil. 380 (1925).
In agency, ratification is the adoption or confirmation by the principal of an act performed
on his behalf by another without authority--the substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority. For ratification to take place, it is
required that the principal must have full knowledge at the time of ratification of all the material
facts and circumstances relating to the unauthorized act of the person who assumed to act as
agent; and that is such material facts were suppressed or unknown, there can be no valid
ratification. Nevertheless, this principle does not apply if the principals ignorance of the
material facts and circumstances was willful, or that the principal chooses to act in ignorance
of the facts. Only the principal can ratify; the agent cannot ratify his own unauthorized acts.
Moreover, the principal must have knowledge of the acts he is to ratify. Manila Memorial
Park Cemetery, Inc. v. Linsangan, 443 SCRA 377, 394 (2004).
Since the basis of agency is representation, then the question of whether an agency has
been created is ordinarily a question which may be established in the same way as any other
fact, either by direct or circumstantial evidence. Though that fact or extent of authority of the
agents may not, as a general rule, be established from the declarations of the agents alone, if
one professes to act as agent for another, she may be estopped to deny her agency both as
against the asserted principal and the third persons interested in the transaction in which he or
he is engaged. Doles v. Angeles, 492 SCRA 607 (2006).

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The general rule is that the principal is responsible for the acts of its agent done within the
scope of its authority, and should bear the damage caused to third persons. When the agent
exceeds his authority, the agent becomes personally liable for the damage. But even when the
agent exceeds his authority, the principal is still solidarily liable together with the agent if the
principal allowed the agent to act as though the agent had full powers. In other words, the acts
of an agent beyond the scope of his authority do not bind the principal, unless the principal
ratifies them, expressly or implied. Ratification in agency is the adoption or confirmation by one
person of an act performed on his behalf by another without authority. Innocent third persons
should not be prejudiced if the principal failed to adopt the needed measures to prevent
misrepresentation, much more so if the principal ratified his agents acts beyond the latters
authority. Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542 (2008).
Under Arts. 1898 and 1910, an agents act done beyond the scope of his authority may
bind the principal if he ratifies them, whether expressly or tacitly. But only the principal, and not
the agent, can ratify the unauthorized acts, which the principal must have knowledge of. Thus,
where the special power of attorney that an agent for the insurance company provides clearly
the limit of the entities to whom he can issue a surety bond, as well as the limit of the amounts
that it can cover, an insured who does not fall within such authority cannot claim good faith as
to make the surety issued outside of the scope of authority binding on the principal insurance
company. Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
(2) Third Person Cannot Set-up Facts of Agents Exceeding Authority Where Principal
Ratified or Signified Willingness to Ratify Agents Acts (Art. 1901)
Principal Should Be the One to Question Agents Lack/Excess of Authority
Power of Attorney (Must) Be Required by Third Party (Art. 1902)
Private or Secret Orders of Principal Do Not Prejudice Third Persons Who Relied
Upon Agents Power of Attorney or Principals Instruction (Art. 1902)
In an expropriation proceeding, the State cannot raise the alleged lack of authority of the
counsel of the owner to bind his client in a compromise agreement because such lack of
authority may be questioned only by the principal or client. [Since it is within the right or
prerogative of the principal to ratify even the unauthorized acts of the agent]. Commissioner of
Public Highways v. San Diego, 31 SCRA 617 (1970)
(3) Where Agent Acts in Excess of Authority, But the Principal Allowed Agent to Act as
Though Agent Had Full Powers (Art. 1911)
(i) Doctrine of Apparent Authority
When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset (piece of land) in the normal course of business, it is legally
obliged to confirm the transaction by issuing a board resolution to enable the buyers to register
the property in their names. Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000).
The doctrine of apparent authority focuses on two factors: first the principals manifestations
of the existence of agency which need not be expressed, but may be general and implied; and
second, is the reliance of third persons upon the conduct of the principal or agent. Under the
doctrine, the question in every case is whether the principal has by his voluntary act placed the
agent in such a situation that a person of ordinary prudence, conversant with business usages
and the nature of the particular business, is justified in presuming that such agent has
authority to perform the particular act in question. Professional Services, Inc. v. CA, 544
SCRA 170 (2008); 611 SCRA 282 (2010).
Easily discernible from the foregoing is that apparent authority is determined only by the
acts of the principal and not by the acts of the agent. The principal is, therefore, not
responsible where the agents own conduct and statements have created the apparent
authority. Sargasso Construction & Dev. Corp. v. PPA, 623 SCRA 260 (2010).
There can be no apparent authority of an agent without acts or conduct on the part of the
principal, which must have been known and relied upon in good faith as a result of the
exercise of reasonable prudence by a third party claimant, and which must have produced a
change of position to the third partys detriment. There is no basis for the courts to apply the
doctrine where there is no evidence showing the manner by which the supposed principal, has
clothed or held out its branch manager as having the power to enter into an agreement, as
claimed by petitioners. Banate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010).
(ii) Agency by Estoppel
By the opening of branch office with the appointment of its branch manager and honoring
several surety bonds issued in its behalf, the insurance company induced the public to believe
that its branch manager had authority to issue such bonds. Consequently, insurance company
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was estopped from pleading against a regular customer thereof, that the branch manager had
no authority. Central Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159 (1971).
Even when the agent of the real estate company acts unlawfully and outside the scope of
authority, the principal can be held liable when by its own act it accepts without protest the
proceeds of the sale of the agents which came from double sales of the same lots, as when
learning of the misdeed, it failed to take necessary steps to protect the buyers and failed to
prevent further wrong from being committed when it did not advertise the revocation of the
authority of the culprit agent. In such case the liabilities of both the principal and the agent is
solidary. Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990)
For an agency by estoppel to exist, the following must be established: (1) the principal
manifested a representation of the agents authority or knowingly allowed the agent to assume
such authority; (2) the third person, in good faith, relied upon such representation; (3) relying
upon such representation, such third person has changed his position to his detriment. An
agency by estoppel, which is similar to the doctrine of apparent authority, requires proof of
reliance upon the representations, and that, in turn, needs proof that the representations
predated the action taken in reliance. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
The law makes no presumption of agency and proving its existence, nature and extent is
incumbent upon the person alleging its existence, nature and extent is incumbent upon the
person alleging it. An agency by estoppel, which is similar to the doctrine of apparent authority
requires the proof of reliance upon the representation, and that, in turn, needs proof that the
representations predated the action taken in reliance. Yun Kwan Byung v. PAGCOR, 608
SCRA 107 (2009).
For one to successfully claim the benefit of estoppel on the ground that he has been misled
by the representations of another, he must show that he was not misled through his own want
of reasonable care and circumspection. Country Bankers Insurance Corp. v. Keppel Cebu
Shipyard, 673 SCRA 427 (2012).

2. Rights of Persons Who Contracted for Same Thing, One With Principal and the Other
With Agent (Art. 1916):
That of Prior Date Is Preferred
If a Double Sale Situation Art. 1544 Governs

IN WHICH CASE: the Liability to Third Person Whose Contract Must Be Rejected Shall
Be as Follows: (Art. 1917):
If Agent in Good Faith Principal Liable
If Agent in Bad Faith Agent Alone Liable
3. Liability of Principal to Third Persons for Acts of the Agents Employees
The mere fact that the employee of the airline companys agent has committed a tort is not
sufficient to hold the airline company liablethere is no vinculum juris between the airline
company and its agent's employees and the contractual relationship between the airline company
and its agent does not operate to create a juridical tie between the airline company and its
agents employees. Article 2180 of the Civil Code does not make the principal vicariously liable
for the tort committed by its agents employees and the principal-agency relationship per se does
not make the principal a party to such tort; hence, the need to prove the principals own fault or
negligence. Spouses Viloria v. Continental Airlines, Inc., 663 SCRA 57 (2012).
COMPARE: With regard to the delivery of the petroleum, Villaruz was acting as the agent of
petitioner Petron: for a fee, he delivered the petroleum products on its behalf; and notably, Petron
even imposed a penalty clause in instances when there was a violation of the hauling contract,
wherein it may impose a penalty ranging from a written warning to the termination of the contract.
Therefore, as far as the dealer was concerned with regard to the terms of the dealership contract,
acts of Villaruz and his employees are also acts of Petron. Petron Corp. v. Spouses Cesar
Jovero & Erma F. Cudilla, 663 SCRA 172 (2012).

4. OBLIGATIONS OF THE PRINCIPAL WITHIN THE AGENCY ARRANGEMENT

a. Obligation to Pay Agents Compensation (Art. 1875)
b. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912)
(1) Agent Has Right to Reimbursement for Expenses Advanced Including Interest from
the Day It Was Advanced
COMPARE: Where Agent Consents and Is Bound to Advance the Sums as Stipulated
(Art. 1886)
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(2) Where Principle Not Liable to Agent for Expenses Incurred (Art. 1918)
According to Hahn, BMW periodically inspected the service centers to see to it that BMW
standards were maintained. Indeed, it would seem from BMW's letter to Hahn that it was for
Hahn's alleged failure to maintain BMW standards that BMW was terminating Hahn's
dealership. The fact that Hahn invested his own money to put up these service centers and
showrooms does not necessarily prove that he is not an agent of BMW. For as already noted,
there are facts in the record which suggest that BMW exercised control over Hahn's activities
as a dealer and made regular inspections of Hahn's premises to enforce compliance with
BMW standards and specifications. Hahn v. Court of Appeals, 266 SCRA 537 (1997).
However, while the law on agency prohibits the area manager from obtaining
reimbursement, his right to recover may still be justified under the general law on obligations
and contracts, particularly Article 1236 of the Civil Code on payment by a third party of the
obligation of the debtor, allows recovery only insofar as the payment has been beneficial to
the debtor. Thus, to the extent that the obligation of the insurance company has been
extinguished, the area manager may demand for reimbursement from his principal. To rule
otherwise would result in unjust enrichment of petitioner. Dominion Insurance Corp. v. Court
of Appeals, 376 SCRA 239 (2002).
c. Obligation to Indemnify Agent for Damages Sustained in Pursuing Agency (Art. 1913)
COMPARE: Liability for Damages for Non-Performance of Agency (Art. 1884)
When the purchase by one company of the copra of another company is by way of contract
of purchase rather than an agency to purchase, the former is not liable to reimburse the latter
for expenses incurred by the latter in maintaining it purchasing organization intact over a
period during which the actual buying of copra was suspended. Albaladejo y Cia. v. PRC, 45
Phil 556 (1923).
d. Right to Retain Object of Agency in Pledge for Advances and Damages (Art. 1914)
(1) Agent Bound to Deliver to Principal Everything Received, Even If Not Due the
Principal (Art. 1891).
(2) Thing Pledged May Be Sold Only After Demand of Amount Due (Art. 2122):
Public auction to take place within one (1) month after demand
Debtor may demand return of not sold within this period

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

V. EXTINGUISHMENT OF AGENCY
1.

How and When Agency Extinguished (Art. 1919)

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

2.

EXPRESS REVOCATION: The Principal May Revoke an Agency at Will

a. In Which Case, Principal May Compel Agent to Return the Document Evidencing the
Agency (Art. 1920)
b. In Case of Multiple Principals, Any of the Principals May Revoke the Agency
Obligation of Several Principals to a Common Agent Is Solidary (Art. 1915)

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

3.

IMPLIED REVOCATION
a. Appointment of New Agent for Same Business/Transaction (Art. 1923)
Impliedly Revoked as to Agent Only
As to Third Persons, Notice to Them Is Necessary (Art. 1922)
In litigation, the fact that a second attorney enters an appearance on behalf of a litigant does
not authorize a presumption that the authority of the first attorney has been withdrawn. Aznar v.
Morris, 3 Phil. 636 (1904).
Where the father first gave a power of attorney over the business to his son, and
subsequently to the mother, without evidence showing that the son was informed of the power
of attorney to the mother, the transaction effected by the son pursuant to his power of attorney,
was valid and binding. Garcia v. De Manzano, 39 Phil 577 (1919).
b. When Principal Directly Manages Business Entrusted to Agent (Art. 1924)
If the purpose of the principal in dealing directly with the purchaser and himself effecting the
sale of the principals property is to avoid payment of his agents commission, the implied
revocation is deemed made in bad faith and cannot be sanctioned without according to the
agent the commission which is due him. Infante v. Cunanan, 93 Phil 693 (1953).
Where purported agent was given only authority to follow up the purchase of fire truck with
municipal government, there was no authority to sell nor was he empowered to make a sale for
and in behalf of the seller. But even if the purported agent is considered to have been
constituted as an agent to sell the fire truck, such agency would have been deemed revoked
upon the resumption of direct negotiations between the seller-principal and the municipality, the
purported agent having in the meantime abandoned all efforts to secure the deal in the sellers
behalf. Guardex v. NLRC, 191 SCRA 487 (1990).
Principal may revoke, express or impliedly, an agency at will, and may even if the period
fixed in the contract of agency has not yet expired. As the principal has this absolute right to
revoke the agency, the agent can not object thereto; neither may he claim damages arising from
such revocation, unless it is shown that such was done in order to evade the payment of agents
commission. The act of a contractor, who, after executing powers of attorney in favor another
empowering the latter to collect whatever amounts may be due to him from the Government,
and thereafter demanded and collected from the government the money the collection of which
he entrusted to his attorney-in-fact, constituted revocation of the agency in favor of the attorneyin-fact. New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824 (1960).
Damages are generally not awarded to the agent for the revocation of the agency, and the case
at bar is not one falling under the exception mentioned, which is to evade the payment of the
agents commissionCMS Logging v. Court of Appeals, 211 SCRA 374 (1992).

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c. General Power of Attorney Is Revoked by a Special One Granted to Another Agent, As

Regards the Special Matter Involved in the Latter (Art. 1926)
A special power of attorney giving the son the authority to sell the principals properties is
deemed revoked by a subsequent general power of attorney that does not give such power to
the son, and any sale effected thereafter by the son in the name of the father would be void.
Dy Buncio and Co. v. Ong Guan Ca, 60 Phil 696 (1934).

4.

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

a. When a Bilateral Contract Depends on It
An exception to the revocability of a contract of agency is when it is coupled with interest,
i.e., if a bilateral contract depends upon the agency. The reason for its irrevocability is because
the agency becomes part of another obligation or agreement. It is not solely the rights of the
principal but also that of the agent and third persons which are affected. Republic v.
Evangelista, 466 SCRA 544 (2005).
b. When It Is the Means of Fulfilling an Obligation Already Contracted
Unlike simple powers of attorney, an agency coupled with interests cannot be revoked at will,
since it had been created for the mutual interest of the agent and the principal. It appears that
Lina Sevilla is a bona fide travel agent herself, and had acquired an interest in the business
entrusted to her: she had assumed a personal obligation for the operation thereof, holding
herself solidarily liable for the payment of rentals; she used her own name in pursuing the
business, after Tourist World had stopped further operations. Her interest, obviously, is not
limited to the commissions she earned as a result of her business transactions, but one that
extends to the very subject matter of the power of management delegated to her. It is an agency
that cannot be revoked at the pleasure of the principal. Sevilla v. Court of Appeals, 160
SCRA 171 (1988).
In the insurance business . . . , the most difficult and frustrating period is the solicitation and
persuasion of the prospective clients to buy insurance policies. Normally, agents would
encounter much embarrassment, difficulties, and oftentimes frustrations in the solicitation and
procurement of the insurance policies. To sell policies, an agent exerts great effort, patience,
perseverance, ingenuity, tact, imagination, time and money. . . Therefore, the respondents
cannot state that the agency relationship between Valenzuela and Philamgen is not coupled
with interest. There may be cases in which an agent has been induced to assume a
responsibility or incur a liability, in reliance upon the continuance of the authority under such
circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or
liability. . . . Furthermore, there is an exception to the principle that an agency is revocable at will
and that is when the agency has been given not only for the interest of the principal but for the
interest of third persons or for the mutual interest of the principal and the agent. In these cases,
it is evident that the agency ceases to be freely revocable by the sole will of the principal.
Valenzuela v. Court of Appeals, 191 SCRA 1 (1990).
The relationship between NASUTRA/SRA and PNB when the former constituted the latter as
its attorney-in-fact is not a simpIe agency, because NASUTRA/SRA has assigned and
practically surrendered its rights in favor of PNB for a substantial consideration. To reiterate,
NASUTRA/SRA executed promissory notes in favor of PNB every time it availed of the credit
line. The agency established between the parties is one coupled with interest which cannot be
revoked or cancelled at will by any of the parties. National Sugar Trading v. Philippine
National Bank, 396 SCRA 528 (2003).
There is no question that the SPA executed is a contract of agency coupled with interest. . .
.[But] in this case, we agree with the CA that although the revocation was done in bad faith,
respondents did not act in a wanton, fraudulent, reckless, oppressive or malevolent manner.
They revoked the SPA because they were not satisfied with the amount of the loan approved.
Thus, petitioners are not entitled to exemplary damages. Ching v. Bantolo, 687 SCRA 134
(2012). Indeed, even an agency coupled with interest may indeed be revoked on the ground of
fraud committed by the agent, which is really an act of rescission, the same must be clearly be
proven. Bacaling v. Muya, 380 SCRA 714 (2002).
c. Unjustified Removal of Managing Partner Revocation Needs the Vote of Controlling
Partners (Art. 1800)
A power of attorney although coupled with interest in a partnership can be revoked for a just
cause, such as when the attorney-in-fact betrays the interest of the principal, as happened in
this case. 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, 10 SCRA 577 (1964).
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In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by
the principal due to an interest of a third party that depends upon it, or the mutual interest of
both principal and agent. In this case, the non-revocation or non-withdrawal under paragraph
5(c) [of the Power of Attorney] applies to the advances made by petitioner [agent] who is
supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from
the stipulation that the parties relation under the agreement is one of agency coupled with an
interest and not a partnership. Philex Mining Corp. v. CIR, 551 SCRA 428 (2008).

5.

Effects of Revocation on Third Parties

a. Agency Created With Reference of Specified Third Parties, Revocation Affects Such
Third Parties Only When So Notified (Art. 1921)
Where principal had expressly revoked the agents power to handle the business, but such
revocation was not conveyed to a long-standing client to whom the agent had been specifically
endorsed in the past by the principal, the revocation was not deemed effective as to such client
and the contracts entered into by the agent in the name of the principal after the revocation
would still be valid and binding against the principal. Rallos v. Yangco, 20 Phil 269 (1911).28
Where the lands principal owner executes a power of attorney giving her agent the power to
mortgage the same, even when there has been a revocation thereof, but the same has not been
made known to third parties, then those who receive a mortgage on the properties in good faith
will be protected pursuant to principle embodied in Art. 1921 that if an agency has been
entrusted for the purpose of contracting with specified persons, its revocation shall not prejudice
the latter if they were not given notice thereof. Lustan v. CA, 266 SCRA 663 (1997).
b. Revocation of Agents General Powers Effective Against Third Persons (Art. 1922)
Refers to Agency Created to Deal with the General Public
Revocation Will Not Prejudice Third Persons Who Deal with the Agent in Good
Faith and Without Knowledge of Revocation
However Notice of Revocation in a Newspaper of General Circulation Is
Sufficient Warning
While Art. 1358 requires that the contracts involving real property must appear in a proper
document, a revocation of a special power of attorney to mortgage a parcel of land, embodied in
a private writing, is valid and binding between the parties, such requirement of Article 1358
being only for the convenience of the parties and to make the contract effective as against third
persons. PNB v. Intermediate Appellate Court, 189 SCRA 680 (1990).
In a case covering a power of attorney to deal with the general public, the fact that the
revocation was advertised in a newspaper of general circulation would be sufficient warning to
third persons. Rammani v. Court of Appeals, 196 SCRA 731 (1991).

6.

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

By Giving Due Notice to Principal
Agent to Indemnify Principal Should He Suffer Any Damage
Unless Withdrawal Is Due to Impossibility of Continuing Agency Without Grave
Detriment to Agent
Even If Agent Withdraws from the Agency for a Valid Reason, He Must Continue to
Act Until the Principal Has Had Reasonable Opportunity to Take Necessary Steps to
Meet the Situation (Art. 1929)
When the agent informs principal by letter that for reasons of health and medical treatment
he is about to depart from the place where the said property is situated, and abandons the
property, turns it over to a third party, renders accounts of its revenues up to the date on which
he ceases to hold his position and transmits to his principal a general statement which
summarizes and embraces all the balances of his accounts since he began the administration to
the date of the termination of his trust, and, without stating when he may return to take charge of
the administration of the said property, asked his principal to execute a power of attorney in due
form in favor of and transmit the same to another person who took charge of the administration
of the said property, it is but reasonable and just to conclude that the said agent had expressly
and definitely renounced his agency and that such agency was duly terminated, in accordance
with Arts. 1919 and 1928 of the Civil Code. Dela Pena v. Hidalgo, 16 Phil 450 (1910).
The fact that an agent institutes an action against his principal for the recovery of the balance
in his favor resulting from the liquidation of the accounts between them arising from the agency,
and renders a final account of his operations, is equivalent to an express renunciation of the

28

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

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agency, and terminates the juridical relation between them. The subsequent purchase by the
former agent of the principals usufruct rights in a public auction therefore was valid, since no
fiduciary relationship existed between them at that point. Valera v. Velasco, 51 Phil 695 (1928).

7.

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

By reason of the very nature of the relationship between principal and agent, agency is
extinguished by the death of the principal or the agent. Rallos v. Felix Go Chan & Sons Realty
Corp., 81 SCRA 251 (1978).
Death of a client divests his lawyer of authority to represent him as counsel, since a dead
client has no personality and cannot be represented by an attorney. Lavina v. CA, 171 SCRA
691 (1988).29
a. When the Agency Continues Despite Death of Principal (Art. 1930):
If It Was Constituted for Common Interest of Principal and Agent; or
In Favor of Third Person Who Accepted Stipulation in His Favor.
An example of an agency coupled with interest is when a power of attorney is constituted in
a contract of real estate mortgage pursuant to the requirement of Act No. 3135, which would
empower the mortgagee upon the default of the mortgagor to payment the principal obligation,
to effect the sale of the mortgage property through extrajudicial foreclosure. The argument that
foreclosure by the Bank under its power of sale is barred upon death of the debtor, because
agency is extinguished by the death of the principal, under . . . Article 1919 of the Civil Code
neglects to take into account that the power to foreclose is not an ordinary agency that
contemplates exclusively the representation of the principal by the agent but is primarily an
authority conferred upon the mortgagee for the latters own protection. It is, in fact, an ancillary
stipulation supported by the same causa or consideration for the mortgage and forms an
essential and inseparable part of that bilateral agreement. Perez v. PNB, 17 SCRA 833
(1966).30
Agency is extinguished by principals death; exception is when it has been constituted in the
common interest of the latter and of the agent, or in the interest of a third person who has
accepted the stipulation in his favor. Sasaba v. Vda. De Te, 594 SCRA 410 (2009).
b. Acts Done by Agent Without Knowledge of Principals Death (Art. 1931): Acts Are
Valid Provided:
Agent Does Not Know of Death or Other Cause of Extinguishment of Agency;
Third Person Dealing with Agent Must Also Be in Good Faith (Not Aware of Death
or Other Cause).
Under Article 1931, we must uphold the validity of the sale of the land effected by the agent
only after the death of the principal, when no evidence was adduced to show that at the time of
sale both the agent and the buyers were unaware of the death of the principal. Bauson v.
Panuyas, 105 Phil 795 (1959); Herrera v. Uy Kim Guan, 1 SCRA 406 (1961).

8.

Death of the Agent Extinguishes the Agency

a. Obligation of Agents Heirs in Case of Agents Death (Art. 1932):
Notify Principal
Adopt Measures as Circumstances Demand in Principals Interest
NOTE: If Principal Dies, the Law Is Silent on Whether His Heirs Have Any
Obligation to Notify the Agent
A contract of management and administration entered into by the Municipality with a private
individual which authorizes the latter to sell forest products is one of agency because the latter
bound himself to render some service or to do something in representation of the Municipality.
The contract of agency establishes a purely personal relationship between the principal and the
agent, such that the agency is extinguished by the death of the agent, and his rights and
obligations arising from the contract of agency are not transmittable to his heirs. Terrado v.
Court of Appeals, 131 SCRA 373 (1984).

29
30

Also Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952).
Superseded the rule laid down in Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad, 104 Phil. 648 (1958).

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B.

BUSINESS TRUSTS

I.

NATURE AND CLASSIFICATION OF TRUSTS

1.

Definition and Essential Characteristic of Trust (Art. 1440)

A trust is a fiduciary relationship with respect to property which involves the existence of
equitable duties imposed upon the holder of the title to the property to deal with it for the benefit
of another.31 The characteristics of a trust are: (a) it is a relationship; (b) it is a relationship of
fiduciary character; (c) It is a relationship with respect to property, not one involving merely
personal duties; (d) it involves the existence of equitable duties imposed upon the holder of the
title to the property to deal with it for the benefit of another; and (e) it arises as a result of a
manifestation of intention to create the relationship. Morales v. Court of Appeals, 274 SCRA
282 (1997).
a. Trusts Are Based on Equity Principles (Common-law) (Art. 1442)
As the law of trusts has been much more frequently applied in England and in the United
States than in Spain, we may draw freely upon American precedents in determining the effect of
the testamentary trust here under consideration, especially so as the trusts known to American
and English equity jurisprudence are derived from the fidei commissa of the Roman law and are
based entirely upon Civil Law principles. Government v. Abadilla, 46 Phil. 642 (1924).32
Article 1442 incorporates a large part of the American law on trusts, and thereby the
Philippine legal system will be amplified and will be rendered more suited to a just and equitable
solution of many questions. Report of the Code Commission, at p. 60.
b. Distinguished from Agency
(1) While both trust and agency relationships are fiduciary in nature; agency is essentially
revocable, while a trust contract is essentially obligatory in its terms and period, and can
only be rescinded based on breach of trust.
(2) Trustee takes legal or naked title to the subject matter of trust, and acts on his own
business discretion; agent possesses property under agency for and in the name of the
owner and must act upon instructions of the owner;
(3) Trustee enters into contracts pursuant to the trust in his own name as legal or naked title
holder, while agent enters into contract in the name of the principal; and
(4) Trustee is liable directly and may be sued, albeit in his trust capacity; while agent cannot
be sued since it is the principal that must be held liable on the suit.
An investment management account, where the written instrument provides that the bank
shall purchase debt securities on behalf of the client and will handle the accounts in accordance
with the instructions of the client, creates a principal-agent relationship, and not a trust
relationship nor an ordinary bank deposit account. Consequently, under Art. 1910, the client
assumed all obligations or inherent risks entailed by transactions emanating from the
arrangement, and the bank may be held liable as an agent, only when it exceeds its authority, or
acts with fraud, negligence or bad faith. Principals are solely obliged to observe the solemnity of
the transaction entered into by the agent on their behalf, absent any proof that the latter acted
beyond its authority, and concomitant to this obligation is that the principal also assumes the
risks that may arise from the transaction. Panlilio v. Citibank, 539 SCRA 69 (2007).

2.

Kinds of Trusts: (a) Express Trusts; and (b) Implied Trusts (Art. 1441)
Express trusts are those which are created by the direct and positive acts of the parties, by
some writing or deed, or will, or by words either expressly or impliedly evincing an intention to
create a trust. Ramos v. Ramos, 61 SCRA 284, 298 (1974).33
Implied trusts are those which, without being expressed, are deducible from the nature of
the transactions as matters of intent, or which are superinduced on the transaction by operation
of law as matters of equity, independently of the particular intention of the parties. They are

31

Also Huang v. Court of Appeals, 236 SCRA 429 (1994); Rizal Surety & Insurance Co. v. Court of Appeals, 261 SCRA 69 (1996);
Tala Realty Services Corp. v. Banco Filipino Savings Bank, 392 SCRA 506 (2002); DBP v. COA, 422 SCRA 459 (2004); Heirs of
Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009); Metropolitan Bank v. Board of Trustees of Riverside Mills Corp.
Provdent and Retirement Fund, 630 SCRA 360 (2010); PNB v. Aznar, 649 SCRA 214 (2011); Torbela v. Rosario, 661 SCRA 633
(2011); Estate of Margarita D. Cabacungan v. Laigo, 655 SCRA 366 (2011); Advent Capital and Finance Corporation v. Alcantara,
664 SCRA 224 (2012); Goyanko v. UCPB, 690 SCRA 79 (2013).
32
Reiterated in Miguel v. Court of Appeals, 29 SCRA 760 (1969); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).
33
Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242 (2007); Pealber v.
Ramos, 577 SCRA 509 (2009); DBP v. COA, DBP v. COA, 422 SCRA 459 (2004).

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ordinarily subdivided into resulting and constructive trusts (89 C.J.S. 722). Ramos v. Ramos,
61 SCRA 284, 298 (1974).34
A resulting trust is broadly defined as a trust which is raised or created by the act or
construction of law, but in its more restricted sense it is a trust raised by implication of law and
presumed always to have been contemplated by the parties, the intention as to which is to be
found in the nature of their transaction, but not expressed in the deed or instrument of
conveyance (89 C.J.S. 725). Arts. 1448 to 1455 are examples of resulting trusts. Ramos v.
Ramos, 61 SCRA 284 (1974).35
A constructive trust is a trust raised by construction of law, or arising by operation of law. In
a more restricted sense and as contradistinguished from a resulting trust, a constructive trust is
a trust not created by any words, either expressly or implied evincing a direct intention to create
a trust, but by the construction of equity in order to satisfy the demands of justice. It does not
arise by agreement or intention but by operation of law. If a person obtains legal title to
property by fraud or concealment, courts of equity will impress upon the title a so-called
constructive trust in favor of the defrauded party. A constructive trust is not a trust in the
technical sense. Ramos v. Ramos, 61 SCRA 284 (1974).36
Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in
another. It is a fiduciary relationship that obliges the trustee to deal with the property for the
benefit of the beneficiary. Trust relations between parties may either be express or implied. An
express trust is created by the intention of the trustor or of the parties, while an implied trust
comes into being by operation of law. Torbela v. Rosario, 661 SCRA 633 (2011).37

II. EXPRESS TRUSTS

1.

Essence and Definition of Express Trusts (Art. 1440)

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

2.

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

For, technical or particular forms of words or phrases are not essential to the manifestation of
intention to create a trust or to the establishment thereof. Nor would the use of some such
words as trust or trustee essential to the constitution of a trust; conversely, the mere fact that
such terms were employed would not necessarily prove an intention to create a trust. What is
important is whether the trustor manifested an intention to create the kind of relationship which
in law is known as a trust. It is important that the trustor should know that the relationship which
intents to create is called a trust, and whether or not he knows the precise characteristics of the
relationship which is called a trust. Here, that trust is effective as against defendants and in
favor of the beneficiary thereof, plaintiff Victoria Julio, who accepted it in the document itself.
Julio v. Dalandan, 21 SCRA 543 (1967).39
Express trusts are created by direct and positive acts of the parties, by some writing or deed,
or will, or by words either expressly or implied evincing an intention to create a trust. Under Art.
1444 of Civil Code, [n]o particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended. The Affidavit of Epifanio is in the nature of a trust
agreement. Epifanio affirmed the lot brought in his name was co-owned by him, as one of the
heirs of Jose, and his uncle Tranquilino. And by agreement, each of them has been in
possession of half of the property. Their arrangement was corroborated by the subdivision plan
prepared by Engr. Bunagan and approved by Jose P. Dans, Acting Director of Lands. Heirs
of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).
The creation of an express trust must be manifested with reasonable certainty and cannot be
inferred from loose and vague declarations or from ambiguous circumstances susceptible of
other interpretations. No such reasonable certitude in the creation of an express trust obtains in
34

Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. Court of Appeals, 280 SCRA 271 (1997); Policarpio v. Court of
Appeals, 269 SCRA 344 (1997); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242
(2007); Pealber v. Ramos, 577 SCRA 509 (2009).
35
Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to
satisfy the demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or
abuse of confidence, obtains or hold the legal right to property which he ought not, in equity and good conscience, to hold. Spouses
Rosario v. Court of Appeals, 310 SCRA 464 (1999).
36
Reiterated in Guy v. Court of Appeals, 539 SCRA 584 (2007).
37
Vda. De Esconde v. CA, 253 SCRA 66 (1996); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); DBP v. COA, 422
SCRA 459 (2004); Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350
(2010).
39
Reiterated in Lorenzo v. Posadas, 64 Phil. 353 (1937);Torbela v. Rosario, 661 SCRA 633 (2011); Goyanko v. UCPB, 690 SCRA
79 (2013).

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the case at bar. In fact, a careful scrutiny of the plain and ordinary meaning of the terms used in
the Minutes does not offer any indication that the parties thereto intended that Aznar, et al.,
become beneficiaries under an express trust and that RISCO serve as trustor. Philippine
National Bank v. Aznar, 649 SCRA 214 (2011).41
In Tamayo v. Callejo, 46 SCRA 27 (1972), the Court recognized that a trust may have a
constructive or implied nature in the beginning, but the registered owner's subsequent express
acknowledgement in a public document of a previous sale of the property to another party, had
the effect of imparting to the aforementioned trust the nature of an express trust. Torbela v.
Spouses Rosario, 661 SCRA 633 (2011).
a. Express Trust Cannot Be Proven by Parol Evidence (Art. 1443)
As a rule, however, the burden of proving the existence of a trust is on the party asserting its
existence, and such proof must be clear and satisfactorily show the existence of the trust and its
elements. Morales v. Court of Appeals, 274 SCRA 282 (1997).42
We find it clear that the plaintiffs alleged an express trust over an immovable, especially
since it is alleged that the trustor expressly told the defendants of his intention to establish the
trust. Such a situation definitely falls under Art. 1443, and cannot be proven by parol evidence.
Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).43
A trust must be proven by clear, satisfactory, and convincing evidence; it cannot rest on
vague and uncertain evidence or on loose, equivocal or indefinite declarations De Leon v.
Peckson, 62 O.G. 994.44
b. Ultimately Existence of Express Trust Requires That Legal Title Is Held By One, and
the Equitable or Beneficial Title Is Held by Another (65 CORPUS JURIS 212)
Trust, in its technical sense, is a right of property, real or personal, held by one party for the
benefit of another it is a fiduciary relationship with respect to property, subjecting the person
holding the same to the obligation of dealing with the property for the benefit of another person.
Guy v. Court of Appeals, 539 SCRA 584 (2007).
What distinguishes a trust from other relations is the separation of legal title and equitable
ownership of the property. In a trust relation, legal title is vested in the fiduciary while equitable
ownership is vested in a cestui que trust. The petitioner alleged in her complaint that the tax
declaration of the land was transferred to the name of Crispulo without her consent. Had it been
her intention to create a trust and make Crispulo her trustee, she would not have made an issue
out of this because in a trust agreement, legal title is vested in the trustee. The trustee would
necessarily have the right to transfer the tax declaration in his name and to pay the taxes on the
property. These acts would be treated as beneficial to the cestui qui trust and would not amount
to an adverse possession. Express trust must be proven by some writing or deed. In this case,
the only evidence to support the claim that an express trust existed between the petitioner and
her father was the self-serving testimony of the petitioner. Bare allegations do not constitute
evidence adequate to support a conclusion. They are not equivalent to proof under the Rules of
Court. Caezo v. Rojas, 538 SCRA 242, 255 (2007).

2.

Other Essential Characteristics of Express Trusts

a. Unilateral and Primarily Onerous (But Can Be Gratuitous)
b. Fiduciary
The juridical concept of a trust, which in a broad sense involves, arises from, or is the result
of, a fiduciary relation between the trustee and the cestui que trust as regards certain property
real, personal, funds or money, or choses in actionmust not be confused with an action for
specific performance. Thus, when claimants to several parcels of land withdraw their claims in
court relying on the assurance and promise of Yulo made in open court that he would convey
the lots claimed after the proceedings had terminated, then a trust or a fiduciary relation
between them arose, or resulted therefrom, or was created thereby. A trustee cannot invoke
the statute of limitations to bar the action and defeat the rights of the cestuis que trustent.
Pacheco v. Arro, 85 Phil. 505 (1950).46

41

Medina v. Court of Appeals, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corporation v. Alcantara, 664 SCRA 224
(2012).
42
Reiterated Caezo v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing Co., Inc., 538 SCRA 42 (2008).
43
Also Pascual v. Meneses, 20 SCRA 219 (1967); Ramos v. Ramos, 61 SCRA 284 (1974).
44
Reiterated in Ringor v. Ringor, 436 SCRA 484 (2004); Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013).
46
Reiterated in Ramos v. Ramos, 61 SCRA 284 (1974); Pealber v. Ramos, 577 SCRA 509 (2009).

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3.

Parties and Elements of an Express Trust

The elements for the valid existence of an express trust are: (1) a trustor or settlor who
executes the instrument creating the trust; (2) a trustee, who is the person expressly designated
to carry out the trust; (3) the trust res, consisting of duly identified and definite real properties;
and (4) the cestui que trust, or beneficiaries whose identity must be clear. Furthermore, there
must be a present and complete disposition of the trust property, notwithstanding that the
enjoyment in the beneficiary will take place in the future. It is essential, too, that the purpose be
an active one to prevent trust from being executed into a legal estate or interest, and one that is
not in contravention of some prohibition of statute or rule of public policy. There must also be
some power of administration other than a mere duty to perform a contract although the contract
is for a third-party beneficiary. Rizal Surety & Insurance v. Court of Appeals, 261 SCRA 69
(1996).47
a. The Trustor. A person who establishes a trust is called the trustor.48
b. The Trustee. One in whom confidence is reposed is known as the trustee.49
Trustee Must Have Legal Capacity to Accept the Trust;
Failure of Trustee to Assume the Position (Art. 1445);
Obligations of the Trustee (Rule 98, Rules of Court);
Generally, Trustee Does Not Assume Personal Liability on the
Trust as to Properties Outside of the Trust Estate.
When a trustee enters into a contract that gives rise to liability, there must be clear
indication that he enters into the contract as trustee, so that he would be liable
individually only to the extent of the trust properties: In other words, when the
transaction at hand could have been entered into by a trustee either as such or in its
individual capacity, then it must be clearly indicated that the liabilities arising therefrom
shall be chargeable to the trust estate, otherwise they are due from the trustee in his
personal capacity. Tan Senguan and Co. v. Phil. Trust Co., 58 Phil. 700 (1933).
Trustee Generally Entitled to Receive a Fair Compensation for His Services.
Lorenzo v. Pasadas, 64 Phil. 353 (1937).
c. The Beneficiary (Arts. 1440 and 1446). The person for whose benefit the trust has been
created is referred to as the beneficiary.50
In order that a trust may become effective there must, of course be a trustee and a cestui
que trust. The existence of an equivalent designated position in the testamentary trust to act as
trustee (i.e., the Civil Governor of Tayabas) complies with the requirement of a trustee. In
regard to private trusts it is not always necessary the the cestui que trust should be named, or
even be in esse at the time the trust is created in his favor. Thus a devise a father in trust for
accumulation for his children lawfully begotten at the time of his death has been held to be good
although the father had no children at the time of the vesting of the funds in him as trustee. In
charitable trusts such as the one here under discussion, the rule is still further relaxed.
Government v. Abadilla, 46 Phil. 642 (1924).
Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of
donations. Cristobal v. Gomez, 50 Phil. 810 (1927).
d. The Corpus, Res, or Trust Estate
Where DBP establishes a pension trust for its officers and employees and appoints trustees
for the fund whereby the trust agreement transferred legal title over the income and properties
of the fund, then the principal and the income of the fund together constitute the res or subject
matter of the trust. Since the trust agreement established the fund precisely so that it would
eventually be sufficient to pay for the retirement benefits of DBP officers and employees, then
the income and profits thereof cannot be booked by DBP as its own, and DBP cannot be
directed by COA to treat such income as it own. DBP v. COA, 422 SCRA 459 (2004).
We see no trust, express or implied, created between the petitioners and the spouses Perez
over the subject property. A trust by operation of law is the right to the beneficial enjoyment of a
property whose legal title is vested in another. A property between two parties, one having the
rightful ownership and property owned by one party is separate and distinct from that which has
been registered in anothers name. Chu, Jr. vs. Caparas, 696 SCRA 325 (2013).

47

Also Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Caezo v. Rojas, 538 SCRA 242 (2007); Goyanko v. UCPB, 690
SCRA 79 (2013).
48
DBP v. COA, 422 SCRA 459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).
49
DBP v. COA, 422 SCRA459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).
50
DBP v. COA, 422 SCRA459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).

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4.

Kinds of Express Trust

a. Express Trust Involving Immovable (Art. 1443)
A person who has held legal title to land, coupled with possession and beneficial use of the
property for more than ten years, will not be declared to have been holding such title as trustee
for himself and his brothers and sisters upon doubtful oral proof tending to show a recognition
by such owner of the alleged rights of his brother and sisters to share in the produce of the land.
[Ergo: The requirement that express trust over immovable must be in writing should be added
as being governed by the Statute of Frauds.] Gamboa v. Gamboa, 52 Phil. 503 (1928).
Express trust over real property cannot be constituted when nothing in writing was presented
to prove it; but it may be proved as an implied trust. Ty v. Ty, 553 SCRA 306 (2008).
In accordance with Art. 1443, when an express trust concerns an immovable property or any
interest therein, the same may not be proved by parol or oral evidence. However, when the
oppositors failed to timely object when the petitioner tried to prove by parol evidence the
existence of an express trust over immovable, there is deemed to be a waiver since Art. 1443
is in the nature of a statute of frauds. Pealber v. Ramos, 577 SCRA 509 (2009).
b. Contractual versus Intervivos Trusts
c. Charitable Trusts
d. Testamentary Trust
A testamentary trust is created by a provision in the will whereby the testator directs the
creation of a trust for the benefit of a secondary school to be established in the town of
Tayabas, naming as trustee the ayutamineto of the town or if there be no ayutamiento, then the
civil governor of the Province of Tayabas. Government of P.I. v. Abadilla, 46 Phil. 642 (1924).
Although the will did not use the words trust or trustee, the intention to create one is clear
since testator ordered therein that certain properties be kept together undisposed during a fixed
period, for a stated purpose. No particular or technical words are required to create a
testamentary trust. (69 C.J., p. 711); hence, probate court exercised sound judgment in
appointing a trustee to carry the proivisions into effect. Lorenzo v. Pasadas, 64 Phil. 353 (1937).
e. Pension or Retirement Trusts
A foundation existing for the purpose of holding title to, and administering, the tax-exempt
Employees Trust Fund established for the benefit of the employees, has the personality to
claim tax refunds due the Employers Trust Fund. Miguel J. Ossorio Pension Foundation, Inc. v.
Court of Appeals, 621 SCRA 606 (2010).

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

5.

Termination of Express Trusts

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

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c. Generally Express Trusts Not Susceptible to Prescription

When there exists an express trust, prescription and laches will run only from the time the
express trust is repudiated. The Court has held that for acquisitive prescription to bar the action
of the beneficiary against the trustee in an express trust for the recovery of the property held in
trust it must be shown that: (a) the trustee has performed unequivocal acts of repudiation
amounting to an ouster of the cestui que trust; (b) such positive acts of repudiation have been
made known to the cestui que trust; and (c) the evidence thereon is clear and conclusive. A
trustee who obtains a Torrens title over the property held in trust by him for another cannot
repudiate the trust by relying on the registration. The rule requires a clear repudiation of the trust
duly communicated to the beneficiary. The only act that can be construed as repudiation was
when respondents filed the petition for reconstitution seeking registration only in his name.
Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).54
xOLD RULES ON IMPRESCRIPTIBILITY OF EXPRESS TRUSTS: A trustee cannot acquire by prescription the
ownership of property entrusted to him (Palma v. Cristobal, 77 Phil. 712); that an action to compel a
trustee to convey property registered in his name in trust for the benefit of the cestui qui trust does
not prescribe (Manalang v. Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil. 810); that the defense
of prescription cannot be set up in an action to recover property held by a person in trust for the
benefit of another (Sevilla v. Delos Angeles, 97 Phil. 875); that property held in trust can be
recovered by the beneficiary regardless of the lapse of time (Marabilles v. Quito, 100 Phil. 64;
Bancairen v. Diones, 98 Phil. 122, Juan v. Zuiga, 4 SCRA 1221; Vda de Jacinto v. Vda. de Jacinto,
5 SCRA 370 (1962). See Tamayo v. Calljo, 147 Phil. 31, 317). The basis of the rules is that the
possession of a trustee is not adverse; and not being adverse, he does not acquire by prescription
the property held in trust. Thus, section 38 of Act 190 provides that the law of prescription does not
apply in the case of a continuing and subsisting trust (Diaz v. Gorricho and Aguado, 103 Phil. 261
(1958); Laguna v. Levantino, 71 Phil. 566; Sumira v. Vistan, 74 Phil. 138; Golfeo v. Court of Appeals,
12 SCRA 199; Caladiao v. Santos, 10 SCRA 691). Ramos v. Ramos, 61 SCRA 284, 299 (1974).

III. IMPLIED TRUSTS

1.

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

The concept of implied trusts is that from the facts and circumstances of a given case (i.e.,
the structure of the transactions that vest title to property) the existence of a trust relationship is
inferred in order to effect the presumed (in this case it is even expressed) intention of the parties
(i.e., resulting trust) or to satisfy the demands of justice or to protect against fraud (i.e.,
constructive trusts). Padilla v. Court of Appeals, 53 SCRA 168 (1973).
a. Distinctions Between Resulting Trusts and Constructive Trusts
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal
title determines the equitable title or interest and are presumed always to have been
contemplated by the parties. They arise from the nature of circumstances of the consideration
involved in a transaction whereby one person thereby becomes invested with legal title but is
obliged in equity to hold his legal title for the benefit of another. On the other hand, constructive
trusts are created by the construction of equity in order to satisfy the demands of justice and
prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or
abuse of confidence, obtains or holds the legal right to property which he ought not, in equity
and good conscience, to hold. Lopez v. Court of Appeals, 574 SCRA 26 (2008).55
b. How to Prove Implied Trusts (Art. 1457)
The burden of proving the existence of a trust is on the party asserting its existence, and
such proof must be clear and satisfactorily show the existence of the trust and its elements.
While implied trusts may be proven by oral evidence, the evidence must be trustworthy and
received by the courts with extreme caution, and should not be made to rest on loose,
equivocal or indefinite declarations. Trustworthy evidence is required because oral evidence
can easily be fabricated. Heirs of Narvasa, Sr. v. Imbornal, 732 SCRA 171 (2014).
An implied trust in order to be recognized must measure up to the yardstick that a trust must
be proven by clear, satisfactory and convincing evidence, and cannot rest on vague and
uncertain evidence or on loose, equivocal or indefinite declarations. Salao v. Salao, 70
SCRA 65 (1976), thus:
The existence of public records other than the Torrens title indicating a proper
description of the land, and not the technical description thereof, and clearly indicating

54

Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Caezo v. Rojas, 538 SCRA 242 (2007).
Also Aznar Brothers Realty Company v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. Court of Appeals, 310 SCRA 464
(1999); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
55

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the intention to create a trust, is considered sufficient proof to support the claim of the
cestui que trust. Municipality of Victorias v. CA, 149 SCRA 32 (1987).
An affidavit of the fact of resulting trust against contrary affidavits, as well as the transfer
certificates of title and tax declarations to the contrary, do not support clearly the
existence of trust. Booc v. Five Start Marketing Co., Inc., 538 SCRA 42 (2007).56
In order to establish an implied trust in real property by parol evidence, the proof should
be as fully convincing as if the acts giving rise to the trust obligation are proven by an
authentic document. An implied trust, in fine, cannot be established upon vague and
inconclusive proof. In the present case, there was no evidence of any transaction
between the petitioner and her father form which it can be inferred that a resulting trust
was intended. Caezo v. Rojas, 538 SCRA 242 (2007).
c. Distinguished from Quasi-Contracts
Our present Civil Code incorporated implied trust, which includes constructive trusts, on top
of quasi-contracts, both of which embody the principle of equity above strict legalism. PNB v.
Court of Appeals, 217 SCRA 347 (1993).

RESULTING TRUSTS

2.

A resulting trust is a species of implied trust that is presumed always to have been
contemplated by the parties, the intention as to which can be found in the nature of their
transaction although not expressed in a deed or instrument of conveyance. Resulting trusts are
based on the equitable doctrine that valuable consideration and not legal title determines the
equitable title or interest and are presumed always to have been contemplated by the parties.
Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).64 They
arise from the nature or circumstances of the consideration involved in a transaction whereby
one person thereby becomes invested with legal title but is obligated in equity to hold his title for
the benefit of another. Spouses Rosario v. CA, 310 SCRA 464 (1999).
In an implied [resulting] trust, the beneficiarys cause of action arises when the trustee
repudiates the trust, not when the trust was created. Paringit v. Bajit, 631 SCRA 584 (2010).

a. Purchase of Property Where Beneficial Title in One

Person, But Price Paid by Another Person (Art. 1448)
RATIONALE: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho
Jan Jing, 19 Phil. 202 (1911).
EXCEPTION: Although the father was the source of the funds in the purchase of a parcel of
land which was titled in the name of his son, no implied trust is deemed to have been
established since under Article 1448, if the person to whom the title is conveyed is the child of
the one paying the price of the sale, no trust is implied by law, and instead a donation is
disputably presumed in favor of the child. The successors of the deceased father had not shown
that no such donation was intended. Ty v. Ty, 553 SCRA 306 (2008).
While the share was bought by Sime Darby and placed under the name of Mendoza, his title
is only limited to the usufruct, or the use and enjoyment of the clubs facilities and privileges
while employed with the company. In Thomson v. Court of Appeals, 298 SCRA 280 (1998), we
held that a trust arises in favor of one who pays the purchase price of a property in the name of
another, because of the presumption that he who pays for a thing intends a beneficial interest
for himself. While Sime Darby paid for the purchase price of the club share, Mendoza was given
the legal title. Thus, a resulting trust is presumed as a matter of law. The burden shifts to the
transferee to show otherwise. Sime Darby Pilipinas, Inc. v. Mendoza, 699 SCRA 290 (2013).
b. Purchase of Property Where Title Is Placed in the Name of Person
Who Loaned the Purchase Price (Art. 1450) Equitable Mortgage
Resulting trust under Art. 1450 presupposes a situation where a person, using his own funds,
buys property on behalf of another, who in the meantime may not have the funds to purchase
ittitle to the property is for the time being placed in the name of the trustee, the person who
pays for it, until he is reimbursed by the beneficiary, the person for whom the trustee bought the
land. It is only after the beneficiary reimburses the trustee of the purchase price that the former
can compel conveyance of the property from the latter. Paringit v. Bajit, 631 SCRA 584 (2010).
c. When Absolute Conveyance of Property Effected Only as a Means to Secure
Performance of Obligation of the Grantor (Art. 1454) Equitable Mortgage

56
64

Also Tigno v. Court of Appeals, 280 SCRA 262 (1997); Morales v. Court of Appeals, 274 SCRA 282 (1997).
Caezo v. Rojas, 538 SCRA 242 (2007).

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

d. Several Persons Jointly Purchase Property, Place Title In One of Them (Art. 1452)
The decedent during his lifetime had married legitimately three successive times, but without
liquidation of the conjugal partnerships formed during the first and second marriages. The only
male issue managed to convince his co-heirs that he should act as administrator of the
properties left by the decedent, but instead obtained a certificate of title in his own name to the
valuable piece of property of the estate. Held: Where the son, through fraud was able to secure
a title in his own name to the exclusion of his co-heirs who equally have the right to a share of
the land covered by the title, an implied trust was created in favor of said co-heirs, and that said
son was deemed to merely hold the property for their and his benefit. Gonzales v. Jimenez, Sr.,
13 SCRA 73 (1964).
The law expressly allows a co-owner (first co-owner) of a parcel of land to register his
proportionate share in the name of his co-owner (second co-owner) in whose name the entire
land is registeredthe second co-owner serves as a legal trustee of the first co-owner insofar
as the proportionate share of the first co-owner is concerned. Article 1452 expressly authorizes
a person to purchase a property with his own money and to take conveyance in the name of
another. Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).
e. Property Conveyed to a Person Merely as Holder Thereof (Art. 1453)
Where real property is taken by a person under an agreement to hold it for, or convey it to
another or the grantor, a resulting trust arises in favor of the person for whose benefit the
property was intended, which is enforceable even when the agreement is not in writing, and is
not an express trust which requires that it be in writing to be enforceable. Martinez v. Grao, 42
Phil. 35 (1921).
Where the original purchaser of the immovable property had sold all his interest thereto to his
brother who reimbursed him all amounts previously, but continued to pay the balance of the
installments in the name of the original buyer with understanding that upon full payment the title
would be transferred to the buyer, am implied trust had been constituted. Heirs of Emilio
Candelaria v. Romero, 109 Phil. 500 (1960).
Article 1453 would apply if the person conveying the property did not expressly state that he
was establishing the trust, unlike the case at bar where he was alleged to have expressed such
intent. Consequently, the lower court did not err in dismissing the complaint, on the ground that
since the complaint sought to recover an express trust over immovables, then under Art. 1443
the same may not be proved by parol evidence. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).
Where a lot was taken by a person under an agreement to hold it for, or convey it to another
or to the grantor, a resulting or implied trust arises in favor of the person for whose benefit the
property was intended. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).
f. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449)
Where the father donates a piece of land in the name of the daughter but with verbal notice
that the other half would be held by her for the benefit of a younger brother, coupled with a deed
of waiver subsequently executed by the daughter that she held the land for the common benefit
of her brother, created an implied trust in favor of the brother under Article 1449 of the Civil
Code. Adaza v. Court of Appeals, 171 SCRA 369 (1989). [CLV: Express trust?]
g. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451)
When the eldest sibling had registered land inherited from the parents in his name, he was
acting in a trust capacity and as representative of all his brothers and sisters. As a consequence
he is now holding the registered title thereto in a trust capacity, and it is proper for the court to
declare that the other siblings are entitled to their several pro rata shares. Severino v. Severino,
44 Phil. 343 (1923); Castro v. Castro, 57 Phil. 675 (1932).
In a situation where a Chinese resident had caused land to be placed in the name of the
trustee who was bound to hold the same for the benefit of the trustor and his family in the event
of death, the application of the doctrine of implied trust under Art. 1451 by the heirs of the trustor
cannot be upheld. This contention must fail because the prohibition against an alien from
owning lands of the public domain is absolute and not even an implied trust can be permitted to
arise on equity consideration. Ting Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).
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CONSTRUCTIVE TRUSTS

3.

a. General Doctrines for Constructive Trusts

Constructive trust is a rule of equity, independent of the particular intentions of the parties.
Paringit v. Bajit, 631 SCRA 584 (2010). Therefore, in constructive trusts there is neither promise
nor fiduciary relations; the so-called trustee does not recognize any trust and has no intent to
hold the property for the beneficiary. Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958).65
A constructive trust (trust ex maleficio, trust ex delicto, trust de son tort, an involuntary trust)
is a trust by operation of law which arises contrary to intention and in invitum, against one who,
by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or
by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in
any way against equity and good conscience, either has obtained or holds the legal right to
property which he ought not, in equity and good conscience, hold and enjoy. It is raised by
equity to satisfy the demands of justice. Sumaoang v. Judge, RTC, Br. XXXI, Buimba, Nueva
Ecija, 215 SCRA 136 (1992).66
Constructive trusts are fictions of equity that courts use as devices to remedy any situation in
which the holder of the legal title, MCIAA in this case, may not, in good conscience, retain the
beneficial interest. Vda. de Ouano v. Republic, 642 SCRA 384 (2011).
Although an implied trust arising from mortgage contracts is not among the trust relationships
the Civil Code enumerates, Art. 1147 provides that such listing does not exclude others
established by general law on trust. Under the general principles on trust, equity converts the
holder of a property right as trustee for the benefit of another if the circumstances of its
acquisition makes the holder ineligible in x x x good conscience [to] hold and enjoy [it].67 As
implied trusts are remedies against unjust enrichment, the only problem of great importance in
constructive trusts is whether in the numerous and varying factual situations presented x x x
there is a wrongful holding of property and hence, a threatened unjust enrichment of the
defendant.68 Juan v. Yap, Sr., 646 SCRA 753 (2011).
Applying these principles, this Court recognized unconventional implied trusts in contracts
involving the purchase of housing units by officers of tenants associations in breach of their
obligations,69 the partitioning of realty contrary to the terms of a compromise agreement,70 and
the execution of a sales contract indicating a buyer distinct from the provider of the purchase
money.71 In all these cases, the formal holders of title were deemed trustees obliged to transfer
title to the beneficiaries in whose favor the trusts were deemed created. We see no reason to
bar the recognition of the same obligation in a mortgage contract meeting the standards for the
creation of an implied trust. Juan v. Yap, Sr., 646 SCRA 753 (2011).

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

Property Which Is Registered in Fiduciarys Name (Art. 1455)
A confidential employee who, knowing that his principal was negotiating with the owner of
some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife,
commits an act of disloyalty and infidelity to his principal, and is liable for damage. The
reparation of the damage must consist in respecting the contract which was about to be
concluded, and transferring the said land for the same price and upon the same terms as those
on which the purchase was made for the land sold to the wife of said employee passed to them
as what might be regarded as equitable trust, by virtue of which the thing thus acquired by an
employee is deemed to have been acquired not for his own benefit or that of any other person
but for his principal and held in trust for the latter. Sing Juco and Sing Bengco v.
Sunyantong and Llorente, 43 Phil. 589 (1922).
An mere verbal assertion of a partner that partnership funds were used to purchase real
properties registered solely in the name of the other partners-spouses, without further evidence,
does not overcome the Torrens title issued showing exclusive ownership in the name of the
partners-spouses, but cannot also be used to establish an implied trust over said properties in
favor of the alleging partner. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).
c. When Property Acquired Through Mistake or Fraud (Art. 1456)
Old Civil Code Rulings: Where a mother and her minor daughter inherited a large tract of
land, and had it applied for cadastral survey, but title was issued only in the name of the mother,
courts of equity will impress upon the title, a condition which is generally in a broad sense
65

Reiterated in Carantes v. Court of Appeals, 76 SCRA 514 (1977); Marcado v. Espinocilla, 664 SCRA 724 (2012).
Also Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).
Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).
68
Heirs of Moreno v. Mactan-Cebu Int.l Airport Authority, 413 SCRA 5023 (2003).
69
Policarpio v. Court of Appeals, 269 SCRA 344 (1997); Arlequi v. Court of Appeals, 378 SCRA 322 (2002).
70
Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).
71
Tigno v. Court of Appeals, 280 SCRA 262 (1997).
66
67

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termed constructive trust in favor of the defrauded party, but the use of the word trust in this
sense is not technically accurate. Gayondato v. Treasurer, 49 Phil. 244 (1926).
When an agent, taking advantage of the illiteracy of the principal, claims for himself the
property which he was designated to claim for the principal and manages to have it registered in
his own name and became part of his estate when the agent died, the estate is in equity bound
to execute the deed of conveyance of the lot to the cestui que trust. The courts have therefore
shielded fiduciary relations against every manner of chicanery or detestable designed cloaked
by legal technicalities. The Torrens system was never calculated to foment betrayal in the
performance of a trust. Escobar v. Locsin, 74 Phil. 86 (1943).77
New Civil Code Rulings: The rules are well-settled under Art. 1456 that when a person
through fraud succeeds in registering the property in his name, the law creates what is called a
constructive or implied trust in favor of the defrauded party and grants the latter the right o
recover the property fraudulently registered within a period of 10 years. Ruiz v. Court of
Appeals, 79 SCRA 525 (1977).78
Under the principle of constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would justify an action for
reconveyance.79 In the action for reconveyance, the decree of registration is respected as
incontrovertible, and what is sought instead is the transfer of the property wrongfully or
erroneously registered in anothers name to its rightful owner or to one with a better right. Heirs
of Tabia v. Court of Appeals, 516 SCRA 431 (2007).80 If the registration of the land is fraudulent,
the person in whose name the land is registered holds it as a mere trustee, and the real owner
is entitled to file an action for reconveyance of the property. Mendizabel v. Apao, 482 SCRA 587
(2006). Pasio v. Monterroyo, 560 SCRA 739 (2008).
The Court is not unaware of the rule that a fraudulently acquired free patent may only be
assailed by the government in an action for reversion pursuant to Section 101 of the Public
Land Act. The foregoing rule is, however, not without exception. A recognized exception is
that situation where plaintiff-claimant seeks direct reconveyance from defendant of public land
unlawfully and in breach of trust titled by him, on the principle of enforcement of a constructive
trust. Hortizuela v. Tagufa, G.R. No. 205867, 23 Feb. 2015.
Where testator expressed [in the notarial will] that she wished to constitute a trust fund for
her paraphernal properties, . . . to be administered by her husband. . . Two-thirds (2/3) of the
income from rentals over theses properties were to answer for the education of deserving but
needy honor students, while one-third (1/3) was to shoulder the expenses and fees of the
administrator, but that eventually in the probate of the will the properties were adjudicated to
the husband as sole heir, then a constructive trust has been constituted under Art. 1456: The
apparent mistake in the adjudication of the disputed properties to Jose created mere implied
trust of the constructive variety in favor of the beneficiaries of the Fideicomiso. Lopez v. Court
of Appeals, 574 SCRA 26 (2008).81

4.

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

a. SUMMARY OF RULINGS FOR EXPRESS TRUSTS:
GENERAL RULE: Express trusts are generally imprescriptible: the express undertaking to hold
title for the benefit of the beneficiary disables the trustee from acquiring for his own benefit
the property committed to his management or custody.
The delay of the beneficiary in seeking recovery of the property is directly attributable to the
trustee who undertakes to hold the property for the former; trustee's possession is, therefore,
not adverse to the beneficiary, until and unless the latter is made aware that the trust has
been repudiated. Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958); Torbela v. Spouses
Rosario, 661 SCRA 633 (2011).83
EXCEPTION: For acquisitive prescription to bar the action of the beneficiary against the trustee
for the recovery of the property held under an express trust, it must be shown that:
(a) Trustee has performed unequivocal acts of repudiation amounting to an ouster of the
cestui que trust;
(b) Such positive acts of repudiation have been made known to the cestui que trust;

77

Reiterated in Pacheco v. Arro, 85 Phil. 505.

Reiterated in Heirs of Tanak Pangaaran Patiwayon v. Martinez, 142 SCRA 252 (1986); Municipality of Victorias v. Court of
Appeals, 149 SCRA 32 (1987); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007).
79
Reiterated in Leoveras v. Valdez, 652 SCRA 61 (2011); Philippine National Bank v. Jumamoy, 655 SCRA 54 (2011).
80
Also Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007).
81
See also Vda. De Esconde v. CA, 253 SCRA 66 (1996); Iglesia Filipina Independiente v. Heirs of Taeza, 715 SCRA 138
(2014).
83
Reiterated in Torbela v. Rosario, 661 SCRA 633 (2011)
78

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(c) Evidence thereon is clear and conclusive: a clear repudiation of the trust duly
communicated to the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose
Labiste, 587 SCRA 417 (2009);84 and
(d) Ten (10) years have lapsed since the point of repudiation. Escay v. Court of Appeals,
61 SCRA 369 (1974).
NOTE: Though prescription does not run between the trustee and cestui que trust as long as
the trust relations subsist, it runs between the trustee and a third person who holds
actual, open, public, and continuous possession of land for over ten years, adversely
to the trust, acquires title to the land by prescription as against such trust. Govt v.
Abadilla, 46 Phil. 642 (1924).
b. SUMMARY OF RULINGS FOR RESULTING TRUSTS:
GENERAL RULE: As a rule, implied resulting trusts do not prescribe except when the trustee
repudiates the trust. Further, the action to reconvey does not prescribe so long as the
property stands in the name of the trustee. To allow prescription would be tantamount to
allowing a trustee to acquire title against his principal and true owner. Tong v. Go Tiat Kun,
722 SCRA 623 (2014).
The rule of imprescriptibility of the action to recover property held in trust may apply to
resulting trusts as long as the trustee has not repudiated the trust. Heirs of Candelaria v.
Romero, 109 Phil. 500 (1960).85
In resulting trusts, acquisitive prescription run in favor of the trustee only when he repudiates
expressly the trusts and makes known such repudiation to the beneficiary, and there is a
lapse of 10 years from:
(a) Notice of repudiation served upon the beneficiary;86
(b) Registration of title in name of trustee, when such registration is equivalent to a clear
act of repudiation said notice of repudiation:87
Such as registration by one of the co-owners of title to his sole name in fraud of
the other co-owners (which makes it a class of constructive trust).88
EXCEPTION: When the Trustee Recognizes the Rights of the Beneficiary. The continuous
recognition of a resulting trust, however, precludes any defense of laches in a suit to declare
and enforce the trust. After all, the beneficiary in a resulting trust may, without prejudice to
his right to enforce the trust, prefer the trust to persist and demand no conveyance from the
trustee. Heirs of Emilio Candelaria v. Lucia Romero, 109 Phil. 500 (1960).
c. SUMMARY OF RULINGS FOR CONSTRUCTIVE TRUSTS:
GENERAL RULE: In constructive trusts, laches constitutes a bar to actions to enforce the trust,
without need of prior repudiation,89 and that acquisitive prescription runs in favor of the
trustee after 10 years from the registration of title in trustees name.90
In constructive trusts, there is neither promise nor fiduciary relation; the so-called trustee
does not recognize any trust and has no intent to hold for the beneficiary; therefore, the
beneficiary is not justified in delaying action to recover his property; it is his fault if he delays;
hence, he may be estopped by his own laches.91
EXCEPTIONS: The acquisitive prescription of 10 years upon registration of title does not apply
to favor the trustee in the following cases:
(1) Where Trustee Recognizes the Rights of the Cestui Que Trust. In a constructive trust,
prescription may not apply by mere registration of the title in the name of the trustee, where
84

Reiterated in Torbela v. Rosario, 661 SCRA 633 (2011)

Martinez v. Grao, 42 Phil. 35 (1921); Buencamino v. Matias, 16 SCRA 849 (1966)]. Ramos v. Ramos, 61 SCRA 284 (1974).
86
Castro v. Echarri, 20 Phil. 23; Bargayo v. Camumot, 40 Phil. 857 (1920); Ramos v. Ramos, 45 Phil. 362; Varsity Hills v.
Navarro, 43 SCRA 503 (1922).
87
Caezo v. Rojas, 538 SCRA 242 (2007).
88
Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962); Castrillo v. CA, 10 SCRA 549 (1964); Lopez v. Gonzaga, 10 SCRA 167
(1974); Gerona v. De Guzman, 11 SCRA 153 (1964); Mariano v. Judge De Vega, 148 SCRA 342 (1987); Figuracion v. FiguracionGerilla, 690 SCRA 495 (2013)..
89
Boaga v. Soler, 11 Phil. 651; Claridad v. Henares, 97 Phil. 973; Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959);
Candelaria v. Romero, 109 Phil. 500 (1960); De Pasion v. De Pasion, 112 Phil. 403;.J.M. Tuazon & Co. v. Mandanagal, 4 SCRA 84
(1962); Alzona v. Capunitan, 4 SCRA 450 (1962); Vda. De Jacinto v. Vda. De Jacinto, 5 SCRA 371 (1962); Gerona v. De Guzman,
11 SCRA 153 (1964); Gonzales v. Jimenez, 13 SCRA 80 (1965); Fabian v. Fabian, 22 SCRA 231 (1968); Bueno v. Reyes, 27
SCRA 1179 (1969); Ramos v. Ramos, 61 SCRA 284 (1974); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
90
Boaga v. Soler, 2 SCRA 755 (1961); J. M. Tuason & Co., Inc. v. Magdangal, 4 SCRA 123 (1962); Alzona v. Capunitan, 4
SCRA 450 (1962); Gonzales v. Jimenez, 13 SCRA 80 (1965); Cuaycong v. Cuaycong, 21 SCRA 1192 (1967); Varsity Hills v.
Navarro, 43 SCRA 503 (1922); Escay v. Court of Appeals, 61 SCRA 369 (1974); Carantes v. Court of Appeals, 76 SCRA 514
(1977); Gonzales v. Intermediate Appellate Court, 204 SCRA 106 (1991); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401
(2007); Cavile v. Litania-Hong, 581 SCRA 408 (2009); Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010); Brito, Sr. v.
Dianala, 638 SCRA 529 (2011).
91
Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958); Caezo v. Rojas, 538 SCRA 242 (2007).
85

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(2)

(3)

(4)

(5)

the trustee formally recognized the beneficial right of the cestui que trust. Geronimo and
Isidro v. Nava and Aquino, 105 Phil. 145 (1959); Adaza v. CA, 171 SCRA 369 (1989).
When the Cestui Que Trust Is a Minor. In an implied trust, when the act of repudiation of
the trustee was effected at the time the cestui que trust was still a minor, then such act does
not prejudice the latter: We are unable to see how a minor with whom another is in trust
relation can be prejudiced by repudiation of the trustee addressed to him by the person who
is subject to the trust obligation.. Castro v. Castro, 57 Phil. 675 (1932).
When Cestui Que Trust is Closely Related to Trustee. Laches being rooted in equity, is not
always to be applied strictly in a way that would obliterate an otherwise valid claim especially
between blood relatives. The existence of a confidential relationship based upon
consanguinity is an important circumstance for consideration; hence, the doctrine is not to be
applied mechanically as between near relatives. Estate of Margarita D. Cabacungan, v.
Laigo, 655 SCRA 366 (2011); Adaza v. CA, 171 SCRA 369 (1989).
Where Cestui Que Trust Is in Possession of the Trust Property. The prescriptive period
applies only if there is an actual need to reconvey the property as when the plaintiff is not in
possession thereof. Otherwise, if the plaintiff is in possession of the property, prescription
does not commence to run against him. Thus, when an action for reconveyance is
nonetheless filed, it would be in the nature of a suit for quieting of title, an action that is
92
imprescriptible. Brito v. Dianala, 638 SCRA 529 (2010).
Where Title of the Trustee Is Void. Where the facts deemed admitted showed that the
signature of the petitioners, being forced heirs, in the extrajudicial settlement with sale has
been forged, and although title to the land had been registered in the name of the buyer, the
contract is void, and the action to seek the declaration of nullity is imprescriptible under Art.
93
1410. Macababbad v. Masirag, 576 SCRA 70 (2009).

NOTE: An aggrieved party may file an action for reconveyance based on a constructive trust,
which prescribes in 10 years from the date of issuance of the certificate of title over
the property provided that the property has not been acquired by an innocent
purchaser for value. Khoemani v. Heirs of Anastacio Trinidad, 540 SCRA 83 (2007).94

o0MID-TERM EXAMINATION COVERAGE0o

92

Reiterated in Armamento v. Guererro, 96 SCRA 178 (1980); Gonzales v. Intermediate Appellate Court, 204 SCRA106 (1991);
Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010); PNB v. Jumamoy, 655 SCRA 54 (2011); Estrella Tiongco Yared v.
Jose Tiongco, 659 SCRA 545 (2011), Zuiga-Santos v. Santos-Gran, 738 SCRA 33 (2014) .
93
Also Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959).
94
Cavile v. Litania-Hong, 581 SCRA 408 (2009).

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C.

PARTNERSHIPS

I.

X HISTORICAL BACKGROUND

1.

Old Branches of Partnership Law

Civil Partnerships - not pursued in mercantile manner, non-habitual or not pursued in the
regular course of business
Commercial Partnerships - in pursuit of industry or commerce; characterized by
habituality or pursuit in the regular course of business
Distinguishing between civil and commercial partnerships was critical under the old set-up
because it determined the applicable rules for registration, personal liability of members, and the
rights and manner of dissolution. Compaia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).
a. Commercial Partnerships Were Deemed to Be, and
Subject to Code of Commerce Provisions for, Merchants:
A commercial partnership is distinguished from a civil one by the object to which it is devoted
and not by the manner with which it is organized. A commercial partnership has for its object the
pursuit of industry or commerce, and is then a merchant that must be governed by, and
comply with the registration requirements of, the Code of Commerce to lawfully come into
existence; it cannot choose to be organized under the Civil Code to make it a civil partnership.
Prautch v. Hernandez, 1 Phil. 705 (1903).
CONTRA: We are inclined to the belief that the respective codes, Civil and Commercial,
have adopted a complete system for the organization, control, continuance, liabilities,
dissolutions, and juristic personalities of associations organized under each. . . . that
associations organized under the different codes are governed by the provisions of the
respective codes. Compaia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).
A commercial partnership that fails to register its articles in the mercantile registry under Art.
119 of Code of Commerce, does not become a juridical person with a personality distinct from
those of the individuals who composed it. Hung-Man-Yoc v.Kieng-Chiong-Seng, 6 Phil. 498
(1906); Bourns v. Carman, 7 Phil. 117 (1906); Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907).
CONSEQUENTLY:
It cannot maintain an action in its name, Prautch v. Hernandez, 1 Phil. 705 (1903), nor in the name of
one nor more of the members on behalf of his associates; nevertheless the individual members may
sue jointly as individuals, and persons dealing with them in their joint capacity will not be permitted to
deny such right. Prautch v. Jones, 8 Phil. 1 (1907); Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909).

Without a separate juridical personality, what was applicable was Art. 120 which made persons in

charge of the management of the association liable for the debts incurred by such partnership de
facto. Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906).

b. Registration Key for Commercial Partnerships Coming into Existence (Arts. 118-119,
Code of Commerce); While Mere Consent Perfected the Contract of Civil Partnership:
A partnership business that is in laundry is a civil partnership and governed by the provisions
of the Civil Code, and it existed validly even when no formal partnership agreement was entered
into and registered, and thereby the obligations of the partners for partnership debts would be
pro rata. Dietrich v. Freeman, 18 Phil. 341 (1911).
c. On Partnership Debts, Commercial Partners Were Solidarily Liable, Albeit Subsidiarily,
While Civil Partners Were Primarily But Only Jointly Liable:
In a civil partnership, each member is bound to pay his pro rata share of the partnership
debts. Co-Pitco v. Yulo, 8 Phil. 544 (1907).
In a commercial partnership, although the partners are only subsidiarily liable (i.e., benefit of
excussion) they are liable solidarily. Viuda de Chan Diaco v. Peng, 53 Phil. 906 (1928). Both
partnership and the partners may be joined in one action, but the private property of the partners
cannot be taken in payment of the partnership debts until the partnership property has been
exhausted. La Compaia Maritima v. Muoz, 9 Phil. 326 (1907). Partners right of excussion is
deemed satisfied where the judgment debts remain unsatisfied after exhaustion of partnership
assets, De los Reyes v. Lukban, 35 Phil. 757 (1916); PNB v. Lo, 50 Phil. 802 (1927).

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II. NATURE AND ATTRIBUTES OF THE PARTNERSHIP

1.

Definition of Partnership (Art. 1767)

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

2.

TRI-LEVEL EXISTENCE/LEGAL RELATIONSHIPS IN A PARTNERSHIP SETTING

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

3.

ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP

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

4.

KINDS OF PARTNERSHIPS
a. As to Object (Art. 1776, 1st par.)
i. Universal Partnership (Arts. 1777 to 1782)
- Deemed a Universal Partnership of Profits when articles do not specify the
partnerships nature. (Art. 1781)
- Persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership. (Art. 1782)
ii. Particular Partnership (Art. 1783)
iii. Usefulness of Distinction? Lyons v. Rosenstock, 56 Phil. 632 (1932).95
b. As to Duration (Art. 1785)
i. Partnership with Fixed Term
ii. Partnership for a Particular Undertaking
iii. Partnership at Will
c. As to the Nature of the Liabilities of Partners
i. General Partnership (Art. 1776, 2nd par.)
ii. Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867)

5.

COMPARED WITH OTHER MEDIA OF DOING BUSINESS

a. Co-Ownership (Arts. 484 to 486)
Under Art. 1769 of Civil Code, which lays down the rule for determining when a transaction
should be deemed a partnership or a co-ownership, means that aside from the circumstance of
profit, the presence of other elements constituting partnership is necessary, such as the clear

95

Villareal v. Ramirez, 406 SCRA 145 (2003).

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intent to form a partnership, the existence of a juridical personality different from that of the
individual partners, and the freedom to transfer or assign any interest in the property by one
with the consent of the others. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).
b. Sole Proprietorship
A sole proprietorship does not possess a juridical personality separate and distinct from the
personality of the owner of the enterprise. Only natural or juridical persons or entities authorized
by law may be parties to a civil action and every action must be prosecuted and defended in the
name of the real parties-in-interest. Ejercito v. M.R. Vargas Construction, 551 SCRA 97 (2008).
c. Agency
Agent cannot escape charge of estafa for conversion of the principals funds by claiming that
he had become a partner when the books of accounts kept for the business showed that the
amount was charged to him since the same was merely a method of keeping an account of the
business, so that the parties would know how much money had been invested and what the
condition thereof was at any particular time. U.S. v. Muhn, 6 Phil. 164 (1906).
Just because a duly appointed agent has made personal advances for the expenses of the
business venture that he had been designated to administer, does not make him a partner of his
principal. Binglangawa v. Constantino, 109 Phil. 168 (1960).
d. Business Trust
e. Cooperative
f. CORPORATIONS

III. PARTNERSHIP AS PRIMARILY A CONTRACTUAL RELATIONSHIP

1.

ESSENTIAL ELEMENTS AND PURPOSE OF THE PARTNERSHIP

a. CONSENT: Partnership Must Necessarily Arise from a Contractual Relationship.
Persons Who Are Not Partners to One Another Are Not Partners as to
Third Persons (Art. 1769[1])
EXCEPT: Partnership by Estoppel (Art. 1825)
b. SUBJECT MATTER: Partners Seek the Joint Pursuit of a Business Venture or
Enterprise as clearly indicated by:
Agreement to Contribute to a Common Fund; and
Agreement or Intention to Divide the Profits and Losses.
EXCEPT: A Professional Partnership.
(i) Partnership Must Be Established for Common Benefit of the Parties (Art. 1770)
(ii) Exclusion of Partner from Participation in Profits and Losses Void (Art. 1799)
The obtaining of profit or gain from the business to be carried on is the very reason for
the existence of a partnership; it is the element that distinguishes the partnership from
voluntary religious or social organizations. Fernandez v. De la Rosa, 1 Phil. 671 (1903).
An agreement to operate a cockpit, by which one is to contribute his services and the
other to provide the capital, the profits to be divided between them, constitutes a partnership.
The performance of services in connection with the business and that defendant not only
rendered an accounting of the business and paid him his share of the profits, were
competent proof to establish the partnership. Duterte v. Rallos, 2 Phil. 509 (1903).
Where the society is not constituted for the purpose of gain, it does not fall within this
article of the Civil Code [on partnerships]. Such an organization is fully covered by the Law of
Associations of 1887, but that law was never extended to the Philippine Islands. Council of
Red Men v. Veterans Army, 7 Phil. 685 (1907).
c. CONSIDERATION: Undertakings to Contribute Money Property or Industry
d. Particular Rules on Testing Perfected Partnership (Art. 1769)
The issue as to whether there is a partnership between the parties is a factual matter.
Alicbusan v. Court of Appeals, 269 SCRA 336 (1997).
Although the existence of a partnership cannot be established by general reputation,
rumor, or hearsay, nonetheless, a verbal partnership is valid and may be proven by
competent evidence, and the intention of the parties, to form a partnership may be gathered
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from the facts and ascertained from their language and conduct, and once so established
should be given effect. Kiel v. Estate of P.S. Sabert, 46 Phil. 193 (1924).
When family members lease out to SHELL a family commercial lot for the establishment
of a gasoline station, and invested the advanced rentals and deposits to allow one of their
members to use the amounts as the registered dealer of SHELL under its of one station,
one dealer policy, and that the registered dealer had accounted for the operations to the
other members of the family, there was a partnership formed, for which the registered dealer
can be compelled to execute the covering articles of partnership, for accounting and
distribution of the shares in profits of the other partners.Estanislao, Jr. v. Court of
Appeals, 160 SCRA 830 (1988).
When facts proven show that purported partner never furnished the P20,000 capital, nor
rendered any help or intervention in the management of the purported partnership business,
much less demanded an accounting of its affairs and its earnings, there was never intended
a real partnership despite the articles of partnership executed. All that the purported partner
did was to receive her share of P3,000 a month, and was in accordance with the original
letter of defendant (Exh. A), which shows that both parties considered themselves as
lessor-lessee under a contract of lease. Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959).
(i) Co-Ownership or Co-Possession Does Not Itself
Establish a Partnership, Even When Profits Are Shared
Mere co-ownership or co-possession of property does not necessarily constitute the coowners or co-possessors are partners in the absence of an agreement to enter into a
partnership. Navarro v. Court of Appeals, 222 SCRA 675 (1993).
When land is purchased with the funds contributed by the parties and thereafter divided
equally among them, there was no partnership. Gallemet v. Tabilaran, 20 Phil. 241 (1911).
When fifteen people contributed money to buy a sweepstakes ticket with the intention to
divide the prize, and in fact the ticket won third prize, a partnership was constituted.
Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939).
First element of an agreement to contribute money, property or industry to a common
fund, is undoubtedly present for petitioners have agreed to, and did, contribute money and
property to a common fund. Second element of intent to divide the profits among
themselves, was present when the facts showed that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves,
displaying the character of habituality peculiar to business transactions engaged in for
purposes of gain. Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957).
Where father and son purchased lot and building and had it administered with the original
purpose of dividing the net income from the property, then a partnership was constituted.
Reyes v. CIR, 24 SCRA 198 (1968).
When after partition of the estate, heirs agreed to use common properties and income as
a common of making profit for them in proportion to their shares in the inheritance, coownership was converted into a partnership. Oa v. CIR, 45 SCRA 74 (1972).
When four brothers and sisters acquired lots with the original purpose to divide the lots for
residential purposes, and later they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but to resell the same to
dissolve the co-ownership. The division of the profit was merely incidental to the dissolution
of the co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later. Obillos, Jr. v. CIR, 139 SCRA 436 (1985).
In contrast with Evangelista, when the only facts proven was the existence of coownership between the parties covering two isolated purchase of parcels of land and the
sharing of profits on the subsequent sales thereof, there can be no deduction that an
unregistered partnership has been constituted to make it separately liable for corporate
income tax: the transactions were isolated, the parcels purchased were not managed or even
leased out. Pascual v. CIR, 166 SCRA 560 (1988).
(ii) Sharing of Gross Return Does Not Create Partnership:
An exclusive agent mandated to develop a parcel of land and entitled to receive a 20%
commission on the gross sales, cannot claim to be a partner to the venture simply on the
basis that he had made personal advances for the expenses incurred in the development
and administration of the property, since the amounts were never considered contributions
into the business. Biglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).
(iii) Receipt by a Person of a Share of the Profits of a Business:
Despite agreement that Bastida was to receive 35% of the profit from the business of
mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any
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contract of partnership constituted on the following key elements: (a) there was never any
common fund created between the parties, since the entire business as well as the expenses
and disbursements for operating it were entirely for the account of Menzi & Co.; (b) there was
no provision in the agreement for reimbursing Menzi & Co. in case there should be no profits
at the end of the year; and (c) the fertilizer business was just one of the many lines of
business of Menzi & Co., and there were no separate books and no separate bank accounts
kept for that particular line of business. The arrangement was one of employment,.
Bastida v. Menzi and Co., 58 Phil. 188 (1933).
Where there is no written partnership agreement, nor proof that the claimant received a
share in the profits, nor that he had any participating with respect to the running of the
business, then no partnership claim can be sustained. Sy v. Court of Appeals, 398 SCRA
301 (2003); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).
Although the Olivas were mere creditors, not partners, the Antons agreed to compensate
them for the risks they had taken. The Olivas gave the loans with no security and they were
to be paid such loans only if the stores made profits. Had the business suffered loses and
could not pay what it owed, the Olivas would have ultimately assumed those loses just by
themselves. Still there was nothing illegal or immoral about this compensation scheme.
Anton v. Oliva, 647 SCRA 506 (2011).
(iv) When Receipt of Profits Does Not Create Presumption of Partnership:
o As Installment Payments of Debt or Interest Thereof
There is no partnership where a loan was obtained to purchase a venture under the
condition that the lender would receive part of the profits of the business in lieu of interest.
Pastor v. Gaspar, 2 Phil. 592 (1903).
A creditor of a business cannot recover his claim against a person who gave personal
guarantees to some other obligations of the business enterprise and who is without any
right to participate in the profits and cannot be deemed a partner in the business enterprise,
since the essence of partnership is that the partners share in the profits and losses.
Tocao v. Court of Appeals, 365 SCRA 463 (2001).
o As Wages of an Employee
A manager of the partnership would naturally have some degree of control over the
business operations and maintenance, but the fact that he had received 50% of the net
profits does not conclusively establish that he was a partnerArt. 1769(4) is explicit that
no inference of being a partner shall be drawn if such profits were received in payment as
wages of an employee. Sardane v. CA, 167 SCRA 524 (1988); Fortis v Gutierrez
Hermanos, 6 Phil. 100 (1906).
The payroll of the company indicating that the brother was listed as an employee
receiving only wages from the company militates against his claim of being a partner. Heirs
of Tang Eng Kee v. CA, 341 SCRA 740 (2000).
The fact that in their articles the parties agreed to divide the profits of a lending business
in a stipulated proportion shows a partnership exists, even when the other parties to the
agreement were given separate compensations as bookkeeper and credit investigator.
Santos v. Reyes, 368 SCRA 261 (2001).
o As Rent Payments to a Landlord
o As Annuity to a Widow or Representative of Deceased Partner
o Consideration of Sale of Goodwill or Other Property

2.

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

a. Nominate and Principal
b. Consensual
Action to compel a party to execute the partnership contract to enforce the terms by which
an enterprise had been constituted is an enforcement of an obligation to do, which is contrary
to public policy against involuntary servitude. Woodhouse v. Halili, 93 Phil. 526 (1953).
There was indeed a partnership formed among themselves, for which the registered
dealer can be compelled to execute the covering articles of partnership, for accounting and
distribution of the shares in profits of the other partners. Estanislao, Jr. v. CA, 160 SCRA
830 (1988).
c. Onerous and Commutative
A partnership is deemed constituted among parties who agree to borrow money to pursue
a business and to divide the profits that may arise therefrom, even if it is shown that they
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have not contributed to any capital of their own to a common fund. Their contribution may
be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they
are liable for debts incurred by or on behalf of the partnership. Lim Tong Lim v. Phil. Fishing
Gear Industries, Inc., 317 SCRA 728, 731 (1999).
d. Bilateral and Reciprocal
e. Preparatory and Progressive
If the contract contains the elements of common fund and joint interest in the profits,
the partnership relation results, and the law fixes the incidents of this relation if the parties fail
to do so. It is of no importance that the parties have failed to reach an agreement with
respect to the minor details of contractthese details pertain to the accidental and not to the
essential part of the contract of partnership. Fernandez v. Dela Rosa, 1 Phil. 671 (1902).

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

CONSEQUENCES OF BEING A JURIDICAL PERSON:

a. Entity Has Legal Capacity to Enter into Contracts and Incur Obligations (Art. 46)
b. It May Acquire Properties in Its Own Name (Arts. 46 and 1774)
c. It May Sue and Be Sued in Its Firm Name (Art. 46)
In a bankruptcy proceeding against a general partnership, since it is a separate juridical
person one partner is not entitled to be made a party as an individual separate from the firm;
and, yet precisely because a partnership is a juridical person, there can be proper service to
the firm of court notices upon service to any partner found within the jurisdiction of the court.
Hongkong Bank v. Jurado & Co., 2 Phil. 671 (1903).
The death of a partner does not constitute a ground for dismissal of the suit against the
partnership, since the partnership has a separate juridical personality. Ngo Tian Tek v. Phil.
Education Co., 78 Phil. 275 (1947); Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).
It has been the universal practice in the Philippine Islands since American occupation, to
treat partnerships as juridical entities and to permit them to sue and be sued in the name of
the company, the summons being served solely on the managing agent or other official of
the company. Vargas & Co. v. Chan, 29 Phil. 446 (1915).
A partnership may sue and be sued in its name, and when it has a designated managing
partner, he may execute all acts of administration including the right to sue debtors of the
partnership. Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988).
d. It Would Have Domicile: Place Where Legal Representation Is Established or Where It
Exercises Its Principal Functions (Art. 51)
e. It Is Taxed as a Corporate Taxpayer. Tan v. Del Rosario, 237 SCRA 234 (1994).
f. It May Be Declared Insolvent Even If the Partners Are Not. Campos Rueda & Co. v.
Pacific Commercial & Co., 44 Phil. 916 (1923).
In view of the separate juridical personality of the partnership, the partners cannot be
sued personally under a contract entered into in the name of the partnership, unless it is
shown that the legal fiction is being used for a fraudulent, unfair or illegal purpose, or when
partnership assets have been exhausted to make partners personally liable for partnership
debts as provided in Art. 1816. Aguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).
g. Partnership Is a Person Entitled to Constitutional Rights
A partnership being a person before the law is entitled to constitutional right to due
process and equal protection. cf Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); Bache &
Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971).
A partnership being a person before the law is entitled to the constitutional right against
unreasonable searches and seizures. cf Stonehill v. Diokno, 20 SCRA 383 (1967).
A partnership obtains its personality from the State and therefore not entitled to the
constitutional right against self-incrimination. cf Bataan Shipyard & Engineering Co. v.
PCGG, 150 SCRA 181 (1987).

2.

Provisions Contravening Principle of Separate Juridical Personality

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

1.

COMMENCEMENT: A Partnership Begins from the Moment of the Execution of the

Contract of Partnership; UNLESS, It is Otherwise Stipulated (Art. 1784).

2.

FORMALITIES REQUIRED:
a. GENERAL RULE: A Partnership May Be Constituted in Any Form (Art. 1771).
b. EXCEPT: Where Immovable Property Or Real Rights Are Contributed:
Must Be In a Public Instrument (Art. 1771)
Would Be Void If Inventory of the Property Is Not Made, Signed by the
Partiers and Attached to the Public Instrument (Art. 1773)
c. EXCEPT: When Capital is P3,000 or More Is Contributed: (a) Must Appear in a
Public Instrument and (b) Registered with the SEC.
BUT: Failure to Comply with Requirements Shall Not Affect the Liability
of the Partnership and the Members to Third Persons. (Art. 1784)

3.

Jurisprudence:
Old Civil Code and Code of Commerce: Third parties without knowledge of the existence
of the partnership who deal with the property still registered in the name of one of the partners
have a right to expect full effectivity of such transaction on the property, in spite of the
protestation of other partners and partnership creditors. Borja v. Addison, 44 Phil. 895 (1922).
a. When Capital is P3,000 or More (Art. 1772)
Mere failure to register the contract of partnership with the SEC does not invalidate a
contract that has the essential requisites of partnership agreement to contribute to a
common fund and the division of profits and losses would bring about the existence of a
partnership. A partnership may exist even if the partners do not use the words partner or
partnership. Angeles v. Secretary of Justice, 465 SCRA 106 (2005).
An unregistered contract of partnership is valid as among the partners, so long as it has
the essential requisites, because the main purpose of registration is to give notice to third
parties. The failure to register the contract does not affect the liability of the partnership and
of the partners to third persons, and that neither does such failure affect the partnerships
juridical personality; and it can be assumed that the members themselves knew of the
contents of their contract. Ma v. Fernandez, Jr., 625 SCRA 566 (2010).
b. When Immovable Property Contributed (Arts. 1771 and 1773)
When the articles of partnership provide that the venture is established to operate a
fishpond, it does not necessarily mean that immovable properties or real rights have been
contributed into the partnership which would trigger the operation of Article 1773. Agad v.
Mabato, 23 SCRA 1223 (1968).
Failure to prepare an inventory of the immovable property contributed, in spite of Art.
1773 declaring the partnership void, would not render the partnership void when: (a) No
third-party is involved since Art. 1773 was intended for the protection of third-parties; and (b)
the partners have made a claim on the partnership agreement which is deemed binding
between them as any other contract. Torres v. Court of Appeals, 320 SCRA 428 (1999).
While the sale of land appearing in a private deed is binding between the parties, it cannot
be considered binding on third persons if it is not embodied in a public instrument and
recorded in the Registry of Deeds. When it comes to contributions of real estate to a
partnership, especially when it covers registered land, then the peremptory provisions of the
Property Registration Decree (P.D. 1459) will prevail as to who has a better claim, right or
lien on the property, since registration in good faith and for value, is the operative rule
under the Torrens system. Secuya v. Vda. de Selma, 326 SCRA 244 (2000).
An instrument purporting to be the contract of partnership/joint venture, which is unsigned
and undated, and does not meet the public instrumentation requirements exacted under
Article 1771, and not even registrable with the SEC as called for under Article 1772, and
which also does not meet the inventory requirement under Article 1773 since the claims
involve contributions of immovable properties, does not warrant a finding that a contract of
partnership or joint venture exist. Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005).
c. Legal Value of the Formal Requirements for Partnerships
An oral partnership is valid and binding between the parties, even if the amount of capital
contributed is in excess of the sum of 1,500 pesetas. The provisions of law requiring a
contract to be is a particular form should be understood to grant to the parties the remedy to
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compel that the form mandated by law be complied with, but does not prevent them from
claiming under an oral contract which is otherwise valid without first seeking compliance with
such form. Thunga Chui v. Que Bentec, 2 Phil. 561 (1903); Magalona v. Pesayco, 59 Phil.
453 (1934).
Registration of the partnership is the best evidence to prove the existence of the
partnership among the partners. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740
(2000); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).
When there has been duly registered articles of partnership, and subsequently the original
partners accept an industrial partner but do not register a new partnership, and thereafter the
industrial partner retires from the business, and the original partners continue under the
same set-up as the original partnership, then although the second partnership was dissolved
with the withdrawal of the industrial partner, there resulted a reversion back into the original
partnership under the terms of the registered articles of partnership. There is not constituted
a new partnership at will. Rojas v. Maglana, 192 SCRA 110 (1990).
x4.

When Corporate Venture Fails to Formally Incorporate,

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

5.

Other Rules on the Constitution of a Partnership

a. When Articles Kept Secret Among Members (Art. 1775)
b. Rules on Partnership Name (Art. 1815; SEC Memo Circular No. 5, s. 2008)
The requirement under the Code of Commerce that the partnership name contain the
names of all the partners, is meant to protect from fraud the public dealing with the
partnership; it cannot be invoked by the partners to allege partnerships non-existence. Jo
Chung Cang v. Pacific Comm Co., 45 Phil. 142 (1923); PNB v. Lo, 50 Phil. 802 (1927).
The contention that the last paragraph of Art. 1840 of Civil Code regulating the
continuation of the business of the partnership name, or the name of a deceased part as part
thereof, allows a partnership from continuing its business under a firm name which includes
the name of a deceased partner has been denied when it comes to a law partnership on the
following grounds: (a) it contravenes the provision of Arts. 1815 and 1825, which impose
liability on a person whose name is included in the firm name, which cannot cover a
deceased person who can no longer be subject to any liability; (b) public relations value of
the use of an old firm name can tend to create undue advantages and disadvantages in the
practice of the profession; (c) Art. 1840 covers dissolution and winding up scenarios and
cannot be taken to mean to cover firms that are intended as going concerns, and cover more
commercial partnerships; and (d) when it comes to other professions, there is legislative
authority for them to use in their firm names those of deceased partners. In the Matter of the
Petition for Authority to Continue Using Firm Names, etc., 92 SCRA 1 (1979).
RULE 3.02, Code of Professional Responsibility: The continued use of the name of a
deceased partner is permissible provided that the firm indicates in all its communications that
said partner is deceased.
c. A Partnership Must Have a Lawful Object or Purpose (Art. 1770)
The action which may arise under Art. 1666 of old Civil Code in the case of an unlawful
partnership, is that for the recovery of the amounts paid in by the members from those in
charge of the administration of said partnership, and it is not necessary for the said partners
to base their action on the existence of the partnership, but on the fact of having contributed
some money to the partnership capital. Arbes v. Polistico, 53 Phil. 489 (1929).
The contract of partnership to divide the fishpond between the parties after the
administrative agency shall have approved the arrangement became illegal under the
Fisheries Act. It is an elementary rule in law that a partnership cannot be formed for an
illegal purpose or one contrary to public policy and that where the object of a partnership is
the prosecution of an illegal business or one which is contrary to public policy, the
partnership is void. Deluao v. Casteel, 29 SCRA 350 (1969).

VI. RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTNERS

1.

Kinds of Partners
(a) Industrial and Capitalist Partners
(b) Ostensible, Nominal and Dormant Partners
(c) Original and Incoming Partners
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(d) Managing and Liquidating Partners

(e) General and Limited Partners
(f) Retiring, Surviving and Continuing Partners

2.

PROPERTY RIGHTS OF PARTNERS

a. CO-OWNERSHIP: Rights to Specific Partnership Properties (Arts. 1810 and 1811)
Equal Right to Possess, But for Partnership Purpose Only. Celino v. CA, 163 SCRA
97 (1988).
Non-Assignable (Art. 1811[2])
Not Subject to Attachment/Execution by Partners Separate Creditors nor For
Legal Support Obligations of Any Partner (Art. 1811[3])
b. MUTUAL AGENCY: Right to Participate in Management of the Partnership
(i) General Rule on Agency

All Partners Shall Be Considered Agents and Whatever Any One of Them May
Do Alone Shall Bind the Partnership (Arts. 1803[1])

Every Partner Is an Agent of the Partnership for Apparently Carrying On in the

Usual Way the Business of the Partnership (Art. 1818)

Partnership Shall Answer to Each Partner for the Obligation a Partner May
Have Contracted in Good Faith in the Interest of the Partnership Business, and
the Risks in Consequence of Its Management (Art. 1796)

(ii) Other Powers or Rights Relating to Mutual Agency:

Can Dispose of Partnership Property Even When in Partnership Name (Art.
1819)
Admission or Representation Made by Any Partner Concerning Partnership
Affairs Is Evidence Against the Partnership (Art. 1820)
Notice to Any Partner Relating to Partnership Affairs Is Notice to the
Partnership (Art. 1821)
Wrongful Act or omission of Any Partner Acting for Partnership Affairs Makes
the partnership liable (Art. 1822)
Partnership Bound to Make Good Losses for Acts or Misapplications of
Partners (Art. 1823)
(ii) Acts Requiring Unanimous Consent (Art. 1818)
(iii) Consent Required in Making Alterations on Immovable Property (Art. 1803[2])
(iv) When There Is Designation of Manager (Arts. 1800 to 1802)
(v) Jurisprudence on Mutual Agency
In the ordinary course of business, a partner has authority to purchase goods (Smith, Bell
& Co. v. Aznar, 40 O.G. 1882 [1941]), to hire employees of the partnership. (Garcia Ron v.
La Compania de Minas de Batau, 12 Phil. 130 [1908]; as well as dismiss them (Martinez v.
Cordoba & Conde, 5 Phil. 545 [1906]).
When partnership real property had been mortgaged and foreclosed, the redemption by
any of the partners, even when using his separate funds, does not allow such redemption to
be in his sole favor, under the general principle of law under Art. 1818 that a partner is an
agent of the partnership. Under Art. 1807, every partner becomes a trustee for his copartner
with regard to any benefits or profits derived from his act as a partner. Catalan v. Gatchalian,
105 Phil. 1270 (1959).
The stipulation in the articles of partnership that the two managing partners may contract
and sign in the name of the partnership with the consent of the other creates an obligation
between the two partners, which consists in asking the others consent before contracting for
the partnership. This obligation of course is not imposed upon a third person who contracts
with the partnership. A third person has a right to presume that the partner with whom he
contracts has, in the ordinary and natural course of business, the consent of his copartner
Third person would naturally not presume that the partner with whom he enters into the
transaction is violating the articles of partnership, but on the contrary, is acting in accordance
therewith. Litton v. Hil & Ceron, 67 Phil. 509 (1935).
In a transaction within the ordinary course of the partnership business effected by the
industrial partner without the consent of the capitalist partner, the provisions in the articles of
partnership that the industrial partner shall manage, operate and direct the affairs,
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businesses and activities of the partnership, constitute sufficient authority to make such
transaction binding against the partnership, as against another provision of the articles by
which the industrial partner is authorized To make, sign, seal, execute and deliver contracts
. . upon terms and conditions acceptable to him duly approved in writing by the capitalist
partner Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941).
In spite of the provision of Art. 129 of Code of Commerce that If the management of the
general partnership has not been limited by special agreement to any of the members, all
shall have the power to take part in the direction and management of the common business,
and the members present shall come to an agreement for all contracts or obligations which
may concern the association, such obligation is imposed by law among the partners, that
does not necessarily affect the validity of the acts of a partner, while acting in the ordinary
course of business of the partnership, as regards third persons without notice. The latter may
rightfully assume that the contracting partner was duly authorized to contract for and in
behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his copartners. Goquiolay v. Sycip, 108 Phil. 947 (1960).
A partner is presumed to be an authorized agent for the firm to bind it in carrying on the
partnership transaction. Muasque v. Court of Appeals, 139 SCRA 533 (1985).
c. EQUITY RIGHTS: Right to Shares in Profits and Losses (Arts. 1810 and 1812)
Stipulation Excluding Partner from Sharing in Profits or Losses Void (Art. 1799)
(i) Participation in Profits and Losses (Art. 1797):
Distributed In Accordance with Stipulation;
If Share In Profits Only Stipulated, Share in the Losses Shall Be the Same;
If No Stipulation on Sharing, Partners Share Profits and Losses in Proportion
to their Capital Contributions;
In the Absence of Stipulation, an Industrial Partner Shall Receive Such Share in
the Profits As May Be Just and Equitable under the Circumstances.
In a partnership arrangement, when the agreement to pay a high commission to one of
the partners was in anticipation of large profits being made from the venture, but that
eventually the venture sustained losses, then there is no legal basis to demand for the
payment of the commissions since the essence of the partnership is the sharing of profits
and losses. Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).
Art. 1797 covers the distribution of losses among the partners in the settlement of
partnership affairs and does not cover the obligations of partners to third persons which is
covered by Article 1816. Ramnani v. Court of Appeals, 196 SCRA 731 (1991).
d. Conveyance By a Partner of His Whole Interest in the Partnership Does Not (Art. 1813):
Dissolve the Partnership
Entitle the Assignee During the Term of the Partnership to Interfere with
Management or Administration of Partnership Business
Entitle the Assignee to Require Information or an Accounting of Partnership
Matters, Much Less to Inspect Partnership Books
But Merely Entitle Assignee to Receive Profits to Which Assignor Is Entitled To
Any partner may transfer his interest and his assignee may demand an accounting from
the remaining partners and a third person into whose hands the partnership property has
passed in satisfaction of the firms debt. Jackson v. Blum, 1 Phil. 4 (1901).
e. Other Proprietary Rights of Partners
(i) Right to Inspect Partnership Books and Records (Art. 1805)
(ii) Right to Formal Accounting (Art. 1809)
Partners right to accounting for partnership properties in the custody of the other partners
shall apply only when there is proof that such properties, registered in the individual names
of the other partners, have been acquired from the use of partnership funds, thus:
Accordingly, the defendants have no obligation to account to anyone for such acquisitions in
the absence of clear proof that they had violated the trust of [one of the partners] during the
existence of the partnership. Lim Tanhu v. Ramolete, 66 SCRA 425 (1975).
(iii) Right to Reimbursement for Advances (Art. 1796)
The rule is inapplicable where no money other than that contributed as capital is involved.
Martinez v. Ong Pong Co., 14 Phil. 726 (1910).

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(iv) DELECTUS PERSONAE: Right to Dissolve the Partnership (Art. 1830[2])

Even in a partnership not at will, a partner can unilaterally dissolve the partnership by a
notice of dissolution, which in effect is a notice of withdrawal. Under Art.1830(2), even if there
is a specified term, one partner can cause its dissolution by expressly withdrawing even
before the expiration of the period, with or without justifiable cause. Of course, if the cause is
not justified or no cause was given, the withdrawing partner is liable for damages but in no
case can he be compelled to remain in the firm. With his withdrawal, the number of members
is decreased, hence, the dissolution. Rojas v. Maglana, 192 SCRA 110 (1990).

3.

OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP

a. Obligation to Contribute to the Common Fund (Arts. 1786):
Every Partner Is a Debtor of the Partnership for Whatever He May Have
Promised to Contribute.
He Shall o Be Bound for Warranty In Case of Eviction With Regard to Specific
and Determinate Things Contributed.
He Shall Be Liable for the Fruits Thereof from the Time They Should Have Been
Delivered, Without Need of Demand.
(i) When Sum of Money: Liable for Interest and Damages from the Time Due (Art. 1788)
(ii) When Property In General (Art. 1795)
Who Bears Risk of Loss for Determinate Thing (Art. 1830[4])
(iii) When Contribution in Goods (Arts. 1787 and 1795)
(iv) When Real Property (Arts. 1772 and 1773),
(v) When in Service (Arts. 1789)
(vi) Percentage of Capital: Unless There Is a Stipulation to the Contrary, the Partners
Shall Contribute Equal Shares to the Partnership Capital (Art. 1790)
(vii) Additional Contribution, in Case of Imminent Loss: Unless There Is an Agreement,
Any Partner Who Refuses to Contribute Additional Capital, Except an Industrial
Partner, to Save the Venture, Shall Be Obliged to Sell His Interest to the Other
Partners (Art. 1791).
Credit, such as a promissory note or other evidence of obligation, or even goodwill, may
be validly contributed into the partnership. City of Manila v. Cumbe, 13 Phil. 677 (1909).
When a partner fails to pay his promised contribution, he becomes indebted to it for the
remainder of what is due, with interest and any damages occasioned thereby, but it does not
authorize the other partners to seek rescission of the partnership contract under Article 1191,
since the remedies are provided for in particular under now Arts. 1786 to 1788 Sancho v.
Lizarraga, 55 Phil. 601 (1931).
A partner who promises to contribute to a partnership becomes a promissory debtor of the
partnership, including liability for interests and damages caused for failure to pay, and which
amounts may be deducted upon dissolution of the partnership from his share in the profits
and net assets. Rojas v. Maglana, 192 SCRA 110 (1990).96

4.

FIDUCIARY DUTIES OF PARTNERS

a. DUTY OF DILIGENCE (Art. 1794): Each Partner Is Responsible to the Partnership for
Damages Suffered By It Through His Fault;
Partner at Fault Cannot Compensate Such Damages with the Profits and
Benefits Which He May Have Earned for the Partnership from His Industry.
However, the Courts May Equitably Lessen Such Responsibility If Partners
Extraordinary Efforts in Other Activities of the Partnership, Unusual Profits
Have Been Realized.
b. DUTY TO ACCOUNT (Arts. 1807 and 1809): Every Partner Must Account to the
Partnership for Any Benefit, and Hold as Trustee Any Profits Derived by Him Without
the Consent of Other Partners from Any Transaction Connected With the Formation,
Conduct, or Liquidation of the Partnership or From Any Use by Him of Its Property.

96

Reiterated in Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).

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c. DUTY OF LOYALTY:
(i) On Recovery of Demandable Sum (Art. 1792):
Received for Partners Account: Share Proportionately With Partnership;
Received for Partnership Account: All to Be Credited to the Partnership.
(ii) On Receiving Partnership Credits (Art. 1793):
Partner Receiving Capital When Others Have Not, Obliged to Bring Sum to
the Partnership Capital in the Event Partnership Becomes Insolvent.
(iii) Partners in General Cannot Engage in Competitive Business
Capitalist Partners Cannot Engage for Their Own Account in Similar
Partnership Business (Art. 1808)
Industrial Partner Cannot Engage in Any Form of Business (Art. 1789)
When the partnership has been terminated, the former partners are no longer prohibited
in pursuing the same business as that for which the partnership was constituted. Halon v.
Haussermann, 40 Phil. 796 (1920).
When partnership real property had been mortgage and foreclosed, the redemption by
any of the partners, even when using his separate funds, does not allow such redemption
to be in his sole favor. Catalan v. Gatchalian, 105 Phil. 1270 (1959); Director of Lands v.
Lope Alba, 105 Phil. 2171 (1959).
An industrial partner is not deemed to have violated his fiduciary duties to the other
partners by having delivered on the particular service required of her and devoting her time
serving in the judiciary which is not considered to be engaged in an activity for profit.
Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973).
Former partners have no obligation to account on how they acquired properties in their
names, when such acquisition were effected long after the partnership had been
automatically dissolved, especially in the absence of clear proof that they had violated the
trust of managing partner during the existence of the partnership. Lim Tanhu v. Remolete,
66 SCRA 425 (1975).
When a partner engages in a separate business enterprise that is competitive with that
of the partnership, the other partners withdrawal from the partnership becomes thereby
justified and for which the latter cannot be held liable for damages. Rojas v. Maglana,
192 SCRA 110 (1990).

5.

PARTNERS SUBJECT TO UNLIMITED LIABILITY FOR PARTNERSHIP DEBTS

a. Partners Liable Pro-Rata with Their Separate Properties After Partnership Assets Have
Been Exhausted, for All Partnership Debts. (Art. 1816)
Any Stipulation Against Personal Liability of Partners for Partnership Debts Is
Void, Except as Among Themselves (Art. 1817).
The meaning of pro rata to determine the unlimited liability of partners in a general
partnership means that they shall equally divide among themselves the partnership debts
remaining after exhaustion of partnership assets. Co-Pitco v. Yulo, 8 Phil 544 (1907); Island
Sales, Inc. v. United Pioneers General Construction Co., 65 SCRA 554 (1975).
b. All Partners Solidarily Liable with Partnership (Art. 1824) for Everything Chargeable to
the Partnership When Caused By:
Wrongful Act or Omission of Any Partner Acting
in the Partnerships Ordinary Course of Business; or
with Authority from the Other Partners (Art. 1822)
Partners Act or Misapplication of Properties of Third Parties
Where Partner Receives Property Acting With Apparent Authority; or
Partnership Received Property in the Ordinary Course of Business (Art. 1823)
Partners are solidarily liable for employees workmens compensation claims. Liwanag
and Reyes v. Workmens Compensation Commission, 105 Phil. 741 (1959).
c. Newly Admitted Partner into an Existing Partnership Is Liable Only Out of Partnership
Property Shares and Contributions, for All the Obligations of the Partnership Arising
Before His Admission (Art. 1826).
d. Partnership Creditors Have Preference Over the Personal Creditors of Each of the
Partners as Regards the Partnership Property (Art. 1827).
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 Remedy of Partners Separate Creditors (Art. 1814): May Apply with the Court That
Entered the Judgment Debt

6.

To Charge the Debtors Equity Interests for the Payment from His Share in the
Profits Or Any Other Money Due from the Partnership

Which Interest Charged May be Redeemed At Any Time Before Foreclosure by

the Other Partners or the Partnership Itself.

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

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

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

1.

NATURE AND EFFECTS OF DISSOLUTION:

a. As Among the Partners:
Dissolution Is the Change in the Relationship of the Partners Caused by Any
Partner Ceasing to Be Associated in Carrying On the Partnership (Arts. 1828)
It Terminates All Authority of Any Partner to Act for the Partnership, Except As May
Be Necessary to Windup Partnership Affairs (Art. 1832)
The Right to an Account of His Interest Shall Accrue to Any Partner (or His
Representative) as Against the Winding-up Partners, or the Surviving Partners, or
the Person or Partnership Continuing the Business, at the Date of Dissolution in
the Absence of Any Agreement to the Contrary (Art. 1842)
Since a partnership has a separate juridical personality, then upon its dissolution, the
withdrawing partners have no cause of action to demand the return of their equity from the
other partners; it is the partnership that must refund the equity of the retiring partners. Before
the partners can be paid their shares, the creditors of the partnership must first be
compensated; whatever is left thereafter becomes available for the payment of the partners
shares. Villareal v. Ramirez, 406 SCRA 145 (2003).
The right to accounting does not prescribe during the life of the partnership, and that
prescription begins to run only upon the dissolution of the partnership and final accounting is
done. Fue Leung v. IAC, 169 SCRA 746 (1989).
b. On the Partnership Itself :
Partnership Continues But Only For Purposes of Winding-up of Partnership
Affairs (Art. 1829)
EXCEPT: When the Non-Breaching Partners Choose to Continue the Partnership
Business Under a New Partnership
An action to dissolve the partnership and for the appointment of a receiver must include
the partnership since it is entitled to be heard in matters affecting its existence as well as the
appointment of a receiver. Claudio v. Zandueta, 64 Phil. 812 (1937).
The legal personality of an expiring partnership persists for the limited purpose of windingup and closing its affairs. Yu v. NLRC, 224 SCRA 75 (1993).
Although the dissolution of a partnership is caused by any partner withdrawing from the
partnership, nonetheless the partnership is not terminated but continuous until the winding up
of the business. Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
c. On the Authority of the Partners:
Terminates All Partners Authority to Bind the Partnership, Except for Winding-up
of Partnership Affairs (Art. 1832)
A Partner Can Still Bind the Partnership (Art. 1834):
By Any Act/Contract Appropriate for Winding-up Partnership Affairs
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 By Non-Winding-up Contracts When Third Party Had Extended Credit to the

Partnership in Good Faith (Not Having Knowledge or Notice of Dissolution),
o But Unknown Partners Not Liable to Such Creditors with their Separate
Properties.
Where Dissolution Is Caused by the Act, Death or Insolvency of a Partner (Art.
1833): Each Partner Is Liable to Co-Partners for His Share of Any Liability Created
by Any Partner Acting for the Partnership as If the Partnership Had Not Been
Dissolved, Unless:
Partner Acting Had Knowledge of the Dissolution; or
Partner Acting Had Knowledge or Notice of the Death or Insolvency of
Another Partner (Art. 1833)
d. On the Existing Liabilities of the Partners
Dissolution Itself Does Not Discharge Existing Liability of Any Partner, Except
When Partner Is Discharged By Reason of an Express Agreement Between the
Continuing Partners and the Creditors. (Art. 1834)

2.

TYPES AND CAUSES OF DISSOLUTION

a. Non-Judicial Dissolution (i.e., Ipso Jure Dissolution) (Arts. 1830, 1833, and 1840[1])
(i) Without Violation of the Partnership Agreement:
Expiration of the Partnership Term or Achievement of Undertaking
By the Express Will of a Partner Acting in Good Faith in a Partnership at Will
Mutual Assent of the Partners to Dissolve or Accept a New Partner
Expulsion of a Partner Pursuant to an Agreement Granting Such Right
The legal effect of the changes in the membership of the partnership would be the
dissolution of the old partnership. Yu v. NLRC, 224 SCRA 75 (1993).
When a new member is accepted into an existing partnership, legally there has been a
dissolution of the old and a formation of a new partnership. Ellingson v. Wals, OConnor &
Barneson, 104 P. 2d 507 (1940).
(ii) In Contravention of Agreement (Art. 1830[2]): Where the Circumstances Do Not
Permit a Dissolution Under Any Other Provision, By the Express Will of Any
Partner at Any Time.
A mere falling out or misunderstanding among the partners does not convert the
partnership into a sham organization, since the partnership exists and is dissolved under
the law. Muaque v. Court of Appeals, 139 SCRA 533, 540 (1985).
Partners who effect a dissolution by his withdrawal in contravention of an agreement
renders himself liable for damages which may be deducted from his partnership
account, and he loses his right to wind-up. Rojas v. Maglana, 192 SCRA 110 (1990).
An unjustified dissolution by a partner can subject him to action for damages
because by the mutual agency that arises in a partnership, the doctrine of delectus
personae allows the partners to have the power, although not necessarily the right, to
dissolve the partnership. Tocao v. Court of Appeals, 342 SCRA 20 (2000)
(iii) By Operation of Law (Art. 1830)
Supervening Illegality of the Partnership Business
Loss of Specific Thing Contributed
Death, Insolvency or Civil Interdiction of a Partner
Absence of any clear stipulation, the acceptance back of part of the contribution by
the partner does not necessarily mean his withdrawal from, or dissolution of, the
partnership. Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
The death of one of the partners dissolves the partnership, but that the liquidation of
its affairs is by law entrusted not to the executors of the deceased partner, but to the
surviving partners or to the liquidators appointed by them. Wahl v. Donaldson Sim &
Co., 5 Phil. 11 (1905).
A partnership is dissolved by the death of one of its partners there being no
stipulation in the contract of partnership of its subsistence after the death of a partner,
and it thereby attains the status of a partnership in liquidation, and only the rights
inherited by the heirs of the deceased partner were those resulting from the said
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liquidation and nothing more. If there would be a continuation of the partnership a clear
agreement on meeting of the minds must be made, otherwise, a new partnership
arrangement cannot be presumed to have arisen among the heirs and the remaining
partners. Bearneza v. Dequilla, 43 Phil. 237 (1922).
In equity, surviving partners are treated as trustees in regard to the interest of the
deceased partner in the firm. As a consequence, it is the duty of surviving partners to
render an account of the performance of their trust to the personal representatives of the
deceased partner, and to pay over to them the share of such deceased member in the
surplus of firm property, whether it consists of real or personal assets. Guidote v. Borja,
53 Phil. 900 (1928).
b. By Judicial Dissolution:
A Partnership With an Unlawful Object or Purpose May Be Dissolved by Judicial
Decree, and the Profit Confiscated in Favor of the State. (Art. 1770)
By the Decree of a Court on Application By or For a Partner (Art. 1831):
Partner Declared Insane in Any Judicial Proceeding or Shown to Be of
Unsound Mind;
Partner Becomes in Any Other Way Incapable of Performing His Contract;
He Has Been Guilty of Such Conduct as Tends to Affect Prejudicially the
Carrying on of the Partnership Business;
He Willfully or Persistently Commits a Breach of the Agreement That It Is Not
Reasonably Practicable to Carry On the Partnership Business with Him;
When Partnership Business Can Only Be Carried On at a Loss;
Other Circumstances That Render a Dissolution Equitable;
Assignee of Partners Interest May Seek Court Order:
o Upon Termination of the Specified Term or the Particular Undertaking of
the Partnership; or
o At Any Time in a Partnership at Will.
The courts can dissolve a partnership without formal application when the continuation of
the partnership has become inequitable. Fue Leung v. IAC, 169 SCRA 746 (1989).
Sustaining of losses is valid basis to dissolve the partnership. Moran, Jr. v. Court of
Appeals, 133 SCRA 88 (1984).

3.

LEGAL EFFECTS AND OPTION ARISING BY REASON OF DISSOLUTION:

a. When Dissolution Is Without Contravention of Partnership Agreement, Each Partner
May Have Demand for the Winding-Up of the Partnership:
Partnership Properties Applied to Discharge Liabilities, and Surplus Applied to
Pay in Cash the Net Amount Owing to the Respective Partners. (Art. 1837)
b. When Dissolution Caused by Bona Fide Expulsion of a Partner Who Is Discharged
from Partnership Liabilities:
Expelled Partner Shall Receive in Cash Only the Net Amount Due Him, i.e., Less
Damages. (Art. 1837)
Partnership Business Continues with the Remaining Partners.
c. When Dissolution Is in Contravention of Partnership Agreement:
Each Non-Breaching Partner Shall Have the Right to:
Liquidate the Partnership (i.e., Have Partnership Properties Applied to
Discharge Liabilities and Receive His Share of the Surplus;
Recover Damages Against Each Breaching Partner (Art. 1837)
All Breaching Partners Shall Have:
If Partnership Business Not Continued, to Receive Their Net Share in the
Surplus After Payment of All Liabilities;
If Partnership Business Continued, to Have Net Value of Their Interests
Ascertained (Which Shall Not Include Goodwill) and Paid to Him in Cash or
Payment Is Secured by a Bond, and to Be Released from All Existing
Partnership Liabilities. (Art. 1837)
All Non-Breaching Partners, If They All Desire, May Continue the Business:
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 Provided They Secure the Payment by Bond or Pay to Any Breaching Partner
the Value of His Interest, Net the Damages, and Indemnity Him Against All
Present or Future Partnership Liabilities. (Art. 1837)
A New Partnership Is Thereby Constituted Among the Continuing Partners.
When a Partner Retires or Dies and Business Is Continued Without Settlement of
Accounts, Such Partner or His Representative Shall Against Such Person or
Partnership (Art. 1841):
Have the Value of His Interest the Dissolution Ascertained;
Receive as an Ordinary Creditor an Amount Equal to the Value of His Interest;
Option to Receive Interest on Such Value or the Profits Attributable to the Use
of His Right in the Property of the Dissolved Partnership
o But Partnership Creditors Shall Have Priority Over the Separate
Creditors of the Partner.
A partnership guilty of an act of insolvency may be proceeded against and declared
bankrupt in insolvency proceedings despite the solvency of each of the partners
composing it. Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1922).
d. When There is Fraud or Misrepresentation (Art. 1838): Where a Partnership Contract
Is Rescinded on the Ground of Fraud or Misrepresentation of One of the Parties, the
Party Entitled to Rescind Is Entitled:
To Lien or Right of Retention of Surplus of the Partnership Property After
Satisfying All Partnership Liabilities to Third Persons for Any Sum Paid by Him
for Purchase of an Interest in the Partnership and for Any Capital or Advances
Contributed by Him;
To Stand, After Payment of All Liabilities to Third Person, in Place of the
Creditors of the Partnership for Any Payments Made by Him in Respect of
Partnership Liabilities;
Be Indemnified by Person Guilty of Fraud or Making the Representation Against
All Debts and Liabilities of the Partnership.
Failure of a partner to have published her withdrawal, and her agreeing to have the
remaining partners proceed with running the partnership business instead of insisting on the
liquidation of the partnership, will not relieve such withdrawing partner from her liability to the
partnership creditors. Even if the withdrawing partner acted in good faith, this cannot overcome
the position of partnership creditors who also acted in good faith, without knowledge of her
withdrawal from the partnership. Thus, when the partnership executes a chattel mortgage over
its properties in favor of a withdrawing partner, and the withdrawal was not published to bind the
partnership creditors, and in fact the partnership itself was not dissolved but allowed to be
operated as a going concern by the remaining partners, the partnership creditors have standing
to seek the annulment of the chattel mortgage for having been entered into adverse to their
interests. Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
When new partners continue the same partnership business which has been dissolved by
the withdrawal of its original partners, the new partnership is liable for the existing liabilities of
the business enterprise even when they were incurred under the old partnership arrangement,
as clearly governed under the provisions of Article 1840 of the Civil Code. However, the new
partnership is not compelled to retain the services of the managers and employees of the old
partnership and may choose their personnel. Yu v. NLRC, 224 SCRA 75 (1993).
The action that lies with the partner who furnished the capital for the recovery of his money is
not a criminal action for estafa, but a civil one arising from the partnership contract for a
liquidation of the partnership and a levy on its assets if there should be any. U.S. v. Clarin, 17
Phil. 84 (1910). BUT: When an individual has been deceived by fraud to invest in a venture for
which there was never intention on the part of the receiving party to invest it for the particular
purpose for which it was invested the receiving partner is liable for estafa. Celino v. Court of
Appeals, 163 SCRA 97 (1988); Liwanag v. Court of Appeals, 281 SCRA 225 (1997).

4.

98

WINDING-UP OF THE PARTNERSHIP BUSINESS ENTERPRISE

Winding-up as the process of settling business affairs after dissolution,98 and it cites as
examples of winding-up process, the following: Examples of winding up: the paying of previous
obligations; the collecting of assets previously demandable; even new business if needed to
wind up, as the contracting with a demolition company for the demolition of the garage used in a
Idos v. Court of Appeals, 296 SCRA 194 (1998).

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used car partnership. Termination of a partnership is the point in time after all the
partnership affairs have been wound up. Idos v. Court of Appeals, 296 SCRA 194 (1998).99
a. Partners Authority Would Only Be for Purposes of Winding-Up (Art. 1834)
b. Authority to Wind-Up: Only the Partners Who Have Not Wrongfully Dissolved the
Partnership or the Legal Representative of the Last Surviving Partner (Art. 1836)
c. Upon Dissolution and Winding-Up, Partners Shall Contribute the Amounts Necessary
to Satisfy the Partnership Liabilities. (Art. 1839[4] and [7])
However, Separate Creditors of Deceased Partner Shall Have Priority Over His
Separate Property. (Art. 1835)
e. SETTLEMENT OF LIABILITIES AND PARTNERSHIP CLAIMS (Art. 1839):
Partnership Assets Covers Partnership Properties and Partners Required
Contributions under the Unlimited Liability Rule
Partnership Liabilities Shall Be Paid in the Following Order of Payment:
o Those Owing to Creditors Other Than the Partners
o Those Owing to Partners Other Than for Capital and Profits
o Those Owing to Partners in Respect of Capital
o Those Owing to Partners in Respect of Profits
When a partner withdraws from the partnership, he is entitled to the payment of what may
be due him after liquidation. But no liquidation is necessary where there was already a
settlement or an agreement as to what the retiring partner shall receive, and the latter was in
fact reimbursed pursuant to the agreement. Bonnevie v. Hernandez, 95 Phil. 175 (1954).
The managing partner cannot be held personally liable for the payment of partners
shares; it is the partnership that must refund their shares to the retiring partners. A partners
share cannot be returned without first dissolving and liquidating the partnership, for the return
is dependent on the discharge of the creditors, whose claims enjoy preference over those of
the partners; and it is self-evident that all members of the partnership are interested in his
assets and business, and are entitled to be heard in the matter of the firms liquidation and
the distribution of its property. Magdusa v. Albaran, 5 SCRA 511 (1962).
It is wrong to presume that the total capital contribution in a partnership is equivalent to
the gross assets to be distributed to the partners at the time of dissolution of the partnership.
We cannot sustain the underlying idea that the capital contribution at the beginning of the
partnership remains intact, unimpaired and available for distribution or return to the partners.
Such idea is speculative, conjectural and totally without factual or legal support. Generally, in
the pursuit of a partnership business, its capital is either increased by profits earned or
decreased by losses sustained; it does not remain static and unaffected by the changing
fortunes of the business. When partners venture into business together, they should have
prepared for the fact that their investment would either grow or shrink. Villareal v.
Ramirez, 406 SCRA 145 (2003).

VIII. LIMITED PARTNERSHIPS

1. Introduction and Background
a.

b.

Origin, Concept and Purpose

See excerpts from Ames v. Downing, N.Y. Surr. Cit. reproduced in BAUTISTA, TREATISE
ON PHILIPPINE PARTNERSHIP LAW, 1995 ed., at pp. 336-227.
Civil Code provisions on Limited Partnership were taken from Uniform Limited Partnership
Act. See TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol V., 1992 ed., at pp. 382-395.
Prohibition against formation of a universal partnership among spouses does not apply
when the partners entered into a limited partnership, the man being the general partner and
the woman being the limited partner, and a year later the two get married. Commissioner of
Internal Revenue v. Suter, 27 SCRA 152 (1969).
Definition (Art. 1843): A Limited Partnership Is One That Is:
Formed By At Least One General Partner and At Least One Limited Partner;
Who Shall Sign and Swear to a Certificate (Articles of Limited Partnership);
Which Certificate Must Be Registered with the SEC.

99

citing Paras, Civil Code of the Philippines, Vol. V, 7th ed., p. 516.

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A limited partnership that does not comply with the registration requirements shall be
treated as a general partnership in which all the members are liable for partnership debts. Jo
Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

2.

FORMATION AND STATUTORY REQUIREMENTS (Art. 1844)

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

3.

GENERAL PARTNERS (Art. 1850)

a. General Partners Have the Rights and Powers and Be Subject to All the Restrictions
and Liabilities of a Partnership Without Limited Partners.
b. HOWEVER: a General Partner Shall Have Authority to Do the Following Only With the
Written Consent or Ratification of the Limited Partners:
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 Do Any Act in Contravention of the Certificate

Do Any Act Which Would Make It Impossible to Carry on the Ordinary Business of
the Partnership
Confess a Judgment Against the Partnership
Possess Partnership Property or Assign Their Rights for Other Than Partnership
Purpose
Admit a New General Partner
Admit a New Limited Partner, Unless the Right to Do So Is Given in the Certificate
COMPARE WITH: Art. 1817

4.

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

In the Absence of Agreement, Limited Partners Shall Stand Upon Equal Footing
(Art. 1855)

g. He May Receive the Stipulated Share in the Profits and/or Compensation By Way of
Income, Provided That After Such Payment the Partnership Assets Are Sufficient to
Cover Liabilities to Third Parties. (Art. 1856).
h. When Limited Partner Has the Right to Demand Return of His Contribution (Art. 1857):
On Dissolution of the Partnership;
When the Date Specified in the Certificate for Its Return Has Arrived; or
After He Has Given Six Months Notice in Writing to All Other Members, If No Time
Is Specified in the Certificate, Either for the Return of the Contribution or for the
Dissolution of the Partnership.
i. A Limited Partner Shall Not Receive Any Part of His Contribution Until (Art. 1857):
All Liabilities to Third Parties Have Been Paid or There Remains Property of the
Partnership Sufficient to Pay;
Such Return Is With Consent of All Members, or Return Is Rightfully Demanded;
The Certificate Is Cancelled or Amended.
j. A Limited Partner Is Liable to the Partnership (Art. 1858) for:
The Difference Between His Contribution as Actually Made and That State in the
Certificate as Having Been Made
For Any Unpaid Contribution Which He Agreed in the Certificate in the Future
A Limited Partner Holds as Trustee for Partnership (Art. 1858):
o Specific Property Stated in the Certificate as Contributed by Him, But Which
Was Not Contributed or Wrongfully Returned
o Money or Other Property Wrongfully Paid or Conveyed to Him on Account of
His Contribution
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k. Limited Partners Right to Assign Their Rights or Substitute Another (Art. 1859):
A Limited Partners Interest Is Assignable
A Substituted Limited Partner Is a Person Admitted to All the Rights of a
Limited Partner Who Dies or Has Assigned His Interest; An Assignee Shall Have
the Right to Become a Substituted Limited Partner Only If:
o All the Members Consent or,
o Assignor Gives the Assignee Such Right Pursuant to the Terms of the
Certificate
o And the Certificate Is Appropriately Amended
Substituted Limited Partner Has All the Rights and Powers, and Is Subject to All
the Restrictions and Liabilities of Assignor, Except Those Liabilities of Which He
was Ignorant and Which Could Not Be Ascertained from the Certificate.
Substitution Does Not Release Assignor From Partnership Liabilities Under:
o False Statements in the Certificate (Art. 1847)
o For the Difference or What Is Due From Him for His Contributions (Art. 1858)

An Assignee Who Does Not Become a Substituted Limited Partner Has No Right
of Information, Nor to Inspect Partnership Books; He Is Only Entitled to Receive
the Share of the Profits or the Return of His Contribution Which the Assignor
Otherwise Was Entitled To.

l. Limited Partner Is Not a Proper Party to Proceedings By or Against the Partnership;

Except Where Object Is to Enforce a Limited Partners Right Against or Liability to the
Partnership. (Art. 1866)
Limited partners have a right to be informed and to formal accounting. Riviera Conbress
Associates v. Yassky, 25 A.D. d 21, 268 N.Y.S. d. 854 (1966).
Limited partner may loan money to the partnership. Hughes v. Dash, 309 F.d (1962);
A.T.E. Financial Services, Inc. v. Corson, 268 A. d 73 (1970).
m. Liability of One Believing Himself to Be Limited Partner (Art. 1852): A Person Who Has
Contributed to the Capital of a Business Conduced as a Partnership, Believing that He
Has Become a Limited Partner:
Is Not By Reason of Exercise of the Rights of a Limited Partner, a General Partner;
PROVIDED : On Ascertaining the Mistake He Promptly Renounces His Interest in the
Profits of the Business or Other Compensation by Way of Income.
EXCEPT: When He Allows His Surname to Be Part of the Firm Name
n. General Partner May Also Be a Limited Partner (Art. 1853):

4.

Provided Such Fact Shall Be Stated in the Certificate

He Shall Have All the Rights and Powers and Be Subject to All the Restrictions of
a General Partner

Except, In Respect to His Contribution, He Shall Have the Rights Against the
Other Members Which He would Have Had If He were Not Also a General Partner.

DISSOLUTION AND WINDING UP

a. Causes Affecting the General Partner (Art. 1860):
Retirement, Death, Insolvency, Insanity or Civil Interdiction of a General Partner
Dissolves the Partnership, and the Certificate Must Be Cancelled.
Unless, the Business Is Continued by Remaining General Partners, Under a Right
To Do So in the Certificate or With the Consent of All Members
b. Causes Pertaining to the Limited Partner:
On Death of a Limited Partner, His Executor/Administrator Shall Step into His
Shoes for Purposes of Settling His Estate, Including the Power to Constitute an
Assignee, But the Partnership Is Not Dissolved. (Arts. 1861 and 1864)
When All the Limited Partners Ceases to Be So, the Partnership Is Dissolved and
the Certificate Must be Cancelled. (Art. 1864)
A Limited Partner May Demand Dissolution and Winding-up When:
o He Rightfully But Unsuccessfully Demands Return of His Contribution; OR

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o Liabilities to Third Parties Have Not Be Paid, or Partnership Property

Insufficient For Their Payment, But Limited Partner Would Otherwise Be
Entitled to the Return of His Contribution. (Art. 1857)
c. Dealings of Limited Partners with Partnership Affairs:
Limited Partner Shall Not Be Liable as a General Partner for Partnership Debts,
Except When:
o He Allows His Surname to Be Part of the Firm Name (Art. 1846)
o He Takes Part in the Control of the Business (Art. 1848)
Limited Partner May Loan To and Otherwise Deal With Partnership, But Cannot
Partnership Assets as Collateral or Conveyance or Release When Partnership
Assets Were Insufficient to Discharge Partnership Liabilities. (Art. 1854)
A Limited Partner Is Liable to the Partnership For:
o The Difference Between Contribution Made and That Stated in the
Certificate;
o Additional Contribution Which He Agreed in the Certificate to Make in the
Future Time. (Art. 1858)
A Limited Partner Holds as Trustee for the Partnership:
o Specific Property State in the Certificate As Contributed by Him, But Which
Was Not Contributed or Has Been Wrongfully Returned;
o Money or Other Property Wrongfully Paid or Conveyed to Him on Account of
His Contribution. (Art. 1858)
A Limited Partner May Assign His Interests:
o Assignee Becomes a Substituted Limited Partner Admitted By All Members,
and Certificate Is Amended
o Assignee Who Does Not Become a Substituted Limited Partner Only Entitled
to Receiver the Share of the Profits or Other Compensation By Way of
Income, or the Return of His Contribution, to Which Assignor Would
Otherwise Be Entitled;
o BUT Assignor Not Released from His Liability Arising from False Statements
in the Certificate or Contributions Received Wrongfully (Art. 1859)
d. Application of a Creditor of Limited Partner (Art. 1862): A Limited Partners Creditors
May Apply With the Courts To:

Charge His Partnership Interests with Payment of the Unsatisfied Amount of Such
Claims, Appoint a Receiver, and Make All Other Orders Which May Be Appropriate

Interest May Be Redeemed With Separate Property of Any General Partner, But
Not Partnership Property

e. Order of Settlement of Accounts (Art. 1863)

Those to Creditors, Including Claims of Limited Partners Other Than for
Contributions and Share in the Profits
Those to Limited Partners in Respect to Their Share in the Profits and
Compensation by Way of Income on Their Contributions
Those to Limited Partners in Respect to Their Contributions
Those to General Partners Other Than for Capital and Profits
Those to General Partners In Respect to Profits
Those to General Partners in Respect to Capital

IX. RTC SPECIAL COMMERCIAL COURTS JURISDICTION OVER PARTNERSHIPS

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

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D.

JOINT VENTURES

JOINT VENTURES ARE SPECIES OF PARTNERSHIP

I.

In the Philippines, the prevailing school of though is that a joint venture is a species of
partnership. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000).100
Generally understood to mean an organization formed for some temporary purpose, a joint
venture is likened to a particular partnership or one which has for its object determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession or vocation. Joint ventures
are governed by the law on partnerships which are, in turn, based on mutual agency or delectus
personae. Applying therefore Art. 1813 of the Civil Code, it is evident that (t)he transfer by a partner
of his partnership interest does not make the assignee of such interest a partner of the firm, nor
entitle the assignee to interfere in the management of the partnership business or to receive
anything except the assignee's profits. Realubit v. Jaso, 658 SCRA 146 (2011).
A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among themselves.
On the other hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to
distinguish between joint ventures and partnerships. Narra Nickel Mining and Development Corp. v.
102
Redmont Consolidated Mines Corp., 722 SCRA 382 (2014).

II. TYPES OF JOINT VENTURE ARRANGEMENTS

1.

INFORMAL OR CONTRACTUAL JV ARRANGEMENT WITHOUT A SEPARATE FIRM

(SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976; SEC Opinion,
29 February 1980; SEC Opinion, 03 Sept. 1984).

The Contract of Lease violates PCSOs charter which prohibits it "to hold and conduct charity
sweepstakes races, lotteries and other similar activities," "in collaboration, association or joint
venture" with any other party, since it mandates the lessee to contribute resources into the venture
and to manage and operate directly the facilties, and makes the lessee participate not only in the
revenues generated from the venture, and in fact absorb most of the risks involved therein, for then
a joint venture arrangement has really been constituted between the purported lessor and lessee,
since under the Law on Partnership, whenever there is an agreement to contribute money, property
or industry to a common fund, with an agreement to share the profits and losses therein, then a
partnership arises. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
When the purported primary co-venturer in a consortium (which is an association of corporation
bound in a joint venture arrangement) declares unilaterally that the other four members are part of a
consortium, but there is no affirmation from any of the other members, nor is there a showing
through a formal joint venture agreement of a community of interest, a sharing of risks, profits and
losses in the project bidded for, then there is really no joint venture constituted among them, lacking
the essential elements of what makes a partnership. Information Technology Foundation v.
COMELEC, 419 SCRA 141 (2004).
a.

JVAs Must Be Construed and Enforced as

Contracts Between and Among Co-Venturers

When a Joint Venture Agreement has been executed among the co-venturers covering
the terms for the development of a subdivision project, the contributions of the co-venturers and
the manner of distribution of the profits, a partnership has been duly constituted under Art. 1767
of Civil Code, and although no inventory was prepared covering the parcels of land contributed
to the venture, much less was a certificate of registrations filed with the SEC, the partnership
was not void because (a) Art. 1773 is intended for the protection of the partnership creditors and
cannot be invoked when the issue is between and among the partners; and (b) the alleged
nullity of the partnership will not prevent courts from considering the JVA as an ordinary contract
form which the parties rights and obligations to each other should be inferred and enforced.
Torres v. Court of Appeals, 320 SCRA 428 (1999).
Although the parties executed the instrument as a Power of Attorney and referred to
themselves as Principal and Manager, it reveals that a partnership or joint venture was
indeed intended by the parties. Perusal of the agreement denominated as the Power of
Attorney indicates that the parties had intended to create a partnership and establish a common
fund for the purpose. They also had a joint interest in the profits of the business as shown by a
100

Reiterated in Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006); Information Technology Foundation
of the Philippines v. COMELEC, 419 SCRA 141 (2004).
102
Motion for Reconsideration denied with finality in a Resolution dated January 28, 2015.

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50-50 sharing in the income of the mine. While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its charter, it has been held that
it may enter into a joint venture which is akin to a particular partnership relationship. Philex
Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008).
When the principal and the agent have entered into a Power of Attorney covering a
construction project, with the principal contributing thereto his contractors license and expertise,
while the agent would provide and secure the needed funds for labor, materials and services,
deal with the suppliers and sub-contractors; and in general and together with the principal,
oversee the effective implementation of the project, for which the principal would receive as his
share 3% of the project cost while the rest of the profits shall go to the agent, the parties have in
effect entered into a partnership, and the revocation of the powers of management of the agent
is deemed a breach of the contract. Mendoza v. Paule, 579 SCRA 349 (2009).
In an informal joint venture arrangement, because no separate firm or business enterprise
has been constituted as to the dealing public, then the effects of the attributes of mutual
agency and unlimited liability are not made to apply with respect to creditors.Traveo v.
Bobongon Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (2009). [See
contrary ruling in Bastida v. Menzi and Co., 58 Phil. 188 [1933])

2.

AS A FORM OF PARTNERSHIP TO PURSUE THE VENTURE AS A FIRM

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

In joint ventures with investor companies, PNCC contributes the franchise it possesses,
while the partner contributes the financing both necessary for the construction, maintenance,
and operation of the toll facilities. PNCC did not thereby lease, transfer, grant the usufruct of,
sell, or assign its franchise or other rights or privileges. This remains true even though the
partnership acquires a distinct and separate personality from that of the joint venturers or leads
to the formation of a new company that is the product of such joint venture, such as PSC and
SOMCO in this case. Hontiveros-Baraquel v. Toll Regulatory Board, G.R. No. 181293, 23
Feb. 2015.
3.

THROUGH A JOINT VENTURE CORPORATION

The manner of nomination of the members of the Board of Directors provided in the Joint
Venture Agreement must be made effective and reconciled with the statutory provision on
cumulative voting made applicable by the Corporation Code to stock corporations. Aurbach v.
Sanitary Wares Mnfg. Corp., 180 SCRA 130 (1989).
When a corporation has been organized pursuant to the terms of the Joint Venture Agreement
(JVA), the right of first refusal appearing in the JVA constitutes a legal means by which the
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corporate venture would include the delectus personae characteristic of the JV arrangement, which
allows the co-venturers-stockholders the ability to prevent equity interests from being transferred to
third parties. The right of first refusal feature of the JVA must be made to apply and be binding to the
Government and the bidder at a public bidding held on the shares of the joint venture corporation
constituted pursuant to the agreement. JG Summit Holdings, Inc. v. Court of Appeals, 412
SCRA 10 (2003).

III. REVISED GUIDELINES AND PROCEDURES FOR ENTERING INTO JOINT VENTURE (JV)

AGREEMENT BETWEEN GOVERNMENT AND PRIVATE ENTITIES PER SECTION 8 OF E.O. 423104
(NEDA Circular approved on 03 May 2013)
a. Definition of Joint Venture
5.7 Joint Venture (JV). An arrangement whereby a private sector entity or a group of private
sector entities on one hand, and a Government Entity or a group of Government Entities on
the other hand, contribute money/capital, services, assets (including equipment, land,
intellectual property or anything of value), or a combination of any or all of the foregoing to
undertake an investment activity.
The investment activity shall be for the purpose of
accomplishing a specific goal with the end view of facilitating private sector initiative in a
particular industry or sector, and eventually transfer the activity to either the private sector
under competitive market conditions or to the government. The JV involves a community or
pooling of interests in the performance of the investment activity, and each party shall have
the right to direct and govern the policies in connection therewith with the intention to share
both profits and, risks and losses subject to agreement by the parties. A JV may be a
Contractual JV or a Corporate JV (JV Company).
b. Definition of Contractual JV
5.3 Contractual JV. A legal and binding agreement under which the JV Partners shall perform
the primary functions and obligations under the JVA without forming a JV Company.
c. Definition of JV Company
5.8 JV Company. A stock corporation incorporated and registered in accordance with the
provisions of the Corporation Code of the Philippines, and based on the prevailing rules and
regulations of the Securities and Exchange Commission (SEC) of which fifty percent (50%)
or less of the outstanding capital stock is owned by the government. The JV Company shall
be registered by the JV partners that shall perform the primary functions and obligations of
the JV as stipulated under the JV Agreement. The JV Company shall possess the
characteristics stipulated under these Guidelines.

IV. TAX RECOGNITION AND TREATMENT OF JOINT VENTURES

1.

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

2.

A JV Consortium Undertaking Construction Projects or Engaging in Petroleum, Coal,

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

oOo
UPDATED: 30 JULY 2015

104

http://www.neda.gov.ph/references/Guidelines/2013%20Revised%20JV%20Guidelines.pdf

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